EVENT - Transcript and Webcast Archive of 3rd Quarter 2011Financial Results Conference Call

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ZAP JONWAY

November 15, 2011

4:30 p.m. ET

 

 

Operator:                             Good day, ladies and gentlemen, and thank you for standing by.  Welcome to the ZAP Jonway Third Quarter 2011 Earnings Conference Call. 

At this time, all participants are in a listen-only mode.  Later we will conduct a question-and-answer session and instructions will follow at that time.  If anyone should require assistance while the conference is in progress, please press star and then zero on your touchtone telephone to reach an operator. As a reminder, this conference is being recorded.

I will now introduce our host for today, Ms. Kristen Chapman from LHA.  Ma'am, please go ahead.

Kristen Chapman:             Thank you, Karen.  Good day, everyone.  Thank you for joining us for the ZAP Jonway third quarter 2011 financial results conference call.  By now, you should have received a copy of the press release.  If you have not, please contact LHA at 415-433-3777 and we will forward a copy to you. 

This call is being broadcast live over the Internet and a webcast replay will be available at the company’s website for 90 days. After reading a short Safe Harbor statement, I will turn the call over to management.

The commentary of this conference call may contain forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties including, without any limitation, continued acceptance of ZAP's products, increased levels of competition, new products and technology changes, ZAP's dependence on third-party suppliers, intellectual property rights, and other risks detailed from time to time in ZAP's periodic reports filed with the Securities and Exchange Commission.

Speaking on the call today are Chairman of ZAP Jonway, Priscilla Lu; and Co-Chief Executive Officers, Steven Schneider and Alex Wang.  Also on the call for the question-and-answer session is Benjamin Zhu, ZAP Jonway's CFO. 

It's now my pleasure to turn the call over to Dr. Priscilla Lu.  Please go ahead, ma'am.

Priscilla Lu:                     Thank you.  Welcome, everybody.  Before we reveal our third quarter results, I will discuss the company's progress and direction to provide background for those who are new to our story and to update our loyal followers. 

ZAP Jonway in its new formation since acquiring a 51 percent majority ownership of Jonway Automobile in January 2011, is a designer and manufacturer of quality, affordable, traditional gasoline, and full-electric vehicles, better known as new energy vehicles in China. 

The acquisition was done with the financing and strategic support of Cathaya Capital, which has invested approximately $36 million since 2009.  In addition, the family ownership of Jonway Automobile has also invested over $4 million since the acquisition, thus showing the commitment and support of the new combined company.

The new company combined the attributes and strengths of both ZAP and Jonway Automobile.  ZAP, known for its long history in designing full-electric vehicles, brings a broad range of design experience and supplier relationships to building our new EV product line. 

Jonway Automobile brings the manufacturing and operations capabilities to complete what is required to build a sound EV company.  It contributes its ISO:9000 certified manufacturing facilities; it’s valuable Chinese automobile manufacturing license, which gives ZAP access to the Chinese EV market; its experienced manufacturing development team that designed and manufactured the current traditional gasoline version of the SUV product platform being sold; and it’s established nationwide dealership network with sales and customer service facilities in every province of China.

Now we have a strong foundation for a new energy vehicle company.  We will leverage the SUV design for both the gasoline and the EVs to reduce development cost, increase economies of scale for procurement of common products and provide a head start in EV model engineering. 

In addition, Jonway Automobiles factory production capacity recently expanded to over 30,000 units that can be almost doubled with multiple shifts.  This gives our company plenty of room to grow. 

Since joining forces, we have realigned resources to deliver gasoline vehicles in our new EV product lines, which targets different market segments.  Our gasoline vehicles are popular among secondary cities in China whether consumers value durability, quality, and value over brand names.  We will also market to international markets with similar demographics. 

Our new EV product lines will be marketed in major cities, where reducing pollution and adopting green initiatives are priorities.  Both in China and internationally, we will focus on selling to businesses and governments using fleets as fixed routes [which] are ideal for full-electric vehicle applications, and depots, [which] are convenient for charging infrastructure.  Our 2012 JNZ SHUTTLE EV van and truck are particularly suitable for delivery fleets, and the JNZ A380 EV 5 targets the taxi market. 

To execute, we will add talent and develop new sales strategies.  Regarding our overall organization, we are continuing to recruit key management executives with auto industry backgrounds to help us expand our sales and marketing as well as increase our R&D technical team expertise. 

Recently, we appointed Mr. Zhang Da Qi as general manager of sales and marketing operations for Jonway Auto.  His role is to reinforce our dealership networks to fortify our current business and to expand sales and marketing to businesses, institutions, and governments, to prepare for our EV launch next year. 

A valuable addition to our team, Mr. Zhang Da Qi has 20 years of automotive management experience including 15 years as general manager at First Auto Works known as FAW, the third largest automaker in China.  He also led the sales team during the formative years at Zotye Auto, a private automobile company based in Hangzhou, where he was instrumental in building up sales from scratch in a very short period of time and delivered over 30,000 vehicles per year. 

Mr. Zhang Da Qi is spearheading our strategic growth plan to move our sales and marketing team to Hangzhou.  The city has a strong technology focus and is seen as the Silicon Valley of China.  Here, we will begin building brand awareness and draw on the talent of the community where many automobile companies have established their headquarters including Geely Holdings owner of Zotye Auto and also Volvo. 

Regarding EV product development, we have begun the Chinese type approval certification of our A380 EV 5 SUV.  This extensive process includes certification [with] endurance testing of the car and key components that are used in the electric power train as well as qualification and approval of a manufacturing production process and facilities.  We hope to complete this time-consuming resource-intensive process by the latter part of [the first quarter of] 2012.  As certification is not required for exporting, we anticipate exporting the EV products to the international markets earlier. 

We continue to see growing market opportunity for both our gasoline and new energy vehicles because of our focus on offering quality in product, services, and support. 

In 2010, new vehicle production in China exceeded 18 million units, surpassing the 11 million units in the United States.  Most of the new vehicles produced within China were purchased there, with the Chinese automobile market growing 35 percent or more annually over the last few years. 

However, due to deliberate efforts by the Chinese government to tamper escalated growth overall, we anticipate that the market growth this year will be comparatively smaller than prior years.  The 2011 auto sales in China are lowered due to policies imposed by the government to contain growth. 

First, in a deliberate move to contain the current country's GDP, the government imposed an increase on bank reserves to 25 percent from the worldwide norm of 10 percent.  As a result, reduced credit availability contracted growth in industries across China. 

This especially affected auto dealers that depend largely on bank financing to support flooring for stocks and inventory.  In addition, to reduce traffic congestion on the road and to dampen the escalated growth in the auto industry, the Chinese government established a policy to limit each family in the major cities to one gasoline vehicle per family.  However, this limit does not apply to ownership of electric vehicles.  Thus, families needing a second vehicle could have a full-electric one. 

So with the bank credit crunch and the limit on gasoline car ownership, the auto industry in China as a whole has seen what we believe to be an average reduction of 30 percent or more compared to last year's sales. 

Jonway, likewise, is seeing lower sales this year compared to last, comparing year-to-year volume.  However, with our new product line in 2012 and our EV models, and our international marketing efforts, we anticipate an increase in sales volume for 2012. 

Despite the Chinese government's effort to dampen growth in order to contain inflation, we see growth opportunities for ZAP Jonway [to sell] full-electric vehicles to fleet buyers as well as to consumers.  Currently, only five percent of Chinese households own a vehicle and the middle-class income population is continuing to increase.  Any family interested in buying a second vehicle will have to opt for a full-electric one. 

Additionally, the Chinese government is focused on promoting full-electric vehicles as the next-generation new energy vehicle in order to reduce its dependency on oil.  This is driven by the interest of the government to create a technology that gives China a competitive advantage against the other global auto players and to reduce the cost associated with the gasoline subsidy that the current Chinese government provides. 

The government sees China as having the largest number of suppliers of lithium batteries in the world.  To propel adoption, the central government, as well as the major city governments, [is] offering incentives to end-customers that are buying electric vehicles of up to 120,000 RMB or approximately $18,000 per full-electric vehicle sold. 

Thus the final cost for the buyer after taking the incentives will be lower than buying a gasoline vehicle of the same model.  Also encouraged by the central government, Chinese banks have packaged attractive buying for full-electric vehicles that is not available for gasoline vehicles. 

Finally, individual cities are proactively seeking green initiatives encouraged by the central government to reduce [their] carbon footprint.  For example, in Shanghai, in the Yangpu district, an area just north of the downtown Bund and home to over a million people in a 24-square mile area with 14 universities in the district area, the city government signed a joint cooperation agreement with ZAP Jonway to work together on the Green City Zone initiative. 

At the Knowledge Innovation Center, a high technology industry part in the Yangpu district, ZAP recently installed the first EV charging infrastructure with plans to deliver EV next year into this Green City Zone.  We will continue to identify additional opportunities for similar charging infrastructure installation delivered in tandem with our EV products into the market place. 

With that, I would like to turn the call over to Steve Schneider, our Co-CEO to discuss our product rollout plans and then Alex Wang, Co-CEO of ZAP Jonway for our third quarter results.  Steve?

Steve Schneider:          Thank you, Priscilla.  Over the last nine months we've been developing the product road map for both the traditional and electric vehicle product line that leverages the common platforms and utilizes the strength of both companies to deliver competitive and compelling products to the market.  Jonway, has what we believe is unprecedented for Chinese-made automobiles, a five-year warranty on the gasoline Mitsubishi drive trains in our A380 gas SUV. 

 In addition, we've been working with the best in class for electric power train Remy Motors, an internationally recognized technology leader in motors in the electric vehicle market place.  These actions further establish ZAP Jonway's commitment to offer quality products with leading technologies for both the electric and traditional gasoline vehicle markets. 

In the coming quarters, we plan to rollout new gasoline and electric vehicles introducing a diverse line up of automobiles that showcase the ZAP Jonway brand.  The new product line is prefixed by the initials JNZ.  And the following lineup is our current plan for our rollout. 

For the first quarter of 2012, we anticipate two launches.  The first will be the JNZ A380 G5, a five-door gasoline SUV that will feature a new stylized and streamlined look.  This updates the main platform currently selling in China, which offers quality and affordability with the Mitsubishi drive train and a Bosh engine control unit.  The A380 three-door SUV popular among young urban professionals is also among the first Chinese SUVs in the international standards for quality and approved for implication into the European union via an Italian distributor. 

We are completing the required in-country homologation certificate to launch the gasoline A380 SUV into the international market which will include countries in Latin-America, Southeast Asia, Africa, and the Middle East. 

Second is the JNZ A380 E5, a five-door full-electric SUV.  We are completing type approval for the A380 E5 in anticipation for product delivery and sales for China and export markets. 

We also expect two rollouts for the second quarter of 2012.  First is the JNZ A380 G3, a three-door gasoline SUV with a new sporty look and new mold; one of the first Chinese SUVs to meet international gasoline type approvals.  The three-door A380 model underwent EU type approval through Jonway's Italian partner last year and will be further enhanced to meet the new EU5 standards.  Its smaller chassis and lighter weight targets young professionals and is an ideal model to leverage the EV platform. 

As such, the next rollout will be the JNZ A380 EV3, the three-door full-electric SUV for sale in China and export markets.  In the second half of 2012, we expect to introduce five new products.  The first are the – the first two are the JNZ SHUTTLE, the electric and gasoline versions.  The passenger and cargo van is an EV is an ideal for fixed route deliveries and small passenger payload transportation. 

It is being planned for export globally and particularly to first-world countries that are going green by reducing city pollution.  The competitively priced JNZ SHUTTLE gasoline version is targeted for developing countries where smaller shuttle vans with carrying capacities are ideally suited to maneuver through narrow city streets.  ZAP Jonway has assigned a separate marketing team to address business-to-business sales and business-to-government opportunities. 

Next are the JNZ A280 EV and the A280 G, a compact SUV, electric and gasoline version.  The mini SUV will be a lighter, more versatile platform that we expect will accelerate electric vehicle adaptation in urban centers around the world, including the U.S. market. 

Last but certainly not least, the JNZ ALIAS, the ALIAS is a three-wheeled sports vehicle designed to be highway ready with the necessary crash-tested safety requirements.  A design by ZAP for the consumer EV market, the three-wheeled model enables the ALIAS to be homologated as a motorcycle while addressing the needs for a crash-safety test, including normal vehicle regulation airbags. 

ALIAS will leverage the existing infrastructure of Jonway motorcycle and its dealer network.  It is intended to be produced in the limited quantities to showcase the company's engineering and technology capabilities. 

With that, I shall now turn over to Alex Wang, our Co-CEO of ZAP Jonway to review the financial summary of the company.  Alex?

Alex Wang:           Thank you, Steve.  I will review the financial results.  For the third quarter of 2011, compared to the third quarter of 2010, please note that the company acquired 51 percent of Jonway operation in January 2011.  As such, when comparing year-to-year, the results of consolidated financial this year of the combined companies increased compared to ZAP's standalone financials from 2010. 

Net sales were $42.1 million U.S. compared to ZAP’s last year of $985,000 U.S. Jonway sales contributed $13.7 million in net sales.  In the three months ended September 30, 2011, Jonway sold 1,164 vehicles with total revenue of approximately $16.1 million compared to the three months ended September 30, 2010 in which Jonway sold over 1,513 vehicles with a total revenue of approximately $16.1 million. 

Several sectors contributed to the Chinese automotive industry’s overall reductions in sales this year.  The Chinese government placed a quota of one new gasoline vehicle license per family, and canceled some incentives and subsidies for purchasing gas vehicles and placed credit restriction policies on the banks to reduce credit facilities available to businesses.

So far Jonway has not provided a road to finance dealers’ orders.  Payments are made largely 100 percent upfront prior to delivery. Additionally, this year, more SUV models were launched into market by automakers, which has enhanced the competition  All this contributed to contraction in sales overall in the year compared to last year.  However, we anticipated with the models we're planning to launch next year and the increased activities internationally we shall see growth in our sales volume compared to this year. 

About 35 percent of Jonway vehicles sold in 2011 were the new, fully automatic transmission engines and the balance were the manual transmission engines; both Mitsubishi. The automatic transmission is priced higher than the manual transmission, but despite the higher price, it currently yields a lower overall margin contribution due to relatively high cost of the initial lower volume of a new model and the increased marketing costs for the market promotion —an inherent feature of new model launching.

Gross profit was $2.1 million or 15.2 percent compared to gross profit of $148,000 or 15 percent.  Gross profit increased by $2 million.  Jonway contributed about $1.9 million.  Operating expense were $7.3 million compared to operating expense of $1.9 million last year.  Operating expense increased by $5.4 million due to the increase in sales and marketing, general and administrative, and research and development related to the addition of Jonway and the integration of EV technology. 

Interest expense was $4.9 million due to non-cash amortization $4.4 million of beneficial conversion feature related to the $19 million in convertible debt issued by ZAP to China Electric Vehicle Corporation on January 12, 2011, the proceeds of which were used to finance the Jonway Acquisition.

Net loss was $8.9 million, almost half of this non-cash or $0.04 per diluted share compared to net loss of $2.3 million last year.  For the nine-month period ended September 30, 2011, net sales were $42.1 million including $40 million contributed by Jonway.  In the nine months ended September 30, 2011, Jonway sold 4,430 gasoline vehicles with total revenue of approximately $48 million as compared to the nine months ended September 30, 2010; in which Jonway sold 4,949 vehicles with total revenue of over $53 million. 

Gross profit was $4.8 million or 11.3 percent.  Operating expenses were $24.9 million.  Interest expense net was $13.7 million due to amortization of the beneficial conversion feature recorded on the $19 million convertible debt, which resulted from a discounted stock conversion price. Also included is interest expense of $1.1 million relating to the $19 million convertible debt at eight percent per annum and bank loans.. 

Net loss was $29.4 million or $0.14 per share compared to net loss $7.6 million or $0.07 per diluted share. 

Now, turning to a review of our balance sheet…  At September 30, 2011 we had cash and cash equivalents of $1.5 million as compared to [a] $1 million cash position at September 30, 2010.  We are looking at plans to raise additional capital to fuel the next phase of our growth. 

 Net cash used for operating activities was $8.7 million in the nine months ended September 30, 2011.  With that I will turn this call back to [Dr.] Priscilla Lu. 

Priscilla Lu:           Thank you, Alex.  When assessing the performance of our company, it is very important to understand the seasonality in automobile sales in China, which are weighted significantly in the fourth quarter of the year.  We are excited about our prospects; however, we believe [the] macroeconomic pressures I described will continue to impact 2011.  That said, we believe the demographics and regulation drivers will fuel long-term growth for new energy vehicles.

We have taken action to broaden our sales channels to address fleet opportunities.  Our mission is to be a global leader in the electric vehicle market offering the best quality, best performance at [the] best value. 

With the excellent progress we have made during this year integrating the two companies and the products of both companies and the initiatives in place planned for the coming months, we believe that we are methodically paving the way toward being a world-class electric vehicle company. 

With that, I'd like to open the lines for Q&A. 

Operator:                 Thank you.  Ladies and gentlemen, if you have a question at this time, please press star followed by the number one key on your touchtone telephone.  If your question has been answered or if you would like to remove yourself from the queue, you may press the pound key. 

Again, if you do have a question, you may press star and then one at this time.  And our first question comes from the line of Laura Engel from Stonegate Securities. 

Laura Engel:           Good afternoon to all the ZAP Jonway team.  How are you?

Priscilla Lu:             Good afternoon, Laura. 

Laura Engel:           I wonder if you could give us updates on the progress with registrations and meeting [the] pre-sales regulations of the Chinese government. 

Priscilla Lu:             Yes.  We are currently in the process of doing the type approval, which is what is required in order to get the registration completed.  It is a fairly long – lengthy process because they do require certification and qualification of not only the vehicle, the electric vehicle, but also for the suppliers as well as our manufacturing plant facilities.  This certification we're talking about is for the electric vehicle.  We, of course, already have the certification and licenses for the gasoline ones. 

Laura Engel:           OK.  And as far as timing, you've discussed that a little bit, could you give us maybe any updated guidance giving the recent results and then kind of what we've seen put out by the company in the past.  Do you have any updated guidance as far as vehicle sales for Q4 or for the following fiscal year?

Priscilla Lu:             This year has been, as we indicated, a challenging year overall for the auto industry in China because of a deliberate efforts by the government to contain the growth of [the] auto industry and basically, overall, the GDP of the country.  However, with the efforts that we have made in ZAP Jonway to expand our marketing and sales internationally as well as with the new product lines that we have lined up for 2012, we believe that we will increase the sales not only for China but also internationally. 

And since there are incentives for the electric vehicle, we believe that this will certainly add to the volume of sales that we currently have [when comparing] 2012 to 2011. 

Laura Engel:           OK.  And then one last question; as far as looking at the fleet sales and the launch in the first half of the next year, is there any specific progress you can discuss or any discussions or things that are underway other than the infrastructure and the development in the Yangpu district?  And then also, are you all taking any pre-orders as far as for these fleet sales?

Priscilla Lu:             The regulations in China require us to get the certification for the electric vehicle before any orders can actually be accepted.  So until we get the certification completed domestically for China, we're not currently taking any pre-orders.  However, for the international market, which does not require the certification approval from the Chinese government, we are now actively pursuing international opportunities in the electric vehicle as well as the gasoline vehicle space. 

Laura Engel:           OK.  Thank you. 

Priscilla Lu:             And [speaking of] the relationships we have with the various government district, Yangpu district [being] one, we also signed agreements with the Tianjin government, both of which will give us visibility on the opportunities available with the government for fleet. 

 And through the working teams that we have, we believe that we are well positioned to address those opportunities. 

Laura Engel:           Great.  Well, thank you for taking my question.  I appreciate it and I'll get back in the queue. 

Priscilla Lu:             Thank you, Laura. 

Operator:               Thank you.  And once again if you have any questions, you may press star then followed by the number one key on your touchtone telephone.  And we'll pause one moment for any further questions.  And once more, if you do have a question, you may press star and then one. 

And I see no further questions at this time.  I would like to turn the conference back to Dr. Lu for any final remarks. 

Priscilla Lu:             Thank you everyone for being on the call and we look forward to [sharing] further information [with] you over the next few months as we develop and rollout our new product line.  Thank you.  Good evening. 

Operator:               Ladies and gentlemen, thank you for your participation in today's conference.  This does conclude the program and you may now disconnect.  Everyone, have a good day. 

END