China XD Plastics Company Limited
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good day, and welcome to the Third Quarter 2017 China XD Plastics' Ltd. Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Anna Bin. Please go ahead.

[Anna Bin:]

Thank you all for joining us for the China XD Plastics Third Quarter 2017 Financial Results Conference Call. Joining me on the call today are Mr. Jie Han, Chairman and the Chief Executive Officer; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer; Dr. Kenan Gong, General Manager of the Dubai Subsidiary; and Mr. Rujun Dai, General Manager of the Heilongjiang Subsidiary. Earlier today, China XD Plastics issued a press release announcing the Third quarter 2017 results. Before management's presentation, I would like to refer to the Safe Harbor statements in connection with today's conference call and to remind our listeners that the management's prepared remarks during the call may contain forward-looking statements, which are subject to risks 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

[Jie Han:]

Thank you all for joining us today. Our total revenue fell short of expectations for the third quarter, although our domestic revenue was up marginally as compared to the same period last year as reported by the China Association of Automobile Manufacturers. For the first nine months of 2017, automobile production increased 5.5% related to the same period last year after robust macroeconomic environment through our China's automobile supply chain led to positive growth in our sales value. Although this was offset by the company's marketing strategy of offering lower end products with lower R&D pricing in order to further penetrate the new regional market in Central China and the South China, which inactively affected our average selling price and gross margin. However, we are confident that in our operating capabilities and believe that our new geographical positioning and the new developmental project will create a more robust and the diversified enterprise. We continue to gain traction into new territories attributable to our new state-of-the-art retail manufacturing facility located in Southwest China. We were fully operational; their strategic initiative will add 100,000 metric tons of annual production capacity to our 390,000 metric tons of annual product capacity from our more established Northeast Harbin plant. Our Sichuan plant [ph] currently has 50 production lines with 216,000 metric tons of annual production capacity and we expect that the ongoing construction and order [ph] will be completed by the end of the first quarter of 2018. The installation of high precision in our Sichuan facilities will enable us to broaden our product platform to serve an array of high-growth verticals which will ultimately result in additional income streams. We are very enthusiastic about all of our new industrial projects. Our development project with the Management Committee of Harbin Economic Technological Development Zone includes an industrial project for upgrading existing equipment for 100,000 metric tons of engineering plastics, which we expect will be completed by the end of June 2018. Also included is an industrial project for 300,000 metric tons of biological composite materials, an industrial project for a 3D printing intelligent manufacture demonstration factory and a 3D printing display and experience cloud factory, all of which we expect to complete by the end of July 2019. We anticipate our development project with the People's Government of Shunqing District, Nanchong City of Sichuan Province for the production of 300,000 metric tons of bio-composite materials and additive manufacturing and 20,000 metric tons of functional master batch will be completed by the end of December 2018. Our Dubai facility extends our specialized hi-tech products into an important overseas market. We plan to complete the installation of 45 production lines with 12,000 metric tons of annual production capacity by the first quarter of 2018, and to complete the installation of an additional 50 production lines with 13,000 metric tons of annual production capacity by the end of 2018. This will bring the total annual production capacity of our Dubai facility to 25,000 metric tons. The Dubai facility will target high-end products for overseas markets and will ultimately help us both source raw materials and make inroads into the markets of Europe, the Middle East, Russia and other overseas markets. We believe that our increased production capacity, geographically expansion and a more diversified customer base both strengthened and augment our current automotive business further our new development projects which leverage our technical expertise, could lead to digital new business. We view ourselves as a leader in the polymer compressive sectors which will enable us to provide creative technology solutions for Chinese auto [ph], transportation, energy, healthcare and industrial sectors, where we iterate our financial guidance for the fiscal year 2017 and continue to be excited of our core market positioning and expanded platform for Group. With that, I will now turn the call over to Taylor Zhang, our Chief Financial Officer to walk you through our financials.

[Taylor Zhang:]

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 we discuss are for this reporting period, the third quarter of 2017, unless as stated otherwise. Additionally, any year-over-year comparisons to the third quarter of 2016 and any sequential comparisons to the second quarter of 2017. So, let's go over our third quarter results. Revenues were $311.4 million for the third quarter of 2017 compared to $331.3 million for the same period last year representing a decrease of $20.4 million or 6.1%. The year-over-year decrease was primarily due to 8.3% decrease in average RMB selling price of our products attributable to the current quarter's greater percentage of lower end modified polypropylene sold in China offset by a 3% increase in sales volume. There was also a 0.6% negative impact from these increase [ph] due to the weakening RMB against U.S. dollar in the current quarter compared to last year. PRC domestic revenues increased by 0.8% in the third quarter of 2017 compared to the same period of 2016, driven by modest growth and demand for our products in China markets and our continued efforts to expand our customer base attributable to our new plants in Sichuan. In the current quarter, we recorded sales increase of 42.8% in Central China, 61.1% in Southwest China, and 0.5% in North China which was offset by deposits of 5.1% in South China, 5.2% in East China and 6.8% in Northeast China as compared to the same period last year. Overseas sales resumed in the third quarter of 2017 and were $14.1 million in the current quarter compared to $37 million in the same period last year, representing a decrease of $22.9 million or 61.9%. The overseas customer has made payments of $62.6 million for the first third quarter of 2017, and expects to pay out the overdue outstanding balance of $44.9 million in the fourth quarter of this year. Premium products, in total accounted for 74.9% of revenues in the third quarter of 2017 compared to 82.8% for the same period of last year. tune up the quarter with 2017 the company implemented a marketing strategy of offering lower end products with lower RMB pricing to further penetrates the new regional markets in Central China and South China. Planning this mining strategy, the company intends to shift this product mix from traditional polymer materials to higher-end products, such as PLA, POM, primarily due to greater growth potential for advanced modified plastics in luxury models in China. Gross profit was $47.3 million in the third quarter ended September 30, 2017 compared to $69.6 million in the same period of last year, representing a decrease of $22.3 million or 32%. Our gross margin decreased to 15.2% for the third quarter ended September 30, 2017 from 21% for the same period last year, primarily due to the usage of higher price to modify polyamide also known as PA or nylon, raw materials inventory for third quarter of 2017 leading to higher costs of goods sold. Lower sales of higher-end products by our Dubai subsidiaries. And implementation of the marketing strategy as was mentioned previously to offer low end products with lower RMB pricing. G&A expenses were $10.4 million for the third quarter of 2017 compared to $8.4 million for the same period last year, representing an increase of $2 million or 23.8%. This increase was primarily due to the increase of $2.2 million in salary and welfare expenses resulting from an increase in the number of management and general staff from our supporting departments and in average salary and bonuses. R&D expenses were $9.8 million for the third quarter of 2017 compared to $7.9 million for the same period of last year, representing an increase of $1.9 million or 24.1%. This increase was primarily due to elevated R&D activities to meet higher quality requirements of potential customers from Europe; mainly engaging automobile components industry. An increased effort directed towards applications in new electrical equipments, electronics, alternative energy applications, power devices, aviation equipments and ocean engineering, in addition to other new products primarily for advanced industrialized applications in automotive sector and in the new verticals such as ships, airplanes, high-speed rail, 3D printing material, biodegradable plastics and medical devices. As of September 30, 2017, the number of ongoing R&D projects were 366. Operating income was $26.2 million for the third quarter of 2017, compared to $53.1 million for the same period of last year, representing a decrease of $26.9 million or 50.7%. This decrease was primarily due to lower gross profit, higher G&A expenses and higher R&D expenses. Net interest expense was $9 million for the third quarter of this year compared to $9.7 million for the same period last year, representing a decrease of $0.7 million or 7.2%. Income tax expense was $3.1 million for the third quarter of 2017, representing an effective income tax rate of 17.8% compared to income tax expense of $5.3 million in the same period of 2016, representing an effective income tax rate of 20.8%. Net income was $14.1 million for the third quarter of 2017 compared to $20.2 million for the same period of 2016, representing a decrease of $6.1 million or 30.2%. Basic and diluted earnings per share in the current quarter were $0.21 compared to $0.31 per basic and diluted share for the same period last year. The average number of shares used in computation of basic and diluted earnings per share current quarter was 49.6 million compared to 49.5 million shares last year. EBITDA was $39 million for the third quarter of 2017 compared to $46.1 million for the same period of last year, representing a decrease of $7.1 million or 15.4%. For a detailed reconciliation of EBITDA and non-GAAP measure, to its nearest GAAP equivalent, please see our financial table at the end of our press release issued early today. Now, let's turn to the balance sheet. As of September 30, 2017, the company had $531.2 million in cash and cash equivalence, restricted cash and time deposits, an increase of a $74.8 million or 16.4% as compared to $456.4 million as of December 31, 2016. As of the current period, working capital was $128.2 million and the current ratio was 1.1, as compared to the current ratio of 1.2 as of December 31, 2016. Stockholders' equity as of September 30, 2017 was $720.4 million, an increase of $86.1 million, or 13.6% as compared to $634.3 million as of the end of last year. Inventories increased by $127.8 million or 45.5% to $408.7 million as of the third quarter 2017, as compared to fiscal year end 2016, as a result of more purchases of raw materials and the company's strategy to stock up on finished goods for anticipated upcoming orders. The aggregate short-term and long-term bank loans increased by $144.3 million or 20.8% to $838.6 million, due to the utilization of existing line of credits to support an expansion of Sichuan and Dubai facilities. We define the manageable debt level as the sum of aggregate short-term and long-term loans over total assets. We expect that we'll be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalence, operating cash flow and bank borrowings. Moving to our financial conditions, financial guidance and outlook for 2017, the company reiterates its financial guidance for fiscal 2017 with revenue to range between $1.2 billion to $1.3 billion, and net income to range between $85 million to $100 million, this is based on anticipation of continued recovery throughout the Chinese automotive supply chain and a stabilization of crude oil pricing and its impact on polymer composites materials in 2017. This forecast also assumes additional contribution from our Sichuan facility and the overseas sales will stabilize as expected. Also assumes the average exchange rates of U.S. dollar to RMB at 6.8 and the company will incur interest expenses for a long-term loans and short-term loans. This financial guidance reflects the company's view of its business outlook for fiscal year of 2017, and is subject to revision based on changing market conditions any time. Before we open to the call to your questions, I'd like to note that for any question directly to management China, I would translate both their questions and their answers, if you want to ask your question in Chinese, please also ask it in English, when it benefits of our listeners. Please also note that we will only be able to respond to question about our financial and operating results. For other matters, you can go private offer [ph], we refer you to our already issued press releases. We'll not be able to respond to questions that are directed to the principle of the going private offer about the propulsion actions. With that, we will now open the calls to your questions. Operator?

[Operator:]

[Operator Instructions] And we will take our first question from Jason Cooper from Stuyvesant Capital.

[Jason Cooper:]

Thanks, that's Stuyvesant. Could you guys provide a little bit more guidance with respect to the orders that you expect to get out of Sichuan. I think that you've expanded your capacity pretty significantly though recently. So, any new order information would be very helpful for projecting our revenue for the fourth quarter?

[Taylor Zhang:]

Okay Jason, sure. Let me direct your question to our Chief Operating Officer Mr. Ma. Hi, Jason. So, the answer comes from our Chairman from Mr. Han. So basically, our Sichuan plants started contributing and also ramping up. Obviously, there is always generally new projects, there is always some bumps. But I think we believe based on the indication of new orders, Sichuan will contribute more as compared to Q3. We do think the Q4 in Sichuan, we will make more contribution on the revenue side.

[Jason Cooper:]

Okay, thank you. And with respect to international customers, can you give a little bit more guidance about Dubai? I know you guys are bringing on 12,000 metric ton in the first quarter of next year. And that's tends to be a value added. I think you said $10,000 per metric ton plastics. So, I wondered how that might impact your top and bottom lines as we get into 2018?

[Taylor Zhang:]

Okay, for 2018, obviously we will provide guidance. Early next year, we'll report our 10-K, but we have provided the progress and updates of our installation of new equipments. So, by the middle of 2018, we expect to finish the first tonnage you mentioned, [indiscernible]. I think next year, we will see more contribution from Dubai and also for the overseas developments, we are broadening more than Asia, but also working alongside Europe, Germany with several customers for quite a while. We do think overtime we will be able to get business from there.

[Jason Cooper:]

Great. Thank you. And in the fourth quarter, do you expect any snap back in the gross margin?

[Taylor Zhang:]

Yes, Jason. We expect gross margin in Q4 will improve, so for Q3 we think that is a property one-off situation because with the increased ramping up of Sichuan capacity and also, we think offering lower price products will help us to get into the door of the customer quicker, so obviously we have made some success on that, but we think our long-term trend will go to offer way at it, ultimately will reflect in gross margin and other financial metrics.

[Jason Cooper:]

Great. Thank you. I guess more of a macro question. In October, you guys had the 19th International Congress Party Meeting and one of the aims seems to be a balance between growth and sustainability you guys are now getting into biodegradable plastics, engineering plastics and potentially moving from automobile to traditional automobiles to electronic vehicles which I assume are going to have higher value-added plastic components and more of them to decrease. Do you think that that's going to make your products on a long-term basis more stable with respect to demand just based on the macro shifts in China?

[Taylor Zhang:]

Yes, let me address the question to our Chairman. So, we determine this women's assessment basically where in a factor that is promoted by the Chinese Governments and also of significant interest to the economy society as well. So, in his personal view, the economic development can only be achieved to where is political stability which is China is doing. So, in our industry the material science or material business, as we know petro-based material are depleting and we will become less, less available in the future. And then the China has probably more stake in the environment related issues. So, that's represents another business for China XD for instance biodegradable materials, we will replace petro-based materials overtime. So, he is very confident in the political and economic environments in China for business.

[Jason Cooper:]

Great, thank you. That's helpful. I guess the last question is a question/concern I had like to raise in that's, it's been a couple of months since launch late in departed as independent number of the Board of Directors and above every other member on the board, I think you represented the minority shareholders due to his, due to the fact that he is been a successful American investor and I'd like to raise the question whether it would be pertinent to have another American on the board to look out for I guess the 16 million shares that are issued and held here?

[Taylor Zhang:]

Okay. So, Jason, the Board has been seeking qualified and experienced candidates to fill the seats after Mr. Latten's [ph] departure. So, I think we will be able to, the Board will be able to do that possibly in the very near future in compliance with all the relevance and rules and regulation perhaps in December.

[Jason Cooper:]

Great. And are your candidates American?

[Taylor Zhang:]

So, Jason, we have several candidates including American candidates. So, our - the board basically wants to make sure the candidates in addition to his qualification and experience such must be we are also responsible to have and that's why particularly longer to get the best suitable candidates.

[Jason Cooper:]

Great. Thank you. I appreciate your answer congratulations on ramping up the production at Sichuan and is look forward to hearing about future developments that's it for me.

[Taylor Zhang:]

All right. Thank you, Jason.

[Operator:]

[Operator Instructions] And we will take our next question from Matthew Larson from Wells Fargo. Please go ahead.

[Matthew Larson:]

Okay. Thanks for taking the call. I know it is a subject that you all can't discuss, which is the going private offer, I just have a general question. It's been nine months since the non-binding offer was made and why does it take so long because, long-timer investors such as myself and people I'm affiliated with have, there is an opportunity cost if you're invested in a situation particularly of globally assets arising, particularly those in China, and particularly those affiliated with the automobile industry. And to have this thing dragged out, for whatever reason is not being, not only fair to shareholders, but there is certain unethical aspect to it. So, that is a major concern of mine and the investors I represent, any sense when this review by Devon Phillips and Davis Polk [ph] will be completed?

[Taylor Zhang:]

Hey Matthew, let me translate your question, but I believe the answer would be, we can reflect your comments or suggestions to the independent community but let me ask, translate your question. So, Matthew, also as a shareholder of the company, he shares the same view and he's pretty much as anxious as huge got a process complete as soon as possible, but because of the nature of independent committee, I think the best way we can do is to first of all focus on the business, secondly related is to reflects and ICO, this payment you viewed about the process. As pretty much what he can answer.

[Matthew Larson:]

I just want to state that out, I am sure he is anxious, he is a major shareholder, but there is an inherent conflict when major shareholders, management and also our directors towards Morgan Stanley, that they might be anxious to see this endeavor coming to a closure, but they're interest is to have it done at the lowest possible price, which is in direct conflict to the other shareholders. And I just want to remind everybody on the board, including the two Morgan Stanley board members that they have not only a fiduciary responsibility, but a legal responsibility to be show that all shareholders are treated fairly. So that the conflict of taking something private at the best price possible for the shareholders involved in the offer do not necessarily align with all the other shareholders and I just want to state that, and we are anxious to resolve this as soon as possible and nine months is dragging it out, I mean really time is money here, particularly in an environment where we have rising asset prices in general. So, I'll just leave it at that. Thank you very much.

[Taylor Zhang:]

Yeah, sure. Matthew, thank you very much. And that's why the principle has been refrained from the independent committee and their independent and we can - if allow we can just reflect your statements and comment to them.

[Operator:]

And we will take a follow-up from Jason Cooper. Please go ahead.

[Jason Cooper:]

Hi, sorry, but Matt's question reminded me of something that I was concerned with. In the case that they going private offer doesn't goes through, is there a plan B?

[Taylor Zhang:]

I just say there is no plan B or C in place currently.

[Jason Cooper:]

Do you think it's pertinent to start working on one to maximize shareholder value in case a deal doesn't go through? As you mentioned - exactly happy that his stock doesn't reflect its intrinsic value, so I am sure he'd like to see if the plan doesn't go through, a reflection in the security as the intrinsic value of the corporation?

[Taylor Zhang:]

So, Jason your suggestion is well taken. So, we are right now, at present we are very - we are dedicating our efforts to enrolling [ph].

[Jason Cooper:]

Okay. Thank you.

[Taylor Zhang:]

All right. Thank you, Jason.

[Operator:]

[Operator Instructions] And this concludes today's Q&A session. I will now turn the conference over to Anna Bin for any additional or closing remarks.

[Anna Bin:]

On behalf of China XD Plastics, we want to thank you for your interest and the participation in this call. If you'd like to speak with us further, please call either myself or Taylor in China XD's New York office or our Investor Relations firm. The contact numbers for us are listed at the end of the press release.

[Operator:]

And this concludes today's conference. Thank you for your participation. And you may now disconnect.