Executives
Crocker Coulson – IR, CCG
Xiangzhi Chen – President and CEO
Anhui Guo – CFO
Jenny Yang – Account Executive, CCG
Analysts
Katherine Lu – Oppenheimer
John Ma – Roth Capital Partners
Robert Sussman – Bentley Capital
Ping Luo – Global Hunter Securities
David Yu – Goldman Sachs
ShengdaTech, Inc. (SDTH) Q4 2008 Earnings Call Transcript April 3, 2009 9:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the ShengdaTech earnings conference call. My name is Erica, and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session toward the end of this conference. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Crocker Coulson. You may proceed, sir.
Crocker Coulson
Thank you so much. Good morning, ladies and gentlemen. Good evening to those of you joining us from China. I’m Crocker Coulson from CCG Investor Relations, the company's Investor Relations firm. I’d like to welcome all you to ShengdaTech's fourth quarter and full-year 2008 conference call.
With us today on this call are Mr. Xiangzhi Chen, ShengdaTech's CEO, and Ms. Anhui Guo, Chief Financial Officer, both of whom are joining us from the company’s headquarters in Tai'an City, China. Also joining us is CCG's Account Executive, Jenny Yang, who will provide translation for your questions and answers.
I'd like to remind our listeners that in this call management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Actual results may differ from those discussed today due to a variety of risks, including, but not limited to, such factors as unanticipated changes in product demand, especially in the tire and PVC industry; the ability to attract new customers; ability to increase the product's applications; ability to identify strategic investment opportunities; ability to meet planned expansion schedule for our NPCC capacity; and other information that is detailed in the company's filings and future filings with the SEC.
Accordingly, although ShengdaTech believes the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that these expectations will prove to be correct. In addition, I’d like to highlight that any projections as to the company's future performance represent management’s estimates as of today, April 3, 2009. ShengdaTech assumes no obligation to update these projections in the future, as market conditions change. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days on ShengdaTech’s corporate website.
I’m now going to provide the management discussion section on behalf of ShengdaTech's Chairman and CEO, Mr. Chen.
Xiangzhi Chen
(Interpreted) On behalf of Mr. Chen, again I would like to welcome everyone and thank you for joining ShengdaTech’s fourth quarter call. We are very excited to share with you the successes that we have achieved over the past year. But first, I’d like to begin by addressing some of the questions we have received from our shareholders regarding the status of our chemical business and our decision not to move forward with the acquisition of Jinan Fertilizer.
As many of you are aware, in June of 2008 we received a mandatory relocation notice from the Tai'an City government as part of China’s strengthening of environmental law enforcement requiring our Bangsheng Chemical subsidiary in Tai'an City to cease production by October 31, 2008 due to its close proximity to residential and non-manufacturing facilities.
Upon receipt of this notice, we began exploring alternatives to continue to operate our chemical operations. And in August of 2008, we entered into an option to buy agreement with a related party, Shandong Shengda Technology, otherwise known as the Shengda Group, to acquire Jinan Fertilizer. Jinan Fertilizer, at that time, was a state-owned company that manufactures products similar to those produced by Bangsheng Chemical.
As previously disclosed under separate agreement, Shengda Group was managing the operations for the local government, and our plan was to buy the company from the government and subsequently extend the option to buy – for ShengdaTech to buy it. However, all of this planning occurred at a time when conditions were far different and far more favorable than those existing today.
Consequently, after careful evaluation of both short and long-term factors, including the effect of the current global economic crisis on Jinan Fertilizer’s business, in March of 2009, we concluded that the acquisition was not in the best interest of our shareholders and we declined our option to buy it.
Both management and the Board take our responsibilities to our shareholders very, very seriously. And given the added pressure on selling prices of coal-based chemical products and increased cost of raw materials, the projected profit margins of Jinan Fertilizer were significantly diminished and no longer offered what we saw as an attractive return on investment.
I’d also like to note that except for a due diligence cost undertaken by our independent directors as a group, we did not incur any liability or cost as a result of not moving forward with the acquisition of Jinan Fertilizer. Some of our investors have expressed concerns over the fact that Shandong Shengda Tech, a related party of ShengdaTech, they had gone [ph] ahead and acquired Jinan Fertilizer once ShengdaTech decided not to pursue this transaction.
Shengda Group is privately held, and we cannot speculate or comment on their financial objectives or reasons why they thought this acquisition was beneficial to them. I would like to add, however, that our obligation to shareholders was to evaluate the current and projected business conditions and the financial effects of the acquisition. Based on the assessment by the independent board, ShengdaTech concluded that the return on investment under the current economic situation would not be in the best interest of the shareholders.
During the period from June 2008, when we first considered the acquisition, to February of 2009, the depression in the global economy has influenced many such business decisions across many industries. For the fertilizer business, in particular, there has been a sharp decrease of chemical product and margins have been further pressurized due to the significant increase in the cost of coal.
While current depressed economic conditions will certainly eventually return to more stable state, there is no definitive way of judging when that will happen. We will continue to see strategic investment opportunities to sustain our chemical operations. However, we believe the best use of our resources and capital is to focus aggressively on growing our far more profitable NPCC business, which will include the pursuit of other available strategic opportunities.
Now I’d like to move on to discussing our fourth quarter results. We closed the year on a very positive note, generating revenue of $31.8 million, up 11% year-over-year. Pro forma net income increased 12.3% year-over-year to $8.7 million or $0.13 per fully diluted share. Revenue from our NPCC segment increased 77% to $24.4 million, representing 77% of our total revenues in the period.
Demand for our NPCC products resisted the challenging economic conditions, as our sales values for the fourth quarter increased 38% year-over-year and was relatively unchanged from the third quarter of 2008. The average selling price of our NPCC products increased about 14% on a year-on-year basis.
I’m also happy to report that sales to our largest end markets in the NPCC segment, the tire industry, increased year-over-year and remained stable relative to third quarter levels. This is due to our primary focus on serving customers for the replacement tire markets, which are relative recession-proof. The construction industry, which uses NPCC in PVC, represents our second largest end market.
During the fourth quarter, sales of PVC grew on a year-over-year basis and declined only slightly from third quarter levels. These two end markets accounted for 70% of net revenues in the NPCC segment for 2008. For the full-year 2008, our revenues grew by 48.5% to a record $149.4 million, exceeding our guidance of $132 million to $134 million quite candidly.
Full-year 2008 pro forma net income was a record $36.4 million or $0.64 per diluted share, again exceeding our guidance of $33 million to $35 million. Our exceptional financial performance in 2008 was a result of continued strong demand for NPCC. Matched with our expanded production capacity, the contribution of our – and the product contribution of our coal-based chemical products.
During the year, we successfully implemented our NPCC growth strategy by rapidly expanding our overall production capacity and market penetration. Due to our high quality product offerings, advanced technological capabilities, and dedicated R&D efforts, we are clearly recognized as the leading NPCC producer worldwide. In the near-term, we expect potential demand from the domestic market to weather the economic storm, leaving our NPCC business relatively unscathed.
Reflecting our proven value proposition, our customers find that our NPCC products have measurable value in their production process as they are able to increase or maintain their gross margin while improving product quality. At the same time, since our product is imbedded into the customer’s end products and vital to production, we are able to develop long-term relationships with our customers.
Despite the lower GDP outlook for 2009, the economic growth rate in China is still remarkably higher than most western countries. In an effort to boost domestic demand, many of you know that the Chinese government had implemented various stimulus plans, including liberal monetary and fiscal policies, which have resulted in lower interest rates, lower cost of capital for corporations, increased money supply, and significantly enhanced government spending.
In addition to these initiatives, the government plans to inject 4 trillion RMB, equivalent to about $585 billion, into the China’s economy with a special focus on building infrastructure, which will eventually help all businesses, especially in the construction industry. Construction means PVC, an application that’s one of the sweet spots for NPCC.
A longer term outlook for NPCC is also extremely strong. Based on company commissioned research conducted by Frost & Sullivan, a global research organization specializing in market research, the worldwide NPCC market presents a huge growth opportunity. And the Chinese market is expected to remain in a high growth mode through 2012, estimated to yield an annual – compounded annual growth rate of around 20%.
To effectively harness the available opportunities, we continue to focus our CapEx plan and to develop – our capacity expansion plan and also on developing new applications for NPCC. In 2008, you will recall that we added 60,000 metric tons of NPCC capacity, bringing total capacity to 190,000 metric tons. During the year, we were able to efficiently utilize our NPCC production capacity at both our Shaanxi and Shandong facilities, with all our facilities operating at 100% utilization during the second half of the year, thus demonstrating the significant demand for our products.
In October 2008, we began construction of our new NPCC facility located in Zibo, Shandong Province with a designed annual production capacity of 240,000 metric tons. Construction is on schedule and we expect the first phase with 60,000 metric tons of capacity to come online in July or August of this year, with a sales forecast to have Zibo shipping at a rate of 80% of capacity by December. We continue to monitor market conditions to determine the most favorable time to begin build-out for a phase two at Zibo.
In addition to bring on new capacity, we are constantly working on broadening our customer base. In 2008, we successfully extended our presence in the domestic and international NPCC market with 47 new customers. Currently, we are working with 77 potential sales lease in varying stages of our sales cycle, including testing procedure, a critical stage in the process, in which approximately 70% of these prospects have completed.
Our sales and research teams work closely with our potential customers to develop customized formulas based on specific requirements. We take pride in ensuring that our customer’s manufacturing process is not interpreted at all during the testing process and no additional material costs are incurred when incorporating NPCC into the manufacturing process.
In the past, we have observed that purchase order quantity increases as our customers implement NPCC on a larger scale after experiencing for themselves the benefits of our products. In 2008, we increased our share of the worldwide NPCC market with sales to international customers accounting for nearly 10% of total revenues, a significant jump from only 1% in 2007.
We averaged a total of 16 international customers, up from two in the prior year. The majority of our international customers are currently in Southeast Asia, including Singapore, Thailand, South Korea, Malaysia, Vietnam, the Philippines, India, and Israel. On the domestic front, we continue to expand our presence and entered new markets. We added a major tire manufacturer. And with this, we are now supplying NPCC to three of China’s top ten tire manufacturers.
We expect to maintain our current revenue breakdown of domestic and international sales in the first half of 2009 as we remain focused on developing the domestic NPCC market through aggressive promotion and technical support among end-users. Our now highly talented and well qualified R&D team in Shanghai works in collaboration with both existing and potential customers to develop new and innovative applications for NPCC.
Current projects include applications for asphalt, epoxy resin, water-based paint used for construction, improvement of latex and polypropylene. We also plan to focus R&D on developing high-end NPCC applications for paper, which we think will provide us very attractive margins. We are currently developing on modifiers for using the NPCC production process.
Modifiers are an essential NPCC component. And upon successful completion, we will be the first and only NPCC supplier able to produce its own modifier. We expect this to reduce our production costs by approximately $15 per metric ton. In addition, we are also in the process of applying for patents on the NPCC application for asphalt, paint, modifiers, and certain production technologies used in the manufacture of NPCC that warrant such protection.
We also plan to relocate our world headquarters from Tai'an City to Shanghai in April of 2009. As one of China’s major commercial centers, Shanghai will provide ShengdaTech with easier access to business partners, easier access to customers and prospect, easier access to our shareholders, and also allows to attract a higher caliber of management and administrative professionals with overseas [ph] international experience.
Crocker Coulson
Now I’m going to discuss ShengdaTech financial results in greater detail on behalf of the company’s CFO, Ms. Guo.
Anhui Guo
I’d like to mention that we continue to provide a non-GAAP financial measure, EBITDA, which as mentioned is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. We believe this – we present this as a supplement to our GAAP results because we think it’s useful information in analyzing the benchmark of our performance relative to other comparable companies.
We are also providing pro forma financial statements for the fourth quarter and full year of 2008 that remove the impact of items related to the cessation of production at Bangsheng Chemical and also to the gain that was related through the purchase of a portion of our convertible notes from our historical GAAP results. We believe these pro forma results provide investors with useful information to analyze and better understand year-over-year financial performance. We’d like to refer to our press release issued on April 2nd for a full reconciliation of all these items to the nearest GAAP equivalents.
Turning to our quarterly results. Revenues in Q4 increased to $31.8 million, up 11% from the same quarter in 2007. The strong revenue growth reflected significantly higher average selling price and 100% utilization across our plants. At quarter-end, total NPCC production capacity was 190,000 metric tons compared with 130,000 metric tons a year ago. NPCC during Q4 accounted for 77% of revenues, with the remaining 23% coming from chemicals. And this compares to 48% and 52% respectively in the same period a year ago.
Revenue from NPCC products increased 77% to $24.4 million. Total volume of NPCC sold in the fourth quarter of 2008 was 49,143 metric tons, up by 15,438 metric tons or 38% from the prior year period. NPCC produced in tires and PVC represented the majority of sales at 43% and 30% NPCC revenues respectively. NPCC use in ink increased to 11% of NPCC revenue, an increase of 8 percentage points compared with Q4 ’07. Sales from NPCC used in paper increased to 8.8% of total NPCC revenues during Q4. And NPCC used in PE, adhesives, latex and paint, all combined, generated the remaining 8.4% of NPCC revenues.
Our revenue from the chemical segment for the shortened operations in Q4 was $7.4 million, a decrease of 58.1% from $14.8 million in Q4 of 2007. Our chemical facility in Tai'an City operated only 30 days during Q4 before the cessation of production at our Bangsheng Chemical facility.
Our gross profit in Q4 was $13.7 million, up 33.3% from Q4 ’07, with a gross margin of 43% compared to 35.8% in the same period of ’07. Chemical segment’s gross margin was 49.5%, up 20 percentage points from 29.5% in Q4 ’07. The significant increase in gross margin for chemical segment was primarily due to increased prices of chemical products in the month of October.
Later in the quarter, the coal-based chemical industry experienced lower margins due to pressure on selling prices of these products and rising raw material costs. Gross margin for the NPCC segment was 41.4% in Q4 compared to 42.6% in Q4 ’07. The average selling price of the company’s NPCC products increased to $480 per metric ton, up 13.5% from $423 per metric ton in Q4 ’07.
Selling expenses in Q4 were $0.6 million or 1.9% of revenues up from $0.5 million or 1.7% of revenues in the same period last year, due to higher sales commission and related expenses in proportion with increased revenues. Selling expenses also increased as a result of increased freight and other costs related to the growth of NPCC exports.
G&A expenses were $0.7 million or 2.2% of revenues, down from $1.3 million or 4.6% of revenues for the same period last year. The decrease in G&A as a percentage of sales was mainly attributed to reduce office, business, and entertainment fees, as well as the cessation of production at Bangsheng. This was partially offset by increased R&D expenses, higher service fee paid to newly engaged leading global independent audit firm, and one-time compensation expense paid to employees who worked at Bangsheng prior to the cessation of production.
During the quarter, we reported a $3.9 million impairment of property and equipment in order to depreciate our fixed assets related to chemical business to their net realizable value. Operating income for Q4 was $8.4 million, unchanged from the same period a year ago. Operating margin was 26.5% compared to 29.5% in Q4 ’07. On a pro forma basis, operating income, excluding the $3.9 million in expenses from the impairment and the $700,000 in staff comp, increased 54.5% to $13 million and our pro forma operating profit margin pro forma operating profit margin was 41%.
Interest expense in Q4 was $2.5 million due to interests associated with the long-term convertible notes we issued in May of – June of 2008. And in the prior year period, we of course did not have any such interest. During the quarter, we recorded a gain of $9 million in other income as a result of repurchasing $19.8 million in face value of the 6% convertible senior notes during Q4 of 2008. These repurchases reduce the dilution of our common stock outstanding by nearly 2 million shares. And we certainly did not have any such gain in Q4 of ’07.
Provision for income tax in Q4 ’08 was $2.3 million, up from $0.7 million in Q4 of ’07, the increase primarily due to increase in taxable income and US tax on the gain from the repurchase in the long-term convertible notes.
Our net income in Q4 was $12.7 million, up 62.8% from $7.8 million in the same period last year. Fully diluted earnings per share for Q4 were $0.11 compared with fully diluted EPS of $0.15 in Q4 of ‘07. Pro forma net income increased 12.3% to $8.7 million and fully diluted pro forma earnings per share for Q4 were $0.13, with a pro forma net margin of 27.5%. EBITDA for Q4 increased 104.6% year-over-year to $18.5 million from $9.1 million in Q4 of 2007.
Now I would like to just spend a little – make a mention of the balance sheet. As of December 2008, the company had $114.3 million in cash, $112.7 million in working capital, and $95.3 million in those long-term convertible senior notes. Shareholders’ equity stood at $135.8 million, up from $89 million in year-end ’07. And in 2008 we generated net cash flow from operations of $38.9 million.
Our outlook for 2009 is for revenue and net income to be in the range of $92 million to $94 million and $18 million to $19 million respectively, with fully diluted earnings per share of between $0.32 and $0.34. The guidance does not include the impact of any potential acquisitions that the company may make.
We have demonstrated a strong ability to generate cash flows from our business operations. We believe we currently have sufficient cash reserves available for ongoing construction of phase one of the new NPCC facility, other working capital requirements, while being in an excellent position to make strategic acquisitions without any need to raise additional capital.
We’ve spend approximately $15.4 million to purchase land use rights and the next 12 months we expect capital expenditures of approximately $43.6 million to complete construction of phase one of the Zibo facility. And that’s going to be funded with cash on hand as well as of expected continued strong cash flow from operations.
We are actively seeking attractive acquisition targets to grow our NPCC segment. Our targets will be NPCC producers who lack the research and development capabilities, but weak sales and marketing efforts on mining or land use rights to acceptable great limestone. Limestone is the most important raw material for NPCC, and there is a shortage of acceptable mining rights.
Also, we will strategically identify targets which are located in close proximity to our very large end-users helping to provide low transportation costs and timely turnaround and delivery of products. Pursuing growth by acquisition strategy, we hope we will accelerate the expansion of our NPCC production capacity and provide immediate access to land use rights, buildings raised by materials, new geographic markets, customers, and often local incentive at a more favorable than a Greenfield development.
Crocker Coulson
Now I’m going to provide some very final remarks on behalf of Mr. Chen and open it up to your questions.
Xiangzhi Chen
So we would like to conclude by saying that our success in 2008 is the result of the strong commitment of our management working with our R&D team and sales professionals. With a very well planned growth strategy in place, a dedicated group and our effort and team spirit, we’ve been able to execute our plan and succeeded in rapidly expanding the scale of our NPCC business, both domestically and internationally.
Through our innovation and our team’s hard work not only have we earned the reputation as a high quality global NPCC supplier, but also we’ve been acknowledged as the undisputed technology leader in NPCC production technology. We are very committed to building on this market position by aggressively developing new higher end markets for NPCC and expanding our market penetration to meet our near-term and longer term revenue and profit objectives.
With that, I’d like to close by thanking you all for your support. And we are now going to open up this call to any questions you may have for ShengdaTech’s management team. Operator?
Question-and-Answer Session
Operator
(Operator instructions) And the first question comes from the line of Paul Qian [ph] from Oppenheimer. You may proceed.
Katherine Lu – Oppenheimer
Hi. This is Katherine Lu for Paul Qian. Thank you for taking my question. Good evening, Mr. Chen and Ms. Guo. I just want to better understand your ’09 guidance. Your NPCC business delivered very impressive growth in 4Q ’08. It was up over 70% while your ’09 topline guidance suggested only 12% to 14% growth, which appears conservative to us. So I’m just wondering if you can elaborate some of the sales trends you observed maybe on a monthly basis. And for ’09 guidance, what kind of assumptions you build into it, for example, like ASP, macro environment, and new account additions? And also if you can elaborate something on the export part, that will be very helpful. Thank you.
Crocker Coulson
Katherine, given the length of the question, would you mind restating it in Chinese? I just want to make sure that – Jenny will translate the answer, but just – maybe clear if you restated in Chinese.
Katherine Lu – Oppenheimer
Sure, sure, I will say that. (Foreign Language)
Anhui Guo
(Foreign Language)
Jenny Yang
Do you want to translate?
Katherine Lu – Oppenheimer
Yes, I would get it translated.
Anhui Guo
(Interpreted) Well, the high growth of revenue in 2008 was based on the production capacity of 190,000 reaching full production capacity by the fourth quarter. And for the production capacity in 2009, we expect the 190,000 production capacity would still reach a 100% of production utilization rate. Besides, our facility in Zibo, we expect the 60,000 production capacity that we expect to add, we – the company expects the production capacity to reach about 20%. So, adding to all those production capacity, that’s one of the assumptions for the revenue – for the guidance on 2009. So, in terms of the customers, currently we have about – over 70 potential customers. And for a majority of them, we always finish the first stage of testing process, though some of them that we are still in the contacting process. So in terms of the customer base, we expect high – we expect a lot more customers in 2009.
Katherine Lu – Oppenheimer
Okay. And thank you. I’d like to follow up just a little bit. I know your capacity actually was running 100% utilization rate. But what kind of – do you see any trend changes from the demand side from October to December on a monthly basis? And in addition for your Zibo facility, I’m just wondering do you have any revenue visibility at this point?
Jenny Yang
(Foreign Language)
Anhui Guo
(Foreign Language)
Katherine Lu – Oppenheimer
Okay, I see.
Anhui Guo
(Interpreted) Okay. It cost us about five to seven months for the testing process. So, after the – I mean, during the testing process, the customer does not sign the contract we have. So, all the sales or the work will be after the testing process is finished. And so that might take longer than five to seven months.
Katherine Lu – Oppenheimer
Okay, great. I just want to – could you just remind us of the tax assumptions for 2009?
Anhui Guo
(Foreign Language)
Jenny Yang
(Foreign Language)
Katherine Lu – Oppenheimer
(Foreign Language)
Anhui Guo
(Interpreted) Okay. The provision for tax that the – the tax assumption for the NPCC facility in Tai'an, the one in Shandong, will be about 12.5% in 2009. And in 2010, it will be about 25%. But the NPCC facility in Shaanxi, that will be about 12.5% in both 2009 and 2010. The new NPCC facility in Zibo, they will have a tax rate of 20% in the first year. And for the next three years, we will have a tax rate of 22%.
Katherine Lu – Oppenheimer
Okay, great. Just one more question. Will NPCC business fall into the high tech definition by Chinese government so that will allow you for a more favorable tax rate later?
Anhui Guo
(Interpreted) All those who qualify for the high tech certification by the Chinese government, two of the requirements include the first one, which is the product and the technology have to be a high tech technology, and the second, the location has to be in the high tech area provided – I mean, guided by the government, plus the location of the (inaudible) as well. So the company’s facility – the new facility in Zibo actually met those two requirements. So the company will try to apply for the certification because it is quite competitive to get the certification.
Katherine Lu – Oppenheimer
Okay, great. Thank you so much. I’ll get back to the queue.
Anhui Guo
Thank you.
Operator
Your next question comes from the line of John Ma from Roth Capital Partners.
John Ma – Roth Capital Partners
Good morning. I have a couple of questions. First of all, on the acquisition, you mentioned that you are seeking acquisition target in NPCC business. But at the same time, you said your Zibo facility have a potential capacity of 240,000 tons. So I’m just wondering would you – if you are making acquisition, would that mean your phase two and phase three will be on hold? (Foreign Language)
Jenny Yang
(Foreign Language)
John Ma – Roth Capital Partners
(Foreign Language)
Xiangzhi Chen
(Foreign Language)
Jenny Yang
Okay, let me translate that.
Xiangzhi Chen
(Interpreted) If we acquire the NPCC facility, the second phase and the first phase will now be in hold because the acquisition will now be in the Zibo – the Zibo as a facility will obviously go to other locations, other geographic locations where we are able to expand the business in other geographic locations. So in terms of like a production capacity, we want really like a (inaudible) – cannibalized production capacity in Zibo. So we want it to be on hold.
John Ma – Roth Capital Partners
My second question relates to your chemical acquisition. I noticed in your previous press release you said that you would terminate the acquisition with Jinan Fertilizer and will focus on NPCC growth. But your press release yesterday and also your 10-K said that you continue to seek acquisition in the chemical, continue to looking forward to your chemical operation. Can you give us a better picture there? (Foreign Language) Yes. What I’m referring to is the – in your press release you said the company is currently seeking strategic investment opportunity to continue chemical operation.
Crocker Coulson
Can you just clarify what you’re asking? So we said that, and what’s your question about it?
John Ma – Roth Capital Partners
Okay, I repeat my question. In your March 17th press release you said you terminate the acquisition effort and will focus on NPCC growth.
Crocker Coulson
Right.
John Ma – Roth Capital Partners
Then in the press release I saw yesterday, you said that the company is currently seeking strategic investment opportunity to continue chemical operations. And that’s the same message you have in the 10-K. So I just want to get a clear picture.
Crocker Coulson
Let me take a cut at that and then Jenny can see if they want to add anything. So basically the management and the Board have decided they are not going to be expanding or replacing their capacity in commodity coal-based chemicals. However, if there are other opportunities, which represent high-margin products with advanced technology that they believe have some sustainable barriers to entry and good growth potential, those they would consider as long as it’s in with your core competencies. So I guess that’s the differentiation here, is we’d be looking for things that fit with their core competencies, their focus on high margin, higher technology, sustainable barrier time for these type of products.
John Ma – Roth Capital Partners
Thanks for the clarification.
Crocker Coulson
Let Jenny translate that and then let’s see if they want to add anything.
Jenny Yang
(Foreign Language)
Crocker Coulson
So, Jenny, did you translate what I said? Did some –
Jenny Yang
(Foreign Language)
Crocker Coulson
Jenny, did you translate what I said?
Jenny Yang
(Foreign Language)
Anhui Guo
(Interpreted) Just to complement Crocker’s answer to the chemical business, well, they will continue to look into other segment of the chemical business. But the purpose [ph] though in high technology, probably environmentally friendly and so forth of chemical products, because we’ve got the chemical products bring high, like, good cost growth. So the company belongs to – like to have this kind of like opportunistic – those are (inaudible) those opportunities (inaudible) like high gross margin, high technology chemical products.
John Ma – Roth Capital Partners
Thanks. And my last question to Ms. Guo, just a few – a quick question. On your G&A expense for Q4, you said that G&A was about $700,000. But then you also mentioned that your compensation for the separation [ph] is about $700,000, I mean, that alone. So I just want to get a better picture, you know, why the G&A is so low if the compensation alone is $700,000. (Foreign Language)
Anhui Guo
(Foreign Language)
John Ma – Roth Capital Partners
(Foreign Language) Just for G&A, general and administration expense. (Foreign Language)
Anhui Guo
(Foreign Language)
John Ma – Roth Capital Partners
(Foreign Language)
Anhui Guo
(Foreign Language)
John Ma – Roth Capital Partners
(Foreign Language)
Anhui Guo
(Foreign Language)
John Ma – Roth Capital Partners
Okay. Well, a final little question is, in your EPS guidance, I just want to clarify what is your share count assumption for the 2009. (Foreign Language)
Anhui Guo
(Interpreted) The share count for the guidance in the EPS is about 65 million.
Crocker Coulson
I just want to back up on your last question. So – I'm not a 100% positive, but I suspect that that $700,000 would have hit in cost of goods sold, not in G&A. In that factory, the kind of administrative component is actually very small. So I think this was like an incentive payment to keep people working and keep them in jobs until we are ready to shut down.
John Ma – Roth Capital Partners
Okay. Because that – you know, that item was mentioned that right after the – in the same paragraph with the discussion of G&A. So that’s – probably that’s one of the – a little bit confuse there. But really –
Crocker Coulson
Maybe, John, why don’t we – we will double-check that and come back to you offline. Anyway that’s my suspicion. But anyway, I may be wrong.
John Ma – Roth Capital Partners
Okay, that helps.
Crocker Coulson
Jenny, Ms. Guo can clarify it now. Or if she is not a 100% sure, we’ll come back offline.
Jenny Yang
(Foreign Language)
Anhui Guo
(Foreign Language)
John Ma – Roth Capital Partners
(Foreign Language) I really appreciate. I don’t want to take too much time.
Crocker Coulson
Okay. Let’s just do it offline. Okay? Thanks.
John Ma – Roth Capital Partners
Thanks.
Operator
Next question comes from the line of Robert Sussman from Bentley Capital. You may proceed.
Robert Sussman – Bentley Capital
Thank you. Can I take a different card at the question that was just asked? The difficulty for analyst in modeling ’09 is that the G&A and the selling expenses are hard to estimate with the chemical business out. Can they give us an idea of what we should be modeling for selling expenses and G&A for 2009, either in dollar terms or as a percentage of revenues?
Crocker Coulson
I’ll let Ms. Guo answer that, but first I just want to make one observation. And Bob, I think you know this because you know the company pretty well. The chemical business was essentially, you know, a drive up the truck and pull the truck type of business, cash-based business. They never had – they are all local customers. They never had to go market or find new customers. Basically their customers just would drive in and take as much as they could produce. So I’m not sure – I suspect that there is almost no selling expense in that segment. G&A –
Robert Sussman – Bentley Capital
Okay. And how about G&A?
Crocker Coulson
G&A, I also suspect, incredibly is very low, but I’m not sure. So I’ll let Ms. Guo answer that one.
Robert Sussman – Bentley Capital
Okay.
Anhui Guo
(Interpreted) Robert, seriously the answer for the G&A and the expense, in the past few quarters the company has encountered the G&A to be about 1.0% to 1.5% of the revenue. And in 2009, this will be a bit higher because first of all, the company plans to increase expense in the R&D in order to increase – in order to expand highly the NPCC market. And the second (inaudible) because they move to Shanghai, they are trying to have class [ph], a lot more high quality (inaudible), experts those are including CFO, including other types of, like, professionals. And because in 2008 – toward the end of 2008, they engaged the independent (inaudible). So the expense will also go up a little bit. So in terms of the selling expense on the NPCC, most of the selling expense is related to the percentage, like a sales compensation given to the sales persons. This commission is about 1.6%.
Robert Sussman – Bentley Capital
1.6%?
Anhui Guo
(Interpreted) Yes, the compensation that we provide to the sales persons.
Robert Sussman – Bentley Capital
Okay. My second question is, the interest expense went up from $1.7 million to over $2.4 million from the third quarter to the fourth, yet the convertible debt went down because of the repurchase. Was there an interest penalty in buying back those convertible bonds?
Anhui Guo
(Foreign Language)
Jenny Yang
(Foreign Language)
Anhui Guo
(Interpreted) Okay. First of all, we do not have enough penalty in terms of repurchase of those convertible bonds. And the interest payment date – the interest payment date for every year is June 1st and December 1st.
Robert Sussman – Bentley Capital
Yes. Okay.
Anhui Guo
(Interpreted) So that’s why we intend [ph] a higher interest rate in the fourth quarter. (Foreign Language)
Jenny Yang
(Foreign Language)
Robert Sussman – Bentley Capital
Jenny?
Jenny Yang
Yes.
Robert Sussman – Bentley Capital
But even if you assumed $120 million of bonds, you took 6% and divided that by four. Well, are you saying that they book six months of interest rather than just three months of interest? Crocker, do you understand my question? It should be done on an accrual basis. And if you took $120 million of bonds, assuming –
Crocker Coulson
Yes, I understand your question. I think we’d like to take this one offline. It’s a little complicated. I want to make sure we get it right. So let’s come back to Bob on this offline.
Robert Sussman – Bentley Capital
Okay, no problem. My last question is, if you take the NPCC –
Anhui Guo
(Foreign Language)
Jenny Yang
(Foreign Language)
Anhui Guo
Okay.
Jenny Yang
Robert, next question please.
Robert Sussman – Bentley Capital
Okay. My next question is, if you look at the fourth quarter NPCC sales and multiple it times four, you get about $97 million. You are estimating $92 million to $94 million this year. And the $97 million rate you went in at the fourth quarter would be increased theoretically by the new capacity coming on July and August. Are you just being conservative or am I missing something in the way I’m looking at this?
Anhui Guo
(Interpreted) Because, first of all, they – we are really – in the question from Oppenheimer, we already answered like how many production capacity we will achieve. It will be like in the 190,000 tons plus about 20% of the 60,000 metric tons from Zibo. So the reason that we have a lower revenue guidance for 2009 is because of the economic downturn worldwide. So we – the company tried to adjust the price in order to get [ph] new customers, but we are also confident that we are able to maintain the current level of gross margin. So basically we will adjust the selling price, but maintain the current level of gross margins. So that’s why the revenue in the guidance is a bit lower than was expected. Does that answer your question first? Hello?
Robert Sussman – Bentley Capital
Pardon me?
Anhui Guo
(Interpreted) Does this answer your question –?
Crocker Coulson
I think in summary, given the global economic environment, they prefer to make conservative assumptions. That’s basically the –
Robert Sussman – Bentley Capital
I understand. They have always done that. Okay, thank you.
Operator
Your next question comes from the line of Ping Luo from Global Hunter Securities. You may proceed.
Ping Luo – Global Hunter Securities
Thank you. My question is, what’s the use of your over $110 million in cash? You just mentioned that you use some for the CapEx. I would like to – actually [ph] in the cash what’s the CapEx for 2009. And also, are you also going to make additional repurchase of your convertible notes? So that’s my question. You know, what’s the cash –?
Crocker Coulson
Sure. So Ping, let me take the first cut at that and then we’ll let Ms. Guo elaborate if she so chooses.
Ping Luo – Global Hunter Securities
Sure.
Crocker Coulson
So, as I said in the prepared remarks, the company has budgeted capital expenditures of $43.6 million related to phase one of the NPCC facility in Zibo. As I also said, the company is very carefully evaluating demand conditions and certainly could choose to move forward on phase two as soon as they have the confidence that they can sell it quickly. We also said that we are very carefully looking at other opportunities for strategic transactions, which could include acquisitions domestically, regionally, or overseas that would accelerate our market penetration in the NPCC segment. And we already covered kind of what would be the benefits and characteristics that we would be looking for. So, that I think is the company’s policy with respect to its available cash and the cash that isn’t expected to continue to be generated by operations. With respect to repurchase of additional convertible notes, that’s something that the Board evaluates, but certainly is not going to make any commitment or definitive statements regarding any repurchase program.
Ping Luo – Global Hunter Securities
Okay.
Crocker Coulson
You want to translate, Jenny, see if Ms. Guo has anything to add?
Jenny Yang
Sure. (Foreign Language)
Anhui Guo
(Interpreted) That’s a correct answer (inaudible). So – and you have a next question?
Ping Luo – Global Hunter Securities
Yes, thank you. My next question is actually you GAAP EPS for the fourth quarter, in your press release on table two, your net income of $12.7 million and your diluted share you mentioned is 67.2 million and your diluted EPS is $0.11. But if you actually divide it by this amount of net income – sorry, divided this net income by the share count, it should be $0.18 or $0.19. So that’s my question about your share count. I also have the same question about 2009 EPS guidance. You have net income $18 million to $19 million and EPS $0.32 to $0.34, which accounts that your share count should be 56 million. So yes, if it is still complicated, we can go offline. But if you want to answer right now, that would be great. Thank you.
Crocker Coulson
I will say that the calculation of diluted shares and EPS with this type of convertible note is extremely complicated. So Jenny, maybe you want to repeat it to Ms. Guo. But first, you go into it on this call or if we prefer to provide kind of a written explanation because this is a rather complex issue.
Jenny Yang
Okay. (Foreign Language)
Anhui Guo
(Interpreted) Ms. Guo says we can answer the question right now. Because the diluted earnings per share is based on the net income and the net income used for the diluted EPS is too less based on the interest on long-term convertible net of tax, so we have to add back the interest in the long-term convertible net of tax and we have to add back the amortization of the interest cost. So we get the net income used for the diluted EPS. So we provided net income adjusted by the diluted earnings per share, which will now give us the correct diluted EPS.
Ping Luo – Global Hunter Securities
Okay, that’s my question. Thank you. We can discuss more offline. Thank you.
Crocker Coulson
Okay. Operator, do we have any more questions?
Operator
Yes, sir. We have a question from the line of David Yu from Goldman Sachs. You may proceed.
David Yu – Goldman Sachs
Hi, good morning. Just a few questions. As it relates to the – again, I want to point to the guidance for 2009. $24 million in Q4 times four is $96 million, plus the potential that’s going to come on from the Zibo facility on an average utilization of 20%. It seems like it should be a higher number. Just looking at – just doing some back-of-the-envelope math, it would suggest that we are implying that pricing is probably going to decline by 10% to 15%. Is that right? (Foreign Language)
Anhui Guo
(Foreign Language)
David Yu – Goldman Sachs
Will you translate that?
Crocker Coulson
Jenny? Jenny?
Jenny Yang
Yes, I’m here, I’m here.
Anhui Guo
(Interpreted) Basically the price reduction of 10% to 15% is correct. The company in January actually reduced the price – the average selling price by about 4% to 5%. And based on the economic condition, they expect to reduce about 4% to 5% in the future as well. So (inaudible) calculation of an increased average selling price of 10% to 15% is basically correct in that perspective [ph].
David Yu – Goldman Sachs
(Foreign Language) Is your 4% to 5% decline that you have already expected in Q4, is that at the end of Q4 and therefore incorporated in the quarter-end numbers?
Crocker Coulson
I believe they are talking about the current Q1 numbers, but – Jenny, maybe you can clarify that.
Jenny Yang
(Foreign Language)
Anhui Guo
(Foreign Language)
Jenny Yang
(Foreign Language)
David Yu – Goldman Sachs
(Foreign Language)
Anhui Guo
(Interpreted) Yes, definitely it’s only – yes, definitely it’s toward the end of 2008, but it’s only seeable [ph] starting from January of 2009.
David Yu – Goldman Sachs
Okay. But my next question is, your NPCC pricing relative to your competitors, do you generally commend a premium or a market price? (Foreign Language)
Xiangzhi Chen
(Foreign Language)
David Yu – Goldman Sachs
(Foreign Language)
Xiangzhi Chen
(Foreign Language)
Anhui Guo
(Foreign Language)
David Yu – Goldman Sachs
(Foreign Language)
Anhui Guo
(Foreign Language)
David Yu – Goldman Sachs
(Foreign Language)
Anhui Guo
(Foreign Language)
Crocker Coulson
Jenny, do you want to translate? Okay.
Jenny Yang
Yes.
Anhui Guo
(Interpreted) Well, first of all, the NPCC that the ShengdaTech produces is very unique. You have a lot much better like a particle stability. It can perform better – it gives us better performance to applications. So in terms of using like a – how much of the price is higher than our competitor, no, it’s not that comparable. But we adjust so like the NPCC producers in China (inaudible) in Guangzhou – in Guangdong Province. Their selling price is about 250 to 300. So basically our NPCC average selling price is like over 60% higher than them. So we –
Crocker Coulson
Go ahead.
Anhui Guo
(Interpreted) Well, it also depends on the application of their products. Some of their products have much higher use, so we have a lot higher price. So it depends on the product segment [ph] and the performance.
Crocker Coulson
Let me just elaborate. Over the course of – in second half of 2008, they actually had very positive ASP trend, the ASPs from Q1 to Q4 appreciating about 24%. And within those different categories, they have some very high ASP categories such as automobile undercutting paints and tires and some such as paints and paper where they have a lower ASP. So, as their sales mix changes, you could also see some fluctuation in ASP. We’d note historically the company has always been a little bit cautious about ASP trends. Thus far this caution has not proved to be warranted, but it sounds like in Q1 they have made some pricing concessions.
David Yu – Goldman Sachs
Right. I was trying to kind of get out if they commend a premium versus a competitor, and it sounds like internally they do.
Crocker Coulson
The answer, yes, they do. Yes.
David Yu – Goldman Sachs
My next question is, as it relates to capital expenditures, you pointed out that in – for the first phase of Zibo, it’s going to cost plus $43 million. How much of that has already been spent in 2008? And therefore, how much residual does that need to be spent in 2009? (Foreign Language)
Anhui Guo
(Foreign Language)
David Yu – Goldman Sachs
(Foreign Language)
Anhui Guo
(Foreign Language)
David Yu – Goldman Sachs
Translate that.
Jenny Yang
(Foreign Language)
Anhui Guo
(Foreign Language)
Jenny Yang
(Foreign Language)
Anhui Guo
(Foreign Language)
Jenny Yang
(Foreign Language)
David Yu – Goldman Sachs
(Foreign Language)
Anhui Guo
(Foreign Language)
David Yu – Goldman Sachs
(Foreign Language)
Anhui Guo
(Foreign Language)
Crocker Coulson
Okay, Jenny, please summarize in English.
Jenny Yang
Ms. Guo just said that 2008, they had a capital expenditure of $43 million for Zibo. And in 2009 they expect about $50 million capital expenditure for the purchase of equipment.
Crocker Coulson
Great. So operator, I think we’ll now take our last question and we’re going to – we're out of time, so we’re going to have to wrap it up.
Operator
And we have no questions in queue.
Crocker Coulson
Okay. Well, perfect. Well, we really appreciate all the very thoughtful questions that everyone provided today. On behalf of the ShengdaTech management team, I’d like to thank you all for your interest and participation in this call. If any of you are visiting China and you want to visit our facilities out in Tai’an, out in Xian, or come visit our new corporate headquarters in Shanghai starting next month. We, of course, always welcome our shareholders to come visit us. And we are currently firming up plans for management to come back to the US and meet with shareholders. So if any of you are interested in seeing management in person when they are in the US, please let us know as well. This now does conclude our call. And thanks again.
Operator
Thank you for your participation. You may now disconnect and have a wonderful day.
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