SORL Auto Parts (SORL) Q4 2015 Results - Earnings Call Transcript

| About: SORL Auto (SORL)

SORL Auto Parts Inc (NASDAQ:SORL)

Q4 2015 Earnings Conference Call

March 31, 2016 8:00 AM ET

Executives

Dixon Chen - Grayling

Jinrui Yu - Chief Operating Officer

Min Kan Lin - Accounting Manager

Raymond Lin - Investor Relations

Phyllis Huang - Investor Relations

Analysts

William Gregozeski - Greenridge Global

Operator

Greetings, and welcome to the SORL Auto Parts Fourth Quarter 2015 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.

It is now my pleasure to introduce your host, Dixon Chen. Please go ahead sir.

Dixon Chen

Thank you. And thank you for joining us today, and welcome to SORL Auto Parts’ 2015 fourth quarter and year-end earnings conference call. Joining us today are Ms. Jinrui Yu, SORL’s Chief Operating Officer; Mr. Min Kan Lin, Accounting Manager; and Mr. Raymond Lin, Investor Relations and Ms. Phyllis Huang, Investor Relations.

Before we begin, I would 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, target, optimistic, intend, aim, will, or 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 net 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 with the Securities and Exchange Commission from time to time. SORL Auto Parts specifically disclaims any obligation to update these forward-looking information in the future.

The 2015 fourth quarter results discussed on today’s call are unaudited numbers and 2015 annual results are audited. All numbers are presented in U.S. dollars under U.S. GAAP. Ms. Jinrui Yu, Chief Operating Officer, will give an overview of the operations for the fourth quarter and twelve month period of 2015. Then I will return to give the financial results. Thereafter, a question-and-answer session will be conducted.

Ms. Yu, please begin your prepared remarks.

Jinrui Yu

Hello, everyone. 2015 was a difficult year for the commercial vehicle market in China due to slower economic growth and sluggish real estate developments and the construction activities. According to the China’s National [indiscernible] statistics, China’s 2015 gross productivity [ph] gross rate 6.8% and it was 9.9% for the full year 2015, representing the lowest annual rates in the past 25 years.

Also commercial vehicle demand in 2015 was affected by the large number of commercial vehicles purchased in 2014, during the play buy periods [ph] before the national implementation of the strict National IV emission standards in January 1, 2015, which significantly increased the crutch price of those vehicles.

The decent to slower economy growth the presence of the employment lay off and the impact of the volatile Chinese stock market reduced confidence and affected the purchasing decision. Passenger vehicle sales increased only 7.3% in 2015, according to the China CAAM. However, the sales of the Chinese transit trucks [ph] declined 12.5% year-over-year and the commercial vehicle sales decreased 9% year-over-year in 2015.

Heavy duty truck sales declined by 12.2% in the fourth quarter of 2015 and by 26% for all of 2015, medium duty truck sales was down by 3.2% in the 2015 fourth quarter and 19.6% for the 2015 full year. In this environment our total sales declined 8% as compared to [ph] market leaders in China.

Our sales were $218.7 million compared to our record annual sales of $237.7 million achieved in 2014. This decrease was mainly due to the decline of the production and sales of the commercial vehicle in 2015. Conversely the evaluation of the IMB [ph] also lowered sales as approximately [ph] 72% of our total sales are in IMB, after we report financial results in US dollars.

Commercial vehicle break system sales decreased 10.9% to $178.6 million for the year ended December 31, 2015, as the lower sales of commercial vehicle in 2015 in China impacted OEM sales. Lower usage of heavy-duty trucks due to reduced construction, new real estate and the infrastructure project also reduced the needs for the replacements of auto parts.

Our aftermarket sales declined by 3.9% to the $57.7 million for the 2015 year; our export sales in 2015 year, decreased by 4.7% to 61 million as compared to 2014. Lower export sales were primarily because of the reduced truck production and the currency depreciation in some countries. To adapt for this less to the low growth environment, we lowered our operating expenses by $5.1 million or 10.4% in 2015. Excluding the impairment of low leased exit [ph], we intend to in house our manufacturing efficiencies to optimize our cost per unit in competitive market place.

During 2015, we also maintained our gross margin in a high 70% area among the highest in the industry. Reduced our inventory [ph] by $10.5 million and grow our cash flow from operating activities to $39.3 million from $22.6 million in 2015. The trends in the heavy duty truck sales has shown recent improvements of quarter-by-quarter as the sales declined by 33.7% in the 2015 first quarter, 78.9% in the 2015 second quarter, 36% in the 2015 third quarter and the 12.2% in the 2015 fourth quarter. Medium truck also exhibited a similar trend, CAAM has reported truck sales in the first two months of 2015 increased by 1.4% and the heavy duty truck sales were up approximately 2%.

Now, let me turn the call to Dixon.

Dixon Chen

Thank you. Now I will briefly review the results for the fourth quarter of 2015. For the fourth quarter of 2015, net sales decreased by 10%, to 56.9 million. While the fourth quarter record result, of 63.2 million in 2014. Revenues from the company’s domestic OEM customers were 25.5 million, a decrease of 7.6% from 27.6 million in the fourth quarter of 2014. The lower OEM sales were mainly due to lower sales of trucks in the fourth quarter of 2015.

Total truck sales excluding electric powered vehicles declined by 15%, that’s by a reduction of 26% in the heavy duty segment. Sales from China’s domestic aftermarket decrease to 16 million compared with $18.4 million in the same quarter 2014. After sales market decreased as well as economic was slow and lower real estate and infrastructure, construction negatively affected truck traffic reducing the demand of all parts as well.

Revenue from international market decreased by 11% to 15.3 million compared with 17.2 million in the same quarter of 2014, due to the lowers commercial vehicle production and currency depreciation in several overseas markets. The gross profit for the fourth quarter 2015 decreased by 12% to 15.8 million from 17.5 million a year ago. Gross margin was 27.2% compared with 27.7% in the fourth quarter of 2014.

In the fourth quarter of 2015, operating expenses decreased to 7.8 million from 12.5 million in the same quarter of 2014. The decrease reflected reduced general and administrative expenses and R&D expenses partially offset by higher selling expenses. As a percentage of revenue, operating expenses were 13.8% in the fourth quarter of 2015, compared with 19.8% in the fourth quarter of 2014.

Selling and distribution expenses were 7.4 million or 13.1% of quarterly revenues, compared with 5.6 million or 8.9% a year ago. The higher selling and distribution expenses were mainly due to higher compensation to the sales team for outperforming the market and increasing the company's market share.

General and administrative expenses in the fourth quarter of 2015 were negative 1.7 million, compared with 5.2 million or 8.2% a year ago. The negative G&A expenses and the reduction of G&A expenses were mainly due to a large amount of aged receivables was collected in the quarter which reversed bad debt provision in the G&A expenses category.

R&D expenses were 1.5 million in the fourth quarter of 2015, compared with 1.7 million in the fourth quarter of 2014. As a percentage of revenue, R&D expenses were 2.7% in the fourth quarter of 2015 compared with 2.6% of total revenue in the fourth quarter of 2014.Financial expenses were 0.4 million, compared with 0.4 million in the fourth quarter of 2014.

Income from income taxes was 6.2 million for the fourth quarter of 2015, including a $3.2 million loss on the sales of a subsidiary, compared to 5.7 million for the same quarter of 2014. The increase in the income before income taxes reflected lower operating expenses during the fourth quarter of 2015 compared with fourth quarter of 2014. Pretax income margin was 11% in the fourth quarter of 2015, compared with 9% in the fourth quarter of 2014.

The provision for income taxes was 0.2 million in the fourth quarter of 2015 from 1.3 million in the fourth quarter of last year. Net income attributable to shareholders for the fourth quarter of 2015 was 5.9 million or $0.31 per basic and diluted share, compared with 4 million, or $0.20 per basic and diluted share a year ago.

Now, let me turn to the highlights of the full-year 2015 results. SORL’s net sales for the fiscal year ended December 31, 2015 decreased by 8% to 218.7 million from last year’s record revenue of 237.7 million in 2014. For the fiscal year ended December 31, 2015, the Company's sales to domestic OEM market decreased by 10.9% to $99.9 million from $112.1 million in 2014.

The pre-buy of less expensive Chinese commercial vehicles compatible with the National III emission standard resulted in higher sales during 2014, before the nationwide enforcement of a more stringent and more expensive National IV emission standard product on January 1, 2015. The reduction in sales in the second half of 2015 was due to a growing number of localities requiring commercial vehicles to comply with the National IV emission standard.

Aftermarket sales decreased by 6.3% to 57.7 million from 61.6 million in the 2014 year. Lower real estate and infrastructure construction resulted in less truck traffic, especially heavy-duty trucks, requiring fewer replacement parts. International sales decreased by 4.7% to $61 million compared with$ 64 million last year as truck production declined and currencies depreciated in certain foreign markets.

SORL's gross profit decreased by 11.2% to 59.4 million in 2015 from 66.9 million in 2014 mainly due to the decrease in sales. Gross margin was 27.2% compared with 28.1% in 2014. Operating expenses decreased to 44.7 million in 2015 from 49.3 million in 2014. Selling expenses decreased by approximately $1 million, compared with 2014 primarily due to decreased freight and packaging expenses. As a percentage of sales revenue, selling expenses were 10.4% for the year ended December 31, 2015 compared with 10% in 2014.

G&A expenses decreased by 3.9 million in 2015, mainly due to lower sales. G&A expenses decreased to 6.4% of total sales for the year ended December 31, 2015, compared to 7.6% for the 2014. The decrease in G&A expenses was mainly due to successful collection of aged receivables which reversed the total bad debt provision account under the G&A expenses.

R&D expenses decreased by 0.2 million from 2014 as SORL continued to build new products and advance traditional technologies. The Company's focus was on developing electronically controlled products to enhance braking performance especially as the company expanded its global presence. As a percentage of sales revenue, R&D expenses were 3.3% for the year ended December 31, 2015 compared with 3.2% in the 2014.

Financial expenses increased to 1.3 million from 1.1 million in 2014, mainly due to higher short term bank loans. Income before provision for income taxes was 16.6 million in 2015 including a 3.2 million loss from the sales of a subsidiary, compared with $18 million in 2014. The pretax income margin was 7.6% for both years. The provision for income taxes was $2 million or 13% tax rate in 2015, as compared to 2.9 million or 15.9% tax rate in 2014.

The net income attributable to stockholders in 2015 was 13.3 million, compared with 13.8 million in 2014. Earnings per share, both basic and diluted, for the full year ended December 31, 2015 and 2014, were $0.69 and $0.71 per share respectively, $0.69 for 2015 and $0.71for 2014.

Now, let’s take a quick look at our balance sheet. As of December 31, 2015, the Company had cash, cash equivalents and short-term investments of 91.2 million, compared to 48.8 million in December 31, 2014. Inventory was 73.7 million compared with 84.2 million on December 31, 2014. Short term bank loans were 23.4 million compared with 9.5 million on December 31, 2014.

Total equity increased to 222.4 million at December 31, 2015, compared with 220.2 million at December 31, 2014. On December 31, 2015, working capital was 169.8 million with the current ratio of 2.7 to 1. Net cash flow from operating activities increased to 39.3 million from 22.6 million in 2014.

Before we open the floor for questions, we are going to provide the guidance for 2016. For the fiscal year 2016, management expects net sales to be approximately $200 million and net income to be approximately $11.5 million. These targets are based on the company's current views on the operating and market conditions, which are subject to change. We do remain cautiously optimistic, although current strength in the heavy-duty sector and excavator markets may signal the beginning of higher construction spending which will increase the need for our products. We continue to build our product portfolio to capture market share in China and this is the second largest commercial vehicle market globally. We also continue to focus on reducing our costs to ensure we are the cost leaders in a very competitive automotive market. We remain well positioned to continue our success in the coming year.

With that operator, we are ready to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you, we’ll now be conducting a question-and-answer session [Operator Instructions]. Our first question of today is coming from William Gregozeski from Greenridge Global. Please proceed with your question.

William Gregozeski

Hi, I’ve few questions. In regards to the SIH, we know that it’s underperformed for a while and I was curious if you could talk about why the decision was made to divest now and what the plan is going forward to win international customers?

Dixon Chen

[Foreign Language - Chinese]

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

The initial idea to have to set up SIH is to help us expand globally. For that we did mention a solid achievement as SIH help us to open up a lot of new markers. And however doing that process we also have to deal with a lot of distributors which eventually affected our end market price to our end users. And to make things worse, a lot of those international markets are experiencing some difficulties whether their local economy or their currency and so we finally decided, we need to make some cuts and to be able to make that business continue to be competitive, continue to be a - getting very close to our end customers. And so for that reason we make that decision to divest SIH.

William Gregozeski

Okay. How about you in the present case [ph] it was mentioned that you guys knocked down an office building, I was curious what’s going to be built on that land and what your current plans are for 2016.

Dixon Chen

[Foreign Language - Chinese]

Unidentified Company Representative

[Foreign Language - Chinese]

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

Okay. So, regarding the old office facility, it’s mainly due to the condition of the facility is no longer meet our production expansion. So we decided to move our production line to the other facility adjacent to the rest of our operations and to vacate this building. When you have an empty building, according to local regulations and laws you have - you will be making some tax implications. So we decided to knock down the building and that was the main reason we had to do that. And of course we will have - we will make a follow up public announcements on that particular subject in the near future when we have some updates.

William Gregozeski

Okay, do you have CapEx targets for 2016?

Dixon Chen

Can you repeat your question?

William Gregozeski

What are your CapEx plans are for 2016?

Dixon Chen

Oh CapEx.

Dixon Chen

[Foreign Language - Chinese]

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

It is about $10 million CapEx for 2016.

William Gregozeski

Okay and my last question is regarding your customers, you give the top five - the breakup of your top five customer revenue in the highlight [ph] and it looked the revenue from those top five fell from 45 million to about 29 million from last year to this year and I’m just curious why that happened and if you’re becoming more relying on smaller OEMs.

Dixon Chen

[Foreign Language - Chinese]

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

[Foreign Language - Chinese]

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

If you look at the half customers the overall sales up top five actually you know -

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

So if you look at the top 10 customers, the overall sales for the top five actually was -

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

Was actually down a little bit, however - well, they are actually down. But that business has been picked up by the remaining top five, so from number six all the way to number 10, these are rising stars in our business as new customers. So for instances JAC [indiscernible] those are new players they are growing very fast, so will make up the top five business customer loss by the growing of the other new customers, leading customers.

William Gregozeski

Okay, great thank you.

Jinrui Yu

Thank you.

Dixon Chen

Thank you.

Operator

Thank you. [Operator Instructions] Our next question amount is coming from Mike Husain [ph] a private investor. Please proceed with your question.

Unidentified Analyst

Hi, thank you for taking my question. I have a question about, could the management give us a little color on why you withdraw the binding [indiscernible] to generate and secondly is there any different share price trading at a really low level, what’s the management view on the share price and any sort of shareholder friendly activity going to happen in the next quarter or so. Thank you

Dixon Chen

[Foreign Language - Chinese]

Unidentified Company Representative

[Foreign Language - Chinese]

Dixon Chen

So as far as our shareholder personal decision and we can’t comment on it. And as the management team what we can do is to operate a strong business and to outperform the market and we believe we are executing our plan very well.

Unidentified Analyst

So what about the second is there any - for example if we look at your cash balance on the balance sheet almost equivalent to your market cap. So, I was wondering is the management considering any shareholder friendly activities to going to happen or what is your view on the share price at the moment?

Dixon Chen

[Foreign Language - Chinese]

Unidentified Company Representative

[Foreign Language - Chinese]

Dixon Chen

For that we have reported to our Board of Directors and when - or if there is a decision will make a public announcement.

Unidentified Analyst

Right, thank you very much.

Dixon Chen

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is coming from Peter Cyrus [ph], a private investor. Please proceed with your question.

Unidentified Analyst

Peter Cyrus [ph], first, I just want to say congratulations on an absolutely sensational year, the business, the overall truck business in China and then in the world was terrible last year. I think, you folks deserve a lot of credit for managing the business during a very - managing the business very well during a difficult period like this, so I just wanted to make that comment. I have a couple of questions, first question is I see that it looks like the guidance for this year is for lower sales and lower earnings than in 2015 and given the slight improvement that we have seen recently I am wondering what the issues are that would cause the 2016 guidance to be lower than 2015. That’s my first question.

Dixon Chen

[Foreign Language - Chinese]

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

Thank you Peter for the questions. The OEM business, if you ask about our downstream customers or competitors and the general feedbacks still are relatively weak. The feeling is 2016 is still going to be flat or slightly lower than 2015, such is the general feeling for 2016. If you look at the international sales - international export market, it is actually the environment has remained difficult. Start with the big country, Russia, India, Brazil, these markets have been very weak, not only economy but currency, the amount has dropped significantly and also if you look at the market like Turkey [ph] and they increase the tariff quite a lot has also negatively impacted our business. Lastly, is our domestic aftermarket business, due to the difficulty in the OEM market you will see more competitors are falling into the aftermarket space to pick up - to try to pick up some sales there, so we will see more intense competition in that space. So in general we believe our guidance are somewhat reflective of our conservative view for 2016.

Unidentified Analyst

[indiscernible], the next question I was going to ask is that I see on the balance sheet that cash is up a lot that the short-term investments are up a huge amounts and yet there is also a short-term loan you are borrowing, while you have much, much more cash you’re boring - also borrowing money from the bank, I’m curious to why.

Dixon Chen

[Foreign Language - Chinese]

Unidentified Company Representative

[Foreign Language - Chinese]

Dixon Chen

So at the end of December 2015, our bank loan - short-term bank loan is somewhere at $23 million. The reason being is, we need to constantly maintain relationship with banks and this happens to be our best day we have that balance, so we tend to generally, periodically maintain a relationship and maintain a balance with the bank. So when we get to a situation we need to call the bank and they can move the amount. It’s not the real intention to borrow that cash.

Unidentified Analyst

Next, in response to an earlier question, I think we - somebody was asking about the CapEx and the answer was - was I correct, the answer was each at 10 [ph] 118?

Dixon Chen

Yes, $10 million CapEx.

Unidentified Analyst

And that $10 million is a higher CapEx than we’ve been seeing, can you talk about where that what some of the investments might be?

Dixon Chen

[Foreign Language - Chinese]

Jinrui Yu

[Foreign Language - Chinese]

Dixon Chen

So in the past couple of years, some of our equipments and went through a wear and tear and we’ve realized as it turns to upgrade on our equipments. This in 2016 will include die casting equipments, machine equipments and some of the molds, so that will help us to ensure product quality having continued to expand it to on the higher market.

Unidentified Analyst

Great, thank you very much.

Dixon Chen

Thank you.

Jinrui Yu

Thank you, Peter.

Operator

Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the call back over to Dixon Chen for any further closing comments.

Dixon Chen

Thank you for participating in SORL Auto Parts 2015 fourth quarter and full year results announcement. We look forward to speaking with you and you have a good day.

Jinrui Yu

Okay, alright. Bye, bye, thank you.

Operator

Thank you, this does conclude today’s teleconference. You may disconnect your lines this time and have a wonderful day. We thank you for your participation today.

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