Ossen Innovation Co., Ltd.
Q4 2014 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Ossen Innovation Company Limited’s Fourth Quarter 2014 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. This conference is being recorded today April 29, 2015. I would now like to turn the conference call over to Tina Xiao of Weitian Investor Relations. Please go ahead.

[Tina Xiao:]

Thank you and welcome everyone to join today's conference call for Ossen Innovation Company Limited. This call will cover Ossen's financial and operating results for the three months and 12 months ended December 31, 2014. Joining us today is Mr. Wei Hua, the company's Chief Executive Officer and Mr. Feng Peng, 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 law regarding Ossen Innovation Company Limited. Forward-looking statements include statements about plans, objectives, goals, strategies, future events and 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 change 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 the cautionary statements. As 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. Wei Hua, CEO of the company, who will be providing brief opening remarks; Mr. Feng Peng, CFO of the company will provide translation from Mr. Hua for opening remarks.

[Wei Hua:]

Thank you, Tina, and I thank you everyone for joining us today for our fourth quarter ended December 31, 2014 financial results conference call. 2014 was a challenging year for Ossen Innovation. [indiscernible] continuing struggle of many companies in the local government, China’s economic growth slowed to the lowest point in 24 years. Additionally, tightened credit environment also limited our ability to borrow funds unless meet the upfront cash deposit requirement to bid on some of the projects that we believe will otherwise could have won. Despite the weakening macro conditions in China’s economic, we grew our overall revenue by 8.5% in 2014 and improved our gross margin by 65 basis points. Next, I’ll turn the call over to Mr. Peng, our Chief Financial Officer, who will be providing a summary of our financial results for the three months and the 12 months ended December 31, 2014. Peng, it’s all yours.

[Feng Peng:]

Thank you, Mr. Hua. Next, I’ll discuss our financial results for the three months and 12 months ended December 31, 2014 respectively. Revenue decreased by 24.4% to $31.8 million for the three months ended December 31, 2014 from $42 million for the same period of the last year. This decrease was mainly due to the declines in rare earth coated product sales and partially offset by increase in plain surface pre-stressed PC strands and other products. Sales of coated PC steel materials, including rare earth and zinc coated products, decreased by 31.2% to $26.7 million and accounted for 84% of total sales for the three months ended December 31, 2014. Sales of rare earth and the zinc coated products were $25.7 million and $1.0 million respectively for the three months ended December 31, 2014 compared to $36.5 million and $2.3 million respectively for the same period of last year. Sales of plain surface PC strands and others increased by 56.6% to $5.1 million and accounted for 16% of total sales for the three months ended December 31, 2014. The increase was driven by the increase in sales of other products. Cost of goods sold decreased by 30.1% to $27.2 million for the three months ended December 31, 2014 from $38.9 million for the same period of last year. The decrease was mainly due to lower revenue and a lower average price of raw materials. Gross profit increased by 48.9% to $4.5 million for the three months ended December 31, 2014 from $3.0 million for the same period of last year. Gross margin increased by 7% to 14.3% for the three months ended December 31, 2014 from 7.3% for the same period of last year. The increase in gross margin was mainly due to the lower average price of raw materials and sales in Japanese market which had higher gross margin compared to domestic market. Selling expenses were approximately $0.02 million for the three months ended December 31, 2014, increasing $0.02 million from the same period of last year. G&A expenses were approximately $2.3 million for the three months ended December 31, 2014 increasing $1.2 million from the same period of last year. The increase was mainly due to increase in research and development expenses. Operating income was $2.0 million for the three months ended December 31, 2014 compared to $1.8 million for the same period of last year. Operating margin was 6.4% for the three months ended December 31, 2014 compared to 4.2% for the same period of last year. After allocating net income attributable to non-controlling interest, net income attributable to Ossen Innovation Company Limited was $1.4 million for the three months ended December 31, 2014 compared to $1.2 million for the same period of last year. Earnings per share, both basic and diluted, was $0.07 for the three months ended December 31, 2014 versus $0.06 for the same period of last year. Next, I will discuss financial results for the 12 months ended December 31, 2014. For the 12 months ended December 31, 2014, revenues increased by 8.5% to $123.6 million from $113.9 million for the year of 2013. The increase in revenues was mainly from sales of rare earth coated pre-stressed PC wires and PC strands. The sales of coated steel materials, including rare earth and zinc coated products, increased by 7% to $107.6 million and accounted for 87% of total sales for the 12 months ended December 31, 2014. The sales of rare earth and zinc coated products were $97.6 million and $16 million, respectively, for the 12 months ended December 31, 2014, compared to $90.6 million and $10 million for the year of 2013. The sales of plain surface PC strands and others also increased by 20.1% to $16 million and accounted for 13% of total sales for the 12 months ended December 31, 2014. Cost of goods sold increased by 7.7% to $110.3 million for the 12 months ended December 31, 2014 from $102.4 million for the year of 2013. The increase was mainly due to the increase of revenues and the pressure to offset by the decrease of average price of raw materials. Gross profit increased by 15.4% to $13.3 million for the 12 months ended December 31, 2014 from $11.5 million for the year of 2013. Gross margin was 10.8% for the 12 months ended December 31, 2014 versus to 10.1% for the year of 2013. The increase in gross margin was mainly due to the decrease in average price of raw materials and the sales in new international market, especially Japan, which had higher gross margin compared to domestic market. Selling expenses were approximately $0.8 million for the 12 months ended December 31, 2014, compared to $0.6 million for the year of 2013. General and administrative expenses were approximately $6.3 million for the 12 months ended December 31, 2014, increasing by $2.9 million from $3.5 million for the year of 2013. The increase in general and administrative expenses was primarily due to increase in research and development expenses associated with the development of products for new customers and rare earth zinc-aluminum coated products. Operating income was $6.2 million for the 12 months ended December 31, 2014, compared to $7.4 million for the year of 2013. Operating margin was 5% for the 12 months ended December 31, 2014, compared to 6.5% for the year of 2013. After allocating net income attributable to non-controlling interest, net income attributable to Ossen Innovation increased by 5.9% to $3.9 million for the 12 months ended December 31, 2014 from $3.6 million for the year of 2013. Earnings per share, both basic and diluted, were $0.19 for the 12 months ended December 31, 2014, up $0.01 from the $0.18 for the year of 2013. Now turning to balance sheet and cash flows. As of December 31, 2014, Ossen had approximately $18.3 million of cash and restricted cash, compared to $32.9 million at December 31, 2013. Total accounts receivable were $53.8 million as of December 31, 2014, compared to $48.2 million at December 31, 2013. The average days sales outstanding were 151 days for the year of 2014, essentially unchanged from the year of 2013. The balance of prepayment to suppliers for raw materials was $56.3 million as of December 31, 2014, compared to $50.6 million at December 31, 2013. The company had inventories of $20.1 million as of December 31, 2014, compared to $18.8 million as of December 31, 2013. Total working capital was $108 million as of December 31, 2014, compared to $85.7 million at December 31, 2013. Net cash provided by our operating activities was $1.8 million for the 12 months ended December 31, 2014, compared to $10 million for the year of 2013. Net cash used in investing activities was $0.1 million for the 12 months ended December 31, 2014, compared to net cash provided by investing activities of $8.1 million for the year of 2013. Net cash used in financing activities was $3.5 million for the 12 months ended December 31, 2014, compared to $22.1 million for the year of 2013. Now, I will turn the call next to operator for any questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of John Sissey [ph]. Please ask your question.

[Unidentified Analyst:]

Hello, everybody. Thank you for taking my call. The first question I would like to ask, fourth quarter revenues were down compared to one year ago, but how much of that was due to the steel price and how much of that was due to sales volume?

[Feng Peng:]

Hold on. Okay. I can’t give you the exact number, but about, I believe, 70% is due to the price and 30% is from the high margin sales, product sales in oversea market. That’s just my estimate approximately. Numbers, yeah.

[Unidentified Analyst:]

Okay. And can you comment on your business in the first quarter of 2015 and your expectations for the second quarter?

[Feng Peng:]

Okay. Our auditor is still reviewing our first quarter numbers, so I can’t comment on that. But we believe the market is gradually recovering, especially after some of – the new announcement of the One Belt, One Road, initially and also the Chinese government is trying to stimulate the economy. Although, this will be a very slow process, but we are conservatively optimistic about the rest of 2015.

[Unidentified Analyst:]

Okay. And have you seen any easing of the credit conditions available to you in 2015, that might make it easier for you to bid on new contracts or maybe reduce your financing cost?

[Feng Peng:]

No. Actually, the easing of credit focused on the other sector like agriculture and consumer. So for the steel industry, still the banks are not still not willing to lend money to our steel and traditional companies, but the way we are trying, we maintained a good relationship with local banks, so we are confident that we can – we will have the enough liberty to be profitable in 2015.

[Unidentified Analyst:]

Okay. Then the company has done well in a difficult environment since it became public, but it has not worked out well for shareholders, so have you considered any steps to improve the company’s position in the stock market and maybe provide some value to investors.

[Feng Peng:]

Yes we are considering some plans right now, but I can tell you, we need to get approval from the board and we need to get a price, so I can’t tell you anything about that right now, but we are considering some options.

[Unidentified Analyst:]

Okay, thank you very much, I look forward to that.

[Feng Peng:]

Thank you.

[Operator:]

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

[Unidentified Analyst:]

Yes thank you. Thank you this gentlemen’s question a little further, do you know when you won’t be able to tell us something about the plans for increasing shareholder value?

[Feng Peng:]

I would say like in next 30 to 60 days, depends on the [indiscernible].

[Unidentified Analyst:]

You announced that you borrowed money at a 10.5% or 10.75% interest rate, is that correct $16 million?

[Feng Peng:]

Yes. It is a note – you mentioned the note that we issued, our subsidiary issued in China?

[Unidentified Analyst:]

Yes, correct.

[Feng Peng:]

Okay.

[Unidentified Analyst:]

So, with such a high interest rate how do you expect to make money on it because your margins are so low? So if you borrow $16 million and you put it to work, but you don’t make that much money on any new business why borrow the money in the first place? I’m not sure I understand that.

[Feng Peng:]

Actually, if you look at our balance sheet, we have a lot of restricted cash and as for our note payable and that’s – the cost for that part of the money is very high and even higher than the interest rate. So, I mean – we had to replace some short-term bank loans and we have to keep the liquidity, so we get these notes issued in China, which you know on the other side proved our company is very high probably in China and we can get that in Chinese bond market.

[Unidentified Analyst:]

Okay, so as I understand it from what you’ve said already, you are being inhibited or prohibited from taking on new projects because your funds are limited. If you had more money you could do more business, is that correct?

[Feng Peng:]

Yes.

[Unidentified Analyst:]

So have you considered selling the company to a larger company that has the resources to take advantage of all the business you could get?

[Feng Peng:]

Hold-on, let me ask this question to our CEO.

[Unidentified Analyst:]

Sure.

[Feng Peng:]

So, first of all it’s a very complicated question, but to put it simple it is not as easy as you say because stock price is so low and we don’t want to sell the company at such a cheap price and also the management Dr. Tang, and Mr. Wei is, they are all in the industry for many years, so they – I believe they still, they are optimistic about the company’s future, so we don’t want to sell the company at this point because if you look at the stock price it’s too cheap.

[Unidentified Analyst:]

Well I agree with you there, but if a larger company sees that you are being hampered because of the lack of funds they want be able to pay at least twice as much or more. They should be willing to do them and if you stop doing business you have about $80 million. If you just stop doing business finished off your projects and just collected the cash and didn’t layout any more money because there are no new projects, you probably have $70 million or $80 million of cash which amounts to $4 a share. So that’s what the company is really worth, how much cash do you have, if you were to cancel operations, is my math not correct? So, I am confused why the price is so low because essentially you do have a lot of cash, but the way you do business is you have to shell out so much cash to gain projects to bid for projects that looks like you don’t have much cash, but you do.

[Feng Peng:]

Okay, understood. I’m not sure about, what effects are you asking, but I mean the company is running well and we think that we – our business will improve after the new initiative announced by the Chinese government and we are optimistic about the future. So, this country has not ever been considered by the Chairman to sell a company.

[Unidentified Analyst:]

Well if I’m the Chairman, and I’m not, but if I am the Chairman I realize the commitment that he and those working at Ossen have and I appreciate the commitment, but if part of the equation is to maximize shareholder value, someone must think this company is worth a lot more than it’s selling for. I mean there is a market value of let’s say $0.70 times 20 million shares is $14 million and you do $120 million worth of business a year. So, it should be worth a lot more than that. And the market price doesn’t indicate that. So whatever you consider it ought to be towards what is going to raise the price as much as possible of the shares. And I know you are doing that by trying to get business, but if your ability to get business is hampered by lack of funds you can never get out of that prison. It is like a prison, you can’t get out of it.

[Feng Peng:]

Okay.

[Unidentified Analyst:]

So, I mean if the business is there for the taking and you can’t bid for it because you don’t have money then the only – one of the choice you have to grow than to sell the company, you can but not at a surprise. I wouldn’t sell-in at this price either, I agree with you. I wouldn’t sell-in at this price but I am wondering if there are larger companies worth more than who have to the wherewithal the money to buy it. In the United States, I can imagine a company like this selling at $0.70 a share and they probably be selling at $5 a share.

[Feng Peng:]

The management is frustrated about the stock price and that’s why we are discussing some plans to improve the – at least we are working on some plan, but it’s not so easy. In China, large steel companies are also struggling because steel price is very low and it’s centric. So it’s at the bottom right now and I am not sure which company like Baosteel or like Anshan Steel will buy us. It’s – they are suffering as us. They are trying to get sell their product at very low price, so the whole industry is depressed right now.

[Unidentified Analyst:]

Does everyone agree in management that the stock is under priced?

[Feng Peng:]

Yeah, of course.

[Unidentified Analyst:]

Okay. What would make management happy? What price do you think the stock should be at?

[Feng Peng:]

As a manual, we will be happy if the PE ratio reflects the average of the market.

[Unidentified Analyst:]

So that would, the PE – that would make…

[Feng Peng:]

Yeah. That would make it about $1.

[Unidentified Analyst:]

Well, if you were at $0.90 last year, is that what you earned?

[Feng Peng:]

Yes.

[Unidentified Analyst:]

So then the price should be $1.90, right at a PE ratio of 10?

[Feng Peng:]

Yes.

[Unidentified Analyst:]

Okay. But I won’t belabor the point except to say that I just think that it looks like everything is very much under price and I recognize all the factors in the steel industry today. I take it that you are not going broke and hope that you will consider all measures to get the value of the stock up to where it should be.

[Feng Peng:]

Yes.

[Unidentified Analyst:]

So I thank you for your time by the way and I thank all of you for all your efforts.

[Feng Peng:]

Okay. Thank you for joining us today and thanks for the questions.

[Unidentified Analyst:]

Okay.

[Operator:]

Thank you. [Operator Instructions] There are no further questions at this time. I’d now like to hand the conference back to today’s presenters.

[Feng Peng:]

Okay. On behalf of all our entire management team, I would like to thank everyone again for joining us today for Ossen Innovation fourth quarter 2014 earnings conference call. We appreciate your interest and supporting Ossen and look forward to speaking with you again next time. Good bye.

[Operator:]

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