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Cleantech Solutions International Inc. (NASDAQ:CLNT)

Q2 2012 Earnings Call

August 15, 2012 9:00 AM ET

Executives

Elaine Ketchmere – IR

Adam Wasserman – VP, Financial Reporting

Operator

Good morning. My name is (inaudible) and I will be your conference operator today. At this time, I would like welcome everyone to the Cleantech Solutions Second Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions). Thank you. Ms. Ketchmere, you may begin your conference.

Elaine Ketchmere

Thank you for your time. Good morning ladies and gentleman and good evening to those of you who joining in from China. I’d like to welcome you to Cleantech Solutions earnings conference call for the second quarter of 2012. Listening today on the call are Cleantech Solutions Vice President of Financial Reporting, Mr. Adam Wasserman, and Vice President of Operations, Mr. Ryan Hua. Also on the call is Mabel Zhang from CCG, Investor Relations, she will provide translation from Mr. Hua.

At this time, I remind our listeners that on the 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 for protection of the Safe Harbor in these forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those expressed today and therefore we refer you to more detailed section of the risk and uncertainties in the company’s filings with the U.S Securities and Exchange Commission particularly in the risk factors in our Form 10-K for the year ended December 31, 2011 and management’s expression and analysis of financial conditions and results of operation in our Form 10-K for the year ended December 31, 2011 and Form 10-Q filed for the quarter ended June 30, 2012.

In addition, any projections as for the company’s future performance represent management as of today August 15, 2012. Cleantech Solutions International Inc assumes no obligation to update these projections in the future as market conditions change. At this point, I would also like to state on this call we will be discussing non-GAAP financial measures, adjusted EBITDA and non-GAAP net income.

We present these financial measures 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 for a complete reconciliation of adjusted EBITDA and non-GAAP net income to net income.

And now it’s my pleasure to welcome Cleantech Solutions Vice President of Financial Reporting Mr. Adam Wasserman who will deliver management prepared remarks covering operations and financing performance today. Adam, please proceed.

Adam Wasserman

Hey, thank you Elaine. Good morning and thank you for joining us on our call today. We appreciate your continued support in Cleantech Solutions. During the second quarter of 2012, our sales improved 1.8% on year-over-year basis and increased 36.4% compared to the first quarter of 2012. As compared to the first quarter of 2012, our sales increased across all segments probably driven by market demand and due to the decline in sales during the first quarter of 2012 by the result of seasonality related to the Chinese New Year holiday. European growing market demand for our dyeing machines for our solar products. We also pleased to see some modest increases in demand for forged rolled rings to heavy equipment industry.

With the exception of sales in wind industry, sales from our business segment reported year-over-year growth. We believe such revenue growth is in line with the increase in order volume we are seeing from our existing and new customers. This demonstrates the high quality of our products and our technical capabilities.

Our total revenue for the second quarter of 2012 was $12.8 million 1.8% increased compared to the same period last year. Our gross margin was $2.7 million, a 11.7% decrease compared to the same year period over last year. Gross margin decline to 21% during the second quarter compared to 24.2% for the same quarter a year ago.

Despite the growth in revenue, gross margin declined to 21% to 24% a year ago. The decline in gross margin was mainly attributable to the forged rolled rings and related product segments and was primarily due to lower operational cost efficiencies including the allocation of fixed costs s depreciation to cost of revenues the operated lower production levels.

Gross margin for our dyeing and finishing equipment segment reflected a slight decrease due to increase in labor cost. Now I want to discuss recent development and our growth strategy for each business segments.

Let’s begin with forged rolled ring and related components. Within the segment, we had experienced continued decline in sales to wind power industry which was in line with our expectations. In the short-term, we continue to expect wind power industry to face challenges due to our capacity and rapid growth.

We are experiencing weak market demand from the wind power industry over the past several quarters and therefore how strategically focus our efforts on diversifying our revenue base. Sales to wind power industry had now declined to 36% of our total revenue in the second quarter of 2012 compared to 50% a year ago. We had executed on our revenue diversification strategy with great success and hope to continue to modify our product portfolio to cater to other heavy equipment industries, the solar industry, LED lighting industry and other clean technology industries.

This explains a 45% year-over-year increase in sales of our forged rolled rings and related components to other industry. We expect some modest increase in revenue going forward as we market our forged products to manufacture of industrial equipment.

At the same time, over the past six years, we have established strong relationship with our customers in the wind industry and hope to leverage our expertise and experience in the long run. In the long-term, we believe the wind sector present an upside potential given the PRC government’s policy support to alternative energy. During the quarter, we received purchase orders to supply flanges to a domestic wind power customer and industrial customer for a total amount of $1.9 million and we also received another purchase order to supply motor shaft forgings to our customers for a total amount of $1.7 million.

We are pleased to receive such follow-up purchase orders from our wind customers which we believe shows the quality of our products and reputation as a strong supplier of wind power and other component in both domestic and international market.

Now I would like to share some updates on sales for our solar related products. At the end of 2011, we began to manufacture and deliver tech assemblies for solar cell manufacturing equipment which mark their entry into the solar product market. This equipment being marketed and manufactured under our forged rolled ring segment. We are seeking to leverage our technical expertise and capabilities to manufacture and market solar components using production in multi-crystalline and mono-crystalline silicon wafer.

In the first half of 2012, we generated revenue from the sale of solar industry related products of $0.3 million. We have been provided positive feedback from our solar customer and are seen a steady order flow from our international customers. Our plan is to work closely with our customers to expand our product offering and benefit from the longer term growth of this segment.

Additionally I want to discuss the recent progress in our dyeing and finishing equipment segment. Revenue from this segment increased 18.5% to $4.6 million or 36% of net revenue compared to $3.9 million or 30.9% of net revenue for the second quarter of 2011. We believe such increase reflects our marketing efforts for our new airflow dyeing unit which is air instead of water which is used in the provisional dyeing process. Additionally, our airflow technology which is designed to enable users to meet the stricter environmental standards, results in reduced input costs, fewer wrinkles, less damage to the textile, and reduced emissions.

A recent uptrend and market demand for our new airflow dyeing machines is largely attributable to the dyeing industry response to the policy offered by the local government in Jiangsu province, where China’s textile industry is concentrated. We are seeing strong order growth from this segment as the PRC government is encouraging textile manufacturers to replace obsolete machinery with low-emission and environmental friendly dyeing machines.

We recently received a new purchase order to supply 21 units of airflow dyeing machines and related components to a domestic customer. We encouraged to see modest growth in orders and a growing acceptance of the new airflow dyeing technology. We will continue to work with our customers and meet their specific requirements and help transition to a new airflow dyeing machine which we believe help to reduce cost in the long run. We expect to see some positive sales growth on this segment in these coming quarters driven by government support and growing market acceptance.

Next I will discuss our financial results for the second quarter of 2012 in further detail. I encourage you to refer to our 10-Q filed with the SEC yesterday and our earnings we issued today. Our revenue for the second quarter of 2012 increased 1.8% to $12.8 million compared to the $12.6 million for the same period in 2011. Our gross margin for the quarter decreased 11.7% to $2.7 million compared to $3.1 million for the same period in 2011. Gross margin decreased to 21% during the second quarter of 2012 compared to 24.2% for the same period a year ago.

Operating expenses decreased 17.8% to $1.1 million, compared to $1.4 million in the comparable period last year. The decrease was primarily due to decrease in fees paid for professional services, reduced bad debt expenses, decrease in payroll and benefits paid, and decrease in shipping expenses as it did not incur any shipping expenses in relation to its products sold to the solar industry.

Selling, general and administrative for the three months ended June 30, 2012 decreased 26.9% to $0.8 million, as compared to $1.0 million for the three months ended June 30, 2011. Operating income decreased 6.7% to $1.6 million, compared to $1.7 million for the same period of 2011. Operating margin was 12.2% compared to 13.3% in the second quarter last year.

Other expense was $62,000 compared to other income of $34,000 for the same period in 2011. The increase was due to an increase in interest expense as a result of increase in debt and capital lease obligations.

Adjusted EBITDA, a non-GAAP measure, which excludes interest, taxes, warrant modification expense, depreciation and amortization, was up $1.5 million to $3.15 million, compared to $3.01 million in the same quarter last year.

Net income was $1.1 million, or $0.40 per diluted earnings per share, compared to $1.2 million, or $0.47 diluted earnings per share in the second quarter of 2011. All shares and per share information has been adjusted to reflect a one-for-ten reverse stock split effective March 6, 2012.

Now, turn to our balance sheet. As of June 30, 2012, we have cash and cash equivalents of $1.3 million compared with $1.2 million at December 31, 2011. Accounts receivable were $8 million and total current assets were $18 million. We had $2.7 million in short-term bank loans payable and $0.2 million of current capital lease obligations and stockholders’ equity of $74.2 million. In the first six months of 2012, we generated $3 million in cash flow from operations.

We anticipate our capital expenditures over the next 12 month period to be mainly related to purchase of machinery for manufacturing products for the solar industry, additional investment in our forged rolled ring segment and a modest expenses in maintenance of our dyeing segment. We believe we will be able to fund these capital expenses using our cash flow from operations.

In conclusion, I want you to note that we at Cleantech Solutions are motivated by opportunities available in the Cleantech technology industry and strive to cater to the heavy equipment need of this rapidly growing industry. Our technical expertise developed over several years of working with green energy players (inaudible) in the equipment industry and more recently the solar industry has enabled us to improve our product portfolio to better meet the specification and needs of various industries.

Despite the near-term challenges faced by the wind sector, we are optimistic about the outlook for our other products including higher margin airflow dyeing machines, forged rolled rings and solar components of solar industry.

With that, on behalf of Cleantech Solutions entire management team, I would like to thank all of our listeners this morning for your participation on this call. We will now open the call for Q&A for the audience.

Question-and-Answer Session

Operator

(Operator Instructions). And there are no audio questions at this time.

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 interest in visiting our office and factory in China, please let us know. We look forward to speak with you again on our next earnings conference call.

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