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Executives

Ken Donenfeld - IR, DGI

Chen Min - Chairman and CEO

Yang Feng - Treasurer and CFO

Analysts

Guanwei Recycling Corp. (GPRC) Q1 2013 Earnings Conference Call May 16, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Guanwei Recycling Corp 2013 First Quarter 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 and instructions will be provided at that time. (Operator Instructions). I would like to remind everyone, that this conference call is being recorded today, May 16, 2013.

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

Ken Donenfeld

Thank you very much, operator, and thank you to all of you who are on the call today. A link to this conference call is going to be posted on the company's website and instructions for accessing the call are included in the earnings release that we issued.

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

In the 50 minutes or so that we have, Mr. Chen asked that I present his opening comments and then Mr. [Lawrence Won] 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. Won 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 in answering some of your questions.

Before we get started, I am going to read a disclaimer regarding forward-looking statements. This conference call may contain, in addition to historical 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 risks inherent in our operations. These and other risks are described in our filings with the U.S. Securities and Exchange Commission.

Okay. Thank you on that, and now I can begin. So, once again, it is a pleasure to have the opportunity to speak with you all directly about our quarterly results. I trust you each had an opportunity to review our Q1 press release issued yesterday and our 10-Q filing. In some important ways, this past quarter was a more typical one for us than the first quarter last year. While our first quarter usually is our slowest quarter, in 2012, our revenues were further affected by the earlier than usual Spring Festival, which led some customers to increase their purchases in the prior quarter, the fourth quarter of 2011.

Also in the first quarter last year, we reported raw material sales of about $1.69 million, and this year had no such sales with raw materials. Since these raw materials typically are disposed off with only a small markup, their inclusion in revenues tends to worsen our margins in the period the sale occur.

So in 2013, looking at our sales in the first quarter of self-manufactured LDPE, our primary product, we reported a sale increase of just over 3.3%. The good news here was that this small increase reflected increases in tonnage and our selling price, indicative of a mildly improved economic environment. The news also was good, with respect to our bottom line. Through the first half of 2012, we experienced growth in our manufacturing costs, that in a relatively weaker economic environment in China, we could not keep up with, in terms of our selling prices.

Around midyear however, this began to improve, mainly as a consequence of the moderation in the costs of our imported plastic waste, our key raw material. Although, we continue to grapple a bit with substantially increased labor costs, mainly arising from the labor shortage in Southern China, where we are located. Fortuitously, in 2013 thus far, there has been further moderation in both our labor and raw material costs, with the latter, actually declining somewhat in this year's first quarter, compared with the prior year. Lawrence will fill you in on the details in his presentation, but in short, as a consequence, we saw improvements in our gross profits and our profit margin, which translated to approximately 15% year-over-year increase in our net income, and EPS improved $0.23 a share, compared with $0.21 a share in the first quarter last year.

With these good results, we were able to further strengthen our financial position. Of note, we have no bank debt, and we increased our cash and cash equivalents by approximately $1.4 million from year-end to nearly $13.5 million at the end of the quarter. Additionally, we have room for further growth, with production capacity of about 80,000 tons, and government approval presently for importing up to 115,000 tons of raw material.

Looking ahead, we remain cautiously optimistic about some further improvements in China's economy in 2013, and that over the remainder of the year, our raw material costs should remain fairly stable.

Longer term, we continue to see a very bright future, based on anticipated growing demand for our recycled LDPE. We expect to maintain a distinct pricing advantage over our competitors, with their ability to import our waste from Europe. This of course, is based on maintain our core strength, namely, our environmentally sound manufacturing process, meeting and exceeding the highest green standards in the world, which we see as a continuing primary focus.

With that, I will hand the microphone over to Lawrence. Lawrence, please?

Unidentified Company Representative

Thank you very much. I too appreciate the opportunity to meet with you again. All of the details of what we are discussing this morning, can be found in the company's filings and press releases, I will pick up some of the highlights for you, and then help answer some of the questions you may have.

Starting with revenues, first, let me explain for those of you who may be new to this call, that one must (inaudible) finally from the sale of the recycled pallets of low density polyethylene [in produces], which typically are 40% cheaper than virgin plastic. It can be replaced with virgin plastic in almost all cases, except where the plastic required is clear, rather than white, which is the color of the highest grade (inaudible) by us.

The company sells to more than 300 customers, 150 of which are active in more than 10 different industries. The company does not manufacture any end products, nor does it sell its recycled products outside of China. However, one more key distinguishing features is that, it is one of the few, perhaps the only company in China that manufactures all its products from plastic waste imported from Europe, primarily, Germany. This is typically higher quality plastic waste that requires less [sorting], and therefore is less expensive to produce.

Lastly, Guanwei is able to import this material, because it is one of the few companies in China that has regularly passed rigorous inspections, allowing it to be certified by German qualities, for meeting the highest green standards. Something the company is quite proud of.

As has been noted, revenue in this year's first quarter, typically is the slowest, where approximately $14.84 million compared with approximately $16.17 million in the year ago quarter. The first quarter last year, however, included approximately $1.69 million in raw material sales, so our payments were (inaudible) just enough to cover costs.

On an apples-to-apples basis, self-manufactured recycled LDPE in this year's first quarter were up 3.3% year-over-year to approximately [$14.51 million]. (Inaudible) LDPE in this year's first quarter, were down slightly to $438,000.

Looking at [net sales] of 2013 first quarter manufactured LDPE sales, that was a 2.3% increase in sales volume to 11,867 tons compared with the prior year. The company also was able to achieve a 0.99% increase in the selling prices to $1,023 per ton.

On the cost side, the real bright spot in the quarter was the continuous stability of manufacturing costs, which consists of plastic waste, raw materials, labor and manufacturing overhead costs.

As gross profit increased 9.1% in the first quarter, the year-over-year cost of revenues from self-manufactured product and sorted non-LDPE materials declined to 73.86% of net revenues from 75.8% (inaudible).

Labor costs in the quarter stabilized and we (inaudible) as being last year's first quarter, while raw material costs saw their first year-over-year decline in a while, going down approximately 1.79% to $766 per ton. Consequently gross margins in the 2013 first quarter, excluding the sales of raw materials in last year's first quarter, improved from 24.2% to a healthier 26.14%. This improved margin, and slightly higher sales, net income in 2013 first quarter grew 14.53% to $2,365,000 or $0.23 a share, up from $2,065,000 or $0.21 a share a year earlier.

Year-over-year, there was a slight increase in diluted shares outstanding from about 10 million shares in 2012 first quarter to about 10.4 million shares in this year's first quarter. Once again, the company finished the first quarter in a very strong financial shape, cash and cash equivalents were about $13,492,000 at quarter end, up from 12,083,000 at December 31, 2012.

While the company continues its policy of providing short term credit to its best long term customers, to help them out in this relatively slower economic period, there was a decline in accounts receivable to about $7.7 million in this year's first quarter from $9.3 million in the first quarter last year. Additionally, working capital increased to approximately $38.76 million as of March 31, 2013, compared with $35.51 million at the end of 2012. The company believes it will be sufficient to fund operations over the remainder of the year, and also net growth via the areas (inaudible) and other productivity enhancements.

Based on discussions with the company suppliers, the company anticipates continuing stability in raw material costs for the remainder of the year, perhaps, less predictable is the economic outlook, although there are signs of products strengthening in some sectors.

In any events, your exposure to more than 10 different industries, the company sees continuing good demand for its lower costs, high quality recycled LDPE.

I think I will stop here and turn this back to Ken. Ken?

Ken Donenfeld

Thanks very much, Lawrence. In closing, before I open this up to questions, I'd like to point out once again, that while the company's very bright future outlook clearly has not yet been recognized in the stock market, management remains optimistic that this perception will change, if the company continues to grow, and continues to point to its strong future growth potential. So thank you very much.

I will now open the floor to questions. Operator, could we move ahead with our question-and-answer session?

Question-and-Answer Session

Operator

Sure. [Operator Instructions].

Ken Donenfeld

Operator, while people are putting that together, I have been asked to (inaudible) callers to ask a couple of questions. The first question is, what -- could the company tell us a little bit more about what's behind the decrease, and raw material costs and this the first decline in some time? Lawrence, could you pose it?

Unidentified Company Representative

[Foreign Language].

Yang Feng

[Foreign Language].

Unidentified Company Representative

Okay. Mr. Yang Feng answered the question that, well in the first quarter of the year, the company has reported raw materials as normal form in European countries, and what made the difference this quarter, is that -- we got better quality of the raw materials imported. So that consequently has increased the stability -- the ratio by 3% to 4%, and finally, we arrived at a lower cost of manufacturing.

Ken Donenfeld

Very good. Hopefully that will continue. Operator, are there any other questions? I have a few more.

Operator

We have no questions on the phone lines. [Operator Instructions].

Ken Donenfeld

Okay. While we are waiting, again, the question I get most frequently is about why or has the company considered buying back stock, given its strong cash position. [We have got] that question before, but since I get it so frequently, I will just ask it again?

Unidentified Company Representative

[Foreign Language].

Yang Feng

[Foreign Language].

Unidentified Company Representative

Okay. Mr. Yang Feng answered, the company currently doesn't have any plans to buy back shares. Yes it's true that we have strong cash position in our accounts. Thus, most part of this -- a majority of this cash, we have used for our daily operations for import of our raw materials. So we don't think we have actual cash, allowing us to buy back our stock.

Ken Donenfeld

Are there any other questions operator?

Operator

We have no questions on the phone line.

Ken Donenfeld

Again, I had a number of questions, I will just pick one of them. One question is that, plastic waste standards in China. Is there any possibility that we will see plastic waste standards in China improving to the point where they could match the current high standards, or much higher standards in Germany and Europe?

Unidentified Company Representative

[Foreign Language].

Chen Min

[Foreign Language].

Unidentified Company Representative

Okay. Mr. Chen answered that. Yes I do think, I do believe that is possible in the future. But it won't happen soon, because currently, in China, our standard to crack the recycled plastic is far below those applied in Germany or in other European countries.

Ken Donenfeld

So your advantage in importing should continue for quite some time then? That's true. All right. I guess, if there are any other questions operator?

Operator

We have no questions on the phone lines.

Ken Donenfeld

Okay. Well in that case, I will conclude the conference call and thank all of you again. I hope you will feel free to call me or Richard at any time with questions you may have, and we will be happy to be as responsive as possible. So thanks all of you again, and I guess that's it operator.

Operator

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

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