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General Steel Holdings Inc. (NYSE:GSI)

Q4 2013 Earnings Conference Call

March 27, 2014 08:00 AM ET

Executives

Jenny Wang - IR

Henry Yu - CEO

John Chen - CFO

Analysts

Tony Tian - New Oriental Capital

Howard Chan - Caledonia Investments

Operator

Hello and thank you for standing by for General Steel’s Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time all lines have been placed on mute to prevent any background noise. After management’s prepared remarks there will be a question-and-session. Today’s conference is being recorded. Before we get started, I am going to review the Safe Harbor statement regarding today’s conference call. Please note that the discussion made by the Company during today’s call may contain forward looking statements that are within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Forward-looking statements involve inherent risk and uncertainties and as such the Company’s results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in the Company’s public filings with the SEC. The Company does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder this conference is being recorded.

I would now like to turn the call over to your host for today’s conference, Ms. Jenny Wang. Ms. Wang you may begin your conference.

Jenny Wang

Thanks operator, and welcome everyone to General Steel’s fourth quarter and full year 2013 earnings conference call. This is Jenny Wang, Investor Relations Manager for General Steel Holdings. Joining me on this call today from management is our Chairman and CEO Henry Yu; and our CFO John Chen. I will facilitate Henry with the translation as Henry will speak in Mandarin.

Today before the market opened the Company issued a press release announcing our fourth quarter and full year 2013 financial results, and posted a presentation for this call which we will be closely following and referring to. The press release and the presentation are also available on the investor section of our website at www.gshi-steel.com. We plan to file our annual report and Form 10-k for the year ended December 31, 2013 with the SEC after market close today on March 27, 2014.

With that said, it’s now my pleasure to turn the call over to Henry Yu, our Chairman and CEO to provide you with updates on operations, strategy and industry. Henry, please go ahead.

Henry Yu

[Foreign Language]

Thank you Jenny and thank you everyone for joining us for today’s conference call.

[Foreign Language]

I'm proud that we continue to make progress in both financial and operational initiatives and despite a very challenging market environment we were able to deliver significant improvement to our bottom line.

[Foreign Language]

As summarized on Slide 4, our fourth quarter net loss totaled $102,000 and full year net loss narrowed to $33 million, marking improvement from a net loss of $49.9 million and $152.7 million a year ago respectively.

[Foreign Language]

This ability to improve the bottom line in the fourth quarter was especially working, and we have to work through a market environment where the average spending price of rebar decreased. While the cost of iron ore increased from a quarter ago, facing this difficult market and substantially decreased gross margin we proactively scale back production and took time in December to conduct a comprehensive equipment maintenance and upgrade in preparation for an anticipated better market environment in 2014.

[Foreign Language]

During the quarter we also enhanced our sales and the distribution network. We expanded our sales in Southwestern market in Sichuan Province for further deepening our penetration in Shaanxi Province into surrounding rural market near Xian City. We also expanded our direct sales efforts, primarily aimed at government and state-owned enterprises. Our direct sales accounted for approximately 45% of full year 2013 sales, up from 40% in the first half of 2013. The enhanced sales and distribution network would enable us to deepen our collaboration with local government, and broaden opportunity in the faster growing rural areas in Western China. In fact at year-end 2013, we received a government grant and subsidy of $4.2 million for our sanction efforts to the countryside and for our economics contribution to local market.

[Foreign Language]

Let’s now turn to Slide 5 and take a look at the big picture. As you know, the overall market environment for the steel industry in China has been extremely difficult over the past couple of years. Demand slowed and overcapacity persisted, which should depress the selling price and gross profit. The China Iron and Steel Association estimated that in 2013, the average net margin for all the large and the medium sized steel enterprise was weaker 0.62% and roughly one out of every five steel companies was running at a loss. Correspondingly, our financial results were unexciting, which unfortunately make it difficult for people to see many operational accomplishments that we were able to achieve as a GSI during the period.

[Foreign Language]

Specifically speaking in 2013, we made a meaningful progress on key initiatives. We successfully launched two additional continuous-rolling production lines, implemented the comprehensive benchmarking program, optimize the working capital management and lower the financial cost. These initiatives have given measurable efficiency improvement, which John will discuss more in details later.

[Foreign Language]

Additionally, we put more resources into enhancing our environment protection system in 2013. Considering the well documented air pollution in China, we believe that the leading non-state controlled steel producer will hold a social responsibility to produce steel in a more environmental friendly way. I want to pass the message reduce the [indiscernible] backside and waste emission while pushing recycling and improving energy consumption. Not consistently, at least generally we were proud that General Steel was the only enterprise in China’s Shaanxi province elected by the MIIT to be included into China’s qualified steel maker’s list.

[Foreign Language]

Signaling the state [indiscernible] determination, the MIIT has issued two list of qualified steel makers, which together comprise about total of 158 qualified steel makers throughout China. The steel makers make its progress little bit were most likely take high electricity cost -- restricted as administered chief measures and adverse effect of [indiscernible] intent all reducing the nation's overcapacity.

[Foreign Language]

Beginning in 2014 we believe China’s steel industry is entering a new era as the government is determinant to shutdown inefficient factories in order to reduce pollution and balance supply. The government has launched a series of initiatives and issued the guidelines in tackling over capacity and it is expected that the annual capacity will be cut 80 million tons over the next five years.

[Foreign Language]

The [indiscernible] region is the leading center of the China’s iron and steel industry with several city in [indiscernible] province listed among the top 10 most polluted city in China and steel enterprises in the region are expected to a main target of the new policy. We believe when the steel production capacity in [indiscernible] province has effectively reduced this [indiscernible] substantially. The China’s steel industry include substantial -- sustainably healthy growth and at the same time we then benefit the steel enterprise like General Steel that are based in other regions.

[Foreign Language]

As you know General Steel is the largest steel enterprise in Shaanxi province in Western China we are local economy developing at a much effective pace than that of the overall China economy. According to the National Bureau of Statistics of China, Shaanxi province in 2013 GDP growth rate was 11% which is noticeably better than China’s 7.7%.

[Foreign Language]

As a steel qualified steel maker elected by the MIIT in our local market in Shaanxi province, we are confident that we will not only provide survive in this new era but also strive in the ventures and growth of the market environment. We will continue to have a lower production cost from our newly built continuous loading production line as well as a lower operating cost from our comprehensive benchmarking programs.

As such, despite the extreme market difficulty over the past couple of years, I continue to be inspired by General Steel’s many operational accomplishments during that period. And I am opportunistic in fact as overall industry and market environment improve, we are firmly positioned to convert the operational improvement into healthier financial results.

[Foreign Language]

Now, I would like to turn the call over to John Chen, our CFO to go through the numbers in details.

John Chen

Thank you Henry and Jenny. We’re glad that in the face of a very tough market environment, we were able to earn positive EBITDA for the full year of 2013. During the year, we made quick strides in optimizing operating expenses, lowering finance expenses and enhancing funding flexibility. We believe we have considerably strengthened our financial foundation and are well positioned for the industry's new era as Henry has described.

A few highlights for our financial achievements in 2013. Compared to the year of 2012, our 2013 year end results delivered a cut of $62 million in finance cost, a saving of $21 million in SG&A and improvement of $136 million in EBITDA, and overall net loss narrowed by $120 million. We believe these enhancements in our key metrics reflect our dedicated efforts to improve the effectiveness and efficiencies of our management and operations.

As highlighted on Slide 6, we made meaningful progress on key operational and financial initiatives in 2013. Firstly, in July and November 2013 respectively, we launched two additional continuous loading Rebar production lines at Longmen joint venture with incremental continuous loading capacity of 2.1 million metric tons.

Based on our internal estimate, the unit production cost has been reduced by approximately RMB50 per ton in December. As the two lines ramp productions we believe we can achieve higher optimization in 2014.

Secondly, the benchmarking programs continue to drive efficiency improvement in our operations and deliver down result in optimizing cost and output, cutting operational expenses and leveraging economies of scale.

Based on our internal assessment by the end of November, our unit ferrous charges consumption per ton of Rebar has decreased to industry leading level of 1,017 kilograms per ton and the comprehensive energy consumption per ton of Rebar has decreased to 525 kilograms equivalent coal per ton by end of November, further improved from 543 kilogram equivalent coal per ton by the end of August 2013.

Thirdly, we effectively managed working capital, which not only contributed to significant savings in finance cost but also largely enhanced our financial flexibility. As we have previously discussed, the steel industry is a capital intensive sector and the finance expense is typically very material for all steel makers. Considering a tighter credit environment and the sensitivity of our net profitability to finance cost, we have focused on optimizing our financial resources and controlling our finance expenses in 2013.

Now, please turn to Slide No. 7 for a detailed breakdown of finance cost. For full year 2013, we reduced total finance and increased expenses by $61.9 million or over 40% to $91.9 million compared with $153.7 million in full year 2012. As you can see from this slide, the saving in finance and interest expense was mainly attributable to less interest expense on bank borrowings and discounted note receivables, which decreased by 46.6% to $71.1 million. This was primarily driven by less early redemption or pre-cashing on notes receivables and an optimized short term loan structure added by cheaper financing support and broader working capital resourced from suppliers and vendors. We tightened our receivable collections and customer relations management, which brought our sales outstanding base in 2013 to only two days.

On the payable side, we were able to gain favorable financing and payment terms from our suppliers and our account payable days in 2013 increased to approximately 87 days. In addition, we’re able to receive higher customer deposits from the state owned enterprises and lower advance inventory payments compared with a year ago. We believe our capability to gain cheaper financing support and broader working capital resources is a strong validation of our excellent credit worthiness and solid operations among our suppliers, customers and SOE partners in Shaanxi province.

Through better planning, auditing, and securing additional working capital support from our partners, we’re confident in our ability to gain additional financial savings and flexibility in future quarters. We believe our financial foundation is more solid and are well positioned to continue our sustainable business turnaround.

Now let’s turn to Slide 8 of the power point presentation for more details on the fourth quarter financial. Please note that all numbers I'll discuss today are in U.S. dollars unless otherwise noted. As discussed, in light of the depressed gross margin and weak seasonality ahead of Chinese New Year holidays, we decided to scale back production and took time to conduct a series of comprehensive equipment maintenance and upgrades in December. During the quarter, we shipped less volume and at a lower average selling price and as a result total sales this quarter decreased 24.2% year-over-year to $548.7 million, compared with $723.4 the same period a year ago.

Longmen joint venture comprised 99.6% of our total sales during the quarter. Sales volume of rebar at Longmen joint venture totaled 1.15 million metric ton for the fourth quarter of 2013, which decreased by 12.2% compared with 1.31 million metric ton in the same a year ago. Our rebar average selling price at Longmen joint venture of $474 per metric ton was 12.6% lower than the same period of last year which was $543 per metric ton.

Looking at the unit purchase cost of our key raw materials, namely iron ore and coke, during the fourth quarter the pricing environment of iron ore and coke remained stable and rational, compared with prior quarter. However as compared with the low base in the fourth quarter of 2012, the unit price of iron ore increased by nearly 16% year-over-year.

For the full year the unit purchase cost of iron ore and coke decreased by 2.5% and 20.6% respectively and we approved inventory allowance provision of $15.2 million for 2013, compared with $9.6 million for 2012, reflecting the decline in market price of both raw material and finished goods in storage.

Correspondingly, due to a combination of lower ASP, higher unit purchase cost of key raw materials, higher inventory allowance provision and higher unit fixed cost from lower production volume, we had gross loss for the fourth quarter. Gross loss margin for the fourth quarter was negative 6% versus gross margin of 1.7% a year ago. On cash basis, which excludes depreciation and amortization and inventory provision, we are still running roughly at gross breakeven point during the fourth quarter.

Looking at our operating efficiency through operating expense breakdown, we continue to make progress from our benchmarking program and disciplined expenses control during the fourth quarter. Comparatively, G&A improved by 47.4%, or $16.9 million to $15.2 million compared with $32.1 million a year ago, and selling expense improved by 8.3% to $9.5 million from $11.4 million a year ago.

In addition, during the fourth quarter, we recognized a gain of $66.7 million in our income from operation for the change in the fair value of profit share and liability at a result of our revaluation of our projected operating profit, taking into consideration of many recent factors including macroeconomics and steel industry outlook in China. Accordingly income from operation for the fourth quarter of 2013 was $9.2 million, compared with a loss from operations of $54 million in the fourth quarter of 2012.

Total other expenses for the fourth quarter of 2013 were $7.8 million, decreased from $13.7 million in the same period year ago. The decrease in other expenses was primarily driven by a saving of $4.3 million in finance expense, an increase of $2 million in government grants offset by a contribution for highway construction of $6.5 million during the fourth quarter of 2013. All in all, net loss attributable to General Steel was 102,000 or net loss per share of $0.002 in the fourth quarter of 2013. This compared with the net loss of $49.9 million or net loss per share of $0.91 per share in the fourth quarter of 2012.

Lastly going to our balance sheet items on Slide No. 9. As of December 31, 2013, General Steel has had cash and restricted cash of $431.3 million compared to the $369.9 million as of December 31, 2012. Accounts receivable, net of allowance was $7 million, compared to $21.7 million as of December 31, 2012.

We closed the fourth quarter with an inventory level of $212.9 million, compared to $212.7 million as of December 31, 2012. Raw materials inventories totaled $164.3 million. Finished goods were $43 million and the remainder being other supply.

We will continue to maintain inventory at a minimal level by matching, purchasing and production closely with customer orders and other market conditions. As of December 31, 2013 the Company had total liabilities of $3.2 billion. This included $1 billion in short-term notes payable related to the banks lines of credit, $491 million in short-term loans and $162 million non-cash profit sharing liability that’s owed to Shaanxi steel.

Let me now provide you with a quick summary of our full year 2013 financial performance on Slide No. 10. For the year ended December 31, 2013 total sales decreased 14% year-over-year to $2.5 billion. Our total sales volume was 5.1 million metric tons and ASP of rebar of $490 per metric ton. Gross loss was $55.9 million, compared with gross profit of $32.1 million for 2012.

Income from operations totaled $34.4 million, compared with loss from operations of $95.5 million a year ago. Net loss attributable to General Steel narrowed to $33 million or $0.60 per diluted share in 2013, compared with net loss of $152.7 million or $2.78 per diluted share in 2012. The improvement in annual bottom line for profitability despite a decrease of 340 basis points in gross margin was mainly attributable to a net gain of $197 million in change in fair value of profit sharing liability, a saving of $62 million in finance cost and a further savings of $21 million in SG&A expense.

That concludes our prepared remarks, and at this time we’d like to take your questions. If you do have additional questions after the call, please do contact us afterwards. Operator you may begin with the first question.

Question-And-Answer Session

Operator

Thank you. Ladies and gentlemen we will now being the question-and-session. (Operator Instructions). Our first question will come from Tony Tian of New Oriental Capital. Please go ahead with your question.

Tony Tian - New Oriental Capital

I have a couple of questions. The first question is regarding the industry environment. Based on the recent data compiled by the China Iron and Steel Association, it appeared that rebar prices has been quite weak, even weaker than 4Q in the first three months of this year. On the other hand overall crude steel production continued to grow on year-over-year basis; the latest result I got it right assuming that the steel production is up about 10% early this year. So based on most newest data do you see that there will be a further pressure in rebar prices in coming months? And any thoughts on overall steel industry outlook this year will be appreciated.

John Chen

I would like Henry to answer this question. Just give me a moment. I’d like to translate your question to him and he will answer that in Chinese and Jenny Wang will translate that into English. Hold on for a second. Go ahead Henry.

Henry Yu

[Foreign Language]

The recent ASP of rebar remained weak and decreased by roughly RMB200 compared to that at end of last year which is very tough for steel.

[Foreign Language]

We believe the major factors impacting the average selling price of the rebar are the combination of the demand and supply in balance and for the price of iron ore. On the other hand, the iron ore price dropped a little bit. On the other hand the steel production in the first quarter actually increased to a level near its peak.

[Foreign Language]

Although the government has called many initiatives to control overcapacity, the steel production keep increasing during the quarter. We believe it’s particularly driven by better credit environments in the first quarter as China is planning to put economic growth as well as the more production coming [indiscernible] government control.

[Foreign Language]

So overall, we anticipate the market environment to remain half [ph] and the average selling price iron ore and rebar will still be [indiscernible] in the first half of 2014 as it take time for the government initiative to effectively change the balance of demand and supply. So, in the long run if more mills get shut down, we believe the market fundamentals will be healthier and the survivors will have better growth opportunities.

[Foreign Language]

According to the government report announced recently by the recently hold Q [ph] session, one of the key initiative in 2014 is to promote population centered urbanization. We believe the construction of infrastructure and real estate will drive the steel demand which will trigger the improvement of steel in the year.

[Foreign Language]

Lastly, as we mentioned many times before, we have unique proposition in Shaanxi Province and targeting the Western China market. While other major steel mills are concentrated in the [indiscernible] region and other coastal areas. So overall we have less competition from the supplier side. And at the same time healthier demand given by the [indiscernible] authority in western area of China. We are competent to not only survive in this new era, but also survive the eventual improved market environment.

Tony Tian - New Oriental Capital

My last question is regarding production volume. You mentioned that in December you made equipment maintenance during the month which may affect your production volume and the sales volume. So I'm just wondering your sales volume of 1.15 million metric tons in Q4 which is probably the lowest in two years for the company, or is that purely related to equipment maintenance or is that somehow related to lack of market demand?

John Chen

Tony, I would like to take that question. Thank you for asking that. You are right. In the fourth quarter of 2013 we only shipped about 1.15 million metric tons compared with 1.43 million metric tons in the fourth quarter of 2012. Actually this was affected by the maintenance that we proactively did to actually to upgrade and maintain the furnaces since we actually foresee a better market in 2013 and this upgrade and maintenance will better prepare us for this new market environment. And this actually, reduction of shipping volume was only related to that maintenance and upgrade. I don’t foresee any sustainable barrier in the future.

Operator

(Operator Instructions). Our next question will come from Howard Chan of Caledonia Investments. Please go ahead.

Howard Chan - Caledonia Investments

I saw your saving in financial expenses in 2013. It's very good. Do you expect further reduction of financial expenses from current levels for 2014? And how do you see the current credit environment for steel mills in China.

John Chen

I would like to take your question here. First of all we remain committed to enhancing our profitability and better cost and expense control is one of the effective task. Finance expense is of course one of the key areas as it is typically is very significant for many steel mills, since this steel sector is very capital intensive. We're satisfied in our capability to control finance expense and optimize our working capital arrangements.

For the full year of 2013 we saved a total of $62 million in finance expense which is equivalent of 2.5% of total revenue. I think going forward, as a major section of the finance expense due to early redemption of notes receivable and loan amounts which depend on many factors including the macro environment, outside credit environment, working capital needs, and client’s payment schedules effects such and such.

I think it’s very difficult for us to precisely estimate the range of future finance expense. But we believe the current spending in finance expense is reasonable and healthy and sustainable; I think. So we don’t anticipate a major cost in finance expense in 2014.

As you asked the overall environment for steel mills in China, I think the -- know I do feel that if it's improving from the profit situation of the credit crunch in the first half of 2013. The central government actually eased the credit control a little bit to boost China’s production activities and economic growth.

And general feel by the end of 2013, we’re able to secure short-term loans of approximately $302 million compared with only $147 million at the beginning of the year. That balance actually demonstrates our capability to secure the loans and support from the banks. Hopefully that will answer your question. Thank you.

Howard Chan - Caledonia Investments

And then I have a follow-up. In January the company’s Longmen joint venture was included as one of the 113 newly qualified steel makers that meet the government requirements. Noted that Longmen joint venture was the only steel maker qualified in Shaanxi province. I was wondering how will this affect your business as well as other steel makers in that province who were not qualified?

John Chen

Okay so you’re asking that the steel maker list, qualified steel maker list. I would like to turn this to Henry for answers. Hold on. Let me translate that question to him. Okay, Henry, go ahead.

Henry Yu

[Foreign language]

First, we believe the list signals the government's determination to control the overcapacity in the credit environment for the steel industry in China.

[Foreign language]

So it is the first time that the China has qualified a steel maker list and the industry [indiscernible] widely, which remains only the ones including the lift at the next or exceeded [indiscernible] national requirement in standard product quality, environmental protection, and energy consumption so on and qualified for future government support.

[Foreign language]

So the few methods that excluded from the list is most likely to face the higher electricity cost, more restricted government perceived [ph] metrics and bank credit policy and net [ph] policy.

[Foreign language]

This initiative will restructure the steel industry, improve demand and supply balance and lead to a new era with healthier market environment.

[Foreign language]

For now the government has not yet come up with detailed plan to support this qualified steel makers, but it has ensured that the elected ones will be the survivors of the [indiscernible] of the industry and we expect more favorable prices to come.

[Foreign language]

Overall, as the only qualified steel maker elected by the MIIT in Shaanxi province, we believe we are having a better position. As we mentioned in this call, in the first quarter, we’re enter into new market in southwestern China and further can attribute this Shaanxi market with our unreached incentive into more rural areas. We believe we will take advantage of this and extend our sales network further this year.

Operator

And ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to management for closing remarks.

John Chen

Thank you, operator. And thank you for joining today’s conference call. If you have any further questions, please do not hesitate to contact us. On behalf of Mr. Yu and the rest of General Steel’s management team, I'd like to thank you all for your continued support. We look forward to speaking with you again soon. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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