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Guanwei Recycling Corp. (NASDAQ:GPRC)

Q4 2012 Earnings Conference Call

April 01, 2013 08:00 am ET

Executives

Ken Donenfeld - DGI Investor Relations

Chen Min - Chairman of the Board, President, Chief Executive Officer

Yang Feng - Chief Financial Officer, Treasurer, Secretary

Analysts

Mark Miller - East West Network Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Guanwei Recycling Corp 2012 Year End Investor Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions).

I will turn the conference over to our Mr. Ken Donenfeld, DGI Investor Relations. Please go ahead, sir.

Ken Donenfeld

Thank you very much, operator, and thanks to everyone who has joined us on the call today. There's a link to this conference call that will be posted on the company's website at www.guanweirecycling.com and instructions for accessing the call are included in the earnings release.

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

In the 60 minutes or so that we have, Mr. Chen, asked that I present his opening comments and then Mr. [Lawrence Wang] will walk you through the numbers. Mr. Chen and Mr. Yang Feng will then be available to answer your questions with the assistance of Mr. Wang and Mr. Sun. We appreciate your holding any questions you may have until we've completed the opening remarks and your patience as we go through the translation process and answering some of the questions.

Before we get started, I am going to read a disclaimer regarding forward-looking statements. This conference call may contain in addition to historic confirmation forward-looking statements within the meaning of the federal securities laws regarding Guanwei Recycling Corp. Except for historical information contained in our comments. The statements we make are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results and future periods to differ materially from forecasted results. These risks and uncertainties include among other things product demand, market competition and risk inherent in our operations. These and other risks are described in our filings with the U.S. Securities and Exchange Commission.

I will now begin with the presentation.

Good morning to each of you. I hope you all were able to review the full year results we published before the holiday weekend on Thursday, slightly ahead of schedule. We of course were pleased to once again report another record year for sales in 2012. Revenues topped $79 million, which was an increase of more than 24% year-over-year. As we pointed out, this gain included approximately $9.8 million in sales of raw materials which we did not have last year as Lawrence will explain in a few minutes.

Nevertheless, we also achieved record sales as a primary product we manufacture, recycled low density polyethylene or LDPE. For the full year, sales of our self manufactured, recycled LDPE grew through almost 9% over the prior year to about $67.33 million. This is one indicator of the continued strong demand for this product even in the relatively weaker economic environment in China that we experienced in 2012. The news with respect to our bottom line also was encouraging that required some [shifting] through the facts.

For the full year, we reported that net income declined slightly by about 7.5% as our gross margins declined 23.4%, or well below our target margin for the at least 30. In some part, this reflected the low margin raw material sales. Excluding the low margin sales of raw materials, our gross margin was 26.29% in 2012, mainly reflecting that for the full year our selling prices did not advance as rapidly as our manufacturing costs.

The good news in this picture as I explained in our third quarter report and it continued through the remainder of the year, is that during the year starting around mid-year, we began to see some reversal on this trend. As Lawrence will discuss, we saw selling price increases quarter-by-quarter to go along with year-over-year and quarter-over-quarter increases in our sales volumes as measured in tonnage.

While our manufacturing costs also continued to increase, they nevertheless grew at a relatively moderate pace in the second half. This was mainly true for raw material cost. In our case, the cost of imported plastic waste, so that for the full year, our selling price increased 3.32% for manufactured, recycled LDPE compared with 4.64% increase in the price of raw materials.

What clearly hurt us the most was the increase we incurred in labor and overhead costs reflecting to some extent the labor shortage in Southern China. As the year progressed, we worked hard to overcome this situation with expenditures to improve our manufacturing quality and productivity and are continuing to do so in the current year.

Of course, we are continuing to work closely with our raw material suppliers in Europe to guard the very distinct pricing advantage we have versus competitors by being able to buy higher quality material from them which reduces our costs. Looking ahead, we are optimistic that the worst has passed with respect to China's economic situation, and we will continue to see growing demand for our main product. It is an essential element in many manufactured products and will remain substantially cheaper than virgin plastic.

There could be some further bumps with respect to labor costs, but we can't say for sure at the moment. While raw material costs are largely out of our control, we believe price increases will continue to be moderate, and we will continue to negotiate with our suppliers. As you know in 2011, we completed self financed projects that bumped up our production capacity from 65,000 tons a year to 80,000 tons, which leaves us room for growth given the roughly 55,500 tons we produced in 2012.

I should add that in 2012, we spent over $2.6 million of our own funds and capital improvement and ended the year with no bank debt whatsoever. We did, however, continue our conservative program of extending credit to our best customers, which increased receivables on our balance sheet, but nevertheless we maintained our very strong financial position and had cash and cash equivalents of more than $12 million at year end. In anticipation of your questions about this, let me say that we believe it is in the company's best interest to remain cautious about how it spends its cash given the still improving economic environment, the potential for additional bulk buying of raw materials to reduce their costs, and so on.

We certainly agree that our shares are very undervalued, but to-date have not seen short-term measures such as paying a dividend or buying back stock as appropriate. Instead, we remain patient to better revival of investor interest on China-based companies like ours that are financially strong, transparent, and have clear growth prospects in what continues to be the world's fastest growing major economy.

Before we open up the call for your questions, let me hand the microphone over now to Lawrence Wang to go over some of our numbers, and then I will be happy to answer your questions.

First, Lawrence, can you pick up from here.

Lawrence Wang

Yes, Ken. Thank you, Ken and Mr. Chen. I will proceed. Most of what I will discuss is covered of course in the Form 10-K we filed last week. I will try to round out explanations and then remain available for any further questions you may have.

Let's start off with revenues. For the year, they grew 24.28% to $79,043,000 compared with 2011. As has been noted, this year revenues included $9,798,000 in sales of raw materials as compared with no such sales in 2011. On these sales, there's only a small markup simply to cover costs. The sales were the consequence of the company's book purchase of raw materials in order to negotiate lower prices from the suppliers. And then the [older] (ph) materials were sold to create more room to our storage facilities.

For those who may be near to the company are strategically explained here that Guanwei's raw materials purchase of plastic waste are made directly from European sellers of this material, eliminating the cost of the middle-man. It is higher quality waste to the extent that it stays real shorter reducing this labor intensive activity at the company's facility in China, which further reduces manufacturing cost.

From this waste, the company produces top grade recycled [plastic], which it sells to more than 300 customers including over 150 active recurring customers in 10 or more industries at prices above 40% lower than virgin plastic.

In order to purchase its raw material in Europe, the company has to pass a vigorous inspection from German authorities to ensure it meets the highest green standards fuel if any other companies in China these certifications from German that's why Chinese authorities that’s providing Guanwei with a significant competitive advantage.

The company's principle product is the recycle LDPE manufacturers, which in 2012 accounted for 85% of sales. The remainder of sales particularly on non-LDPE material show that our firm attaches of important raw materials which can never be entirely pure LDPE. Non-LDPE sales in 2012 were approximately 3% of the total sales. In 2012, we also had the sales of raw materials, which accounted for 12% of the sales.

As described in at least the [Chen's] comments, in the slower economy in 2012, sales were up but at a slower pace in the recent past and the sales price were up as well, but also at a slower pace. At the same time, there was continuing growth in the cost of sales due to increased cost of raw materials, labor and overhead. In fact, for the full year, the growth in these costs in the aggregate our pace increases in selling prices.

More specifically, sales of manufacturing recycled LDPE in 2012 increased 8.77% year-over-year to a record $67,332,000. This was a combination of year-over-year growth in tonnage sales from 52,666 tons to 55,448 tons, a 5.28% increase. While average selling prices increased 3.32% from approximately $1,175 per ton in 2011 to $1,214 in 2012. Sales of non-LDPE materials increased 12.57% percent to $1,914,000 in 2012, reflecting a 5.41% increase in tons sold and a 6.85% increase in selling price to approximately $312 per ton.

Of note, in the second half of 2012, sales tonnage and selling prices of manufactured recycled LDPE improved sequentially by quarter as well as year-over-year as was particularly apparent in the final quarter of this year. On product recycled LDPE sales numbers in Q4 were $19,446,000, compared with $17,431,000 in third quarter of 2012, a gain of 11.56% as compared with the full year gain of 8.77%. The tonnage of recycled LDPE sold in the fourth quarter on an unaudited number basis was 15,883 tons which was approximately 10% higher than the 14,427 tons sold in the third quarter of 2012.

Additionally, the average selling price for recycled LDPE in Q4 were $1,224 per ton, up from $1,208 per ton in Q3 and compared with the average of $1,214 per ton for the full year. Meanwhile, manufacturing cost of recycled LDPE rose throughout the year and for the full year were $51,041,000 or 73.71% of sales, up 15.71% from 2011.

The leveling off in cost that occurred in the second half of the year reflective of annual manufacturing cost per ton in the second half of the year, which were just slightly higher than cost in first half 2012. Further, while manufacturing costs were 73.71% of sales for all of 2012, is compared with the 73.57% of sales in the first six months of 2012, a difference of just 0.14%.

Of particular note for the full year, raw material costs of $722 per ton were 4.64% higher than $698 per ton in 2011. In the same timeframe, selling prices per ton improved from $1,175 per ton to $1,214 per ton an increase of 3.32%. As previously noted, the labor component of manufacturing cost was primarily responsible for the year-over-year jump in manufacturing cost given the relative improvement in raw material cost increase in the second half of the year.

During 2012, direct labor cost per ton was 30% higher than in 2011. This reflects our difficulty including factory workers which necessitate increased pay and benefits in order to attract and retain workers. While management anticipate further possible increases in 2013 measures and benefit expenses and continually is focused on productivity improvements in the manufacturing products.

I should also note as described in the press release and the 10-K that going in 2013, we again have been able to obtain from the China's government a combined 115,000 tons limit on the amount of raw materials we may import. Mr. Chen [component] as well to the company's financial strength and emphasize our optimism for the future. In particular, the company had no bank debt on its books as of the end of 2012 and cash and cash equivalents of about $12.1 million.

Of significance was $12.83 million increase in accounts receivables in 2012, compared with 2011 as we reach approximately $9.3 million. It reflects a continuation and expansion of the company's decisions to expand credit to its best long-term customers with good credit history during the relative economic slowdown. While there was some slowing in payments during the year there was no material amounts of bad debt that were problematical. Something we monitor carefully.

The net operating cash flows generated from net income and debt to equity conversions during the year translate to an increase in working capital 2012 to approximately $35.5 million, up about 49% from the prior year. The company believes this will be sufficient to fund operation in 2013 as well as to expand the growth of the business is new equipment and improvements to the production facility to enhance productivities.

With that, I will turn the floor back to Ken and then be available for questions with the rest of our team. Ken?

Ken Donenfeld

Thank you, Lawrence. Let me conclude with Mr. Chen's comment that with the turnaround we had been seeing from the more difficult period from mid-2011 to mid-2012 and our strong financial position, we are quite optimistic about our future as a leader in this essential business in China. We also remain very proud to be a leader in contributing to a greener China with our zero discharge manufacturing as the focus on improving our environment is likely to intensify with our new government leaders.

Thank you very much. I will now open the floor to any questions you may have. Operator, could we move ahead with our question and answer session?

Question-and-Answer Session

Operator

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

Mark Miller - East West Network Group

Good evening. I just have one question. The age of your oldest receivable and how much is it? I mean, your receivables did double year-over-year, and you made a comment on your pay that your customers paid slower during 2012 as a result of economy slowdown. Go ahead with your answer.

Ken Donenfeld

Did you get that? The age of the oldest receivable that we have.

Lawrence Wang

Okay. Let me translate. [Foreign Language].

Yang Feng

[Foreign Language].

Lawrence Wang

Okay. Well, that's Mr. Yang Feng, the CFO of the company said, because of the tightening of credit in China by the banks and also the slower economies, some of the customers do have some cash flow issues, so not that they are unable to pay, but they need longer terms and Guanwei basically will only extend longer credit terms to the long-term customers that the customers that we have good relationship and we have a long history of doing business with them, so we don't think we increased our credit risk at this point.

Mark Miller - East West Network Group

Do you have like a number and age, like you said 100 days or 150 days?

Lawrence Wang

Yes.

Mark Miller - East West Network Group

Any different number? Could you give an estimated number? What is a typical credit term is another question I have here. Is it 30 days, 60 days?

Lawrence Wang

[Foreign Language].

Yang Feng

[Foreign Language].

Lawrence Wang

Not existing 90 days.

Mark Miller - East West Network Group

So, you don't have one receivable out passed 90? Is that correct?

Lawrence Wang

No.

Mark Miller - East West Network Group

Okay. Excellent. One more, guys. Do you still enjoy -- what percent approximately do you have to your advantage of your LDPEs, your platform that you produce your high quality versus the so called virgin plastic out there? Remember in the past, it was near 40%. Is it still in that?

Ken Donenfeld

Did you get that? Is the price difference between what you are selling and virgin plastic still around 40%?

Lawrence Wang

[Foreign Language].

Yang Feng

[Foreign Language].

Lawrence Wang

So, typically, it's going to be -- about 30% to 50% will be plastic as you know the prices of LDPE are fluctuating. It's just like any commodities, so at the moment, it is about 30% to 40%.

Mark Miller - East West Network Group

30% to 40% or 50%?

Lawrence Wang

Yes.

Mark Miller - East West Network Group

One more, guys. Thank you on that. I wish you would break your fourth quarter out. It looks to me that your cost for the quarter for your material was approximately $740 per ton, which looks like your first quarter was $761, then you had $690, $697, and $740. Is this a pattern, I mean, is the first and fourth quarter always high and then the middle ones low? I mean, what do you see of that?

Lawrence Wang

So are you talking about the material cost or you are talking about overall?

Mark Miller - East West Network Group

Your stated material cost.

Lawrence Wang

Not manufacturing cost. Material cost?

Mark Miller - East West Network Group

Again, your first quarter you reported $761 per ton, and then middle quarters quarter two was $690 and quarter three $697, and so you are arrive at the $722 annual cost you had to use the number $740, which that's what I came up with. If you do the math, the result came up that way. Does it appear that your first and fourth quarters are always higher gathering this material or is it such pattern or what do you see out there?

Lawrence Wang

[Foreign Language].

Yang Feng

[Foreign Language].

Lawrence Wang

[Foreign Language].

For accounting purpose, we are calculating the cost based on first-in, first-out. The inventory is first-in first-out, and then we buy from several suppliers, and then it's lot of materials, the price will be somewhat different, it depends on the material they have on hand, so on each lot of the materials we negotiate the prices with them, so it's not really seasonal for the prices. It really depends on how much we buy our materials and when, so I mean like for the fourth quarter, the materials we are using, we purchased in the third quarter, so it's really -- in the third quarter, there may be certain contracts that they have less inventory, so I mean they sell at a little bit higher prices. The other question, it's really not a pattern that Q1 and Q4 the average price will be higher, so.

Mark Miller - East West Network Group

Great. All right. Well, congratulations on your year-end report. We appreciate your efforts. Hope to see you some time in the future.

Ken Donenfeld

Operator, are there any other questions?

Operator

We have no further questions, but if anyone else would like to ask a question at this time, (Operator Instructions). And, we have no further questions at this time.

Ken Donenfeld

Okay. Well, in that case, the questions that I had were already answered. They were relating to receivables. And, I will therefore thank each of you for joining us and hope that you will feel free to call me or anyone on the line with any further questions that you may have after the call. So, thank you very much again.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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