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Edited Transcript of OSN earnings conference call or presentation 11-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Ossen Innovation Co Ltd Earnings Call

Shanghai, PRC Apr 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Ossen Innovation Co Ltd earnings conference call or presentation Tuesday, April 11, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Tony Tian

* Wei Hua

Ossen Innovation Co., Ltd. - CEO, Interim CFO and Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Fourth Quarter 2016 Ossen Innovation Co., Ltd. Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, 11th of April 2017. I would now like to hand the conference over to your speaker host today, Mr. Tony Tian. Thank you. Sir, please go ahead.

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Tony Tian, [2]

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Thank you, operator, and welcome, everyone, to today's conference call for Ossen Innovation Co., Ltd. This call will cover Ossen's financial and operating results for the 12 months ended December 31, 2016. Joining us today is the company's CEO and acting CFO, Mr. Wei Hua. 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 federal securities laws regarding Ossen Innovation Co., Ltd.

Forward-looking statements include statements about plans, objectives, goals, strategies, future events or 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 with -- from time to time with the SEC. All such forward-looking statements, whether written or oral, made on behalf of the company are expressed 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 would like to turn the call over to Mr. Wei Hua, CEO and acting CFO of the company, who will comment and review on the full year financial results. His comments will be delivered in English by my colleague Dan McCarran. Dan, please go ahead.

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Wei Hua, Ossen Innovation Co., Ltd. - CEO, Interim CFO and Director [3]

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Thank you, Tony, and thanks, everyone, for joining us today for our Fiscal Year 2016 Financial Results Conference Call. Our revenues decreased slightly in 2016 as we continued to scale back of our plain surface PC strands business in light of its gross margin deterioration in recent quarters. However, revenues from the coated products snapped back after a down year in 2015 and grew 14.8% in 2016 as a result of increase in sales volume that more than offset the decrease in average selling price for [ coasted ] products.

Looking ahead, due to continuing macro headwinds, with slowing GDP and infrastructure build-out growth trends as well as structuring imbalance in the steel industry, we remain cautious on our near-term outlook.

Next, I will discuss our financial results for 12 months ending December 31, 2016. For the year of 2016, revenues decreased by $0.9 million or 0.7% to $117 million from $117.9 million for 2015. This decrease was partially due to decreases in sales from zinc coated products and plain surface PC strands and other products and partially offset by increased sales from rare earth coated products. Sales of coated PC strand materials, including both rare earth and zinc coated products, increased by $14.1 million or 14.8% to $109.6 million and accounted for 94% of total sales for the year of 2016 from $95.5 million or 81% of total sales for 2015.

This increase in sales of PC steel materials was a result of increase in sales volume for rare earth coated products and partially offset by decreases in average selling prices for both rare earth and zinc coated products.

Sales of rare earth coated products increased by $16.4 million or 19.2% to $101.4 million for the year of 2016 from $85.0 million for 2015.

Sales of zinc coated products decreased by $2.3 million or 21.6% to $8.2 million for the year of 2016 from $10.5 million for 2015. Sales of plain surface PC strands and PC wires decreased by $11.1 million or 67.9% to $5.3 million for 2016 from $16.4 million for 2015. The decrease of the sales generated by plain surface PC strands and PC wires was primarily due to the decline in sales from wholesale market during this period. Other sales were $2.2 million for the year of 2016 compared to $6 million for 2015. This decrease was primarily due to less spare raw materials sold in 2016 compared to 2015.

We generated approximately 4.2% and 6.6%, respectively, of our revenues during the years of 2016 and 2015 from sales to customers in international markets, including primarily Vietnam, South Korea, Japan, New Zealand, Australia, Bangladesh, Brunei, Costa Rica and Chile, primarily for use in the construction of bridges. The decreases in 2016 was primarily due to one of our customers in South Korea filing for bankruptcy.

Gross profit increased by $0.4 million or 2.5% to $16.1 million for the year of 2016 from $15.7 million for 2015. Gross margin improved by 43 basis points to 13.8% for 2016 from 13.3% for 2015. Gross margins for rare earth and zinc coated products were 11.3% and 14.7%, respectively, for 2016 compared to 11.8% and 19.7%, respectively, for 2015. Gross margin for plain surface PC strands and PC wires was 22.6% for the year of 2016 compared to 17.5% for 2015.

Selling expenses decreased by $0.3 million or 25.6% to $0.7 million for the year of 2016 from $1 million for 2015. The decrease was due to lower transportation costs.

General and administrative expenses increased by $1.9 million or 42.4% to $6.4 million for the year of 2016 from $4.5 million for 2015, mainly due to higher research and development costs as well as high bad debt provision in 2016. As a result, total operating expenses increased by $1.6 million or 30.1% to $7.1 million for the year of 2016 from $5.5 million for 2015.

Operating income decreased by $1.3 million or 12.3% to $9 million for the year of 2016 from $10.2 million for 2015. The decrease in operating income was primarily attributable to increases in research and development cost and bad debt provision in 2016. Operating margin was 7.7% for 2016 compared to 8.7% for 2015.

Net income decreased by $1.3 million or 19.5% to $5.3 million for the year of 2016 from $6.6 million for 2015.

After deducting net income attributable to noncontrolling interest, net income attributable to Ossen Innovation decreased by $1.1 million or 18.2% to $4.8 million for the year of 2016 from $5.9 million for 2015. Earnings per share was $0.24 for the year of 2016 compared to $0.30 for 2015.

Now turning to balance sheet and cash flows. As of December 31, 2016, the company had cash and restricted cash of $6.9 million compared to $9.6 million at December 31, 2015. Notes receivable were $15.3 million as of December 31, 2016, compared to $8 million at December 31, 2015. Accounts receivable were $37.3 million as of December 31, 2016, compared to $43.2 million at December 31, 2015. The average days of sales outstanding were 126 days for the year of 2016 compared to 150 days for 2015. The balance sheet of prepayment to suppliers for raw materials totaled $46.7 million as of December 31, 2016, compared to $55.7 million at December 31, 2015. The company had inventories of $26 million as of December 31, 2016, compared to $27.3 million at the end of 2015. Total working capital was $101.6 million as of December 31, 2016, compared to $97.4 million at December 31, 2015.

Net cash provided by operating activities was $15.5 million for the year of 2016 compared to $12.4 million for 2015. This increase in cash provided by operating activities was a result of a $1.3 million decrease in inventories due to higher consumption of raw materials at the end of 2016, a $9 million decrease in advance of suppliers due to less prepayments for raw materials of plain surface and zinc coated products, partially offset by $1.3 million decrease in net income due to higher operating expenses and a $7.3 million increase in notes receivable, because our customers used less cash for payment.

Net cash used in investing activities was $17,500 for the year of 2016 compared to $29,700 for the same period of last year. Net cash used in financing activities was $7.5 million for the year of 2016 compared to $4.4 million for 2015. The increase in cash used in financing activities was the result of the repayment of bond, a decrease in proceeds from notes payable and a decrease in restricted cash, partially offset by an increase in proceeds from short-term bank loans and increasing proceeds from long-term bank loans and a decrease in repayment of notes payable.

Now I would like to turn the call over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of [ John Sheehy ]

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Unidentified Analyst, [2]

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What was the amount of the bad debt that was mentioned in the press release? And can you share some explanation?

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Tony Tian, [3]

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Thank you, John. I'll translate for Mr. Hua. (foreign language)

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Wei Hua, Ossen Innovation Co., Ltd. - CEO, Interim CFO and Director [4]

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(foreign language)

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Tony Tian, [5]

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(foreign language) Bad debt (foreign language)

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Wei Hua, Ossen Innovation Co., Ltd. - CEO, Interim CFO and Director [6]

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(foreign language)

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Tony Tian, [7]

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At Mr. Hua's admission, the company actually do not have -- mostly do not have much bad debt. The bad debt reported number is actually is an accounting treatment for some collection account that's from account supposed to be payable. It's overdue for like over 1 -- [ 12 ] months. It's just accounting treatment.

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Unidentified Analyst, [8]

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Okay. So it's the [ As ] receivable. I understand. And for my second question, what is the current status of the proposed transaction? Why is it taking so long? And do you have any idea when it may be concluded?

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Tony Tian, [9]

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Thank you, John. (foreign language)

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Wei Hua, Ossen Innovation Co., Ltd. - CEO, Interim CFO and Director [10]

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(foreign language)

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Tony Tian, [11]

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(foreign language) John, the proposed transaction actually is making progress, step-by-step. As you know, the transaction has to follow certain procedures, including certain due diligence and financial auditor -- auditing financial results for the target company, et cetera, et cetera. So the company suggests investors to pay attention to the company's upcoming news release.

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Operator [12]

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(Operator Instructions) We have a follow-up question from the line of Mr. John Sheehy.

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Unidentified Analyst, [13]

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I don't really have a question. It's just a comment. Your press release shows earnings per share based on 19.8 million ordinary shares outstanding. But after the reverse split that was implemented last year, the number of ADS outstanding is 1/3 as many. So earnings per ADS was actually $0.73 for the year. So I think the company, in the future, should make that more clear in the public announcement. That's just a comment.

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Tony Tian, [14]

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Thank you, John. (foreign language)

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Wei Hua, Ossen Innovation Co., Ltd. - CEO, Interim CFO and Director [15]

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(foreign language)

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Tony Tian, [16]

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John, Mr. Hua wants to thank you for a very good suggestion. Actually, after I saw your e-mail yesterday, I already forwarded your e-mail to the management, and the company agreed that it's a very good suggestion. And we will, going forward, we will refer to both earnings per share and also earnings per ADS. As you just said, the company's net earnings per ADS was $0.73 for the year of 2016 compared to $0.89 per ADS for the year of 2015.

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Operator [17]

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There are no further questions at this time. I would now like to hand the conference back to the management team for the closing remarks.

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Wei Hua, Ossen Innovation Co., Ltd. - CEO, Interim CFO and Director [18]

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On behalf of our entire management team, I would like to thank everyone again for joining us today for Ossen International Fiscal Year 2016 Earnings Conference Call. We appreciate your interest and support in Ossen and look forward to speaking with you again next time. Goodbye.

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Operator [19]

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