Highpower International's (HPJ) George Pan on Q1 2014 Results - Earnings Call Transcript

| About: Highpower International, (HPJ)

Start Time: 10:00

End Time: 10:25

Highpower International, Inc. (NASDAQ:HPJ)

Q1 2014 Earnings Conference Call

May 12, 2014, 10:00 AM ET


Henry Sun - CFO

George Pan - CEO

Bryan Bai - VP, Sales

Tricia Ross - IR, Financial Profiles, Inc.


JinMing Liu - Ardour Capital Investments


Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Highpower International First Quarter 2014 Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Monday, May 12, 2014.

I would now like to turn the call over to Tricia Ross of Financial Profiles. Please go ahead.

Tricia Ross

Thank you and good morning. This is Tricia Ross, 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 310-622-8226.

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 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 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 Mr. 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.

Henry Sun

Thank you, Tricia, and thank you all for joining us today. Welcome to Highpower International's first quarter 2014 earnings conference call. I will begin with an overview of our first quarter 2014 progress and the financial results, which we reported in our press release issued this morning. Then, we will turn the call over to Chairman Pan for some very brief remarks and next turn to Bryan for some commentary on our recent sales and marketing initiatives. Finally, I will review our guidance for fiscal year 2014 before opening up the call to your questions.

Overall, the first quarter was an excellent quarter for Highpower which is always seasonally our slowest of the year. We were pleased with the revenue levels we achieved for both of our major business units; lithium and nickel-metal hydride, but more importantly we are excited that the progress we made on positioning our business for future sustained growth.

We have achieved a number of transformative business milestones since the start of 2014 including adding two Fortune 500 customers; SONY and Philips to whom we are now an approved supplier. We received our first ever electrical vehicle order for large format lithium polymer batteries to be used in electric buses. We began shipping products from our new Huizhou facility. We continue to grow into new innovative markets such as wearable products, mobile payment devices and electric lawn mowers.

We initiated the roll-out of our solar compatible energy storage systems line of products and we successfully accessed the capital markets to strengthen our balance sheet by about $5 million. Each of these milestones make Highpower very well positioned to capture significant growth of the rechargeable battery and a clean energy market in the years ahead.

As we have seen for a number of quarters, our lithium battery business continues to deliver strong growth. We continued to secure significant orders from new and existing customers. Our lithium battery net sales were up 44.7% in the first quarter of 2014 over the first quarter of 2013, and our total lithium battery pieces sold increased to 15.2% while we also had 22.5% increase in volume per ampere hour.

Total net sales for the first quarter of 2014 were $29.2 million, a year-over-year increase of 19.5% compared with $24.4 million for the first quarter of 2013. The increase in sales for the first quarter was due to a $4.1 million increase in net sales of our lithium batteries and a $0.4 million increase in net sales of our nickel-metal hydride batteries.

The increase in the number of nickel-metal hydride battery units sold in the first quarter of 2014 was primarily attributable to increased orders from our new customers. The increase in the volume of lithium batteries sold in the first quarter of 2014 was primarily attributable to growth of global demand.

Approximately 69% of our revenue came from China, Hong Kong and the rest of Asia in the first quarter of 2014. Europe contributed approximately 22% in this quarter and the remaining 9% came from North America and rest of the world.

First quarter 2014 gross profit increased to $5.9 million. This compared with $4.8 million for the first quarter of 2013. Gross profit margin was 20.3% for the first quarter of 2014 as compared with 19.5% for the first quarter of 2013. The year-over-year increase in gross profit margin for the first quarter of 2014 was primarily attributable to increase in the average selling prices of lithium battery sales.

We have experienced competitive pricing pressure in the nickel-metal hydride battery business as the industry moves towards product consolidation. However, the gross margins for our lithium business remain at the high end of their historical range as we have benefitted from running at nearly full capacity at the old facility and have seen a modest shift towards higher margin products.

R&D spending was $1.8 million for the first quarter of 2014 as compared with $1.1 million for the first quarter of 2013, reflecting the expansion of our R&D in lithium battery particularly in the area of new product development via transportation and energy storage sectors.

Selling and distribution expenses were $1.5 million for the first quarter of 2014, as compared with $1.4 million for the first quarter of 2013. The year-over-year increase in selling and distribution expenses was due to increased marketing activities, including the participation in industry trade shows and international travel to promote and sell our products globally.

General and administrative expenses were $3.6 million for the first quarter of 2014, as compared with $2.8 million for the first quarter of 2013. The increase was due to the expansion of our workforce at our Huizhou facility. Also included in the amount was non-cash share-based compensation of $401,000, up from $49,000 in the first quarter of 2013.

Net loss attributable to the company for the first quarter of 2014 was $0.9 million, or $0.07 per diluted share, based on 14 million weighted average shares outstanding. This compares with our first quarter 2013 net loss attributable to the company of $0.6 million or $0.04 per diluted share, based on 13.6 million weighted average shares outstanding.

The increase in net loss attributable to the company is primarily attributable to the $0.4 million increase in non-cash share-based compensation expense between periods and the $0.7 million increase in R&D spending on future products.

Now turning to the balance sheet. As of March 31, 2014, Highpower International had cash, cash equivalents and restricted cash totaling $26.6 million, total assets of $138.2 million and stockholders' equity of $34 million. Bank credit facilities totaled $54.1 million at March 31, 2014, of which $28.9 million was utilized and $25.2 million was available as unused credit.

As I briefly mentioned, subsequent to the end of the quarter, we completed a registered direct offering of 1 million common stock which was sold to institutional investors at a price of $5.05 per share, including warrants to purchase an additional 500,000 shares of common stock with an exercise price of $6.33 per share.

Net proceeds from the offering were approximately $4.7 million, after deducting the placement agent fees but prior to offering expenses. This money will be used for general corporate purposes, including research and development, sales and marketing, G&A, manufacturing and capital expenditures.

Our days sales outstanding stood at 96 days for the first quarter of 2014, which is a modest pickup from 88 days during the first quarter of 2013 and up from 69 days for the fourth quarter of 2013. We are managing our inventory levels diligently even as we are experiencing our robust top line growth.

Inventories were $20.1 million at March 31, 2014, up modestly from $19.7 million on December 31, 2013 and $16.1 million from the year ago level. Our new facility in Huizhou is proceeding well and to plan. Our target that we outlined on our yearend call about six weeks ago is still fully on track. We expect to generate about $20 million of revenues out of this facility in 2014.

To the first quarter, about 20% of our lithium battery volume was delivered from this facility. Our Huizhou facility is positioned to produce higher volume orders of mobile device batteries and a large format lithium batteries, electric vehicles and energy storage systems in Huizhou.

I will touch briefly on our new battery recycling facility in Ganzhou, Jiangxi Province which we have launched in the second quarter this year. We expect to provide an update of this operation towards the end of the second quarter. This will be attractive to many Fortune 500 companies. We remain committed to our pioneering efforts in the battery recycling space.

Now, I will turn the call over to our Chairman and CEO, Mr. George Pan, for some brief remarks.

George Pan

Thank you, Henry. I'm happy to talk to (indiscernible). I would also like to welcome some of our new institutional shareholders to the call. We are excited that Highpower's value and potential was acknowledged by investors during our recent product offering. Our lithium battery business is experiencing robust growth and we believe this new capital will help us fund that growth and enable us to strengthen our global leadership in clean energy industry. We are very pleased in growth trends we made at Highpower during the first quarter and are very pleased in yields of this new capital to enhance shareholder value.

I will now turn the call over to Bryan Bai, VP of Sales.

Bryan Bai

Thanks, George. I will keep my remarks brief as I am joining the call today from Europe, Holland (indiscernible) maybe the signal is not good, but you can [make my] (ph) speech later and where I am meeting with our new Fortune 500 customer. (indiscernible) that the Highpower brand is becoming more recognized worldwide, especially after our announcement in the electric buses place which I discussed in detail on the last call along with adding two (indiscernible) to our customer roster, Philips and SONY since the beginning of the year.

Also, of note, (indiscernible) we are seeing for our new commercial, resi and solar compatible (indiscernible) that range from 0.5 kilowatt hour to 15 kilowatt hour. The industry demand for the ESS product is widely expected to kick off in the coming year and we believe this is a very valuable product offering for customers in the clean energy markets.

The ESS market is expected to experience tremendous growth over the next few years. According to the Navigant Research, the world micro grid market will increase from $4.3 billion in 2013 to $19.9 billion in 2020. Our ESS series is designed not only to appeal to the developed countries that are promoting clean energy initiatives but also to countries that lack sufficient electrical infrastructure. Our products can be adapted to a wide range of applications including commercial, residential, telecommunication and disaster rescue operations.

Just last week we announced our first initial testing order for the 10 kilowatt hour lithium-base energy storage system. Our new enterprise customer will integrate a solar panel with our system, and the whole system will be used in residential stand-alone power source areas. The feedback I have received in this order bolsters our confidence about our opportunities in the large scale energy storage space. We're very pleased about (indiscernible) and inroads we're making with Fortune 500 customers in that line.

Now, I will turn it back to Henry. Thank you.

Henry Sun

Thank you, Bryan. We were very pleased with our revenue growth and the gross margin level during the first quarter as our business continues to expand with the ramp up of our new Huizhou facility. Our first quarter's results have been on track with our forecast, also with our recent key customer additions and other accounts we are working on in the pipeline, we believe that we are well positioned for growth throughout 2014.

Therefore, based on our current expectations for global demand in the rechargeable battery market in 2014 and our continued shift toward mobile power sources, higher value energy storage systems and transportation products, we are reaffirming our 2014 guidance of revenues to a range between $150 million to $170 million and net income in a range of $2.5 million and $4 million. Despite our continued commitment to R&D and product development, we remain very focused on cost control measures and the prudent use of capital.

So now I would like to open the call to your questions. Operator, please go ahead.

Question-and-Answer Session


Thank you, sir. (Operator Instructions). Our first question comes from the line of JinMing Liu with Ardour Capital. Please go ahead.

JinMing Liu - Ardour Capital Investments

Thanks for taking my questions. First is a question for your lithium business. It looks like a surprise for your lithium products increase about 22% during the quarter. Can you comment on that whether that price increase was due to simply the market improvement or due to change in your product mix?

Henry Sun

Thank you, JinMing, for the question. The ASP of the lithium battery is due to our shift towards a higher end product. As we have mentioned, the old facility we have was already full capacity. The old facility has semiautomatic equipment and the (indiscernible) we introduced to our Huizhou facility is more higher and we are targeting for major segments which is smartphone and mobile devices, computer tablets, electric vehicles and energy storage systems. So all these four areas are higher end markets and with higher enterprises, so the increase of the ASP is because of the shift towards our high end products.

JinMing Liu - Ardour Capital Investments

Okay. Regarding your new solar energy storage system, can you give us some color about the market potential for that application? How much revenue you expect to realize in the near future and how big the market is?

Henry Sun

We do not plan to give any forecast to the sales yet because this is a new product offering. We're now working on a market penetration and finding the right partners, penetrating different markets like North America or Europe. So we probably will have better visibility in a quarter or two about the sales volume in this area.

JinMing Liu - Ardour Capital Investments

Okay. What is your internal view of the market size of that application?

Henry Sun

The market size, it's huge I will say because this area is still, for example, in North America. The energy storage piece is still sort of missing in a lot of families, so they have rooftop panels installed. But still they experience power outages. This doesn't make sense at all. In all these installations they don't have this energy storage piece in their garage or wherever. So we see this market is unmet and also not only in the developed countries like U.S. or Europe, but also in some underdeveloped countries like in Southeast Asia or even in Africa, the remote areas without electricity infrastructure all these regions need (indiscernible) to solve the electricity problem. So the market is huge. It depends on how we can access it.

JinMing Liu - Ardour Capital Investments

Okay. Lastly, what is your capital plan for this year and next or how much capital expenditure you will plan for on next two years?

Henry Sun

The guidance we gave for the capital expenditure for this year is 5 million to 10 million.

JinMing Liu - Ardour Capital Investments

Okay. Thanks a lot.

Henry Sun

Thank you, JinMing.


Thank you. (Operator Instructions). I'm showing no further questions. I'll turn the call back to Henry Sun for closing comments.

Henry Sun

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 Tricia Ross at Financial Profiles at 310-622-8226 or myself if you have any follow-on questions. As always, we welcome your feedback. Thank you.


Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.

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