RINO International Corporation Q4 2009 Earnings Call Transcript

| About: RINO International (RINO)

RINO International Corporation (OTC:RINO) Q4 2009 Earnings Call Transcript April 1, 2010 9:00 AM ET

Executives

Matt Hayden – IR, HC International

Jenny Liu – CFO

Zou Dejun – CEO

Zhang Yang [ph]

Analysts

Rob Stone – Cowen & Company

Amit Dayal – Rodman & Renshaw

Adele Mao – OLP Global

Michael Deng – Canaccord Adams

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the RINO International Corporation fourth quarter 2009 conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions)

This conference is being recorded today, Thursday, April 1st of 2010, and I would now like to turn the conference over to Matt Hayden with HC International. Please go ahead, sir.

Matt Hayden

Thank you Bernie. We would like to thank all the shareholders and investors who have joined us this morning for the conference call to discuss RINO’s fourth quarter and fiscal year 2009 earnings results. The announcement went out yesterday post the close and I trust that everyone has received a copy, if not, you could send an email to me, matt.hayden@hcinternational.net.

On our call today is Ms. Jenny Liu, the CFO of RINO; in addition to Mr. Zou, the CEO and founder. Mr. Zou will provide opening remarks, which will be translated by Zhang Yang [ph]. He will also be available during the Q&A session later on in the call. Jenny will be providing a summary of the fourth quarter and the financial results for fiscal year 2009, in addition to further details on operations during the year and recent business developments.

I am going to briefly run through the Safe Harbor statement before we get started. This conference call may contain forward-looking information about the company, RINO International, its direct and indirect subsidiaries, including Innomind Group Limited, Dalian Innomind Environment Engineering Company, Dalian RINO Environmental Engineering Science and Technology, Rino Investments, Rino Heavy Industries, RINO Technology, and Dalian Rino Environment Project Design Company.

Forward-looking statements are those that are not historical facts. These statements can be identified by words which include terminology such as expect, may, will, should, project, plan, seek, intend, anticipate and other connotations thereof and for full disclosures of all risks in forward-looking statements, we refer you to our SEC filings on Form 8-K, 10-Q and 10-K.

At this time, I would like to turn the floor over to Mr. Zou. The floor is yours. Jenny, can you please prompt Mr. Zou?

Jenny Liu

Zou, go on.

Zou Dejun

(foreign language)

[Interpreted] Thank you Matt. Good morning everyone. On behalf of our Chairwoman, Ms. Qiu Jianping and the management team of RINO, I would like to thank you for joining us today for RINO’s 2009 conference call. 2009 is a very good year for RINO although affected by the international financial crisis, the revenue in each business segment of the company maintained good return growth, which we expected results in 2010 (inaudible) $100 million successfully, thanks to the associated efforts of all the members of RINO company, thanks to the great support from the BOT, and the high international, above all, thanks to the trust of every investor, along with the constant improvement of the company’s product technology and the continuous affecting of technology level, both technologies of DXT ammonia, ammonia the method, desulphurization technology, sludge treatment technology with independent intellectual property rights to be operational this year. This will definitely be a good foundation for the business development of RINO in the future.

Our investors, please have confidence that we will work hard to complete our growth plans. Thank you.

Jenny Liu

Thank you Mr. Zou, and I will now move on to discussing the numbers. Now, let’s do a quick summary. Financial highlights before we delve into the numbers in specific. Fourth quarter 2009 sales increased 29.9% to $53 million. Adjusted net income increased 93% to $13.5 million, with EPS of $0.53.

For the full year, sales increased about 27.7% to $192.6 million, and surpassed the 2009 revenue guidance of $176.5 million. Adjusted net income increased 47.3% to $57.3 million, with EPS of $2.26. Cash and cash equivalents on December 31st, 2009, were amounted to $134.5 million and the backlog as of February 28th, 2010 was $89.4 million. We will provide guidance and more specifics later on the call.

Now, I will discuss our performance in the fourth quarter of 2009 in detail. All comparisons for the quarter’s income statement are made radical to the fourth quarter of 2008. Net sales for the fourth quarter ended December 31st 2009 increased 39.9% to $53 million. Revenue growth was driven by demand across its wastewater treatment and anti-oxidation systems and coatings sales. The company recorded a $27.3 million in desulphurization revenue, a decrease of 9.3% from Q4 of last year. $14.4 million in wastewater treatment system sales, an increase of 700% from Q4 of last year, and a $7.7 million in anti-oxidation equipment and coatings, an increase of 413% compared to the same year-ago period. We also generated $3.6 million in machining service, down 51% from last year as we focused the capacity on co-products.

During the quarter, we executed work our five flue gas desulphurization systems, three wastewater treatment systems, and six anti-oxidation systems and coatings. As a percentage of total revenues for the quarter, desulphurization represented of 51.5%, wastewater treatment equipment as a percentage of 27.2%, and anti-oxidation was 14.5%, and 6.8% for machining services.

Gross profit for the fourth quarter of 2009 was $16.1 million, an increase of 49.1% over the year-ago period. Gross margins were approximately 30.3% and 26.4% respectively, which were impacted during both period by outsourcing the company executed a large number of projects during the fourth quarter. The 390 basis points improvement in gross margin was due to prudent management of company’s associates during the fourth quarter of 2009.

Total operating expenses for the fourth quarter of 2009 decreased 71% to $2.9 million, which was directly related to absence of $6 million in charges of stock compensation expenses during the fourth quarter of 2008. Excluding the non cash equity compensation charge of $50,000 and $6 million for the fourth quarter of 2009 and 2008 respectively, operating income would have been $13.2 million and $8.3 million, with operation margins of 24.9% and 20.3% respectively.

It is important to note that year-over-year comparisons will be impacted by the non-cash charges taken during 2008, which will make the variance to look more extreme than they are from a pure operating basis. As a note for 2008, there was a total non-cash expense of $17.7 million recorded.

GAAP net income for the fourth quarter was $17 million compared to $1 million reported in the same period in the last year. GAAP earnings for the quarter were $0.67 per diluted share Q4 of 2009. During the fourth quarter of 2009, the company incurred a non-cash equity compensation charge of $50,000 and a change in value of warrant of $3.6 million.

During Q4 2008, the company incurred a non-cash charge in equity compensation expense of $6 million. Taking this into consideration, the net income non-GAAP was $13.5 million compared to $7 million for fourth quarter of 2008. Based on 25.4 million shares outstanding, excluding the non-cash charges, we would have reported a fourth quarter 2009 fully diluted earnings of $0.53 per share compared to $0.28 in the year-ago period. All numbers are based on 25.4 million shares. The company incurred no taxes during 2009, because of the two-year tax holiday afforded to foreign-based entities.

The backlog as of February 28th, 2010 was $89.4 million, with the breakdown as follows

our tax limited a 45.8 million in contracts for desulphurization systems, 22.8 million in wastewater treatment system contracts, and 1.9 million in anti-oxidation system contracts, and 18.7 million in sludge treatment. We expect to record approximately 29 million of these backlog during the coming quarter, with the remainder recorded during second half of 2010.

Moving along to the full-year 2009 results, revenue increased to 38.3% to $192.6 million. The increase was due to strong demand for our wastewater treatment systems and anti-oxidation systems. But the majority of the revenues in absolute dollars came from the desulphurization system sales. Specifically in June 2008, the Chinese government heightened the sulphur emission control significantly and even more stringent for Europe standard, thus requiring all coal-fired sinters to have desulphurization equipment installed. This has been a major driver for customer adoption and as the recognized leader in this space, RINO has been able to capture additional market share.

We worked on a total of 16 flue gas desulphurization contracts, which generated $116.4 million in revenues compared to 25 contracts, which contributed $105.3 million in the year-ago period. During 2009, we worked on a total of nine wastewater treatment equipment contracts with sales totaling about $46 million compared to six contracts in the year-ago period that generated $14.4 million in sales. During 2009, the average price of this contract was twice the size of 2008. In addition, our marketing efforts in 2008 paid off as customer adoption of our anti-oxidation units accelerated. We installed a total of 9 units during 2009, which were coupled with coating sales accounted for $25.1 million in sales, representing a 336% increase year-over-year.

Machine services generated a $5.2 million in revenues from 62.7% year-over-year as we have the operating escrow to full capacity and allocating resources to further growth in our business. The company continued to diversify its customer base. During 2009, no single customer generated more than 10% of revenue, and sales from the top 10 customers accounted for 50% of total revenue. Gross profits increased 33.1% to $72.3 million and gross margin for the year was 37.5% compared to 39% in 2008, which was in line with guidance of 35% to 40%.

Margins were modestly impacted by selective outsourcing to complement internal production capacity. Operating expenses for 2009 were $17 million compared to $31.6 million in 2008. Before non-cash items, operating income for the year totaled $55.3 million, an increase of 142.5% over 2008 and operating margins were 28.7% compared to 16.3%. Excluding the non-cash equity compensation charge of $50,000 and $17.7 million for 2009 and 2008 respectively, adjusted operating income were $55.3 million, an increase of almost 36.5% from the $40.5 million in 2008. And adjusted margins would have been 28.7% versus 29.1% for each year respectively.

The GAAP net income was $56.4 million for the year ended December 31st, an increase of 165% compared to 2008 and earnings per diluted share were $2.22 based on 25.4 million shares outstanding compared to $0.85 based on 25.1 million shares outstanding. Adjusted net income, which excludes both non-cash charges would have been $57.3 million or $2.26 per diluted share compared to 38.9 million or $1.55 per diluted share in 2008. The company enjoyed a two-year tax holiday afforded to foreign-based entities. Accordingly, the company didn’t pay or accrue any income taxes during 2009 and 2008. The company will incur 50% of the regular tax rate since 2010 for the next three years.

Now, I would like to cover some highlights from the balance sheets and the statements of the cash flow. Cash and cash equivalents on December 31st, 2009 were $134.5 million compared to $19.7 million on December 31st, 2008. The increase in cash and cash equivalents was mainly driven by cash generated from operations and net cash proceeds of 94.4 million from issuance of 3,252,032 shares of common stock at $30.75 per share in public offering during the fourth quarter. Working capital on December 31st, 2009 was $223.8 million, an increase of 215.7% from $70.9 million on December 31st, 2008.

Our balance sheet issued our current ratio is at 15 to 1. Accounts receivable increased 12.2% to $57.8 million from $51.5 million on December 31st, 2008. While days sales outstanding decreased to 210 compared to 135 at the end of last year, the accounts receivable are mainly held by large space on the steel producers. As of December 31st, 2009, we made allowance for the bad debt reserves of $273,000 [ph] history of RINO, we did not experience any write-off of those accounts receivable, since these are for the most part government obligations.

Net cash provided by operating activities was $30.9 million for the year ended December 31st as compared to $6 million in the year ended at 2008. During 2009, our capacity utilization was approximately 100% with a significant amount of manufacturing assembly work being performed offsite near our customers’ locations, which gave the size of our systems, is the most effective way to complete the work.

Backlog for projects signed but not yet completed on February 28th, 2010 was approximately 89.4 million and we estimate that at least 80% of this will be earned into revenue by the end of the second quarter, which ends June 30th, 2010. Desulphurization represented a 51.3% of the backlog, wastewater treatment equipment represented 25.5%, anti-oxidation was 2.2% of the backlog and 20.9% for sludge treatment systems.

For 2010, management expects to report revenues of at least $225 million, representing at least 70% growth over fiscal 2009 results. While we will not provide EPS guidance at this time, on March 31st, 2009, the company had 28.6 million common shares outstanding. The company expects to generate revenue growth in all of its business lines, including contribution from its new sludge dehydration projects.

Now, covering some development on a macro and corporate level during the year, which impacted our business indirectly and directly. On July 31st, 2009, Chinese Ministry of Industry and Information published a guideline to formalize the government’s plan to accelerate adoption and installation of the flue gas desulphurization systems, specifically for sinter at iron and steel manufacturing and set that goal to double the number of installations being completed over the next three years.

For some of you who are new to the story, I will go through the details which we provided the last year. The report established our total adjustable market of 500 sinters and estimate that at that time, both installed has been completed. Our first move advantage patent to the technology which fuels up to 99% of the sulfur dioxide emission and the design which both signifies and reduces the cost of ongoing maintenance for the steel company, combined with the number of installations we have successfully completed puts us in a strong position to win more business as our market continues to grow.

We estimate our adjustable markets to be approximately 200 sinters and if this plays out, it would generate well over $1 billion in sales during the next several years. The new product carries important to implications before RINO’s business as it prioritized the sinters flue gas desulphurization system as our priority environmental project that set specific desulphurization target and enables both essential and local government to provide priority funding for installation of the flue gas desulphurization equipment, while offering further support for domestic-based technologies. To speed adoption, developments were encouraged – transfer ownership structure, which would allow the finances to operate the systems for up to 20 years and then transfer ownership to the steel producer. The stimulus trend enacted at the end of 2008 and improved operations for many steel providers, ensured adequate capital for regular to combined.

During the third quarter of 2009, we announced the first contract for our new ammonia-based desulphurization system on a 280-square meter sinter system at Hunan Lianyuan Iron and Steel Company in 2009. The contract value is $14 million. Our research and development team successfully commercialized this technology, which was based on technology license exclusively from Baosteel Group, China’s largest steel producer. This new DXT operating system utilizes coking waste ammonia in the flue gas to effectively remove the sulphur dioxide from the sinter flue gas and produces ammonia sulfate as a by-product, which can be used as fertilizer. In addition to filtering out more than 99% of harmful sulphur emissions, the DXT system utilizes considerably less energy, decreases maintenance costs, and creates a sustainable revenue generating activity through the production of fertilizer.

The Chinese government strongly supports technologies like DXT system and the iron and steel manufacturing companies that use the DXT system will be eligible for tax credits and government subsidies to offset the costs. While we price the DXT system about 30% to 50% higher than our traditional desulphurization technology, we estimate it can save iron and steel manufacturing customers about 60% of their regular operation maintenance and upgrading costs, which will increase the return of investment. We commenced installation on September 2009 and expected to have this system installed by April 2010.

We also expect to utilize this as reference projects to win other DXT bids during 2010. In January of this year, we announced our first sinter flue gas desulphurization BOT contracts with Shougang Jingtang Iron and Steel Company. BOT stands for Build-Operate-Transfer. Through this model, we would finance build and operate the system, manage the system and then ultimately transfer ownership to the steel producer. The BOT contracts consists of build contracts of 33.8 million and operating contracts of 84.3 million valued at a total of 118 million.

We initiated engineering design work on January 1st, 2010 and the installation will be completed by September 30th, 2010. This project uses our traditional technology and we anticipate the systems will filter at least 91.7% of the sulfur dioxide produced from sinter mines. We will operate the system for a 10-year term, which will commence upon receipt of the final state environment protection department approval. After the final payment under the BOT contracts, the ownership of the flue gas desulphurization units will be transferred to Shougang Jingtang Iron and Steel Company. This project is a significant milestone for the company as we enter into new service agreements and we look to do so with as many customers as possible to provide high margin recurring revenue.

As we have stated, our research and development team is consistent today evaluating new products and technologies, which we can incorporate into our products suite. During 2009, we announced the first contracts for our DWM Sludge Treatment systems for Dalian Development District valued at $18.4 million and will be deployed in two phases. Our sludge treatment system uses a new Rotary Drum Film Dryer from the DWM technology, which was incepted by Dalian University of Technology, which produced a superheated steam to dehydrate sludge and reduces the water by 10% more than other technologies being widely used in China.

In addition, we believe our technology costs about 50% less than systems, with imported product and daily operations costs about 45% less. We commenced the first phase of this project valued at 9.6 million in February 2010, which is slated for completion in August 2010. The facility will have the capacity to process 200 metric tons daily. We will commence second phase valued at $8.8 million in September 2010, which is expected to be online in February 2011 and increase by an additional 200 metric tons per day.

We view sludge treatment as a very significant growth opportunity for RINO. The addressable market is estimated to be over 28 billion and the Chinese government has made these a priority as many municipals do not have adequate processing in place to deal with current population, not to mention future growth.

During December 2009, we completed a registered direct offering totaling 100 million with several institutional investors. The net proceeds from the financing were 94.9 million. We issued a total of 3,252,032 shares of common stock at $30.75 per share in the offering. This capital will be utilized to expend our production capacity and for general working capital as we continue to grow our business. As I mentioned, we generated $31 million in cash flow from operations and believe this along with our cash balance will meet our growth objectives for 2010.

During March, the company’s newly wholly-owned subsidiary named Rino Heavy Industries, which will be utilized before expensing. This subsidiary completed a 7.5 million one-time payment to the Land and Housing Bureau of Dalian, for 50-year land use rights covering approximately 57.58 [ph] in the Changxing Island Harbor Industrial Zone. The company has commenced the construction of a new facility, which will include approximately 137.8 square feet contained in two factory buildings, including new equipment. We expect to bring this online by September 2010.

This facility will give the company the ability to significantly increase its annual production capacity for all of its key products, including up to 22 desulphurization units, 400 wastewater management systems, 31 anti-oxidation equipment systems, and 500 DWM units for sludge treatment. This concludes my summary and again I would like to thank everyone for taking this time to listen to the call and thanks for shareholders for their support.

Before we move to the Q&A, Mr. Zou, do you have additional comments.

Zou Dejun

(foreign language)

[Interpreted] As Jenny mentioned, the development status of RINO Company depends on three factors, marketing demand, technology level and production capacity. With the high pressure of the Chinese government environment protection policy and the strong demands of the public for better quality in recent environment produces the marketing demands of the Chinese environment protection, therefore the marketing capacity and share of the environment protection technology for RINO is very huge. The engineering technology of RINO Company occupies a leading producing hemisphere, but along with operating of the indicators of the environment protection available technology will soon have difficult to meet the market demand. And now, we are speaking for that advanced mature technology and we will see.

RINO has acquired land in Changxing Island in March 2010, powers approximately 233,000 square meters for the construction of the company’s production base, which is Rino Heavy Industries. Rino Heavy Industries covers a total area about 233,000 square meters, which gives approximately 50 years of usage rights and $7.5 million we take, and after the construction, we will add 33 sets of machinery and equipment and the factory building covers approximately 128,000 square meters, office building will cover 12,000 square meters and service building 8,000 square meters, which will provide accommodation for all the 400 staff and employees.

After the construction is built into operation, the production capacity will be as following

desulphurization equipment 22 sets; our wastewater treatment equipment 400 sets; anti-oxidation equipment 31 sets; sludge treatment equipment 500 sets; and annual production capacity will be 5 billion RMB. Total investment amount will be 730,000 RMB – sorry 30,000 million [ph] RMB, the Rino Heavy Industries, putting into operation will meet the development demands for the RINO Company in four to five years.

In 10-K, you will find that I took a loan amounting to $3.5 million [ph] during December. This loan was necessary to meet some immediate obligations and will be repaid in full or before 10th of May. Thank you everyone. Please now read your questions.

Jenny Liu

At this time, I think we are going to open this up to Q&A and will provide a summary or wrap-up at the end. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Rob Stone with Cowen & Company. Please go ahead.

Rob Stone – Cowen & Company

Good evening everyone. Thanks for taking my question. Jenny, I wonder if you could just walk through the build-operate-transfer model a little bit more detail, how that works with respect?

Jenny Liu

Okay. Currently we signed this BOT contracts with the Shougang. The contract is viewed itself, it’s similar, it’s nine months, the equipment is building, which is similar to our current operations, and followed by the equipment, we will have 10 years operation service contract with our customer. And I will have Mr. Zou to have further address this BOT to give you the idea because this is the new business model for us and moving or going forward, we will have more contracts signed under the BOT. Zou, go on.

Zou Dejun

(foreign language)

[Interpreted] BOT is a construction model in which contractors will construct the whole project. And the contractor will pay for the construction project in advance including construction and operation, and in the final stage will hand over to the company. That’s it and that’s all.

Operator

Thank you. And our next question comes from the line of Amit Dayal with Rodman & Renshaw. Please go ahead.

Amit Dayal – Rodman & Renshaw

Thank you. Hello Mr. Zou, Jenny, thanks for all the color provided in the call. You know, you provided the near-term guidance for revenues and margins, probably can you give us a little bit more color on what we can expect from a strategic perspective in the next 12 to 18 months. You know the opportunities near term but are there other emissions-related opportunities that you are going after in the near term?

Zou Dejun

(foreign language)

[Interpreted] Compared to 2009, in 2010, the total growth rate of RINO Company is approximately 17%, and this number is a constructed number. For the entire project, this is the biggest growth rate. Therefore, the wastewater treatment project, we can keep the growth rate of this year and may not be very large growth rate. And anti-oxidation project compared to desulphurization project, we prefer to do more sulphurization projects because projects period is comparatively long. Thank you.

Amit Dayal – Rodman & Renshaw

Hi Jenny, just one more question, just specifically more for you I guess, you know, you discussed the tax rates, could you please go over that again? I missed a little bit of that.

Jenny Liu

You mean the backlog number?

Amit Dayal – Rodman & Renshaw

No, tax rates for 2010.

Jenny Liu

What’s your question? Can you repeat it one more time?

Amit Dayal – Rodman & Renshaw

You discussed the, you know, the taxes that you are liable to pay.

Jenny Liu

Taxes, yes, during – effective from this year 2010, we will have income tax rated at 12.5%, which is 250% [ph] of the current, the general tax rate for next three years. So, basically, the China government granted a two-year tax exemption for 2008 and 2009 and effective from 2010, 2011, and 2012, we will have 50% tax rate of the regular tax, which is 12.5% tax rate.

Amit Dayal – Rodman & Renshaw

Is the company potentially applying for exemptions on the next three years as well? Is that something that might happen?

Jenny Liu

When we – if the new production line at Changxing Island completed by September 2010, and we will be eligible for applying from this new facility for another two years tax exemption status.

Amit Dayal – Rodman & Renshaw

Perfect, thank you so much. I will step back in queue, and maybe follow-up later maybe with you.

Jenny Liu

Thanks Amit.

Operator

Thank you. And our next question comes from the line of Adele Mao with OLP Global. Please go ahead.

Adele Mao – OLP Global

Hi, I have questions. Jenny, with respect to the backlog number, $89.4 million as of February 2010, how much of the BOT contract value was included in this number?

Jenny Liu

Let me see this, BOT for – we included $9 million from this Jingtang desulphurization.

Adele Mao – OLP Global

I guess am I trying to understand, you included $9 million for the equipment building portion of the BOT contract, is that correct?

Zou Dejun

(foreign language)

[Interpreted] Exclude 10 years operation.

Adele Mao – OLP Global

Jenny, you said $9.4 million that was included in $89.4 million, right?

Jenny Liu

Yes.

Adele Mao – OLP Global

So, how does that become a 10-year, because your 10-year operating contract value is somewhere over $80 million. So, I guess, I am just trying to understand the equipment part, which was the 25-something-plus-million, plus the interest that got you to 33 million, and that operating part is 80 million. So, the total is 118 million, and how much of that and which part was included in your current backlog?

Zou Dejun

(foreign language)

[Interpreted] Funding is also excluded.

Adele Mao – OLP Global

Okay. So, I guess I am still not getting it, but you know, the $118 million includes the bank interest, plus the equipment contract value, plus the operating portion of that, and I guess the rest of the backlog should also include the wastewater treatment contract you have and sludge treatment contract you have, because I was expecting actually a lot bigger number if you include everything from the BOT contract you just announced.

Zou Dejun

(foreign language)

[Interpreted]

Adele Mao – OLP Global

Okay. Sure, I will get that offline from you guys later. I guess I am also trying to understand, regarding gross margin in the fourth quarter, I am trying to understand why does outsourced portion goes up every year during the fourth quarter, is that something that you typically do every year in the fourth quarter?

Zou Dejun

(foreign language)

[Interpreted] After the third quarter, most large projects will be meeting its end, and the fourth quarter is, how to say it, closure quarter. And then they too appear – the profit rate is lower than first three quarters.

Adele Mao – OLP Global

So, would you expect similar trends to happen in the fourth quarter of 2010?

Zou Dejun

(foreign language)

[Interpreted] Maybe it will happen again, because at the fourth quarter, some other receivables will be handled and treated in the fourth quarter.

Adele Mao – OLP Global

Okay. I have a number of questions on BOT contract if I may ask, first of all, I like to understand, after completing the building contract, how long does it take to, you know, for you guys to receive product approval from customers and also the acceptance by the state environmental protection department?

Zou Dejun

(foreign language)

[Interpreted] Well, faster the construction finish.

Adele Mao – OLP Global

I see, okay. And then what is the penalty, in case there is a project delay, what is the penalty according to the BOT agreement?

Zou Dejun

(foreign language)

[Interpreted] There will be no penalties, but the risk of delay of the receivables, because the operation time is calculated simultaneous, if we delay the project with time, then the amount of receivables and the payments we get will be delayed as well. There is risk but not necessarily. The main reason is that our technology has been used in many steel factories and is quite advanced mature technology. And because of the major banks in Dalian, all of that interested in our project with Jingtang Steel and (inaudible) Bank has guaranteed a loan of amount 75 million RMB.

Adele Mao – OLP Global

Okay, that’s good to know. My last question related to BOT is that the reason you guys disclosed gross margins for the building contract is about 38%, how much was margin that you expect from the operating portion of the BOT contract?

Zou Dejun

(foreign language)

[Interpreted] 45% approximately.

Adele Mao – OLP Global

How does that come about, because I remember the revenue you book is about 8.2 million every month from the operating portion, the operating revenue, and then RINO is responsible for utility expenses, which is about, I think it’s over 6.2 million for the year in addition to salary staff expenses, etcetera. Could you sort of give me the breakdown in terms of how the 45% is calculated?

Zou Dejun

(foreign language)

[Interpreted] The main cost of operation including labor cost, equipment cost and spare parts of the equipment, and the electricity and water, gas and all these costs, deduction from all these costs, all these operation costs and profits will be approximately 45%.

Adele Mao – OLP Global

Okay, thank you. I will get back in the line.

Zou Dejun

(foreign language)

[Interpreted] Thank you.

Operator

(Operator instructions) And our next question comes from the line of Michael Deng with Canaccord Adams. Please go ahead.

Michael Deng – Canaccord Adams

Hi good evening. My question is about the sludge treatment project, just wondering have you already started construction, what’s the status on it, and also have you received any interest for other projects like the new locations and new cities that wanted to set up the similar facility?

Zou Dejun

(foreign language)

[Interpreted] Yes. The project of sludge treatment has come out there from the very beginning of design and yet we didn’t promote this project to the marketing with a strong force, and after the project is finished, there will be examining and investigation project and now about 10 companies or organizations have interest and already negotiated with us.

Michael Deng – Canaccord Adams

Okay, thanks.

Jenny Liu

Thank you.

Operator

Thank you. Ladies and gentlemen, that is all the time that we have for questions today. At this time, I would like to turn the call back to management for any closing remarks.

Jenny Liu

Thank you. Ladies and gentlemen, this concludes the RINO International fourth quarter and 2009 earnings conference call, and again we appreciate all your support. If you have any questions, please contact Mr. Zou and myself, and we have our contact information on our Website, and this conference will be available for replay through April 8th, 2010. You may also access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 4275058 followed by the pound sign. Thank you for your participation.

Operator

Thank you. Ladies and gentlemen, this concludes the RINO International Corporation fourth quarter 2009 conference call. We thank you for your participation. You may now disconnect.

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