Feng Peng - CFO

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2015 Ossen Innovation Co. Limited Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. I must advice this conference is being recorded today the 29 of June, 2015. I would now like to hand the conference over to your first speaker for today Mr. [Chester Fan] [ph]. Please go ahead.

Thank you, and welcome everyone to today's conference call for Ossen Innovation Company Limited. This call will cover Ossen's financial and operating results for the three months ended march 31, 2015. Joining us today is Mr. Feng Peng, the company’s 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 the 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 these cautionary statements, and that 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. Feng Peng, our Chief Financial Officer. Feng please go ahead.

Thank you, Chester, and thank you everyone for joining us today for our first quarter ended March 31, 2015 financial results conference call. Regarding the quarterly results, while China’s economy continue [indiscernible] anticipated [indiscernible] through a lower GDP growth of just 7.0%, our company’s total revenues ended with a 4.5% year-over-year decrease. Despite the change in macro conditions, our management team performed well and both gross and operation margins improved on a year-over-year basis, leading to an EPS of $0.04 for the first quarter of 2015, from $0.02 for the same period of last year. Next, I will discuss our financial results for the three months ended March 31, 2015. Revenue decreased by 4.5% to $26.8 million for the three months ended March 31, 2015 from $28 million for the same period of last year. This decrease was mainly due to the declines in rare earth coated product sales and partially offset by increase in zinc coated, plain surface pre-stressed PC strands and other products. Sales of coated PC steel materials including rare earth and the zinc coated products decreased by 16.6% to $22.1 million and accounted for 83% of total sales for the three months ended March 31, 2015. Sales of rare earth and zinc coated products were $18.2 million and $3.9 million respectively for the three months ended March 31, 2015 compared to $26.5 million and nil respectively for the same period of last year. Sales of plain surface PC strands and other increased to 110% to $4.6 million and accounted for 17% of total sales for the three months ended March 31, 2015. The increase in plain surface PC strand sales was driven by the increase in sales of plain surface PC strands as well as sales of other products. Cost of goods sold decreased by 8.9% to $23.1 million for the three months ended March 31, 2015 from $25.4 million for the same period of last year. The decrease was mainly due to lower total revenue and the lower average price of raw materials. Gross profit increased by 37.2% to $3.6 million for the three months ended March 31, 2015 from $2.6 million for the same period of last year. Gross margin increased by 4.1% to 13.5% for the three months ended March 31, 2015, from 9.4% for the same period of last year. Gross margins for rare earth and zinc coated products were 11.6% and 26.2% respectively for the three months ended March 31, 2015, compared to 8.9% and nil respectively for the same period of last year. Gross margins for plain surface PC strands and others was 11.3% for the three months ended March 31, 2015, compared to 19.1% for the same period of last year. Selling expenses were approximately $0.1 million for the three months ended March 31, 2015 increasing $20,000 from the same period of last year. G&A expenses were approximately $1.8 million for the three months ended March 31, 2015, increasing $0.5 million from the same period of last year. The increase was primarily due to increase in provisions for bad debts. Operating income was $1.7 million for the three months ended March 31, 2015, compared to $1.2 million for the same period of last year. Operating margin was 6.2% for the three months ended March 31, 2015, compared to 4.3% 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 $0.9 million for the three months ended at March 31, 2015 compared to $0.5 million for the same period of last year. Earnings per share both basic and diluted were $0.04 for the three months ended March 31, 2015 versus $0.02 for the same period of last year. Now turning to balance sheet and the cash flows; as of March 31, 2015 Ossen had approximately $10.8 million of cash under restricted cash compared to $18.3 million at December 31, 2014. Total accounts receivable was 68.7 million as of March 31, 2015 compared to $53.8 million at December 31, 2014. The average day sales outstanding were 206 days for the three months ended March 31, 2015 compared to 151 days for the year of 2014. The increase in DSO is attributable to the higher accounts receivable as of March 31, 2015 pushing the company higher than its historical range. The balance of prepayments to suppliers for raw materials was $54.1 million as of March 31, 2015 compared to $56.3 million at December 31, 2014. The company has inventories of $16 million as of March 31, 2015 compared to $20.1 million at December 31, 2014. Total working capital was $109.7 million as of March 31, 2015 compared to $108 million at December 31, 2014. Net cash provided by operating activities was $3.6 million for the three months ended March 31, 2015 compared to net cash used in operating activities of $1.1 million for the same period of last year. Net cash used in investing activities was 17,000 for the three months ended March 31, 2015, compared to $1,000 for the same period of last year. Net cash used in finance activities was $4.1 million for the three months ended March 31, 2015 compared to $0.1 million for the same period of last year. Now I will turn the call next to operator for any questions.

[Operator Instructions] We have the first question from the line of Leonard Samuels. Please ask you question.

Congratulations on a good quarter. I noticed that there is both an increase in days sales outstanding that seems quite significant, and also an increase in bad debt, that totaled twice the earnings of the company. Is any of this increased days sales outstanding likely to turn in to bad debt and is there an approach that the company is taking to reduce the days sales outstanding and the risk of bad debt?

First of all these bad debts are provisions from most of these accounts receivables from big and large state owned companies. So we don’t expect these provisions to turn to bad debts. And in the same quarter we increased our effort to crack these accounts receivables. So we expect DSO will decrease in the second quarter.

We have the next question from the line of [Edward Goldzimer] [ph]. Please ask your question.

Yes, I have several questions, but staying on the days sales outstanding, why is it so high? Why don’t you get paid after you deliver your products, why does it take so long?

It’s from a couple of large companies and the main reason was because of the Chinese New Year in the late February. So in the first quarter they delayed the payment, so we expect this accounts receivable can be tracked in the second quarter.

But it seems like it’s always going to be around five or six months day sales outstanding, is that not true?

That’s true.

Yeah, and I am just wondering why these big companies which I assume have cash don’t pay you when your product is delivered. What are your terms with these companies?

Usually a project last a few months to even to a couple of years, so usually a portion of may be 10%-15% is down payment and the rest is spread across the whole project. So the average based on the company’s historical records the range is around 150 days in the last couple of years.

Okay, but day sales outstanding means that on average whatever it is 200 days, those relate to products that you have already delivered for the projects right?

Yes.

So they are still waiting to pay you. I know that they are spreading it out, but they are waiting to pay you. And so you have to borrow money in order to keep afloat, because they are not paying you on time. Is that correct?

Yes, it’s just how the way these companies do business, especially in the construction and the infrastructure industry.

And you have very little say about it since those companies are so large and you are so small, is that correct?

Yes, you can say that, and also that some projects are from government and the government they tend to delay the payment, because in last two years the government had to raise a lot of debt in China to fund those projects.

Okay. After the last conference call you issued a press release stating that you had authorized the purchase of a certain amount of stock of your company, and my question is, since that time which was early May, how much stock have you purchased.

I [indiscernible] the total, but on average we can’t buy all the shares on the market every day, we have a limit. We have a ceiling for every day amount based on the average trading volume. But since May, I don’t have the number, but on average we bought about 3000 to 4000 shares every day.

Okay, and do you know when you are scheduled to be delisted from NASDAQ if your share don’t rise above $1.

I believe its August of 2nd. But we still have options to do a reverse split to maintain stock price and to stay on the NASDAQ.

Okay. Also on the last conference call we talked about what the company was doing to enhance shareholder value. And you said that you were considering various approaches and that you suspected you would have an answer within 40-60 days, and it’s now 60 days, so I am re-asking the question as to what the company is doing to enhance shareholder values.

We issued a press release to buy back the stocks, and I think that’s one step we have taken. And we always consider other options, but right now to maintain a business we need cash, and also it’s very expensive to pay dividend. I think all the shareholder has to pay tax in China, both China and the US for our dividend. So we are still discussing this right now. But the first step we have taken is to buy back the stock.

Yeah, can I ask you about, because I don’t know about that? How much of a tax do you have to pay to pay a dividend?

You mean the company?

Do you have to pay the government or anybody else?

There’s always holding tax in China. I believe it’s 20%.

20%, okay. And we also discussed last time what percentage of your bids are successful, both in rare earth and in the others. And I think you mentioned that your bids for rare earth contracts were 80% and for other contracts were about 50%. Is that still true?

Yes, in the fourth quarter I think that’s the range about the bidding success rate.

Can you say anything about your performance this quarter, which is coming to an end and for the rest of the year?

I am not going to comment on the second quarter right now. After it’s finished we still need an audit to review that.

And for the rest of the year, do you see any improvement or --.

We see improvement in the zinc coated products, actually the price increased in zinc coated products. But for the other products the price is still low, but we see some positive signal from zinc coated products. You can see that our gross margin increased mainly due to the zinc coated products and we won project that required a special standard and the high strength. We are the only company to meet that requirement. So we won that project and gross margin from that project is really high.

The product that you have that no one else has, isn’t that the rare earth or is it the zinc coated.

It’s not about the product, it’s not about the quality and about some special requirements.

Okay, and because of that you can get a larger gross margin from that, right?

Yeah, in this quarter.

And does that come under the heading of rare earth or zinc coated or both.

That’s from the zinc coated products.

Okay, that’s from zinc coated products, alright. And is your rare earth products distinguished for any of the other companies or is that the same?

Yes, of course, but right now the market is not – there is not too much market for higher strength product.

Okay.

Because our rare earth products has a higher strength than other products.

And do you have any new products that are coming on board?

We are still doing our research on that new product we mentioned in our 20-F. It’s still in development stage.

You mentioned that you used 4.0 million in net cash in financing activities, which was a lot higher than last year, what was that for?

We funded our working capital and you see we have our accounts receivable increased - this use in financing activity was to fund our working capital and also the interest of our bond issued in China.

Okay, I think that’s all the questions I have for now, thank you very much. I appreciate it.

We have the next question from the line of [John Shea] [ph]. Please ask your question.

Congratulations on a good result and thank you for taking my call. Could you comment on the revenue amount, the revenue amount was down? Was this due to the price of steel or due to the volume of steel that you sold?

Mostly it’s from the volume we sold in the first quarter, and I believe it’s just a one-time see and it’s due to Chinese New Year and all other reasons, the cold winter season. So we believe it’s just one time, and we expect it will be, the revenue will still be uptrend in the future.

You were really a processor, so the price of steel or you buy steel, you process it and then you sell steel. So if the price of the steel that you buy, I think your cost of goods sold was down 8% or your revenues were down 4%. So to some extent the market price of steel is not as important to you as the amount that you earn from processing, but when you just report the revenue number it’s a little bit difficult for the outside observers to tell, okay is the revenue down, because your business is bad or just because the market price of steel changed. So maybe could you comment on your capacity utilization?

In the first quarter the capacity utilization is almost about, let me take a look here, it’s about 100%. It’s almost over 100% in the first quarter still, but as I said in the last conference call, we have some product in the middle and during the process we just have one or - we have some products sold after several work-in-processes not the final product. So it's --.

That’s very helpful. And can you share some comments about the end market demands. Why was there less customer interest in rare earth products in this quarter?

Because in the first quarter we didn’t see some more - first of all the demand for the higher strands rare earth product is still low, and second, you know we had some precious order from overseas with higher margin and also with like this zinc coated products coming in, so we try to focus on some higher margin products in the first quarter. So the lower revenue for the rare earth coated products was still due to these two reasons.

So the part that you have to choose if your capacity is limited, you can use it for one type of business which has a higher margin and then you have to give up lower margin business, is that correct?

Yes. Okay.

And there’s a lot of news, almost every day about Chinese government measures to try to add some stimulus to the economy by increasing the infrastructure spending using the financing for businesses. Can you comment on what impact do you see from those?

We think that it will impact us positively, but it’s not in the near future. You can see that Chinese economy is very - actually it’s slowing down in the first half of 2015. Everybody can feel that in China. It’s a very difficult environment actually, and the Chinese government has to boost the stock market to, basically to increase the stock market index and to attract more money from the people savings and use that money to, and also those big companies can’t raise cheap money from the stock market and by this the government hopes that this will also stimulate the economy. But I am not a buyer of this strategy, but that’s a reality in China, the first half of 2015 is very slow actually, and we hope that those projects we have launched and also those money will come in to help to impact us positively, on the positive side.

So for example rail road construction spending, there’s a plan to spend more money, but do you see the orders actually coming in yet or is that still going to be increasing in the future.

We see little coming in, but we don’t see too much and we expect to see that in - we hope to see that, a lot orders coming in the second half. But the Chairman believes it really will be in 2016.

Okay, that’s great. I really appreciate all the information you’ve shared and congratulation again on the good results.

[Operator Instructions] We have the next question from the line of [Khalid Baven] [ph]. Please ask your questions.

I guess the first two guys that asked questions is of course they asked the same question over and over and over again, so I am not going to do that. But I just think if there’s anything that you can do about these [have been] callers where they just babble and babble and babble. Please do it for the rest of the participants, thank you very much.

As there are no further questions at this time, I would like to hand the call back to your speakers for any closing remarks.

Okay. Thank you everyone for joining us today. On behalf of our entire management team, we appreciate your interest and support in Ossen, and I look forward to speaking with you again next time. Good bye.

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