Highpower International Inc. (NASDAQ:HPJ)
Q4 2013 Earnings Conference Call
March 25, 2014 10:00 AM ET
Larry Clark - IR, Financial Profiles
Henry Sun - CFO
George Pan - CEO
Bryan Bai - VP, Sales
Walter Ramsley with Walrus Partners
Mike Simmons [ph]
Ladies and gentlemen thank you for standing by and welcome to the Highpower International Fourth Quarter and Fiscal Year 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will conduct a question-and-answer session. (Operator Instructions) And as a reminder, this call is being recorded today, March 25, 2014. I’d now like to turn the conference over to Larry Clark of Financial Profiles. Please go ahead sir.
Thank you and good morning. This is Larry Clark, Investor Relations for Highpower International. By now, you should have all received a copy of the press release we put out earlier this morning. If you need one, please feel free to contact us at 310-622-8235 or by email at email@example.com.
Before we begin, I would like to remind you that comments on today’s call contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are identified through the use of the words expect, project, target, continue, believe and other words of similar meaning. Such statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of Highpower International to differ materially from the results expressed or implied by such statements.
For a discussion of risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see the Risk Factors and Management's Discussion and Analysis of financial conditions and results of operations in the Company’s annual report on Form 10-K and other reports the Company files under the Securities and Exchange Act of 1934.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurances that such expectations will prove to be correct. The Company has no obligation to update the forward-looking information discussed during today’s call. With us today on the call from management is George Pan, Chairman and Chief Executive Officer; Henry Sun, Chief Financial Officer and Bryan Bai, Vice President of Sales.
With that, I would now like to turn the call over to Henry Sun.
Thank you, Larry and thank you all for joining us today. Welcome to Highpower International’s fourth quarter and fiscal year end 2013 earnings conference call. I will begin with an overview of both our full year 2013 and fourth quarter financial results which we have reported in our press release issued this morning. Then we will turn the call over to the Chairman Pan for some brief remarks and next to turn to Bryan, who will tell some of our recent sales and marketing initiatives. Finally, I will discuss our guidance for fiscal year 2014 before opening up the call for your questions.
Let me start by stating that 2013 was a transformative year for Highpower, as we continued to position the company through investments in R&D and infrastructure to capitalize of future growth opportunities for lithium batteries, including electric vehicles all at the same time achieving top-line growth and profitability. We are excited to end the year on such an exceptional note, having once again generated record revenues in our lithium battery segment and overall record revenues for the company.
As we have mentioned before much of our growth is coming from the strength of our lithium battery business, which continues to grow at a very rapid pace and is driven by long term consumer demand trend. Lithium battery net sales were up 53% in fiscal year 2013 as compared to 2012. Our total lithium battery volume per ampere hour increased by an impressive 50% year-over-year. We continue to benefit from selling higher capacity large format batteries and increased orders from both new and existing customers. Nickel-Metal Hydride net sales were up slightly in 2013 by just under 2%. We continue to gain market share with volume increase of approximately 10% but this was offset by an average selling price decline of approximately 8% due to cost savings from lower commodity prices and competition. We continue to believe this business is stable and important source of revenue for our company but it will not experience the similar growth in volume that our lithium battery business is expected to achieve.
Total net sales for our fiscal year 2013 were $132.8 million, a year-over-year increase of 18% compared with $112.6 million for fiscal year 2012. The year-over-year increase was primarily due to a $20 million increase in net sales of lithium batteries and $1.1 million increase in net sales of Nickel-Metal Hydride batteries which was partly offset by an $800,000 decrease in revenues from the materials business as we shift away from materials trading to preparing for a materials processing and reflecting type 1 [ph] in our Ganzhou facility.
Gross profit for 2013 increased to $26.4 million compared with $23.7 million for 2012. Our gross profit margin was 20% for 2013 compared to 21% for 2012. The lower gross margin in 2013 was primarily due to decreases in the average selling prices of Nickel-Metal Hydride battery and an increase in labor costs for the comparable period.
R&D spending was $5.7 million for 2013 as compared with $4.6 million for 2012 which reflects our ongoing commitment to R&D activities and the expansion of our workforce in research focused on basic materials and electrochemical platforms and the development of complex battery management systems. Selling and distribution costs were $6.2 million for 2013 as compared to $5.3 million for 2012, reflecting increased investment in sales and marketing, including participation in industry trade shows and expanded international sales efforts.
General and administrative expenses including stock based compensation were $12.1 million for the 2013 compared to $11.5 million for 2012. The increase was primarily due to an increase in management staff headcount to support the growth of our business. Net income attributable to the company for the year end December 31, 2013 was $1.5 million or $0.11 per diluted share, based on 13.7 million weighted average shares outstanding. This compares with the 2012 net income attributable to the company of $1.7 million or $0.13 per diluted share.
Next, I will cover our fourth quarter 2013 financial results. Net sales for the fourth quarter of 2013 were $38.4 million, a year-over-year increase of 25% compared with $30.8 million for the fourth quarter of 2012. The increase in sales for the fourth quarter of 2013 was primarily due to a 29% year-over-year sales increase in our lithium battery segment which was offset by a 4% decline in our Nickel-Metal Hydride battery sales.
Gross profit for the fourth quarter of 2013 increased to $8.6 million compared with $6.4 million for the fourth quarter of 2012. Gross profit margin was 22% for the fourth quarter of 2013 compared with 21% for the prior year’s quarter. The year-over-year increase in gross profit margin was primarily due to higher sales volumes, lower commodities cost and a greater percentage of higher end battery product sales. R&D spending was $1.7 million for the fourth quarter of 2013 as compared with $1.3 million in the fourth quarter of 2012 due to the increase in our workforce to expand our research and development efforts.
General and administrative expenses, including non-cash stock based compensation were $3.7 million for the fourth quarter of 2013 compared to $3.2 million for the fourth quarter of 2012 as we continue to outgrow our management team to support the growth of our business.
Net income attributable to the company for the fourth quarter of 2013 was $1.2 million or $0.09 per diluted share, based on 13.9 million weighted average shares outstanding. This compares with the net income to the Company of $0.6 million or $0.04 per diluted share for the fourth quarter of 2012.
Now turning to the balance sheet. At December 31, 2013, Highpower International had cash and cash equivalents including restricted cash of $36.6 million, total assets of $151.8 million and stockholders' equity of $34.7 million. Total debt was $67.3 million at December 31, 2013. If you account for the $28.6 million of restricted cash held as partial collateral against portions of our bank debt, our adjusted total debt is $38.7 million. Our bank credit facilities totaled $74.6 million, of which $29.3 million was available at the end of the year.
Our relationships with our vendors continue to be strong and we remain confident that we are able to support our current debt levels, as well as fund our expected capital expenditures for increment in 2014. Our day sales outstanding improved to 69 days for the fourth quarter of 2013 from 72 days for the fourth quarter of 2012 as we remain focused on working capital management.
We spend approximately $20 million in capital expenditures in fiscal year 2013. The cash tax was primarily spent on the payment lines for our new manufacturing facility in Huizhou, Guangdong province. We expect to reduce the CapEx in 2014 in the $5 million to $10 million range. I should note that we have started delivering product from this new facility. We expect that by the second half of the year production will be a fully ramped up on the first line and we expect to generate over $20 million of revenues part of this facility in 2014. We intend to produce high volume orders of mobile device batteries and larger format lithium batteries for electric vehicles and energy storage systems at this new facility. As a reminder this facility’s infrastructure is capable of supporting up to four times of the existing production capacity.
We have also been allocating some of our capital expenditures to the new battery and e-wave and refactoring facility that we are building in Guangzhou, Jiangsu Province which we expect to launch in the second quarter of 2014. We remain committed to our pioneering efforts in the battery refactoring space. Some of our existing large customers as well as potential customers in our pipeline have expressed interest in our refactoring initiatives. This refactoring platform helps us to serve as another key differentiator for us in winning new business. Being on the forefront of this trend makes sense from both a business and environmental perspective, especially over the next few years when increasing amounts of complex energy storage systems and electric vehicle batteries need to disposed of.
According to a Frost & Sullivan report, the EV lithium battery recycling market is expected to worth more than $2 billion by the year 2022, with more than half of the million end of life EV battery packs becoming available for recycling through the waste stream. We expect our sales and marketing and G&A costs to come down as a percentage of total revenues in 2014. However, our investments in R&D will continue at a healthy pace. Our R&D spending is focused on technical intellectual property and solutions as we strive to remain competitive and at the forefront of the market in advanced higher margin products including energy systems and electric vehicles.
In the fourth quarter of 2013 approximately 67% of our revenues was from China including Hong Kong, and 10% from the rest of Asia. Europe contributed approximately 16% of our revenue for the fourth quarter with the remaining 7% of our revenue coming from North America and the rest of the world.
Now I will turn the call over to Chairman and CEO, George Pan for some brief remarks.
Thank you, Henry. I just wanted to welcome you all to our year end conference call. I want to tell you that appreciate your interest and investment in Highpower International. We have never felt better about our Company as many of the [indiscernible] we have been working are now beginning to pay off. Our newly opened facility in Huizhou and our recently announced first major order in the EV market gives us tremendous momentum and increased brand recognition in our [indiscernible] and as Henry mentioned we are looking for orders to starting our battery recycling period this year. All in all we are optimistic about 2014 and I look forward to updating you on our progress as we move forward.
I will now turn the call over to Bryan Bai, VP of sales.
Thank you, George. Firstly I would like to spend a little bit of time reiterating our sales strategy. We are always focused on our sales efforts in the fast growing consumer electric markets. We target Fortune 500 companies as well as top 10 companies in various vertical industries worldwide. Our market penetration capabilities will ensure that our global sales distribution is diversified geographically and that we maintain market leadership.
Next I would like to talk about a very significant event that occurred after our fourth quarter close; Highpower’s first large scale interest into the Chinese electric vehicle market. We received our first over order for lithium batteries to be used in electric buses from [indiscernible] Energy Technology Limited. Consistent integrator serving various manufacturers throughout China. As we speak we already started shipping our products to [indiscernible]. Both 16 ampere hour and 10 ampere hour lithium polymer batteries that have passed the quality check approval by both China National Quality Center and [indiscernible].
As batteries were reused in some of China’s well-known brands of hydrating electric buses and plugging operated electric buses, it is estimated that electric bus were used 96 of the 16 ampere hour batteries, where it's plugging operated electric bus will use 200 each of the 20 ampere hour batteries. Highpower expects sales to range in between $4 million to $5 million during the fiscal year of 2014. This order represent a significant milestone for Highpower as we have now exceeded our target markets from the traditional consumer electronic markets to new segments; include the rapidly growing electric vehicles market. We expected to secure more EV customers this year and will continue to focus on our R&D efforts to developing complete battery solutions beyond batteries.
With respect to the electric vehicle market that is effective that the market will grow from an estimated 35 million units sold in 2012 to nearly 130 billion in 2022 driven by e-bikes but also by more restricted initial standard throughout the board. However the value of the marketing expense is expected to grow at twice the pace of the unit volume as larger and more expensive vehicles are increasingly affected to adopt the technology. Motorcycles, military vehicles, busses and earth movers are among the types of vehicles that will migrate to the use of electric battery.
In addition experts believe that in 10 years a higher percentage of the global output of sliding industrial vehicles, commercial vehicles and cars will be electric. Beyond customer additions we continue to build the Highpower brand name by increasing our attendance at international industry events included CIS and the 31st International Battery Seminar. We have a strong lithium battery customer pipeline and recently added another major customer in Europe for personal care products. We are excited to bring on the additional tier 1 international customers in 2014, causing us to remain very optimistic about our lithium battery business.
Thank you. And now I will turn it back to Henry.
Thank you Bryan. Finally I will address our outlook for fiscal year 2014. Based on our current expectations for global demand for the rechargeable battery market in 2014 and our continued shift towards mobile power sources, higher value energy system and transportation products, we’re issuing 2014 guidance of revenues to range between $150 million to $170 million and net income to range between $2.5 million to $4 million.
Before opening up the call to questions, I want to reiterate Chairman Pan’s statement about the current trajectory for Highpower. We firmly believe that we are in an excellent position to profitably capitalize on the major trends that are occurring in the Lithium battery and e-waste recycling markets and look forward to keeping you updated on our progress throughout 2014 and beyond.
We would now like to open the call to your questions. Operator, please go ahead.
(Operator Instruction). And our first question comes from the line of Brian [indiscernible] Capital. Please go ahead.
I wanted to ask with regards to the bus -- my question is with regards to the order and the EV sector for the buses. Can you give us an idea when you’re going -- when those are scheduled for delivery, if your schedule product is scheduled for delivery to the client?
Actually, we mentioned it already, already, Brian first of all thank you for the question. We actually already started generating.
That’s great. And can -- little follow up, can you address the capacity of the recycling facility now and as you go forward?
The recycling facility we’re going to start the operation Q2 this year. So, the capacity is actually of 40,000 metrics tons of metal, that is line capacity, but we can give more color on the actual asset.
[Operator Instruction]. And our next question comes from the line of Walter Ramsley with Walrus Partners. Please go ahead.
Walter Ramsley - Walrus Partners
I was wondering if you could just kind of point out the key variables that explain the difference in sales forecast between 150 and 170 million? What might cause it to go from one end towards the other?
So, in terms of product breakdown, Lithium battery will grow a lot faster than our Nickel-Metal Hydride business. As we have mentioned, we are seeing a flattened Nickel-Metal Hydride battery business -- I mean the market growth but we're consolidating all the players by providing better products and at competitive prices but our Lithium battery is growing a lot faster, not only than our Nickel-Metal Hydride business but also lot faster than our competitors. The average industry growth year-over-year for Lithium battery market is about 20% but we have seen -- we are growing over 50% year-over-year already. So, we’re doubling the sales, the growth speed of the industry. And this year with a new plant in Huizhou we don’t have the restraint for the capacity issue. So, for this -- but along we can deliver over $20 million in sales and on part of our existing screen power facility. And on top of the new facility actually our existing facility as spring power is also improving the equipment and efficiency. So, we’ll see new sales addition from the Huizhou new facility. At the same time we’re going to continue to grow our Lithium battery sales from the existing facility because of the efficiency improvement.
Walter Ramsley - Walrus Partners
Okay. Thank you. And as far as R&D spending do you have an idea of how much that’s going to be in 2014?
Well, 2014, in terms of the percentage, it will be around -- it will over 4%. Our forecast is about 4.5% for the year. We’re going to continue through our dedicate R&D efforts to higher end products solutions. Firstly, it’s on the large format battery sales. Beyond that we’re spending resources on battery systems and also ESS and not only for EV but also for energy storage systems.
Walter Ramsley - Walrus Partners
Okay. And the gross margin, can you describe how the deprecation charge on the new facility will affect that over the course of the year and how it might look like as the company exists the year.
The gross margin, actually for the existing -- overall we're going to see over 20% gross margin, but since the new facility we need to absorb fixed assets, expenses everything. The gross margin for the new facility this year will be low, but 2015 the gross margin will ramp up quickly because of the sales increase.
And our next question comes from the line of Mike Simmons [ph]. Please go ahead.
I was wondering if you could repeat 2014 guidance and then I have a follow-on.
Sure, the 2014 guidance for the top line sales is $150 million to $170 million and the net income line is $2.5 million to $4 million.
Okay great. I’m also trying to get an idea of the capacity of this new manufacturing facility. Is there some way you could compare the new large EV order that you’re already recorded in terms of how many orders similar to that this facility would be able to crank out in a typical year?
Well for year one this year, our sales forecast for this facility is over $20 million. That’s a conservative number. For this EV order, the order size is about 4 to 5, so you can roughly estimate how many orders of that will be hosted but actually this facility will not only produce EV batteries but also consumer electronics and also energy storage systems. Those are the three main areas that we’re going to focus on though this new facility. But again, this EV battery contract range is only our first contract and we expect to gain opportunities from this facility.
Okay, the 20 million recorded for this year, that kind of – that depends on the facility ramping up to production in the second half. I probably expect in 2015 you’d be able to kind of on an annualized basis ship out more products than the $20 million number correct?
Okay, can you give me an idea of what that might be, just the slag based on current metrics? Or is that difficult?
Roughly more or less around $40 million, the year one sales.
And our next question comes from line of [indiscernible]. Please go ahead.
My question -- there's a couple of questions. I'd like to focus -- I heard you mentioned multiple times sales forecast and I would appreciate if you could differentiate with this new very, very large plant between sales forecast and capacity? And so with the current line that is already up in producing at the plant, what is the capacity of that line versus, this $20 million sales forecast you’ve mentioned? Number one. And then number two, what is the capacity of the entire plant? And how do you plan to build out that capacity over the next one, two, three years? And what are going to take into account in terms of how fast you’ll build that capacity out?
Sure, the year one sales is 20 million. That’s our budget for this new facility that if it’s at full capacity we’re expecting more less around $40 million because we have add on increment then. We can leverage the current platform. So for some positives, we can share increment. So for the second year, the $40 million in sales is sort of like full capacity for the current platform. And for year two, year three depending on the actual ramp up of the capacity, so we do a plan to host more increment from this facility. And we -- phase 2 and phase 3 will be planned out once the phase 1 increment is utilized. And we still have additional space actually in the new campus. And so we can continue to grow sales out of this campus.
Okay thank you. And the follow-on question was regarding your current somewhat lower gross margin Nickel-Metal Hydride business. Can you tell us a little bit about any measures you’re taking to improve those margins? Number one. And can you comment on that in the context of it seems like there is fewer global Nickel-Metal Hydride players? How do you guys see yourselves sitting into or positioning yourself in that market over the next two to three years and what do you foresee the resultant impact will be on your margins in that business?
Thank you for that great question. So our number one step is actually we are already contemplating new initiatives to change or improve the current decrement with new additional new equipment. We plan to reduce headcount in our Nickel-Metal Hydride facility. So this will actually greatly improve our gross margin. And secondarily as we’ve mentioned in the call, once we have this new facility for recycling up and running, we will rely less on external sources for raw materials. So we will generate some additional efficiency or raw material reliance on external suppliers and this will relieve the gross margin pressure as well. On top of that we have many patents to protect our technology to keep our Nickel-Metal Hydride business strong and competitive.
(Operator Instructions) And I'm showing no further questions in the queue. Please continue.
Once again, on behalf of the entire Highpower team, I want to thank you again for joining us on today's call. Please feel free to contact Larry Clark or Tricia Ross at Financial Profiles at 310-478-2700 or myself if you have any follow-on questions. We look forward to seeing at conference over the next few months. As always we welcome you your feedback. Thank you and have a good day.
Ladies and gentlemen, this does conclude our conference for today. You may now disconnect.
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