Tina Xiao - Weitian, Investor Relations Feng Peng - CFO

Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the Ossen Innovation Company Limited’s Third Quarter 2015 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. This conference is being recorded today December 10, 2015. I would now like to turn the conference over to Ms. Tina Xiao of Weitian Investor Relations. Please go ahead. Thank you.

Thank you, operator and welcome everyone to today’s conference call for Ossen Innovation Company Limited. This call will cover Ossen’s financial and operating results for three months and nine months ended September 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 laws regarding Ossen Innovation Company Limited. Forward-looking statements include statements about plans, objectives, goals, strategies, future events, 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 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, CFO of the Company. Feng, please go ahead.

Thank you, Tina. And thank you everyone for joining us today for our third quarter of 2015 financial results conference call. We are pleased to announce our third quarter financial results with year-over-year increase 7.6% in top line and 601.2% in bottom line, as well as increase in gross margin and operating margin, which reached the highest level in the past four years due to lower material costs and the strong sales volume across all major products categories that more than offset decline in average selling price. Next, I’ll discuss our financial results for the three months ended September 30, 2015. Revenues increased by 7.6% to $30 million for the third quarter of 2015 from $27.9 million for the same period of last year. This increase was mainly due to increased sales in plain surface PC strands. The sales of coated PC steel materials including both rare earth and the zinc coated products decreased by $0.9 million to $23.8 million and accounted for 80% of total sales for third quarter of 2015. Sales of rare earth and zinc coated products were $23.8 million and nil for third quarter of 2015, compared to $24.7 million and nil respectively for the same period of last year. Sales of plain surface PC strands and others increased by 94.8% to $6.1 million and accounted for 20% of total sales for the third quarter of 2015. Cost of goods sold decreased by 1.6% to $25 million for the third quarter of 2015 from $25.4 million for the same period of last year. The decrease was mainly due to lower average price of raw materials. Gross profit increased by 104.7% to $4.9 million for the third quarter of 2015 from $2.4 million for the same period of last year. Gross margin increased to the highest level in four years to 16.5% for the third quarter of 2015 from 8.7% for the same period of last year. The increase in overall gross profit and gross margin were mainly due to lower raw material costs. Gross margins for rare earth and zinc coated products were 16.2% and nil respectively for the third quarter of 2015 compared to 8.1% and nil respectively for the same period of last year. Gross margin for plain surface PC strands and others was 17.5% for third quarter of 2015 compared to 12.8% for the same period of last year. Selling expenses were approximately $0.2 million for the third quarter of 2015, decreasing $0.1 million from the same period of last year due to the decrease in shipping cost. General and administrative expenses were approximately negative $0.2 million for the third quarter of 2015, decreasing $1.4 million from the same period of last year. The decrease was primarily due to the $0.1 million decrease in research and development, and $1.3 million decrease in the provision for bad debt. Operating income was $5 million for the third quarter of 2015 compared to $0.9 million for the same period of last year. Operating margin was 16.5% for the third quarter of 2015 compared to 3.1% for the same period of last year. After allocating net income attributable to non-controlling interest, net income attributable to Ossen Innovation was $3.3 million for the third quarter of 2015 compared to $0.5 million for the same period of last year. Earnings per share, both basic and diluted, were $0.16 for the third quarter of 2015 compared to $0.02 for the same period of last year. Now, shift gear to nine months ended September 30, 2015 financial results. Revenue decreased by 10% to $82.6 million for the nine months ended September 30, 2015 from $91.8 million for the same period of last year. This decrease was mainly due to the declines in coated product sales. Sales of coated PC steel materials, including both rare earth and zinc coated products, decreased by 15.8% to $68.1 million and accounted for 82% of total sales for the nine months ended September 30, 2015. Sales of rare earth and zinc coated products were $61.9 million and $6.2 million respectively for the nine months ended September 30, 2015 compared to $71.9 million and $9 million respectively for the same period of last year. Sales of plain surface PC strands and others increased 33.1% to $14.5 million and accounted for 18% of total sales for the nine months ended September 30, 2015. Cost of goods sold decreased by 14.8% to $70.7 million for the nine months ended September 30, 2015 from $83 million for the same period of last year. The decrease was mainly due to the lower average price of raw materials. Gross profit increased by 35% to $11.9 million for the nine months ended September 30, 2015 from $8.8 million for the same period of last year. Gross margin increased by 4.8% to 14.4% for the nine months ended September 30, 2015 from 9.6% for the same period of last year. The increase in gross margin was mainly due to lower raw material costs. Gross margins for rare earth and zinc coated products were 12.6% and 23.6% respectively for the nine months ended September 30, 2015 compared to 7.9% and 22.1% respectively for the same period of last year. Gross margin for plain surface PC strands and others was 17.7% for the nine months ended September 30, 2015 compared to 10.4% for the same period of last year. Selling expenses were approximately $0.7 million for the nine months ended September 30, 2015, increasing $0.1 million from the same period of last year. General and administrative expenses were approximately $2.5 million for the nine months ended September 30, 2015, decreasing $1.5 million from the same period of last year. As a result, total operating expenses were approximately $3.2 million for the nine months ended September 30, 2015, decreasing $1.4 million from $4.6 million for the same period of last year. Operating income was $8.6 million for the nine months ended September 30, 2015 compared to $4.2 million for the same period last year. Operating margin was 10.5% compared to 4.6% for the same period of last year. After allocating net income attributable to non-controlling interest, net income attributable to Ossen Innovation was $5.4 million for the nine months ended September 30, 2015 compared to $2.4 million for the same period of last year. Earnings per share, both basic and diluted were $0.27 for the nine months ended September 30, 2015 compared to $0.12 for the same period of last year. Now, turning to balance sheet and cash flows. As of September 30, 2015, Ossen Innovation had approximately $16.7 million of cash and restricted cash compared to $18.3 million at December 31, 2014. Total accounts receivable were $32.3 million as of September 30, 2015 compared to $53.8 million at December 31, 2014. The days of sales outstanding were 106 days for the nine months ended September 30, 2015 compared to 158 days for the year of 2014. The decrease was mainly due to a decrease in accounts receivable including approximately $9 million of accounts receivables aged over one year we collected from five customers in the third quarter of 2015. The balance of prepayments to suppliers for raw materials was $63.9 million as of September 30, 2015 compared to $56.3 million at December 31, 2014. The Company had inventories of $22 million as of September 30, 2015 compared to $20.1 million at December 31, 2014. Total working capital was $111 million as of September 30, 2015 compared to $108 million at December 31, 2014. Net cash provided by operating activities was $12.5 million for the nine months ended September 30, 2015 compared to $7.5 million for the same period of last year. Net cash used in investing activities was $19,000 for the nine months ended September 30, 2015 compared to $7.8 million for the same period of last year. Net cash used in financing activities was $7.6 million for the nine months ended September 30, 2015 compared to $1.4 million for the same period of last year. We temporarily put buyback program on hold in third quarter of 2015, mainly because we had cash needs for bidding new projects. However, we resumed the buyback program and approximately 12,000 shares were repurchased in the fourth quarter of 2015. Now, I will turn the call next to operator for any questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have a first question from the line of John Sheehy. [Ph] please ask your question.

Hello, thank you for taking my call, and congratulations on these great results. I noticed that the advances to suppliers on the balance sheet stayed at a relatively high level and inventory rose a little bit. Do these mean that you’re prepared for continued strong business in the fourth quarter?

Yes, we increased our advance to suppliers for two reasons

One is anticipation of higher sales volume in coming quarters; and the second is to lock the current low level of cost for raw materials.

Okay. And could you give us an update about what you’re seeing about the government stimulus plans and whether these are starting to deliver funds for actual spending for projects; is that money moving now or do you still see it as being a little bit slow?

It appears to us that it will likely take years for the Chinese steel industry to get back on track, oversupply, weakening demands as China’s GDP grow slower and as the central government tightens environmental regulations. But we see the government stimulated program is kicking in. So, you can see our sales volume has increased in the third quarter.

So, does this make you optimistic about fourth quarter and 2016 that you can continue with the good level of business?

Yes. We are optimistic. But our Q3 gross margin benefited from low fixed cost and related to our plain surface PC products. Normally, we see a lag in sales price versus changing material costs. And we expect a slight dip in gross margin on a quarter-to-quarter basis in the fourth quarter.

Okay. And could you share some comments, what kinds of customers or projects or product specifications are working really well for you right now?

For the third quarter, actually we have less export but we have some projects that enjoyed high gross margin. For example, we have a project to deliver 5,300 tons of zinc coated products in the first nine months which has about gross margin of 27%.

And what is special about that product; is it especially strong, is it for high speed rail; or could you help us understand that a little bit better?

It’s for bridge and it’s kind of customized product. We have to put some customized products. We have to do some research and development for that. And that’s why this product has higher gross margin.

Okay. Thanks very much. That’s all my questions, and congratulations again on the excellent results.

Okay. Thank you, John.

[Operator Instructions] Pardon me, sir. There are no further questions from the audio line. Please continue. Thank you.

On behalf of our entire management team, I would like to thank everyone again for joining us today for Ossen Innovation third quarter 2015 earnings conference call. We appreciate your interest and support in Ossen and look forward to speaking with you again next time. Good bye.

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