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Jinpan International Limited (NASDAQ:JST)

Q2 2014 Results Earnings Conference Call

August 12, 2014, 08:30 AM ET

Executives

Albert Sheng – Vice President-Investor Relations

Mark Du – Chief Financial Officer

Analysts

Douglas Ruth – Lenox Financial Services, Inc.

Les Bryant - UBS Financial Services

Operator

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Jinpan International Second Quarter 2014 Earnings Conference Call. At this time, all participants are in 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, the conference is being recorded.

With us today is Mr. 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 of Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations. They 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 turn the call over and introduce Mr. Albert Sheng. Please go ahead.

Albert Sheng

Thank you, operator and thank you everyone for joining today’s conference call. I will provide some opening remarks and the review of our second quarter 2014 operational performance and update our current business development. Afterwards I will turn the call over to Mark Du, who will more thoroughly review our financial results and provide our outlook for 2014.

We're pleased with our second quarter results, which reflected a continuation of positive trends we have seen in previous quarters. Our team continued its strong execution of our strategic plans and produced encouraging results.

Our expanded production capacity and productivity improvements, drove double-digit revenue growth for the fourth consecutive quarter with [4D] (ph) operating margins approaching double-digits.

We made excellent progress in further diversifying ourselves. Revenues from the sale of switchgears and unit substations reached US$12 million an 86% increase over the prior year period and accounted for approximately 18% of total revenue.

We believe that the sales of switchgears and unit substations have potential for further growth because the addressable market for these products is substantially larger than our core dry-type transformers.

Sales to our OEM customers continue to increase and diversify. During the quarter, we supplied dry-type transformers to our OEM customers for a wide range of applications. Our strategy remains focused on expanding our business with the six OEMs with whom we have qualified.

Within China we generated double-digit sales growth by mid end markets, we remain well positioned within key market segments and strong growth in renewable energy and rail transportation and stable demand from the industrial sector which offer weakness within the residential construction market.

We believe our product manufacturing capacity and cost structure enable us to compete in a slower growth environment and capture market share over time. We continue to be highly productive with our projects and ensure projects meet our margin and cash flow requirements.

At this point, I'll 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, Albert. I will now discuss our second quarter 2014 consolidated results and outlook for full year 2014. Net sales for the second quarter were $65.7 million a 12% increase from $58.7 million in the same period last year. This was driven by an increase in sales of VPI transformers to one of our OEM customers and substantial increase in the sales of switchgears and unit substations to our customers in China.

In the second quarter, China sales increased 10.2% year-over-year to $55.8 million or 84.9% of net sales compared to $50.6 million or 86.3% of net sales in the same period last year. Sales outside of China for the quarter increased 23.2% year-over-year to $9.9 million or 15.1% of net sales compared to $8 million or 13.7% of net sales for the same period last year.

Sales to OEM customers increased 5% year-over-year to $11.9 million or 17.9% on net sales compared to $11.2 million or 19.1% 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 the utilities were approximately 34%, sales to commercial customers and others were approximately 17% and sales for residential project were approximately 5%.

Gross profit in the second quarter increased 7.9% year-over-year to $22 million from $20.4 million in the same period last year. Second quarter 2014 gross profit margin was 33.5% compared to 34.8% in the prior year period. Gross margin for the quarter was within our expectation.

The decrease from the same period last year was due to an increase mix of switchgears and unit substations products, which typically carry a lower margin, but also higher unit price and that presented a substantial larger addressable market to Jinpan.

Selling and administrative expenses in the second quarter were $15.6 million or 23.7% of net sales, compared to $15 million or 25.5% of net sales in the same period last year. Selling and administrative expenses increased slightly from the same period last year due to higher sales volume, increased cost associated with establishment of the Guilin plant and increased research and development expenses.

Operating income for the second quarter increased 18.9% to $6.4 million or 9.8% of net sales, from $5.4 million or 9.2% of net sales in the same period last year. Net income for the second quarter increased 20.6% to $5.3 million or $0.32 per diluted share, compared to $4.4 million, or $0.26 per diluted share in the same period last year. Second quarter net income as a percentage of net sales was 8% compared to 7.5% in the same period last year.

I’ll now review our balance sheet and cash flow. As on June 30, 2014, the company had $18.8 million in cash and cash equivalent and restricted cash and short-term investments compared to $30.8 million as of December 31, 2013.

Company's accounts receivable on June 30, 2014, total $133.9 million compared to $144.6 million as of December 31, 2013. Total bank loans outstanding on June 30, 2014 were $41.7 million compared to $43.1 million at December 31, 2013.

The company's cash flow from operating activity for the second quarter of 2014 was $3.5 million. Balanced cash flow operating activity is seasonally strong in the second half of the year so it's best to view this on a full year basis. For the trailing 12 months ending June 30, 2014, cash flow from operating activity equals $17.5 million approaching 98% of net income during the same period.

We are pleased with this cash flow converging and especially the cash flow from operating activity will meet our net income for our full year 2014. For the end of June our balance equaled to $190 million up 0.8% from first quarter 2014.

The company will reiterate its guidance for the full year 2014. For the full year 2014 net sales are 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 for today’s conference call. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions) We will take our first question from Doug Ruth, Lenox Financial Services.

Douglas Ruth – Lenox Financial Services, Inc.

Congratulations on a very nice quarter.

Mark Du

Thank you, Doug.

Douglas Ruth – Lenox Financial Services, Inc.

You're welcome. Could you give us a little bit color on the VPI transformers sale? Is this a new customer?

Mark Du

Yes, I will tell you the VPI transformers. Yes, we sell this product to one of our OEM customers starting from last year and this is a new product and this year in Q2 we fell above $5.6 million for this product.

As compared with last year it was up $3.5 million in 2013. And this year, year-to-date for first six months in sales almost $9.3 million for this product as compared with 2013 first six months we saw about $5.8 million in 2013. So with this year the growth of this product and we are mid stage that we should be able to sell more to the customers.

Douglas Ruth – Lenox Financial Services, Inc.

Is this all for one customer or is this to multiple customers.

Albert Sheng

For this product right now, the sales that Mark mentioned were to one OEM customer.

Douglas Ruth – Lenox Financial Services, Inc.

Is it possible that this product -- it could expand to other customers?

Mark Du

Yes, we can expand it to other customer too, particularly in China and for our design at this moment we sell to this particular OEM customer and as well as -- and to certain design sell to other customers.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. That’s a nice successful year. The sale of the switchgears and substations is there any particular customer or is there any particular type of customer that's buying these products, any specific industry?

Mark Du

No, the switchgear and substation is we have a variety of different customers. Whoever buy transformer from us actually they also need switchgears and substation. So basically we have the same customer base as transformers.

So our substation is able to increase our sales, penetrated sales, switchgears product to the same customer base and also we understand that switchgear is a huge market. Our market is much larger than our transformer market.

Albert Sheng

Much of the switchgear, I would say most of the switchgear and substation sales by now are to our customers in China.

Douglas Ruth – Lenox Financial Services, Inc.

And is it possible it could be sold to other parts of the world.

Albert Sheng

We are just beginning to start more international sales whereas very beginning of prompting this product internationally. So we are optimistic that we can make headway in international sales as well, but in keep in mind right now we are at the beginning this process and make those sales.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. Where is the increase in international sales coming from? Is it any specific country? Is it any specific product?

Mark Du

For this year Europe particular as compared to last year, Europe is the area that increased our international sales.

Douglas Ruth – Lenox Financial Services, Inc.

How much of the sales up in Europe this year?

Mark Du

Europe this year -- this year, year-to-date is approximately close to $6 million sales.

Douglas Ruth – Lenox Financial Services, Inc.

What did you do last year in Europe?

Mark Du

Last year about close to $4 million.

Douglas Ruth – Lenox Financial Services, Inc.

That’s terrific. What is the capacity of the Guilin facility now? How are you doing -- how is it doing versus your plan?

Mark Du

Guilin, we still continue expanding and I think we used about at this moment about 40% of utilization rate and it still has room for us for our future growth and all this was implemented according to our trend and also implemented according to our budget.

Douglas Ruth – Lenox Financial Services, Inc.

And do you have a sales target for much could come out of Guilin in 2014?

Mark Du

2014, actually we have already surpassed our project for Guilin. At this moment so we are on target of the -- our sales in Guilin. At the end of June, our sales will reach almost US$29 million.

Douglas Ruth – Lenox Financial Services, Inc.

$29 million

Mark Du

Yes $29 million.

Douglas Ruth – Lenox Financial Services, Inc.

That’s terrific. Is that from the switchgears?

Mark Du

Including switchgear and transformer.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. That’s wonderful. How are you doing with the accounts receivable collections?

Mark Du

Accounts receivable collections, if you may recall, at the end of June, our collection compared with December 31, it did improve especially for the all edge receivable.

There is a particular industry that owe us the money and we do see the recovery of the industry. So at the end of June, we do see that improvement from collection especially for all edge receivable. So we are hoping and also we do see that for the second half of the year, we should be able to continue to improve our collection especially for this particular industry as they continue to recover from their [pace] (ph).

Douglas Ruth – Lenox Financial Services, Inc.

What industry is the one that's creating the biggest challenge?

Mark Du

Yeah if -- we believe our -- we probably did mention last year. It’s our polysilicon manufacturing.

Albert Sheng

Manufactured in polysilicon.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. What is the state of the market in China? What are you seeing? What are your customers telling you?

Mark Du

Well, you mean what's our sense of the Chinese economy?

Douglas Ruth – Lenox Financial Services, Inc.

Yes.

Mark Du

Well Chinese macro-data has shown a recovery for the past several months and it appears to be stabilizing at a slower but still respectable growth rate. Second quarter TBC growth was measured at 7.5%, which was slightly ahead of expectation. The most recent economic metric in July has also been encouraging. In China overall July saw past week’s [TMI] (ph) 51.7 was our higher in one more than two years since April 2012.

So the Chinese and our transformer market, which are typically leading indicators has also posted strong performance over the past one or two months. So I would say overall the Chinese economy, it’s seen some recovery, some improvement.

Douglas Ruth – Lenox Financial Services, Inc.

That’s encouraging. You know what Jinpan stock trading at a pre big discount to its book value. Has the company considered a stock buyback?

Mark Du

Right now this company does not have plans to implement a share buyback program. We’re still focused on our business and executing our business plan. We have achieved some good results in the second quarter but we are monitoring the situation. Our management and Board are monitoring the situation and we have -- we'll be hoping so and decide our next step.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. What about the managers or the employees -- you would really show your faith in the future of the company if you folks would personally buy some stock, could you offer any commentary on that issue?

Mark Du

Well our managers and employees, we have stock options or compensation especially for the company’s Executive Management Team and also for many of our high level or mid level -- high level managers in China. So we all have a stake in the business and the employees and management of the company have a stake economically through these employee stock options in the company.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. What market in China has the most potential do you think now for your products?

Mark Du

Which specific industrial sector your mean?

Douglas Ruth – Lenox Financial Services, Inc.

Yes.

Mark Du

Well we believe that from what we’ve seen so far this year, we believe that the development of China’s rail infrastructure presents a lot of promise to us and also development of China utility scale also presents a lot of opportunities for our business.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. What’s happening with the research and development project? How’re you doing with that this year?

Mark Du

Our budget is about the same as last year and there are few new products is under development and also we always try to improve the efficiency of our production line and also improve the quality of our products and all this remain the budget of our R&D expenses. So our R&D expense every year is around $9 million. This year it’s the same also.

Douglas Ruth – Lenox Financial Services, Inc.

Forward goal is to spend US$9 million.

Mark Du

Its U.S. dollars yeah.

Douglas Ruth – Lenox Financial Services, Inc.

Yes, what is happening with the pricing of the metals?

Mark Du

On the metals and lower price plus to a low end now, so now about the same as last year, a little bit lower than last year's price, but few at the lower end.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. All right. Last question. How is Mr. Li doing?

Albert Sheng

He has been very well Doug.

Douglas Ruth – Lenox Financial Services, Inc.

Okay. All right. While we enjoyed him in the conference call the last time and perhaps he will be able to join again, but thank you for answering my questions and congratulations on a really good report.

Albert Sheng

Thank you.

Mark Du

Thank you.

Operator

(Operator Instructions) Our next question from Les Bryant, UBS Financial Services.

Les Bryant - UBS Financial Services

Mine is more a complement. I want to complement whoever put a video on YouTube on your -- I guess it's the Guilin facility. The operations, it gives our shareholders a great deal of comfort to see where our money is invested. I have a question, is that the Guilin facility that is on the eight-minute video?

Mark Du

Les, we have to check on YouTube the video you are referring to, but we can certainly check and get back to you on that point.

Les Bryant - UBS Financial Services

Oh! I was just curious if it was of the Guilin or the [other] (ph), but okay, thank you very much. But I think it's a good expose of the company and the good that you guys do and there has been a lot of thought in developing this company to this stage and I think you are doing a great job.

Albert Sheng

Thank you, Les. We appreciate it.

Operator

At this time, there are no further questions. Ladies and gentlemen, I would like to turn the floor back over 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 remain focused on executing our growth strategy. As a reminder, we will be presenting at the Jefferies 2014 Global Industrial Conference in New York tomorrow morning. We'll also be presenting at the Euro Pacific Capital Global Investment Conference in New York on September 9. We hope to see some of you as these events.

We look forward to updating you on our progress at the next conference call in November for our third 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 and you may disconnect your lines at this time.

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