Wei Hua - CEO and Acting CFO Tony Tian - IR

Ladies and gentlemen, thank you for standing by. Welcome to Fourth Quarter 2016 Ossen Innovation Co., Ltd. Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s call will include a question-and-answer session [Operator Instructions]. I must advise you that this conference is being recorded today, Tuesday, April 11, 2017. I’ll now like to hand the conference over to your speaker host today, Mr. Tony Tian. Thank you. Sir, please go ahead.

Thank you, operator, and welcome everyone to today’s conference call for Ossen Innovation Co., Ltd. This call will cover Ossen’s financial and operating results for the 12 months ended December 31, 2016. Joining us today is the company’s CEO and Acting CFO, Mr. Wei Hua. 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 federal securities laws regarding Ossen Innovation Co., Ltd. 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 the company’s products, the impact of competition and 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. Wei Hua, CEO and Acting CFO of the company who will comment and review on the four-year financial results. His comments will be delivered in English from a colleague, Dan McCurren [ph]. Dan, please go ahead.

Thank you, Tony, and thanks everyone for joining us today for our fiscal year 2016 financial results conference call. Our revenues decreased slightly in 2016 as we continued the scale back of our plain surface PC strands business in light of its gross margin deterioration in recent quarters. However, revenues from the coated products snapped back after a down year in 2015 and grew 14.8% in 2016 as a result of increase in sales volume that more than offset the decrease in average selling price for coated products. Looking ahead, due to continuing macro headwinds with slowing GDP and infrastructure build-out growth trends as well as structuring imbalance of the steel industry, we remain cautious on our near-term outlook. Next, I will discuss our financial results for 12 months ending December 31, 2016. For the year of 2016, revenues decreased by 0.9 million or 0.7% to 117 million from 117.9 million for 2015. This decrease was partially due to decreases in sales from zinc coated products and plain surface PC strands and other products and partially offset by increased sales from rare earth coated products. The sales of coated PC strand materials, including both rare earth and zinc coated products increased by 14.1 million or 14.8% to 109.6 million and accounted for 94% of total sales for the year of 2016 from 95.5 million or 81% of total sales for 2015. This increase in sales of PC steel materials was the result of increase in sales volume for rare earth coated products and partially offset by decreases in average selling prices for both rare earth and zinc-coated products. Sales of rare earth coated products increased by 16.4 million or 19.2% to 101.4 million for the year of 2016 from 85.0 million for 2015. Sales of zinc-coated products decreased by 2.3 million or 21.6% to 8.2 million for the year of 2016 from 10.5 million for 2015. Sales of plain surface PC strands and PC wires decreased by 11.1 million or 67.9% to 5.3 million for 2016 from 16.4 million for 2015. The decrease of the sales generated by plain surface PC strands and PC wires was primarily due to the decline in sales from wholesale market during this period. Other sales were 2.2 million for the year 2016 compared to 6 million for 2015. This decrease was primarily due to less spare raw materials sold in 2016 compared to 2015. We generated approximately 4.2% and 6.6%, respectively, of our revenues during the years of 2016 and 2015 from sales to customers in international markets including primarily Vietnam, South Korea, Japan, New Zealand, Australia, Bangladesh, Brunei, Costa Rica, and Chile, primarily for use in the construction of bridges. The decreases in 2016 was primarily due to one of our customers in South Korea filing for bankruptcy. Gross profit increased by 0.4 million or 2.5% to 16.1 million for the year of 2016 from 15.7 million for 2015. Gross margin improved by 43 basis points to 13.8% for 2016 from 13.3% for 2015. Gross margins for rare earth and zinc coated products were 11.3% and 14.7%, respectively, for 2016 compared to 11.8% and 19.7%, respectively, for 2015. Gross margin for plain surface PC strands and PC wires was 22.6% for the year of 2016 compared to 17.5% for 2015. Selling expenses decreased by 0.3 million or 25.6% to 0.7 million for the year of 2016 from 1 million for 2015. The decrease was due to lower transportation costs. General and administrative expenses increased by 1.9 million or 42.4% to 6.4 million for the year of 2016 from 4.5 million for 2015, mainly due to higher research and development costs as well as high bad-debt provision in 2016. As a result, total operating expenses increased by 1.6 million or 30.1% to 7.1 million for the year of 2016 from 5.5 million for 2015. Operating income decreased by 1.3 million or 12.3% to 9.0 million for the year of 2016 from 10.2 million for 2015. The decrease in operating income was primarily attributable to increases in research and development costs and bad-debt provision in 2016. Operating margin was 7.7% for 2016 compared to 8.7% for 2015. Net income decreased by 1.3 million or 19.5% to 5.3 million for the year of 2016 from 6.6 million for 2015. After deducting net income attributable to non-controlling interest, net income attributable to Ossen Innovation decreased by 1.1 million or 18.2% to 4.8 million for the year of 2016 from 5.9 million for 2015. Earnings per share was $0.24 for the year of 2016 compared to $0.30 for 2015. Now turning to balance sheet and cash flow. As of December 31, 2016, the company had cash and restricted cash of 6.9 million compared to 9.6 million at December 31, 2015. Notes receivable were 15.3 million as of December 31, 2016 compared to 8 million at December 31, 2015. Accounts receivable were 37.3 million as of December 31, 2016 compared to 43.2 million at December 31, 2015. The average days of sales outstanding were 126 days for the year of 2016 compared to 150 days for 2015. The balance sheet of prepayment to suppliers for raw materials totaled 46.7 million as of December 31, 2016 compared to 55.7 million at December 31, 2015. The company had inventories of 26 million as of December 31, 2016 compared to 27.3 million at the end of 2015. Total working capital was 101.6 million as of December 31, 2016 compared to 94.7 million at December 31, 2015. Net cash provided by operating activities was 15.5 million for the year of 2016 compared to 12.4 million for 2015. This increase in cash provided by operating activities was the result of a 1.3 million decrease in inventories due to higher consumption of raw materials at the end of 2016, a 9 million decrease in advance to suppliers due to less prepayments for raw materials of plain surface and zinc coated products, partially offset by a 1.3 million decrease in net income due to higher operating expenses and a 7.3 million increase in notes receivable because our customers used less cash for payment. Net cash used in investing activities was 17.5 thousand for the year of 2016 compared to 29.7 thousand for the same period of last year. Net cash used in financing activities was 7.5 million for the year of 2016 compared to 4.4 million for 2015. The increase in cash used in financing activities was the result of the repayment of bond, a decrease in proceeds from notes payable and a decrease in restricted cash, partially offset by an increase in proceeds from short-term bank loans, an increase in proceeds from long-term bank loans and a decrease in repayment of notes payable. Now, I would like to turn the call over to the operator.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of John Shihi [ph]. Please go ahead.

Hello, everybody. Thank you for taking my call. What was the amount of the bad debt that was mentioned in the press release, and can you share some explanation?

Thank you, John. I’ll translate for Mr. Hua. [Foreign Language]. Hi, John. Mr. Hua’s explanation, the company actually mostly does not have much bad debt. The bad debt reported number is actually an accounting treatment for some collection account that some accounts supposed to be payable is overdue for like over one or two [ph], it is just accounting treatment.

Okay, so it’s an age receivable, I understand. And for my second question, what is the current status of the proposed transaction, why is it taking so long and do you have any idea when it may be concluded? Thank you.

Thanks, John. [Foreign Language]. Hi, John. The proposed transaction actually is making progress step-by-step. As you know, the transaction has to follow certain procedures including certain due diligence and auditing financial results for the targeted company, et cetera, et cetera. So the company suggests investors to pay attention for the company’s upcoming news release.

Thank you. [Operator Instructions]. We have a follow-up question from the line of Mr. John Shihi. Please go ahead.

Hello, again. Thank you for taking my follow-up. I don’t really have a question, it’s just a comment. Your press release shows earnings per share based on 19.8 million ordinary shares outstanding, but after the reverse split that was implemented last year, the number of ADS outstanding is one-third, so earnings per ADS was actually $0.73 for the year. So I think the company in the future should make that more clear in the public announcement. That’s just a comment. Thank you very much.

Thank you, John. [Foreign Language]. Hi, John. Mr. Hua wants to thank you for a very good suggestion. Actually after I saw your email yesterday, I already forwarded your email to the management and the company agrees that it’s a very good suggestion. And going forward, we will report both earnings per share and also earnings per ADS. As you just said, the company’s net earnings per ADS was $0.73 for the year of 2016 compared to $0.89 per ADS for the year of 2015.

Thank you. There are no further questions at this time. I would now like to hand the conference back to the management team for the closing remarks.

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

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