China BAK Battery, Inc. (CBAK)

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China BAK Battery, Inc. (CBAK)

F1Q09 (Qtr End 12/31/08) Earnings Call

January 23, 2009 7:00 pm ET

Executives

Tony Shen - CFO and Secretary

Analysts

Rick Fearon - Accretive Capital Partners

Mark Tobin - Roth Capital Partners

Doug Ruth - Lenox Financial Services, Inc.

Presentation

Operator

Good evening, everyone, and thank you for joining us on the China BAK Battery's Fiscal 2009 First Quarter Conference Call. During today's call, we will provide details on the company's FY '09 first quarter results, as well as provide a corporate update about recent activities. Today's call will be limited to one hour.

With me today on the call is China BAK's senior management team led by Mr. Xiangqian Li, China BAK's President and Chief Executive Officer. All of them will be available to answer questions during the Q&A section.

Our agenda for today is as follows. Mr. Tony Shen, China BAK's Chief Financial Officer, will make remarks on behalf of the management team on the company's financial performance and discuss current business strategies, and he then will make remarks about China BAK's business outlook. Finally, we will open the call to your questions.

Before we get started, I'd like to remind our listeners that comments today will contain forward-looking statement, and management may make additional forward-looking statements in response to your question. Such written and verbal disclosures are made in pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from anticipated results. These types of statements and underlying factors as well as risk and uncertainties are listed in the company's filings with the Securities and Exchange Commission as well as in news release that was distributed earlier this afternoon.

China BAK's statements on this call are made as of January 23, 2009, and the company undertakes no obligations to update any of the forward-looking statements contained here within whether as a result of new information, future events, changes in expectations or otherwise.

With that said, it is my pleasure to turn the call over to China BAK's CFO, Mr. Shen.

Tony Shen

Thank you, Keith. I would like to extend a warm welcome to everyone joining us on the call today. Because of the Chinese New Year's holiday, Mr. Li and Dr. Mao are calling from outside, and they may not be calling in on time for the Q&A session. But I will be able to answer your questions throughout the whole session.

First, some highlights. In the first quarter of FY '09, our net revenue remained strong in the midst of the global financial crisis and recession. Gross margin remained at a similar level to previous quarter.

Cylindrical cells revenue continued to be robust accounting for 27% of total revenue. Prismatic cells revenue continued to grow and reflect further penetration after China OEM cell phone market. A number of cost cutting efforts were taken and at least $1.5 million of operating expense reduction per quarter is expected in the coming quarters.

Now, in more details. Net revenue for the first quarter of FY '09 were $68.1 million, down 6.4% from last quarter and up 29% from the same quarter of last year.

Revenues from cylindrical cells used in notebook computers were $18.4 million, down 6.5% from last quarter and up 615.7% from the same quarter of last year. Market demand from notebook computer manufacturers weakened slightly due to the global financial crisis and recession.

Revenues from prismatic cells, including aluminum-case cells, steel-case cells and battery packs, were $45.8 million, up 1.7% from last quarter and up 2.1% from the same quarter of last year. Revenues from aluminum-case cells were $37.3 million, up 3.6% from last quarter and up 24.0% from the same quarter of last year.

Revenues from battery packs were $5.4 million, up 0.2% from last quarter and up 8.1% from the same quarter of last year.

Revenues from steel-case cells were $3.1 million, down 15.1% from last quarter, and down 68.3% from the same quarter of last year. We have started to phase out the production of steel-case cells in this quarter, so revenue from steel-case cells is expected to be minimal in coming quarters.

Revenues from lithium polymer cells, used in personal electronic devices such as PDAs, MP3 players and Bluetooth devices, were $3.9 million in the first quarter of FY '09, down 51.2% from last quarter, and down 27.4% from the same quarter of last year. Market demand from our largely US based lithium polymer cell customers weakened due to the financial crisis and recession.

Gross profit for the first quarter was $10.6 million, down 7.7% from last quarter and up 49.1% from the same quarter of last year. Gross margin was 15.6%, compared to 15.8% last quarter and 13.5% in the same quarter of last year. The slight decrease in gross margin from the previous quarter was the result of lower average selling prices offset mostly by lower average costs. The increase in gross margin from the previous year's first quarter was attributable to improvements in our product mix and increased average selling prices, which outweighed the impact of average cost increases.

Operating expenses totaled $9.8 million or 14.4% of revenues in the first quarter, as compared to 11.6% of revenue last quarter and 13.1% of revenue in the same quarter of last year. R&D expense was $1.4 million or 2.1% of revenue, as compared to 2.3% of revenues last quarter and 2.5% of revenue in the same quarter of last year. Sales and marketing expense was $1.6 million or 2.3% of revenue, as compared to 2.2% of revenue last quarter and 2.6% of revenue in the same quarter of last year.

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