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Tri-Tech Holding, Inc.(NASDAQ:TRIT)

Q2 2012 Earnings Call

August 15, 2012 09:00 am ET

Executives

Phil Fan – Co-President, Director

Gavin Cheng – Joint CEO, Co-President & Director

Analysts

Michael Gaugler – Brean Murray, Carret & Co.

Unidentified Company Representative

Good morning everyone, this is (inaudible) to the Board of Directors of Tri-Tech Holding, Inc. I apologize for the delay, and I’d like to welcome you all being on the call today.

In addition to covering the financial results for the second fiscal quarter ended June 30, 2012. The company’s management will all like their long-term forward-looking business plans in more details. This discussion will include conservative forward-looking statements with regards to fiscal year 2012 and beyond. Executives on the call today are Chairman and Joint CEO, Warren Zhao; Joint CEO, Gavin Cheng, President, Phil Fan, Chief Financial Officer, Peter Dong.

Before we move forward, I’d like to briefly remind you of the Safe Harbor languages as required by leading the Company’s disclaimer statements. This call may contains various forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. They represent the Company's expectations or beliefs concerning future events of the Company’s financials and operational performances. These forward-looking statements are further qualified by important factors that would cause results to differ materially from those in the forward-looking statements. These factors include, but not limited to market conditions in China, India and other regions of the world.

The financial and political environment of water, wastewater, flash flood and full industrial pollution and safety activities in China, India and numerous other potential factors. Results actually achieved may differ materially from the expected results included in the following statements.

As a reminder that we will facilitate questions and answers at the end of management’s prepared remarks and in order for all participants to be heard. We ask for two, no more than two questions from each participant at a time during the Q&A session.

Now, I’d like to turn the call over to President, Mr. Phil Fan to start with an overview for the second quarter ended June 30, 2012.

Phil Fan

Thank you, Ian. Let’s begin with an overview of the key financial figures for the second quarter and Mr. Gavin Cheng our joint CEO will then give you a summary of our growth strategy going forward and our operation in the second quarter.

Our revenue for the second quarter was $19.2 million, an increase of $9.5 million over the same period in 2011. Our gross profit for the quarter two was $5.8 million, a slight increase from $5.3 million in Q2 2011. Our gross margin decreased from $26.3 million in the same period of 2011, to 25.3% in Q2 2012. Operating income totaled $1.6 million, up 44.3% of decrease from $2.9 million in Q2 2011, and diluted earnings per share was $0.17 based on the net income of $1.4 million, which was 22.2% of decrease over the net income of $1.8 million in second quarter of 2011.

The decrease in net income and the EPS was due to several combined factors in the second quarter. Such substantial increase in the operating expenses mainly due to a 50% of increase of employees accounted for the business development and the project execution.

And there’s a one-time stock option cost expenses approximately $250,000 for this year’s management team stock option at about fund dollars striking price early this year, there’s a book in this expenses for this quarter. Last year, we begin the contract award to the implementation and slower revenue recognition from two of the company’s largest project, the expansion phase of Ordos water processing plant and the India wastewater treatment system project.

I would continue to accomplish our moderated growth in the second quarter of 2012. Although we reported stronger than expected results from our water resource management and industrial pollution control and safety segment, our municipal water and wastewater treatment business declined due to the slow progress on several key projects. The impact from the macroeconomic environment, including rising finance, labor and raw material cost, as well as the weakened market demand presented unprecedented challenges for our sales in the second quarter.

To address the challenge we are improving our profitability through enhanced corporate governance and cost efficiency. On the other hand, we also emphasize strategic market development where our core technological advantage allowed us a competitive edge over our competitors. In addition, we will grow our market share in the water and the wastewater treatment segment overseas in order to diversify our revenue stream portfolio.

Here, I would like to give you some color, give you more color of our financial performance for the second quarter. Revenue from the operating segment Water, Wastewater Treatment and the Municipal Infrastructure was $8.4 million, a decrease of $8.4 million, or 50.2% from $16.8 million in the same period of 2011.

This decrease was mainly due to slow revenue recognition from the expansion phase of the Ordos drinking water plant project and the Indian Bihar municipal wastewater treatment projects, which collectively contributed 25.4% of the total revenue of Q2 of 2012. By comparison, the Ordos project contributed 79.5% of the total revenue in the same period in 2011. The Indian Bihar municipal wastewater projects was well completed 25%, contributing $0 million, or 17.3% of the company’s revenue as the end of this reporting period.

Revenue from Water Resources Management Systems and Engineering Service showed substantial growth of 264.5% to $8.4 million from $2.3 million, representing 36.6% of the total revenue for Q2 of 2012. Revenue from Industrial Pollution Control and Safety was $6.3 million, a increase of 459.2% from $1.1 million in Q2 of 2011, representing 27.1% of the total revenue for Q2 2012. This increase was primarily due to increase of revenue from the wastewater system contract for Xushui Dawangdian Industrial Park in Hebei and our international projects in Canada and Mexico. The Dawangdian Industrial Park project was 40% completed; and the Mexican steel plant wastewater treatment project will reach a 20% of the completion by end of Q2 2012.

Gross margin of this quarter declined to 25.3% compared to 26.3% for the same period in 2011. The decrease was due to the lower gross margin of the Indian project, which constituted a substantial percentage of our total revenues for this quarter. In spite of the lower gross margin, we expected the project as a first step to open in the Indian market.

Total operating expenses for Q2 2012 were $4.2 million, or 18.2% of the total revenues, an increase of 76.2% from $2.4 million, or 11.8% of total revenue for Q2 2011. The increase resulted from rising general and administrative expenses as the company implements its growth plans amidst rising expenses.

On the balance sheet, we finished the second quarter with $9.6 million in cash and cash equivalents, a decrease of 24% from a $11.9 million balanced December 31, 2011, largely due to expenses associated with a rapid market expansion. During the restricted cash position, we had by the end of the Q2, we are striving to improve our collection of account receivables and the [salaried] payment collection from several large projects. Moreover, we are also actively working with local Chinese bank to secure financial support.

During the second quarter, we received $7.9 million from Ordos water treatment plant and build-transfer contract, and a $3.1 million in July 2012. We expect additional RMB 10 million will be collected by end of Q3, and as the progress of the project we expected the cash payment will become more efficient from the customer in the quarter going forward. In terms of the bank loans by the end of the second quarter, we have lines of credit of $31.1 million of which additional $2.4 million was secured in June from ICBC Bank.

Accounts and notes receivable was $23 million and unbilled revenue was $21 million. As of June 30, 2012, working capital was $9 million, compared to $3.3 million as of December 31, 2011. Our inventories carried at $6.5 million, a $1.2 million decrease compared to the beginning of the year. Accounts payable and the projects accrual increased to $31.9 million mainly due to project cost accruals.

Now I would turn to our Joint CEO, Gavin Cheng to give you more insight about the business.

Gavin Cheng

Thanks Phil. Once again, I’d like to thank everyone for being on the call. It’s good to be with you again. First of all, I’d like to start with our backlog and pipeline. We are still in strong position in our backlog in Q2 2012. At June 30 2012, we had a total contract backlog of $79.2 million, most of which we expect to collect in 2012, backlog included $41.9 million in Municipal Water, Wastewater Treatment and Municipal Infrastructure, $12.2 million in the Water Resource Management System and Engineering Services and $25.1 million, Industrial Pollution Control and Safety Study.

In the meantime, our pipeline of contract continue to be exciting with diversified projects portfolio, we are currently pursuing a total value of $152.2 million of [Ambbio] contract, including $39.7 million in the Water and Wastewater Treatment segment. $33.1 million is in the Water Resources segment and $39.4 million in the Industrial Pollution Control and Safety segment. The contract value of domestic project was 1 trillion accounts from 77.8%, and that our international project picks up 33.3%.

Overall, we are continuing our trend of growth. Based on the performance in the second quarter of 2012, and the projection for the rest of the year, we reaffirm the previously announced guidance for the year 2012 that now takes exactly within $103 million to $128 million. Net income will likely be between $9.7 million and $12.1 million.

Assuming the number of products still overspending remain the same. We expect our earnings per share to range from $1.18 to $1.47 based on the company’s target, not producing our actual performance, the foregoing statements regarding projects are forward-looking and actual results may differ materially. In the Q3 and onwards, we will further invest our resource to implement the procured project to keep an effective conversion of backlog to revenue.

We expect to complete the settlement order of the initial phase of Ordos project, and expect the Q1 agreement for operation of the water plant. We are going to complete the dependency of (inaudible) in the final segment. For that part, again industrial wastewater treatment project, we are going to complete pipeline placing, and the stable compressing of the wastewater treatment plant, equipment procurement and the signing of contract. We expect to start between commissioning for that Xinjiang airport economic zone wastewater treatment plant expansion project.

For the Indian project, we are going to finish design of Power Station, and a sewage treatment plant and file the civil construction of the pipeline network, and finish procurement of the materials. For the Qatar project, we expect to complete procurement of material, and start the fabrication of evaporator. We also expect to complete the equivalent procurement and the fabrication of evaporator for the Mexico project.

In Q3, 2012, in addition to focus on the implementation of the award projects, we will continue execute our (inaudible) support in Japan, our business in domestic and overseas markets. We will import our leading potential and continue to strengthen our core everyday increasingly competitor and DTO provider from municipal water treatment project.

Specifically, we will continue to develop water and wastewater treatment business in domestic market, focusing mainly on the construction and retrofit of municipal water and the wastewater treatment facilities in small- to medium-sized cities in Central and West China. We will select projects with favorable payment terms and maintain tight controls over costs. Overseas, we will continue municipal project development in South Asia and North America to further diversify our customer base and optimize our revenue portfolio.

Research and development of the membrane technology and applications in the municipal water and the wastewater treatment segment will be one of our main focuses in the coming quarters. To that end, we actively seek partnerships and the potential domestic acquisition opportunities emphasizing proprietary technologies.

We continued to conduct market surveys and analysis to assess domestic market demand for forward osmosis membrane products, with a focus on products used in military and mine safety and rescue settings.

As a whole, we plan to further enhance our water and wastewater treatment technology by independent research and development, cooperative development, and mergers and acquisitions.

For the water resource management business, we will continue to expand our market share in flash flood and small river hydrologic monitoring. We will closely monitor market demands driven by the government policies and fund allocation. We have launched market survey and preparing several water resource management programs such as national water resource monitoring program and irrigation area information system program. We intend to capture a larger market share by partnering with the leading international water conservancy information solution providers and importing competitive technologies from overseas. In addition, we are expanding the business to the South Asian market. Starting in the second quarter of fiscal of 2012, we have participated in several project biddings there.

In the upcoming quarters, we anticipate strong performance from our flash flood and hydrologic monitoring offerings, as a result of the growing market demand. For the industrial pollution control business, we are reporting domestic market development. We conducted pilot testing of specialties industrial wastewater, zero liquid discharge and thermal seawater desalination technologies and accelerated the commercialization of core technologies in China market, prioritizing especially on the petrochemical industry.

We believe higher effluent standards emphasizing on the resource recovery and the lower energy consumption present vast market opportunities. Moreover, we continue to explore the application of membrane technology in industrial wastewater treatment, through research and development and introduction of the technology to municipal governments. Overseas, we continue to undertake cutting-edge projects of industrial wastewater zero liquid discharge and thermal seawater desalination. Our competitive pricing structure, reliable operation and the lower energy consumption enable us to compete effectively with international peers.

Next quarter, we will continue to expand the business in the China market, particularly in the thermal seawater desalination and the zero liquid discharge technologies, which are our core strengths in industrial wastewater treatment. We anticipate sales from the all segment to continue a steady growth. These are all we are going to implement in the next quarter and beyond.

That concludes our prepared remarks. Hope we have. We’ll now open the call for the questions. Thank you, all.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And we do have a question from the line of Michael Gaugler with Brean Murray, Carret & Company. Please go ahead.

Michael Gaugler – Brean Murray, Carret & Co.

Good day, everyone.

Phil Fan

Good morning, Michael.

Michael Gaugler – Brean Murray, Carret & Co.

I’d like to focus a little bit on the G&A line, $3.2 million last quarter. If we back out the option expense, there is about $2.9 million, would just under $3 million be a good expectation going forward and should we expect option expense to reoccur in the future second quarter numbers?

Phil Fan

Yeah, I think it’s around the $3 million or under $3 million will be the more normal and this is the one-time option expenses there.

Michael Gaugler – Brean Murray, Carret & Co.

Okay. And then my next question around headcount, certainly ramped up in the first half of the year. As the Ordos contract wraps up, will you be shrinking the workforce there or are there other projects to deploy those workers to?

Phil Fan

We will deploy the people to the other site or in the same time we continue to pursue the business in all those area. There are several in the pipeline.

Michael Gaugler – Brean Murray, Carret & Co

Okay. We’re limited to do so on step back in.

Phil Fan

You can come back after that.

Operator

Thank you. (Operator Instructions) And your next question comes from the line of Mark (inaudible) Advisors. Please go ahead.

Unidentified Analyst

Hi. We’re new to the company, so I don’t want to ask a lot of questions that you’ve already gone over. But we’ve had a very tough time. We have a very small position in the company, one of the things raised the position and we can’t get any information because of the thought from Brean Murray, a couple of times he didn’t call us back. The other [thing] analysts who’s got a sell on, as I didn’t want to talk to him, I understand you have a PR firm that I could address these questions to, but not in the States. The only answers we could get was from your PR guy in China and that’s very convenient for because of the time lag. Is there some one in the States that we could talk to and get more information, because there is a little bit of stock knocking around and we’d like to point it up? So, but we need some information.

Phil Fan

Okay. We will not all IR people could give you the information. Well, there is a phone you can reach to me; by the way my name is Phil Fan. You can reach me is it through 630-254-5038 as a U.S. number.

Unidentified Analyst

Okay, all right. I think one of my analyst, [Bruce Jordan] was trying to get all the earlier and we’ll work that out. I do have one other question. There was a - I believe in EPS that disposed of the stock. I’m sure you guys know what the reason is, but I’d be curious to know why they haven’t remove it from their fund?

Phil Fan

Dennis, do you I think you get after the some people regarding this question. Dennis, are you there?

Unidentified Company Representative

No, isn’t. But well, we haven’t really got any feedback from the [EBR] but we will certainly contact the [EBR] to find out what the reason that they no longer there. (Inaudible).

Unidentified Company Representative

Yeah, I think Dennis our IR manager in Beijing is getting inquiry on this question, but the answer we’ll get is first of all maybe our marketing capital is too small in that index and the other reason of course they didn’t give us exactly a reason just is there – they’ve made the decision certify themselves

Unidentified Analyst

Okay. All right. Thank you.

Unidentified Company Representative

Okay.

Operator

Thank you. And our next question comes from the follow-up from Michael Gaugler with Brean Murray, Carret & Company. Please go ahead.

Michael Gaugler – Brean Murray, Carret & Co.

Hi again. So I was wondering, if you could provide us with an update on the India project that kind of how that’s progressing and how you see that developing over the next say six to 12 months?

Unidentified Company Representative

Okay. Indian project, we are at this time, we only recognize the revenue about 25% is a move that delayed due to the Indian government regulatory procedures, but we have to set up a project office, we are going to review an approval by five different central government agencies. We are getting to the final stage, we expected to get approval end of this month. We finished 80% of the design work and we finished all the surveys and we lined up the material vendors. We are expected to start the civil construction by end of this month.

Going forward, starting the second quarter and the third quarter, we started bidding some new municipal projects there in India in different states. We still think that Indian market is a very, very good opportunity for us. We already have over 50 people in Indian office. All of them are engineering staff and project execution team, including the project management team too.

Michael Gaugler – Brean Murray, Carret & Co.

Okay. That’s helpful. Thanks, Bill.

Unidentified Company Representative

Okay. Thank you.

Operator

Thank you. (Operator Instructions) And management, there are no further questions in the queue. Please continue.

Unidentified Company Representative

Okay. Thank you very much.

Unidentified Company Representative

Thank you all for being on the call. Thank you. See you next quarter.

Operator

Thank you, ladies and gentlemen. That does conclude the Tri-Tech Holding’s second fiscal quarter 2012 financial results conference call. Thank you for your participation. You may now disconnect.

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