China Auto's (CALI) CEO Tong Shipping on Q1 2014 Results - Earnings Call Transcript

May.19.14 | About: China Auto (CALI)

China Auto Logistic Inc. (NASDAQ:CALI)

Q1 2014 Results Earnings Conference Call

May 19, 2014 8:00 AM ET

Executives

Ken Donenfeld - President, DGI Investor Relations

Tong Shipping - President and CEO

Jin Yan - Chief Operating Officer

Yang Feng - Financial Controller

Richard Sun - Corporate Secretary

Lawrence Wang - Member of the Financial Team

Analysts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the China Auto Logistics Inc. 2014 First Quarter Investor Call on Monday, the 19th of May, 2014. Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Ken Donenfeld, President of DGI Investor Relations. Please go ahead, sir.

Ken Donenfeld

Thank you very much, and thank you to those who are joining us on the phone and on the Internet for this periodic update. We greatly appreciate your interest in our company.

On the conference call today will be Mr. Tong Shipping, President of China Auto Logistic; Mr. Yan, COO and other executives of the company including Mr. Yang Feng, Financial Controller; Mr. Richard Sun, Corporate Secretary and Mr. Lawrence Wang, who is the member of the financial team. Mr. Tong has asked me to begin the presentation. Lawrence will then walk you through the numbers. Afterwards we will have a question-and-answer period. So hopefully whatever questions you have can be answered.

I will first read the required disclaimer regarding forward-looking statements. This conference call may contain an addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding China Auto Logistics Inc. Except for historical information contained in our comments, the statements we make are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, product demand, market competition, and risks inherent in our operations. These and other risks are described in our filings with the U.S. Securities and Exchange Commission.

Okay, I will now begin with comments from Mr. Tong.

Tong Shipping

Good morning to all of you. I once again appreciate the opportunity to speak with you about our results in what we see ahead. To put our recent results in context, I believe it’s necessary to look back over the past few years. In short, Cali’s key goal from the time, we’ve been public to the present, has been to leverage our leadership position in China in the imported auto space into other auto related services which offer the opportunity to increase our profits and our profitability.

The reason for this is that while we have grown our imported sales business on the top line, the margins in auto sales have quite been at best and the competition in this space has become fierce. On the other hand, margins on auto related services which we have used from the start to help build our auto sales are considerably greater and with even much smaller revenues offer the potential to build our profit as we have shown.

We focused initially on website development, which allowed us to utilize skills we had built up with our experience selling imported vehicles over the years. This was coupled with the recognition that in China perhaps to an even greater extent than elsewhere customers are utilizing the Internet. And it has rapidly become an integral part of the sales process for automobiles and other goods and services.

After some significant progress with this focus, however, we stumbled a bit with an acquisition. And at the time came to realize that we would be up against too much competition to achieve our goals in the web-based advertising space. So we determined to largely exit web-based advertising services to focus on building what has become a reasonably successful financial services business. And we intensified our search for another auto related business with the potential for scale and for better margins.

This is what let us to a decision to take next step to diversify our business, we rushed into used cars. This is still a very new and somewhat fragmented business in China. And it offers potentially better margins and significant growth potential.

Until last year, we identified an opportunity with Car King China, which has developed a successful used auto business in Shanghai. And we concluded, it might be possible to achieve similar or greater success in our important port city of Tianjin. After many discussions in November of 2013, we finalized the joint venture agreement with Car King China, which created Tianjin Car King Used Car Trading Company in which we have 40% interest.

As part of this agreement, we also moved ahead with our [Zhonghe] (ph) acquisition, which gave us ownership of a very significant piece of Tianjin real estate, which we saw as the home base for the Tianjin Car King used car business and also could possibly provide additional rental income. We agreed on a $91.4 million price for what we believe is an extraordinary property, the Airport International Automall. With 26,000 square meters of space, the property has nestled among a variety of the city’s most significant auto dealerships near the Tianjin Airport.

Further it is in the center of what we believe may become China’s second Free Trade Zone. The first such FTZ as it is called, which recently created in Shanghai were almost immediately the value of the properties and the companies in it shot up fairly dramatically. Among some of the many advantages in FTZ provides businesses located in it are freedom from bureaucracy and an ability to freely engage in commercial transactions with companies in other countries using foreign currencies.

Our financial agreement with respect to the Automall acquisition entailed initial first payment in 2013 of $39 million, with the remaining amount owed, spread out over the next three years. What this means, of course, is a series of new cost risks going forward, in particular, interest on the remaining amount to be paid and depreciation on property.

At the same time, we estimate that the used car business won’t begin ramping up until the second half of 2014. We also have yet to decide on the very best uses for the Airport Auto Mall. With that background, I can talk a bit about 2014 first quarter.

A key aim in the 2014 quarter was stabilized results in our auto sales operations, which comprised approximately 98% of our revenues in the period. In recent periods, we have seen an already thin margin in this business shrink even further.

In an effort to maintain our leadership position, we felt it necessary to provide our customers with the lowest prices available on the automobiles we sold to them. As Lawrence will explain further, we succeeded in the first quarter in shifting the mix of automobiles sold to include more higher-end vehicles.

So on roughly flat year-over-year revenues, we were able to achieve slightly higher margins than in the recent past. Equally important, we believe we can sustain this going forward and not skirt the line as closely on profitability.

At the same time, during the quarter we saw a decline in contributions to operating income from two of our auto related services business, financing services and auto mall services. With respect to financing services, this has been a successful business and it is still the biggest contributor to our operating income.

However, as Lawrence will provide details on, we decided to temporarily reduce the volume in one of our key financing services after determining that at least temporarily the working capital in this service was required to help finance their acquisition. Additionally, while our Airport Auto Mall Services business was still in start-up mode, at the end of February, we reached the end of our annual contract with the Auto Mall we have been managing in Tianjin. And therefore, we had a month less revenue from this business in the quarter.

Together with the reduced income from operations, led by these situations, we also had new acquisition-related interest, depreciation, and amortization costs in the first quarter. Also as anticipated, we incurred a small loss in the Car King Tianjin joint venture in its first quarter of business. The net result of all these was an approximately $1.35 million loss on relatively flat year-over-year revenues of approximately $107 million.

As we look ahead, it is likely in the near term that we will continue to have difficult comparisons, at least until we begin to generate revenues from our new businesses some time in the second half of the year. Even with the stabilized contribution from auto sales, the continuing interest, appreciation, and amortization costs relating to our acquisition will weigh on our results.

In our view however, the short-term sacrifice is well worth it. We see a significant longer-term growth opportunity boast further for our new businesses. Going forward, we see ourselves becoming a stronger diversified company with a leadership position in at least two automobile sectors, where above average growth continues to be anticipated, luxury auto sales and used car sales. Further, while China is currently moving in a slower mode, it is only a matter of time before we move into a growth cycle.

Lastly, I wanted to make comment on a recent distraction that has generated from headlines involving our company. I'm referring to the announced SEC complaint against few individuals for alleged improprieties with respect to our shares going back to our entry into the U.S. as a public company.

In short, our company has not been accused of anything. And as we stated in our earnings release, we strongly support any efforts by the SEC aimed at protecting our shareholders. Other than reiterating here that we will continue to operate the company with the best interest of shareholders in mind, I won't make any further comments on the matter in our question-and-answer period.

With that, okay, let me hand over the microphone to Lawrence, who will quickly walk through some of the numbers with you. And then, we will open floor to your questions. Lawrence, please?

Lawrence Wang

Thank you, Ken. I will now go through some of the key numbers for the quarter extracted from the Form 10-Q we filed on the 15th which contains more extensive information. When I have concluded, I will look forward with the management team to try to answer any questions you may have.

Starting at the top, the revenue for the 2014 first quarter of $106,975,000 was down less than 1% from approximately $107,625,000 a year earlier. This does not include revenue from the company’s 40% share of Car King Tianjin, as used car joint venture which reports results on a separate line and was not yet fully operational in the quarter. The main component of revenue was Sales of Automobiles, which accounted for 97.9% of the revenues, up slightly from the prior year.

Of particular note, as Mr. Tong noted was the slight improvement in the gross profit margin for auto sales from 0.04% in the 2013 first quarter to 0.17% in this year’s first three months. These improvements represent stabilizations which we feel will continue during the year following slow quarters of decreasing margins reflecting heavy price cutting by the company to maintain its competitive position. A key reason for the improvements was the shift in the mix of cars sold.

During the 2014 first quarter, the top three brands sold by the company were BMW, Land Rover, and Mercedes Benz, which accounted for 65% of our total sales. Of note, Land Rover sales replaced sales of Toyotas in this period and Land Rover prices increased 15% year-over-year. With this mix, the average unit selling price per automobile rose to $106,000 compared with $84,000 in a year ago period and permitted the slightly higher gross margins.

Unit sales in the 2014 first quarter, however, were down about 22% year-over-year to 981 automobiles. A further significant in the quarter, revenues from the company’s Financing Services decreased 18.76% year-over-year to about $1,543,000. The company’s aggregate credit lines as of March 31, 2014, were about $157 million, against which about $94.1 were drawn.

The gross margin in this business decreased by a greater amount however to about 36.5% in the current quarter from 69.7% in the year ago period. The decline in revenue reflected a decline in fee income of about 57% year-over-year to about $571,000, while interest income grew to about $973,000 from about $570,000 a year earlier.

As Mr. Tong explained it, the key reason for the decline in fee income was the decision to utilize the company’s working capital to help finance the Automall acquisitions decisions which necessitate a shift away from extending credit to customers beyond the financing terms they can get from the banks. However, the company hopes to restore its program in the near future.

Consequently led by the decline in Financing Services, operating income from the company’s Value-Added Services, Web-Based Advertising, and especially Financing Services, declined to an aggregate amount of $323,000. Additionally, the company lost one month of revenue from Auto Mall Management Services with expiration of the Auto Mall Management contract effective March 1, 2014. While we only added Airport Auto Mall Management, the newly added Auto Mall business segment generated gross profit about $337,000. This largely was from [vendor] (ph) income received from the Car King Tianjin.

Putting these together, the net loss from operations in the 2014 first quarter was $700,600 down from operating income of $1,464,000 a year earlier. The increase in interest expense in the 2014 first quarter is substantial from roughly $77,000 to about $1.32 million, mainly due to the interest on the remaining amount payable on the Airport International Automall acquisitions.

Another significant expense in the 2014 quarter was the depreciations on the Airport International Automall which helped depreciation expense grow to about $645,000 from about $28,000 a year earlier. The net result in the 2014 first quarter was a loss attributable to shareholders of about $1,346,000 or a loss per share of $0.33 compared with the earlier net income of about $1,007,000 or $0.27 earnings per share.

Let me now turn floor back to Ken. Ken?

Ken Donenfeld

Okay. Thank you, Lawrence. And I think, operator, we’re ready now for any questions we may have from the audience and appreciate if you could get this going forward.

Question-and-Answer Session

Operator

(Operator Instructions)

Ken Donenfeld

Operator, I guess, I have a couple of questions that have been e-mailed to me, so I might start things off. The first question is, could you tell us a little more about the current status of your website, do they still play a role in your current business, and what role do you see for websites in the used car business?

Lawrence Wang

Sorry. Ken, do you mean the website for used car business, right?

Ken Donenfeld

Yeah. I guess a quite. It’s a two-part question but if I can do it again. Thus, what is the current status of -- you’ve had a few different websites, do they still play a role in your current business in the luxury auto import business? And what role do you see for the Internet, for websites and the used car business?

Lawrence Wang

[Foreign Language]

Tong Shipping

[Foreign Language]

Lawrence Wang

Okay. Mr. Tong took your questions. First, as you all know that the company is operating few websites and we believe these websites are significant to our current business because through this website, we -- they allow -- they provide us a platform to disclose the information of our auto related, sorry -- to disclose the information of our luxury car business. And they are also a platform through which we can communicate with our customers. And I believe this website will continue to be important for our future business including the used car business that we're going to launch in the second half of the year.

Ken Donenfeld

Okay.

Lawrence Wang

Ken?

Ken Donenfeld

Yes. There was a part two to this question also on the used car business to understand it a little better. Do you anticipate selling used cars to dealers or to individuals? What kind of mix do you see? And will this be a national business or will it be a business focused on Tianjin?

Lawrence Wang

[Foreign Language] Ken, I forgot the first part of your question.

Ken Donenfeld

The first part is just whether it’s going to sell it to individual or….

Lawrence Wang

Yeah, thank you. [Foreign Language]

Tong Shipping

[Foreign Language]

Lawrence Wang

Okay. Mr. Tong said our used second -- that our used car business as they deny that it is for the individual purchasers -- consumers. And we will buy the new business in the Airport Auto Mall. We’ll focus on the local market of Tianjin because you know the used car -- the sales of used car is always closed related that auto -- to local consumptions. And when we see this mall as successful, we will duplicate in other cities.

Ken Donenfeld

Okay. Operator, do we have other questions.

Operator

There are no audio questions at this time.

Ken Donenfeld

Okay. Another question that I just got. We’ve been -- let me read this, we’ve been hearing from other companies about the downturn in the economy in China. How serious is it, do you see it from your viewpoint? And who is being affected by it?

Lawrence Wang

[Foreign Language]

Tong Shipping

[Foreign Language]

Lawrence Wang

Mr. Tong said for a long-term growth, I’m still optimistic with the economic growth in China and I believe that our Chairman, our credit and the Shi and our Premier Li, they are able to maintain a growth rate around 7.5% a year. But I also believe that for a short period of time, we are in -- as far as short-term borrowings, we are in period of adjustment and we have also witnessed some constrained consumption in the aspects, such as auto and real estate. But I believe the market will come back soon and I hope we could have some nice figures in our future quarterly report.

Ken Donenfeld

Very good. And I have one final question here from an investor. You’ve mentioned Free Trade Zone couple of times. What is the status of the Free Trade Zone in Tianjin. Is there any more news about it and why do you think this will be a big positive for the company?

Lawrence Wang

A big part, sorry.

Ken Donenfeld

A positive. Why might this be positive for the company?

Lawrence Wang

[Foreign Language]

Tong Shipping

[Foreign Language]

Lawrence Wang

Okay. Well, as we have mentioned that the Shanghai Free Trade Zone was approved last year and Tianjin free trade zone is under a process of approval by the central government. Few weeks ago, the Premier Li visited the Tianjin and he delivered some favorable message to Tianjin in terms of economic development. And I’m not of the decision-makers of this subject, but as far as I know that some favorable news on this issue will be concluded before end of the year. According to what we have seen from the Shanghai Free Trade Zone, we can anticipate that to receive some favorable benefits in term of financial services and in term of import processes, which will be resulted from the Free Trade Zone policy.

Ken Donenfeld

Okay. That’s all the questions I have in front of me, operator. Is there anyone else with the question?

Operator

(Operator Instructions) There are no questions at this time, sir.

Ken Donenfeld

Okay. Well, it appears then that’s it. If anyone online has any other questions after the call, please don’t hesitate to give me a call or, and anything that I can answer I will forward of course to the company to repeat and respond. Thank you all very much again for joining us and have a great day everyone. Thank you.

Lawrence Wang

Thank you, again.

Operator

Thank you. This concludes the China Auto Logistics’ Inc 2014 first quarter investor call. Thank you for participating. You may now disconnect.

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