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Guanwei Recycling Corporation (NASDAQ:GPRC)

Q3 2012 Earnings Conference Call

November 14, 2012, 08:00 a.m. ET

Executives

Ken Donenfeld - DGI, IR

Min Chen - CEO

Feng Yang - CFO

[Laurent Swan] - Member of Finance Team

Analysts

Mark Miller - East West Network Group

[Victor Stephens] - Private Investor

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Guanwei Recycling Corporation 2012 Third Quarter Investor Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today November 14, 2012.

I’d now like to turn the conference over to our host Mr. Ken Donenfeld. Please go ahead, sir.

Ken Donenfeld

Thank you and thank you to everyone joining us on the call today. Link to this conference call will be posted on the company’s website at www.GuanweiRecycling.com and instructions for accessing the call are included in the earnings release.

On the conference call today will be Mr. Chen Min, Chief Executive Officer; Mr. Yang Feng, CFO; and Mr. [Laurent Swan] a member of the company’s financial team together with Mr. Richard Sun who will serve as our interpreter.

In the 60 minutes or so that we have Mr. Chen to present his opening comments and then Mr. [Laurent Swan] will walk you through the numbers. Mr. Chen and Mr. Yang Feng will then be available to answer your questions and we greatly appreciate your holding any questions you may have until we completed the opening remarks and your patience as we go through the translation process and answering them.

Before we get started I’m going to read a disclaimer regarding forward-looking statements. This conference call may contain in addition to historic confirmation forward-looking statements within the meaning of the federal securities laws regarding Guanwei Recycling Corp. except for historical information contained in our comments. The statements we make are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results and future periods to differ materially from forecasted results. These risks and uncertainties include among other things product demand, market competition and risk inherent in our operations. These and other risks described in our filings with the U.S. Securities and Exchange Commission.

Okay. I can now begin.

Good morning. I trust you all had a chance to review the results we announced yesterday for our 2012 third quarter. I’m pleased with the fact that they track very closely with the discussion we had at the end of our second quarter. At that time you will recall I said we believed that the moderating and raw material and labor cost we began to see will continue in the second half of the year. As with the moderate price increases for our recycled low density polyethylene or LDPE, that indeed has been the case and as a consequence in the third quarter we were able to achieved an important turning point in our operations.

With our net revenues continuing quarter-over-quarter growth, selling prices also increased at a higher rate than our manufacturing cost. Consequently, we were able to achieve the year-over-year 12% increase in gross profit and with the year-over-year increase of just over 7% in sales we generated net income which also increased just over 7%.

Underlying our progress in what has been a difficult to economic environment is the continuing demand for our key product recycled LDPE which continues to provide manufacturers with a significantly lower cost alternative to [frozen] plastic. While some businesses have been hit harder than others in the downturn that we have experienced in China. We have benefited from a diversified list of over 300 clients and also have been able to ratchet it up our list of active clients to over 150.

We also have benefited from a strong balance sheet. We have no short-term borrowings or interest cost. And we have utilized the cash we generated very judiciously to upgrade our facilities with a variety of capital projects including the expansion of our raw material storage facilities and improvements on our ability to produce top of the line (inaudible). Year-to-date we have made approximately $2.4 million in expenditures. We believe these projects has helped to improve our margins and also have provided a foundation for future capacity expansion. While doing so, we also were able to end the third quarter with cash and cash equivalents of approximately $13,237,000.

In short we believe that with good management we have turned an important corner. Although we can’t say when we will see a clear turn in China’s economy, we are confident that whenever that comes we will be well positioned to benefit from it. At the same time there are some external events we hope will improve U.S. investor views of China based company. Obviously, one of these is the new leadership in China. There also have been some positive steps with respect to accounting (inaudible). I think it's quite clear our company continues to be seriously undervalued primarily because of the negative attitude towards China based docs in general but we remain hopeful this situation will improve for the best performing companies such as ours as soon as possible.

At this point I’d like to turn the proceedings over to Mr. [Laurent Swan] who will discuss our results in more detail. [Laurent].

[Laurent Swan]

Thank you, Ken. As the employer shareholder cost before getting into the quarter I’d like to spend a couple of minutes discussing our company for those on the line who maybe new comers.

As you know our main product is recycled low density polyethylene or LDPE. Recycled LDPE is used as a substitute for version LDPE obvious the highest with the high grade can be mixed with LDPE in a wide variety of our product. We don't mix the product our more than 300 customers do. They range from shoe soles and toys to wire and piping in the construction industry and so on.

We believe we are the largest manufacturer of this product in China, bigger than our two largest competitors combined. We (inaudible) various grades differentiate only by color. Our top grade is far white and lowest grade palette are black. The main advantage we provide is that our recycled LDPE is more than 40% (inaudible).

Our key basis for our price advantage to source of our raw materials which is plastic that has been used only once before. Nearly all of our supply comes from (inaudible) mainly Germany where it is cheaper for them to sell used plastic to us then to recycle it themselves. We believe we are one of only a few companies that can import our waste from Germany because we are one of the only few companies that satisfy all the environmental steps required to be satisfied by German doc qualities.

They have some of the toughest standard in world and we have emissions manufacturing process. We can therefore, purchase our waste directly in Europe with no middle man and this imported waste is less costly because it is more carefully sorted and requires less processing.

(Inaudible) the product remain strong. The key limitation in selling it on how much plastic waste (inaudible) the PRC government to import each year and whether we have enough production capacity.

Our current capacity is 80,000 tons per years and our current combined import quota is 115,000 tons of waste.

Turning to the third quarter this year, as noted by Mr. Chen, it was the first significant quarter for us. In the first half of the year we have to content with the inflation in some of our key cost. This included not only the cost of our raw materials but also labor cost and we were required to increase wages and welfare expenditures to attract and maintain a strong workforce in the face of our workers shortage in the Southern China.

Toward the end of the second quarter following negotiations with our suppliers, we began to see a moderation in raw material cost as well as stabilization our labor cost, which we believe will continue into the second half of 2012.

As reflected in our third quarter results, this proves correct and the combination of increased tonnage sold in the period and the modest price increases used or revenues at a slightly (inaudible). As a consequence we achieved a double-digits gross margin and approximately 7% improvement in net income year-over-year.

Most specifically, as reported, we achieved revenues in the quarter up $17,905,974 up 7.36% from the same period last year. Of significance is primarily was the resale of increase in the volume of our [south] manufacturer LDPE coupled with small slight increase.

Tonnage sale of our [south] manufacturer recycled LDPE increased 5.77% year-over-year to 14,427 tons. I should note this was also 818 million more tons than was shown in the second quarter of this year.

Our recycled LDPE price in the third quarter up $1,208 per ton was up 0.75% from the same period of last year. Increase sales price as well as increased tonnage sold for LDPE material in the quarter also contributed to our higher gross profit and higher net income in the 2012 third quarter.

Our net income in the third quarter grew 7.32% to $3,622,832 or $0.17 per share. The per share figure in the third quarter matched the per share number among last year as we have roughly 816,000 more shares outstanding this year. This reflected shares that were issued to a vendor to the company to pay off the loan as discussed in our Form 10-Q filed with the SEC.

The turnaround in our bottom-line came as we generated gross profit in the third quarter of $5,531,524 up 11.59% on the prior year. In a quarter, raw material cost or in other words the cost of imported plastic waste decreased 0.99% to $697 per ton compared with $704 per ton at year earlier and compared with $690 a ton during the second quarter, an increase of just about 1%.

We continue during the quarter to develop relationship with our new suppliers and to maximize purchases from European suppliers versus wholesalers. As we continue to broaden our suppliers and strengthen our relationship, we anticipate receiving more favorable terms and discounts especially for [bulk] orders.

During the quarter we also saw flattening of our labor cost following increases in the first half combined with the moderating raw material cost we saw in and improvement in our gross margin to 30.89% in 2012 third quarter compared with 29.72% in the year earlier period.

For the nine months ended September 30, 2012, gross revenue were up 13.3% year-over-year to $52,772,402. Your tonnage sold of recycle LDPE increased 1.42% and selling price increased 3.33% compared with the first nine months of 2011.

It's quite in our second quarter report, revenues in the first half of 2012 included $3.46 million in the sales option raw materials which generated minimal margins as we intend only to cover our cost. There were no such sales in 2011.

To the first nine months of 2012, our cost of revenues or the percentage of cost to net revenues increased year-over-year from 69.33% to 72% primarily due to the relatively high increase in raw material cost versus increased in average selling prices coupled with higher labor and overhead cost. As noted however, this trend began to reverse in the third quarter this year and we believe this is the cost for optimism we get into outlook for the remaining of the year.

On that note I will return the floor back to Ken for Mr. Chen’s closing comments before we pen the session to your questions. Ken.

Ken Donenfeld

Thank you very much [Laurent]. Mr. Chen says we are indeed optimistic about the remainder of the year. We see continuing price increases of about same magnitude as in the third quarter, growing faster than our cost which we believe are also likely to slightly increase. At some point going forward we believe that an improving economy in China will permit a return of the stronger growth we have experienced for many years prior to the recent where it should be a downturn. Again we also think it is time that we receive recognition in the stock market for our accomplishments and outlook and hope you all will help spread the word about the solidity of our story and our continuing exciting growth potential rooted in our strong concern for the environment.

So, thank you very much. I will now open the floor to questions. Operator, if you could help in that regard.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Mark Miller with East West Network Group. Please go ahead sir.

Mark Miller - East West Network Group

You have 34 days approximately to qualify for your NASDAQ listing, which your cash position stated of over 13 million for the quarter. I believe that the companies that they believe that their stock is undervalued here and they could probably without even putting a dent in a position say less than 4% of the cash position used to buy back their own stock. So the investment community could also understand that company believes that their stock is undervalued, but nothing speaks louder than opening up your own wallet. I feel this has to be done; everything else will take its course. Sometimes it takes stronger than most people to anticipate. The way phone ring is not going to happen, you have to make your phone ring. I would strongly suggest and I’d love to see this, that the board act in this fashion and I don't want to hear that we are using every penny for working capital because this would represent not even 4% of your cash position. You have always maintained anywhere from 12 to 15 million in cash every quarterly report. This would make a statement this would take your pressure off and this would (inaudible) business decisions you have been making.

Min Chen

So, first of all Mr. Miller, thank you for your long-term interest in our company and as you can see we have achieved good result in quarter three this year. And regarding the buying stock actually we have aligned that the east economy in Europe where our major suppliers are located. The economy there are not or another (inaudible) very well. So, the company would rather try to maintain a relative amount of cash in hand. So, by doing so we are ready at any time to curtail supply raw materials from our suppliers at a better price. So, for this reason the company doesn’t have a plan in short run to buy back our stock. And on the other hand in order to stimulate our stock and bring it back up about $1 to regain the listing of qualification at NASDAQ the company is ready to do anything and we are particularly so (inaudible) the market with our good performance with our profit.

Ken Donenfeld

Are there any other question operator.

Operator

(Operator Instructions) And our next question comes from the line of [Victor Stephens] a Private Investor. Please go ahead.

[Victor Stephens] - Private Investor

[Question Inaudible].

Min Chen

Yes sure you are right; the company doesn’t have planned in short-term to buy back stock.

[Victor Stephens] - Private Investor

And my second question is I believe I heard that there were I think 800,000 shares issued for loan, is there any reason why we couldn’t pay cash by the loan instead of decreasing shareholder value by adding more shares to overall share total?

Feng Yang

The company’s growth to issue shares to our shareholders because that shareholder is also controlled by a Chinese guy based in China. So, if we pay the debt in cash we will encounter a lot of problem due to the currency control in the country and that will be very complicated. And we believe by issuing shares to him is more easier for him to receive a benefit.

[Victor Stephens] - Private Investor

And I think the shares were issued at a price do you have that?

Feng Yang

Remember that we issued those shares to that shareholder as a price a $1.85 per share.

Ken Donenfeld

$1.80 actually. Well it was above the market price. Are there any other questions operator?

Operator

(Operator Instructions) We are showing there are no further questions. I will turn the call back to Mr. Donenfeld for closing remarks.

Ken Donenfeld

Okay. I’m just looking to see if I have any email questions here which I don't. So, I will simply say that thank you very much to all of you who joined us on this call. I hope that you will feel free to call for any additional questions after the call and you can be sure that they will be forwarded to Mr. Chen for his response. And thank you all very much.

Operator

Ladies and gentlemen this concludes our conference for today. Thank you for your participation you may now disconnect.

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