ShengdaTech, Inc. Q1 2009 Earnings Call Transcript

ShengdaTech, Inc. (SDTH)

Q1 2009 Earnings Call

May 12, 2009 9:00 am ET

Executives

Crocker Coulson - IR, CCG.

Xiangzhi Chen - CEO

Andrew Chen - CFO

Anhui Guo - COO

Jenny Yang - CCG

Analysts

Hao Hong - Brean Murray, Carret & Co.

Scott Tong - Oppenheimer

John Ma - Roth Capital

Ping Luo - Global Hunter Securities

Katherine Lu - Oppenheimer

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the ShengdaTech Q1 Earnings Call. (Operator instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Crocker Coulson. Please proceed, sir.

Crocker Coulson

Thank you very much. Good morning, ladies and gentlemen. Good evening to those of you joining us from China. Welcome to all of you ShengdaTech's Q1 2009 conference call. With us today are Mr. Xiangzhi Chen, ShengdaTech's Chief Executive Officer; Mr. Andrew Chen, the company's Chief Financial Officer; and Mr. Anhui Guo, Chief Operating Officer. All of them are joining us from China.

Also joining us is Jenny Yang of CCG, 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 some 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 various risks, including, but not limited to, unanticipated changes in product demand, especially in the tire and PVC industry; the ability to attract new customers, the ability to prepare for growth and manufacturing capacity expansion and other information detailed from time-to-time in the company's filings with the SEC.

Although the company believes the expectations reflected in these 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, May 12, 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 an overview of the Q1 results on behalf of ShengdaTech's Chairman and CEO, Mr. Chen.

Xiangzhi Chen

Welcome everyone and thanks for joining us on ShengdaTech's first quarter conference call. We are very pleased to announce that in the first quarter 2009, our NPCC business demonstrated strong year-over-year growth, driven by our aggressive NPCC capacity expansion plans to increase market penetration and enhance sales and marketing efforts.

We started our 2009, with positive growth and solid fundamentals, generating NPCC revenues of $20.7 million, up 54% year-over-year from $13.4 million in Q1 of 2008, as a result of increases in both sales volumes and in average selling prices. Our ability to successfully add 60,000 metric tons of capacity in April 2008 and ramp up to full utilization, contributed to the 27% year-over-year increase.

Just like other industries, we were also somewhat affected by the challenging economic environment as some of our existing customers were forced to cut back their production levels. However, our broad customer base along with newly acquired customers resulted in continued high level demand due to markets growing awareness of NPCC as a multi category characteristics improving proven value proposition.

The pure and stable particles of our NPCC products, combined with our advanced technology and strong customer support allowed us to stand these long-term relationships with key customers. This is essential as we grow our production volumes and work to identify new application areas to expand our base.

We believe that the price of NPCC products will remained at a high level, while effective cost control processes promise to offset some of the increases in raw material costs. The net effect is that NPCC gross margins continue to be at favorable levels such as we currently enjoy.

Our product mix during the quarter reflects the growing acceptance of NPCC in a variety of end markets and increased recognition of ShengdaTech's brand. Sales to our two largest end markets, tires and PVC contributed 71% of revenues during the quarter.

At the same time, our sales of high margin products made a greater contribution to revenues. Sales to adhesive and latex accounted for over 10% revenues and increased 48.1% year-over-year and was three-fold quarter-over-quarter.

Sales for NPCC in polyethylene or PE accounted for over 8% of revenue, up significantly both year-over-year and sequentially. This reflects the growing acceptance of our products and increased recognition of value-add solutions ShengdaTech brings to our manufacturing customers.

During the quarter, we made a strategic decision to no longer pursue the acquisition of Jinan Fertilizer Company and our long-term strategy to direct our resources towards high growth and high margin NPCC segment. To that end, we've stepped up our R&D efforts to expand our application base and have increased marketing and sales activity to enhance our image in this category.

Our objective and focus is clear and that is significantly increase NPCC's penetration in our current served end markets and accelerate entry in the new application categories and geographic regions.

Standing behind these goals is our patented advanced membrane dispersion technology, which remains the most efficient method of producing high performance NPCC particles as compared to competitor's offerings. We have no known competitors using this production method and this provides us with a desirable and exclusive position in the industry.

NPCC production has ramped up from 30,000 metric tons and has now become the largest NPCC manufacturer with 190,000 metric tons. And I'm pleased to report the capacity utilization continues to run at 100%.

The first phase of our new Zibo NPCC facility is under way, with 60,000 metric tons of capacity, scheduled to come online in either July or August of 2009. An additional 20,000 metric tons can be added through the purchase of additional equipment. Based on estimated demand, we expect the 60,000 metric tons to reach an 80% run rate utilization by the end of 2009.

The total designed annual capacity for the Zibo facility, based on our demands that we've acquired is 250,000 metric tons, which is planned to be built out in several phases. We're going to continue to closely monitor market conditions and then choose the most favorable time to bring on the new capacity.

The other element of our strategy is development and expansion of our customer base by developing a robust pipeline of new potential customers. We are currently working with 41 potential domestic customers and two potential international customers in various phases of the sales cycle. Over 55% of these customers are now in the testing stage, including a major supplier of automotive undercoating paints.

Another foundation of our business model is to constantly improve our technological expertise and enhance our R&D pipeline. R&D has remained the cornerstone NPCC business since its inception in 2001 and we have a highly qualified R&D team at our Shanghai Research Center.

They are focused on new breakthrough end applications, such as asphalt, epoxy resin, water-based paints for construction and improvements for latex and polypropylene. This year we are planning to develop improved NPCC applications for existing end products, including rubber, adhesives, automobile undercoating paints, high quality paper, plastics and paints.

We're also in the process of applying for four patents, including our NPCC formula and preparation method of asphalt and three patents related to the manufacturing process that enhance the consistency and performance of our products.

Our team is also working on a special modifier for use with rubber, which is an essential NPCC component in tire applications. Using our own modifier will help us to control cost and improve the quality of the NPCC used in these tire and rubber applications.

As you all know, we discussed our plan last quarter to relocate our headquarters' from Tai'an City to Shanghai. And I am pleased to announce that we've now opened our office in Shanghai and expect to complete our relocation process this quarter. As one of China's major commercial centers, Shanghai will provide the mutual benefit of easier access to our business partners, customer contact, and stakeholders as well as allowing us to track and even higher caliber of management, scientific and administrative professionals.

I'd now like to welcome to this call, ShengdaTech's new CFO, Mr. Andrew Chen, who will discuss ShengdaTech's financial results in greater detail. Andrew over to you.

Andrew Chen

Thank you, Crocker. Ladies and gentlemen, welcome to the first quarter of 2009 conference call. It is great to be part of ShengdaTech team and I am excited about the tremendous opportunity the company has for continued growth and prosperity. It is indeed a pleasure to be here with you today.

Before I get into the financial results, I would like to encourage you to read our 10-Q filed with the Securities and Exchange Commission and our quarterly press release published yesterday for more detailed financial disclosures.

In our press release yesterday, we provided EBITDA reconciliation schedule in addition to our standard financial statements for the period. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

We also presented schedules that showed impacts to our financials due to our adoption of FASB Staff Position Accounting Principles Board Opinion 14-1. Accounting for Convertible Debt Instruments that may be settled in cash upon conversion, including partial cash settlement commonly knows as APB 14-1.

On January, 1, 2009, we presented these schedules to help our investors and other stakeholders to better understand the impact of our adoption of APB 14-1 to our financials and to better analyze and benchmark our operational and financial performance.

Let me start with our revenue for the quarter. Total revenues for the first quarter of 2009 were $20.7 million, down 27.6% from $28.6 million in the first quarter of 2008. The decline in total revenue during the first quarter was attributable to the ceased production at Bangsheng Chemical Facility on October 31, 2008.

Pursuant to a mandatory directive from the Tai'an city government due to rezoning of the facility's location into a residential and non-manufacturing area, as a result we did not generate revenue from the coal-based chemical segment in the first quarter of 2009.

Our NPCC segment contributed 100% of our total revenue for the first quarter, compared with 47% for the same period a year ago. Revenue from our NPCC segment increased 54% to $20.7 million compared to $13.4 million in the first quarter of 2008. Due to the growing demand for our NPCC products, higher average selling price and an increase of 60,000 metric tons of annual production capacity added in April 2008 at the company's Shaanxi facility.

During the first quarter of 2009 even with the global slowdown our NPCC production facilities were operating for 72 days to meet the increased market demand. At quarter end total annual NPCC production capacity was 42,969 metric tons, up 9,253 metric tons, or 27.4%, from 33,716 metric tons in the first quarter of 2008.

Our gross profit in the first quarter of 2009 all of which was derived from NPCC products was $8.5 million, down 15.7% compared with overall gross profit of $10.1 million a year ago.

Gross profit for the NPCC segment rose 54.0% on a year over year basis. Gross margin was 41.1% in the first quarter, up 5.8 percentage points from overall gross margin up 35.2% a year ago, but unchanged from the NPCC segment gross margin in the same quarter last year.

The average selling of our NPCC products was $481 per metric ton, an increase of 20.8% from $398 per metric ton in the first quarter of 2008, which was offset by an increase in the cost of raw materials including, anthracite, soft coal, and limestone used in the manufacturing process.

Our selling expenses for the first quarter of 2009, all of which was derived from NPCC products, were $0.3 million, or 1.5% of revenue, down 28.3% from $0.4 million, or 1.5% of revenue for the same period last year. The percentage of sales commissions for the NPCC products was lower compared with the same period a year ago, resulting in lower selling expenses during the period.

General and administrative expenses were $1.4 million, or 6.6% of revenue, up from $0.7 million, or 2.6% of revenue for the same period last year. The increase was mainly due to increases in expenses related to the cost of compliance with securities and other regulations, including audit fess, legal fees, investor relations expenses, higher research and development expenses, and land amortizations expenses related to our expanded NPCC operations.

Operating income for the first quarter of 2009, all of which was derived from the NPCC segment, was $6.8 million, down 23.4% from $8.9 million in the same period a year ago. Operating margin improved to 33.0%, compared to 31.1% in the first quarter of 2008.

Interest expense related primarily to our convertible bonds was $2.5 million for the three months ended March 31, 2009. Interest expense included $1.4 million of contractual coupon interest on convertible notes, $0.3 million of amortization of debt issuance costs, and $1.3 million of amortization of debt discount due to the adoption of APB 14-1. The total interest expense was reduced by $0.5 million of interest cost capitalized during the three-month period ended March 31, 2009.

During the first quarter of 2009, based on the requirement of APB 14-1 we recorded a $1.6 million gain on extinguishment of debt due to the repurchase of an aggregate of $5.2 million face value of our 6% convertible notes, for cash consideration of approximately $2.5 million, plus accrued interest of $0.07 million and the difference of $1.1 million, was allocated to debt issuance cost and a discount on the notes.

Our effective income tax rate increased from 16.8% for the three-month period ended March 31, 2008 to 19.5% for the three-month period ended March 31, 2009 due primarily to the additional US income tax we accrued as a result of recognizing gain from repurchase of our convertible notes during the period and the interest income earned by the company's US entities during the period, which would be taxable at a higher US statutory tax rate of 34%.

For tax purposes, the gain from the repurchase of our convertible notes qualifies for deferral until 2014 in accordance with the provisions of the American Recovery and Reinvestment Act of 2009. Comparing our quarterly EBITDA year-over-year, the current quarters EBITDA of $9.5 million was practically unchanged in light of our significantly changed operations.

Our net income in the first quarter of 2009 was $5 million, down 32.8% from the net income in the same period last year. Diluted earnings per share for the first quarter of 2009 were $0.08, compared with diluted earnings per share of $0.14 in the first quarter of 2008. Excluding the impact of APB 14-1 our net income was $6.3 million or $0.08 per diluted earnings per share.

Excluding the impact of adoption of APB 14-1 as well as the gain on the repurchase of convertible notes our net income was approximately $4.7 million. Our diluted weighted average shares outstanding during the quarter was $57.4 million, up 24.4% from $54.2 million in the same quarter last year.

Now let's move on to talk about our balance sheet. As of March 31, 2009 we had $114.2 million in cash, and $115.1 million in working capital. Shareholders' equity was $152.5 million, up 3.7% from $147 million at the year end of 2008. In the first quarter of 2009, we generated net cash flow from operating activities of $6.9 million.

In February 2009, we repurchased an aggregate of $5.2 million face value, of our 6% convertible senior notes due 2018, for consideration of approximately $2.5 million, plus accrued interest of $0.07 million in cash. We are now actively seeking to repurchase additional notes and have no plan for early termination of the notes.

We are reaffirming our guidance for 2009, excluding the impact of any acquisitions, repurchase of convertible notes, and the adoption of APB 14-1. Our guidance 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 $0.32 to $0.34.

With the strong growth in the NPCC business, we are confident in our ability to generate positive cash flow from operations. Currently, we have sufficient cash reserves for completing Phase I of the new NPCC facility in Zibo, for other working capital requirements, and to develop new products and markets, to seek attractive acquisitions, specific to our Zibo expansion as of March 31, 2009.

The total capital expenditure was approximately $32.6 million, the amount was mainly used to purchase land use right and to build a plant. We'd expect an additional capital expenditure of appropriately $26.4 million this year to complete Phase I of Zibo facility, which will be funded by our cash on hand and cash flow from operations.

Crocker Coulson, will now provide final remarks before we start our Q&A session.

Crocker Coulson

Thank you, Andrew. We'd like to conclude by saying that our success in 2009 will be driven largely by our long-term strategic decision to focus on a rapidly growing high margin, high growth and technologically advanced NPCC business. Our research and development initiatives, quality focus, technological expertise and steadfast determination all have contributed to our globally recognized position as a leading NPCC supplier.

The next level of growth, we'll focus on expanding our geographic position by entering new international markets, increasing our market penetration in existing markets and enhancing our sales and marketing strategies. We will continue to elevate R&D standards to extend our advance NPCC technology, focusing on innovative application areas, which will prove pivotal to capturing a broad range of untapped markets and provide new opportunities for ShengdaTech and our shareholders.

In addition, we believe the NPCC market in China presents some several attractive acquisition targets, which help us to measurably broaden our NPCC business. We're also considering acquiring other high technology chemical companies and remain alert to any such opportunity that may present itself.

Our management team and Board will carefully evaluate the benefits of all potential acquisitions to ensure that they are accretive and add long-term value and favorable returns to our shareholders.

With that we'd like to close the call by thanking you for your support and we are now ready to open this call to any questions as you have for ShengdaTech's management team. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Hao Hong.

Hao Hong - Brean Murray, Carret & Co.

It's Hao Hong from Brean Murray. A couple of questions firstly just now you mentioned that you seem to have a large backlog of customers that may be coming on stream, you mentioned that 53 are in the testing stage. I'm just wondering how soon can we convert these clients into actual sales. And in terms growth percentage, how much growth would these clients represent?

(Foreign Language)

Anhui Guo

(Foreign Language)

Basically the timeline depends on the customer on the potential customer on their product that they are testing. So usually it takes about seven to nine months and therefore for other clients it takes about a year to finish the testing process and to start like taking large quantity of orders.

Hao Hong - Brean Murray, Carret & Co.

Right. So is it seven to nine moths after the testing stage has been completed or is it seven to nine months in total? And also the second part of my question is if we are successful in converting these clients, how much of growth in terms of percentage would that represent for this year?

(Foreign Language)

Andrew Chen

As you know, we currently have 22 customers that's we are working with on testing our products, in different areas and it's extremely difficult to predict when exactly would the testing be finished. We do have a tracking system that will very well be with the potential customers, try to develop more long-term relationships. And typically we have a 55% of locking rate and historically meaning that we have a 55% of possibility that these people who are testing across for eventually becoming our long-term customers.

Then, regarding exactly how much revenue can those new customers bring to us, it's a moving topic with all this economic environment changes. However, we are very optimistic as the Chinese economy is bottoming up. It appears that we might have a good potential to locking some of these new customers and potentially generate some nice revenue for the company, however it's very difficult to quantify provided the nature of our business.

Hao Hong - Brean Murray, Carret & Co.

Sure. Second question is on the application of your NPCC materials. You mentioned that you are doing some new application developments for Thai industry, for paint et cetera, et cetera. I'm just wondering in terms of percentage of revenue composition, how much of your revenue is exposed to the auto sector and would like to say construction industry which is now rebounding very strongly in China?

(Foreign Language)

Andrew Chen

For first quarter of 2009, 24.3% of our revenue were attributable to the sales with our tire customers, and 29.9% of the sale was attributable to our PVC customers. So, actually these two categories of customers contributed. I was talking about domestic customers and then international customers [30.7%] of the total revenue were attributable to international tire customers. About 3% of revenue were attributable to international PVC customers

So if you look at the domestic we did experience, some slower demand in our PVC customer due to the economic slowdown in the second half of 2008 and very beginning of this year. However, as you indicated that the Chinese economy is recovering and we are seeing signs of people starting to increase their order size.

Hao Hong - Brean Murray, Carret & Co.

Just one last question on your pricing trend, you mentioned that on the year-on-year basis your pricing is up 21%, I'm just wondering on a sequential basis what are you seeing and also whether you can give some indication of the pricing trend going into the remaining of the year?

(Foreign Language)

Anhui Guo

(Foreign Language)

Just let me translate the question. As we have indicated previously, we have actually a lower say price of the NPCC at 5% towards the end of 2008 and in fact at the beginning of 2009. So in total, we are lower about 10% of the price of NPCC. And from now going into the entire year 2009, we see the trend to be quite stable.

Operator

Our next question comes from Scott Tong from Oppenheimer.

Scott Tong - Oppenheimer

This is Scott calling in for Katherine Lu. Just on the NPCC pricing again, you've just mentioned that there was a 5% cut in towards the end of fourth quarter and then another 5% of January. But it seems first quarter ASP is kind of the same with fourth quarter, so can you just kind of give us an explanation for that?

(Foreign Language)

Anhui Guo

(Foreign Language)

Basically what happens, the price lowering is for different products or the NPCC and every single product has different price. So that's why you don't see much difference in terms of the change from Q4, 2008 to Q1, 2009. So we expect to actually see some price decrease. Afterwards, the price in general will still be stable.

Scott Tong - Oppenheimer

Just another question is can you sort of give us some color on the demand trend for the NPCC products on the monthly basis for the first quarter?

(Foreign Language)

Anhui Guo

(Foreign Language)

Basically for because our main two products that's in the PVC and the tire, so we have actually seen an increase in adhesive and a large increase in adhesive and latex.

Crocker Coulson

I think what he's asking, he would you like to know kind of on a monthly basis did sales pick up over the course of the quarter or where they kind of steady, just trying to look for some color.

Scott Tong - Oppenheimer

Yes, that's right. Thanks.

Unidentified Company Representative

(Foreign Language)

Basically what happens that during the Chinese New Year there is a slowdown in the demand for the NPCC in January which is say Chinese New Year and then afterwards the demand for NPCC has been recovering, so the demand for NPCC in March was normalized. So, we had actually a production base of 72 days during the first quarter of 2009.

Scott Tong - Oppenheimer

One last question is, our guidance for the bottom line guidance, does it include the gains from the convert buyback?

Andrew Chen

Well, the answer is no. As I indicated in my speech just now, the guidance was excluding any potential acquisitions, any repurchase of the convertible notes. Actually we are now looking to do any additional purchase in foreseeable future at this time. And we are now looking to terminate this convertible notes and then it also doesn't implement soon, from any repurchase. That now includes the impact of the function of the 14-1, it's technically a pure operational based guidance and it stays consistent with what we have provided at year end.

Operator

Our next question comes from John Ma from Roth Capital.

John Ma - Roth Capital

I have a few questions. Number one is that, I tried to understand the time lag between your sales to tire industry and the auto sales in general. We've seen Q4 is the worst quarter for the Chinese auto market and the Q1 has picked up substantially. However, we've seen your Q1 sales to tire was worse in past several quarters. So, can you give us better cut on this?

(Foreign Language)

Anhui Guo

(Foreign Language)

Basically, the first quarter is a very special quarter because of Chinese New Year, and due to the slowdown in the auto market during Q4, so the sales on the NPCC for the tire was low compared to other quarters. However, starting from March, we have due to the stimulus plan by the Chinese Government we have seen an increase in the demand for both NPCC applications for the PVC and for the tire. So, with the stimulus plan the demand for those products have been increasing.

John Ma - Roth Capital

My second question is about your gross margin. You had mentioned that you are adding some new products to higher margin applications, so I'm just wondering how much is the difference between margins between, say, polyethylene, paint, paper, ink, the new applications versus your tire and PVC?

(Foreign Language)

Anhui Guo

(Foreign Language)

Basically, for all the gross margin, we have different gross margin for different products. So, the average gross margin is about 41%.

(Foreign Language)

Actually during the Q1, our lowest gross margin is 14%. We had a gross margin of about 34.5%, and the highest margin was on the PE, which is about 46%.

Andrew Chen

Let me provider a little bit more information on the subject. The PVC, which accounted for 32.9% of revenue, has a gross margin of 36.1%, tire, which accounted for 38.1% of revenue has a gross margin of 43% for the first quarter. Ink, which accounted for 3.3% has a gross margin of 34.5%, paint 4.7% of revenue, and has a 39.8% of gross margin, and then for adhesives and latex, which accounted for 10.2% of revenue has 44.2% of gross margin. The last one, we have a couple other smaller categories, and the PE, which in this quarter, I told you accounted for 8.3% of revenue, has a gross margin of 46.2%. So, I hope that helps your answer.

John Ma - Roth Capital

That's very helpful. Now my last question for Andrew is that, help me understand your EPS guidance? You guided net income, excluding these items would be $18 million to $19 million, and then EPS would be $0.32 to $0.34, but that would apply, if I run a number, that would apply your share count at about 55 million, 56 million. Your reported share count is about 67 million, so can you explain that a little bit?

Andrew Chen

The guidance was provided with everything removed. All the taxes was removed just to focus on the operations of the company on a normal basis. So, your question is what?

John Ma - Roth Capital

My question is what is the basis of your assumption of total share count outstanding, because if I divide $18 million with $0.32, that comes out like 56 million shares.

Andrew Chen

I think that's probably is without including the potential dilution effect of the convertible notes.

John Ma - Roth Capital

So you're using basic EPS instead of a fully diluted EPS?

Unidentified Company Representative

(Foreign Language)

Basically, they exclude their dilution on the convertible notes, so the management will provide additional answers if it is requested.

Operator

Our next question comes from Ping Luo from Global Hunter Securities. Please proceed.

Ping Luo - Global Hunter Securities

My question is regarding your growth rate. We know that your current NPCC production is running full capacity, and you have about 60,000 tons coming online later this year, and slowly ramping up towards next year. This kind of curve to your gross rate for this year and next year, my question is that, in your Zibo facility, you do have room for total 240,000 tons of capacity, and you do have enough cash to build more capacity. Do you have any plan to actually speed up that building new capacity to grow your top line faster or actually you do not have enough customers, and your marketing efforts is not ready to actually sell additional capacity?

(Foreign Language)

Anhui Guo

(Foreign language)

Our decision to expand the production capacity depends on three points. The first point is that the demand of our existing customers. The second is the research and development. Our research and development team, they work closely with the potential clients to see what the demand will be. The third point is the current market condition.

So, if we see a sudden increase in demand for us existing or like potential or the prediction of the potential clients, then we'll be able to just add the equipments to Zibo and the one in Shaanxi, because in those two facilities, we still have the plant to add 20,000 tons of production capacity for each of them, which means we only need to buy the equipment, and then we can start the production. So, if we see a sudden increase in demand, we'll be able to do that and be able to meet the increasing demand.

Ping Luo - Global Hunter Securities

Just to continue on the growth strategy, can you provide a little more color on your acquisition plan in the NPCC business?

Andrew Chen

We are evaluating our potential acquisition targets. We have nothing new to disclose at this time.

Operator

Our next question comes from Hao Hong from Brean Murray. Please proceed.

Hao Hong - Brean Murray, Carret & Co.

I have two very quick follow-up questions. Firstly, on your pricing, given that your Zibo facility is running at 100% utilization rate and you mentioned that the run rate in your new facility is going to be 80% utilization rate, so it seems to me that demand has been very, very strong. So, I am wondering why we need to reduce ASP by another 5% going into the remainder of the year given the strong demand environment we're seeing right now?

Unidentified Company Representative

Just to make sure, you said Zibo facility has a production capacity of 100% or the overall capacity?

Hao Hong - Brean Murray, Carret & Co.

I hear just now, comment was that capacity utilization is at 100% which is great.

Andrew Chen

What we were saying is that, for the existing 190,000 metric tons of capacity, those are running 100% capacity. Then, for the 50,000 metric tons of capacity that we will get online in July or August of this year, for the rest of 2009, I think it is going to achieve about 20% of utilization, and then combine everything together, I think the entire 250,000 metric tons of capacity will have a run rate of about 80% for the year. I think that's the more precise description on that situation.

I think although we continue to see very strong demand on our products, however, we also need to satisfy the customers' demand to some extend on the lower price. We have to be actually competing with our other vendors, and also be considering the market condition. However, we are saving considerable amount of cost from raw materials. As you can see our Tier 1 gross margin have remained the same.

So, meaning that the top line reduction in terms of selling price have been offset by the savings from our raw materials, so that, with the size of the business the company is having a lot of economies of scale and good contract with many of the strategic vendors, who are able to give us a good prices on the raw materials. So that, we have several areas that we can work together just to maintain our gross margin on a going forward basis.

Bottom-line, we're seeing that good demand continues and at the same time, we are trying to maintain our pricing system to be competitive in the marketplace. Internally we try to reduce the cost of raw materials and then maintaining the same gross margin if not prior.

Hao Hong - Brean Murray, Carret & Co.

Thanks Andrew for the very comprehensive answer, also just one last follow-up question on the share count. I remember in the last conference call, we had a similar style of confusion on your share count and EPS calculation. Now just purely from a very simple conceptual perspective, is it because your share price is below a certain level and therefore, your in terms of EPS calculation, then you can exclude the convertible conversion in your share count?

(Foreign language)

Andrew Chen

I think we've clarified that calculation and will communicate further with investors and then we get back to you on that subject.

Operator

Our next question comes from Katherine Lu from Oppenheimer.

Katherine Lu - Oppenheimer

Andrew congratulations and welcome. Andrew, first of all I have some follow ups for you. What kind of convertible feature on that cost expense related to the compliance of APB 14-1. Is that a mark-to-market expense how should we be modeling these items going forward?

(Foreign language)

Andrew Chen

(Foreign language)

Okay. I think your question is regarding what going to be the impact going forward by this, APB 14-1. The company will have additional interest expenses in the coming years, between the beginning of Q2, 2009, and the end of May 2011 when the first technical redemption date for the convertible notes. End of May is actually the first technical redemption date.

Now the $15 million of additional discounts on a convertible notes would be amortized and just to interest expense. And then as time goes on, this quarterly charge to interest expense related to APB 14-1 would increase gradually. For example, for the rest of the year, for Q2 we are going to have $1.35 million of projected additional interest charge, for Q3 $1.48 million, for Q4 $1.58 million of additional interest charge.

Combined for the rest of the year will have amount of on a before tax basis $4.41 million of interest charge. And then assuming a US corporate tax rate of 34% that potentially is going to have amount of $2.9 million of impact on the bottom line, which is net income.

Then into 2010 and 2011 assuming no any additional repurchase activities and US corporate statutory tax rate remains the same at 34%. We are going to have close to $4.8 million hit on the net income for 2010 and about $2.3 million of hit on the bottom line for 2011. Remember that this the redemption date happens at the end of May, so we only have five months to consider.

In 2011, that's the reason it comes down, so we are going to put, I have distressed all these are non-cash impacts on the company's operations. Actually it doesn't have any impacts on the company's operation and we would not have any impacts on the cash flow.

Katherine Lu - Oppenheimer

Then can I confirm with you that your current NPCC capacity is running at 100%?

Andrew Chen

Yes 190,000 metric tons.

Katherine Lu - Oppenheimer

Is it running at the 100% utilization?

Andrew Chen

Yes. 100%. Yes, while the capacity is 190,000 running at 100%.

Katherine Lu - Oppenheimer

Finally I'm just wondering if you could minus of the remaining regulatory procedures if there is any in order to bring Zibo facility up and running?

(Foreign Language)

Anhui Guo

(Foreign Language)

Basically, we don't need any type of government approval. I think before the construction we have to receive all the approvals on the government in order to start the construction and since we've already down it. So we need to just make sure to construct, to have the plans on time for the production.

Katherine Lu - Oppenheimer

Does the government need to conduct any inspection of the facility?

(Foreign Language)

Anhui Guo

(Foreign Language)

Basically all the government inspections are done throughout the entire period for the construction.

Operator

Now I'd like to turn the call over to Crocker Coulson for closing remarks.

Jenny Yang

On behalf of the entire ShengdaTech management team, we want to thank you for your interest and participation on this call. If you have an interest in contacting or visiting ShengdaTech, please let us know. Again, thank you for joining us on this call. This concludes ShengdaTech's first quarter 2009 earnings conference call. Thank you.

Operator

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day and thank you.

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