Lentuo International Inc. (NYSE:LAS) Q4 2012 Earnings Call April 29, 2013 8:00 AM ET
Christian Arnell - Christensen
Jing Yang - CEO
Ladies and gentlemen, thank you for standing by. Welcome to the Lentuo International Fourth Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions)
I will now turn the conference over to Christian Arnell from Christensen. Please go ahead.
Hello and thank you for joining us for Lentuo International’s fourth quarter and full-year 2012 earnings call. I remind you that we are recording and webcasting today's call. The webcast archive of the call will also be available on the Investor Relations section of Lentuo’s website.
Joining me today are Mr. Jing Yang, Lentuo’s Chief Executive Officer. We will first cover the operational and financial highlights for the fourth quarter and full-year 2012 then go to your questions.
I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors all of which are difficult to predict and many of which are beyond the company’s control which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.
Further information regarding these and other risks, uncertainties and factors is included in the company's filing with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required under law.
Next Mr. Jing Yang, CEO will cover our current strategy and I will translate for him. Mr. Yang, please.
Good morning, and good evening everyone and thank you for joining us today. Our performance during the fourth quarter was disappointing as our business continue to face significant challenges due to intense market competition and the stringent Sino-Japanese relation. Despite this lackluster performance, I am quite pleased with the solid topline growth and the substantial increases in both the number of cars sold and the number of cars serviced during the year 2012. These results demonstrate our ability to adapt to increasingly intense competition as we capitalize on our strategy to expand outside Beijing.
China’s economic weakness, continue to affect consumer sentiment creating an environment where consumers and retailers have become more price sensitive. While this sentiment has impacted our bottomline, I believe that the impact will be temporary and that we will eventually benefit from the momentum of higher volume sales as a rebounding car sales in China should meet its stronger prices as well as increased sales of more high-end cars and from our expansion into the pre-owned car segment.
Our expansion strategy has focused on several initiatives including expansion outside Beijing, expansion into high-end cars, Audis for the time being, and expansion of our traditional brands namely Volkswagen. Having acquired three dealerships outside Beijing in 2011, we took a pause and reassess the merits of our planned acquisition of an Audi dealership in Zhejiang Province. This deal was originally announced during the second half of 2011 and has not been completed. While it did fit our strategy to go up market, we decided that changing market condition may be economic and financial terms of the deal no longer attractive. As a result, we decided not to proceed further with the acquisition; the termination was accomplished at no cost to our shareholders as our 27.8 million deposits was returned to us in full.
We continue to be focused on extending up market, but will now do so organically with the help of Itochu a Fortune Global 500 company who ever decades has successfully drop a premium car business in Asia. Our joint venture agreement with them is a substantial step in that direction, starting with the new Audi dealership in Beijing and later expanding nationwide. Our soon to be opened FAWVW flagship store will further strengthen our Volkswagen segment.
More recently we have decided to expand into the pre-owned car market, and this market segment is growing at a healthy pace and faster than new car sales. We will soon be opening a centralized centre fully dedicated to pre-owned cars in Beijing that will be used as a platform to sell such cars in tier 2 and 3 cities.
While the challenges Lentuo faces in China will most likely remain in the short term. Our ability to compete effectively has improved a great deal in 2012. Our joint venture agreement with Itochu and the strategic agreements with First Automobile Finance will significantly improve our position as we leverage the additional financial resources provided by these agreements to further expand into China’s high end car segment.
I am confident that our ability to effectively leverage these additional resources and strategic initiatives will deliver and the sustainable, long term growth we seek and bring further benefits to our shareholders.
With that I will now turn the call back over to Christian, who will go over the financials.
Before reviewing the details of our financial results for the fourth quarter and full year 2012, I would like to provide a brief overview of our revenues and cost recognition policy as per US GAAP requirements. Our revenues comprise new car sales, repair and maintenance services and other services, primarily insurance and financing commission. We report revenues net of promotions and discounts at value added tax. For cost of goods sold, our new car sales we report our costs of purchase from OEMs and in accordance with US GAAP guidelines. We recognize we've made some purchases from OEMs when conditions are fixed or can be reasonably estimated such as volume purchase rebates.
For rebates that are based on subjective factors such customer satisfaction results or based on the discretion of the automobile manufacturer, we recognize these rebates only when realized. Consequently, our cost of goods sold and therefore gross margin can significantly fluctuate quarter-over-quarter or year-over-year due to varied recognition timing of OEM rebates. On today's call, we will refer to certain non-GAAP financial information. The non-GAAP financial numbers exclude the loss within operating expenses from the impairment of dealership agreement and intangible assets of $4.2 million incurred during the fourth quarter of 2012.
With that let me now discuss our fourth quarter 2012 results. Revenues for the quarter were $148 million, down 15.4% year-over-year. Revenues for automobile sales decreased 16.2% year-over-year to $122 million. The company sold 4484 vehicles during the quarter down 12.8% from the same period in 2011. The decrease in revenues from automobile sales and number of vehicles sold was primarily due to difficulties encountered selling Japanese branded cars stemming from the strain in Sino-Japanese relations. Sales of Japanese branded cars during the fourth quarter of 2012 decreased by 47.5% when compared to the fourth quarter of 2011, while sales of German branded cars increased by 2.6%.
As a reminder, two of the five new dealerships added in the second half of 2011 partially contributed to revenues during the fourth quarter of 2011. The company will begin reporting comparable sales numbers for these dealerships starting in the first quarter of 2013. Average new vehicle unit price for the fourth quarter of 2012 was $27,782, down 1.9% for the same period last year. Revenues from repair and maintenance services decreased 14.1% during the quarter to $14.4 million. The company serviced 47,392 vehicles, down 4.6% for the same period last year. The decrease in revenues from repair and maintenance services and vehicle services primarily due to increased market competition that caused the decrease in unit price, through the offering of discount as well as a number of vehicle serviced.
Cost of goods sold decreased 12.1% to a $131.8 million during the quarter as a result of lower revenue and sales volumes. Gross profit was $9 million, down 45.2% for the same period last year. The decrease in gross profit was mainly due to the decrease in overall gross profit margin and revenue. Overall gross margin were 6.4% compared to 9.9% in the fourth quarter of 2011. Gross margin for automobile sales was 2.6% compared to 5.1% during the same period last year. Gross margin for repair and maintenance services was 31.6% compared to 48.5% in the fourth quarter of 2011.
The decrease in gross margin for automobiles sales was due primarily to increased market competition and a weakening macroeconomic environment. Gross margin for repair and maintenance services declined primarily due to industry-wide pricing pressure and inflation-driven increases in wages for repair and maintenance staff.
Selling, marketing and distribution expenses increased 6% to $5.7 million during the quarter primarily as a result of higher advertising expenses incurred to increase new vehicle sales, additional staff at the new dealerships and wage inflation. As a percentage of revenues, selling, marketing and distribution expenses increased to 4.1% in the fourth quarter of 2012 from 3.2% during same period last year.
General and administrative expenses were $2.6 million, down 36.8% from the same period last year. The decrease was primarily the result of increased cost efficiency from incorporating the five new dealerships into Lentuo's centralized management system. As a percentage of revenues, general and administrative expenses decreased to 1.8% in the fourth quarter of 2012 from 2.5% in the fourth quarter of 2011.
Operating was $3.5 million during the fourth quarter of 2012. Operating margin during the fourth quarter was negative 2.5%, compared to positive 4.2% for the same period in 2011. The decrease in operating margin was primarily attributable to the 350 basis point decrease in overall gross margin and the 300 basis point increase in intangible assets impairment as a percentage of revenue.
Net loss attributable to the controlling interest was $3.9 million, which translates into basic and diluted loss per ADS of $0.14.
Non-GAAP net loss, which excludes the impairment of certain intangible assets, was $1.6 million, which translates into non-GAAP basic and diluted loss per ADS of $0.06.
Now let me review the full year 2012 financial results.
Revenues for the year 2012 were $524.1 million, down 7.5% from 2011. Revenues from automobile sales increased 7.9% in 2012 to $461.5 million. The company sold 16,900 vehicles during the year 2012, a 24.4% increase from 2011. The increased in revenues from automobile sales and vehicles sold was primarily due to the contribution from the company's five new dealerships added in the second half of 2011.
Average new vehicle price for the year 2012 was $27,308, down 13.3% from last year. The decrease was primarily due to discounts the company offered to increase sales in the midst of fierce market competition, as well as the lower prices of vehicles sold by the new dealerships outside Beijing. Typically, vehicles sold by the new dealerships outside Beijing sell for lower prices than vehicles sold by the original Lentuo dealerships in Beijing.
Revenues from repair and maintenance services decreased 2.6% during the year to $52.2 million. The company serviced 189,268 vehicles during 2012, up 23.4% from 2011. The decrease in revenues from repair and maintenance was primarily due to intensified market competition and a series of promotional activities launched by both new and older dealerships, offering discounts in order to attract more business.
Cost of goods sold increased 10.7% to $483.9 million during the year 2012 as a result of higher revenue and sales volumes.
Gross profit was $40.2 million, down 19.8% from 2011. This was primarily due to the decrease in overall gross profit margin.
Overall gross margin was 7.7% compared to 10.3% in 2011. Gross margin for automobile sales were 3.5% compared to 4.7% during 2011. Gross margin for repair and maintenance services was 41.9% compared to 51.1% in 2011. The decrease in gross margin for automobiles sales was due primarily to increased market competition and a weakening macroeconomic environment. Gross margin for repair and maintenance services declined primarily due to industry-wide pricing pressure and inflation-driven steady increases in wages for repair and maintenance staff.
Selling, marketing and distribution expenses increased 11.1% to $16.3 million during the year 2012, primarily as a result of higher advertising expenses incurred to increase new vehicle sales, additional staff at the new dealerships and wage inflation. As a percentage of revenues, selling, marketing and distribution expenses increased to 3.1% in the period from 3% in 2011.
General and administrative expenses were $10.2 million in 2012, up 16.6% from 2011. The increase was primarily due to the addition of the five new dealerships and the hiring of additional staff to support growth. As a percentage of revenues, general and administrative expenses increased to 1.9% in the year from 1.8% during the full year 2011.
Operating income for the year was $9.5 million, down 64.5% from 2011. Operating margin for the year 2012 was 1.8%, compared to 5.5% for 2011. The decrease in operating margin was primarily attributable to the 260 basis point decrease in overall gross margin, and the 100 basis point increase in operating expenses as a percentage of revenue.
Net loss attributable to controlling interest was $0.9 million, which translates into basic and diluted loss per ADS of $0.03.
Non-GAAP net income, which excludes the impairment of certain intangible assets, was $1.4 million, which translates into non-GAAP basic and diluted earnings per ADS of $0.04.
As of December 31, 2012, the company had cash and cash equivalents of $51.2 million.
This now concludes our prepared remarks. Operator we will now open the call up for questions. Please begin.
(Operator Instructions) We have no questions at the moment. I will hand the call back to Christian Arnell for closing remarks.
Thank you. In closing, on behalf of the entire Lentuo management team, we would like to thank you for your interest and participation in today’s call. If you require any further information or have any interest in visiting our dealerships in China, please let us know. Thank you for joining us today. This concludes our fourth quarter and full year 2012 conference call.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.
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