Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Crocker Coulson – IR

Xiangzhi Chen – President and CEO

Jenny Yang – Interpreter

Andrew Chen – CFO

Analysts

Katherine Lu – Oppenheimer & Company

Ping Luo – Global Hunter Research

Ingrid Yin – Brean Murray

Greg Garner – Singular Research

Brian Moore

Steve Chan – Roth Capital

ShengdaTech, Inc. (OTC:SDTH) F4Q10 (Qtr End 12/31/09) Earnings Call March 16, 2010 9:00 AM ET

Operator

Good day, ladies and gentlemen. Welcome to the ShengdaTech Inc. fourth quarter and fiscal year 2009 earnings conference call. My name is Angie and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today’s call, Mr. Crocker Coulson.

Crocker Coulson

Thank you so much Andy -- Angie, sorry. Good morning, ladies and gentlemen, and good evening to those of you joining us from China. I’m Crocker Coulson from CCG Investor Relations, the company’s Investor Relations firm.

Joining us this morning from China are Mr. Xiangzhi Chen, ShengdaTech's Chairman and CEO; Mr. Andrew Chen, the company's Chief Financial Officer; and Ms. Anhui Guo, the Chief Operating Officer; and also Mr. Carl Mudd, a member of the Board of Directors and also the Chairman of the Audit Committee. Also joining us from China today is CCG's Jenny Yang, who will provide translation for your questions-and-answers.

Before we get started this morning, 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 that’s contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to variety of risks, including but not limited to such factors as unanticipated changes in product demand, especially in the tire and PVC industries, the ability of the company to attract new customers, the ability to prepare for growth, planned capacity expansion, our ability to increase our product applications and other information that will be detailed from time-to-time in our filings and future filings with the U.S. SEC.

Accordingly, although the company believes that the expectations reflected in these forward-looking statements are reasonable, there could be no assurance that such expectations will prove to be correct.

In addition, any projections as to future performance represent management's estimates as of today, March 16, 2010. ShengdaTech assumes no obligation to update these projections in the future as market conditions change.

For those of you unable to listen to the [ph] entire call at this time, we’re going to make a recording available via webcast for 90 days and you can find that on ShengdaTech's corporate website.

With those formalities out of way, I’d now like to turn this call over to ShengdaTech's Chairman and CEO, Mr. Chen. He will provide some opening remarks will be translated by Jenny Yang. Chen Xiang?

Xiangzhi Chen

(Foreign Language)

Jenny Yang

Thank you, Crocker. Good morning, everyone. I’d like to start by thanking everyone for joining us on ShengdaTech’s fourth quarter and full-year 2009 conference call. I am very pleased to announce that ShengdaTech exceeded our planned financial growth in 2009, reflecting strong demand for our products, successful execution of our aggressive capacity expansion strategy, and our progress in achieving greater penetration in our end-user markets.

We are proud of the commission we received during the year, including the 2009 China Frost & Sullivan Award for Growth Excellence, and being named on the Forbes Magazine's Fifth Annual list of "Asia's 200 Best Under a Billion" for the year 2009. Both of these awards acknowledge our commitment to excellence and recognize our continue revenue and profit growth, as well as, ShengdaTech ability to manage a progressive, a highly successful enterprise.

Now, Mr. Crocker Coulson will discuss some additional remarks on our operations on my behalf. I will participate in the question-and-answer session along with Mr. Andrew Chen and Ms. Guo. I sincerely thank you for your continued interest in ShengdaTech. Crocker?

Crocker Coulson

Thank you, Mr. Chen, and thank you Jenny for the excellent translation. I'd now like to provide some highlights from our full-year 2009 results from continuing operations.

Revenue for the full-year of 2009 increased 23.9% to $102 million, compared to $82.4 million in 2008. Net income from continuing operations in 2009 was $23.6 million, with diluted earnings per share of $0.43.

I’m very pleased to announce that even through the global turndown -- downturn, thanks to faster anticipated improvement in market conditions for NPCC products with high margin, combined with our ability to maintain our selling prices, we exceeded our revenue and EPS guidance for the full-year of 2009.

Now, I'd like to move on to discussing our fourth quarter results. We closed the year with strong revenue growth, generating $30.1 million in revenue, up 23.3% year-over-year. And with gross profit of $11.9 million, up 19.4%, year-over-year with a gross margin of 39.8%.

Our double-digit topline growth was a result of continued market demand for our NPCC products in our existing end markets, which contributed to higher sales volume. In addition, our new NPCC facility in Zibo, with 60,000 metric tons of production capacity, began its operations in August of 2009, which contributed to the overall growth in ton shipped during the fourth quarter of 2009.

Excluding the new Zibo facility, our overall production capacity utilization rate was running at full capacity during the fourth quarter of both 2009 and 2008. During the quarter, we are very excited to announce that we've added 25 new domestic customers, including seven PVC producers, seven adhesive and latex manufacturers, six tire manufacturers and five polyethylene producers.

In comparison to the third quarter of 2009, revenue increased 18.4% as a result of higher sales volume, while selling prices remained relatively unchanged. This was mainly due to the positive impact from a strengthening economic environment in China, and the additional capacity at Zibo, which now allowed us to meet the incremental needs of both new and existing customers.

During the quarter, we continue to take advantage of our broad range of NPCC capabilities, improving our product mix by developing and selling applications that create higher value, more and wider demand while offering a solid measurable return in costs and quality to our customers.

Our NPPC application for polyethylene or PE was our largest end market during the quarter, accounting for 32.4% of the quarter's revenue, a significant increase from only 7.8% in the same period last year.

PE is one of our newest and higher margin NPCC applications. For those of you are not familiar with the product, PE is used in consumer products such as plastic bottles, plastic bags and food packaging.

Our PE customers benefit from improvements in the mechanical property in the plastic and enhance heat resistance. What’s more important our NPCC application for PE reduces manufacturing costs and enhances our customer’s margins, providing them with a strong price and profit advantage.

We expect the PE end market to demonstrate further growth in 2010, based on our market analysis and the feedback that we’re getting from our sales team, who are in regular contact with our customers in this industry.

Sales from our NPCC application for tires declined 24.3% year-over-year and 8.8% on a quarter-on-quarter basis, as a result of the global economic downturns impact on the tire industry.

NPCC for tires historically has been our largest end market. And despite the fact, that it became a lower percentage of our larger base in 2009, we expect it to continue to rebound and to be a meaningful contributor to revenue in the years ahead and in ever present source of profitable revenue growth for ShengdaTech.

Our NPCC tire application has a very compelling value proposition. As it used in tire manufacturing is capable of delivering 10% to 20% overall improvement and performance as measured by increase traction, wave resistance, tear resistance, tensile strength and aging resistance, and reduces tire manufacturing cost by about $20 to $30 per metric ton.

We remain very positive about our presence in vertical market and the largest NPCC supplier in Chinese tire industry with current penetration of approximately 26% of market demand.

We now supply -- NPCC to three of Chinese top tire manufactures. Based on the industry research the market for NPCC for use in tire manufacturing in China is expected to grow from $557 million tires in 2007 to $1 billion tires by 2012.

As anticipated due to the global downturn, sales to the PVC industry declined 16.5% on a year-over-year basis. Our target projects for this application have narrowed and we’ve learned that PVC producers do not experience significant costs benefits from using NPCC when compared to other application areas for our product.

We expect to have a somewhat different application mix of sales contributions going forward and the percentage of revenue contribution from NPCC application for PVC will not be a significant as it was in previous years.

We have a very strong pipeline of new customers, we’re currently working with 76 perspective customers, including 59 domestic customers of which 42 are in the testing phase and 17 international customers all assume are in the testing phase.

To support our base of planned capacity expansion and new product development initiatives, we took several steps in 2009 to strengthen our international sales and marketing team. At our global headquarters in Shanghai, we significantly expanded our international sales team of well qualified and experience personnel focused on expanding our worldwide sales and marketing efforts, and particularly targeting international customers with manufacturing basis on tires in the China market.

We recently appointed Mr. Gary Cao as our new International Marketing Director. Mr. Cao brings with him strong sales and marketing experience in the specialty chemical sector. We believe his impressive background will prove to be a major asset to ShengaTech, as we aggressively expand our presence into Europe and North America over the next few years.

As most of you aware, a major contributing factor to our success and growth has been our proven ability to execute our capacity expansion plans allowing us to maintain our position as the undisputed leader in the domestic NPCC industry. In 2010, we will continue to increase the scale of our operations as we expand in both domestic and international markets.

The initial phase of our Zibo facility which began production at the end of August 2009 has ramped up to 100% utilization rate in January of 2010, bringing our current aggregate annual capacity to 250,000 metric tons, all of which is out operating at full utilization.

In response to ever increasing market demand for our products, we’re excited to announce our plan to purchase equipment that add another 40,000 metric tons of design capacity at this existing facility in Zibo, and we expect to begin production in that new equipment in October of 2010.

We’re also in the process of completing equipment and technological upgrades, as well as repairs and maintenance at our recently acquired facility in Chaodong, Anhui Province with approximately 10,000 metric tons of production capacity. We’ve obtained the required business licenses and registrations, and expect to begin production at this facility in April of 2010.

By 2013, based on projected market demand, we expand to -- expand -- we plan to expand our Chaodong facility by an additional 200,000 metric tons in capacity that will be build in several phases.

We’re extremely excited about the market opportunity in the high potential prospect-rich Yangtze River Delta economic region. We will be the first NPCC manufacturer to attract this market and our confident in our ability to rapidly penetrate that market and build relationships as we preemptively create significant barrier to our competitors.

Now, I’d like to provide updates on our R&D development efforts before handing this call over to Mr. Andrew Chen to discuss our financial results in greater detail.

Our NPCC application for asphalt is expected to achieve the long-awaited approval from our five testing and fully engaged potential large volume customers. Once four approvals are obtained, we anticipate beginning to ship increasing volumes of NPCC going forward. As functional filler in asphalt pavement, NPCC helps prevent water damage and ultraviolet oxidation, which are the leading causes of high rate deterioration.

In addition, NPCC for asphalt reduces the frequency of costly road repairs and lowers production cost. The China asphalt market is expected to reach 15 million metric tons by 2010, as the industry is driven by robust growth in infrastructure construction in China.

The potential market size for NPCC asphalt application is sizable as our asphalt application partially replaces SPS asphalt, which based on our estimate is used in 60% of road pavement asphalt in China.

We are also developing a new NPCC application for high grade paper which based on our preliminary evaluation we believe may hold larger market potential than even our asphalt application. We continue our steadfast focus on improving and expanding the use of our current NPCC applications including adhesives and latex. We plan to provide you very close updates on our progress.

With that overview of the company’s operational progress in the fourth quarter, I’m now going to turn this call over to ShengdaTech's CEO -- CFO, Mr. Andrew Chen, who’s going to provide a more detailed discussion of the quarter’s financial results. Andrew, over to you.

Andrew Chen

Thank you, Crocker, and welcome, everybody. Before I get into our financial results, I would like to encourage all of you to read our 10-K filed with SEC and our press release published this morning for more detailed financial disclosures.

In December 2009, we committed a plan to disclose our Bangsheng coal-based chemical facility operating assets in according with U.S -- in accordance with U.S. GAAP. As a result, we have reclassified the assets, liabilities, operations and cash flows of Bangsheng facility, as discontinued operations for all periods presented in our consolidated financial statements.

In addition, I will also discuss a non-GAAP financial measure, EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. We present this financial measure as a supplement to our GAAP results because we believe it provides useful information in analyzing and benchmarking the performance of our operations and assist investors in analyzing our year-over-year financial performance. We presented a reconciliation of EBITDA to net income in our press release issued this morning.

First, let's go to our quarterly results. Revenue increased to $30.1 million, up 23.3% from US$24.4 million in the fourth quarter of 2008. Total volume of NPCC sold during fourth quarter of 2009, was up 26.5% to 62,146 metric tons from 49,143metric tons in the fourth quarter of 2008.

The averaging selling price of NPCC products declined 2.6%, to $484 per metric ton from $497 per metric ton in the fourth quarter of 2008, caused primarily by changes in product mix.

NPCC for used in PE tires and PVC, represented in a majority of NPCC sales at 32.4%, 26.7% and 20.6% of total NPCC revenue respectively.

NPCC used in adhesives and latex increased to 14.4% of total NPCC revenue, compared to 9.4% of total revenue in the fourth quarter of 2008. NPCC used in paper, oil, ink, paint and automobile undercoating paint combined to generate 5.9% of NPCC revenue.

Our gross profit for fourth quarter of 2009 was $11.9 million, up 19.4% from $10 million in the fourth quarter 2008. Total gross margin were 39.8%, compared with 41.1% during the fourth quarter of 2008. The slight decline of 1.3% in gross margin was due to anticipated production startup costs at new Zibo facility, as it ramped up to target capacity utilization.

Selling expenses was $0.7 million, or 2.4% of revenue, up from $0.6 million or 2.4% revenue for the same period last year. Selling expenses as a percentage of revenue remained unchanged, because of the decline in sales commission, due to our new lower commission policy in 2009. The decline was offset by increases in office expenses, salaries and benefit-related expansion of our NPCC business operations.

General and administrative expenses were $1.7 million, or 5.6% of revenue, up from $1.3 million, or 5.3% of revenue for the same period last year. The increase in G&A expenses was mainly due to increase professional services expenses, and increase in executive compensation as we had expanded our senior staff. Higher research and development expenditures, and increase in amortization of land-use rights related to the company's growing NPCC operations.

Operating income for the fourth quarter of 2009 was $9.6 million, up 17.8% from $8.1 million in the same period a year ago. Operating margin were 31.8%, compared to 33.3% in the fourth quarter of 2008.

Interest expense, related primarily to our convertible notes issued in May and June 2008, was $3.03 million for the three months period ended December 31, 2009, up from $2.8 million a year ago.

Interest expense included $1.4 million of contractual coupon interest on the convertible notes, $0.3 million of amortization of debt issuance costs, and $1.6 million of amortization of debt discount. The total interest expense was reduced by $0.2 million as a result of interest cost capitalized during the three months period ended December 31, 2009.

We recorded a $0.6 million gain on bargain purchase from the acquisition of our new Anhui Facility in the fourth quarter of 2009. In the fourth quarter of 2008, we recognized a $5.5 million gain on the repurchase of our convertible notes.

Our effective income tax rate decreased from 9.7% for the three months ended December 31, 2008 to 6.6% for the three months ended December 31, 2009, due primarily to the effect of the PRC income tax holiday.

EBITDA for the fourth quarter of 2009 increased 21.3% year-over-year to $11.6 million from $14.7 million, again primarily as a result of the $5.5 million gain from the repurchase of convertible notes in the fourth quarter of 2008.

Net income from continuing operations in the fourth quarter of 2009 was $6.7 million, down 31.8% from $9.9 million in the same period last year, which included $5.5 million gain as a result of repurchasing of senior notes during the quarter.

Fully diluted earnings per share from continuing operations was $0.12, compared with fully diluted earnings per share for continuing operation per share of $0.17 in the fourth quarter of 2008.

Fully diluted weighted average share base outstanding were $54,205,257 in the fourth quarter of 2009, down from 67,247,616 in the same quarter last year, primarily due to the fact that the number of potential common shares associated with our convertible debt was anti-dilutive for the fourth quarter of 2009, and therefore was excluded from the diluted earnings per share computation for the quarter.

Loss from discontinued operation was $57,692 down from $0.2 million in the fourth quarter of 2008. Its impact to fully diluted earnings per share is minimum for both periods.

Next, let’s move on to the balance sheet, as of December 31, 2009, ShengdaTech had $116 million in cash and $116.3 million in working capital and $79.3 million in long-term convertible senior notes. Shareholders' equity was $170.6 million, up from $147 million at year-end 2008.

In 2009, we generated net cash flow from operating activities of $28 million. We are confident in our ability to generate positive cash flows from our business operations. Profitability when combined with our strong cash position will sufficiently support our planned business expansion in 2010.

We expect to incur capital expenditures of approximately $52.4 million in 2010 including $4.5 million for the acquisition and upgrade of our Chaodong facility in Anhui Province excluding that.

We plan to invest $21 million to install equipment to build another 40,000 metric tons of capacity at Zibo NPCC facility. We also plan to invest approximately $47 million to purchase approximately 100 acres of land for the existing Chaodong facility and its expansion in a future. All the capital expenditures in 2010 are expected to be funded by cash on hand and cash flow from operations.

Now, I would like to provide our guidance for 2010, we expect the revenue and net income to be in the range of $123 million to $126 million and $25 million to $27 million, respectively.

In closing, I would like to highlight our key growth drivers in 2010 with our planned 40,000 metric tons capacity expansion in Zibo and restoration of the 10,000 metric tons capacity at our Chaodong facility. Our Chaodong capacity is expected to increase by 20% during the year reaching 300,000 metric tons by the end of 2010. We will establish a stronger presence in international markets by executing our international sales and marketing plan.

We will begin to strategically position ourselves in the important Yangtze River Delta economic front to serve the different industries with high potential for NPCC application. We will continue to explore growth opportunities in high-value add and technology-driven chemical business sector. We would expect such opportunities will help to diversify our business portfolio, leverage our each management experience and offer attractive returns to our shareholders.

Our positive outlook is based on our proprietary production technology. Strong capability and new applications developments we’re established well value proposition of our NPCC, positive growth outlook of NPCC business sector and most importantly our highly experience management team.

We have strong pipeline of new applications for NPCC products and well qualified research team to ensure successful execution accelerating our growth in the coming years.

Now, I would like to open up the call to any questions you may have for the management. We will take one question from each -- from every participant and hope to get back to you in case you have a follow-up question. Operator, please start the Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Katherine Lu with Oppenheimer & Company.

Katherine Lu – Oppenheimer & Company

Hi. Good evening, everyone. Thank you for taking my call. Congratulations on the very strong quarter. My question is regarding to the --

Crocker Coulson

Sorry, Katherine, we can’t here you. Can you repeat your question?

Operator

Katherine, your line is open.

Katherine Lu – Oppenheimer & Company

Okay. Good evening. Can you hear me?

Crocker Coulson

Now we can hear you, yes.

Katherine Lu – Oppenheimer & Company

Okay. Good evening. Thank you for taking my questions. Congratulations on the very strong quarter. My question is regarding to the guidance. Andrew, could you talk about some assumptions you used for this guidance, for example, what kind of a pricing and volume assumption that you gave into the guidance? I understand you talked about 10,000 tons of Anhui facility in April and also 40,000-ton -- 40,000 additional equipment installation for the Zibo facility in October 2010. Should we think this 40,000-ton to be incremented phase-by-phase or just in one shot by October?

And also what kind of growth margin assumption did you gave in your guidance? Finally and how much cost -- how much interest expense should we’ll be assuming in 2010 associated with the commercial bonds?

Andrew Chen

Okay. As you know, we currently have 250,000 metric tons of capacity and by April, that 10,000 additional capacities are belonging to existing Anhui facility will becoming available, it will up and running. So if you analyze this capacity in Anhui it’s going to be 7,500 metric tons. So that portion combine with existing 250,000 is going to be close to 260,000.

And then we have the 40,000 of equipment that will be installed in a factory building that already built in Zibo facility. That if you have to build from Greenfield, meaning that you have to build a building and also install equipment it takes a whole year to do it. But then if you already have a building and you just install equipments, it takes about seven months. So we are estimating that this 40,000 of additional capacity, there is a good profitability is going to be it will stop to generate revenue but then as similar to the other 50,000 metric tons of Zibo facility took a while to ramp up to the anticipated full capacity utilization, right.

So, but it will stop to generate something in fourth quarter. So combining all these factors and also assuming the NPCC price is going to remain very stable with a very -- we also allow a little bit room of price decline just be conservative. That’s a basis for our revenue forecast.

And then the gross margin will remain at about 40% or a very, very close to 40%. And I’d like to go into more detail with you after we finish this conference call to go to some of the other detail assumptions that around this budget and any other investors, any other analysts who are covering this company world economy to go over all the detail assumptions of our guidance.

And then in terms of the interest expense for 2010 associated with convertible notes is estimated to be about U.S.$13.9 million which is comprise of coupon interest expense of $5.4 million, amortization of debt discount $7.2 million, amortization of debt issuance cost of $1.2 million.

And then of course, we are going to have a lot of construction activities in Zibo to build up 40,000 and that’s going to incur some of the capitalized interest and capitalized interest would be offsetting these three factors of interest expense items. So the actual interest expense will probably be slightly lower than $13.9 million as I just quoted. I hope that answer your question.

Katherine Lu – Oppenheimer & Company

Yeah. Absolutely. Thank you so much for the color. Just want to quickly follow up here. And you talked about you essentially assume a relatively stable NPCC pricing with modest decline just to be conservative here. I’m wondering what kind of price decline did you assumed.

Andrew Chen

Yeah. It’s a -- the decline is within a couple of percent.

Katherine Lu – Oppenheimer & Company

Okay. Okay. May be --

Andrew Chen

Yeah.

Katherine Lu – Oppenheimer & Company

May be --

Andrew Chen

It depends on product line, some have a couple of points decline and some did not. Some even has adjusted. So, for the most part we forecast the price will remain very stable for 2010.

Katherine Lu – Oppenheimer & Company

Okay. Great. I will get back to the queue. Thank you.

Operator

Your next question comes from the line of Ping Luo with Global Hunter Research.

Ping Luo – Global Hunter Research

Yes. I would like to ask about the share count, share count for this quarter was $54 million and used to have $60 -- about $67 million fully diluted shares in the first half year. I want to know what’s this under diluted effect that and about, of course, share count for 54 million and what share count should -- is going forward to calculate our EPS?

Andrew Chen

Okay. As you know that with the outstanding convertible notes, typically that, if I, when you calculate the fully diluted earnings per share, you’ll need to include the diluting -- the share numbers that’s causing the diluted interest. And that’s typically about 12.5 million shares on top of the basic shares, which is 54,206,036 shares, right.

And then, typically, it amounts to $66 million to $67 million, but sometimes when as you know that the amortization of discounts, of that discounts will be increasing through our quarter, right. As -- I think we went over this subject many times is that we -- and as a result, the (inaudible) of interest expense, when you use, when you calculated by fully diluted earnings per share may cause, right, when you calculate, when you use the, when you add the interest expense back to the incomes and the other factors, it's going to cost the computation result even higher than basic earnings per share. That's why we call anti-diluted. And according to U.S. GAAP, you cannot report a fully diluted earnings per share when the sub calculation is anti-diluted.

So on a going forward basis in the next few quarters, it is very likely, although, it fluctuates. It's not entirely predictable depending on the market and the price of the share. However, that if the share -- assuming a share remains at the current level, we believe that the -- it’s very likely we are going to have the fully diluted earnings per share equivalent to basic earnings per share with only difference in share base is the stock option that when independent director owns, okay.

Ping Luo – Global Hunter Research

Thank you.

Andrew Chen

I think the, I can, I will be have to go through a very compacts detail calculation process for the fully diluted shares base with you, after this call if you want to call me and go through the process.

Ping Luo – Global Hunter Research

Understand. Thank you. Further between this several facilities you have, including the new facility in Anhui, what would be the overall --

Crocker Coulson

Katherine, I think we are going to take another question, and we'll be happy to come back to any further questions that you have.

Operator

Your next question comes from the line of Ingrid Yin with Brean Murray.

Ingrid Yin – Brean Murray

Good evening, everyone. Congratulations on the quarter.

Crocker Coulson

Thank you very much, Ingrid.

Ingrid Yin – Brean Murray

Okay. So the first question is really regarding the demand for NPCC product, dramatically in China and also internationally, we are excited that you are expanding internationally, but when you enter U.S. and Europe market, who will be your competitors and what kind of price or margin do you expect to get, and when do you expect to see a significant contribution in terms of revenue?

Crocker Coulson

Jenny that might be a good one to translate for Mr. Chen, and then he can decide whether he or Andrew addresses it.

Jenny Yang

Sure, sure. (Foreign Language) Basically, well, the company doesn't have any actual number for the demand, the international demand for the NPCC for 2009. But based on the research in 2008, there's a lot more demand for the NPCC in the international market compared to the Chinese domestic market.

So basically although like in 2009 the company actually experience a slight decrease in terms of sales to the international market, compared to the domestic market. But the company actually reinforced their international sales team by hiring a highly experienced International Marketing Sales Director, and he will be responsible to expand the international market even further.

In terms of the pricing, we actually expect that the price for the NPCC products are about 15% more than the domestic NPCC price, that's just an average. And for the competitors, we do have actually a few competitors, including one in Japan. The name of the competitor is Shisharo [ph]. Andrew? We -- the name of the company – we have one is Shisharo [ph].

Andrew Chen

I think the competitors of NPCC international -- the most significant international players in NPCC are the three companies. Shirashi of Japan, which primarily are very active in Japan and Asia, excluding China. The other company is European based, Solvay based in Belgium. And then the third one is based in U.S., is Mineral Technology Inc, we call it MIT.

Jenny Yang

Ingrid that answers your question.

Ingrid Yin – Brean Murray

Yeah. Thank you, Jenny.

Crocker Coulson

That answers your question. Operator, I think we're ready to take the next question. We can always come back.

Operator

Certainly. Your next question comes from the line of Greg Garner with Singular Research.

Greg Garner – Singular Research

Thank you. Nice quarter. First of all a clarification, I didn't hear the volume that was reported. Could you just tell me that then I'd like to ask a question about your expansion plans. Did you say it was 62,000 metric tons in the quarter? Is that right?

Anhui Guo

You mean volume -- the sales volume, you mean the sales volume for the quarter?

Greg Garner – Singular Research

Sales volume, yes.

Andrew Chen

The fourth quarter 2009 sales volume was 62,146 metric tons.

Greg Garner – Singular Research

Okay. Thank you. Just a clarification on some of the expansion plans and the measures in the 10-K expanding up to 640,000 metric tons, and in the prepared remarks it was mentioned that Shandong will increase 200,000 metric tons by 2013. So a question, does that mean by the end of 2012?

And with that, if you're growing the Zibo by 40,000 metric tons this year then it appears to me as if this 200,000 additional metric tons is planned from 2011 and 2012, just over a two-year timeframe. Am I looking at that correctly?

Andrew Chen

At the moment for 2010, I want to go through this one more time, is that we are -- the thing that we are technically committed to do is the 40,000 metric tons expansion in Zibo.

And there is a possibility that we might, depending on the market and depending on the discussion, internal discussion, and how we see the opportunity and how we see the cash flow situation that we might also be starting to build a 100,000 metric tons factory building in Anhui Facility. And at the same time install another 40,000 metric tons of the equipment in Anhui factory, okay.

And then in 2011, we may be adding another 40,000 -- 60,000 metric tons of capacity in Anhui to be housed in the same building which will be built this year if this project gets into being executed. However I have to say that if you read the 10-K and also the previous Q, regarding our acquisition of Anhui, we have an investment plan and there's no contractual obligation for the company to invest those money. Those are the tentative investment plans that we'd agreed with the government and there's a lot of details to be worked out. For example like the land we plan to purchase still needs to go through an option process to establish the transaction price.

And we also need to go through other administrative procedures to finish the land purchase. Well, and after we purchase the land we start to think about building a factory and installing the equipment. And then if the market demand is not as robust as what we have been anticipating, we can always adjust the pace. And if it -- the market demand picks up we can speed up. And then it also needs to go hand in hand with our partner arrangement for financing for these projects.

However I have to stress that these are not contractual obligations for the company. We do have flexibility to in terms of selecting time to commit money and to make investments to protect the best interest of our shareholders.

Greg Garner – Singular Research

Thank you. That was very helpful. So there needs to be a building built in Shandong, Anhui, is that right?

Andrew Chen

No. The current, right, as you know that in the second, at the, toward the end of 2008, and also the first half of 2009, we've been building the 60,000 metric tons of facility -- of capacity in Zibo, and then in 2000, at the end of 2008 we built a factory that was designed for 80,000 metric tons of capacity.

However, through our scientific layout of equipment we discovered that this originally designed facility to house 80,000 metric tons of equipment can house up to, one capacity of up to 100,000 metric tons. And so we now have enough room to add an additional 40,000 metric tons of capacity in the same building with the existing 60,000 metric tons of equivalent without having to build any other factory buildings in Zibo. This is the committed expansion plan.

Greg Garner – Singular Research

Yeah. I understand that. My question is more about the Chaodong facility. This would require new building and if demand is there right now, I'm just wondering how long would that take, regarding all the governmental regulations?

Andrew Chen

It's all this, the land purchase of Chaodong in Anhui Province, would be completed in 2010. We hope that it can be completed in the first half of 2010, then we are buying about 16 acres of land, which the existing 10,000 metric tons of capacity is situated on, excuse me, it's located on. And then we are buying additional 84 acres of new land, for expansion purpose and combined the investment is approximately U.S.$27 million.

And then if, during the next half year, when we go through this land purchasing process, we will be also be exploring the markets to make the -- to build up more detailed business plan and then decide when are we going to build the factory and if we are going to do it this year.

Greg Garner – Singular Research

Okay. Thank you very much.

Operator

Your next question comes from the line of Brian Moore, please state your company name.

Brian Moore

Private Investor. I have just a couple of brief questions. First one is that you're supposed to be developing a modifier that's supposed to save you $15 per metric ton. Where are you people at with that?

And a follow-up on that one is, you used to have a chemical line to two segments of your business, are you afraid of having all your eggs in one basket with just the NPC line?

Crocker Coulson

Jenny, can you translate that for the management?

Jenny Yang

(Foreign Language) Just to answer your first question regarding a modifier that the company expects to do the research and development. The company is actually still working on developing the modifier, there's still some technology, technical issues that still needs to be resolved where the capability et cetera is not very stable. So the company will actually try to solve those technical issues and start testing products but for now it is not a -- the product is not in a mature state for the production.

So your second question was regarding the chemical business that you are talking about. Would you like to be more specific?

Brian Moore

Well, you had two segments you build for the chemical line and your NPC line, and now it's strictly NPCC. And what I'm concerned about, having your eggs all in one basket without being diversified could that be problematic in the future?

Jenny Yang

(Foreign Language) Okay. Basically, regarding the chemical business, the company is always looking for opportunistic investments on the high-end chemical business if there is one and definitely we have not really demand the chemical business.

Operator

You do have a follow-up question from Katherine Lu with Oppenheimer and Company.

Crocker Coulson

That's great. Katherine, go ahead.

Katherine Lu – Oppenheimer & Company

Hello. Can you hear me?

Crocker Coulson

We can, go ahead Katherine.

Katherine Lu – Oppenheimer & Company

Okay. Great. Thank you. Thank you for taking my follow-up. Actually, in your prepared remarks you mentioned the asphalt project is still waiting for approval. I'm wondering what kind of approval timeline should we be thinking about for this project. And also, just in general, what kind of order visibility do you have for your business just in general? Thank you.

Jenny Yang

(Foreign Language)

Andrew Chen

Excuse me, the, I think, Jenny, proceed the translation.

Jenny Yang

(Foreign Language)

Andrew Chen

At the moment we are testing with five of the asphalt manufacturers and Ms. Guo has some information about regarding (Foreign Language).

Jenny Yang

Okay. Basically, after the Chinese, sorry.

Andrew Chen

After the Chinese festival, the five companies engaged with us to conduct large scale testing and we're expecting to get the test results after mid April. And we expect initially we are only going to be getting small amounts of orders from these potential customers.

And then gradually, as they use the products very successfully, get good experience they will extend on their purchase orders. And that has been a very typical procedure for any of NPCC applications to grow from a small revenue source into a very large one.

Katherine Lu – Oppenheimer & Company

Okay. Thank you.

Operator

Your next question comes from the line Ingrid Yin with Brean Murray.

Ingrid Yin – Brean Murray

Hi. Just a follow-up because I think one of my questions just got lost in translation. So what do you expect to see a contribution in terms of revenue from international sales? You talked about three major competitors internationally. So what would be our competitive advantage when competing with them? Is it better technology or is it the lower cost?

Andrew Chen

(Foreign Language). The international sales in 2009, accounted for 7% in our total revenue and with the recovery of the world economy we expect the international sales would account for about 10% of sales in 2010.

Ingrid Yin – Brean Murray

Okay.

Andrew Chen

But only five to do it.

Ingrid Yin – Brean Murray

Okay. Great. So you're expanding to new verticals like asphalt and PE, will these new customers give you a higher gross margin compared with the gross margin you could get from PVC or tire because PVC and tire will have much lower percentage contribution to the total revenue?

Andrew Chen

Well, I can go through some of the gross margins of the different applications for fourth quarter 2009. The gross margin for tire is 42.7%, for PE was 33.6%, latex 37.2%, paint is 41% and the oil ink is 31.2% and PE-206, 206 is 46.3%, 41.9%, I'm sorry, and then automobile undercoating is 46.3%. So combined, we have the gross margin of 39.8%.

And as a matter of fact, PE-206, which has 41.9%, we sold 20,126 tons in Q4 2009, accounted for 32.4%. And PE-601 we sold the -- the PVC, we sold 12,754 and that's only half the gross margin of 33.6%.

Ingrid Yin – Brean Murray

Okay. Great. Thank you for taking my follow-up.

Operator

Your next question comes from the line of Steve Chan with Roth Capital.

Steve Chan – Roth Capital

Congratulations on strong quarter. (Foreign Language) My question is related to the pricing trend and do you see any pricing trend change regarding your average selling price?

Andrew Chen

Well the, for 2009, the average selling price for the entire product mix is U.S.$481.74. And then for Q4 it was U.S.$484. So I think the, we had, so throughout 2009, have been pretty stable and towards the end of the year, I think we see the prices actually pretty strong.

On a going forward basis, I think in order, we do not rule out the possibility in order to quickly extend into the other markets and to grow our revenue, we might have the pricing strategy which will have depending on product applications, we might have a little bit price adjustments but not so much under heavy pressure on prices. And some of the price adjustments are conducted as our initiative to improve our market penetration. But I don't think there's any significant pressure on our prices, as I -- as Ms. Guo indicated earlier, that we at least spend below our international competitors when it comes to the general NPCC sales price per ton.

Steve Chan – Roth Capital

Okay. That's helpful.

Operator

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

Crocker Coulson

Hello, Operator?

Operator

Yes, sir.

Crocker Coulson

Yes. Can we just poll one more time for questions to make sure?

Operator

Certainly. (Operator Instructions)

Crocker Coulson

Okay. Well, Operator, if we're at the end of our questions, we'd like to thank all of our listeners this morning for your interest in the company story and your participation in the call. For any of those of you who'll be headed over to China in the next few months, we certainly encourage you to visit ShengdaTech's management at their new corporate headquarters in Shanghai. And of course, if any of you want to have a facilities tour, we will do our best to arrange that based on the availability at the time.

Again, we'd like to thank all for joining us on the call. And this now concludes ShengdaTech's first quarter and full year 2009 earnings call. Thank you very much operator for your assistance.

Operator

Thank you. This concludes today's conference call, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ShengdaTech, Inc. F4Q10 (Qtr End 12/31/09) Earnings Call Transcript
This Transcript
All Transcripts