Feng Peng - Chief Financial Officer Tina Xiao - Weitian Investor Relations

Good morning ladies and gentlemen. Thank you for standing by, and welcome to the Ossen Innovation Company Limited Second Quarter 2016 Earnings conference call. During today’s presentation, all parties will be in a listen-only mode. This conference is being recorded today, October 3, 2016. I’d now like to turn the call over to Tina Xiao with Weitian Investor Relations. Please go ahead.

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 the three months and six months ended June 30, 2016. Joining us today is the company’s CFO, Mr. Feng Peng. Before we get started, I’m going to quickly read a disclaimer about forward-looking statements. This conference call contains in addition to historical information forward-looking statements with the meaning of federal security laws regarding Ossen Innovation Company Limited. 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 company’s products, the impact of competition and government regulation, and other risks contained in statements filed from time to time with 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 would like to turn the call over to Mr. Feng Peng, the CFO of the company. Feng, please go ahead.

Thank you, Tina, and thanks everyone for joining us today for our second quarter 2016 financial results conference call. For the second quarter of 2016, both our revenues and profitability decreased, impacted by China’s weakening economy and the structural imbalance between supply and demand of the Chinese steel industry. Both gross and operating margins also decreased in the second quarter as a result of declines in average selling price of our coated products, underscoring increased pricing pressure from our competitors as industry demand slowed. Looking forward, we are committed to improve what we can control with uncertain market conditions. Next, I will discuss our financial results for the three months ended June 30, 2016. For the second quarter of 2016, revenue decreased by 9.4% to $23.4 million from $25.9 million for the same period of last year. This decrease was mainly due to a decrease in sales from zinc coated products and plain surfaced and other products, and partially offset by increased sales from rare earth coated products. The sales of coated PC steel materials, including both rare earth and zinc coated products, decreased by $1.2 million to $21 million and accounted for 89% of total sales for the second quarter of 2016. Sales of rare earth and zinc coated products were $20.7 million and $0.3 million for the second quarter of 2016 compared to $19.7 million and $2.5 million respectively for the same period of last year. Sales of plain surface PC strands and others decreased by 30.7% to $2.5 million and accounted for 10.8% of total sales for the second quarter of 2016. Cost of goods sold decreased by 7.1% to $21 million for the second quarter of 2016 from $22.6 million for the same period of last year. Gross profit decreased by 25.3% to $2.5 million for the second quarter of 2016 from $3.3 million for the same period of last year. Gross margin decreased to 10.5% for the second quarter of 2016 from 12.7% for the same period of last year. Gross margins for rare earth and zinc coated products were 10.1% and 32.4% respectively for the second quarter of 2016 compared to 9.2% and 20.3% respectively for the same period of last year. Gross margin for plain surface PC strands and others was 13.3% for the second quarter of 2016 compared to 26.2% for the same period of last year. Selling expenses were approximately $0.2 million for the second quarter of 2016, decreasing $0.2 million from the same period of last year. G&A expenses were approximately $1.3 million for the second quarter of 2016, increasing $0.5 million from the same period of last year. Operating income was $0.9 million for the second quarter of 2016 compared to $2 million for the same period of last year. Operating margin was 4% for the second quarter of 2016 compared to 7.8% for the same period of last year. After allocating net income attributable to non-controlling interests, net income attributable to Ossen Innovation Company Limited was $0.3 million for the second quarter of 2016 compared to $1.3 million for the same period of last year. Earnings per share, both basic and diluted, were $0.02 for the second quarter of 2016 compared to $0.07 for the same period of last year. During the second quarter of 2016, the company repurchased 37,680 shares at a cost of approximately $37,000 under its repurchase plan. Now shifting gears to the six months ending June 30, 2016 financial results; for the first half of 2016, revenues increased by 1.7% to $53.5 million from $52.6 million for the same period of last year. This increase was mainly due to the increase in sales from rare earth coated products and revenue contributions from plain surface PC strands and other products, and partially offset by decreased sales from zinc coated products. The sales of coated PC steel materials, including both rare earth and zinc coated products, increased by $0.7 million to $45 million and accounted for 84% of total sales for the first half of 2016. Sales of rare earth and zinc coated products were $44.4 million and $0.6 million for the first half of 2016 compared to $37.9 million and $6.4 million respectively for the same period of last year. Sales of plain surface PC strands and others increased by 3.5% to $8.6 million for the first half of 2016. Cost of goods sold increased by 4.9% to $47.9 million for the first half of 2016 from $45.7 million for the same period of last year. Gross profit decreased by 19.3% to $5.6 million for the first half of 2016 from $6.9 million for the same period of last year. Gross margin decreased to 10.4% for the first half of 2016 from 13.1% for the same period of last year. Gross margins for rare earth and zinc coated products were 8.8% and 33.1% respectively for the first half of 2016 compared to 10.3% and 23.9% respectively for the same period of last year. Gross margin for plain surface PC strands and others was 18.2% for the first half of 2016 compared to 17.8% for the same period of last year. Selling expenses were approximately $0.4 million for the first half of 2016, decreasing $0.1 million from the same period of last year. G&A expenses were approximately $2.7 million for the first half of 2016, which is essentially unchanged from the same period of last year. Operating income was $2.5 million for the first half of 2016 compared to $3.7 million for the same period of last year. Operating margin was 4.6% for the first half of 2016 compared to 7% for the same period of last year. After allocating net income attributable to non-controlling interests, net income attributable to Ossen Innovation was $0.8 million for the first half of 2016 compared to $2.2 million for the same period of last year. Earnings per share, both basic and diluted, were $0.04 for the first half of 2016 compared to $0.11 for the same period of last year. Now turning to the balance sheet and cash flows; as of June 30, 2016, Ossen had approximately $8.2 million of cash and restricted cash compared to $9.6 million at December 31, 2015. Total accounts receivable was $39 million as of June 30, 2016 compared to $43.2 million at December 31, 2015. The days sales outstanding were 180 days for the three months ended June 30, 2016 compared to 212 days for the same period of last year. The balance of prepayments to suppliers for raw materials was $59.2 million as of June 30, 2016 compared to $55.7 million at December 31, 2015. The company had inventories of $30.2 million as of June 30, 2016 compared to $27.3 million at December 31, 2015. Total working capital was $93.8 million as of June 30, 2016 compared to $94.7 million at December 31, 2015. Net cash provided by operating activities was $7.8 million for the six months ended June 30, 2016 compared to $5.4 million for the same period of last year. Net cash used in investing activities was $11,500 for the six months ended June 30, 2016 compared to $18,000 for the same period of last year. Net cash used in financing activities was $5.1 million for the six months ended June 30, 2016 compared to $4.2 million for the same period of last year. Now I will discuss recent developments of the company. On July 8, 2016, the company announced that it had entered into a non-binding letter of intent with America-Asia Diabetes Research Foundation, a California corporation that owns 90.27% of the equity interest of San MediTech (Huzhou) Company Limited, a China-based medical device company engaging in research, development, and marketing of glucose control products, and the shareholders of the foundation. Pursuant to the LOI, the company intends to acquire all of the issued and outstanding equity interest of the foundation in exchange for 27,081,000 ordinary shares, which is represented by approximately 9,027,000 shares after giving effect to the ratio change. On August 4, 2016, the company announced that its board of directors with unanimous agreement of all directors has formed a special committee of the board, consisting exclusively of independent directors to evaluate the non-binding term sheet. As of September 28, 2016, the special committee is in the process of retaining its legal counsel and financial advisors. On August 16, 2016, the company announced a ratio change for the company’s ADS program. As a result, the number of the company’s ordinary shares represented by each ADS was changed from one ordinary share to three ordinary shares. The effective date of the ratio change was August 22, 2016. On September 6, 2016, the company received notice from the NASDAQ Stock Market LLC that the company has regained compliance with NASDAQ Marketplace Rule 555082, which requires that the closing bid price per share of a listed company be at least one dollar per share. Now I will turn the call next to the operator for any questions.

[Operator instructions] The first question comes from the line of Mr. John Shihi [ph]. Please ask your question.

Hello, thank you for taking my call. Can you give us any information, I don’t know, a sense of how the proposed transaction would benefit the shareholders?

Okay, thanks for the question. At this moment, I don’t have a comment on this because our special committee is still reviewing this term sheet, so we will update the investors in the near term on any progress, and we are still in the due diligence process with the company, so we will update investors about this progress.

Okay. Do you have any idea how much time it will take to evaluate?

The company is still in the process of being audited by a U.S. audit firm, so at this moment, my estimation will be at least three months from today, but I can’t be sure about this. It’s just my estimation.

Okay, thank you very much.

[Operator Instructions]. . There are no further questions at this time. If you did not get the opportunity today to ask a question or if you have any follow-up questions, you may email them through to tina.xiao@weitian-ir.com. I repeat, that’s tina.xiao@weitian-ir.com. I would now like to hand the conference back to today’s presenters. Please continue.

On behalf of our entire management team, I would like to thank everyone again for joining us today for Ossen Innovation’s second quarter 2016 earnings conference call. We appreciate your interest and support in Ossen and look forward to speaking with you again next time. Goodbye.

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