Transcript - ZAP Jonway Fourth Quarter & Year-end 2011 Financial Results Conference Call

 

ZAP Jonway Fourth Quarter & Year-end 2011 Financial Results Conference Call

April 17, 2012, 4:30 p.m. Eastern Time

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Operator:

Good day, ladies and gentlemen, and thank you for standing by.  Welcome to the ZAP Jonway Fourth Quarter and Year-end 2011 Earnings Conference Call.  As a reminder, this conference is being recorded. 

I will now introduce our host for today, Ms. Becky Herrick from LHA.  Please go ahead, ma’am. 

 

Becky Herrick, LHA:

Thank you, operator.  Good day, everyone.  Thank you for joining us for the ZAP Jonway fourth quarter and year-end 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 one year.  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. 

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

 

Priscilla Lu, Chairman of ZAP Jonway:

Thank you Becky, and welcome everyone.

First I will review our 2011 accomplishments and financial results.  Then I will provide our 2012 vision and a summary. 

2011 was a transformational year for ZAP Jonway. This past year is our first year of consolidated financials of ZAP and 51% of Jonway Auto in China.  Our efforts have been focused on strengthening our foundation as a New Energy Vehicle company.

We are adding new products to our portfolio, including the full electric and gasoline versions of the Shuttle Van and the new model of the A380 SUV.

We are developing new sales channels in China to support these new products, and in 2011 added several new members to our executive team from the automotive industry to increase overall effectiveness and management depth.

On the executive team, we appointed Mr. Zhang Da Qi, formerly from First Auto Works, and then at Zote, as our General Manager of Sales and Marketing Operations for Jonway Auto. 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. 

To create better access, Jonway Auto moved its sales and marketing teams to Hangzhou, a strong technology-focused city and viewed by many as the hub of innovation and new industries.

In addition, we have revamped our dealership network to bring in dealers with financial strength and industry depth.  We have also added a new sales organization dedicated to selling the Shuttle Van, and a separate team for the electric vehicle products.  Each of these teams is focused on separate sectors of the market that require dedicated effort and experience.

Our 2011 highlights follow.

We completed the A380 SUV EV for China type approval, which we believe will be issued mid-2012.  This will provide the baseline for EV type approval internationally, and we shall begin efforts to start the type approval for the US market this year.  We believe that this US type approval process for electric vehicles will take more than 12 months and expect it could be finished sometime in the middle of 2013.

We also finished development of both the gasoline and electric versions of the new Shuttle Van.  The next step is type approval of the EV van, which we expect will be completed in the second half of 2012 and should be available for international market in the same time frame.

We also completed the EV manufacturing production line for the A380 SUV with all of the required automated test tools and calibration equipment needed for mass production manufacturing.  We expect the production line will roll out its first EV production vehicle in June 2012.

We also finished development for the new A380 SUV model, which upgrades the interior of the vehicle.  The new exterior 2012 look of the A380 SUV vehicle is planned for October 2012.

Much of our effort and resources in 2011 were spent in building the framework and foundation to mass produce our EV product line, starting with the A380 SUV EV, followed by delivering the EV Shuttle Van.  Both of these products share common components in the EV power train so that we can drive volume and gain economy of scale to be more cost competitive. 

In addition, the company now offers in China a five-year warranty on the gasoline Mitsubishi drive trains in our A380 gas SUV. On the electric vehicle side, our EV technology team in Hangzhou, ZAP Hangzhou JV, formed with Jonway Auto and Better World, has been working with the best in class for electric power train, Remy Motors to be incorporated in our next product releases.

Another key strategic initiative was quality. The team strived to continue to improve our product quality by incorporating quality improvement processes, encouraging our partners and customers to provide feedback and track the corrective actions taken to determine the effectiveness of our improvements. To this end, we encouraged continuous communication with dealers and customer support centers on product issues and the Jonway Auto team reported regularly to our Chinese network of dealers and service support centers on the improvements that have been made. To facilitate this, Jonway Auto hired an experienced manufacturing production quality chief engineer whose sole responsibility is to be accountable for quality of products delivered from the factory, and the process to manage and control quality through this continuous feedback process.

Now on to a review of the industry and trends.

In an effort to reduce traffic in major cities in China, the central and local governments in cities such as Shanghai and Beijing have made it very difficult to obtain licenses for new cars.  Beijing has adopted a lottery system and Shanghai has an auction system that bids up the price of the new car license in weekly auctions. But in the case of electric vehicles, for Beijing, new car licenses are immediately available and offered free, compared to the price in some cases of more than US$8,000 for the car license for gasoline vehicles.  The central government has also restricted families to no more than one new gasoline vehicle per family.  However, this limit does not apply to ownership of electric vehicles.  Thus, families wanting a second vehicle can now have a full-electric car.

In addition, China’s electric power companies, the National Grid and Southern Grid, have both taken an active role in driving the adoption of EVs.  They have set up battery swap stations in a few selected cities and provide battery leasing programs to encourage fleets and taxis to adopt EVs as the vehicle for commerce. 

We are seeing growing interests in EVs internationally, especially in the US where charge station infrastructure is being installed by city and state governments.  In the US, consumers can get a $7,500 subsidy per vehicle, which serves as a huge incentive.  In some states like California, there is an additional subsidy for the installation of charge stations of $2,000 or more.

With the increasing cost of gasoline prices, the trend towards adoption of EV is now not only in China but mainstream and worldwide.  Major distributors in US, Brazil and some European countries have approached us to become our local partners, looking for the opportunity where a technology shift in the underlying platform, creates the opening that enables a new player like ZAP Jonway to offer a quality product at an affordable competitive price.  We shall be focusing on the type approvals for a few selected countries with the goal of becoming one of the first to offer a practical quality EV at an affordable price.

On to a review of our financial results. For the fourth quarter of 2011…

Consolidated net sales were $14.2 million r, including $13.9 million contributed by Jonway, compared to $1.1 million for ZAP on a standalone basis for the fourth quarter of 2010. 

Consolidated gross profit was down due to one-time obsolete inventory write down in ZAP USA, and in Jonway Auto, there were promotional incentives offered to dealer to clear inventory of the prior year model and additional incentives to motivate higher sales quota and to compensate for advertisements and new branding promotion using the name Jonway, replacing the prior brand UFO. The $687,000 gross profit for the fourth quarter of 2011 was contributed by Jonway, compared to gross profit of $64,000 for ZAP on a standalone basis in the fourth quarter of 2010.

Consolidated operating expenses were $7.8 million, including both $5.4 million related to Jonway and non-cash charges of $1.6 million related to quarterly amortization of distribution rights, stock based compensation and others.  This compares to operating expenses of $7.3 million for ZAP on a standalone basis for the fourth quarter in 2010. 

Net loss attributable to ZAP was $11.4 million, or $0.05 per diluted share, including total comprehensive loss of $2.1 million from Jonway. This compares to a net loss of $11.4 million, or $0.09 per diluted share in the fourth quarter of 2010 for ZAP on a standalone basis.

At December 31, 2011, cash and cash equivalents was $5.9 million.

In December 2011, the $19 million convertible note was extended to August 12, 2012.  Subsequently this was further extended to August 12, 2013.  There will be no interest accrual going forward after the end of the first term that ended February 12, 2012.

At the end of 2011, ZAP paid 70 million shares for the Shuttle Van to Jonway Group for design, engineering and production operations work valued at over $18.2 million, booked at $15.4 million; of which $3.8 million was attributed to R&D; and the balance $11.6 million is attributed to capital investment in molds and equipment for amortization.  This included payment for the design, exterior and interior molds, tooling, and test production equipment for manufacturing.

For the full year…

Consolidated net sales were $56.2 million including $54.3 million contributed by Jonway. This compares to $3.8 million in 2010 from ZAP on a standalone basis. 

Consolidated gross profit was $4.5 million including $5.0 million contributed by Jonway, or 7.9% of sales, compared to gross profit of $429,000 in 2010 from ZAP only. ZAP contributed negative gross profit due to inventory write down, and the gross profit for Jonway was lower primarily due to sales and marketing costs to present the direction and product vision of the new company as well as increased promotional incentives to encourage volume sales and including rebates for advertisement expenses by the dealers to support rebranding under the Jonway brand from its previous name of “UFO” last year.

Consolidated operating expenses were $32.7 million, including $16.6 million related to Jonway and non-cash charges of $7.2 million related to amortization of distribution rights, stock based compensation and others.  This compares to operating expenses of $14.5 million in 2010 for ZAP alone.  The higher operating expenses from Jonway were due primarily to increases in sales and marketing in establishing its branding in 2011, general and administrative for relocation of the sales team to Hangzhou, and R&D related to Chinese EV product type approval and engineering work needed to integrate local supplier parts for our EV power train.  There were also one-time development costs for tooling and testing of equipment for production manufacturing of the EV product line. 

Consolidated net loss in 2011 was $45.4 million. Net loss attributable to ZAP was $40.8 million including total comprehensive loss of $8.1 million attributed to Jonway Auto, compared to net loss in 2010 of $19.0 million from ZAP on a standalone basis. More than $30 million of the consolidated net loss was non-cash, attributed to stock based compensation and amortization of distribution rights, interest payment and depreciation, and non-cash loss, which was due to a momentary high in the stock price at more than one dollar per share, at the time towards end of January 2011, resulting in a difference in the market price and the convertible note conversion share price when the convertible note was issued at the time.  Of the remaining consolidated net loss, approximately $14 million was cash expenditure of which more than $4 million of this is one time expense associated with the legal and accounting costs from the acquisition, EV technology development for production manufacturing and payment for development of EV tooling and type approval expenses. Consolidated net loss in 2011 was $45.4 million.  Net loss attributable to ZAP was $40.8 million including total comprehensive loss of $8.1 million attributed to Jonway Auto, compared to net loss in 2010 of $19.0 million from ZAP on a standalone basis. More than $30 million of the consolidated net loss was non-cash, attributed to stock based compensation and amortization of distribution rights, interest payment and depreciation, and non-cash loss, which was due to a the stock price trading at more than one dollar per share at the end of January 2011 resulting in a difference in the market price and the convertible note conversion share price when the convertible note was issued.  Of the remaining consolidated net loss, approximately $14 million was cash expenditure of which more than $4 million was a one-time expense associated with the legal and accounting costs from the acquisition, and also EV technology development for production manufacturing and payment for development of EV tooling and type approval expenses.

Now for our vision…

Our outlook for 2012 is favorable. With much of the hard work to build the foundation of the combined company in place, we expect to begin seeing some of the financial results from the sales of the new products this year.

With the new sales team in place, a stronger Chinese dealership network, and the additions of the new Shuttle van, and A380 SUV models, we expect China’s gasoline vehicle sales to increase and move our traditional vehicle business toward profitability this year. Our target for Jonway Auto in China is to reach profitability and to exceed 2,000 vehicles per quarter, attaining over 8,000 vehicles per year at a gross margin of over 10%.  With the increased volume, we hope to improve the gross margins by another 2% to 3% by the end of the year.  As we begin to sell our Shuttle Van product in China, we are targeting sales of 2,000 or more by end of the year, so that we can ramp up sales in 2013 to achieving sales volume of over 5,000 for the gasoline vans in China in 2013. 

Internationally, we are working with partners in Brazil for South America, Thailand for Southeast Asia, Turkey for European markets, and South Africa for the African continent, and Russia for Eastern Europe.  With key partners that are experienced in auto sales distribution, operating as “hubs” to support their surrounding countries, we hope to work closely with the partners to develop their neighboring regions and expand our sales in these strategic geographies. We expect to add an international sales force to the team to provide sales, marketing and customer support to our international partners.

Our goal is to drive international sales of both the gasoline and electric versions of the SUV and van. With the A380 SUV EV and the EV Shuttle Van, we have unique products priced competitively to address the market demands of developing countries as well as the US and European markets. 

The EV Shuttle Van will have two models: one model will be priced more economically and will use lead acid batteries, with shorter driving range and the other, a higher-end model, will use more expensive lithium batteries and enable a driving range of over 100 miles per charge with longer life cycle for the batteries. 

We believe that the EV Shuttle Vans will be highly desirable for city deliveries and will be popular among government and corporate maintenance utility vehicles.

Much of the investment in R&D this year will be directed to type approval for selected countries. We expect to begin selling our EV products for both A380 SUV and the Shuttle EV Van in the second half of 2012 in China and Southeast Asian countries. The international sales and the EV products both have higher margins and we are well positioned to compete with others in these segments, both in terms of price and quality.

Our focus and priority is to utilize the experience base of our seasoned team and the established platform of our traditional vehicle business to develop leadership in the electric vehicle sector in China and develop our markets internationally. 

To launch the 2012 New Year, we held our annual dealership sales conference in March in Hangzhou. There were more than 450 attendees, with over 80 dealers, and more than 250 customer service center partners and close to 100 sub-dealers. We announced the launch of our new five-door gasoline SUV, the JNZ A380-G with its fully re-styled interior, and our EV product line. Also at the event, we unveiled our 2013 concept vehicle designed by Maggiora, a renowned Italian auto designer well known for its exquisite stylish design of Italian sports cars.

We are controlling our operating expenses to focus on the key priorities that will generate near term revenues in market segments that yield the most attractive margins. We hope to reduce our overall operating expenses by 30% to 40% compared to 2011, while increasing revenue.  We believe that much of our operating expenses will be reduced in 2012 since many of the 2011 expenses were one-time costs incurred due to the integration of the two companies and the adoption of EV products and the EV production line in our factories.

In summary…

2011 was a year of transition in the integration of the two companies and our outlook on 2012 is positive as we expect to see some of the results of what has been invested to combine the strengths of the two companies, leveraging technology know-how, with manufacturing production excellence, and global market access. We aim to be one of the market leaders in the new EV space, and will work hard to achieve this by delivering excellence in our technology and quality in our products and customer services.

We expect 2012 operating expenses to decrease as 2011 operating expenses included one-time costs associated with EV product line adoption for mass production.

Regarding sales volume, while first quarter 2012 is expected to be similar to 2011 as we had not yet completed the  our new sales program, internal reorganization, dealership network enhancements and new management additions become fully integrated and drive results, we believe the second quarter of 2012 will increase compared to the same period in 2011.   

Our A380 EV SUV is ready to ship and is scheduled to come off the production line by end of June 2012. We are uniquely positioned with a competitive EV product that is practical, affordable and technologically robust.

We believe that ZAP Jonway is well on its way this year to delivering the results envisioned with the integration of the two companies.

Thank you everyone for joining us today and for your support of ZAP Jonway. We look forward to speaking with everyone again soon. Thank you.