Gushan Management Discusses Q2 2010 Results - Earnings Call Transcript

Executives

Wilson Kwong – President

Frank Chan – Principal Financial Officer

Analysts

Robert Lahey – Ardour Capital

Gushan Environmental Energy Limited (GU) Q2 2010 Earnings Call August 18, 2010 8:30 AM ET

Operator

Good morning. And thank you for participating in the Second Quarter 2010 Earnings Conference Call of Gushan Environmental Energy. At this time, all participants are in a listen-only mode. After the call, we will conduct the question-and-answer session. Today's conference is being recorded.

I would now like to turn the call over to Wilson Kwong, President of Gushan Environmental Energy. Please proceed.

Wilson Kwong

Good morning, ladies and gentlemen. And welcome to Gushan's second quarter 2010 earnings call. Joining me on the call is Frank Chan, Principal Financial Officer of Gushan.

Please note that today's discussion may contain forward-looking statements made under the Safe Harbor provisions of Federal Securities laws. Please see today's press release under the section Safe Harbor Statement for a discussion of risks and uncertainties that may affect our results. Before opening the call to questions, I would like to briefly review our second quarter results.

As with the past several quarters, the challenging operating environment and continued uncertainty over the consumption tax issue negatively impacted Gushan’s results for the second quarter of 2010.

Total revenues for the quarter dropped 64.8% year-to-year and 16.6% quarter-on-quarter to $8.9 million. The revenue decline was mainly the result of a drop in the sales volume of both biodiesel and biodiesel by-products.

Sales volume of biodiesel was down 68% year-to-year and 17.5% quarter-on-quarter to 12,833 tons. Sales volume declined because production remained suspended at our Fujian plant due to the consumption tax issue and because production was suspended at our Shanghai plant beginning in April of this year due to environmental restrictions imposed by Shanghai municipal government for the Shanghai Expo of 2010.

We are continuing to see a slow recovery in diesel prices as conditions in China’s refine oil market continue to improve. Average selling prices of our biodiesel products rose 12.1% year-to-year from the second quarter of 2009 and 2% sequentially from the first quarter of 2010.

Unfortunately, those price increases were more than offset by higher raw material costs. The average unit costs for our raw material feedstock rose 41.6% year-to-year and 12.6% quarter-on-quarter in the second quarter of 2010, reflecting general costs inflation in China and higher costs faced by our client.

Overall, costs of revenues dropped 64% year-to-year and 11.8% quarter-on-quarter to $13.8 million in the second quarter. This included a provision of $0.6 million made for potential consumption tax liability for the second quarter of 2010. Excluding the provision, our costs of revenues dropped 50.3% year-to-year and 11.8% quarter-on-quarter.

As a result, we reported an operating loss of $16.6 million and a negative gross margin of 55.8% of which 6.4% was attributable to the provision for consumption tax. This compares to negative gross margin of 47.2% of which 6% was attributably devoted to consumption tax provision during the first quarter of 2010, and 52.3% of which 46.4% was attributable to consumption tax provision for the second quarter of 2009.

The deterioration in margins reflect both higher raw material costs relative to selling prices and fixed production costs spread over a lower production volume, as well as the provision for consumption tax.

We reported a net loss of $16 million for the second quarter, representing a basic and diluted loss per ADS of $0.192. Just like the difficult quarter, we have maintained cash on hand of $73 million and have no bank borrowings as of the end of the second quarter of 2010.

As of the end of the second quarter of 2010, Gushan’s annual biodiesel production capacity was 450,000 tons or 135 million gallons, which will rise to 490,000 tons, which is 147 million gallons by the end of 2010, with the completion of the new plant in Fujian under relocation of our existing Fujian production lines there.

As our results indicate, much of that production capacity is not currently being used, production at our Fujian plant remain suspended indefinitely because of the consumption tax issue. For the same reason we have not commenced production at our completed Chongqing and Hunan plants.

Production at our Shanghai plant was suspended in April of this year to comply with municipal restrictions during the 2010 Shanghai Expo. We expect production to remain suspended at Shanghai until October 31, 2010.

More recently on August 1st, this year, we suspended production at Sichuan Gushan in preparation for the relocation of all its production to our new larger plant, which will have an annual production capacity of 1000 tons.

We expect to commence production at our relocated production line in Sichuan in the fourth quarter of this year and in order to prudently manage our cash flow in the current operating conditions. We’ll delay bringing the new capacity totaling 50,000 tons online in Sichuan until the end of this year.

The consumption tax this year as well as a difficult operating environment continues to weigh heavily on our results. The situation with regards to the consumption tax issue remains unchanged from our last earnings call.

We’re still awaiting a determination by the PRC State Administration of Taxation on whether biodiesel products without petroleum-based diesel content are exempted from the consumption tax. We will of course provide you with an update as soon as we receive a determination.

As indicated on previous earnings call, we have continued to shift our primary sales channel for biodiesel away from the refined diesel market to the chemical industry. Sales to the chemical industry amounted to more than 68% of our biodiesel sales in the second quarter of 2010.

We planned to expand production in sales of refined glycerine for our chemical market as well as develop and manufacture new products for our chemical industry. At the same time, we will step up our efforts in diversifying our source of raw materials by entering into long-term fixed price or cost-plus supply contracts to combat the continued rise in raw material’s costs.

In addition, the company is continuing to seek opportunities to invest in businesses in the energy and/or environmental sector. We will keep you informed of our progress as developments warrant.

Finally, let me address and issue that are notice of concern to investors. On May 27, 2010, we received notice from the New York Stock Exchange that the company was not in compliance with one of the NYSE standard for continued listing of our ADS on the exchange because the average closing price of the ADS was below $1 for 30 consecutive days.

The company has six month’s remedy to deficiency and has already notified the exchange that it intends to result the issue by if necessary reducing the ratio of its ADS to ordinary shares. The company will continue to monitor the share price, the market price of its ADS and will take such remedial action if the price fails to recover in order to ensure that our ADS remain in compliance with NYSE standard. The exact ratio change will determine if and when such remedial action is seen necessary.

At this time, we would be pleased to answer any questions you may have and I will now turn the call back to the operator to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of JinMing Liu of Ardour Capital. Please proceed.