Ossen Innovation Company's (OSN) Management on Q3 2014 Results - Earnings Call Transcript

| About: Ossen Innovation (OSN)
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Ossen Innovation Company Limited (NASDAQ:OSN) Q3 2014 Earnings Conference Call December 29, 2014 8:30 AM ET

Executives

Tina Xiao - Weitian Group

Feng Peng - CFO

Analysts

Operator

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Ossen Innovation Company's Limited Third Quarter 2014 Earnings Conference Call. During today's presentation all participants will be in a listen-only mode. This conference is being recorded today 29th of December 2014.

I would now like to turn the call over to the Weitian Group. Please go ahead.

Tina Xiao

Thank you and welcome everyone to today's conference call for Ossen Innovation Company Limited. This call will cover Ossen's financial and operating results for the three months and nine months ended September 30, 2014. Joining us today is Mr. Feng Peng, the company's Chief Financial Officer.

Before we get started, I'm going to quickly read a disclaimer about the forward-looking statements.

This conference call may contain in addition to historical information forward-looking statements within the meaning of the federal security law regarding Ossen Innovation Company Limited. Forward-looking statements include statements about plans, objectives, goals, strategies, future events of performance and underlying assumptions, and other statements that are different than historical facts. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements.

Potential risks and uncertainties include changes in demand for the company's products, the impact of competition and government regulation, and other risks contained in the statements filed from the time to time with the SEC. All such forward-looking statements, whether written or oral, made on behalf of the company are expressly qualified by the cautionary statements, and such forward-looking statements are subject to risks and uncertainties and we caution you not to place undue reliance on these.

At this time, I'd like to turn the call over to Mr. Feng Peng, the CFO of the company, who will be providing brief opening remarks and a summary of the third quarter 2014 financial results. Mr. Peng, please go ahead.

Feng Peng

Thank you. And I thank everyone for joining us today for our third quarter 2014 financial results conference call. As a result of weakening macro conditions in China's economy, our business remains challenged in the third quarter of 2014 leading to year-over-year declines in both our revenues and profitability. However, our rare earth coated products continue to [indiscernible] for us, growing 7% year-over-year to $24.7 million in the third quarter of 2014.

We continue to use lower grade raw materials for rare earth coated products to improve profitability, but without sacrificing product strength or quality. And we continue to expand our customer base through our enhanced sales efforts and a competitive product offerings, which are recognized for the durability strength and anticorrosive characteristics.

As a highlight of the quarter, we announced $11.4 million contract wins for the construction of three bridges in Jiaozuo, Henan Province, Ji'an, Jiangxi Province and Zhaoqing, Guangdong Province. Additionally, Dr. Tang, our Chairman was recognized as one of the national winners of National Outstanding Contributors at the Fourth National Outstanding Contributors Award Ceremony which took place in Beijing last month. The award is regarded as a flagship national award given every other year to individuals who have made a significant contribution to the society.

Next, I will discuss our financial results for the three and nine months ended September 30, 2014 respectively. Revenue decreased by 16% to $27.9 million for the three months ended September 30, 2014 from $33.1 million for the same period of last year. This decrease was mainly due to the decline in both zinc coated products and the plain surface pre-stressed percent sales partially offset by increase in rare earth coated product sales.

Sales of coated pre-stressed steel materials including rare earth and the zinc coated products decreased by 11% to $24.7 million and accounted for 89% of the total sales for the three months ended September 30, 2014.

Sales of rare earth and the zinc coated products were $24.7 million and nil respectively for the three months ended September 30, 2014 compared to $23.0 million and the $4.6 million for the same period of last year. Zinc coated products that didn't contribute any revenue during the third quarter of 2014 are expected to generate revenue in future quarters based on current order trends.

Sales of plain surface PC strands decreased 43% to $3.1 million and accounted for 11% of total sales for the three months ended September 30, 2014. The decrease in plain surface PC strands sales was due to the decline in both sales volume and average selling price.

Gross profit decreased by 38% to $2.4 million for the three months ended September 30, 2014 from $3.9 million for the same period of last year. Gross margin contracted by 3 points to 8.7% for the three months ended September 30, 2014 from 11.7% for the same period of last year. The decline in gross margin was mainly due to lower average selling price and the lack of sales of higher margin zinc coated products in the third quarter of this year.

Selling expenses were approximately $0.3 million for three months ended September 30, 2014 increasing $0.1 million from the same period of last year. The increase primarily reflects the higher transportation cost associated with new overseas customers and higher commission fees.

General and administrative expenses were approximately $1.3 million for the three months ended September 30, 2014 increasing $0.4 million from the same period of last year. The increase is primarily due to $0.3 million increase in R&D expenses and $0.1 million increase in bad debt provision.

Operating income was $0.9 million for three months ended September 30, 2014 compared to $2.9 million for same period of last year. Operating margin was 3.1% for the three months ended September 30, 2014 compared to 8.7% for same period of last year.

After allocating net income attributable to non-controlling interest, net income attributable to Ossen Innovation Company Limited was $0.5 million for the three months ended September 30, 2014 compared to $1.7 million for the same period of last year.

EPS both basic and diluted were $0.02 for the three months ended September 30, 2014 was $0.08 for the same period of last year.

Now, I will shift gear to nine months ended September 30, 2014 financial results. Revenue for the nine months ended September 30, 2014 grew 28% to $91.8 million from $71.9 million for the same period of last year as sales of plain surface PC strands, rare earth and the zinc-coated products all grew on a year-over-year basis.

Sales of coated pre-stressed steel materials including rare earth and the zinc-coated products grew 31% to $80.9 million and accounted for 88% of the total sales for the nine months ended September 30, 2014.

Sales of rare earth and the zinc-coated products were $71.9 million and $9 million respectively for the nine months ended September 30, 2014 compared to $54.1 million and $47.7 million for the same period of last year.

Sales of plain surface PC strands grew 8% to $10.9 million and accounted 12% for the total sales for the nine months ended September 30, 2014.

Gross profit increased by 3% to $8.8 million for the nine months ended September 30, 2014 from $8.5 million for the same period of last year. Gross margin was 9.6% for the nine months ended September 30, 2014 versus 11.8% for the same period of last year. The decline in gross margin was mainly due to decrease in the average selling price in 2014 compared to the same period of 2013.

Selling expenses were approximately $0.6 million for the nine months ended September 30, 2014 increasing by $0.1 million from the same period of last year.

G&A expenses are approximately $4.0 million for the nine months ended September 30, 2014 increasing by $1.6 million from the same period of last year. The increase in general and administrative expenses was primarily due to increase in R&D expenses.

Operating income was $4.2 million for the nine months ended September 30, 2014 compared to $5.6 million for the same period of last year. Operating margin was 4.6% for the nine months ended September 30, 2014 compared to 7.9% for the same period of last year.

After allocating net income attributable to non-controlling interest, net income attributable to Ossen Innovation Company Limited decreased by 1% to $2.4 million for the nine months ended September 30, 2014 from $2.5 million for the same period of last year.

EPS was basic and diluted were $0.12 for the nine months ended September 30, 2014 essentially unchanged from the same period of last year.

Turning now to our balance sheet and the cash flows; as of September 30, 2014, Ossen had approximately $23.1 million of cash and the restricted cash compared to the $32.9 million at December 31, 2013.

Total accounts receivable were $49.3 million as of September 30, 2014 compared to $48.2 million on December 31, 2013.

The average days sales outstanding were 154 days for the third quarter of 2014 compared to 150 days for the year of 2013. The balance of prepayments to suppliers for raw materials was $43.3 million as of September 30, 2014 compared to $50.6 million at December 31, 2013.

The company had inventories of $24.1 million as of September 30, 2014 compared to $18.8 million at the end of last year. Total working capital was $98.2 million as of September 30, 2014 compared to $85.7 million at December 31, 2013.

Net cash provided by operating activity was $7.5 million for the nine months ended September 30, 2014 compared to $18 million for the same period of last year. Net cash used in investing activities was $7.8 million for the nine months ended September 30, 2014 compared to about $14,000 for the same period of last year.

Net cash provided by financing activities was $1.4 million for the nine months ended September 30, 2014 compared to net cash used in financing activities of $21.9 million for the same period of last year.

Now, I will be ready to take any question you may have. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

Your first question comes from the line of John Arrow [ph]. Please go ahead.

Unidentified Analyst

Good morning. Just a couple of things. I felt that your cash position increased sequentially by $8 million this quarter. Do you kind of buying back some stock with that cash and also with regards to your earnings, your last couple of quarters have gone from $0.07 down to $0.02, do you see in the next year where your earnings actually flip into the negative all the way at least stay positive? Thanks.

Feng Peng

Okay. For the first question, our business is very cash intensive, we need cash to – you to buy raw materials and used in our four projects. Also recently, we have to put cash deposits for bidding the new projects. So at this moment, we don’t have the plan to buy back the stock. But, this is always our consideration when we look at stock price. And this is – this will really depend on the management decision and subject to the Board approval.

And for next year, I'm not in the position to predict any quarterly results, but from the visibility at this moment, I don't think there will be a negative quarter in income in 2015.

Unidentified Analyst

Okay. Okay. And one last thing, have insiders bought any stock in the past and do they have plans to buy any down here?

Feng Peng

There is no insider buying stocks as of my knowledge and I don't know any plan that insider will buy any stock at this moment.

Unidentified Analyst

Okay. Thank you.

Feng Peng

Okay. Thank you.

Operator

Thank you. [Operator Instructions] Your next question comes from the line of John Hissey [ph]. Please go ahead.

Unidentified Analyst

Hello. Thank you for hosting the call and thank you taking my questions. Can you comment on how falling steel prices affected your business volume, revenues and income in the third quarter?

Feng Peng

We enter Korean and Japan market and we are getting profit from these two market in recent quarters especially Japan. We recently passed quality inspection by one of the largest importer in Japan and this is very positive news and this will help us to further enter into the Japanese market. And also the profitability is higher compared to the domestic market.

The steel price in – the international steel price, it's not a very – we always buy the raw material from the domestic market. It won't really impact our business in big – I don't think it's a big concern I mean from our perspective.

Unidentified Analyst

Okay. Can I clarify what I wanted to ask about was the falling steel price, the decrease in the steel price during the third quarter?

Feng Peng

Um-hmm.

Unidentified Analyst

So can you explain, did that make customers a little bit slower to place the orders because they saw that the price was going down and they thought that maybe – if they delayed their order, they would get a better price?

Feng Peng

You mean the domestic or international buyer, customers?

Unidentified Analyst

Any customers because my understanding is that the price of hard rolled coil, steel in China declined fairly significantly in the third quarter.

Feng Peng

Yes. And yes, it really will impact our revenue. And we have tried to find new customers and try to use our rare earth technology to produce lower strands products to attract new business. So it really impacts our revenue and it will slow the buyer actually from the customers. But, we are trying to minimize these impacts.

Unidentified Analyst

But in the end those railways and bridges still needs to be built, so the long-term volume would go down, right?

Feng Peng

Yes. Our businesses [indiscernible] to the macro economy and as an infrastructure sector and but the reason to that the steel price declined in China, it really impact our third quarter results. Eventually all these bridges and railways will be built and but, the bottom will be higher but as the – profitability declined in the third quarter.

So we hope it will be turning to higher profitability buying, selling more products, rare earth products to those big bridge projects. We are putting a lot of effort on that right now.

Unidentified Analyst

Okay. Thank you. And could you comment at all of the level of business that you achieved in the fourth quarter?

Feng Peng

At this moment, I can say that we will see the growth in the whole year compared to 2013.

Unidentified Analyst

And when you say growth that mean in revenues or also in net income?

Feng Peng

Revenue growth.

Unidentified Analyst

Okay. Thank you. And that was the last question, Ossen business has been successful, but shareholders have not received any benefit, can you take some actions in 2015 to help shareholders sharing the success of the company.

Feng Peng

Yes. Okay. This is always a consideration by the company and the management. It stands as the ADR fee for average shareholder and issuing dividend or buying back the stocks, it's always under our consideration. But, we will see it's all the situation we will be and the management will make decision and get the Board approval. But, at this moment, I can't promise that anything will happen.

Unidentified Analyst

Okay. Thank you very much. Thanks for answering my questions.

Feng Peng

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Edward Cohen [ph]. Please go ahead.

Unidentified Analyst

Thank you. First question unrelated to the finances and that has made difficulty and being able to communicate within Investor Relations. I have emailed them and I have received the response. But, I called them four times over the past month, the first time; I was told by a female that I got the wrong number. And the second, third and the fourth times, a female answered and then hung up. So I'm calling the number that you list, but I'm not getting any response.

Feng Peng

Okay. My apologies and I will look into this issue and make sure every investor can access our Investor Relations and get the response from them.

Unidentified Analyst

Okay. My second question involves also the fourth quarter, can we assume in view of what you said tonight that the fourth quarter will be no better than the third quarter in terms of revenue and top-line and bottom-line revenue and net income. And now that you are saying you are facing headwinds.

Feng Peng

Essentially the fourth quarter is unchanged compared to the third quarter. But, I would expect the net income will be better than the third quarter.

Unidentified Analyst

Okay. Another question is that it looks like – do you know what time – which month the company will be delisted from NASDAQ because you failed to meet the $1 requirement?

Feng Peng

The deadline is February 9, 2015 and we have initial discussion with NASDAQ and we are eligible to apply for another six month extension to gain the compliance. So we will apply that and if necessary we at the second – 180 days extension – if necessary we will do reverse split to meet the compliance requirement.

Unidentified Analyst

Okay. And then how much of what percentage of the stock of the 20 million shares is owned by insiders?

Feng Peng

It's about 70%.

Unidentified Analyst

70%? So the flow is only about 6 million shares something like that is that correct?

Feng Peng

Yes.

Unidentified Analyst

Okay. Okay. Let's see, now I just want to refer again to what some of the other individual investors were talking about, which is enhancing shareholder value. And my question revolves around why you can't issue $0.05 dividend – special dividend each year to put a base under the – base price under the stock. Let me explain, the difference between your assets and liabilities is $100 million. And if you think $1 million each year an issue of $0.05 dividend then there is a reason for people to invest in the stock and I can't believe that you can't afford the $1 million each year to increase the price of the stock and give shareholders a return.

I mean basically if you let the company – if you just finished up your present jobs and let everything and stop building business, you would have a $100 million and $5 a share for every person. And if that's too optimistic, then $4 or $3 but it wouldn't be $0.70. So why don't you take $1 million and issue a $0.05 dividend, are you not allowed to by Chinese Law or any other regulation?

Feng Peng

As far as I know, we are allowed to do that. And that’s a very good point. It's a very – as I said it's a cash intensive business and we are – recently the financing for our sector is more difficult. But, we always consider issuing dividend to enhance the value of our stocks and to enhance them.

As you say that to put base on the stock and we have discussed this internally the management has discussed these internally for several times. We will consider this but this is subject to the conclusion of the management and conclusion from the Chairman and CEO and always subject to the Board approval. But, I take your point as you already send me an email about that so I will keep this topic open in our discussion with Chairman and CEO, reach any decision I mean – I'm sorry.

Unidentified Analyst

I wish you would emphasize to – I wish you would emphasize to them from the standpoint of an America – can you hear me?

Feng Peng

Um-hmm. Yes.

Unidentified Analyst

Can you hear me? Okay.

Feng Peng

Yes, yes. I can.

Unidentified Analyst

I wish you would emphasize that from the standpoint of an American investor, if there is no return and in fact there is a minus $0.02 every year on each share, there is no reason for anybody to invest in Ossen Innovation. If there, however, is a dividend then the price will go up. And if you have a need to raise cash and you have to issue more shares you are on a lot better ground in terms of what you can value that at. If you were paying a dividend and the dividend will virtually have no effect on your ability to do business $1 million is nothing compared to what you guys have in terms of assets over liabilities.

And I can understand why you wouldn't do what virtually every other company making a profit is doing to enhance shareholder value buying back shares or whatever and there weren’t any shares available. You could buyback 6 million, you could spend $6 million buyback all the shares and take all the company private again. So I just don't understand anything. And if you need a reason for why the stock goes down despite the fact that the company is still making a profit that's the reason.

Feng Peng

Okay. That's well noted I mean – yes, go ahead please.

Unidentified Analyst

It's very frustrating for those of us who have been invested with you for a long period of time. By that I mean years to hear that you are considering it, you are considering it, you are considering it. I know what you said that you need down payments for projects. But you also need to enhance shareholder value especially since you are making a profit. I know what you mean when you say you have headwinds. But you are still fully capable of issuing a dividend each year.

Feng Peng

Okay.

Unidentified Analyst

You have cash flow. You have net profit and you are able to do that. And the last question I had for you is, can you give us some idea in terms of the contracts that you bid on, what percentage of them you are actually receive, which ones – what percentage are wins?

Feng Peng

In the past it's a higher percentage, its about 3 or 4 years ago it's about like 80% to 90% but due to the micro condition and all headwinds, recently it's – I can't say that in 2014 it's about like 50%, it really depend on what kind of bid – what kind of bid we are trying to win. There are different kinds of bids but on average it's about like 50%. And some times --

Unidentified Analyst

For your rare earth contract?

Feng Peng

I’m sorry.

Unidentified Analyst

Is it higher than 50% for your rare earth contract?

Feng Peng

Yes.

Unidentified Analyst

Okay. So that's kind of your specialty?

Feng Peng

Yes.

Unidentified Analyst

Okay. Well, again, I can reiterate or emphasizing up how important it is for the company to show that it has shareholder value in mind and that it will either buyback stock or pay a dividend and then my preferences for the company to pay a dividend. So I hope you will take that back to the Board that they will respond somehow.

Feng Peng

Okay. I will definitely do that.

Unidentified Analyst

Thank you. And I also thank you for responding to my emails when I send them to you. You are prompt and I very much appreciate it.

Feng Peng

You are very welcome.

Operator

[Operator Instructions] Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Good day.

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