Highpower International, Inc. (HPJ) CEO George Pan on Q1 2019 Results - Earnings Call Transcript

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About: Highpower International, Inc. (HPJ)
by: SA Transcripts
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Earning Call Audio

Highpower International, Inc. (NASDAQ:HPJ) Q1 2019 Results Conference Call May 13, 2019 10:00 AM ET

Company Participants

Yuanmei Ma - Investor Relations Director

George Pan - Chairman and CEO

Sunny Pan - CFO

Conference Call Participants

Matthew Larsen - National Securities

Operator

Greetings, and welcome to the Highpower International's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Yuanmei Ma, Investor Relations Director for Highpower. Thank you. You may begin.

Yuanmei Ma

Thank you, Cathy, and good morning everyone. Thank you for joining us today for our first quarter 2019 earnings call. Before we begin, I refer you to the Safe Harbor statements in our earnings release, which also apply to our conference call today as we will make forward-looking statements.

With us today are George Pan, Chairman and CEO of Highpower and Mr. Sunny Pan, CFO of Highpower. Following management's prepared remarks, we will conduct a Q&A session.

I will now turn the call over to Mr. George Pan. Please note that George will first speak in Mandarin and I will follow with English translation of his remarks. George, please go ahead.

George Pan

Good morning, everyone. And welcome to our first quarter 2019 earnings call. Our first quarter results show a good start to 2019. Top line performance reached our guidance in R&D term, driven by continued growth in our battery solution businesses. We also continued to optimize our product mix and improve labor efficiency, which successfully increased our margins, which also exceeded our expectations.

During the quarter, we continued to expand our capacity to fulfill increasing customer demand. We're in fact with the development of our new production line in our Huizhou facility we're phase 2 building is expected to be completed by the third quarter of this year. We also remained committed to R&D innovation and intend to maintain our ongoing efforts in talent acquisition and a corporation with university and the third party research institutions.

We anticipate that raw material prices will be stabilized in the second half of the 2019. However, potential trade conflicts may place downward pressure on the broader global economy environment, creating uncertainties to our business to offset the effects we intend to adapt to market forces and remain focused on executing our strategy, while ensuring that we have the talent, technology and the capacity necessary to continue our growth. We remain dedicated to sustainable long term growth and to providing clean, safe and efficient power solutions to meet society's needs.

Now, I would like to turn the call over to Mr. Sunny Pan, Highpower's CFO, who will go over our financial results in greater detail. Sunny, please go ahead.

Sunny Pan

Thank you, George. Good morning, everyone and thank you for joining us on our call. Let me walk you through our first quarter 2019 financial results. Please note that unless stated otherwise, all numbers are presented in U.S. dollar terms and all comparisons are made on a year-over-year basis.

Net sales increased 16.7% to $58.1 million from $49.8 million. Our lithium business grew 16.8% to $42.7 million and our incremental rechargeable battery and accessory business grew 16.7%to $15.4 million. The primary drivers of our lithium business were high-end customer products, industrial applications and the increased demand for artificial intelligence products. We also continued to optimize our sales structure.

Gross profit increased 57.3% to $12.7 million from $7.6 million. Gross margin increased to 21.8% from 15.2%. This increase was due to better product mix and the improvement in our labor efficiency. Research and development expenses were $3 million compared to $2.6 million as a percentage of net sales. R&D expense remained flat at 5.1%.

Selling and distribution expenses were $2.8 million compared to $2 million. As a percentage of the net sales, selling and the distribution expenses increased to 4.8% from 4%. The increases of expenses were mainly driven by expenses business scale, including marketing expenses for most branded customers. General and administrative expenses were $4.8 million compared to $4.1 million. As a percentage of net sales, general and administrative expenses remained stable at 8.3%.

Net income attributable to the Company for the first quarter of 2019 was $0.3 million compared to a net loss of $1.1 million in the prior year period. Net income attributable to the Company per diluted share was $0.02 compared to a net loss per diluted share of $0.07. EBITDA for the first quarter of 2019 increased by 374.6% to $2.8 million from $0.6 million.

Moving on to the balance sheet. As of March 31, 2019, our cash balance was $24.2 million compared to $24.9 million as of December 31, 2018. Our total assets were $284.1 million and our total equity was $79.5 million. For the second quarter of 2019, we expect net revenue to grow over 20% year-over-year. Gross margin is expected to be similar or slightly lower than that of the first quarter of 2019. We will continue to closely monitor all potential lease and uncertainties impact related to the trade conflict between the U.S. and the China, raw material prices and the exchange rate.

This concludes our prepared remarks. We will now move into the Q&A session. Please be reminded that we will take a moment to translate questions into Mandarin. And we will then talk in English. Operator, please open the line for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Matthew Larsen with National Securities. Please proceed with your question.

Matthew Larsen

Thanks for taking my call, and congratulations on very nice quarter that I can see. Just wanted to know whether or not -- couple of things, that how much product do you sell into the U.S. that might be affected by any of the trade negotiations going on, so that we can get a gauge of future guidance you might have?

Yuanmei Ma

Thank you very much. So let me translate into Chinese. [Foreign Language] Okay. Thank you for your questions, Matthew. It is the answer from our CEO. From the figures of 2018, the total ratio of our products gradually and interestingly is our battery to U.S. is around 14%. And for this year 2019, we think the percentage will be around 15% to 17%, including direct and indirect using high product…

Operator

Mr. Larson, we are able to hear you…

Unidentified Analyst

Hello.

George Pan

We can hear you. Hello?

Operator

Everyone, you are still connected. It looks like, Mr. Larson has disconnected from the call [Operator Instructions]. Thank you. Our next question is from the line of [Bob Reiser], a private investor. Please proceed with your question.

Unidentified Analyst

Thank you for my taking my question. Can you just give a description of how the VI2 extensions will impact revenue in 2019?

Yuanmei Ma

I'm sorry can you repeat your questions?

Unidentified Analyst

Yes. Can you give description of how the VI2 extensions will impact revenue in 2019?

Yuanmei Ma

Sure. Thank you very much. Let me translate [Foreign Language]. Okay, thank you for your questions, Bob. Our answer for our VI2 freight, we're increasing our production capacity continuously. But as for the phase 2 as we reported in third quarter this year, we completed the buildings for the phase 2. So the contribution from phase 2 for this year is quite limited, but we anticipate that for next year our second phase will contribute about 10% to 20% to our total stock revenue for next year. And it will contribute more in '20, '21.

Operator

Thank you. Our next question is from the line of Matthew Larsen with National Securities. Please proceed with your question.

Matthew Larsen

I’m sorry my line dropped, I’m not sure why, so I’m calling from different phone. We were in the middle of the question, and you had answered almost inclusively that your exports are around 15%, so it's pretty small amount. So therefore whatever trade negotiations result in it shouldn’t have a meaningful impact. And the other thing I wanted to ask, which I'm sure is on lot of people's mind is the going private offer. I’m sure you can't give me much detail, but just wanted to ask you this. Most recently management has expanded and strengthened their desire to go forward with the offer and initially, the offer was made almost a year ago. Just wondering why it takes so long for your advisors, Roth and some law firms, to be able to consider your offer. You seem to be quite serious and it seems to be the longer it takes to make this assessment, your company just continues to do better and better. And so it's more difficult to justify the current $4.80 offer. So it seems to me that the quicker they resolve it, it gets better. I certainly know you're in the United States when one company makes an offer for another, or private firm tries to buy a company, the process is quite short. So I don’t quite understand why for a company of your size, it would take Roth and their legal partners so long to assess it. Since you all management, as well as the director and then second investment firm assets, so something of that nature are very serious about going forward with it. Can you just answer why the process is so lengthy and why it takes so long? Thank you.

Yuanmei Ma

Thank you very much. So let me translate into Chinese [Foreign Language]. Okay. So Matthew, George would like to add more information about your first question. From the ratio perspective, our transaction with the U.S. is quite low. So currently, as they come back to the impact that to Highpower, the direct impact to Highpower is limited. And for Highpower, our target market is global and we have over 18 years experience serving the Fortune 100 and top 10 brands in the world. And some of the international brands have operated with Highpower for over 15 years. So our target market is the global.

And we also believe that with the growing demand for the clean and safe energy solutions that our transaction with the U.S. will also getting big and bigger. So it is more information about your first question. [Foreign Language] Yes, okay. And as for your second question, and I thanks for your good questions. As a member of the consulting group, I will follow the SEC regulations and procedures, the schedules detained on the progress and the schedule of special committee, SEC and the shareholder meeting, if there is and confirm the progress or schedule, the company will announce and I myself translate the proposal for myself is careful in this period. Thank you.

Matthew Larsen

Thanks very much for those answers and I guess I will just close, and I'll let somebody else ask question with -- I would think your advisers probably have had talk and make the decision. So I think it's in your best interest certainly that the earlier that they can arrive at some fairness appraisal, it's good for you and it gives some transparency to the shareholders, which is myself I’m a shareholders. So thank you for your time.

Yuanmei Ma

Thank you. We believe that the proposal, the offer is for the best interest of the company and all shareholders. Thank you.

Operator

[Operator instructions] Thank you. We do have an additional question from the line of [Alan Al], a Private Investor. Please proceed with your questions. Alan, your line is live. You may proceed with your questions.

Unidentified Analyst

I have a question on balance sheet. I noticed that account receivable has dropped significantly year-over-year, and that contributed to improvement in cash flow for the quarter. Is there any explanation for the drop of the account receivable?

Yuanmei Ma

Thank you very for the question. So let me translate [Foreign Language].

George Pan

So Alan, this is something of a discussion. So actually our control of our accounts receivables were carefully and also we get the support from our brand customers. Normally, our receivable terms stays actually the most likely. So because of the valuations as the fluctuation is mainly due to the seasonality. So it means actually we always almost keep three months mark sales revenue as our account receivable figure. Alan, did that answer your question?

Unidentified Analyst

So do you mean that its related customer practice, so is that what you mean or how do you expect number fluctuating around in the rest of the year?

George Pan

Yes, it's compared to last year actually, because the last year our peak season is normally the first quarter and the fourth quarter. So it means our accounts receivable by end of last year is almost peak time. But for Q1 normally is the lowest season so that is we have likely base accounts receivable base. So that means we will keep three months sales revenue. So that's the reason. Every quarter end actually we will have a lot or most -- so this quarter sales -- means the turnover figure, yes.

Unidentified Analyst

Another following question also on the balance sheet side as well on the liability. So I noticed that the short term loans has also decreased also, it's one on financial institutional borrowing then also has -- that line also jumped already. So it's a good sign. I'm just wondering do you expect the short term loan to remain at this level, or how do you expect to move in rest of the year?

George Pan

Okay, well good question. Yes, also let me continue to answer this question.

Yuanmei Ma

Okay. Let me translate your question into Chinese first [Foreign Language].

George Pan

So let me answer this question so thank you for your question. Actually, in the Q1 our vendor and also the note from the third party reduced the debt too, because actually we kept operating inflow, particular month in Q4 and Q1. So that means we have the activity to reduce the note. But on the upside, actually because our businesses still keep growing so we still see quite money for the investment, not only the activity also for the R&D expense, et cetera. So that means actually in the coming period quarterly so we still need other financings to support our business growth. So I think our panel will increase in the coming quarters.

Operator

Thank you [Operator Instructions]. It appears that we have no additional questions at this time. I'd like to pass the floor back over to management for any additional concluding comments.

George Pan

Thank you for joining us today. We look forward to speaking with you next quarter. As always, on behalf of the entire Highpower team, we welcome your feedback and visit to our facilities in China. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.