Executives
Wilson Kwong – President
Analysts
JinMing Liu – Ardour Capital
Gushan Environmental Energy Limited (GU) Q4 2009 Earnings Call March 10, 2010 8:30 AM ET
Operator
Good morning and thank you for participating in the fourth quarter 2009 earnings conference call of Gushan Environmental Energy. At this time, all participants are in listen-only mode. After the call, we will conduct a question-and-answer session. Today’s conference is being recorded. I would now like to turn the call over to Wilson Kwong, President of Gushan Environmental Energy. Please proceed, sir.
Wilson Kwong
Thank you. Good morning, ladies and gentlemen, and welcome to Gushan's fourth quarter 2009 earnings call. Joining me on the call is Frank Chan, Principal Financial Officer of Gushan.
Please note that today's discussion may contain forward-looking statements made under the Safe Harbor provisions of US Federal Securities laws. Please see today's press release under the section Safe Harbor Statement for a discussion of risks and uncertainties that may affect our results. Now before opening the call to questions, I would like to briefly review our fourth quarter and full year 2009 results.
Gushan's results in the fourth quarter continued to be significantly impacted by uncertainty over potential consumption tax liability and a challenging operating environment. Total revenues for the quarter dropped 77.1% year-to-year and 35.7% quarter-on-quarter to $10.6 million. For the full year, total revenues declined 58.0% to $92 million.
The year-to-year drops in revenue for both the fourth quarter and the full year were attributable to drops in both the sales volume and average selling prices of our biodiesel and biodiesel byproducts. The sequential drop in revenues from the third quarter to the fourth quarter of 2009 reflected a lower sales volume.
There were two major reasons for the large drop in year-to-year sales volume. First of all, the company suspended production at several of its plants over the course of 2009. Production was suspended at our Fujian plant beginning in mid-April due to road work and remained suspended because of the still uncertain outcome of the consumption tax issue. Production at our Hebei plant was suspended from mid-September through the end of November. As a result, the sales volume year-over-year in the fourth quarter dropped 98% at the Fujian plant and 79% at the Hebei plant.
The second reason for the drop in sales volume was our strategic decision to shift our primary sales channel away from the refined diesel market to the chemical industry in response to the continued uncertainty over the consumption tax issue. While the question of whether refined biodiesel is subject to consumption tax remains unresolved, sales to the chemical industry are not subject to the consumption tax. That shift, although requiring time to fully gear up, is happening.
Sales to the chemical industry now accounted for 65.4% of our biodiesel sales in the fourth quarter of ’09, and that is up from 10% in the fourth quarter of ’08. Although year-to-year the average selling price of our biodiesel products was down 15.9% in Q4, biodiesel prices rose 4.2% on a sequential quarterly basis from the third quarter. Price trends for our biodiesel byproducts were similar.
Cost of revenues dropped 58.2% year-to-year and 33.6% quarter-to-quarter to $15.3 million. These costs included a provision of 0.7 million for potential consumption tax liability for the fourth quarter. Excluding the provision, our cost of revenues would have dropped 60.2% year-on-year and 27.9% quarter-on-quarter in Q4 as a result of lower sales volume.
The average unit costs of our raw material feedstock rose 12.5% year-on-year and 2.4% quarter-to-quarter to RMB3,043 per ton in Q4. Reflecting our effort to diversify raw material supply and negotiating with suppliers, our raw material average unit cost on a sequential quarterly basis rose slower than our average biodiesel selling prices.
As a result, the company reported a gross loss of $4.7 million for the fourth quarter and a negative gross margin of 44.4%, of which 7% was attributable to the provision for consumption tax. This compares to a negative gross margin of 39.9%, of which 17.2% was attributable to the provision for consumption tax in Q3 ’09 and a gross profit margin of 20.9% for the fourth quarter of ’08.
For the full year ’09, the company reported a gross loss of $20.3 million and negative gross margin of 22.0%, 16.6% of which was attributable to the provision for consumption tax as compared to a gross profit margin of 35.6% for 2008. Now for the full year, the decrease in gross profit margin was mainly due to lower average selling prices, higher average unit cost of raw materials, the provision for consumption tax, and an increase in the average fixed production costs resulting from lower production and sales volume.
The average unit cost of the company’s raw materials increased by 3.8% in ’09 while the average selling prices of biodiesel and biodiesel byproducts decreased by 29.7% and 63.2% respectively during the same period. We reported a net loss of $13.2 million for the fourth quarter, representing a diluted loss per ADS of $0.158. For the full year, our net loss totaled $41.5 million or a diluted loss per ADS of $0.498.
Despite a difficult quarter and year, our balance sheet remains strong with cash on hand of $83.7 million and no bank borrowings as of the end of 2009. As of the end of 2009, Gushan’s annual biodiesel production capacity was 450,000 tons or 135 million gallons, which will rise to 500,000 tons or 150 million gallons by the middle of 2010 with the completion of a new second plant in Sichuan with an annual capacity of 50,000 tons.
Beyond that, the company does not expect to further expand production capacity in the near future, given the slow recovery in demand and prices for diesel in China and the uncertainty of the consumption tax issue. Clearly, the consumption tax issue as well as the difficult operating environment continued to weigh heavily on the company’s results. Unfortunately, the situation regarding the consumption tax issue remains unchanged from our last earnings call.
The PRC State Administration of Taxation has still not provided us with a decision on whether our biodiesel products, which does not contain petroleum-based diesel, are exempted from the consumption tax. In the interim, given the uncertainty and weak market environment, production remains suspended at our Fujian plant as any sales from that plant would be subject to the consumption tax on a contingent basis, pending a decision by the PRC SAT.
At this time, we still do not have any indication of when we can expect a determination from the PRC SAT on the consumption tax issue. We share your frustration over the prolonged uncertainty regarding this important issue. Unfortunately, despite our assets in (inaudible) our case and assisting the PRC SAT and its assessment on our consumption tax position, the timing of when PRC SAT will make a determination on our consumption tax issue remains outside of our control. We will, of course, provide you with an update as soon as we receive a determination. However, in the absence of a resolution of the tax issue, the company is taking action to preserve and build shareholder value.
As I indicated earlier, in order to avoid incurring additional potential to consumption tax liability, the company has made a strategic decision to shift its primary sales channel for biodiesel away from the refined diesel market, which remains sluggish to supplying the chemical industry. Although China’s chemical industry like the refined diesel market was impacted by the economic slowdown, there are signs that it is now beginning to recover.
In addition, the company is also actively seeking opportunities for strategic investments in the energy and environmental sector. We will continue to keep you informed of our progress as developments warrant.
At this time, we would be pleased to answer any questions you may have. And I will now turn the call back over to the operator to begin the Q&A session. Thank you.
Question-and-Answer Session
Operator
Thank you. (Operator instructions) Your first question comes from the line of JinMing Liu with Ardour Capital. Please proceed.
JinMing Liu – Ardour Capital
Hi, Wilson.
Wilson Kwong
JinMing, hi.
JinMing Liu – Ardour Capital
Yes. During the last earnings conference call, you mentioned that you are – Gushan will (inaudible) source castor bean oil from Southeast Asia.
Wilson Kwong
Yes.
JinMing Liu – Ardour Capital
Could you give us an update on that?
Wilson Kwong
Sure. It is still progressing. We expect to have some results within two months. So hopefully by the next earnings call we should be able to inform you as to how we are doing. You know we have signed agreements, and therefore we are working to ensure that the crops are properly growing and then we can actually use the fruits and crush to get the oil for us to use to produce our product.
JinMing Liu – Ardour Capital
Okay. Your new facility at Sichuan Province, which will add 50,000 tons capacity, I know initially that facility was designed to use jatropha oil. Are you guys still planning to use the same raw material or something else?
Wilson Kwong
That plant, in fact, is designed to use what we call inedible oil, which includes jatropha, and it can also use castor bean oil. So a small – these are the pure oil, more pure, but they are obviously inedible. So this plant can use castor bean or jatropha as well.
JinMing Liu – Ardour Capital
Are you currently sourcing jatropha or castor bean oil in that province to –?
Wilson Kwong
We are. Although jatropha, the quantity is not – I guess is not coming through that much. And therefore we are – as you know, we also signed a contract in Sichuan as well for castor bean. And therefore it looks like – we are tending towards the castor bean side as the quantity we expect will come more from that side, both in China and also in Southeast Asia.
JinMing Liu – Ardour Capital
What are the prices for castor bean oil and (inaudible) and the jatropha in that province –?
Wilson Kwong
It’s around – just over RMB3,000 per ton.
JinMing Liu – Ardour Capital
Oil, not beans?
Wilson Kwong
Yes, oil.
JinMing Liu – Ardour Capital
Okay, oil. Lastly, you mentioned that your company is looking for opportunities to (inaudible) other business. Are you looking at companies inside China or internationally – international opportunities as well?
Wilson Kwong
Both. Obviously, we know China market is better and therefore we will – China is always a priority. But we are also looking abroad, particularly in Asia.
JinMing Liu – Ardour Capital
You mean other Asian countries?
Wilson Kwong
Yes, in other Asian countries.
JinMing Liu – Ardour Capital
Okay, all right.
Wilson Kwong
And as I said, maybe it’s too early to say anything more, but specifically looking in the energy sector where we’re operating in and also the environmental factors.
JinMing Liu – Ardour Capital
You mean energy sector meaning traditional energy or –?
Wilson Kwong
Both. Traditional and renewable.
JinMing Liu – Ardour Capital
Okay. Got that. Thanks.
Wilson Kwong
Thank you.
Operator
(Operator instructions) At this time, there are no additional questions in queue. I would now like to turn the call back over to Mr. Wilson Kwong for closing remarks.
Wilson Kwong
Thank you again for joining our fourth quarter earnings call. And we very much look forward to speaking to you again on our next call. Thank you very much.
Operator
Ladies and gentlemen, this concludes the presentation, and you may now disconnect. Thank you, and have a good day.
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