Exceed Company Limited (NASDAQ:EDS) F3Q10 Earnings Call November 16, 2010 8:00 AM ET
Vivien Tai – VP, Finance & Company Secretary
Shuipan Lin - Chairman and Chief Executive Officer
Terence Wong - Chief Financial Officer
Welcome to Exceed Company’s third quarter 2010 earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. Now I would like to transfer the call to Ms. Vivien Tai, VP of Finance and Company Secretary of Exceed Company Limited.
Good day, everyone, and welcome to the Exceed Company Ltd. Third Quarter Results conference call. With me today are our Chairman and Chief Executive Officer, Mr. Shuipan Lin, and our Chief Financial Officer, Mr. Terence Wong. As we proceed through our prepared remarks, we will refer to our results presentation which can be downloaded from our website at www.ir.xdlong.cn. Following the remarks, Mr. Lin and Mr. Wong will be happy to take your questions.
The primary purpose of today's call is to provide you with information regarding our fiscal third-quarter 2010 performance. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and future performance of Exceed. These statements are based on management’s current expectations or beliefs. Actual results may vary materially from those expressed or implied by the statements herein. This information is qualified in its entirety by cautionary statements and risk factor disclosure contained in certain of Exceed's Securities and Exchange Commission filings. For a description of certain factors that could cause actual results to vary from current expectations and forward-looking statements, please refer to documents that Exceed files with the Securities and Exchange Commission. Exceed is under no obligation to, and expressly disclaims any obligation to, update or alter its forward looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. Now I’d like to pass the call over to our Chairman and Chief Executive Officer, Mr. Shuipan Lin. He will give you some highlights of the Q3 results of Exceed Company Ltd, the owner and operator of “Xidelong” brand, one of the leading domestic sportswear brands in China.
Thank you, Vivien. Good morning and good evening everyone. Thank you for joining us today for Exceed Company Ltd (Xidelong)’s third quarter results call. We once again posted strong results for the third quarter, with solid revenue growth of 25.8% and net profit that almost doubled versus last year.
Before Terence covers our financial results in more detail, I’d like to review our successful progress this quarter on our key operational initiatives and growth drivers. People in China are increasingly interested in leading a fit, healthy lifestyle. This trend goes hand in hand with China’s economic growth and growing urbanization. Our goal is for the Chinese population to turn to Exceed, and our XIDELONG brand, to fit this happy, healthy lifestyle. In the large and fragmented sportswear market, we have focused our efforts on the second- and third-tier cities in China, where we believe we can gain the most traction. In order to deepen our market penetration, we opened 557 new stores in the twelve months leading up to September 30 2010, and many of them were within our target 2nd and 3rd tier Chinese cities.
We are continuing our initiative to strengthen our market position through investments in advertising and promotions. We are smart about our A&P spend – and we allocate these resources carefully in our recent Happy Lifestyle campaign to build awareness in the market about both the qualities that our brand stands for and the features and functionality of our products. Our work to enhance our brand value will solidify and extend our leading market positions, and we are growing revenue by attracting higher store traffic volume and by commanding greater pricing power in the market, evident by our double- digit growth in ASP during the quarter. We were also able to improve production efficiency and our careful spend on operating expenses allow us to sustain our margin improvement in the quarter. Our 3Q results underlined the potential of our addressable market and the success of our growth strategies. Looking ahead, we expect our strong growth momentum to continue, as we continue to benefit from China’s consumer and sportswear market growth, and our proven growth initiatives. This is demonstrated by the 25% sales value growth in our 2011 Spring/Summer sales fair, which is one of the strongest in the industry. In all, we remain confident in our ability to improve both our top- and bottom-lines, and to drive significant growth in the coming quarters. With that, I will pass the call over to Terence Wong. Terence?
Thank you, Mr. Lin. I will begin on slide 7 of the presentation, which is a snapshot of our third quarter results. Total net revenue in the quarter grew by 25.8% year-over-year to RMB 832.4 million. Sales growth was driven by our successful advertising and promotional campaigns, as well as our new apparel and footwear product launches. Gross profit was RMB252.8million, an increase of 28.3%. Gross margin was 30.4%, versus 29.8% last Q3; the improvement was due to our increased ASP and improved production cost controls. Operating profit increased by 91.1% year-over-year to RMB 128.1 million. A lower A&P spend allowed us to expand our operating margin, which was 15.4% in Q3 of this year versus 10.1% in Q3 of 2009. Profit attributable to equity shareholders for the third quarter was RMB111.0 million, an increase of 98.6% over the third quarter last year. Basic and diluted earnings per share were RMB4.39 dollars and RMB3.98 dollars, respectively, down 54.9% and 55.1%, respectively. The EPS decrease is due to a greater number of shares outstanding after our Nasdaq listing in late 2009.
Slide 8. We had strong performance across our three business units – footwear, apparel, and accessories. Our apparel division, in which we reported 46.6% year-over-year revenue growth, was once again a highlight. It is an industry phenomenon that apparel products are more related to macroeconomic conditions, compared with footwear, particularly in times of a booming economy. The increased revenue and increased average selling price can also be attributed to healthy demand for our lifestyle apparel product expansion and the expanded display areas for apparel in our stores.
You can see on slide 9 that the sales volume momentum for our apparel division is accelerating due to growing consumer demand. For our footwear division, the slight decline in volume is due to early product deliveries in the first half of this year. The strength of our Xidelong brand allows us to increase our average selling price. ASP for our footwear climbed by 12.1% from 3Q09, and ASP for our apparel products grew by 13.7% year-over-year.
Slide 10 shows more detail on our gross profit and gross margin. Our ability to offer products in a higher price range improved our gross profit and our gross margin. Improved cost controls in our in-house footwear production also contributed to the gross margin improvement.
Moving on to slide 11, Q3 operating profit was RMB128.1 million, representing a 91.1% year-over-year increase. Our operating margin increased to 15.4% versus 10.1% last year. This is primarily due to a change in capital spending cycle which resulted in a lower A&P spend in Q3 after significant A&P expenditures in the first half.
The A&P expenses as a percentage of sales in the first three quarters remained at our target level of 12%, as the company continued its commitment in brand building. Administrative expenses grew year-over-year in absolute terms, due to higher professional and legal fees and expenses after listing, but decreased as a percentage of sales. We continued our steady pace of investments in R&D, which is geared toward further enhancing our product offering.
Slide 12. Profit before tax was up 120.8% to RMB127.6 million. Third quarter 2010 tax expenses increased significantly versus last year because the full exemption period of our PRC subsidiary Xidelong (China) Co. Ltd. expired at the end of 2009. As a result, our overall tax expenses increased to RMB16.7 million, with an effective tax rate of 13%. This subsidiary, however, will be entitled to a 50% reduction in the PRC corporate income tax until Dec. 31, 2012.
Slide 13. Third quarter net income was RMB111 million, representing a 98.6% year-over- year increase. Basic and diluted EPS declined due to the increase in the number of shares outstanding following our 2009 listing and were RMB4.39 dollars and RMB3.98 dollars, respectively.
On Slide 14, you will see a snapshot of our balance sheet. As of September 30, 2010, cash and bank balances and pledged time deposits were up 136.5% year- to-date to RMB655.7 million, primarily because we are enforcing a shorter payment cycle for our distributors. The average inventory turnover days for the third quarter 2010 were 13 days, compared to 15 days last year. The average trade receivables turnover days was 64 days, versus 74 days in Q3 of 2009, and was within the credit period allowed for our distributors. Because we tightened our credit control policy in 2010, after our distributors’ business and financial status returned to normal, the trade receivables balance decreased to RMB585.9 million as of September 30, 2010, from RMB812.7 million as of December 31, 2009. We will continue our efforts to maintain the trade receivables balance.
Cash inflow from operations was RMB129.2 million for the third quarter 2010, compared to an outflow of RMB20 million for the same period in 2009, primarily due to shorter payment time from our distributors.
Slide 15. That wraps up my financial review for the quarter. I would like to take a few minutes to review our operational progress, beginning on slide 16. Slide 16. As we have said, growing demand from our target end customers is driving our revenue. In order to leverage this demand and deepen our market penetration, we are steadily expanding our sales and distribution network. Since October 1, 2009, we added 557 new retail stores, bringing our nationwide total to 4,194 Xidelong retail stores as of September 30, 2010, up from 3,637 one year ago. Q3 store openings were concentrated in the highly-attractive second- and third-tier cities in Guangdong, Jiangsu and Zhejiang provinces. During the quarter, we added 123 stores in these provinces.
Slide 17. Our advertising and promotional activities are continuing as planned; we are focused on the most influential media outlets. We are shifting our advertising toward more powerful regional media buys. Our “Happy Lifestyle” theme is gaining traction in the market and the Q3 results demonstrated that it successfully enhances our Xidelong brand. We are continuing to gain consumer mindshare with our sponsorships, such as our sponsorship of the popular CCTV 1 “Inter-City” television program.
I’d like now to turn the call back to our CEO Mr. Lin for a discussion of our strategic priorities and outlook. Mr. Lin?
Thank you, Terence. To recap, our growth strategy is comprised of three parts: 1) deepening our market penetration to drive growth and gain market share in China’s 2nd and 3rd tier cities, 2) strengthening our leading market position by continually strengthening our Xidelong brand, and 3) leveraging our brand equity to increase our ASP and expand margins. Our execution of this strategy has allowed us to truly benefit from the macroeconomic trends and consumer market dynamics in China.
Slide 20. We are employing specific operational initiatives in order to execute our strategy. Our plan to broaden and deepen our distribution network by opening approximately 700 stores in both 2010 and 2011 remains intact. These openings will give us a new presence in many of China’s 3rd tier cities, and will enhance our profile in select second tier cities. We are driving efficiency in the sales channel by employing more effective promotional expenditures and marketing campaigns, ensuring that our A&P activity is directed to our target consumers. We are also continually looking for ways to enhance our in-house production efficiency.
Slide 21. As our execution of this strategy brings our company meaningful and sustainable growth, we will continue to offer a broad and attractive product line that is in synch with consumer desires, a highly-recognized and admired brand, and strong track record of operational execution, and we are well poised to deliver significant growth in the coming quarters. We expect to generate net revenues in the range of RMB2,639.0 million to RMB2,680.6 million in the fiscal year 2010, representing a year-over-year increase of 27% to 29%, as compared with RMB2,078.0 million in 2009. This represents the Company’s preliminary estimates, and is subject to change. Once again, thank you for joining us today. We will now be happy to take your questions.
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