Executives
Wilson Kwong – President
Analysts
JinMing Liu – Ardour Capital Investments
Gushan Environmental Energy Limited (GU) Q3 2010 Earnings Call Transcript November 29, 2010 8:30 AM ET
Operator
Good morning, and thank you for participating in the third 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 a question-and-answer session. Today's conference is being recorded.
I would now like to turn the conference over to Mr. Wilson Kwong, President of Gushan Environmental Energy. Please proceed.
Wilson Kwong
Good morning, ladies and gentlemen, and welcome to Gushan's third 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. Now, before opening the call to questions, I would like to briefly review our third quarter results.
Gushan’s earnings continue to be negatively impacted by a challenging operating environment and continued uncertainty over the consumption tax issue, and this is reflected in the company’s results for the third quarter of 2010. Total revenues for the quarter declined 63% year-over-year and 31.1% quarter-on-quarter to 6.2 million, due to declining sales volume of both biodiesel and by-products.
Sales volume of biodiesel was down 66.3% year-over-year and 34.8% quarter-on-quarter to 8,363 tons. Sales volume declined because production remained suspended at several of our plants including our Fujian, Chongqing and Hunan plants because of the consumption tax issue, our Shanghai plant because of environmental restrictions imposed by the Shanghai municipal government for the Shanghai Expo, and an ongoing dispute with a contractor, and our Sichuan plant where production was temporarily suspended as we relocate the production line to the site of our new plant.
During the quarter, diesel prices continued to rebound, as conditions in China’s refined oil market continued to improve. Average selling prices of our biodiesel products rose 13.7% year-over-year from the third quarter of 2009 and 5.2% sequentially from the second quarter of 2010. However, increases in our raw material costs continue to outpace the rebound in diesel prices. The average unit costs for our raw material feedstock rose 34.9% year-on-year and 11.3% quarter-to-quarter in the third quarter, reflecting a general cost inflation in China and higher costs faced by our suppliers.
Overall, cost of revenues dropped 58.3% year-on-year and 30.3% quarter-to-quarter to 9.8 million in the third quarter. This included a provision of 0.4 million made for potential consumption tax liability for the third quarter. Excluding the provision, our cost of revenues dropped 54.3% year-on-year and 30% quarter-to-quarter.
As a result, the company reported a gross loss of 3.6 million and a negative gross margin of 57.5%, of which 5.9% was attributable to the provision for consumption tax. This compares to negative gross margin of 55.8%, of which 6.4% was attributable to consumption tax during the second quarter of 2010, and a negative 39.8% of which 17.2% was attributable to consumption tax provision for the third quarter of 2009.
The deterioration in margins reflected both higher raw material costs relative to selling prices and fixed production cost spread over lower production volume. During the quarter, the company recognized an impairment loss of 142.1 million in property, plant and equipment to reflect the fair value of those assets in light of a persistently weak operating environment, the unresolved consumption tax issue and the increase in raw material costs over the past several quarters.
As a result, we reported a net loss of 149.3 million for the third quarter, representing a basic and diluted loss per ADS of $8.95. Please note that the value to the loss per ADS for the third quarter reflects on a pro forma basis the ADS ratio change which increased the number of ordinary shares represented by each ADS from two to 10.
The ADS ratio change which became effective on November 12th, 2010 is intended to restore the company’s compliance with the New York Stock Exchange’ continued listing standard. Despite a difficult quarter, our balance sheet remains sound with cash on hand of 65.6 million and no bank borrowings as at the end of the third quarter.
As of the end of the third quarter 2010, Gushan’s annual biodiesel production capacity was 390,000 tons or 117 million gallons, which is expected to rise to 490,000 tons, 147 million gallons by the end of 2010, with a completion of a new plant in Sichuan and relocation of existing Sichuan production there. However, as results indicate, much of that production capacity is not currently being used. At present, only two of our plants, Beijing and Hebei, with a combined annual production capacity of 130,000 tons, representing just 33% of our current capacity are in operation.
Production at our Fujian plant remains suspended because of the unresolved 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 to comply with municipal restrictions during the Shanghai Expo. Although we expect it to resume production at the Shanghai plant at the end of October, we had to defer [ph] production until the first quarter of 2011 as we seek to resolve a legal dispute with a contractor.
Production in Sichuan remains suspended since August pending completion of a new plant there and relocation of our existing production line to a new facility. The new Sichuan plant is expected to commence production in the first quarter of 2011.
The situation with regards to the consumption tax issue remains unchanged from our last earnings call. We are still waiting in 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 its termination.
As indicated on previous earnings calls, 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 exceeded 69% of our biodiesel sales in the third quarter of this year.
On previous calls, we have also indicated our intention to pursue investment opportunities in the energy and/or the environmental sector to leverage our strong balance sheet. During the third quarter of this year, the company made its first significant investment when it entered into a definitive agreement to acquire 67% beneficial interest in Mianyang Jin Xin Copper Company Limited, a PRC-based company that engages in copper recycling. That acquisition was approved by the Sichuan Province Department of Commerce on the 3rd of November, 2010, and the company has issued 24 million new shares as consideration subject to an escrow arrangement and earn-out target, and injected 4.5 million of new capital into Jin Xin as per the terms of the acquisition.
Jin Xin sells copper rods, wires and granules made from recycled copper to producers of power wires and cables in Sichuan and elsewhere in China. The company has a current daily production capacity of 60 tons of recycled copper and is constructing a new production line that will add a daily production capacity of 100 tons upon commencement of production, which is expected to be in December of 2010.
The company will continue to seek similar attractive investment opportunities in the energy and environmental sectors, and we will keep you posted of our progress as developments forward.
At this time, we will be pleased to answer any questions you may have, and I will now turn the call back over to the operator to begin the Q&A session. Thank you.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of JinMing Liu from Ardour Capital.
JinMing Liu – Ardour Capital Investments
Hi there, Wilson.
Wilson Kwong
Hello JinMing.
JinMing Liu – Ardour Capital Investments
Yes, I was going to make questions related to the recent increase in diesel price in China, you know, the supply demand, the situation of diesel in China. It looks like, I had turned back to the very similar situation in 2007 and early 2008, basically very small demand than in our supply. And I do know that the flexible oil price increased as well, but can you just comment on that, you know, the price of significant increase in diesel price and whether that will help you to achieve higher selling price for both, specialty chemicals and biodiesel?
Wilson Kwong
Yes, I think the recent increase in diesel price is really twofold. One is, I think there is a general trend that diesel prices have been increasing, and I think that this part is reflected in our biodiesel selling price, which has been, also been increasing through the last few quarters. But the second fold is actually we understand, the market is such that there has been a lot of sort of speculative activities in the diesel market, and in fact, the government is trying to clamp down on that. So, I think the more excessive part of the rise in diesel prices have been due to more of the speculative activities. But I do think the general trend, it’s upwards, and we should be benefitting from that.
JinMing Liu – Ardour Capital Investments
So, you mentioned that you would currently only have 130,000 metric tons of capacity in production?
Wilson Kwong
Yes.
JinMing Liu – Ardour Capital Investments
Do you expect that those capacities will be somehow more utilized during the fourth quarter?
Wilson Kwong
Yes. I think the key here really is the raw materials costs. As you can see, our raw materials costs have gone up quite significantly, and we are still trying to manage the balance of ensuring we are able to operate on a positive cash flow basis before we – if we produce, we would need to be operating on more or less a positive cash flow basis, or else we will not be producing if we do it on a loss, if you see what I mean. And of course, we would try to increase our production, and our main aim, our current main aim really is to try to be able to source raw materials where the costs would be lower and trying to control that and manage that.
JinMing Liu – Ardour Capital Investments
Okay. Switching to your Jin Xin acquisition.
Wilson Kwong
Yes.
JinMing Liu – Ardour Capital Investments
Just to clarify, you will have 160 tons per day production capacity this year?
Wilson Kwong
That’s correct.
JinMing Liu – Ardour Capital Investments
(inaudible) And the main spending of that is the metal recycling business has relatively low markets, but positive, that will help you guys. I think the margins, net margins for the metal recycling companies are in the, around 5% range. Is that the correct –?
Wilson Kwong
Yes. We expect it to be 4% to 5% around that sort of mark.
JinMing Liu – Ardour Capital Investments
Okay. And do you have plans to expand the capacity for Jin Xin further in the near future?
Wilson Kwong
Yes. We are actually monitoring the situation. So far, Jin Xin is performing up to our expectation, and if this trend continues, we do want to expand production at Jin Xin or may even acquire other related similar type of business.
JinMing Liu – Ardour Capital Investments
Okay. Based on those numbers, I believe next year you may see more revenue coming from Jin Xin instead of comparing to your biodiesel segment?
Wilson Kwong
Yes.
JinMing Liu – Ardour Capital Investments
Okay. Thanks. That’s all I have. Thanks.
Wilson Kwong
Thank you. Thanks JinMing. Thank you.
Operator
(Operator instructions) This concludes our question-and-answer session. I would like to hand the call over again for closing remarks.
Wilson Kwong
Thank you again for joining our third quarter 2010 earnings call, and we very much look forward to speaking with you again on our next call. Thank you.
Operator
Thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect. Have a great day.
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