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Cleantech Solutions International, Inc. (NASDAQ:CLNT)

Q2 2014 Earnings Conference Call

August 15, 2014 09:00 AM ET

Executives

Elaine Ketchmere - Compass IR

Adam Wasserman - VP of Operations

Analyst

Matthew Larson - Morgan Stanley

Operator

Good morning and welcome to the Cleantech Solutions International Second Quarter 2014 Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

At this time I would now like to turn the conference over to Ms. Elaine Ketchmere. Please go ahead ma’am.

Elaine Ketchmere

Thank you operator. Good morning, ladies and gentlemen and good evening to those of you joining in from China. I'd like to welcome all of you to Cleantech Solutions' earnings conference call for the second quarter of 2014.

With me today on the call are Cleantech Solutions' CFO, Mr. Adam Wasserman and Vice President of Operations, Mr. Ryan Hua. Also on the call is Maple Jong from Compass Investor Relations, who will provide translation for Mr. Hua.

At this time, I remind our listeners that on this call management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor in its forward-looking statements the risk contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's filings with the U.S. Securities and Exchange Commission, including factors described in Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2013. And management’s discussion and analysis of financial condition and results of operations in our Form 10-Q for the quarter ended June 30, 2014.

Any projections as to the Company's future performance represent management's estimates and are made as of today August 15, 2014. Cleantech Solutions International assumes no obligation to update these projections in the future as conditions change.

At this point, I would also like to state that on this call, we will be discussing a non-GAAP financial measure, EBITDA. We present this measure as a supplement to our GAAP results, because we believe it provides useful information in analyzing and benchmarking the performance of our operations and assist investors in analyzing our year-over-year financial performance.

Please visit our earnings press release, a copy of which is on our website and has been filed with the SEC as an exhibit to our Form 8-K for a complete reconciliation of EBITDA to the GAAP earnings.

And now, it’s my pleasure to welcome Cleantech Solutions' CFO, Mr. Adam Wasserman who will deliver management’s prepared remarks, covering operations and financial performance today. Adam, please proceed.

Adam Wasserman

Thank you, Elaine. Good morning, everyone and thank you for joining us on our call today. We appreciate your continued support and interest in Cleantech Solutions. In the second quarter of 2014 we saw a modest increase in revenue from the comparable period of 2013. We’re profitable and generated strong operating cash flow. Sales of our low-emission airflow dyeing machines grew at a more tampered pace this quarter with sales from this segment growing 7% year-over-year to 9.7 million as we operated near full utilization and are in the process of bringing on additional capacity online.

However revenue for the second quarter of 2014 reflected a modest decline from the first quarter of 2014. In the wake of Chinese governments [indiscernible] pollution Chinese techbio industry is facing stricter enforcement of environmental protection laws that regulate water pollution discharge from dyeing and finishing plants. The government is already encouraging textiles and manufacturers to upgrade their equipment and facilities and will impose daily fines on violators who will fail to improve beginning in January of next year. We believe this will present a tremendous growth opportunity for our Company as textile manufactures upgrade to lower emission machinery.

In the near-term we may see some fluctuations in demand as the industry consolidates and small players exit the market due to high cost of compliance. Over the last few quarters we have been gradually increasing capacity of our dyeing equipment business to meet anticipated demand. The new capacity which was funded in part by $1.7 million stock purchase by our Chairman, Mr. Wu and his wife that came online this quarter, will allow us to expand production of our low-emissions airflow dyeing machines and other industrial equipment components while shortening cycle times.

We’re optimistic about the prospects of our new garment washing machine for denim. Made of stainless steel and customized for use by Chinese jean manufacturers, the machine is capable of stone wash, enzyme wash and other wash, water washing techniques at a very attractive price point relative to U.S. and German imports. We currently have 10 prototypes being tested at a large high profile customer located in the heart of Chinese jean manufacturing industry in South China. Initial feedback is positive and we look forward to follow on orders soon.

In our forged products business we saw a slight increase in sales to customers in the wind power industry with revenue rising 5% year-over-year to $3.2 million. The increase was due to our sales efforts and the increasing ability and willingness of manufacturing companies and wind power companies to purchase equipment since the availability of bank finance of owners of wind farms who require bank loans to purchase equipment and for potential purchases of heavy equipment is getting better. We anticipate sales volumes of forged rolled rings and related products to customers in the wind power industry will remain at its current level for the near-future.

Our products to existing wind power customers, but are putting less emphasis on this industry until short-term industry issues such as curtailment and good connectivity are resolved. Longer term the prospects are more favorable, especially given the Chinese government’s commitment to renewable energy and wind power in particular.

Sales of forged products to customers and other industry declined about 10% to $4.6 million. The decrease was mainly attributable to a reduced demand from our customers who have sufficient inventory from purchases of forged rolled rings and related products for other industries in prior periods and the absence of sufficient sales to new customers to offset such reductions. Sales of forged rolled rings and related products to other industries will remain at its current level during the remainder [Technical Difficulty]. Diversify into new areas for our forged rolled rings and related product segment. We are currently developing forged products and related components for a large state owned manufacturer of industrial blowers, whose customers include nuclear, oil and natural gas power generation companies. We see strong growth potential in this area although it is still in the early stage of development and we do not presently have any orders for these applications.

Going forward we expect our dyeing machine segment to be our primary revenue driver in the coming months as textile manufacturers prepare for stricter enforcement and environmental regulations in China in 2015. We expect to ramp our newly added capacity over the next few quarters and we will continue to seek to diversify our product offering to help to generate future growth.

Now let’s take a closer look at our financial performance. I will encourage you to refer to our Form 10-K filed with the SEC and our earnings press release issued yesterday. Our revenue for the second quarter of 2014 increased 1.8% to 17.5 million, compared to 17.2 million for the same period of 2013. Our gross profit for the quarter rose 2.8% to 4.1 million compared to 4 million for the same period in 2013. Gross margins improved to 23.3% during the second quarter of 2014 compared to 23.1% for the same period a year ago.

The increase in gross margin for the second quarter was primarily attributable to increased operational and cost efficiencies in the forged rolled rings and related product segments and small declines in gross margin in the dyeing and finishing equipment segment reflecting the introduction of new models of machine and its initial production at relatively low volumes.

Operating expenses increased 21.9% to 1.1 million compared to 0.9 million in the comparable period last year. The increase was primarily due to higher selling general and administrative expenses. In the second quarter of 2013 selling general administrative expenses benefit from $300,000 recovery of an accounts receivable that had been previously written off.

Our operating income was $3 million down slightly from 3.1 million in the same period of 2013. Income taxes was 28 million compared to 0.7 million in the same period in 2013. The increase in income taxes was attributable to an increase in taxable income generated by our operating entities.

EBITDA, a non-GAAP measure which adds back the net income interest expense, income taxes, depreciation and amortization was $5.2 million up from $4.8 million in the second quarter of last year. Net income was $2.2 million, or $0.61 per basic and diluted share, compared to 2.3 million or $0.79 per basic and diluted share in the second quarter of 2013.

Now let’s turn to our balance sheet. As of June 30, 2014, we had cash and cash equivalents of $1.8 million compared to $1.1 million at December 31, 2013. Accounts receivable were $13.7 million and total current assets were 25.1 million. We had $3.1 million in short-term bank loans payable and stockholders’ equity was $97.4 million.

In the first half of 2014, we generated $5.3 million in cash flow from operations, compared to 5.2 million in the first half of 2013. This along with the proceeds on the sale of shares to Mr. Wu was used to fund approximately $6.3 million in capital expenditures to expand production capacities, capabilities and purchase equipment for dyeing and finishing equipment segment.

In conclusion, we believe our dyeing equipment will continue to perform well as textile manufacturers' upgrade to lower emissions machinery in response to new environmental directives from the Chinese government. Although we may see some near-term fluctuation in demand as the industry consolidates and the growth rates have declined in the second quarter of 2014.

Order flow for our low-emission airflow dyeing machines remains strong and we’re optimistic about our new garment washing machine for denim. We continued to diversify into new areas such as components for industrial blowers for the power generation industry and we’ll continue to utilize our expertise and manufacturing precision products to meet the needs of heavy equipment and clean technology industries in the future.

We want to thank you all for our investors for your continued support. With that we now open the call to Q&A from the audience.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Matthew Larson of Morgan Stanley. Please go ahead.

Matthew Larson - Morgan Stanley

I got a question for you. Even though you saw a sequential drop in earnings versus say last year; it seems to me that your CapEx was up dramatically in advance of increasing your capacity. If the CapEx was just marginally lower your (range looks) [ph] quite a bit higher I guess, so that the comparisons really aren’t that accurate on a first look basis. But regarding the CapEx, you’re bringing on some new capacity. Can you give us a sense of the percentage capacity you’re bringing on to take advantage of trends in China which mandates more green textile dyeing machines?

Elaine Ketchmere

Well I think that there will be capacity for new models of dyeing machines. So in terms of the capacity for existing old models they are not going to expand. They’re investing money in building the capacities for new garment dyeing machines as well you might have heard of part of the new dyeing machines. And it will take a month or two for them to finish the construction, testing and the company expects to see the revenue coming for the new capacity in second half of the year.

Matthew Larson - Morgan Stanley

And then as a follow up, I am making an assumption, a common sense assumption that with the Chairman significant investment in the company to help fund the CapEx and the mandates that were outlined by Adam that could take into effect, the governmental mandates for the cleaner machines that take effect January 1, that this initiative could very well grow your sales significantly and in addition you said that smaller players may not be able to compete.

Now you guys are in a large company. Are you a large or small player over there also? So I am trying to get a sense of the growth prospects. If I can just touch on to the company traded such a low price to earnings, a low price to book in almost every other metric. So that really we need to get this company on the radar and if the catalyst is a trend towards cleaner machines and you guys are on the vanguard, that would be a message to get out there and if it comes through with significantly greater sales, I think that’s -- would help all shareholders.

Elaine Ketchmere

Let me check with Ryan about this in the coming months.

Mr. Hua expects that the second -- later -- the second half this year early next year we’ll see the sales coming in for new dyeing machines, new models of dyeing machine. And because the training the staff as well as purchasing equipment, testing and other projects need to be done in the new capacity; it takes a month or two for them to ramp that. And in terms of increasing the valuation, the company is trying to be more aggressive in participating in conferences and visiting investors once they have more visibility of the sales.

And actually the CFO is planning on presenting in conferences in second half this year.

Operator

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Adam Wasserman for any closing remarks.

Adam Wasserman

Okay, thank you operator. On behalf of the entire Cleantech Solutions International management team we want to thank you for your interest and participation on this call. Also if you have any interest in visiting our office and factory in China, please let us know. We look forward to speaking with you again on our next earnings conference call.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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