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Jinpan International Limited (NASDAQ:JST)

Q1 2014 Results Earnings Conference Call

May 15, 2014, 08:30 AM ET

Executives

Albert Sheng – Vice President-Investor Relations

Zhiyuan Li - Chairman, President and CEO

Mark Du – Principal Financial Officer

Analysts

Douglas S. Ruth – Lenox Financial Services, Inc.

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Jinpan International First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Instructions will be provided at that time for you to queue up for questions. As a reminder this conference is being recorded.

With us today is Zhiyuan Li, Jinpan's Chairman and Chief Executive Officer; Mark Du, Jinpan’s Chief Financial Officer and Albert Sheng, Jinpan’s Vice President of Investor Relations.

This call may contain forward-looking statements made pursuant to the Safe Harbor Provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations, involve known and unknown risks, uncertainties and other factors not under the company’s control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors detailed in the company’s filings with the SEC. Jinpan undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call.

At this point, I would like to introduce Mr. Albert Sheng. Albert, please go ahead.

Albert Sheng

Thank you, operator and thank you everyone for joining today’s conference call. Mr. Li Jinpan Chairman of the Board and Chief Executive Officer has joined us for today's call and will provide some opening remarks and the review of our first quarter 2014 operational performance and update current business development. I will translate for Mr. Li. Afterwards, Mr. Li I will turn the call over to Mark Du, who will more thoroughly review our financial results and provide our outlook for 2014.

I am now pleased to introduce Mr. Zhiyuan Li.

Zhiyuan Li

Thank you, Mr. Li. I'll now translate Mr. Li's opening remarks. Thank you, operator and thank you, ladies and gentlemen for joining today's call. I am Zhiyuan Li, the Chairman of the Board and CEO of Jinpan International. Before answering your questions I want to have an opportunity to introduce you to Jinpan.

Since the founding of Jinpan in 1993, we have focused on building a company that's recognized with high quality product, strong technological capabilities and excellent customer service. To achieve this objective the company has built a corporate culture that -- in fact the company has to build a corporate culture that can attract and retain talented people. I am very proud of our team and our performance is a result of disciplined execution of our growth strategy.

I will translate for Mr. Li. We are pleased with Jinpan's strong start to 2014. The company's sales growth continued its momentum from last year. We posted double-digit sales growth for the third consecutive quarter. Our Guilin facility increased and rationalized our production which we can leverage to enhance our leading position in China's dry-type transformer market and to further penetrate the larger market or switchgears and unit substations.

Demand for our product remains healthy. Sales in the first quarter of 2014 increased by 17.5% over the prior year period. As of March 31, 2014 backlog increased by 80% compared with the backlog at the end of last year. Strong growth in China's rail, subway and utility scale solar sector continue to drive our sales in China, in China's dry type transformer market. Our switchgears and unit substations products are also gaining traction as we seek to further penetrate these markets.

Having qualified with fifth international OEM customers we have now shifted our focus from expanding our OEM customer base to deepening our relationship with these customers. We are making good progress with this effort. The company sales to OEM customers in the first quarter of 2014 increased by 37% over the prior year period.

I will now translate for Mr. Li. Operationally we are pleased with our effort to ramp up production in the Guilin facility and to rationalize our production across our manufacturing facilities. In addition to providing us with increased cast resin transformer capacity the Guilin facility also increased our capacity for switchgear and unit substation products.

Our financial results reflect the positive results of our productivity effort. We remain focused on managing our working capital. Our additional capacity has improved productivity which is reflected in inventory turnover. We continue to make efforts to improve the accounts receivable turnover which I have identified as one of our top priorities.

I will now translate for Mr. Li. Looking ahead we remain optimistic about 2014 and beyond. Based on our first quarter results and the order volume increase in order volume and quotation activities we have seen so far in the second quarter, we believe that we are track to achieve revenue and earnings growth of approximately 10% to 15% consistent with our guidelines.

At this point I will translate for Mr. Li. I believe that at this point I would like to turn the call over to our Chief Financial Officer, Mark Du who will present the details of our financial performance and discuss our financial outlook for 2014.

Mark Du

Thank you, Mr. Li and Albert. I will now discuss our first quarter 2014 consolidated results and the outlook for the full year 2014. Net sales for the first quarter were $41.3 million a 17.5% increase from $35.2 million in the same period last year. This was driven by steady demand in the Chinese market, increased sales of switchgears and unit substations and the expanded sales to our OEM customers.

In the first quarter, China sales increased 15% year-over-year to $37.1 million or 89.8% of net sales compared to $32.2 million or 91.6% of net sales in the same period last year. Net sales outside of China for the quarter increased 40% year-over-year to $4.2 million or 10.2% of net sales compared to $3 million or 8.5% of net sales for the same period last year.

Sales to OEM customers increased 36.6% year-over-year to $6.5 million or 15.8% on net sales compared to $4.8 million or 13.6% of net sales in the same period last year. From an end market perspective, sales to industrial customers were approximately 44% of total sales during the quarter. Sales to utilities were approximately 35%, sales to commercial customers were approximately 8% and the sales for the residential project were approximately 13%.

Gross profit in the first quarter increased 17.1% year-over-year to $12.8 million from $10.9 million in the same period last year. First quarter 2014 gross profit margin was 31% compared to 31% in the prior year period. Gross margin in the first quarter was stable compared with the same period last year as slightly improved pricing and the lower production costs were offset by an increased mix of lower margin products.

Selling and administrative expenses in the first quarter were $10.9 million or 26.3% of net sales, compared to $9.6 million or 27.2% of net sales in the same period last year. Selling and administrative expenses increased from the same period last year due to high sales volume and increased costs associated with the establishment of the Guilin facility.

Operating income for the first quarter increased 43.9% to $1.9 million or 4.7% of net sales, from $1.3 million or 3.8% of net sales in the same period last year. Net income for the first quarter increased 32.8% to $1.5 million or $0.09 per diluted share compared to $1.1 million, or $0.07 per diluted share in the same period last year. First quarter net income as a percentage of net sales was 3.7% compared to 3.2% in the same period last year.

As on March 31, 2014, the Company had $18.6 million in cash and cash equivalents, restricted cash, and short term investments compared to $30.8 million as of December 31, 2013. Total bank loans outstanding at March 31, 2014 were $43.2 million, compared to $43.1 million at December 31, 2013. The company's accounts receivable on March 31, 2014 totaled $140.5 million compared to $144.6 million as of December 31, 2013.

We continue to make major progress managing our working capital. Our day sales outstanding decreased slightly and our inventory turnover improved year-over-year. At the end of March our backlog equaled $118 million, which is down 16.9% from prior year period but is up 18% from fourth quarter of 2013.

The increased production of standardized cast resin transformers from our Guilin facility has accelerated our average cycle time and enabled us to convert it over into revenue more quickly. We expect our backlog will gradually increase as our business expands. The company reiterates its guidance for the full year 2014. For the full year 2014 net sales is expected to be in the range of $248 million to $260 million. The net income is expected to be in the range of $18.2 million to $19.1 million or $1.09 to $1.14 per diluted year.

That concludes our remarks on today’s conference call. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question will from Douglas Ruth with Lenox Financial Services.

Douglas S. Ruth – Lenox Financial Services, Inc.

Hi. I want to first thank Mr. Li for participating in the call today. We’re very grateful for that. Could you give us some color about how much in sales you had in switchgears and how much in sales you get in sub stations?

Albert Sheng

Doug, we will translate your question to Mr. Li and then I’ll answer your question.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay.

Albert Sheng

Doug, for the first quarter our switchgears total sales about $5 million and our substation sales about $4 million. So between substation and switchgear total $9 million for Q1.

Douglas S. Ruth – Lenox Financial Services, Inc.

And how about from the prior period, how much did you get in the prior -- in the same period a year ago.

Albert Sheng

The year ago total is about $5 million.

Douglas S. Ruth – Lenox Financial Services, Inc.

That’s fabulous. And does Mr. Li think you might be able to improve the gross margin for the year?

Albert Sheng

Doug are you referring to overall gross margin?

Douglas S. Ruth – Lenox Financial Services, Inc.

Yes, the overall gross margin.

Albert Sheng

Doug, our margin we expected between 30% to 33% for the full year. This is based on our guidance and we understand that switchgears and substation the market is huge much larger than just four months but their gross margin is not as good as transformers. But we expect that our gross margins between 30% and 33% for the whole year.

Douglas S. Ruth – Lenox Financial Services, Inc.

Okay. So it's better to sell some of these substation and switchgears because we can further increase the revenue is what you’re saying.

Albert Sheng

Yes.

Douglas S. Ruth – Lenox Financial Services, Inc.

Could you give us a little update as far as what’s happening with some of the OEM customers?

Albert Sheng

Doug, we’re now qualified as suppliers to industrial electrical equipment manufacturers. We qualified with one of the largest in back in 2005. For this customer we supply cast resin transformer and reactors for wind power applications. We also supply this customer with cast resin transformers or power distribution applications at modest scale then for the wind, projects with wind applications.

We qualified with two other large OEM customers in 2010. For these two we supply cast resin transformers or power distribution applications primarily to the -- for international markets. We made shipments to both of these two OEM customers and continue to receive orders from them in Q1. Sales to these customers ramped up nicely during the first quarter -- sales to one of these customers ramped up nicely during the first quarter.

We qualified with our fourth OEM customer which is a leading Europe-based wind turbine manufacturer in 2013. We have an agreement with this OEM customer to supply his factory in China and we're working to finalize an agreement with this OEM customer to supply them on a global basis. We are optimistic about finalizing this agreement soon.

And finally, we qualified with our fifth and sixth OEM customer in late 2013 and we expect shipments will ramp up gradually over time. So with the qualification at the fifth OEM customers our focus is now on increasing purchase orders from our -- from these OEM customers rather than increasing the number of OEM customers. We're focused on deepening relationship with OEM customers for which we're [working] hard.

Douglas S. Ruth – Lenox Financial Services, Inc.

That's a fabulous accomplishment. I congratulate everybody at Jinpan to being able to do that.

Albert Sheng

Thank you, Doug.

Douglas S. Ruth – Lenox Financial Services, Inc.

Could you talk some about -- could Mr. Li talk some about the overall China transformer market? Is the market expanding at this point?

Zhiyuan Li

I am very glad that you asked this question. In terms of production capacity for cast resin transformers and in terms of sales of cast resin transformer, both in terms of capacity and sales of cast resin transformers in China Jinpan is a leading company in China. And I am very glad that investors like you are asking these questions.

With improvements in technology and development in the China market we see that demand for cast resin transformers to be increasing. This is probably due to the increase in demand for cast resin transformers in China, is probably due to the characteristic for the product such as low maintenance and low hazard and fire risk, that is direct characteristic of cast resin transformers. And they are used as a result in public transpiration projects or high density urban areas.

Because of the low maintenance nature of cast resin transformers, cast resin transformers are adopted in many alternative energy applications and we are now supplying cast resin transformers for those applications.

With growth of the China's economy and market we see more places that they use, increase in the number of places that use cast resin transformers. And as a result we see continued growth in demand. Mr. Li asked whether you are satisfied with his response.

Douglas S. Ruth – Lenox Financial Services, Inc.

Yes. The one clarification, is there a growth rate of the overall China transformer market?

Zhiyuan Li

Doug, Mr. Li says it's difficult to get an accurate picture of the entire cast resin transformer market in China. But going through our own estimates we believe the growth rate for demand for cast resin transformers in China is around 10% to 15% annually.

Douglas S. Ruth – Lenox Financial Services, Inc.

Wow, that's fabulous. Okay I got one last question. What rate you see Guilin facility operating yet now?

Albert Sheng

You mean the capacity?

Douglas S. Ruth – Lenox Financial Services, Inc.

Yes at what capacity?

Albert Sheng

Okay. Mark will answer this question.

Mark Du

Let me translate it for Mr. Li.

Yeah in terms of the utilization rate in Guilin last year, up to last year in Q1 the utilization rate is approximately 40% of our total capacity and we are last year we only had operations for about nine months. And this year we're going to have full operation. We're going to have full operations for the full year.

So last year in terms of the Guilin facility last year our total sales translated to about US$9 million and this year we estimate we should able to reach $20 million in Guilin.

Douglas S. Ruth – Lenox Financial Services, Inc.

Fabulous. Thank you very much for answering my questions. You folks at Jinpan are really doing a good job for the investors and I am grateful that you are all there and I am very optimistic about the future of the company.

Albert Sheng

Thank you, Doug.

Douglas S. Ruth – Lenox Financial Services, Inc.

You are welcome.

Operator

And next we’ll move to [Les Brian] with UBS Financial Services.

Unidentified Analyst

Good morning or good afternoon or evening. I want to thank you guys for coming by and giving us an update a few weeks ago at my home. That was very, very beneficial to me and to their shareholders here and very good of you. I have a question in regards to your research and development charges; are much of your research and development charges are they in use, are you are qualifying the cost of new OEM customers? Are they listed as research and development cost?

Albert Sheng

Mr. Li said yes part of the R&D expenses are used to for testing to qualified suppliers to OEM customers to quality the product for OEM customers. But also part of the money is used to conduct R&D to improve our existing pipeline as well as to develop new products.

Unidentified Analyst

Now that we are not pushing to have a number of new OEMs qualified, will our Research and Development expenditures decline any?

Albert Sheng

No, actually not as far OEM quantification R&D expenses it's not a major contribution to our R&D expense. Actually we take a lot more [inaudible] into the quality of our products and also spend more money in the development of new products. There are few new products still under the development so we have -- we are now [inaudible] at this moment.

Unidentified Analyst

Okay. I am not objecting to the cost, I am just trying to get my mind around them, how we operate? Now it appears I was a little bit confused when I read the different, the China sales and the OEM sales. I seem to read that we have $6.5 million in OEM sales and for -- that 4.2% of or I am sorry 15%,15.8% is OEM customers and our exports are 10% roughly. It would appear that we are doing some OEM business now in China and that is growing, is that correct?

Albert Sheng

Yes. Now OEM companies buy from us directly in China and then use in the Chinese market.

Unidentified Analyst

Good. Thank you guys. You are doing a great job and I am giving you an attaboy. Thank you.

Operator

(Operator Instructions). And at this time there are no further questions. Ladies and gentlemen at this time I would like to turn the floor back to management for any closing remarks.

Albert Sheng

Thank you everyone for your time this morning and your questions. We are encouraged by our recent operating and financial performance and remained focus on executing our growth strategy. We look forward and we will update you on our public press conference call in August for our second quarter 2014 results. Thank you again and have a good day.

Operator

Thank you, ladies and gentlemen this concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.

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