SORL Auto Parts (SORL) Q3 2016 Results - Earnings Call Transcript

| About: SORL Auto (SORL)

SORL Auto Parts, Inc. (NASDAQ:SORL)

Q3 2016 Results Earnings Conference Call

November 14, 2016 08:00 AM ET

Executives

Dixon Chen - IR, Grayling

Jinrui Yu - COO

Min Kan Lin - Accounting Manager

Raymond Lin - IR

Phyllis Huang - IR

Analysts

William Gregozeski - Greenridge

Operator

Greetings, and welcome to the SORL Auto Parts 2016 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 Dixon Chen. Thank you, Mr. Chen. You may now begin.

Dixon Chen

Thank you, Operator. And thank you for joining us today, and welcome to SORL Auto Parts’ 2016 third quarter earnings conference call. 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 would like to just 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 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 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 2016 third quarter results discussed on today’s call are unaudited. All numbers are presented in U.S. dollars under the U.S. GAAP. Ms. Jinrui Yu, SORL’s Chief Operating Officer, will give an overview of the operations for the third quarter of 2016. Then I’ll return to give financial results. Thereafter, there will be a question-and-answer session concluded.

With that Ms. Yu, please begin your prepared remarks.

Jinrui Yu

Thank you, everyone. Thank you for joining us today. The third quarter is typically the lowest season in the year due to the summer slowdown. We are pleased to report strong our third quarter results with continued growth in both top line and bottom line, despite seasonality led by the renewed growth in the China truck OEMs segment. Our sales to OEM aftermarket and international market all posted growth as our broad portfolio of advanced products drove higher volume. We expanded our market share as we outpaced the overall Chinese commercial vehicle market. During the third quarter, our ongoing focus on innovative products whether in the high speed rail segment or in the electric vehicle area, continued to propel our growth in an industry experiencing technological change, and customers are increasingly demanding more advanced products. Despite the slow economic growth, the overall sales of Chinese auto industry is a bright spot.

According to the data from the China Association of Automobile Manufacturers, there was a 14.1% rise in commercial vehicle production and 6.1% increase in the commercial vehicle sales. Overall truck sales increased 15.4% driven by strong growth in the heavy and the medium duty truck sales, such 4.2% and the 18.7% respectively. Excluded electrical vehicle bus sales declined by 13.1% in third quarter of 2016 with the heavy duty bus sector softening a 29.3% decrease. In September of 2015, EV section was affected by the schedule of [indiscernible] among some bus OEMs to claim subsidies.

The government initially took an investigation, although 2016 government incentive [ph] program for the commercial vehicle remained unclear at the point of time. The sales of electric buses remained strong and gross [indiscernible] increase of $0.58 to exceed 1,000 [ph] units for the first nine months in 2016. The regulatory environment changed quickly and many automakers are closely watching and waiting for the new facility to enter into the EV markets. While many of them already have developed design and the technology for their own EV models, we believe this overall electrification tender will benefit our new product line where we continue to stay ahead of our competitors.

Our net sales for the third quarter of 2016 increased by 23% year-over-year to $61.9 million and compared with $50.3 million a year ago. Our domestic OEM business, domestic market, international market increased year-on-year by 38.4% 16.6% and 8.8%, respectively as we continue to expand our leading position in Chinese commercial vehicle braking market.

Our gross profit increased year-over-year by 31.9%, once again outpacing our sales growth to $18.6 million. Gross margin for third quarter of 2016 was 30.1%, a significant improvement from a gross margin of 28% in the same quarter of 2015. Our successful new product rollout, stringent cost controls, improved inventory balancing and increased production efficiencies enabled us to maintain our market leading gross margins.

Our continued investment in research and developments, allocating fixed cost [ph] and revenue in third quarter of 2016. New high margin products are being launched to meet evolving needs of our customers, attract new customers and remain our financial returns at high rates. A significant portion of our sales growth in the third quarter and the first nine months of 2016 were generated by new products from our research and development program.

With that now, let me turn the call to Dixon. Thank you.

Dixon Chen

Thank you, Ms. Yu. Now, I will briefly review the results for the third quarter. Net sales for the third quarter of 2016 increased by 23% to $61.9 million from $50.3 million in the third quarter of 2015.

Revenues from the Company’s domestic OEM customers increased 38.4% to $27.8 million from $20.1 million in the third quarter of 2015. Sales from China’s domestic aftermarket increased by 16.6% to $17.9 from $15.3 million in the third quarter of 2015. Revenues from international markets rose by 8.8% to $16.2 million from $14.9 million in the third quarter of 2015, mainly due to the Company’s growing global customer base.

SORL’s commercial vehicle brake sales increased by 26.2% to $51 million and represented 82.4% of total sales in the third quarter of 2016. The sales of passenger vehicle brake systems increased by 10%, to $10.9 million, which accounted for 17.6% of total sales for the third quarter of 2016.

Gross profit for the third quarter of 2016 grew by31.9% to $18.6 million compared with $14.1 million for the third quarter of 2015. Gross margin for the third quarter of 2016 was 30.1%, compared with a gross margin of 28% in the same quarter of 2015, which is primarily due to a shift in product mix to higher margin products during the third quarter of 2016.

Operating expenses increased to $15.4 million in the third quarter of 2016 from $12.7 million in the third quarter of 2015. As a percentage of revenue, operating expenses were 24.9% in the third quarter of 2016, compared with 25.3% in the third quarter of 2015. The increase in operating expenses was primarily due to higher selling and distribution expenses related to higher net sales. The decline in operating expenses as a percentage of revenue was primarily due to higher net sales.

Selling and distribution expenses rose to $7.9 million from $4.8 million in the same quarter of 2015. As a percentage of revenue, selling and distribution expenses were 12.8% compared with 9.6% of the quarterly revenue in the same quarter of 2015. The increase in selling and distribution expenses was primarily the result of higher freight, packaging expenses and salaries as unit volume rose during the third quarter of 2016.

General and administrative. G&A, expenses for the third quarter of 2016 declined by 12.5% to $4.9 million, or 7.9% of revenue, compared with $5.6 million, or 11.2% in the third quarter of 2015. The decline in G&A expenses and G&A expenses as a percentage of revenue was mainly due to a decrease in allowance for doubtful accounts during the third quarter of 2016.

R&D expenses were $2.4 million in the third quarter of 2016 compared with $2.3 million in the third quarter of 2015. As a percentage of revenue, R&D expense was 3.9% in the third quarter of 2016, compared with 4.5% of revenue in the third quarter of 2015. The Company continues to develop new and higher-margin, electronically controlled products, and upgrade the Company’s traditional brake system products, to capture greater market share.

Other operating income was $0.3 million for the three months ended September 30, 2016, as compared to $0.07 million in the third quarter of 2015, an increase of $0.23 million. This increase was mainly due to higher sales of raw material scrap in the third quarter of 2016.

Interest expenses decreased by 46% to $214,974 in the third quarter of 2016 compared to $395,121 in the third quarter of 2015. Decreased interest expenses were mainly due to a lower interest rate and a smaller average amount of loans outstanding during the third quarter.

Income before provision for income taxes rose 39.4% to $4 million for the third quarter of 2016 as compared to $2.8 million for the third quarter of 2015. The increase in income before taxes was primarily due to higher gross profit and higher other operating income. Pretax income margin was 6.4% in the third quarter of 2016, compared with 5.7% in the third quarter of 2015.

The provision in the income taxes was $0.4 million, in the third quarter of 2016 and 2015. The tax rate was 11% in the third quarter of 2016 compared with 15% third quarter 2015.

Net income attributable to stockholders for the third quarter of 2016 increased by 55.4% to $3.2 million, or $0.17 per basic and diluted shares, compared with $2 million or $0.11 on per basic and diluted shares, in the third quarter of 2015.

Now, let’s review our first nine months 2016 financial performance. Net sales for the first nine months of 2016 increased by 17% to $189.3 million from $161.8 million for the first nine months of 2015. Revenue from the Company’s China OEM customers increased by 24.6% to $92.7 million from $74.4 million in the same period in 2015. Revenue from China’s domestic aftermarket increased by 19.7% to $49.9 million from $41.7 million in the first nine months of 2015. Revenue from international markets increased by 2.2% to $46.7 million from $45.7 million in the first nine months of 2015.

SORL’s commercial vehicle brake sales increased by 18.3% to $154.3 million and represented 81.5% of total sales in the first nine months of 2016. The sales of passenger vehicle braking system increased by 11.4% to $35 million, which accounted for 18.5% of the total sales for the first nine months of 2016.

Gross profit for the first nine months of 2015 increased 23% to $55.7 million from $45.3 million in the same period of 2015. Gross margin in the first nine months of 2016 increased to 29.4% from 28% for the first nine months of 2015.

Operating income for the first nine months of 2016 increased to $12.5 million from $8.6 million in the same period of 2015. Operating margin was 6.6% for the first nine months of 2016 compared to 5.3% in first nine months of 2015.

Net income attributable to stockholders for the first nine months of 2016 was $10.9 million, or $0.57 per basic and diluted shares, compared with $7.4 million, or $0.38 per basic and diluted shares, in the same period of2015.

Now, let me walk you through our balance sheet highlights. As of September 30, 2016, the Company had cash and cash equivalents of $7.5 million. Inventories were reduced to $63.9 million from $73.7 million as of December 31, 2015. Deposits received from customers increased 17.7% to $23.6 million from $20 million at the end of 2015. There were no long-term liabilities as of September 30, 2016. Total stockholders’ equity was $159.2 million at September 30, 2016. The Company had working capital of $97.5 million at September 30, 2016 with the current ratio of 2.7 versus 1.

Cash-flow from operating activities for the first nine months of 2016 was $3.3 million. The increase of net sales in the first nine months of 2016 affected our cash flow from operating activities. Capital expenditures were $12.3 million in the first nine months of 2016.

Now, let me revenue our business outlook. For fiscal year 2016 management has increased their expectation for the net sales to be approximately $255 million and net income to be approximately $14.5 million. These targets are based on Company’s current views on the operating and market conditions, which are subject to change.

With that we will now open the floor for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. Our first question is from the line of William Gregozeski with Greenridge. Please proceed with your question.

William Gregozeski

I have a couple of questions. In regards to the passenger sale, the passenger business, earlier this year you had mentioned, I guess maybe a bleaker outlook for that sector, but you’ve had year-over-year increases each of the first three quarters. So, just curious what’s driving that and if you think you can see that continued growth going forward into next year?

Jinrui Yu

[Foreign Language]

Dixon Chen

On the passenger vehicle area you mentioned, we have some -- we have registered some good growth in the first three quarters. One area we see growth is due to the increase of steering pump products for the passenger vehicle aftermarket. We implemented a promotion in that area and attracted lot of customers and we see growth comes with that -- follow that promotion. And going forward -- and also we selected the better credit customers to let them enjoy our price discounts. And so, we believe going forward, we will continue to focus on larger scale customers with good credit -- payment credit and to help us to improve our overall customer quality. But then with this kind of customer, start to stabilizing or customer portfolio, we are not seeing further rapid growth in that particular area.

William Gregozeski

Okay. As far as the gross margins, obviously they increased quite a bit this quarter, and I know you guys are always focused on cutting cost and the new higher margin products. Where does the company see gross margins kind of stabilizing out?

Unidentified Company Representative

[Foreign Language]

Dixon Chen

To answer your question on the gross margin, I think the biggest contributor to our gross margin is our product for the new energy or electric vehicle segment. And with our further expansion to that area and also with the increased competition coming into that area, we see we are looking to expand the customer base. So, we are not expecting further expansion on the gross margin. So, this gross margin will start to stabilize at this level.

William Gregozeski

So, around the 30% level, not kind of 26% to 28 %the company has been at?

Dixon Chen

It’s around 29%.

William Gregozeski

Okay, alright. And then last question I have is in regards to the selling expenses. There was almost 13% of sales, which is quite a bit more than it has been. Was there any bonuses or anything like one-time items or is this percent of sales kind of something we can look for going forward?

Jinrui Yu

[Foreign Language]

Dixon Chen

So, first part of the answer to your question is, the sales -- selling expenses are increasing due to three factors and first is the increased regulation on the overloading situation in the truck business, truck logistic business are affecting the shipping costs. Secondly is the labor cost, as we all know has gone up, especially for the sales force. Thirdly, because our product has been upgrading and customer also expecting a higher quality in the packaging, so we’re procuring higher quality packaging material and that is also affecting our selling expenses.

Looking forward, we see the selling expenses as the percentage of revenue will continue to operate at a relatively higher level the entire year but if you want to model this, we recommend you use 11%.

Operator

[Operator Instructions] Our next question is from the line of Carl Hu, [ph] a private investor. Please go ahead with your question.

UnidentifiedAnalyst

[Foreign language] Your revenue growth has been tremendous to say the least. Do you think in the next year, you’ll continue to grow your revenue outpacing your competition?

Jinrui Yu

[Foreign language]

Dixon Chen

Our growth also came from or benefited from the growth of OEM market in China. If you look at 2015 data and the full year of 2015, total heavy-duty truck sales was 540,000 units. However, in the first nine months of 2016 we already exceeded that number, the total of sales of heavy duty trucks in January to September was 550,000 units. We think the Chinese government’s restriction and increased regulation on overloading situation in the truck logistic market has affected, positively affected the increase of truck sales, which we also benefited from that trend. Looking into 2017, we don’t have visibility at the moment but we can tell you the growth of 2016 even for the first nine months, a big part of that was the contribution from the third quarter of 2016, this particular quarter we see quite a bit increase in the OEM truck sales.

Unidentified Analyst

Okay. Thank you for answering my question. Can you name your top 10%, your 10% customers and your top 5 customers in the truck business?

Jinrui Yu

[Foreign Language]

Unidentified Analyst

I don’t need the top-10 customer, I want 10%, the customer who has taken 10% of your total revenue.

Jinrui Yu

[Foreign Language]

Dixon Chen

We do not have any customer at more than 10% of our total sales. Our top 5 truck OEM customers are FAW, Dongfeng, JAC, Beiqi Foton and Shaanxi.

Operator

Thank you. There are no additional questions. At this time, I’d like to turn the floor back to management for further remarks.

Dixon Chen

Thank you for attending SORL third quarter 2016 earnings conference call. We look forward to speaking with you. Thank you.

Jinrui Yu

Thank you.

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