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SORL Auto Parts, Inc (NASDAQ:SORL)

Q1 2014 Earnings Conference Call

May 16, 2014 08:00 am ET

Executives

Kevin Theiss - Grayling

Jin Rui Yu - Chief Operating Officer

Min Kan Lin - Accounting Manager

Raymond Lin - Investor Relations

Phyllis Huang - Investor Relations

Analysts

Peter Siris - Private Investor

Operator

Greetings, and welcome to the SORL Auto Parts 2014 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kevin Theiss of Grayling. Thank you, sir. You may begin.

Kevin Theiss

Thank you for joining us today and welcome to SORL Auto Parts' 2014 First Quarter Conference Call. This is Kevin Theiss from Grayling, SORL Auto Parts' U.S. Investor Relations Advisor. Joining us today, are Ms. Jin Rui Yu, SORL's Chief Operating Officer; Mr. Min Kan Lin, Accounting Manager; Mr. Raymond Lin, Investor Relations; and Ms. Phyllis Huang, Investor Relations.

Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The words believe, expect, anticipate, project, targets, optimistic, intend, aim, will or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts are statements that may be deemed forward-looking statements.

These forward-looking statements are based on current expectations or beliefs, including but not limited to statements concerning SORL Auto Parts’ operations and its financial performance and condition.

SORL Auto Parts cautions that these statements by their nature involve risks and uncertainties and actual results may differ materially depending on a variety of important factors including those discussed in SORL Auto Parts' reports filed with the Securities and Exchange Commission from time-to-time. SORL Auto Parts specifically disclaims any obligations to update the forward-looking information in the future.

The 2014 first quarter results are unaudited numbers and presented in U.S. dollars under U.S. GAAP. I will begin with a brief overview of operations first quarter results. Thereafter management will conduct a question-and-answer session.

We are pleased to report strong revenue growth in the beginning of 2014 despite a slow market environment.

Revenues in all three of our major market segments in OEM, aftermarket and international markets rose in the first quarter of 2014 compared with the first quarter of 2013. We increased our market share in the first quarter of 2014, as our overall sales increased by 21%, compared with a 9.2% increase in total commercial and passenger vehicle sales in China during the first quarter of 2014.

We also achieved higher profitability in the first quarter of 2014. Our gross margin rose to 30.8%, net margin increased as earnings per share more than doubled in this quarter to $0.14 from $0.06% in the quarter of 2013.

Commercial vehicle sales in China during the first quarter of 2014, continued its recovery trend of 2013. Total commercial unit sales reached $1.1 million among which truck unit sales, including complete, incomplete and trailer sales rose by 4.4% to 924,208 and bus unit sales increased by 10.5% to 128,610 units.

In this quarter, real estate and infrastructure spending rose compared with the first quarter of 2013. As a result, the market for heavy-duty truck sales increased by 16%. A large percentage of our domestic OEM sales are into the heavy duty commercial vehicle market.

Our largest market segment by sales, the domestic OEM segment grew by 25.4% year-over-year to $28.6 million in the first quarter of 2014. Higher spending on infrastructure, construction and continuing pre-buy of vehicles were the main drivers in the first quarter of 2014.

In April 2014, the Chinese government decreed the sales of national three vehicles will stop at the end of 2014. This directive allows the pre-buy of commercial vehicles before the full nationwide enforcement of the of the National IV emission standard in 2015. We expect to continue generating sales to the OEM truck market, especially heavy-duty trucks for the remainder of 2014.

Aftermarket sales growth accelerated in the 2014 first quarter to 14.1% year-over-year compared with flat growth in the preceding fourth quarter of 2013. We continue to expand our distribution network to provide high-quality products for vehicles operating beyond their warranty periods.

Additionally, our growing portfolio of advanced products is capable of servicing an increasing number of vehicle models as they come off warranty every year in the periodic maintenance.

International sales increased by 17.2% to $10.9 million for the first quarter of 2014, compared to $9.3 million for the same quarter in 2013. We have expanded our distribution networks to increase our customer base. Additionally, the quality, performance and reliability of our higher-margin new brake products are being well received in the number of foreign markets.

We continue to concentrate on increasing our leading market share in the Chinese OEM market, with a stream of new products. Our new state-of-the-art testing center was competed in January 2014. This facility enhances our capability to provide advanced products with higher-quality, functionality and performance to differentiate them in the market. These advanced products will strengthen SORL's reputation and help add to our leading market share in the Chinese OEM market. We will leverage our advanced products and reputation to further penetrate the aftermarket and foreign markets as we implement our plans to become a global supplier.

Several developments provide encouragement for the future. We believe we are in the initial stages of a new replacement cycle with a many maturing trucks sold in earlier years, especially in the important heavy-duty truck market.

Government spending to further expand infrastructure, the railway systems and public housing has added to the demand for trucks. For pre-buy of truck sales will continue during the remainder of 2014, although it will likely reduce demand in early 2015. We are continuing our efforts to penetrate other markets, including the construction equipment, railways and bus markets.

Now, we have a brief overview of our quarterly profits. The gross profit for the first quarter 2014 increased 25.9% to $15.4 million from $12.8 million for the first quarter of 2013. Gross margin for the first quarter of 2014 improved to 30.8% from 29.6% in the first quarter of 2013.

The gross margin increase was primarily due to high value-added products, more automated production lines and the reclassification of certain costs associated with post-sales product modifications at OEM sites of cost of sales to selling and distribution expenses. Retrospectives adjustments to the historical income statement have also been made to provide a consistent basis of comparison for the financial results.

These reclassifications did not have a material impact on the earnings or the company's financial condition in the first quarter of 2014. This gross margin can be maintained by improving production efficiency as well as introducing products with more advanced technologies to cost-effectively improve its product portfolio in a cost-effective manner.

Operating expenses increased $11.5 million in the first quarter of 2014 from $10 million in the first quarter of 2013. The increase in operating expenses for the same quarter last year reflected higher expenditures in selling and distribution, general and administrative and research and development areas.

As a percentage of revenue, operating expenses were 23% in the first quarter of 2014, down from 24.1% in the first quarter 2013. Selling and distribution expenses were $5.7 million or 11.4% of quarterly revenues compared with $4.4 million for 10.7% of revenues in the same quarter of 2013. The increase in expenses was mainly due to higher freight cost and packaging expenses during the quarter.

General and administrative expenses in the first quarter of 2014 were $4.3 million or 8.6% of revenue compared with $4.2 million or 10.1% in the first quarter of 2013. Research and development expenses were $1.5 million or 3% of revenue in the first quarter of 2014 compared with $1.4 million or 3.4% of revenue in the first quarter of 2013.

The company continues to deploy resources for the development of new products, especially higher-margin electronically controlled products and product upgrade of older products. Strict cost controls ensure the R&D expenditures were monitored for effectiveness.

Financial expenses decreased to $0.7 million from $0.9 million, due to the lower currency exchange losses during the first quarter 2014 for the company's export sales contracts. Income before provision for income taxes increased 140% to $3.6 million for the first quarter of 2014 compared to $1.5 million for the same quarter of 2013.

The higher income reflected increased sales, higher gross profits and controlled expenses during this quarter. The pre-tax income margin was 7.2% in first quarter of 2014, compared with 3.7% in the first quarter 2013. The provision for income taxes was $0.5 million or a 14.3% tax rate in the first quarter 2014, which compared with $0.2 million or a 10.9% tax rate in the first quarter of last year.

Despite the fluctuations of the tax rate, the annual tax rate for 2014 is approximately 15%. Net income attributable to stockholders for the first quarter of 2014 was $2.8 million or $0.14 per basic and diluted share compared with $1.2 million or $0.06 per basic and diluted share in the first quarter of 2013.

Our balance sheet as of March 31, 2014, the company had cash and cash equivalents of $35.8 million compared to $28.2 million on December 31, 2013. Total equity increased to $206.9 million at March 31, 2014, compared with $199.5 million at December 31, 2013. At March 31, 2014, working capital increased to $151 million with the current ratio of 3.9:1.

For the business outlook, we believe the outlook for commercial vehicle sales is for continuing growth as inventory levels are positive as we enter a higher growth quarter. The pre-buy before the strict enforcement of the National IV emission standards continues and the movement of goods and people resulting from urbanization will sustain demand for commercial vehicles.

We expect that our growing portfolio of upgraded and new product will capture market share in foreign markets as their value become more recognized by local customers and our brand develops greater visibility.

For the fiscal year 2014, the management reiterates its outlook for net sales to be approximately $225 million and income to be approximately $12.5 million. These targets are based on the company's current views on the operating and market conditions, which are subject to change.

With that, operator, we are now ready to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question comes from the line of (Inaudible) Capital Investors. Please proceed with your question.

Unidentified Analyst

How much will capital expenditures be for the remainder of 2014 and what are some of your key projects going to be?

Unidentified Company Representative

[Foreign Language]

Unidentified Company Representative

[Foreign Language]

Kevin Theiss

Our 2014 total CapEx is around U.S. $5 million. This $5 million will be used for some of the automated production equipment and as assembly lines as well as some testing equipment.

Operator?

Operator

Our next question comes from the line of Gary Nash from (Inaudible) Capital. Please proceed with your questions.

Unidentified Analyst

Hi. Good morning, everyone. I think, I might have missed it, but the aftermarket sales growth accelerated in 2014, first quarter to 14.1%. What is the outlook for the rest of 2014?

Unidentified Company Representative

[Foreign Language]

Kevin Theiss

Okay. The overall 2014, we are confident the aftermarket and year-over-year growth will be around or about 10%.

Unidentified Analyst

Okay. All right. Thank you.

Operator

(Operator Instructions) Thank you. Our next question comes from the line of Peter Siris, a private investor. Please proceed with your question.

Peter Siris - Private Investor

[Foreign Language] What I said was that they speak better English than I do, so I actually have three questions. First question is, I see the (Inaudible) has been going down some in value. How does that impact your future projected international sales. Am I correct in assuming that could be a positive for international sales?

Unidentified Analyst

[Foreign Language]

Kevin Theiss

As it relate to the RMB exchange to U.S. dollars, or U.S. to RMB, start to weaken as early as December last year has grow over to $10 million. The exchange rate was $1.00 to $6.01, late last year. Now, it's $1.621. It's a two percentage change than we believe these are posting some of the positive impact to our international sales and give us some more pricing advantages over our competitors, so we enjoy that on the currency change at the moment.

Peter Siris - Private Investor

Okay. Secondly, I noticed even though you didn't say anything, this is the first time in a long time that I have seen big increases in automobile brake sales. Can you tell me what's going on there that the automobile price sales had such a strong quarter.

Kevin Theiss

You mean, the passenger vehicle?

Peter Siris - Private Investor

Yes. That's what I mean. Passenger vehicle. Sorry.

Unidentified Analyst

[Foreign Language]

Kevin Theiss

In terms of passenger vehicle business, that accounts for around 20% of our revenue. However, in the domestic market, due to the increase in the warranty cost and the lower margin - due to the heightened competition, so we actually scaled back our sales in domestic markets for the passenger vehicle component, especially the hydraulic component, hydraulic pumps for some of the global names, so that give us some very healthy growth, which has showed up in the first quarter.

Peter Siris - Private Investor

Got it. The next question I have is in the past, you talked about EV, electric vehicles, and I understand these vehicles have different systems. It's is a more expensive product. Can you tell us what's going on in the EV business?

Unidentified Analyst

[Foreign Language]

Kevin Theiss

You know, China [literally are going] in solutions matter and China is now aggressively moving to environment-friendly vehicles. EV is clearly one of the solutions. In terms of EV, our presence in each or our product presence in the EV market, we do have a number of products actually fits very well as a solution to the EV braking systems for our cheap products, which are compressor, electric compressor, electric power steering, pumps and the air dryers, foot brake. These are important components for the EV braking systems.

Also, some of the customers we are currently supplying to the largest clutch maker in China, (Inaudible) and we are also working with an international company. Later, we probably will make announcement.

Peter Siris - Private Investor

You think are growth are for you?

Unidentified Company Representative

[Foreign Language]

Kevin Theiss

Yes. Correct. It's a growth area for our products.

Peter Siris - Private Investor

My last question is, I noticed I was going to ask three months ago, but I didn't. I noticed in the (Inaudible) or 10-K, that your several largest export customers that three of them are in the United States, but it looks like that you do a decent amount of business in the United States. Am I correct in the way I read that?

Unidentified Company Representative

[Foreign Language]

Kevin Theiss

Yes. Correct. U.S. is an important market for our international sales. Currently, the U.S. sales account for 25% of our total global international business.

Peter Siris - Private Investor

If I wanted to get new brakes for my truck, I could somewhere find your product to put on my truck, right?

Unidentified Company Representative

[Foreign Language]

Kevin Theiss

Yes. In some parts of country in America, you can definitely get our product and however you may not see our brand, SORL's brand, because they - the private label with us.

Peter Siris - Private Investor

[Foreign Language]

Jin Rui Yu

Okay. Any question?

Peter Siris - Private Investor

That's all. I am sorry, operator. Thank you for the questions.

Jin Rui Yu

Okay.

Operator

As a final reminder, (Operator Instructions). Thank you. It appears, we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Kevin Theiss

Thank you for participating in today's conference call. We look forward to speaking to you again next quarter and we wish you all good day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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