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Executives

Darcy Zhang - Corporate Secretary

Alex Lee - Assistant to CFO

Crocker Coulson - President IR

China Industrial Waste Management Inc. (OTCPK:CIWT) Q2 2009 Earnings Call August 18, 2009 9:00 AM ET

Operator

Welcome to the China Industrial Waste 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.

Crocker Coulson

Good morning and welcome to China Industrial Waste second quarter 2009 earnings conference call. With us today on the call are; Mr. Jinqing Dong, the Chairman and CEO; Mr. Xin Guo, the company's Chief Financial Officer; Mr. Alex Lee, Assistant to the CFO; and Mr. Darcy Zhang, Secretary of the Board.

Before I turn this call over to Darcy, I would like to remind our listeners that management's prepared remarks during this call contain forward-looking statements, which are subject to risk 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, and therefore we would like to refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. In addition, any projections as for the company's future performance represent management's estimates as of today August 18, 2009, and China Industrial Waste Management assumes no obligation to update these projections in the future as market conditions change.

It's now my pleasure to turn this call over to the company's Corporate Secretary, Mr. Darcy Zhang, who will make some initial introductory comments on behalf of Mr. Dong.

Darcy Zhang

Thank you, Crocker. On behalf of Mr. Dong, Chairman and CEO, I will give a brief introduction of CIWT's business [in the best interest of our valued] shareholders and then we will discuss our current operations and ongoing business initiatives. Later Alex will provide a more detailed discussion of our second quarter financial results.

Established in 1991 and based in Dalian, China. China Industrial Waste Management Inc. through its net project called subsidiary Dongtai is a leading industrial waste processor, pollution treatment, environmental protection and a solutions provider. Dongtai (inaudible) several key [messages] through the State Environmental Protection and Administration and operates for proprietary and non-propitiatory systems for waste treatment and recycling. What is encouraging is our more than 650 customers including Fortune 500 companies such as Pfizer, Canon and Panasonic.

In addition to waste collection, and disposal operations, Dongtai is involved in waste catalysts recycling municipal water and sludge treatments. And design, manufacturing and the sales of equipment for waste water and sludge treatments.

Following a strong year in fiscal 2008 our second quarter of 2009 showed significant improvements over our first quarter. We were impacted by the fact of weak economic conditions worldwide. We expect to see continuing improvements for the remainder of this year.

Despite the decline in year-over-year sales we were still able to operate profitably demonstrating the attraction of our high margin products and services. During this downturn, we continue to erupt in new business and facilities and geographic expansion and thus our company should rebound strongly in an economic upturn.

Now, Crocker we will update you on our progress, in each of our key business segments.

Crocker Coulson

Thank you, Darcy. As Darcy said during the second quarter the company's Industrial Waste Treatment and Recycling Services business continued to be impacted by the global economy slowdown. Most of Dongtai's industrial customers are in the export manufacturing business and we continue to see low waste collection volumes as a curtailed production. However, we began to see improving volumes as compared to the first quarter.

Our average daily collection volumes were a 127 tons down 24% from 167 tons in Q2 of 2008, but this is up 60% from the 79 tons during the first quarter of 2009. As a reminder we collected about 135 tons of waste per day in 2008.

We expect that the positive trends we saw in the second quarter will carry through the remainder of 2009. As many of you know as part of our Industrial Waste Treatment business we also sell byproducts such as cupric sulfate, aluminum products, and zinc slag, whose prices have dropped sharply from last years level's.

We should know however that cupric sulfate prices increased over the first quarter. And we've seen prices continue to rise through since the end of the second quarter. The average price of cupric sulfate in Q2 of 2009 was approximately $1,580 per ton, up from $1,245 per ton in First quarter, while the average over the past five years has been about $2,059 per ton.

As a result, our strategy continues to be to keep a level of products in inventory and wait for prices to firm in order to maintain an attractive gross profit margin. At the end of June we had 440 tons of cupric sulfate, 250 tons of aluminum products and 147 tons of zinc slag in inventory. Prices have been trending higher lately and we expect this trend to continue for the reminder of 2009.

We have continued to make very good progress on our major expansion project for the Dalian Dongtai Industrial Waste Treatment Center that we had started back in July of 2008. We completed the incineration workshop in January of 2009 and the construction of the incineration plant, which has an annual capacity of 9,000 tons, is under construction.

The new incinerator is specially equipped with tail gas cleansing system and an online monitoring system to ensure all emissions are in compliance with environmental standards. In addition our expansion project will include capacity expansion of hazardous waste landfill and industrial effluent treatment system and an organic solvent recycling system.

This expansion project will also be equipped with a new research and development center. Once we fully ramp up we believe the new facility will provide twice the capacity of our current plant and we will be able to centralize our hazardous waste treatment processes increasing our operational efficiency. We expect to complete construction of the remaining storage and processing facilities during the fourth quarter of 2009.

In July we were pleased to announce that we received a national subsidy of RMB 10 million or approximately $1.4 million. We continue to expect that 30% of the total cost of this $16 million expansion will be subsidized by the central government.

In our Zhuorui Resource Recycling business where we separate and purify waste catalysts, we began trial production during the first quarter of 2009. However, we temporarily seized operations in the second quarter due to material price levels that were not attractive and we continue to work towards improving our extraction technologies and expect to restart operations as material prices improve.

We continue to think that this will be a very attractive high margin business over the longer-term, since the recovery of heavy metals such as cobalt, molybdenum, nickel and vanadium are considered hazardous waste but are also important industrial materials with high recovery value.

As far as our Municipal Waste Water Treatment business is concerned, during Q2 Dongtai Water generated approximately 0.25 million in revenues, and is running at full capacity of 30,000 tons per day. We plan to increase this capacity to about 100,000 tons per day over the next few years. The Municipal Water Treatment business is a steady predictable business for us and we believe it will further help us diversify and smooth out our revenue streams.

In the Sludge Treatment business, we recently announced that we completed trial production at the first six fermentation tanks for sludge treatment for a municipal Build-Operate-Transfer or BOT project in Dalian. Results of the trial production showed that the facility can generate stable biogas supplies as well.

Once completed, we will have 12 fermentation tanks in operation and the designed capacity of the project is 600 tons per day for sludge treatment, and 25,000 to 30,000 square meters per day for biogas generation. In July of 2009, the first six tanks were tested and are now ready for use.

With a total investment of $18 million, 30% of this project will be funded by the Dongtai Organic Waste Treatment and the other 70% will be funded via bank loans. The success of the trial operations of the initial six fermentation tanks means that the Lipp tanks, which have anaerobic digestion as their core technology, have realized our expectations.

We've undertaken the task of municipal emergency sludge treatment for Dalian City as well. We expect to be in full operation by October of 2009 and we expect that this business will generate approximately $4 million in annual revenues, including processing fees, guaranteed by the local government and sales of methane and fertilizer byproducts.

Building on our success in our Municipal Sludge Treatment business, we have been focusing on its complementary business and started our 75% owned Environmental Engineering division, Dalian Lipp Environmental Engineering and Technology Company in 2008. We are the sole distributor of Lipp tanks for sludge treatment in China and we plan to target other waste management companies and BOT sludge treatment projects throughout China who could benefit from our technology.

Dalian Lipp is addressing a huge sludge treatment market in China due to the governments increasing regulation and prevention of secondary pollution caused by municipal sludge. As part of China's RMB 4 trillion stimulus plan approximately RMB 350 billion will be invested in environmentally friendly construction projects and both water and sludge projects are designated as key areas for improvement particularly driven by concerns on the quality of drinkable water in China.

As all these updates indicate 2009 has been a year of significant expansion for our company and we will positioned to achieve very meaningful growth once the economic activity returns to normal levels. Importantly, we believe we have sufficient resources in place between our existing cash resources anticipated government grants and available debt facilities to complete all of our growth plans for this year.

Now that I have provided you with an update on each of our businesses, I'd like to now turn the call over to Alex Lee, Assistant to the CFO who will go over the financial results in a little bit greater detail.

Alex Lee

I am pleased to provide a more detailed discussion on our second quarter of 2009 results. Operating revenues was $2.5 million down 31.7% from $3.6 million in the second quarter of 2008. Revenues from service fees were $1.6 million down 16% from $2 million in the same quarter of 2008, but up 37.2% from $1.2 million sequentially. The decrease was primarily due to the lower demand for solid waste treatment from the company's international customers since the global economic crisis in late 2008.

Sales of recycled products were $0.8 million, down 50.5% from $1.6 million the prior year, but up 95.7% from $0.4 million sequentially. The decrease resulted from declining waste collection volumes, as well as the decline in prices for recycled products including cupric sulfate and aluminum as a result of the economic crisis.

For the three months ended June 30, 2009, gross profit was $1.6 million, down 37% from $2.5 million in 2008, but up 78.3% from $0.9 million, in the first quarter. Gross margin for the second quarter 2009 was 64.2%, compared to 69.6% a year ago due to the lower volume of waste treated. Gross margin in the first quarter was 54.8%.

Total operating expenses for the second quarter of 2009 were $0.9 million, up 25.1% from $0.8 million in 2008, driven mainly by an increase in R&D expenses. Income from operations was $0.6 million, compared to $1.7 million in 2008. Operating margin in the quarter was 25.9% versus 48.7% in last year's second quarter, but improved from an operating margin of 16.11% in the first quarter of 2009.

As a result of the significant drop in operating revenues, net income declined 58.1% to $0.6 million from $1.4 million in 2008, and compared to $0.10 million in the first quarter. Net margin for the second quarter of 2009 was 23.4%, compared to 38.2% a year ago, and 6.7% in the first quarter of 2009.

Basic and diluted earnings per share were $0.04, compared with $0.10 for the second quarter of 2008, and $0.01 in the first quarter of 2009.

Turning to the balance sheet; as of June 30, 2009, the company had cash and cash equivalents of $8.0 million and working capital of $1.9 million. Inventory was approximately $2.5 million on June 30, 2009 compared to $2.4 million on December 31, 2008, the majority of which consists of metals extracted during the recycling process. At June 30, 2009, the company had stockholders' equity of $24.1 million compared to $23.6 million on December 31, 2008.

With that I would now like to turn this call back to Darcy for some final remarks.

Darcy Zhang

In just summary, well we were disappointed with our second quarter results. We are pleased to see that most of our business sectors have improved in the first quarter. Some of our customers are approaching normal production levels, and some are even expanding their production capacity.

We continue to work actively to expand the capacity of our existing projects and seek new municipal BOT projects. We plan to continue to build geographic expansion opportunities, including our new waste treatment project in Yingkou, Liaoning province and are discussions for another major project in [Hunan] Province.

We expect that the economic recovery will continue to stimulate industrial waste treatment demand for the remainder of 2009, which should be to continue improvements in our operating results for the third and fourth quarters.

In addition, we are anticipating that our centralized solid waste treatment facilities will be completed by the end of this year, so we can better meet increasing demand from our customers.

We thank you for your interest and support and look forward to speaking with you again. With that I will open the floor to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And there are no questions on the phone line.

Crocker Coulson

Okay operator; let's just give them one more chance to queue up for questions, because I know we had a number of listeners on the line. So operator do we have any questions at this point.

Operator

There are no questions on the phone line.

Crocker Coulson

Okay, well in that case on behalf of Mr. Dong, our CEO; and Mr. Guo, our CFO. We want to thank all the listeners for your interest and participation in the call. If any of you have follow-up questions, then management will be available and we can always set up a one-on-one call. And we want to thank you and look forward to coming back to you later in the year ad talking about our continued progress on all the exciting projects discussed on today's call.

Operator

Ladies and gentlemen that concludes the presentation. Thank you for your participation and you may now disconnect. Have a great day.

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