Guanwei Recycling's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Apr. 1.14 | About: Guanwei Recycling (GPRC)

Guanwei Recycling Corp. (NASDAQ:GPRC)

Q4 2013 Earnings Conference Call

April 1, 2014 08:00 AM ET

Executives

Kenneth Donenfeld

Chen Min - President and CEO

Yang Feng - CFO

Lawrence Wan - Financial Team

Richard Sun - Interpreter

Analysts

Robert Kecseg - Las Colinas Capital Management

Operator

Ladies and gentlemen welcome to the Guanwei Recycling Corporation 2013 Yearend Investor Conference Call on April 1, 2014. For today’s presentation all participants will be in a listen only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions) I will now hand the conference over to Kenneth Donenfeld, President of DGI Investor Relations Corporation. Please go ahead, sir.

Kenneth Donenfeld

Thank you very much Michaela and thanks to those of you on the phone and Internet. A link to this conference call will be posted on the Company's website and instructions for accessing the call are included in the earnings release. On the conference call today will be Mr. Chen Min, the Chief Executive Officer; Mr. Yang Feng, CFO; and Mr. Lawrence Wan a member of the Company’s financial team, together with Mr. Richard Sun who will serve as our interpreter.

Mr. Chen asked that I present his opening comments and then Mr. Lawrence Won will walk you through the numbers. Then he and the others will be available to answer your questions. We appreciate your holding any questions that you do have until after we've completed the opening remarks and then your patience as we go through the translation process in answering those questions.

Before we get started, I am going to read a disclaimer regarding forward-looking statements. This conference call may contain, in addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding Guanwei Recycling Corp. Except for historical information contained in our comments, the statements we make are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include among other things, product demand, market competition and risks inherent in our operations. These and other risks are described in our filings with the U.S. Securities and Exchange Commission.

And now for Mr. Chen's opening comments. Good morning and thank you again for joining us for this update. For the most part 2013 was another of progress for our Company. In the first half of the year sales and prices continued to trend up despite a less robust economic climate in China than in prior years, working with suppliers while raw material costs increased. Mainly through bulk purchasing we managed to moderate the increase. The labor shortage in Southern China where we’re based continues to be a problem and we took steps in terms of salary and benefit increases to attract new workers and improve worker retention. But of course this had some impact on our margins.

Our progress might have continued in the third quarter but as we've reported we were impacted by unforeseen events over the summer that were beyond our control. We saw a decision by the Chinese government to tighten regulations with respect to the waste materials that are exported to our country, what has been called the imposition of a green fence.

In turn, this stimulated action by local regulatory entities everywhere, in our case the Fuzhou Environment Protection Department, the Fuqing City Environment Protection Department and Fuqing Customs, each of which intensified their oversight functions. More specifically our manufacturing in storage facilities were subjected to a series of inspections over the course of nearly two weeks, near the end of the third quarter and spilling a bid into the fourth quarter which halted our production and disrupted our sales cycle to a significant extent.

As a consequence our revenues and our profits in the third quarter were negatively impacted and while we achieved a quarter-over-quarter gain in sales of over 9% from our third quarter to the fourth, our full year results also were down somewhat, despite what otherwise was another year of growth and is still relatively slower economic environment. I will leave it to Lawrence to walk through the specific numbers, which of course we reported in detail in the 10-K we filed yesterday and highlighted in our year-end release.

The good news as we see it, is that we expect there will be no further Green Fence impact on our results in 2014. And while growth expectations in China for the current year have been moderated to a single-digits by many, we continue to see unabated demand for our key product, namely recycled low density polyethylene or LDPE.

Principally we believe this will be because the price advantage of recycled LDPE versus virgin plastic continues to be around 40%. Further it is because of our well diversified customer base, more than 150 active customers in more than 10 different industries. This we believe insulates us to a great extent from fluctuations in any one industry. Not least of all, it is because of what distinguishes us from all others in our industry, namely our environmental leadership.

We remain one of the few, if not the only LDPE manufacturer that can buy our raw material, plastic waste directly from European sellers without the additional cost of any middle men. The higher rock quality material we import directly contributes to the high quality of our products. It also permits us to produce our product at lower cost than our competitors who pay higher prices for their raw material.

There is other good news. Once again as Lawrence will note, we ended the year in strong financial chase with no bank debt. You will also recall that in 2012, we were able to expand our annual production capacity to 80,000 tons. Importantly, as of January this year, we have been approved to be able to import a total of 135,000 tons of raw material. And so in short, we are well positioned to continuing the growth over the near term. We see this coming from our current client base, as well as from further penetration of the construction manufacturing industry in line with the stimulus policy of our new government leadership. At the same time we will continue to take steps to improve and expand our production as well as continually improve our environmental status.

For the longer term, we remain excited by the potential we see given that in our estimation, there are few if any competitors with either the scale or the sophistication to match the environmental standards of our facilities. This should continue to provide us with a significant competitive advantage.

At this point I will hand it over to Lawrence to review the financials and then I'll be happy to answer any questions you may have. Lawrence?

Lawrence Wan

Thank you very much. And hello again to those of you joining us on this call or monitoring us on the Internet. I will walk you through our financial results and then we'll be happy to answer any questions you may have. Starting at the top, our main focus is on the performance of our manufactured recycled LDPE sales, which typically constitute the bulk of our revenues. In 2013, full year revenue from our recycled LDPE products were down about 3.74% to $64.81 million, primarily due to the second half production delay Mr. Chen described previously. Mainly for the same reason, net income for 2013 was down just over 18% to $9.7 million or $0.93 a share from about $11.83 million or $1.15 per share a year earlier.

Revenues for the full year, which also includes sales of sorted non-LDPE materials and raw material sales reached $72.26 million compared with $79.04 million in 2012. Excluding the raw material sales which I will explain in a moment, the decline was mainly due to a decline in sales volume. This again was a consequence of the second half production delay as we saw tonnage sales for the manufactured recycled LDPE decline 6.15% to 52,038 tons so compared with the prior year. The average selling prices however rose during the year to $1,246 per ton, up about 2.64% from 2012. Shorter non-LDPE sales volume and selling prices follow suit. Year-over-year tonnage sales declined roughly 10% to 5,521 tons. While the selling prices rose 6.09% to $331 per ton.

The reason we have sales of raw materials near year end was that we acquired the raw materials in quantity to obtain discounts. We then disposed of 7,889 tons of this raw materials for approximately $5,622,000 basically to recoup our cost at just over breakeven. The disruption of second half productions and sales also affected our gross profit margin, which declined to 23.45% from 26.29% in 2012. As many of our costs were fixed despite the unanticipated decline in sales volume, for the reasons previously noted during the year we again experienced increased labor cost as well as an approximately 9% hike year-over-year in the cost of labor cost as well as approximately 9% hike year-over-year in the cost of raw materials which in 2013 averaged about $787 per ton. With these costs exceeding the increase we saw in the selling prices, our continuing focus in 2014 is on doing what we can to moderate further increases through worker retentions, further diversifying our source of raw materials and so on.

I think you will agree our financial position in year-end 2013 was quite strong without detailing all the highlights, although I'm happy to review them in the Q&A, of December 31, 2013. We had close to $12 million in cash and cash equivalents, only slightly less than the prior year.

Once again we also had no bank debts. We also had a $ 10 million year-over-year increase in working capital, up just over 28% to about $45.46 million. With nothing as that, while we – worth noting is that while we continue to extend credit to most credit worthy customers, we manage our accounts receivable very well. The amount on the books at year ending related to the sales of raw materials for which we did not receive payments until the year end. The increase in advances to suppliers is reflection of the requirements of the marketplace, as well as our focus on obtaining raw materials at the best price when possible.

In 2014, I should add that we will utilize our working capital to the extent possible to continue to improve our production process and expand our capacity. Lastly in anticipation of your questions, I will say that we believe the cash we have in hand is needed for the business. We need to always be in a position to secure our raw materials at the best prices when possible.

With that, I will hand the microphone now back to Ken. Ken?

Kenneth Donenfeld

Thanks very much Lawrence. Mr. Chen’s only closing thought is that the Company greatly appreciates what appears to be some heightened investor interest in its progress, and the Company is steadfastly focused on continuing to grow the business with what it hopes will be fewer bumps in the current year.

And now I believe we’re ready to open up the session to any questions that you all might have. So operator, could you get the ball rolling on that?

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from Robert Kecseg from Las Colinas Capital Management. Please go ahead.

Robert Kecseg - Las Colinas Capital Management

I wanted to ask about the capacity. If the manufacturing capacity is up to 80,000 tons; if they had customers to be able to service to that volume, would the working capital be sufficient to be able to manufacture 80,000 tons?

Lawrence Wan

Richard, you want me to translate this one?

Richard Sun

Okay, let me translate. [Foreign Language]. Just now our CFO Mr. Yang Feng answered your question that our current working capital is not sufficient to allow us to produce 80,000 tons a year, and to reach that target we may need another $10 million cash.

Robert Kecseg - Las Colinas Capital Management

The reason why I asked that is because it probably answers the question of the investors frustration at the past about the level of working capital relative to share buyback. So perhaps that’s another way to explain it. So then the other question would be then, based on your business prospects and your available capital, what kind of tonnage could you possibly be able to handle in the coming year approximately?

Richard Sun

[Foreign language] Mr. Yang answered your question that let’s say, without any further impact from the government policy regarding the environmental protection and based with our current working capital, it has to have about 10% increase compared with the tonnage of last year.

Operator

Thank you. (Operator Instructions) The next question comes from Mike Miller from West Network Group. Please go ahead.

Unidentified Analyst

Could you explain what you’ve just said about the 10%, I mean, that was a great question. You have $11 million in cash, $52 million in tonnage. Is that your max? How much more tonnage could you do with your $11 million in cash approximately?

Richard Sun

[Foreign language]. With the current $11 million cash in our account, we believe that it’s sufficient for support about 50,000 tons of capacity per the year.

Unidentified Analyst

50,000 more tons?

Lawrence Wan

The 50,000 in total, just 50,000 [ph] tons for the whole year of 2014.

Unidentified Analyst

Yes, how many tons would that support?

Richard Sun

60,000 tons.

Unidentified Analyst

So, roughly 15% whatever. I’ve had one question here please. Since I’ve been following your Company for the last four years, have been an investor. I’ve noticed your receivables have gone from nil to currently $18 million and your cash flow, it’s onetime which is excellent, has dropped. Your receivables have gone up. Your revenues have gone down. Can you explain that to me a little bit please? Thanks.

Richard Sun

[Foreign language] Mr. Yang answered that in the recent couple of years the Company grow in China as the slowing down. We are passing the slowing down and most of our customers have certain degree of shortage of cash for their operation. So for this reason we provide longer payment term or some credit to our old customers, to our loyalty customers. And that is one reason that we have decline -- we have increase in our receivables. And another reason is that close to the year-end we sold raw materials but by December 31, 2013 we didn’t have the payment from the buyer. So that is another reason that we have about $5 million increase in our receivables.

Unidentified Analyst

Okay, could I ask another question? What percent of your customers would you categorize as consumer oriented that they're selling to as compared to what the west wants and they want manufacturing, and they want infrastructure build out, which is already happened. So again of your 150 base or you say 300 base customers that you have in your inventory, what percent of those customers would you think would be consumer oriented? Or like for example if you’re selling your product to a shoe manufacturer, I would consider that a consumer type product. Can you answer that one please?

Richard Sun

[Foreign Language] Sir, the answer to your question is over 80% of our product was sold to the manufacturer of consumer product.

Unidentified Analyst

That’s good because we over here don’t understand the transition that China is going through, and that’s all we hear is how many Caterpillars can we sell on it every second. And if you guys don’t buy in, then things are bad over there. I just have one more thing to add and I appreciate your time and answering the questions correctly in my opinion. Just on the math that we asked about your cash on hand compared to what tonnage you can put out. Just a thought here as everyone harped on the stock buyback and right now China is still -- nobody loves China, some people do. I have a great idea. 60% of the stock is held by management. So roughly 4 million shares which is nothing that’s out there in the flow. Why don’t you just issue a special cash dividend to those people? Management doesn’t get any because Mr. Chen didn’t like this last fiscal year. So maybe next year will be better, he could participate in a special cash dividend, this would equate to maybe $400,000 of your cash, in the bank which would maybe what 3%, 4% and you'd still have enough cushion because you said that you had this percent that you felt you could do. Just a thought, you can give me a comment on that. Thank you.

Richard Sun

[Foreign Language] Mr. Yang replied to your projection that in the recent couple of years the Government of China has tightened its policy on environmental issues. Now we have received a great pressure from the government and we focused our effort to increase our environmental protection facilities in order to respond to the government regulation. So in this case actually we need in fact more money to improve our facilities. So, therefore we cannot consider paying dividend to our shareholders.

Unidentified Analyst

Is this going to be more than what you. I assume what you are trying to say -- you're going to enhance your plant capabilities or bring them up to the government standards. How much more are you going to have to spend as opposed to years past?

Lawrence Wan

We have to invest more to improve our facilities in order to satisfy the government environmental regulation.

Unidentified Analyst

Do you have a number?

Richard Sun

[Foreign Language] Well, up to now, we can -- we have seen a trend that the Government of China wishes to tighten the regulation on environment protection. But however, we are not able to anticipate what steps to take -- action the central government or the local government is going to take this year or next year. So we can only anticipate that we have to invest more on the aspect, that we cannot tell a specific figure now.

Unidentified Analyst

Are you in compliance now with their local and state laws?

Richard Sun

Local what law?

Unidentified Analyst

Whatever law they have, I mean is your plan in compliance with their environmental toll?

Richard Sun

[Foreign Language] Yes. Today we are compliant with all the laws and regulations from either the central government or the local government. However, as I said, as we have anticipated that our government is going to tighten the regulation over time on environmental protection. So that is a trend. The policy will be strict and more and more and strict. So we have to consider -- invest more to improve our facility.

Unidentified Analyst

As long as you’re doing the right thing and maybe the other ones that aren’t, that will help you to be – will help your markets. Okay guys, with all your help and if you can -- who is the interpreter again? Whom I am speaking with?

Richard Sun

This is Richard Sun

Unidentified Analyst

Okay Richard, Hi. Could you send me your contact? So maybe someday when I have a question, I could just send it off to you and you could reply to me? Would that be okay, please?

Richard Sun

Yes, sure. Actually you can find my email in our press release.

Kenneth Donenfeld

This is Ken, I guess, based on the last question, or following up on the last question, given your financial strength relative to others in the industry and your advantages currently in terms of environmental, doesn’t that provide you with an advantage and possibly new opportunities going forward, the tightening of regulations? Richard?

The question was given that you're one of the biggest, if not the biggest company in your space right now, and you have advanced environmental facilities, doesn’t -- going forward don’t you have some advantage over competitors given the tightening? I imagine some of your competitors will have a big problem?

Richard Sun

[Foreign language] Okay, Mr. Yang said, as you know, since the government has tightened the regulation of environment provision, so most of our competitors are [indiscernible] regulation and they are in even worse situation now and some of them have closed up and the smaller size of capacity they have, the less capable they will be to improve their environmental protection capability.

Kenneth Donenfeld

That’s what I thought, sure. Thank you. Operator, do you we have some more questions?

Operator

(Operator Instructions) There appears to be no further questions. Please continue with the any other points you wish to raise.

Kenneth Donenfeld

Okay, I think we had several good questions there and some good answers, and at this point if there are no other questions, let me thank all you for joining us today. Again, as per the earlier question, feel free to call me or to call Richard or email Richard at any time with any additional questions you may have. So thank you all very much and we will sign off now. Thank you.

Operator

This concludes today’s conference call. Thanks for participating. You may now disconnect.

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