SORL Auto Parts (SORL) Q2 2014 Results - Earnings Call Transcript

Aug.16.14 | About: SORL Auto (SORL)

SORL Auto Parts, Inc. (NASDAQ:SORL)

Q2 2014 Earnings Conference Call

August 15, 2014 8:00 AM ET

Executives

Kevin Theiss – IR

Jinrui Yu – COO

Raymond Lin – IR

Analysts

Bill Gregozeski – Greenridge Global

Richard Rabbito – The Overseas Development and Finance Group

Adam Brett [ph] – Vertical

Peter Siris – Hua-Mei 21st Century

Operator

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

I would now like to turn the conference over to your host, Kevin Theiss with Grayling Capital. Thank you. You may begin.

Kevin Theiss

Thank you for joining us today, and welcome to SORL Auto Parts’ 2014 Second Quarter Conference Call. This is Kevin Thiess from Grayling, SORL Auto Parts’ U.S. Investor Relations advisor. Joining us today are Ms. Jinrui 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, contend, aim, will, or other similar expressions are intended to identify forward-looking statements.

All statements other than statements of historical fact 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 conditions.

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 obligation to update the forward-looking information in the future.

The 2014 second quarter and six months results are unaudited numbers represented in the U.S. dollars, under U.S. GAAP. Ms. Jinrui Yu, SORL Auto Chief Operating Officer will give a brief overview of our operations in the second quarter and six months results. Thereafter a question-and-answer session will be conducted. Ms. Yu, please begin your presentation.

Jinrui Yu

We are very pleased to report an outstanding second quarter performance with sales of $65.7 million, a new record for second quarter. We delivered 14.6% annual sales increase compared to 10.6% decline in commercial vehicle units sold in China.

We believe that these record results are the results of our increased market share, as our customer in each of our three major market segments; the OEM, aftermarket and the international continue to recognize the superior value of our high-quality and low-cost brake units compared to the competing products.

Our OEM segment sales in the second quarter increased to $31.9 million from $30.6 million in the previous year’s period. This increase is in the contrast to the 14.4% decline in the unit truck sales in China during the second quarter. We anticipate pre-buy of the less expense National III-compliant, a measure we expect to continue until the January 1, 2015. The government took only [ph] National IV-compliant vehicles nationwide.

Aftermarket sales increased 20.3% to $15.4 million in the second quarter of 2014, compared with the same quarter in 2013. Improvements in the infrastructure spending over the past few years in China, has led to increases in the commercial vehicles selling, making China the biggest commercial vehicle market in the world.

Having such a larger and the growing commercial vehicle markets also translates into great market opportunities, as a higher number of OEM fixed price [ph]. Our largest portfolio of products with more new products for the aftermarket provides us with a consistent advantage, enabling us to further penetrate and capture additional shares in this segment.

For example, in June and July of 2014, we began supplying our new braking products to two new commercial vehicles; Sichuan Hyundai Chuanghu brand premium heavy-duty trucks and the Shaanxi’s new model M3000 heavy-duty vehicles. As the safety-related products, braking system has a really high performance and the reliability requirements, which help increase the barriers to entry.

International sales increased by 30.5% to $18.4 million in 2014 in the second quarter due to extending customer rates and the larger distribution networks. In additional to improving and extending our international networks, we are taking steps to make end-user more aware of relative superior performance and the value of our products.

For the first six months of 2014, our sales increased 17.1% to $115.7 million from $98.8 million for the first six months of 2013. OEM customer sales increased 13.3% to $60.5 million from $53.4 million in the same quarter in 2013. Sales from the China domestic aftermarket increased 17.7% to $25.9 million from $22 million in the first six months of 2013. And international sales increased 25.2% to $29.3 million from $23.4 million in the first six months of 2013.

We are positioning ourselves to capitalize on the government’s policies, encouraging spending in our highways, railways and other infrastructure projects that will further increase demand for commercial vehicles. We are targeting more diversified markets faced by expanding deeper into the fast construction and roadway markets. Our goal is to become a market leader in each of this sector by continuing to adapt our technologies and products to service this segment.

Our reputation as a designer and manufacturer of high-quality, high-performance brake products remains strong. We increased the research and development by 36.1% to $2.2 million in the second quarter, and by 22.7% to $3.7 million in the first six months of 2014.

Our introduction of the safety-related [ph] technological advanced products that provides unique solution have increased our market share. Our research and development program is dedicated to developing products and will help our customer excel and we believe that will continue to make us [indiscernible] vendor.

Now we will have a brief overview of our second quarter and six months profits. Our gross profits increased by 10.1% to $18.5 million, from $16.8 million in the second quarter of 2013. We maintained our industry-leading gross margin at 28.2% in a challenging sales environment, compared with the gross margin of $29.3% in the same quarter of 2013. New advanced equipments in increased productivity and with innovative new products led to high gross margins. We were [indiscernible] our gross margin in the markets.

Operating expense increased to $13.4 million in the second quarter of 2014 from $11.7 million in the second quarter of 2013. The increase in operating expense reflected higher selling and distribution expenditures and the research and development costs. As a percentage of the revenue, operating expenses were stable at 20.4% in the second quarter of 2014 and in the third quarter of 2013.

Selling and distribution expense were $6.5 million, or 9.8% of quarterly revenues, compared with $4.9 million or 8.5% in the same quarter of 2013. Higher expenses were primarily due to the increased packaging and freight expenses during the quarter.

G&A expenses in the second quarter of 2014 were $4.7 million, or 7.2% of revenue, compared with $5.2 million, or 9.1% in the second quarter of 2013. The decrease in expenses was mainly due to the low allowances for doubtful accounts in the 2014 second quarter.

Research and development expenses were $2.2 million in the second quarter of 2014, compared with $1.6 million in the same quarter of 2013. As a percentage of revenue, R&D was 3.3% in second quarter of 2014, and compared with 2.8% of revenue in the second quarter of 2013. The R&D program continues to mainly focus on the development of new, higher-margin, electronically-controlled mechatronic products and to upgrade the company’s traditional brake products to capture market share.

Financial expenses were $479,058 in the second quarter of 2014, compared with $492,094 in a year ago, primarily due to reduced interest expense related to bank loans, and discounted bank and trade acceptance notes.

Income before provision for the income taxes was $5.2 million for the second quarter of 2014, compared to $5.1 million for the second quarter of 2013. The higher income reflected lower financial expenses and increased other income during the second quarter of 2014, compared with the same quarter a year ago. The pre-tax income margin was 8% in the second quarter of 2014, compared with 8.8% in the second quarter of last year.

The provision for income taxes was $0.7 million, or a 12.4% tax rate in the second quarter of 2014, which compared with $0.5 million, or a 10.6% tax rate, in the second quarter in 2013.

The net income attributable to stockholders for the second quarter of 2014 was $4.1 million, or $0.21 per basic and diluted share, compared with $4 million, or $0.21 on per basic and diluted share, in the second quarter of 2013.

For the first six months of 2014, our gross profit increased 16.7% to $33.9 million from the $29 million in the same period in 2013. Gross margin slightly decreased to 29.4% from 29.5% in the first six months of 2013.

Operating income for the first six months of 2014 increased to $9.9 million from $8.2 million in the same period in 2013. Operating margin was 8.6% versus 8.3% in first six months of 2013.

Net income attributable to stockholders for the first six months of 2014 was $6.9 million, or $0.36 per basic and diluted share, compared with $5.3 million, or $0.27 per basic and diluted share, in the same period in 2013.

As of June 30, 2014, the company had cash and cash equivalents of $27 million. Total equity increased to $211.5 million at June 30, 2014. On June 30, 2014, working capital was $155.5 million and the current ratio was 3.8 to 1.

Overall, we remained optimistic about the future markets commercial vehicle sales and the continuing demand for our premier products. Decline in the inventory level was due to the pre-buy for the National III-compliant vehicles. They generated great demand for vehicles in the future.

We also believe that heavy-duty trucks will be coming into early stages of the new logistic [ph] cycles as many units bought for several years ago are aging. Demand for market is expected to continue increase due to the fast urbanization and the need for the more environmentally friendly markets to reduce air filtering in China cities. We’re extending our portfolio of innovative and high-quality brake products into new segments, supported by national infrastructure [indiscernible].

Our abilities to diversify the anticipated market have generated increased sales in the OEM, aftermarket and international markets. We are positioning ourselves for continued success.

For the fiscal year 2014, management reiterates its outlook for the net sales to be approximately $207 million and the net income to be approximately $12.5 million. These two targets are based on the company’s current view on the operating and market conditions, which are subject to change.

Our strategy is to continue to capture great market share in China. As we view the larger global footprint, we have the strength of development product through the global align of our products and meet the need of our expanding global market.

With growing sales and enhanced production capabilities, we believe we can generate strict economies of scale to robust sales margins and improve our cash flow from operations. Thank you.

Raymond Lin

Operator?

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question is from Bill Gregozeski from Greenridge Global. Please proceed with your question.

Bill Gregozeski – Greenridge Global

Hi. Great quarter, comparing how bad the commercial market was. Couple of questions. With the price cutting you did in the domestic aftermarket segment. Is that price cutting going to be maintained going forward, and if so, do you have a new gross margin target range that you’re looking at?

Raymond Lin

Sorry, operator. The line is not very clear. Can you adjust the line?

Operator

Yes, just one moment. Mr. Bill Gregozeski, please repeat your question.

Bill Gregozeski – Greenridge Global

Yes, congratulations on the great quarter in light of the bad commercial market. And in light of the price cutting in the domestic aftermarket segment, is that going to be maintained going forward. And if so, do you have a new target gross margin range?

Jinrui Yu

It’s too much noisy. We cannot hear your question clearly.

Raymond Lin

Bill, can you repeat your question?

Bill Gregozeski – Greenridge Global

Yes, I was asking about the price cutting in the domestic aftermarket segment was going to be maintained, and if so, what’s the target gross margin range going forward would be, so that’s for the company in total [ph]?

Jinrui Yu

[Foreign Language – Chinese] We do promotions through our pricing strategies. We did that during the second quarter. We usually do these – take these actions during the low season, where the OEM market is relatively weak – overall OEM end-market is relatively weak. And we utilize our production capacity to continue to produce a large volume of products and targeting at the domestic aftermarket. And that will give us better market share, better expansion in the aftermarket arena.

Bill Gregozeski – Greenridge Global

Okay. So the price cutting was really just a one-time thing for this quarter, and maybe something that we’ll see again in the second quarter next year?

Jinrui Yu

Yes.

Bill Gregozeski – Greenridge Global

Okay. And then as far as the inventory building, you talked about this in the past. If you can just clarify a little more on why its increasing as much it has, especially in the last two years quite a bit growth to see your sales level, and I am just curious of everything in there is still good, or if there might be some kind of inventory write-down at some point in the future?

Jinrui Yu

[Foreign Language – Chinese] First is, to answer your question, we don’t see any inventory risk given the inventory has increased in the last couple of years. The reason being is our business has grown quite a bit, and also we take advantage of our capacity. And when OEM season is high, usually the aftermarket demand is not – it’s being very steady, so they are demanding more products.

And so what we did is we used the low season to build up on the inventory, and so we can continue to expand the aftermarket when the OEM market return to high season, so that’s the main reason.

And in terms of products, our products is very suitable for the vast aftermarket today in China. And so we don’t see any issues with this product in place in anytime in the near future.

Bill Gregozeski – Greenridge Global

Okay. And then my last question is on the international side, the $18.4 million. Is that a number you guys feel that you will start growing off of, or is it just a one-time quarterly bump like the $19 million in the first quarter of last year?

Raymond Lin

You’re talking about international sales for $19 million?

Bill Gregozeski – Greenridge Global

Yes.

Raymond Lin

Okay.

Jinrui Yu

[Foreign Language – Chinese] Overall as you know, the European market is overall, it has been very slow and also Middle East is a turbulent market, for too many reasons. However we are able to post strong growth in the third quarter. We posted a 30% year-on-year growth and we continue to expand our international footprint. And we believe we can maintain the momentum in the international market.

Bill Gregozeski – Greenridge Global

So is it something like an $18 million number, something that management thinks could happen even in the next quarter?

Jinrui Yu

[Foreign Language – Chinese] Yes, that’s something you can look at it. That one number you can kind of model like $18 million.

Bill Gregozeski – Greenridge Global

Okay. All right, thank you.

Jinrui Yu

Thank you.

Raymond Lin

Thank you.

Operator

Our next question comes from Richard Rabbito with The Overseas Development and Finance Group.

Richard Rabbito – The Overseas Development and Finance Group

Yes, thank you very much. Good morning for your presentation. Just a quick question. I would like to know your capital expenditures, your CapEx requirements going forward into the next few quarters, please? Thank you.

Raymond Lin

Thank you.

Jinrui Yu

[Foreign Language – Chinese] So the CapEx for 2014 is about $5 million.

Richard Rabbito – The Overseas Development and Finance Group

Okay. And do you have a variance with your OpEx. Could you describe your OpEx requirements?

Raymond Lin

You’re asking, where we use the CapEx?

Richard Rabbito – The Overseas Development and Finance Group

Yes.

Jinrui Yu

[Foreign Language – Chinese] There is two area we spend our money. First is in our testing line. And the testing line is right now be awarded as provincial level R&D center, but we are looking to upgrade our facility to reach to the national level, so there will be national R&D center specification. And the other one we are doing is, as you know, the labor costs in China have increasing steadily over the years. We are working now on improving our automation in our facilities now. So we’ve bought lot more equipment to help, not only reduce the costs, but also control the quality of the products.

Richard Rabbito – The Overseas Development and Finance Group

Okay, thank you very much. Could you just – just a follow-up question please? Could you just take the amount for each of those two areas you have mentioned, what percentage of that, if you could address the total amount of expense that is required specifically?

Jinrui Yu

[Foreign Language – Chinese] So 30% of that – 35% of that $5 million is going to the R&D facilities, testing centers. The remaining 65% will be doing the upgrade the facility on the automation side.

Richard Rabbito – The Overseas Development and Finance Group

Okay, great. Thank you very much.

Raymond Lin

Thank you.

Jinrui Yu

Thank you.

Operator

Our next question is from Adam Brett [ph] with Vertical.

Adam Brett [ph] – Vertical

Hi. Just first off I wanted say congratulations on such a great second quarter on your sales side. I wanted to know on international sales, it increased 30% in the second quarter of 2014. What geographic area is growing the fastest, and what percent of international sales is OEM versus the aftermarket?

Jinrui Yu

[Foreign Language – Chinese] The main driver for our strong growth in the international business are the USA markets, the India markets and some parts of Middle East we’re doing very well. And in terms of OEM, we do have OEM customers in Russia. We’ve been growing our vendors quite nicely with them.

Adam Brett [ph] – Vertical

About what percent of your international sales is OEM versus aftermarket sales?

Jinrui Yu

[Foreign Language – Chinese] For the international business, about less than 10% of our business is going to OEM. So the remaining is all aftermarket.

Adam Brett [ph] – Vertical

Okay, thanks.

Raymond Lin

Thank you.

Operator

Our next question is from Peter Siris with Hua-Mei.

Peter Siris – Hua-Mei 21st Century

Peter Siris, Hua-Mei. Thanks for the great quarter. I have a couple of follow-on questions. First, just on the international sales. You mentioned that the U.S. is an expanding market. What kind of products are you selling in the U.S., and generally you don’t want to give us the exact name, but who are you selling those products to?

Raymond Lin

Okay. So let me repeat your question. Your question is you see our growth in U.S. market has been strong.

Peter Siris – Hua-Mei 21st Century

Yes.

Raymond Lin

And want to know who are we selling the products to in the United States?

Peter Siris – Hua-Mei 21st Century

And what type of – I assume this is your heavy-duty brakes or something – exactly what are you selling in the United States? Can I go buy one for my truck tomorrow?

Raymond Lin

Okay. You want to know what kind of products that we’re selling?

Peter Siris – Hua-Mei 21st Century

Yes.

Jinrui Yu

[Foreign Language – Chinese] We are selling our braking systems – the braking component products to the U.S. aftermarket heavy-duty sectors. So our product is very similar to Haldex, Bendix products and also selling some of the hydraulic power steering pumps to the – that’s for the passenger vehicle.

Peter Siris – Hua-Mei 21st Century

The passenger vehicle, okay. It’s interesting. On the last call you talked about developing some products for the electronic vehicles that you said were higher margin higher and high value-added. Can you tell us what’s going on with that?

Jinrui Yu

[Foreign Language – Chinese] The products for higher-value products, for example like electronic bus, we have electronic air compressor, electronic power steering pumps, electronic air dryers and electronic foot brake valve. This is one segment. The second one segment is we subscribe full brake systems for military, army trucks which are high-value products.

Peter Siris – Hua-Mei 21st Century

Interesting. And do you think in the future years, that’s going to be a growth area for you?

Jinrui Yu

Yes. For the electronic parts, now China has cleaned air provisions, so now the governments pay high energy [ph] to expand the electronics parts [indiscernible] to be regulated, purchasing our air compressor from us.

Peter Siris – Hua-Mei 21st Century

Great. And finally, are there other new products that you’re developing that you’re excited about for the future?

Jinrui Yu

And also like the railways is our – they want to be the developer in the future, the railway parts.

Peter Siris – Hua-Mei 21st Century

And you haven’t done business with the railway before, right?

Jinrui Yu

Yes. We already done the business with railways, but in future we want to enhance the big volume.

Peter Siris – Hua-Mei 21st Century

Okay. Thank you very much for the conference call the quarter. Thanks.

Jinrui Yu

Okay, thank you.

Operator

(Operator Instructions) There are no more questions at this time. I would like to turn the floor back to Kevin Theiss for closing remarks.

Kevin Theiss

Yes, thank you for participating in today’s conference call. We’d like to reiterate the outlook for 2014, net sales to be approximately $225 million, net income to be approximately $12.5 million. We look forward to speaking to you again next quarter, and we wish you all a good day.

Jinrui Yu

Thank you, Kevin. Okay.

Operator

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Have a wonderful day.

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