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Edited Transcript of CXDC earnings conference call or presentation 15-May-19 1:00pm GMT

Q1 2019 China XD Plastics Company Ltd Earnings Call

Haerbin Heilongjiang May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of China XD Plastics Company Ltd earnings conference call or presentation Wednesday, May 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jie Han

China XD Plastics Company Limited - Chairman, CEO & President

* Shaojie Wen

China XD Plastics Company Limited - IR Contact of New York, US

* Zhang Dahe

China XD Plastics Company Limited - CFO, Secretary & Director

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Conference Call Participants

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* Peter J. Siris

Guerrilla Capital Management LLC - MD and Portfolio Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the China XD 2019 First Quarter Earnings Conference Call. (Operator Instructions) I must advise, this conference is being recorded today, the 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.

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [2]

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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 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 contain our 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 risks 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 today, and we refer you to a more detailed discussion for the risks and uncertainties in the company's filing 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 tax, depreciation and amortization, which will be referred 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)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [3]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [4]

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[Interpreted] 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 started 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%.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [5]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [6]

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[Interpreted] 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.

These is our strategic plan of producing specialized high-tech products for various important new markets, which will ultimately enable more active inroads into various product application and other market regions.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [7]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [8]

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[Interpreted] 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 plan, supported by an increase in our production capacity, our entry into new markets, 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.

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [9]

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(foreign language)

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [10]

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[Interpreted] With that, I would now turn the call over to Taylor Zhang, our CFO, to walk you through our financial. Taylor?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [11]

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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 6.5% negative impact from exchange rates 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 of 2019 compared to 81% for the same period of 2018. The company continued to shift production mix from traditional lower-end products, such as PP, to higher-end products, such as POM, PPO, primarily due to greater growth potential of advanced modified plastics in luxury automobiles model in China, stronger demand as a result of promotion by the Chinese government for clean energy vehicles and better quality demand from and customer recognition of higher-end cars made by automotive manufacturers from China and Germany joint ventures, Sino-U. S., Sino-Japanese joint ventures where manufacturers tend to use more and higher-end 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 of last year, primarily due to the adopted lower-priced strategy as a new entrant to new categories of higher-end products, 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 $0.9 million in salary and welfare and partially offset by the 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 equipment and electronics, alternative energy application, power devices, aviation equipment and ocean engineering, in addition to other new products primarily for advanced industrialized application in automobile sector and in 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 in the 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 3-month period ended March 31, 2019, was $0.16 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 the 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 of end of last year.

Working capital was negative $64.7 million, and the current ratio was 1 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 we open the call for 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 question about our financials and operating results. For other matters including the going-private offer, we refer you to our already issued press releases. We will not be able to respond to question that are directed to the principles of the going-private offer about the proposed transaction.

With that, we'll now open the call to your question. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first question from Mr. Peter Siris.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [2]

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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 so much inventory?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [3]

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Let me translate your question so our CEO can probably address that. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [4]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [5]

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[Interpreted] Okay. So there's 3 reasons for the inventory level at this level. So first is 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 the product shifts. And secondarily is our -- we anticipate Sichuan company will be producing more in the coming quarters. And we also -- that's why we have increased raw material purchase for that purpose.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [6]

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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 we'll see an increase in production and a decrease in inventory. Is that correct?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [7]

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(foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [8]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [9]

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[Interpreted] That's the trend and also as we have planned.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [10]

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Okay. Now in -- when you talk about increased production in Sichuan, we're talking about from the original factory, can -- I assume we're talking about the original factory. What is the status of 2 new factories, one in Heilongjiang and one in Sichuan?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [11]

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Okay. Yes, that's the assumption. Let me ask the status. (foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [12]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [13]

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[Interpreted] So Peter, for Heilongjiang, we expect to launch and start producing later this year. And for Sichuan, we plan to break grounds in June or September. That was approximately delayed for about a year.

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Peter J. Siris, Guerrilla Capital Management LLC - MD and Portfolio Manager [14]

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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?

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [15]

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(foreign language)

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Jie Han, China XD Plastics Company Limited - Chairman, CEO & President [16]

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(foreign language)

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Zhang Dahe, China XD Plastics Company Limited - CFO, Secretary & Director [17]

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[Interpreted] So Peter, during Q1, we have about 5 customers from UAE and Europe. This customer actually, we deliver 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.

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Operator [18]

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(Operator Instructions) As there are no questions, I'd like to hand the call back to you, speakers, for any closing remarks.

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Shaojie Wen, China XD Plastics Company Limited - IR Contact of New York, US [19]

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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.

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Operator [20]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]