China XD Plastics Company Limited (OTC:CXDC) Q1 2019 Earnings Conference Call May 15, 2019 9:00 AM ET
Shaojie Wen - Investor Relations
Jie Han - Chairman & Chief Executive Officer
Taylor Zhang - Chief Financial Officer
Conference Call Participants
Ladies and gentlemen, thank you for standing by. Welcome to the China XD 2019 First Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise this conference is being recorded today, 15th of May 2019.
I would now like to hand the conference over to your first speaker for today Mr. Shaojie Wen. Please go ahead, sir.
Thank you. Hi, everyone. Thank you all for joining us for the China XD Plastics first quarter 2019 financial results conference call. Joining me on the call today are Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer; Mr. Rujun Dai, Deputy General Manager of Heilongjiang Subsidiary.
Earlier today, China XD Plastics issued a press release announcing the first quarter 2019 results. Before management's presentation, I would like to refer to the Safe Harbor statements in connection with today's conference call and remind our listeners that management's prepared remarks during the call may contain forward-looking statements, which are subject to risk and uncertainties and that management may make additional forward-looking statements in response to your questions. All statements, other than statements of historical fact contained, are forward-looking statements including but not limited to the company's growth potential in the international market; the effectiveness and profitability of the company's product diversification; the impact of the company's product mix shift to more advanced products and related pricing policies; the volatility of the company's operating results and financial condition; the company's projection of performance in 2019 and other risks detailed in the company's filings with the SEC and available on its website at www.sec.gov.
These forward-looking statements involve known and unknown risk and uncertainties and are based on current expectations, assumptions, estimates and projections about the company and the industry. The company, therefore, claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed to date and we refer you to a more detailed discussion for the risk and uncertainties in the company's filings with the Securities and Exchange Commission.
In addition, any projection as to the company's future performance represents management's estimate as of today, May 15, 2019. China XD Plastics assumes no obligation to update these projections in the future as market conditions change. To supplement the financial results present in accordance with the U.S. GAAP, management will make reference to earnings before interest expense, income taxes, depreciation and amortization, which we refer to as EBITDA. EBITDA is a non-GAAP financial measure, reconciled from net income, which the company believes to provide meaningful additional information to better understand its operating performance. A table reconciling net income to EBITDA can be found on the earnings press release issued earlier today.
Now I would like to turn the call over to our Chairman and Chief Executive Officer, Mr. Han. Mr. Han will be speaking in Chinese and I will translate his opening remarks into English.
[Foreign language] Our first quarter 2019 results are consistent with the declining trend of the Chinese auto industry. Though, the declining trend becomes narrower during the first quarter of 2019. Besides increased sales of higher-end products, such as modified POM and PPO, the company starts sales of the new categories of higher-end products of PA66 and PA6 produced with high-priced raw materials for higher selling price in China, leading to an increase of sales price in domestic market by 14.3%.
Our successful trial production at our production base in Dubai has brought us prospect in international sales, targeting high-end products. We are working hard to complete the equipment installation and testing our industrial projects in Heilongjiang base for upgrading existing equipment for 100,000 metric tons of engineering plastic by the end of the third quarter of 2019. This is our strategic plans of producing specialized high-tech products for various important new market, which will ultimately enable more active inroads into various product application in other market regions.
China XD continues to value our deep working relationships with our customers above all and is committed to creating value with our culture of hard work and innovation. We anticipate that the continued execution of our strategic plans supported by an increase in our production capacity, our entry into new market, a diversified customer base and diversification with international sales, will help to generate business growth for years to come. For fiscal 2019, we are reiterating our financial guidance of $1.3 billion to $1.6 billion in revenue and $90 million to $110 million in net income.
With that, I would now turn the call over to Taylor Zhang, our CFO, to walk you through our financial. Taylor?
Thank you, Mr. Han. And thank you, everyone, for joining the call today. Before I review the numbers, let me remind you that all figures I discussed are for this reporting period, the first quarter of 2019, unless I state otherwise. Additionally any year-over-year comparison is to the first quarter of 2018 and any sequential comparison is to the fourth quarter of 2018. So let's go over our first quarter results.
Revenues were $301.5 million in the first quarter ended March 31, 2019, a decrease of $9 million or 2.9% compared to $310 million in the same period last year. This was due to approximately 11.1% decrease in sales volume, and a 6.5% negative impact from its increase due to depreciation of RMB against U.S. dollars, and partially offset by 15.7% increase in average RMB selling price as compared with those of the same period last year.
Premium products including PA66 PA6, Plastic Alloy, PLA, POM, PPO in total accounted for 82.7% of revenues in the first quarter 2019, compared to 81% on the same period of 2018. The timing continue to shift production mix on traditional lower-end products such as PP to higher-end product such as POM PPO primarily due to greater gross potential for diverse modified plastics and luxury automobiles model in China.
Some of the demand are results of promotion by Chinese for clean engine vehicles and better quality demand from in customer recognition of higher-end cars made by automotive manufacturers from China and joint ventures. Same U.S. Japanese joint ventures where manufacturing change, who use higher-end plastics modified plastics in quantity per vehicle in China.
Gross profit was $50.3 million in the quarter ended March 31, 2019 compared to $53.9 million in the same period of 2018 representing a decrease of 6.7% or $3.6 million. Our gross margin decreased to 16.7% during the quarter ended March 31, 2019 from 17.4% during the same quarter last year, primarily, due to the adopted and lower price strategy as a new entrant to new categories of higher-end products of PA6 and PA66 in domestic markets for the first quarter.
G&A expenses were $8.8 million in the quarter ended March 31, 2019 compared to $8.9 million in the same period in 2018 representing, a decrease of 1.1% or $0.1 million. The decrease was primarily due to our approach in optimizing management structure enhancing efficiency leading to a decrease of about $0.9 million in salary and welfare and partially offset by an increase of $0.8 million in professional fees.
R&D expenses were $10.1 million during the quarter ended March 31, 2019 compared with $5 million during the same period last year, an increase of $5.1 million or 102.0%. This significant change was primarily due to elevated R&D activities to meet the new higher specification requirements from potential customers especially overseas and increased efforts directed towards application in new electrical equipments and electronics, alternative energy application, power devices, aviation equipments and ocean engineering. In addition to other new products primarily for advanced industrialized application in automobile sector and new verticals such as ships airplanes high-speed rail, 3D printing materials, biodegradable plastics and medical devices.
As of March 31, 2019 the number of ongoing research and development projects was 355. Total operating income was $31.2 million in the first quarter ended March 31, 2019 compared to $38.9 million last year representing a decrease of 19.8% or $7.7 million. This decrease is primarily due to lower gross margin, higher R&D expenses partially offset by the lower G&A expenses and selling expenses.
Net income of $11 million in the first quarter compared to net income of $19.1 million in the same period last year representing a decrease of $8.1 million or 42.4%. Basic and diluted earnings per share for the three months period ended March 31, 2019 was $0.15 compared to $0.29 for the same period last year. Earnings before interest tax depreciation and amortization was $47.6 million for the first quarter of this year compared to $49.6 million for the same period last year, a decrease of $2 million or 4%.
For a detailed reconciliation of EBITDA a non-GAAP measure to its nearest equivalent, please see the financial table at end of our press release issued earlier today.
And now let's turn to the balance sheet. As of March 31, 2019 the company had $506.2 million in cash and restricted cash, an increase of $139.2 million or 37.9% as compared to working capital $367 million as end of last year.
Working capital was negative $64.7 million and the current ratio was one as compared to the current ratio of 0.9 as of end of last year. Stockholder equity as of March 31, 2019 was $774.6 million an increase of $25.7 million or 3.4% as compared to $748.9 million as of end of last year.
Now before opening the call to your question, I would like to note that for any question directed to management in China I'll translate both their questions and their answers. If you want to ask a question in Chinese please also ask in English for the benefit of our other listeners.
Please also note that we will only be able to respond to questions about our financial and operating results. For other matters including the going private offer, we refer you to our already issued press releases. We will now be able to respond to questions that are directed to the principles of the going private offer about the proposed transactions.
With that we'll now open the call to your question. Operator?
[Operator Instructions] We have the first question from Mr. Peter Siris. Please go ahead.
Hi. My first question is on the inventories. I -- can you explain why there's $793 million of inventories. That's almost a year's supply. What's the benefit of having some much inventory?
Peter let me translate your question, so our CEO can probably address that.
[Foreign language] Okay. Hi Peter. So, there's three reasons for the inventory level at this level. So, of course, as we mentioned that we have a product mix and also new product categories which will naturally require us to stock up more raw materials for the new products and also product shifts.
And secondary is our -- we anticipate Sichuan company will be producing more in the coming quarters. And we also -- that's why we must have increased raw material purchase for that purpose.
Okay. So, where I see the guidance for the year is $1.3 billion to $1.6 billion in revenues. What you're suggesting is that in coming quarters that will see an increase in production and a decrease in inventory. Is that correct?
[Foreign Language] Hi Peter. That's the trend and also as we have planned.
Okay. Now, in -- when you talk about increased production in Sichuan, we're talking about from the original factory I assume we're talking your original factory what is the status of two new factories one in Heilongjiang and one in Sichuan?
That's the assumption let me ask the status.
[Foreign Language] So, Peter for Heilongjiang, we expect to launch and start producing later this year. And for Sichuan, we plan to break grounds and in January-September. That was approximately delayed for about a year.
Okay. And my last question is when will we see real production and real customers? I'm not talking about Korean customer, but real production and real customers coming from Dubai?
[Foreign Language] So Peter during Q1 we have about five customers from UAE and Europe. This customer actually, we delivered product for their trial run, which was successful. So we do expect in Q2 that we're going to receive their orders, which are normal business order from them going forward.
Right. Well, thank you very much.
[Operator Instructions] As there are no questions, I'd like to hand the call back to you speakers for any closing remarks.
On behalf of China XD Plastics we want to thank you for your interest and participation in this call. If you would like to speak with us further, please call either myself or Taylor in New York office. The contact numbers for all of us are listed at the end of the press release. Thank you.
Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.