Ossen Innovation Co., Ltd.
Q2 2014 Earnings Call Transcript

Published: 29 Sep 2014

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Ossen Second Quarter 2014 Earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time if you wish to ask a question, you will need to press star, one on your telephone. I must advise you that this conference is being recorded today, Monday, 29 September 2014. I would now like to hand the conference over to your first speaker today, Mr. Scott Powell. Thank you, sir. Please go ahead.

[Scott Powell:]

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 six months ended June 30, 2014. On our call today is Mr. Feng Peng, the company’s Chief Financial Officer. Before we get started, I’m going to quickly read a disclaimer about forward-looking statements. This conference call may contain in addition to historical information forward-looking statements within the meaning of the federal securities laws 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 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 these 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, CFO of the company, who will be providing brief opening remarks and a summary of our second quarter 2014 financial results. Mr. Peng?

[Feng Peng:]

Thank you, Scott, and thank you everyone for joining us today for our second quarter ended June 30, 2014 financial results conference call. Ossen is again very pleased to report another strong quarter with healthy revenue, gross profit and net income growth quarter-over-quarter. Our revenue was up 49% year-over-year and our EPS was up 75% year-over-year. We continue to expand our customer base through our enhanced sales efforts and competitive product offerings which are recognized for their durability, strength and anticorrosive properties. Our strong R&D team continues to innovate, developing products that are well regarded for their superior performance, reliability, functionality and quality, and are increasingly valued by customers in the infrastructure marketplace. Ossen continues to be recognized as an innovative leader in our industry. In June, we were awarded the major scientific and technological innovation title in Jiujiang City for the year 2014. In August, Ossen was awarded the highest honor in product quality, the Jiujiang City Mayor Quality Award of 2014 due to our superior product quality and advanced quality management systems. These awards are a testament to the talent of our R&D team and the quality of our products and the primary reason for our customer retention and continued expansion of our customer base. Now I will discuss our second quarter ended June 30, 2014 financial results. Please be aware that all of the comparisons I will reference are on a year-over-year basis. Revenue for the three months ended June 30, 2014 was $35.9 million, up 49% from the same period a year ago. Sales of coated pre-stressed steel materials, including rare earth and zinc-coated products, were approximately $29.7 million, up 39% compared to approximately $21.3 million in the second quarter of 2013. Sales of plain surface PC strands were $5.9 million for the three months ended June 30, 2014, an increase of $3.4 million or 136% compared to the prior year. The overall increase in revenue was primarily due to increased demand for higher strength and higher quality rare earth and zinc-coated products and the addition of several new customers. Gross profit was $3.7 million, up 28% compared to the same period a year ago. Gross margin was 10.4% in the second quarter of 2014, down from 12.1% in the second quarter of 2013. Gross margin was lower primarily due to lower unit pricing of coated products in order to attract new customers in the second quarter of 2014, partially offset by using lower grade raw materials to improve profitability but without sacrificing product strength or quality. Selling expenses were reduced by 30% to $0.2 million due to lower transportation costs partially offset by higher commission fees. G&A expenses increased 50% to $1.4 million primarily due to increased R&D expenses and higher bad debt provision. Operating income was approximately $2.1 million, an increase of 23% from the same period a year ago. Net income attributable to Ossen Innovation was $1.5 million in the second quarter of 2014 compared to $0.7 million in the year-ago period. Earnings per share were $0.07 versus $0.04 a year ago. The weighted average diluted shares outstanding were 19.9 million, unchanged from the year-ago period. Turning now to our six months ended June 30, 2014 financial results, revenue for the six months ended June 30, 2014 was $64 million, up 65% from the same period a year ago. Sales of pre-stressed, rare earth, coated PC wires and PC strands were $56.2 million, an increase of $22 million or 64% from the same period of 2013. Sales of plain surface PC strands and PC wires were $7.4 million for the six months ended June 30, 2014, an increase of $3.3 million or 80% compared to the prior year, primarily due to increased demand for higher strength and higher quality rare earth and zinc-coated products and the addition of several new customers. Gross profit increased from $4.6 million to $6.4 million, a 38% year-over-year increase. Gross margin was 10%, down from 11.9% in the same period of 2013. Gross margin was lower as a result of a decrease in the average unit sales selling price of coated products in order to attract new customers in 2014 compared to the prior year period. Selling expenses were reduced by 3% to $0.3 million due to a decrease in transportation costs partially offset by higher commission and testing fees. General and administrative expenses were $2.8 million, up 78% compared to $1.6 million in the same period of 2013 due to increased R&D expenses partially offset by lower audit fees. Operating income was approximately $3.3 million, an increase of 20% from the same period a year ago. Net income attributable to Ossen Innovation was $2 million in the six months ended June 30, 2014 compared to $0.8 million in the year-ago period. Earnings per share were $0.10 versus $0.04 a year ago. The weighted average diluted shares outstanding were 19.9 million, unchanged from the year ago period. Turning now to our balance sheet, Ossen had approximately $15.4 million of cash and restricted cash as of June 30, 2014 compared to $32.9 million at December 31, 2013. The decrease was due to an increase in inventories and the repayment of bank loans. Total accounts receivable on June 30, 2014 decreased to $44 million from $48.2 million on December 31, 2013. The average account receivable days sales outstanding were 112 days for the second quarter of 2014 compared to 150 days for 2013. The decrease was primarily due to improved accounts receivable collection times and increased revenue in the second quarter. The balance of prepayments to suppliers of raw materials was $47.1 million as of June 30, 2014, a decrease of $3.5 million compared with December 31, 2013. The decrease was mainly due to an increase of raw materials compared with prepayment during the second quarter. Inventories increased from $18.8 million at December 31, 2013 to $20.6 million at June 30, 2014 primarily due to anticipation of increased sales during the second quarter of 2014. Total working capital was $89.1 million at June 30, 2014. The company generated positive cash flow from operations of $9.8 million for the six months ended June 30, 2014 as compared to cash flow of $12.4 million for the same period of 2013. The primary reasons for the decrease in cash generated in operations were an increase in notes receivable partially offset by an increase in net income, a decrease in notes receivable from a related party, and a decrease in accounts receivable. Cash flow used in financing activities was $11.3 million for the six months ended June 30, 2014 as compared to cash flow used in financing activities of $14.9 million for the same period of 2013. The primary reason for the decrease in cash used by financing activities were a decrease in proceeds and repayments from short-term bank loans, a decrease of proceeds from bank acceptance notes partially offset by a decrease in restricted cash, and an increase in repayments of bank acceptance notes. Regarding our business outlook overseas, we continue to expand our sales in Japan and Korea. We also continue to bid on other large scale infrastructure projects in China and in other Asian countries, which should create additional sales opportunities for Ossen. Furthermore, we expect to continue adding new customers, both domestic and foreign, over the course of 2014 as they continue to be attracted to our product quality and performance. Now I’m ready to take your questions.

[Operator:]

[Operator instructions] Your first question comes from the line of John Shishis (ph), private investor. Please ask your question.

[Unidentified Participant:]

Hello. Congratulations on these excellent results, and thank you for taking my call. Could you comment about the remainder of 2014 – do you expect sales and earnings to continue this good trend of exceeding the 2013 results?

[Feng Peng:]

We expect the whole year results will be exceeding 2013 results, and right now I’m not at a position to comment on third quarter and fourth quarter, but we expect the whole year result will be higher than 2013.

[Unidentified Participant:]

Okay, and then could you make some comments about the outlook for 2015, based on what we know about the outlook for railway expenditures and infrastructure expenditures?

[Feng Peng:]

Okay. Actually as we announced in the first quarter, the Central Bank of China cut deposit reserve requirements for the banks making loans to rural and small business. Also, several government agencies in western China were evaluating a number of new infrastructure projects, and we expect all these factors will be reflected in our revenue growth in early 2015, so we expect that in 2015 we will see a continued revenue growth compared to 2014.

[Unidentified Participant:]

Okay, thank you. Then can you share any comments about the potential for capacity expansion?

[Feng Peng:]

Yes. We are still developing the rare earth zinc aluminum coated products right now, and we are waiting for the completion of this development. After that, we will be in a better position to expand our capacity because we think the trend is to use these products in the next 10 years.

[Unidentified Participant:]

Okay, thank you. Then there’s been some news about the Chinese government promoting development of high-speed rail lines in other countries. If China participates in the building of these high-speed rail products in other countries, is that an opportunity for Ossen to supply some of the steel for the related construction?

[Feng Peng:]

Yeah, actually our sales are actively monitoring the bidding opportunities from the government, and we may have the opportunity to join the bid for other—for high speed railway projects in other countries. We will sell to the contractors of these projects, so we think that there might be some opportunities but we are actively looking for these kinds of opportunities right now.

[Unidentified Participant:]

Okay, thank you. That’s great. The last thing I wanted to ask about is if your stock price remains under $1.00, do you have any plans to address the deficiency notice from the Exchange?

[Feng Peng:]

Yes. We don’t comment on the price movement, but we are trying — we will try everything to keep the listing on NASDAQ, and we still have about five months to bring it back to compliance. So we will do whatever it takes to keep the listing on NASDAQ.

[Unidentified Participant:]

Okay, thank you for all that information, and congratulations on the continued good results.

[Feng Peng:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. Your next question comes from the line of Edward Golseimer (ph), private investor. Please ask your question.

[Unidentified Participant:]

Thank you for taking my call. I’m wondering why you can’t comment on the upcoming quarter or the past quarter which is just about through – I mean, the quarter through September, since it’s just about done. Sometimes in the past, you’ve commented that the quarter will be better or worse, and sometimes you don’t. My second part of the question is what determines when you issue a press release with regards to new business, such as the five bridges in Japan? Thank you.

[Feng Peng:]

Okay. So let me address the first question. Usually we are — you know, sometimes we still have all the results revealed by our accounting department, and after that I will have to have it reviewed by our auditors, so right now I’m not ready to announce third quarter, maybe to comment on the third quarter right now. For the second question, we decide to announce — release a press release based on if that’s material or it can clarify our expansion in overseas and it’s not restricted by any confidential agreement, because most of our contracts have confidential terms in it so most of the time we really cannot announce it. But we can announce some of them which are — which don’t have confidential terms or it’s overseas, it’s not going to affect our competition position in China.

[Unidentified Participant:]

Okay. Is there a trend towards diminishing gross margins? Do we expect a further reduction in gross margins?

[Feng Peng:]

For the gross margin, we continue — for the first half, we do have some contraction in our gross margin, but for the second half of 2014 we will see some — we will see the trend will continue, but I don’t think it’s a long-term trend. It’s a short-term trend and we will see it stabilize, and it will get back to normal position after we see the results from the government stimulation and new infrastructure projects launched by the government in western China. I would expect that will be late 2014 and early 2015.

[Unidentified Participant:]

Are you operating at maximum capacity now?

[Feng Peng:]

Right now, yes.

[Unidentified Participant:]

So basically we should not expect an increase in the amount of business that you’re doing because you’re operating at maximum capacity. Is that correct?

[Feng Peng:]

We were at maximum capacity as of June 30, 2014, and at this moment I’m not in a position because I didn’t check with our operators in two subsidiaries today or in the last seven days, so I can’t tell you if it’s running in full capacity. But as of June 30, I can tell you it was running at 100%.

[Unidentified Participant:]

Okay, but what I’m trying to get at is if that’s so, then the maximum earnings power of Ossen at this time is somewhere around $0.07 or $0.08 a quarter. Is that not correct? If you were operating at maximum and you earned $0.07, that’s about the maximum you can earn.

[Feng Peng:]

If the gross margin improves, I think you will get better EPS.

[Unidentified Participant:]

Right, right. Okay. Okay, that was all my questions. Thank you so much for your time.

[Feng Peng:]

Okay, thank you.

[Operator:]

Thank you. Once again, if you wish to ask a question, please press star, one on your telephone and wait for your name to be announced. There are no further questions at this time. I would now like to hand the conference back to today’s presenters. Please continue.

[Feng Peng:]

Okay, on behalf of our entire management team, I would like to thank you for your interest in Ossen Innovation. Thank you everyone for joining us today for the Ossen Innovation Second Quarter 2014 Earnings conference call. We appreciate your interest in Ossen and look forward to speaking with you again in the near future. Goodbye.

[Operator:]

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.