China XD Plastics Company Limited (CXDC)
Q2 2013 Earnings Conference Call
August 9, 2013; 09:00 a.m. ET
Jie Han - Chairman & CEO
Qingwei Ma - Chief Operating Officer
Taylor Zhang - Chief Financial Officer
Junjie Ma - Chief Technology Officer
Glenn Krevlin - Glenhill Capital
Previous Statements by CXDC
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I would now like to hand the call over to your host for today’s call, Tong Ji (ph). Please go ahead.
Tong Ji (ph)
Thank you operator. Good morning and good evening and thank you for joining us for the China XD Plastics’ second quarter 2013 financial results conference call.
Joining the call today is Mr. Jie Han, Chairman and CEO; Mr. Qingwei Ma, Chief Operating Officer; Mr. Taylor Zhang, Chief Financial Officer; Mr. Junjie Ma, Chief Technology Officer.
Earlier today China XD Plastics’ issued a press releases announcing the second quarter 2013 financial results. Before managements presentation I would like to report to the Safe Harbor statement in connection with today’s conference call and remind our listeners that management’s prepared remarks during this call may contain forward-looking statements, which are subject to risks and uncertainties, and then management may make additional forward-looking statements in response to your questions. 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. I will refer you to a more detailed discussion of the risks and uncertainties in the company’s filing with the Securities and Exchange Commission. A more comprehensive description of the company’s forward-looking statements is contained in the company’s filing with the SEC.
In addition, any projection as to the company’s future performance represent management’s estimate as of today, August 12, 2013. China XD Plastics assumes no obligation to update those projections in the future as market conditions change.
To supplement its financial results presented in accordance with U.S. GAAP, management will make reference to EBITDA, 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 earning press release issued today.
I would now like to turn the call over to Mr. Han. Mr. Han will speak in Chinese and I will translate his presentation into English. Mr. Han, please go ahead.
Jie Han (Interpreted)
Thank you Tom and welcome to all of you who have joined us today. I’m pleased to report our solid revenue growth and positive business development, especially during the changing and challenging macro environment, affecting different industries in China.
Although gross margin declined during the second quarter of 2013, mainly due to our marketing strategy such as discounts on listed price includes some of shipping cost since the fourth quarter of 2012.
This strategy has helped us achieve tremendous progress in market penetration, especially in East China, the largest automobile market in China. Revenues from East China and North China during the second quarter of Fiscal 2013 increased by 88.5% and 44.8%, compared to the second quarter of 2012.
Furthermore, we initialed our entry to southwest China Market on solid footing with 4.8% revenue contribution from the region, during the second quarter of 2013. As previously reported, during the first quarter’s earnings release, we expected gross margin in the second quarter to improve approximately 18% due to our gradual reduction of the sales discount.
The improvement in gross margin during the second quarter speaks volume of our strategy at Q2. The number of end customers increased to 304 to the end of the second quarter of 2013 from 187 as compared to the prior year.
As evidenced by the higher volumes shipped, we continue to experience strong demand for our products across our portfolio. As market demand grows in our high-end products, as part of our long-term growth strategy, we remain committed to our investment in research and development, in order to enhance our product offerings, especially for the higher-end applications. We believe this strategy is the key to further strengthening our market position and will help us deliver long-term value for our stockholders.
Thanks to our high level of product customization and comprehensive technical support offered to our customers, the substantial switching cost due to our customer turnover and our customer have remained very loyal to us. We are confident in our ability to leverage our bargaining power and to gradually reach our profitability without compromising the growth momentum created by our marketing strategy.
For the second quarter of 2013, the company had gross margin at 18.4% as we started retracting our discount. Our effective penetration in East China market serves well our strategy, to make inroad to southwest market, where we plan to build our fourth production base in Sichuan province as previously disclosed and expand our sales network coverage nationwide.
2013 makes an exciting year with both opportunities and challenges for China XD. As previously disclosed, the company had planned to establish its fourth production base with 300,000 metric tons production capacity in Sichuan province.
The construction is expected to commence in the second half of this year. Once our southwest production base is up and running, we’ll be able to effectively cover the entire country geographically and reach our goal of 10% market penetration with our major products; with our southwest production base covering southwest and central China and reaching into east China and our northeast production base covering northeast and north China and reaching into east China