Deer Consumer Products (NASDAQ:DEER)

2010 Second Quarter Conference Call notes (Still awaiting Q&A section)

Operator:

Good day, ladies and gentlemen, and welcome to the 2010 Second Quarter Earnings call for Deer Consumer Products, Inc., listed on the NASDAQ Global Select Market under stock symbol: DEER.

I’d now like to introduce the Deer’s Management team: With us here today is Bill He, Chairman & Chief Executive Officer, James Chiu, Head of Asia Pacific, Helen Wang, President, and Zhongshu Nie, Chief Financial Officer & Director.

I’d now like to turn the call over to the Company’s Council Robert Newman. Please proceed.

Robert Newman - Legal Disclaimer:

My name is Robert Newman of the Newman Law Firm, outside legal counsel of Deer Consumer Products.

This morning’s presentation contains "forward-looking statements" within the meaning of the “safeharbor” provisions of the Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to differ materially from the results expressed or implied by such statements, including changes from anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, access to capital, difficulties in developing and marketing new products, marketing existing products, customer acceptance of existing and new products, and other factors. Accordingly, although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The Company has no obligation to update the forward-looking information contained in this presentation.

It is my pleasure to introduce Bill He Chairman & Chief Executive Officer of the Company.

BILL HE

Thank you all for participating in this call.

Good morning ladies and gentlemen. I am Bill He, Chairman, CEO and the founder of Deer 15 years ago. I am very happy today to announce record 2010 Q two earnings. I am very proud of our progress in China and our export markets. We look forward to building a strong brand in China and growing our export business.

I would now like to introduce Mr. James Chiu, our Head of Asia to discuss second quarter results for 2010.

James Chiu:

Thank you all for being here today. As this is just our third earnings call since we have become a Nasdaq listed company, we would like to give a brief introduction to the company.

Deer Consumer Products, Inc. is one of the world's largest vertically integrated branded and ODM/OEM manufacturers of small home and kitchen appliances marketing to both global and China domestic consumers. In recent years, we have rapidly increased the sales of our own Deer branded products which are primarily sold in mainland China. In 2010, we anticipate a balanced China and export revenue mix of 40 and 60%.

Revenues

Our revenue for Q2 of 2010 was $34.5 million, an increase of $19.1 million or 125 % from $15.3 million for Q2 of 2009. The increase in revenue was a result of our fast growing business in the China domestic market and our expansion in Asia excluding China, the Middle East and South America.

We have experienced strong sales in China. We increased our China domestic market sales from approximately $1.7 million in Q2 of 2009 to approximately $11.4 million for the same period in 2010, a 579 % increase in sales.

Sales in China exceeded our expectation. During the quarter, we ship our products on a daily basis to various retail customers. We ship at least once a week to traditional retailers like Gome and SuNing. In the second quarter, we have also increased the total number of shipments and the size of each shipment. To date, we have not experienced any returns. Although we do not have access to sales data at the store level, we are confident that our repeated shipments of the same products into the same warehouses can only mean one thing; the end customers are buying our products. From our conversations with the retailers, they are very happy with the in-store progress and they intend to increase product offerings.

In the second quarter, we increased our SuNing store counts from roughly 500 to over 700. SuNing is currently very happy with the sales of the products that we provide to them under their store brand called Mazuba. We are in constant conversation with SuNing about increasing product offerings. We are currently in roughly 140 Gome stores. We continue to add Gome stores. In anticipation to ramping up advertisement and promotion of Deer products in Gome stores, we worked very hard in the second quarter to make sure that the products are on the shelves, the sales people are properly trained, and the in-store banners are properly installed. In the second half, we anticipate to increase advertising spending for our Deer branded products. However, we anticipate our China profit margins to stay the same or expand as we have allocated 20% for SG&A expenses for our China sales.

Including SuNing, Gome, Wal-Mart, and other regional retailers, we are in roughly 1,000 stores which is 2/3 of our 2010 target of 1,500 stores.

Currently, many distributors are asking us to carry Deer products. There are several reasons. Due to our sales performance in SuNing, Gome, Wal-Mart, and other regional retailers, the distributors are eager to establish business relationships with us. Being a Nasdaq listed company with $74 million dollars of cash on the balance sheet has also been very helpful. We are working hard to identify the right distributors for regional retailers throughout China. We also look forward to attending a national distributors’ conference in August. We will be meeting with distributors from all over China and we plan to provide extensive training on Deer products to them.

Our export sales were $23.1 million for Q2 of 2010, a $9.4 million or 69% increase over the same period in 2009. We experienced stronger than expected sales in South America and Asia excluding China. We believe that increases in sales in Asia excluding China and South America were largely due to emerging wealth and the regions experiencing less impact from the financial crisis. In the longer term, we are optimistic about our Asian and South American export markets due to their fast GDP growth and large population.

We believe that many smaller suppliers with limited capital resources had gone out of business leading to further consolidation in the industry. We utilized this market opportunity to add new accounts and increase sales volume with our existing customers.

Cost of Revenue

Our cost of revenue for Q2 of 2010 increased to $24.6 million from $11.5 million in 2009. The increased cost of revenue in 2010 was due to the increase in sales.

Gross Margin

Our gross margin for Q2 of 2010 was 28.7 % compared to 24.8 % for the same period in 2009. The year over year increase in gross margin was due to higher sales in the China domestic market. Due to lower household penetration of small household products and trends of emerging wealth, our gross margin is substantially higher in the China domestic market. During the Q2 of 2010 we have also benefited from manufacturing efficiency as a result of higher unit volume.

Selling, General and Administrative Expenses

SG&A expenses increased from $1.5 million for Q2 of 2009 to $2.9 million for Q2 of 2010. Our SG&A expenses were higher in the Q2 of 2010 primarily due to higher revenue in the quarter. SG&A expenses have been lower than expected as we ramped up both our export and domestic market sales. We are confident that we can keep our SG&A expenses low as we gain economy of scale and further improve our operating efficiency.

Operating Profit and Margin

Operating income for Q2 2010 was $7.0 million, an increase of $4.7 million or 209% over the quarter in 2009. Operating margin increased from 14.7% to 20.2% year over year. The increase in operating margin is largely attributed to increased sales in China and higher manufacturing efficiency. We enjoy significantly higher gross margins in China. After adjusting for higher SG&A expenses associated with building a strong consumer brand, the operating margins in our China business is still considerably higher than our export business. China represented 33.0% of our overall revenue in Q2 of 2010. We expect
higher operating margins in subsequent quarter as we ramp up our sales in China to represent more than 40% of our 2010 overall revenue.

Taxes

Our effective tax rate for Q2 of 2010 was 15.5% versus 19.7% for the same period in 2009. In 2009, we were able to lower our tax rate to 15% as a result of Deer being granted high tech status by the local government. The tax benefits will last three years and we can renew our beneficial status prior to expiration.

Net Income

Net income for Q2 2010 was $6.0 million, an increase of $4.3 million or 251% over the same quarter in 2009. Our net margin improved from 11.2% in Q2 of 2009 to 17.5% in this quarter. We believe that we have one of the highest net margins in the small household appliance sector worldwide. Our high net margin is a result of years of strategic planning and a corporate culture that emphasizes efficiency and providing our clients with the best value in the small household appliances industry.

This brings us to the conclusion of our discussions. Thank you all for your time. We will be available to address questions if there are any.

While we are waiting for listeners with questions, please refer to our website www.deerinc.com for any additional questions you may have after the conclusions of today’s call.