China Auto Logistics' (CALI) CEO Shiping Tong on Q2 2014 Results - Earnings Call Transcript

| About: China Auto (CALI)

China Auto Logistics, Inc. (NASDAQ:CALI)

Q2 2014 Earnings Conference Call

August 14, 2014 8:00 a.m. ET


Ken Donenfeld - DGI, IR

Shiping Tong - CEO

Jin Yan - COO

Xinwei Wang - CFO

Yang Feng - Financial Controller

Richard Sun - Secretary

Lawrence Wang - Member of the Financial Team



Please stand by. Good day, and welcome to the China Auto Logistics, Inc. 2014 Second Quarter Investor Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Ken Donenfeld of DGI Investor Relations. Please go ahead, sir.

Ken Donenfeld

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

On the call today with me will several executives of the company, Mr. Jin Yan, COO; Ms. Xinwei Wang, CFO; Ms. Yang Feng, Financial Controller; Mr. Richard Sun, China Auto's Secretary; as well as Lawrence Wang, Member of the Financial Team. I've been asked by Mr. Tong to begin the presentation with his remarks. Lawrence will then walk you through the numbers. Afterwards, with the assistance of Mr. Sun and Lawrence, who will help us with translations we'll have a question-and-answer period.

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'll now begin with comments from Mr. Tong. Good morning and thank you for joining us today. For those of who you have been CALI shareholders, the past few weeks have been very trying. For reasons we don't fully understand and clearly are not about making our company and its shareholders have been threatened by the depository trust company or DTC with what they term a "global lock." This action would make it difficult, if not impossible to affect trades in our shares and already has impacted our stock price.

The letter from DTC was the result of a complaint by the Securities and Exchange Commission against five individuals, who the SEC alleges engaged in improprieties with respect to the company's shares.

Notably the SEC did not point anything to us, and we in fact publicly supported the SEC action. However, DTC has indicated that the alleged illegal trading is the underlying source of their action. Our view is that their action is misplaced (technical difficulty) among other things. It clearly disregards the highly negative consequences for all current shareholders who are far in move from the activities of the five individuals, who are allegedly engaged in the illegal trading activity.

We've hired special counsel to help us fight the decision, which we believe could greatly harm our company and its shareholders. And that's that I've been advised that I can say at this point. When there is anything more that we can say to our shareholders, we will.

I'll only add here that the DTC decision comes at a time when our company has been able to affect two of the most significant positive initiatives in its history. The first of this, just seven months ago was our announced $91.4 million acquisition of the Tianjin Airport International Auto Mall. And most recently, on the heels of a very significant new rules change for imported cars announced by the Chinese government, we announced a strategic cooperation agreement with a major auto dealer leasing and development company, which we think opens the door to an enormous growth opportunity for our company over the next few years.

As more usual, I'll now spend a few minutes discussing the quarter, before turning the floor over to Lawrence Wang, who will summarize the financials after which we'll open the session up to your questions.

So, with respect to our second quarter, in short, the operating results were pretty much within the range of our expectations. Of course, we continue to deal with the economic slowdown in China as well as the increased competition in this space where we remain a leader, namely imported high-end luxury automobiles.

I should emphasize that while one of our key goals continues to be to grow our auto-related services with profit margins are much higher than the very thin margins in automobile sales, it is imperative that we maintain a leading position in the industry as a seller of imported luxury cars.

The good news in the quarter was that the shift in our sales mix we began in the first quarter to include more top-ended line luxury vehicles enabled us to increase our total revenues year-over-year. We did so by selling fewer vehicles at higher prices. Further, while we reported a slightly negative gross margin, as described in our press release and 10-Q, this would have been above breakeven except for small reserve we set up for few slow moving vehicles from prior years.

It was our goal to at least achieve stability on the bottom line, which I think we did, and I'm hoping this will continue through the remainder of the year.

We also were able to decrease our reliance in the quarter on our three largest auto dealer customers, who last year accounted for 30% of sales and in the second quarter of this year accounted for 19% of our sales. Overall in the quarter, our gross margin was still not large enough to offset the anticipated increases we incurred in interest cost, depreciation and amortization stemming from our Airport International Auto Mall acquisition.

One reason for this was the dip in the fee income revenue and the margins of our financing services business, where we again temporarily ceased to provide certain services in order to utilize the available funds to help finance our Auto Mall acquisition, and lend working capital to Car King Tianjin.

While we saw the contributions to our operating income from our services businesses decline in the quarter, the contribution from financing services nevertheless continued to top all of the segments as the interest income component of that business led to revenues that nearly matched the revenues in the same period last year.

We also saw a small contribution to revenues from the International Airport Auto Mall as a result of payments made to the company by Car King Tianjin, which is headquartered at the Airport International Auto Mall. Lastly, we had a small loss resulting from our share of the used car joint venture, which is still in the early stages of development.

Looking down the road a bit, we see a very different picture from our results in the second quarter. In particular, we have continued to review what maybe the best possible utilization of the 26,000 square meter Auto Mall we acquired at the end of 2013. While we hope to see some further contribution in 2014 from this facility, which is in an outstanding location near the Tianjin Airport, there are also a longer term usage possibilities for it, including as we've said before a retail auto sales showroom and business.

Of course, we also have a 40% equity position in the Car King Tianjin's used car business. Right now in China, new vehicle sales are about 75% of total auto sales and used cars are about 25%, which is a reverse of the figures for other developed countries around the world. We believe that our company is well positioned to benefit as China moves in the direction of the rest of the world.

Even more exciting in our view is what we see ahead as a consequence of the strategic cooperation agreement we struck with Tianjin Binhai International Automall after the second quarter in August. In short, we envision a substantial potential expansion at our high-end imported auto sales coupled with our one-stop auto-related services anchored by the construction or acquisition of several new auto malls in selected locations throughout China.

We anticipate the sales will be based on new e-commerce platforms we're developing based on our successful and sometimes not so successful deep experience with e-commerce sales. We anticipate these sales will have somewhat better margins, while the additional services we sell will continue to have substantially better margins than our auto sales. While high-end imported autos represent a smaller time for us to operate in than some of our competitors like Big Auto and Auto Home, our goal is to be the biggest fish in this pond, where in our review growth should continue at a high pace over the next several years especially as economy picks up again.

The decision of China Auto and Tianjin Binhai Automall to enter into this strategic cooperation agreement stems in part from the new rules for imported autos that were announced on August 1st by the State Administration for Industry and Commerce or the SAIC in China. In effect, these new rules will allow us significantly greater freedom to pick and choose imports that we think have the best sales potential. While they open the door to more competition, we're very confident that our experience and size provides us with a significant advantage going forward.

At this point, let me shift the microphone to Lawrence who will briefly discuss the financial highlights of the quarter. Lawrence?

Lawrence Wang

Hey. Thank you, Ken. Hi, everyone. I will run through these numbers very quickly as Mr. Tong's comments provided explanations for many of them. And they are fully explained in the form 10-Q we filed yesterday.

First, on the top line we saw second quarter revenues grow 3.11% to approximately $113,687,000, up from $110,256,000 a year earlier. This was mainly a consequence of the 3.2% year-over-year increase in auto sales which comprise 98.07% of all revenues in the quarter.

As Mr. Tong explained, the growth in auto sales revenues came as a company shift to next off sales starting in the first quarter. In both quarters we saw the average selling prices per vehicle increased $206,000 which compare with $87,000 per vehicle in the second quarter of last year.

We sold 1.048 vehicles in this year's same quarter, 15% fewer than the prior year, but more than the 981 vehicles sold in the first quarter.

Once again, our margins on auto sales were fairly thin as we lower prices to beat our competitions and maintain our leadership in luxury autos. As reported we actually dipped slightly below breakeven in the quarter with gross margin on auto sales of negative 0.06%. However, this number reflected our decisions to setup a reserve of $308,444 for some slow moving inventories from 2012 and 2013. Without this result, our gross margin would have been a positive 0.21% which will have to be higher than the Q1 results, but slightly lower than in the second quarter of last year. To this extent, we believe we continue to stabilize our bottom line and hope this will continue to be the case for the rest of the year.

It should be noted that the sales of our 405 interest in Car King Tianjin used car joint venture are not included in the auto sales results. We reported on a separate line that our share of the loss of these scheduling operations was $193,121. Separately, we noted that this operation have a revenue of $604,766 representing automobile sales and commission revenues for an aggregate of about 220 used car vehicle, 220 used vehicles during the quarter.

Overall, gross margins in the second quarter were 1.33% which matched the first quarter which was down slightly from the year earlier. This results mostly from the lower contribution to uploading income from our higher margin service business.

In our financing service business, the income decreased 38% in the quarter and margins declined to about 39% from about 63% a year earlier. This was because we temporarily stopped providing some services which allow us to shift some funds to help finance the Zhonghe acquisitions and provide its working capital loan to Car King Tianjin.

Revenues from financing service go and if it's from interest income and we will let 1% below what they were in the second quarter at 2013. Continuing from the first quarter we saw a small positive contribution for the airport automotive services based on lending income from Car King Tianjin. While generating less income from more positive official statements, we also saw and anticipated interest expense for the second quarter grow to approximately $1,720,000. And depreciation expense and amortization expense combined, up $667,000, both finally exceeding from the acquisition of airport international mall.

Consequently, the net loss attributable to shareholders in the second quarter was $1,846,254 or $0.46 loss per share down from a net income of $800,484 or $0.22 earnings per share a year earlier.

For the first six months of 2014, revenues increased to approximately $220,662,000 from approximately $217,881,000 a year earlier. Net loss attributable to shareholders was $3,192,422 or $0.79 loss per share compared to a net income of $1,807,819 or $0.49 in earnings per share in the first six months of 2013.

Diluted weighted average common shares outstanding were $4,034,494 shares for the second quarter of 2014 compared with $3,694,394 shares for the same period of 2013.

I guess I will get back to Ken before we open up the Q&A sessions of the conference. Ken?

Ken Donenfeld

Thank you very much, Lawrence. Mr. Shiping just wanted to say again that the company is continuing to do what it can to support shareholders with respect to the DTC lock, and hope the shareholders can see the exciting possibilities ahead following a difficult couple of years.

With that, I'm going to ask the operator to please provide instructions for the Q&A period. Keep in mind, go, that as I indicated at the start, at least for today we will not be able to answer any more question on the DTC matter.

So operator, could you please provide us with the Q&A instructions?

Question-and-Answer Session


Certainly. (Operator Instructions)

Unidentified Analyst

Operator, I've been asked to ask a couple of questions from people. So maybe I will ask the first question, and a couple of people have asked, given the small margins in auto sales now, what is the point of expanding this business nationally? If you could provide some color on that that would be appreciated?

Unidentified Company Representative

Okay. [Foreign language - Chinese]

Unidentified Company Representative

[Foreign language - Chinese]

Ken Donenfeld

Well, the answer to your question is that it's now -- actually you know that CALI is now operating in Tianjin which is the largest port for import of autos in China. So for this reason the competition in Tianjin in the market over Tianjin is extremely varying. And the way it -- the reason that we are going to expand our business to other cities of China is that we'd like to reallocate our resources to the other places in order to be more closer to the local dealers and these local end users. Okay?

Unidentified Analyst

Yes. I guess when you say you're going to expand, you're also expanding your auto related services when you expand, is that correct?

Unidentified Company Representative

[Foreign language - Chinese] Yes, exactly.

Unidentified Analyst

Okay. The other question I've gotten from a few people is looking at the company's balance sheet in light of the acquisition it's become more leveraged and the company has another big payment due in November. I think it is on the airport mall acquisition. Are you positioned to make that payment? And to do so, will you need any additional financing?

Unidentified Company Representative

[Foreign language - Chinese]

Ken Donenfeld

Well, as per our current financial status, I should say that we will be fully favorable to make this payment, which is due in November.

Unidentified Analyst

Okay, good. And that's good to hear that directly. And the last related question to that is that you reported very large or fairly large restricted cash number on the balance sheet in the second quarter, could you walk through that a little bit for us?

Unidentified Company Representative

[Foreign language - Chinese]

Unidentified Company Representative

[Foreign language - Chinese]

Ken Donenfeld

Okay. Yes, what (indiscernible) mentioned is that the current financial policies and situation in China makes us to use most part of the restricted cash. In fact, I'd say a deposit event which will fix the trunk that will generate more interest for the company.

Unidentified Analyst

Okay. So that the restricted cash is related to the company's financings, is that correct, Ken?

Ken Donenfeld

Yes. Operator, do we have any other questions? Could you ask?


We currently have no questions at this time. (Operator Instructions) And we'll pause for just a moment.

Ken Donenfeld

Thank you.


And, sir, it appears we have no questions in queue at this time.

Ken Donenfeld

Okay. I guess then that appears that that's it. If any other questions do arise, please feel free to give us a call. We appreciate your support, and we'll keep you posted of any new developments going forward. So, thank you all again very much.


That will conclude today's conference. Thank you all for your participation.

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