China Gerui Advanced Materials Group (NASDAQ:CHOP)
Q4 2012 Earnings Call
March 26, 2013 09:00 AM ET
Kevin Theiss - IR
Mingwang Lu - CEO
Edward Meng - CFO
Echo He - Maxim Group
Dmitriy Shapiro - Global Hunter Securities
Good morning my name is Lindsey and I will be your conference operator today. (Operator Instructions). Thank you Kevin Theiss you may begin your conference.
Thank you. Good morning ladies and gentlemen and good evening to those on those joining us from China, I’m Kevin Theiss from Grayling and I would like to welcome all of you to China Gerui Advanced Materials Group’s conference call to discuss the fourth quarter and year end and 2012 results. With me today, our China Gerui’s Chairman and Chief Executive Officer, Mingwang Lu and Chief Financial Officer Mr. Edward Meng.
Also (inaudible) will translate for Chairman with his opening remarks and help with the Q&A. I would like to remind our listeners in this call management’s prepared remarks contain forward-looking statements which are subject to risk 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 that is contained in the Private Securities Litigation Reform Act of 1995.
Actual results may differ from those discussed today due to various risks including, but not limited to, the availability of funds and working capital to finance its activities; the actions and initiatives of current and potential competitors; the Company's abilities to win new customers, merchants and vendors for its products; the development and acceptance of new steel products, marketing and promotional activities; pricing policies of suppliers and competitors; competition in the steel market; and other risks detailed in the Company's filings with the Securities and Exchange Commission.
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. In addition, any projections as to the Company's future performance represent management's estimates as of today March 26, 2013 and China Gerui assumes no obligation to update these projections in the future as market conditions change.
I'll now turn the call over to China Gerui's Chairman and CEO, Mr. Mingwang Lu for some brief openings remarks. Grayling (inaudible) will be translating for Mr. Lu. Mr. Lu, please begin.
For China steel industry 2012 is probably the most difficult year since we entered in entered into this 21st century with the sluggish recovery of global economy in China’s economic growth slowdown, China’s steel industry has been under tremendous pressure from (inaudible) demand severe over capacity (inaudible) steel product prices, accessibly higher iron ore cost and operating loss across the industry.
Under this implementing in streak environment and as the leading precision in cold-rolled steel producer in China I’m very pleased that China Gerui was able to achieve our year-end revised 2012 revenue guidance and concluded 2012 with profitable operation. However due to fierce competition and favorable pricing environments were cold-rolled steel products price recovery of finished cold-rolled steel products fell behind and the load that of raw materials which resulted in our lower than expected earnings for the fourth quarter and for the whole year.
Nevertheless we’re encouraged to buy the relative stable volumes in the fourth quarter relative to volumes in the third quarter of 2012 and that our product mix continue to be optimized. Getting into 2013 we will focus on sustaining our industry leading position in terms of volume, revenue, and profitability.
As we also mentioned that the widely sales increased in global iron ore prices in the fourth quarter had helped push up the price at hot-rolled steel which is our raw material of operation but it is now translate into the same price increase of cold-rolled steel in China for the fourth quarter. We seek price hike of raw materials or efforts to selling price had been discounted due to customer’s price and sensitivity. It will take considerable patience and time for us to revert to the pricing from 2011 and before.
As the counter measure China Gerui elected to hold back the release of production capacity to manage market demands to the best extend we can so as to prevent damage to our perceived reputation as a high end premium price cold-rolled steel producer. Please do understand that with the current domestic market demand it's much more difficult to take back price discount offered to customers.
We believe we should continue with our current pricing strategy and in cold-rolled steel market recovers and customers give priority to call it even price (ph). The highlight we show all be aware is that while many of our non-state competitors separated heavy losses or simply went out of business we were able to maintain production across all production lines in the fourth quarter and deliver to our customer in a timely manner.
The utilization of our 500,000 tons of specialized cold-rolled steel was approximately 75% to 80% in the fourth quarter of 2012 which is in-line and slightly above the 75% utilization rate we achieved in third quarter. However, the utilization of our higher margin chromium production line was approximately 60% during the fourth quarter slightly below the 65% of the third quarter.
Despite challenging market conditions and pressures of our business model we believe that fundamentals of our operations are sound and a number of smaller competitors have undergone foreclosure and other smaller competitors lack the R&D to match our increasingly diverse product offerings.
We’re cautiously optimistic about the potential for a price rebound that would result in a meaningful turnaround in our specialized steel segment in the second half of 2013 that will enable us to further utilize our strong product capabilities and product diversity.
We believe our segment of this two industry is restructuring and we’re evolving China Gerui business into new higher margins in steel sectors through additional product offerings including a recently announced introduction of a new laminated steel production, a strategic effort to provide more solutions for our current customers especially in our more profitable market segments attract new customers particularly in markets where we do not currently have a presence as we improve our profitability in the future.
China Gerui strategy is to improve our competitive profile to reach a wider range of customers and markets both domestically and internationally with an expanded portfolio of products and materials. In 2013 our strategic decision includes focusing upon exports so as reach a more diversified customer base in further attraction which will accelerate our strategy of being a global world class and high precision metals producer.
Thank you everyone for joining us and I will now turn the call over to Edward Meng, our Chief Financial Officer.
Thank you Mr. Lu and thank you our (inaudible) for translation. Good morning and good evening for everyone online. We do appreciate you fit your time for earnings conference call. We present a summary of the fourth quarter financials and for more details future product or earnings press release we first distributed early today. Our revenue decreased 30.5% to 63.9 million in the fourth quarter of 2012 from 91.9 million and the first quarter of 2011. The decrease in revenue was primarily due to a 18% decrease from the company’s average selling price of 778 per ton for the fourth quarter of 2012 as compared to an average selling price of 949 for the fourth quarter of 2011.
As well as a 14.9% increase with sales volume to approximately 81,200 tons for the fourth quarter of 2012 as compared to approximately 95,400 tons for the same quarter of 2011. Gross profit decreased 75.4% to 6.9 million and the fourth quarter of 2012 from 28 million in the same period of 2011. Gross margin was 18.7% in the fourth quarter of 2012 compared to 30.4% in the same period of last year. A decrease in gross margin was due to pricing pressure from intense competition as China’s (inaudible) and the amount for our products languished.
Market has driven raw material cost high teens beyond our needed ability to pass through the increase to our customers. In addition to the modifications were converted for the wide-strip line in the fourth quarter between service improved position and successful future ramp up. Our information that actually in the fourth quarter one of our wide-strip mill went through some technical difficult so several concepts that came out and were below a designed specification so we have to offer the same cost, the volume from that contract to the customer at a discounted price rather than the originally negotiated contract price.
Our operating income futures 97.3% to 7000 in the fourth quarter of 2012 including the impact of share-based compensation expenses of 3.7 million from operating income of 23.9 million for the fourth quarter of 2011. The decrease in operating income in the fourth quarter of 2012 as compared to the operating income in the fourth quarter of last year it's primarily due to a 75.5% decrease in gross profits and a relatively higher operating expenses we’re presenting a higher percentage of revenue in the fourth quarter of 2012 as compared to the same period of 2011.
Net loss were 0.5 million in the fourth quarter of 2012 or negative $0.01 per diluted share including the impact of share based compensation expenses from 3.7 million or the equivalent of $0.06 per share on a fully diluted basis. Compared to a net profits of 18.2 million or $0.62 per share for the first quarter of 2011.
For the full year 2012 our revenue decreased 20.3% to 265.5 million for the fiscal year ended December 31, 2012 from 331.8 million for the fiscal year 2011. A decrease in revenue was primarily due to a 19% decrease in the company’s average selling price to 81 per ton for fiscal year 2012 as compared to 984 per ton for fiscal year 2011 and a 5% decrease in sales volume to 331, 500 metric tons for fiscal year 2012 as compared to approximately 347,200 metric tons of fiscal year 2011.
So the major contributor of the decrease is actually to the average selling price, a lot of them the total sales volume. Gross profit decreased 49% to 56.9 million for the fiscal year ended December 31, 2012 from a 101.9 million for fiscal year 2011. Gross margin was 21.4% for fiscal year 2012 compared to 29.7 million in fiscal year 2011 with less than highly competitive pricing pressure the company faced in the second half of 2012. Operating income decreased 49.3% to 42.3 million for the fiscal year ended December 31, 2012 from 83.5 million for the fiscal year 2011. Operating margin for fiscal year 2012 was 15.9% compared to 24.4% for fiscal year 2011.
Net income decreased 54.6% to 26.1 million for fiscal year ended December 31st, 2012 from 67.6 million for fiscal year 2011. Net income per diluted share for fiscal year 2012 decreased to $0.45 including the impact of shared based compensation expenses of 3.7 million from $1.02 per diluted share for fiscal year 2011.
As of December 31, 2012 we have 228.9 million in all restricted cash 16.4 million in current certificate of deposit and additional 145.4 million in restricted cash as compared to 246.6 million in all restricted cash and 118.1 million in restricted cash as of December 31, 2011.
Working capital was 151.7 million as of December 31, 2012 compared to a 142.5 million as of fiscal year end 2011, our short term debt of notes payable and term loans that totaled 317 million, as of December 31, 2012 compared to 249.1 million as of December 31, 2011. The company has no long term debt; shareholder’s equity was 330.1 million as of December 31, this year as compared to 298.4 million as of December 31, 2011.
The net cash used in operating activity for the top month ended December 31, 2012 was 2.5 million, 2.1 million compared to net cash provided by operating activities of 56.2 million as of fiscal year end 2011.
I will now begin the business outlook and update you of the call to provide better clarity as to China Gerui strategy to optimize its position in a challenging market price while evolving into a global metal processes through enhanced product offerings and a proactive strategic effort to locate new global markets. To begin I would like to address some of the macro-economic factors that are effecting our industry in China as well as China’s specific issues that have been impacting our business this past year. On the macroeconomic side the recently released economic data indicates in the fourth quarter China’s GDP growth accelerated to 7.9% business expectations and China (inaudible) in the fourth quarter of 2012.
This expected to lead to a progressive strengthening especially if the external climate starts to improve and gradual pick-up in global growth. The new leaders from China have implemented R&D (inaudible) plan to help strength economic growth. This is stimulus and potentially other new growth programs where we have time to will take time to boast economic growth and the company hopes to see renewed strength in 2013 and most likely starting in the second half of the year, leading to improved demand of domestic steel products in the coming quarter’s to come.
In May of 2012 the Central Government implemented a small stimulus plan to a fixed economy by helping the provisional and local Japanese investment growth stocks et cetera, the one in every 10 years change of the Central Government has recently been completed. We expect a new leadership will propose new economic gross policies as (inaudible) gross of 7.9 and 2012 has been the slowest since 1999 according to the National Bureau of Statistics. This slower growth has also reduced the infrastructure build-out, growth rate which has reduced demands for steel and increased in a competitive pressures. Now we’re consciously optimistic that the new central government leaders will provide a stronger stimulus to increase heavy industry activities leading to more demand for steel products.
As a lot of percentage of China’s population still lives in rural areas new projects may target those areas to improve the life of the (inaudible) more modern residual residential housing projects may also be another source of future (inaudible). As Chairman Lu just now mentioned at the beginning of this call China’s steel industry went through a painful year of 2012 and that overall domestic amount and consumption of steel products was weak and witnessed an active growth in certain industries.
The hiking iron ore price in the second half of the year helped push up general steel price but was also guilty of squeezing profit margins of China steel producers resulting in average 98% decrease in profits despite a 4.5% decrease in sales revenue as compared from 2011. This is across the whole steel industry.
For those of you who have followed China's steel market trend, getting to 2012 the concept of steel pricing in China continued its steel drop until September, before it went north and up. However the steel price for cold rolled steel was nowhere close to hot rolled steel price which is raw material for metal processors like China Gerui. Thus on one hand we have faced a rapidly increasing raw material cost, whereas on the other hand our average selling price of cold-rolled steel products did not recover with the same speed and magnitude as raw material cost resulting in sustained pressure on our gross margin.
A number of factors contributed to the current depressive steel market in our sector in China. First and foremost, the decline in price of iron ore for the first nine months of the year – of last year have caused pricing to continue to erode as end users demand lower price consistent with decrease in this raw material cost. Starting in the fourth quarter, the raw material cost increased, but it failed to translate into corresponding increase in average selling price of cold-rolled steel products, with customers fending off efforts to take back price concessions given out by their suppliers like China Gerui since the beginning of the year.
We estimate that any substantial price recovery in this regard will take a lot of patience and time, but we believe we will eventually get there. Due to the reduced economic outlook in China, large scale capital-intensive infrastructure projects have been put on hold or cut back and real estate development have been stymied due to speculation concerns. This has also dampened demand for steel. Further, the great uncertainty as to economic risk both in Europe and the U.S. also plays a great role in fostering the country challenging time in China's steel industry. Finally, exacerbating all these factors is the aforementioned oversupply of steel that is over capacity of the especially state-owned steel producers were large. They have created a predatory price environment across all levels of the China steel industry. For long wire in 2012, China Gerui was able to maintain operating position even as some of our competitors in our cold-rolled steel market decided shut down or cutback on the outputs until the market rebound.
In this toughest of times, China Gerui's performance fell in line with in relation to our peers from the United States, where their gross margins averaged in the mid-teens and clearly though, the fourth quarter's performance continued a depart from our historical margins and profitability. We’re a highly specialized steel producer and our business model of cost plus and based on the pricing typically generates sustainable margins for far above our peer group. We believe that our decision not to engage in price wars will enable us to raise prices once again when raw material prices, supply and demand forces are normalized will help us to retain our margins from before 2011.
Our balanced entry remain the marketing environment with over capacity and pricing pressure making high returns on investment unlikely. We’re more R&D and economy scale as advantages of our mom and pop operations and we’re focused on the needs of a few markets which know very well and have long established customers compared to larger integrated steel metals. We feel the market space that requires technology and production sophistication that smaller producers are unable to match and we compete with larger integrated steel operations are by being more specialized and able to provide specific products targeting customers' unique needs.
We continue to be focused upon becoming a global specialist metal processing company and are undertaking a comprehensive and a fully integrated approach towards becoming a major worldwide enterprise. Right now we see a major consolidation is happening in the upper stream crude steel production industry, but we have every reason to believe that that consolidation process is going to migrate and migrate into the lower stream of (inaudible) steel processing in sector within market that China Gerui is engaged in right now and we do believe that once we get there as China Gerui is in a very good position to be a consolidator rather than consolidate.
Given our view of near-term market conditions, our revenue guidance for the year of 2013 is between $280 million to $290 million. We definitely will continue to monitor the market, especially the pricing movement and provide updates wherever and whenever necessary to share clarity on our business with investors.
As you have all been aware that early at the beginning of this year January 29th we announced that China Gerui is ready to introduce a new laminated steel processing lines at the existing production facilities in Zhengzhou, China, and we believe that the new laminated steel processing production line will be completed, tested and to begin commercial production in the second quarter of 2013 this year. We’re very excited about this new addition to our product portfolio. This is part of the product mix and optimization efforts we have been engaged in.
We’re looking to migrate further up specialized cold-rolled steel sector value chain with this new specialized steel material and we continue to work on additional product initiatives that involve technologies and end-use applications that appear to both existing and new customers. We believe that this new laminated steel production line will further solidify our competitive edge as the leading specialized cold-rolled steel materials produced in China.
We believe that under normal market conditions, this laminated steel products will get for us the same kind of margin profile as our chromium-plated steel products. You may have also noticed that backing February 28; we did a SEC 6-K filing. We disclosed that the Company entered into equity transfer agreement with Zhengzhou No. 2 Iron and Steel Works which is a predecessor company of Henan Green, the wholly-owned subsidiary of China Gerui and Zhengzhou. So, based on that agreement, China Gerui will pay $42 million for the acquisition of Zhengzhou No.2 Iron and Steel Works. We have the cash available for that acquisition and this acquisition is based on objective, third-party appraisal by a local appraisal firm and asking salary reviewed and approved by audit committee and the Board.
I want to talk a little bit about the rationale about this acquisition. As a background knowledge Zhengzhou No. 2 Iron and Steel used to be the predecessor company and owner of China Henan Green our fully owned subsidiary in Hernan. And back in 2008 when China Gerui, I mean acquired Henan Green through offshore holding company we did not acquire the land from this company because at that time it didn't have enough cash to pay for that. However, over the last four years this company has become idle company with no other income except for the land leased income from China Gerui. And China Gerui has its operations and newly added capacity all built on a piece of land owned by the stranger of No. 2 steel and this has possessed a (inaudible) option risk if land disagreement is terminated unanimously by this Zhengzhou Company. And also actually we have seen the cost of land has been rising very sharply over the last four years, which may result in Henan Green incurring higher cost if the acquisition is delayed until further into the future.
The other rationale is actually over the last couple of years, I mean we have several bankers and also I mean potential investor reviewing the company doing due diligence and we have realized that when they do a review the balance sheet and the some of them asked the question about the return on asset is extremely high for China Gerui and then we reutilize that with this acquisition of Zhengzhou No. 2 Iron and Steel works will help I mean solidify our balance sheet, to enable our investors to conduct really meaningful financial analysis in China Gerui. Because as I said just now because of China Gerui not owning the lands and return on assets is risk status and then going forward we see more rationalized depreciation and amortization expenses getting to our income statement. So overall I think the balance sheet and also the financial analysis on China Gerui will be much solid after this acquisition.
China Gerui appreciates the investors supporting our stock at these undervalued levels, right now to demonstrate our continued commitment to our shareholders. We have continued our share repurchase program during the fourth quarter and as of December 31, 2012 we have totally repurchase 1,971,929 ordinary shares at an average price about $3.08 per share for a total repurchase price of approximately $6.1 million. China Gerui fully expects to resume the share repurchase program after we move out of this in the blackout period, until the Board approved $10 million line is completed.
However by that time if the market condition spreads will come back to the Board for authorization within large repurchase program. In summary while China Gerui faced challenging market conditions in the second half of 2012 we continue to remain profitable and command a market leading position. We will continue to supply our customers and we’re adding more products to provide a more complete line of steel products. So our plan is to sell more higher margin products to our current customers, use this higher-margin products to penetrate deeper into our current markets with an emphasis on segments were higher-margin are evident and then enter into new markets. We will continue to opportunistically evaluate expanding our export strategy while identifying our strategic business combinations that will enable us to enter new markets while expanding our capacities.
We, after this earnings call, and we will very soon provide further update on the progress we have achieved in contemplating our export business. Please stay tuned.
The other thing probably you have noticed that starting from January 2013, we have retained Grayling IR as a new IR firm. We do appreciate all the hard efforts CCG has provided us and supported us over the years, but now with Grayling, with a more integrated IR and Corporate Communication platform we’re very hopeful that the Grayling IR will help us to improve communication with investors and also help us to beef up the enthusiasm and also attention of potential investors in China Gerui. As always, we welcome investors and analysts to our facility in Zhengzhou to better understand our sophistication and the value-added processing capabilities and we will continue to be active with our global investors with events and conferences that will be announced in the very near future.
With that, I'll just conclude my summary of the business outlook and also I mean walk you through the financials. Operator?
(Operator Instructions). Your first question comes from the line of Echo He.
Echo He - Maxim Group
First one, I want to ask on, Ed you mentioned in your prepared remarks that the demand of your products boosted during the quarter, I just wonder could you give some reasons and what's the consideration? The second question I would like to know more details about ASP changes on your raw material, and also your product during the first quarter and also currently and this configuration during the first quarter of 2013? The third question and you talk about the acquisition rationale, just want to know whether you could talk more about what the major changes in your balance sheet? That will be it.
I mean first of your question about the shrinking or weaker market demand and why that happened. As I said, actually 2012 as the worst year since the beginning – since the very first year of the century, we as a long-term player in this market, we really haven’t seen this market the way – as bad as it was. Now, look at it from two perspectives. One, if you look at the overall our upper stream the crude steel producers the market demand was weak too and then the margin was even worst. In our sector of the market for cold-rolled steel products, first of all especially in the construction and decoration material sector our end applications, the demand was weak, but we hope that with the new government coming on board with this I mean urbanization initiative hopefully that's going to come back gradually.
And then the overall reaction from the customer or the market as since the beginning of this, I mean last year starting from actually January, February and March, the market was very weak and then April, May and June it hesitated and then all of a sudden starting from July, the overall I mean prices really went like fell like a rock into the historical low level of September. Because of that I mean on one hand we try to maintain the operation of all production lines. On the other hand, we don't release that capacity only to see us engaging in pricing what was competitors, which are going to hurt our reputation of the premium precision cold-rolled steel producer and also going to get us to the point of no return where we can charge I mean no longer charge premium compared to our competitors.
So, that's our strategy, but I mean as I see whatever I mean pricing concession to give to the customers, it's very difficult to get it back within a short timeframe, but we do expect that as I talked already in the call, when the market comes – it now comes backs, will come back to the position where we’re able to charge premium compared to the competitors based on our cost plus method of pricing and we’re going to see gradual improvement of the margin getting to 2013, especially in the second half of the year. Now the second part of your question about the average cost of the average selling price and also the average cost of the raw materials is a very detailed but I can show that offline.
I want to mention that the thing is, probably people say I can actually done a lot of questions from very enthusiastic and caring, I mean investors asking hey, we see the iron ore cost really going up. I mean the price goes up so you can translate that into a higher price average selling price for China Gerui, but in this case the (inaudible) works that way, first of all you see the iron ore cost really goes up but that just squeeze without the meager profits of the crude steel producers in office stream of the value chain. They have to check up their average selling price, but they are not really making profits, that’s why I'm saying I mean across the board the overall China steel industry was actually incurring losses in lion share for our sector of the market which is stream in the value chain, we see first of all the raw material cost that really goes up that the average selling price in the recovery is not moving in tandem.
For easy reference I recommend if you go to mysteel.com you see the composite, I mean steel price indicate that for cold rolled and hot rolled, you will see they are not really moving in the same fashion. So, this is primarily because of the resistance from the customer whom we used to serve, who are used to the – from January to February last year they kind of liking the price concession.
As I said it's going to take a lot of patients and time for that to recover. Now we just now mentioned about trying to, asking for some indications about what happening in fiscal of 2013 if we look at the overall price movement which is probably (inaudible) upon in the Internet you see that actually in the first quarter of 2013 the overall steel price actually comes down. So I want to be very cautious about, in the first quarter we haven’t announced that yet, but given the calendar New Year in January and then the Chinese spring festival, for the country it's going to be a low season historically low but despite that I mean we’re very opportunistic about the guidance we provided on the full year basis, because we’re very optimistic about the especially the second half of the year. We’re going to have some new and introduced laminated steel products as well as the expected recovery of the average selling price starting for the second half. Now third question you asked about the how the acquisition of Zhengzhou No. 2 Iron and Steel Works is going to help solidify the balance sheet. First of all how that’s going to impact the balance sheet, first of all you are going to see that actually look at the financial statement we just release early today.
We have actually deposited only certain amount about $24 million for the acquisition of that company, so that is down and then the balance between purchase price versus 24 already deposited. We have that cash reserved for that earmarked for that purpose. So it's not going to hurt out our cash position on impact our operations going forward no its going to happen. But once we’re done with that acquisition we’re going to see – primarily you see the land use right is going to be – the balance of account is going to be increased and then on the income statement going forward you will see probably added the amortization cost of the land from that newly acquired business.
But after this acquisition when you do the recent analysis of our balance sheet, our income statement I personally, I do think that it is going to be more meaningful than what it used to be when we’re just leasing that land from the company paying a symbolic lease payment to the company over the last four years and then when our investors or bankers comes in, do analysis on the company say hey, the denominator of the recent analysis is actually understated. So I think that's going to be an income. For this acquisition I want to make further comment is that our relationship with Zhengzhou No. 2 Iron and Steel has been fully disclosed through our SEC filing.
This acquisition is based on a fair appraisal of the target company and being went through the solid review by the Board, so we believe this is an arms-length transaction. Going forward will be have fully successfully initiated risk associated, risk financed usage. I hope that answers your question.
Your next question comes from the line of (inaudible).
Just looking at the rising prepaid fixtures, actually had contributed negative operating cash flow for 2012, so I think my question is that why are we seeing $76 million of prepaid purchase in the current environment, and if so many Chinese companies are having to extend more generous payment terms, you know this is a case for other companies that incurred high DSO, then why this trough is prepaying more for the raw material than the years ago, while the balance was actually a decline.
With the timing in mind, we have skipped the translation if you don't mind. So, I'll take your question. I mean first of all, yes I mean I think at the third quarter earnings call we discussed about this issue and at that time I just say that by the end of the fourth quarter we're going to settle accounts with the supplier for the prepayments, prepaid purchases.
So, that's happening, but just unfortunately because the balance sheet is going to snapshot on what all – what is the situation as of December 31, 2012. Probably here we haven't seen what's really happening, because once we close the book, we close our book and we sit down and kind of settle the prepayment on our account. So, it's happening as we speak right now, but this is just because of the cut-off I mean of the balance sheet.
You didn't see that moving down significantly. It is coming though, and then as a second part of the answer to your question why we have those prepayments to the supplier. Now, historically before 2011 the Company's products have been just narrow-strip cold-rolled steel. So, I mean we have four or five suppliers basically providing us the narrow hot-rolled - cold for us I mean as raw material.
So, the type of product is relatively different simple, but once we get into 2012, we’re offering both wide and narrow-strip and starting from 2012, we anticipated we will be moving towards further optimizing our product mix by offering wide-strip, narrow-strip, chromium plated, laminated, so that means for example that probably means we’re going to, given the newly added chromium plating capacity, for example, that means going forward we may not have to take the half-finished products from our own cold-rolled steel mills and then put them through that chromium-plating or laminating process.
We can actually go to the market and purchase finished cold-rolled steel and for further processing. So, that is in our initial assumptions, so that's why our strategy as part of the supply chain management is we try to comb and combing are kind of like a grooming one to two suppliers who can offer us the kind of like flexibility when we do our production scheduling. So, it can happen that we come back with them very (inaudible) wide-strip or I need finished cold-rolled steel. So this provides a kind of like special demands on the capability of the supplier to meet our changed supply requirements so that’s the reason why it's like more like a pilot project where we say we try to work with one or two major supplier and hope that they can help us with the as I said product offering and also kind of like flexibility required (inaudible). So that’s why we do this, starting from the fourth quarter as I said once we pass that and the accounts settled going forward we will be more cautious with this approach and probably we will come back and revisit the strategy and when the market comes back to a more normalized situation where we can be part the transition rate with product offering for both light and laminated and going forward. Thank you.
So you mean that going forward will be more the self-sufficient in terms of self-supply of the cold-roll as opposed to you that you have goal on purchase externally?
That really depends on the markets, I mean if the market changes I mean the demand because I mean the market changes and the demand let’s say chromium plating, chromium plated products coming very let’s just comeback a very strong then I think this is strategy this is going to work, I mean this is make supply chain management strategy is going to really work for that purpose but we have to I guess we see the pros and consequences of this approach and also the pros and cons plays out differently at different market situation. So, I guess we really need to be very careful this time. But this is a good reminder and good question.
Your next question comes from the line of Dmitriy Shapiro.
Dmitriy Shapiro - Global Hunter Securities
Given the slowdown in construction, is there an emphasis in shifting out goods away from the construction and household products and move into faster growing market such as automotive?
I guess for your question, I guess my answer would be, we wish first of all to get into automobile industry the actual situation is, if you look at the auto seats, those are usually of a different specification, especially in terms of width, and then in China, the government really encouraging, for example, the heavyweight players, especially state-owned like Bao Steel and Wuhan Steel to dominate that market, right now that is not our focus. I mean both because we don't have the expertise and secondly our current facility or the equipment is not really I mean focused on that sector of the market.
But I mean actually as of now, although I mean it picks up only very small percentage, I understand that our some of our customers are actually using our cold-rolled steel as a for the manufacturing of some small parts for the automobile. But as I said, yes, we see that is a very promising industry in China automobile and we’re getting our foot into that stretched forward a little bit with the material financing some of the auto parts manufacturing. But going forward we will keep watching and see whether we can contemplate that capability either simply ourselves or through a partnership with some industry leaders going forward.
Dmitriy Shapiro - Global Hunter Securities
Also can you give us an update on your export strategy and also talk more about your longer-term goals in potential new markets?
Dmitri just now I said that after this earnings call, very soon within next two weeks we’re going to come out with a press release providing investors with update on the export business. But I do want to mention that given the current market situation in China and given kind of interest we have obtained from potential overseas customers and given the fact that we have been through some of the critical testing for some – which may lead to sales orders coming from overseas, one of the strategic focus of China Gerui into 2013 is contemplating export business. Again, we’re going to provide a separate update through the press release. Please keep your eyes open and stay tuned.
Dmitriy Shapiro - Global Hunter Securities
Also looking at your balance sheet I see that your total debt level has increased. Can you explain why do you need more debt given your strong cash position and also can you talk about the terms of these loans and notes payable?
First of all as I see, for example, for the purchases we said once we get to the yearend, we’re going to settle the accounts and some of the units were returned, taken off that account, and secondly, throughout the year we have been, I mean we’re looking at several opportunities including potential partnership also including, for example, the anticipated acquisition of China Zhengzhou No. 2 Iron and Steel Works. So we have been reserving some cash for that purpose to support, I mean, make the operation. We have been utilizing some of the bank facility which comes in the form of most payable rather than cash allowance so that's the reason. But getting to 2013 we’re working on and we believe that level is coming down.
This concludes today's conference call. You may now disconnect.
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