SORL Auto Parts, Inc. (SORL) on Q1 2019 Results - Earnings Call Transcript

May 16, 2019 1:06 AM ETSORL Auto Parts, Inc. (SORL)2 Comments1 Like
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SORL Auto Parts, Inc. (NASDAQ:SORL) Q1 2019 Earnings Conference Call May 15, 2019 8:00 PM ET

Company Participants

Kevin Theiss - Investor Relations Contact, Awaken Advisors

Jin Rui Yu - Chief Operating Officer

Conference Call Participants

Jim Baron - Private Investor

Peter Cyrus - Private Investor

Operator

Welcome to the SORL Auto Parts 2019 First Quarter Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Kevin Theiss, Investor Relations. Please go ahead.

Kevin Theiss

Thank you for joining us today and welcome to SORL Auto Parts 2019 first quarter conference call. Joining us today are Ms. Jin Rui Yu, SORL's Chief Operating Officer and Mr. Min Kan Lin, Accounting Manager. Before we begin, I would like to remind all listeners that throughout this call, we may make statements that may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words, believe, expect, anticipate, project, target, optimistic, contend, aim, will or similar expressions are intended to identify forward looking statements. All statements other than statements of historical fact are statements that may be deemed forward looking statements. These forward-looking statements are based on current expectations or beliefs, including but not limited to statement concerning SORL Auto Parts operation and its financial performance and condition.

SORL Auto Parts cautions that these statements by their nature involve risk and uncertainties, and actual results may differ materially depending on a variety of important factors, including those discussed at SORL Auto Parts reports with the Securities and Exchange Commission from time to time. SORL Auto Parts specifically disclaims any obligation to update the forward looking information in the future.

The 2019 first quarter results discussed on today's call our unaudited numbers and the fiscal year numbers are audited. All numbers are presented in U.S. dollars under U.S. GAAP. Ms. Jin Rui Yu, SORL's Chief Operating Officer will give an overview of the operations for the 2019 first quarter then I'll return to give the financial results. Thereafter, there will be a question and answer session conducted.

Ms. Yu, please begin your prepared remarks.

Jin Rui Yu

Okay. Thank you, everyone for joining us today. After economic growth slows in seven years in 2018 automotive sales in China suffered a first decline for the past 28 years. The native impact of the impending U.S. - China trade war [indiscernible] and the volatile stock markets affected consumer confidence and spending in China. Additionally, the tax levy on new passenger vehicle purchase increased in 2008 from 7.5% to a former trend of 10%. In such challenging environment, we managed it to continue to achieve growth. We are pleased to report that our first quarter total sales growth by 26.5% year over year to $136.2 million led by 44.6% growth in sales to the OEM market. Commercial vehicle sales increased by 18.3% to $188.4 million in first quarter of 2019 as a Chinese heavy duty truck markets remain strong in the 2019 first quarter. We captured more market share in the commercial vehicle markets and we also increased our sales through the EV bus sector, a growing [indiscernible] that is eating away the market share of traditional buses powered by engine.

In the aftermarket segments, we grew our market share so that intensified marketing campaigns slow our traditional distribution network. In the first quarter of 2019, China's GDP continued to slow late in six months to 4% growth the same as a fourth quarter of 2018 but below the third and the second quarter of 2008. This GDP growth rate has been the lowest in the last decades. According to the data reportage by the China Association of Automotive Manufacturers, in the first quarter of 2019 total vehicles, sales declined by 11.6% year over year as a passenger car sales decreased 13.7% and the commercial vehicle sales increased 2.2%. In the commercial vehicle segment, the traditional engine powered bus market continued to experience significant year over year decrease in unit sales in first quarter of 2019. As EV bus sales continue to expand with government subsidies. Overall trucks sales declines with immediate duty diesel truck sales volume down 20.3%. China's passenger vehicle sales declined for the ninth consecutive month in March of 2009.

As Chinese automakers sales dropped to by 20.7% year over year in the first quarter of 2019. And the market share dropped to 1.5%. In response to the slow economy growth the Chinese Central Government has offered a number of the physical stimulus, loosened the credit regulations, providing for more restructuring, encourage the local governments to spend more on infrastructure projects, encourage the money supply. Introduced the tax incentives for the consumers to increase economic growth and in-college consumer spending. New incentives has been also in play mandates [ph] for the replacement for the lower costs complying with the 2007 emissions regulations and the forecast with engine of 1.6 liters or smaller in the rural areas. We are optimistic [ph]. This incentive will ignite economic growth in the automotive markets in the future. Our [indiscernible] of the high quality braking product is capturing market share as we are the premium braking product supplier to a large number of Chinese vehicle manufacturers with involving technical opportunities. We help being a leader in developing more advanced electronic braking products and we are in leadership position with our combination of the hydraulic brake products and the newer electronic brake products. Furthermore, as we approach the year 2020, demands for commercial vehicles make growth from the pre-buy of overload commercial vehicle using the current national emission standards before the stricter and the more costly national fixed emission standards become the required standard in median 2020

With that now, let me turn the call to Kevin. Thank you.

Kevin Theiss

Thank you Ms. Yu. Now I will briefly review the results for the first quarter of 2019. For the first quarter of 2019 our net sales increased 26.5% year over year to $136.2 million compared to $107.7 million in the first quarter of 2018. Revenues from our domestic OEM customers were $74.9 million, an increase of 44.6% from $51.8 million in the first quarter of 2018. The strong year over year sales growth was mainly due to increased truck sales in the first quarter and improved market share. Sale to the China's domestic aftermarket was $43.3 million compared with $38 million in the same quarter of 2018. The increase in aftermarket sales was mainly attributable to the exploration of warranties from higher sales of new vehicles over the past few years, and our increased marketing campaigns to bolster our market share through our already well established distribution network, revenues from international markets were $18 million compared to $17.9 million in the same quarter of 2018.

The gross profit for the first quarter of 2019 increased 20.9% to $36.5 million from $30.2 million in first quarter of 2018. Gross margin was 26.8% compared with 28% in the first quarter of 2018. In the first quarter of 2019, operating expenses increased to $25.2 million from $18.4 million in the same quarter of 2018. As a percentage of total revenues, operating expenses were 18.5% in the first quarter of 2019, compared to 17.1% in the first quarter of 2018. Selling and distribution expenses were $12.9 million or 9.5% of quarterly revenues, compared with $10 million or 9.3% in the first quarter of 2018. The higher selling and distribution expenses were primarily due to the higher freight and packaging costs and increase personnel costs. General and administrative expenses, G&A in the first quarter of 2019 were $7.4 million, compared with $4.8 million a year ago.

G&A expenses as a percentage of revenue in the first quarter of 2019 were 5.4%, compared with 4.4% in the first quarter of 2018. The higher G&A expenses were mainly due to an increase in allowance for doubtful accounts and labor costs during the quarter. Research and Development, R&D expenses were $5 million compared with $3.6 million in the first quarter of 2018. As a percentage of revenue R&D expenses were 3.6% in the first quarter of 2019, compared with 3.3% of revenue in the first quarter of 2018. Interest income was $1.7 million compared with $1.5 million in the first quarter of 2018. Financial expenses were $4 million compared with $3.4 million in the same quarter last year. Income before income taxes was $11.8 million in the first quarter of 2019, compared with $10.8 million in the first quarter of 2018. Income taxes were $1.9 million in the first quarter 2019 compared with $1.6 million in the first quarter of 2018. Net income attributable to stockholders for the first quarter of 2019 was $9 million or $0.46 per basic and diluted share compared with $8.3 million or $0.43 per basic and diluted share in the quarter a year ago.

Now we will highlight a few balance sheet items and financial items. As of March 31, 2019 the company had cash and cash equivalents of $8 million compared to $73.6 million in December 31, 2018. Accounts receivable were $170.9 million compared to $150 million on December 31, 2018. Inventories were $187.4 million compared to $204.3 million on December 31, 2018. Short term bank loans were $212.4 million compared to $217 million at the end of 2018. Total equity was $219.7 million at March 31, 2019 comparing with $205.5 million at December 31, 2018. On March 31, 2019 working capital was $44.6 million but the current ratio of 1.1 to 1. Net cash used by operating activities was $25.8 million compared with net cash flow provided by operating activities of $36.3 million in the first quarter of 2018. Acquisition of property plant equipment and land use rights was $13.3 million compared with $19.7 million in the first quarter of 2018.

Business outlook. For the fiscal year 2019 management has reiterated that it expects net sales to be approximately $515 million and net income attributable to stockholders to the approximately $22 million. These targets are based on the company's current views on the operating and marketing conditions, which are subject to change. Before we move to Q&A, we want to provide an update of our recent development. After the first quarter our Board of Directors [indiscernible] non-binding preliminary proposal letter date April 25, 2019. Mr. Xiao Zhang, SORL's Chairman and Chief Executive Officer, Ms. Shuping Chi, and Mr. Xiao Feng Zhang Directors of the company and the Ruili Group together the consortium to acquire all the outstanding shares of common stock of the company not only owned by the consortium for a price of $4.26 per share of common stock in cash. Ms. Chi is the wife of Chairman, Zhang and Mr. Xiao Feng Zhang is the brother of Chairman Zhang. The $4.26 per share price of the proposal represented a 13.9 percentage premium over the company's closing price on April 24, 2019. A premium of approximately 35.64% to its average closing price over the last 30 days, and the premium of approximately 36.93% to its average closing price during the last 60 days. The members of the consortium currently own in the aggregate approximately 58.9% of the outstanding common shares of the company on a fully diluted basis. Consortium tends to fund the proposed transaction with cash on hand and proposed transaction will not be subject to a financing condition. The Board intends to form a special committee consisting of independent directors to consider the proposal. The Board expects that the special committee will retain independent financial and legal advisers to assist them in this process.

With that we now open the floor for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from line of Jim Baron with Private Investor. Please proceed with your question.

Jim Baron

Yes, it sounds to me like the CEO and the CFO are not present for this call, is there any particular reason for that?

Kevin Theiss

Unfortunately there is a large client of us, they have called a meeting emergency for potential large project. And so he's not here yet to attend a meeting for that reason

Jim Baron

Well, he was a President of the previous earnings call either, either one of them were my memories when I know the CEO was not. I just I don't know I mean it just seems strange to me that he's not -- he can't spend what is it you guys been on the call for 20 minutes now he doesn't have 20 or 30 minutes to spend with the people who have invested in his company that just sounds kind of -- it seems kind of disrespectful to me that you know, if he can't put his people on hold for a few minutes while he is at the earnings call. I don't know, it doesn't make sense to me. It's disrespectful to the investors but that's just my feeling.

Kevin Theiss

Well, so he will try to come on time for the meeting. He was on the call last time through a dial-in from another city.

Jim Baron

Because when I was on the other call last time, I thought there was only two or three people, he wasn’t one of them, but maybe I don't know if he called in or not. But at any rate, it also looks like you're essentially out of cash at 8 million, are there any specific actions being taken to try to get the short term debt down and the cash position up? Because I would have thought given how much the sales increased that there would have been -- the cash position would have been better. Anyway, it's something that caught my attention.

Kevin Theiss

Okay. So, as we you mentioned the cash fluctuation is mainly due to the increase of a working capital demand. As you know our business has been growing rapidly and then and also we have continue to increase the capacity. So, we put down some money to procure or to buy the production equipment to help with our new capacity expansion and also we and during the quarter, we increased the shipment to OEM customers. As you know, OEM customers tend to pay slow. So what they do is they usually give us what we call note payable. It's a note in their name, it's a bank instrument, but it has a certain days. If you go to the bank cash out prior to the date, you had to take a discount basically. And it's equivalent to cash but it's unfortunately being classified accounts receivable until we go to the bank and to cash was a discount and also our you know, a combination of all these things such as the increase of receivables to 28 million, 29 million increase of a bill payable, you know, 11 million and also some prepayment and equipment related expenses 10 million. So, all these combined, we just happen to be on that day where our cash is low

Going forward there are a couple things we can do, since we are also procuring a lot of components from suppliers. So we're going to negotiate with our suppliers. We are going to structure some kind of deal so we don't have to pay them so fast as we are collecting from our OEM customers. We are also stepping up in terms of collections with OEM customers as they are increasing shipment and as we're increasing shipment with them and we're demanding a faster turnover on the payment. And lastly, we have other way to tap the credit lines if we need to. And the other thing is the repayment for Ruili Group also came in. It's actually on May 15th so two days ago there was a payment of RMB170 million repayment from Ruili Group to SORL. So that helped not only reducing some of the outstanding accounts, but also help to beef up our cash position.

And also during the Q2, we're going to see more and gradual repayment coming from Ruili Group and so that should all been considered will help us the cash position.

Jim Baron

I mean, I don't want to keep coming back to you guys but what's our typical payment terms for your customers are they 60 days or 30? You have a tremendous amount of inventory.

Kevin Theiss

So, the term on the contract when we signed with OEM, the typical term is 90 days, but it's not finished yet. But at the end of 90 days, we only receive a bill payment what we call classified bill receivable they give us instrument, they work with commercial bank issued instruments sent to us that bill payment is typically a six months to the expiration date and then you can really get the cash and if we want to say we need to get that get cash immediately we had to go to the bank and depending on the interest rate, you had to take a discount and they gave us cash. So that's additional six months. That's the old system where it was based on the paper commercial in a bill payment, okay, that's on the paper, but nowadays everything is moving to digital. So the digital bill payment is issued by the bank on behalf of the these OEM clients, the payment, the due date is one year. So all things considered, you know, I hope you understand why our receivables cycle is so long. Now however, the positive side of most of those OEMs are large state owned companies. So essentially the chance of their default is very, very low and we actually have very low record -- we have a record of very low default on those payments in the past many years because those are large scale companies. They are supported by local or central government.

Jim Baron

Right. No, I mean we are on this exact function for multiple companies before and I've never heard terms that long and the defaults late, I know it's different country and all that, but default rates for us were less than 1%, but we got paid in 30 days I see what's happening now.

Operator

[Operator Instructions]. Our next question comes from line of Derek Winger [ph], Private Investor. Please proceed with your question.

Unidentified Analyst

Yes, I'd like to know how the $4.26 figure was put forth to the Board in terms of the valuation and what the independent members think of that price?

Kevin Theiss

Because we are here or the management team we're not involved with this take -- go private proposal from the large shareholder. However, we are aware we know for a fact that Board of Directors are going to form a special committee and to review the proposal and the special committee will then retain financial advisor and the legal counsel to evaluate the fairness of the offer or the proposal on behalf of our minority shareholders. So when we have further notice from the special committee or the Board of Director, independent committees, we will make do announcements to update or shareholders

Operator

Our next question comes from line of Peter Cyrus, Private Investor. Please proceed with your question.

Peter Cyrus

I have a comment and a question, two comments and a question. I know I've owned this stock longer than anybody else around so I have some history. And the two comments I would like to make, or I'm assuming that even if the Board, the independent advisor, if the independent directors approve it, that a vote would have to come from the majority of the minority in other words, the people who get to vote are not the management, not the chairman and his family, but the rest of us get to vote and they don't one of the reasons I believe that the price of the stock is as low as it is because you're doing a wonderful job running this business. Are the inter-related party transactions between the Ruili Group and SORL and I believe the owners of the Ruili Group should not be rewarded because of these interrelated party transactions. I also believe that this will lead to significant legal issues. So, my suggestion to you folks is number one that to the degree possible immediately that you should try to eliminate all related party transactions between the two but number two, that the price that they're offering, in my view, considering this company went public, basically $6 a share and where it was 12 years ago I know I for one would not vote for this privatization. Thank you.

Kevin Theiss

I think Peter, your comment earlier on the procedure is correct. It needs to have a majority of the minority shareholders and to vote for it and to approve this proposal which means again, it's not insiders votes.

Peter your points is well taken on the suggestion on the really to quickly resolve the related party situation, transaction situation, again, as we mentioned earlier, we are management, we're professional management. Our job mainly is focusing on operating a good business and in terms of proposal submitted by the large shareholder we will have to leave that to the Board of Directors and the newly formed the forthcoming forming of the special committee to decide. What we can do is we understand we have fiduciary duty to our shareholders, to focus on managing a good business and convey your concern or your suggestion to the Board. And also, we are working diligently to clean up some of the outstanding accounts. So that's what we are we fully understand that's our fiduciary duty.

Peter Cyrus

I mean, you could also buy the Ruili Group.

Kevin Theiss

Okay.

Operator

[Operator Instructions]. We have a follow up question from Peter Cyrus, Private Investor. Please go ahead.

Peter Cyrus

I just have one business question. The market for automobiles and trucks and buses have been terrible in China. You talk about the aggressiveness of going after share. Have you obviously have you gained so much share somebody has to lose share. Have you seen competitors in your core businesses exiting the business, going broke, closing whatever?

Kevin Theiss

So, Peter, good question. Before we answer that question, I think we want to quickly review the competitive landscape. Globally, China, there are major players, there are small mom and pop shops. The major players in our business are three -- the Big 3s in China are [indiscernible] and VIE. Those are main, VIE is a [indiscernible] is a German company and Wacko [ph] is a American company then VIE is a Chinese local large company. And other than these three, then we have a lot of smaller players and the large, at the top, I mean the Big 3s, are our competitors -- they're very similar to our business model they provide a system solution. So a brake system including many different components and even softwares and so photo solution while the smaller mom and pop shops are there, there are many, they only specialize in single components and so as OEM are growing to this stage, they are changing their procurement process. They want to deal with a large supplier and become their one stop shop. And also due to the volume purchase they can get better price and shipment is the most reliable and so on so forth.

And as we are rapidly expanding our distribution and marketing and campaign and first we are we are definitely killing those smaller mom and pop companies, shops and they are struggling and we are seeing some of the businesses are shutting and exiting which is good for the industry and become less fragmented. On the other hand, we are competing with the larger players like Wacko, [indiscernible] and VIE we are providing a better value, you know price to quality value. We have a better turnaround cycle than our competitors and in terms of R&D development, product development, and we are very good on quality control and so all these are enabling us to gain market share. And so, we are gaining market share on both sides whether from a large established local I mean domestic competitor or global competitor and the smaller mom and pop shops. So, this is what we are doing

Peter Cyrus

So given that as I look at your numbers why shouldn't you -- given how what you've done in this terrible quarter for automotive business do you think your current guidance is too conservative

Kevin Theiss

Our projection or guidance on the revenue is based on our communication with the OEM customers. A lot of those customer for instance, the truck makers are they tend to give a conservative estimate and for the outlook and given 2019 the environment. So this year there are some expectation, the commercial vehicle sector may have a flatter or even a small decline versus 2018. However, that doesn't really affect us that much because we are gaining market share. We are also entering into other areas such as the EV business. They are eating away market share from the traditional internal combustion engine powered vehicles.

Operator

[Operator Instructions]. Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Kevin Theiss for closing remarks.

Kevin Theiss

We want to thank everyone for joining us today, and we look forward to speaking with you in the future. Thank you for joining us.

Operator

This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation.

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