Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Gushan Environmental Energy Limited (NYSE:GU)

Q1 2011 Earnings Call

May 26, 2011 8:30 am ET

Executives

Wilson Kwong – President

Frank Chan – Principal Financial Officer

Analysts

JinMing Liu – Ardour Capital

Dale Lio – Sage Press

Operator

Good morning. And thank you for participating in the First Quarter 2011 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 first quarter 2011 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 Safe Harbor provisions of U.S. 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 results for the first quarter of 2011. Gushan reported its second consecutive quarter of revenue growth in the first quarter of 2011. Revenue growth was contributed by the company’s recycled copper product business, Mianyang Jin Xin Copper Limited, which was acquired in November 2011 – 2010 as part of Gushan’s ongoing diversification strategy.

As a result, total revenues for the quarter rose 241.7% year-to-year and 5.5% quarter-on-quarter to $37.7 million. Jin Xin Copper contributed $33.8 million in revenue, up 8.2% quarter-to-quarter from the fourth quarter of 2010, an accounted for the entire growth of in revenue in the first quarter of this year.

The sales volume of recycled copper product declined by 2.3% quarter-to-quarter to 3,701-ton, mainly due to teething problems with the newly added production capacity, the Chinese New Year holiday in February and a reduction of business operations during a period of significant market volatility immediately following the earthquake in Japan in March.

First quarter 2011 revenues from the company’s biodiesel business declined 64.6% year-to-year and 13.2% quarter-on-quarter to $3.9 million, biodiesel sales volume in the first quarter of 2011 was down 70.9% year-to-year and 19.6% quarter-on-quarter to 4,532-ton. The decline in biodiesel revenues and sales volume were attributable to two main factors.

First, production during the quarter remained suspended at company’s Shanghai and Sichuan plants. Production was suspended at Shanghai in April 2010 because of heightened environmental controls adopted by the Shanghai municipal government during Expo 2010 in Shanghai from May through October 2010.

The company extended the suspension of production at Shanghai Gushan because of an ongoing lawsuit filed against the company by construction contractor. Production at Sichuan was suspended in August 2010, while production lines were relocated to the company's new plant in Sichuan.

Second, the company’s biodiesel revenue and volume continue to be impacted by the fall out from the consumption tax issue. During the long period when the issue remained unresolved the company made a strategic decision to shift its primary sales channel away from the refined diesel market to the chemical industry, which was not subject to consumption tax, even though this shift resulted in the smaller customer base relative to the size of the refined biodiesel market.

Although, the consumption tax issue was favorably resolved in December 2010 when the PRC SAT issued a formal notice clarifying that subject to fulfillment of certain conditions, pure biodiesel made from animal fat or vegetable oil is exempted from consumption tax. It has taken some time for the company to ramp up for assumption or commencement of production at its various plants, that process has been further complicated by market conditions where both favorable and unfavorable trends are visible.

In particular, in both our recycled copper business and biodiesel business, we saw significant rises in both average selling prices and raw material costs. Average selling prices for our recycled copper products for the first quarter of 2011 rose 10.9% quarter-to-quarter to RMB59,558. Biodiesel prices also continued to improve in the first quarter of 2011.

During the first quarter of 2011, the average selling price of our biodiesel products rose 23.4% year-to-year and 11.1% quarter-on-quarter to RMB5,371 per ton, continuing the improvement which began in the fourth quarter of ’09 and reflecting the increase in world oil prices and gradually rising demand for diesel in China.

Cost of revenues increased 128.5% year-to-year and 12.5% quarter-to-quarter to $37.1 million, largely reflecting the impact of Jin Xin, which accounted for $32.3 million of those costs. Cost of revenues at Jin Xin increased 10.4% quarter-to-quarter, largely as a result of higher raw material costs, which rose 15.7% quarter-to-quarter to RMB56,173 per ton.

Cost of revenues for the biodiesel business totaled $4.8 million in the first quarter of 2011, representing a decrease of 70.3% year-to-year and an increase of 28.7% from the fourth quarter of 2010. Excluding the effects of the provision for consumption tax in the first quarter of ‘10 and the reversal of consumption tax provisions in the fourth quarter of 2010, cost of revenues for the biodiesel business decreased 69% year-to-year and 10.1% quarter-to-quarter.

While biodiesel selling prices rose in the quarter, that improvement was offset by a continued rise in the cost of our raw material feedstock. The overall average and the cost of our raw material input increased 28.2% year-to-year at 3% quarter-to-quarter to 4100 RMB during the first quarter. Raw material input costs have also risen significantly since the end of the fourth – first quarter of 2011.

For the first quarter of 2011, the company reported gross profit of 0.6 million comprising a gross profit of 1.5 million attributable to the recycled copper products business and a gross lose of 0.9 million from the biodiesel business. This translated into a gross profit margin of 4.4% for the recycled copper products business and a gross loss margin of 23.7% for the biodiesel business.

Excluding the provision and the reversal of the consumption tax provision, the gross loss margin for the biodiesel business was 23.7% for the first quarter of this year as compared to a gross loss margin of 41.3% for the first quarter of 2010 and a gross loss margin of 19.3% for the fourth quarter of 2010.

The slight drop in margin in our recycled copper business reflects a higher raw material prices while the decrease in gross margin in the biodiesel business in the first quarter of 2011 from the fourth quarter of 2010 reflects the impact of higher raw material prices and lower production volumes as a result of continued suspension of production at a number of plants.

We reported a net loss of 2.7 million for the first quarter representing diluted earnings per ADS of $0.16. Our balance sheet remains healthy with cash on hand of 21.8 million and short-term bank borrowings of 9.1 million, all from the recycled copper product business as of 31st March 2011.

The margins in our recycled copper product business now at slightly during the quarter, we remain confident in the outlook for that business and are continuing to explore strategic acquisitions that will further strengthen and complement our recycled copper products business.

The outlook for our biodiesel business is difficult to predict with any clarity as market conditions remain uncertain. While rising diesel prices and a favorable resolution of consumption tax issues are very positive developments, rising raw material feedstock prices remain a major concern amidst general overall inflation rate pressures in China.

Year-to-year raw material unit cost rose 28.2% while average biodiesel selling prices rose 23.4%. While the situation improved somewhat between the fourth quarter of 2010 and the first quarter of 2011, since the end of the first quarter of 2011 raw material prices have continued to rise significantly.

As indicated on previous calls we are taking a number of steps to try and control our raw material cost as the slow flat quarter we are in negotiations with the local government in Mian Yang to be appointed as the exclusive collector and processor of used cooking oil in the region under its jurisdiction.

We are also continuing with our previously disclosed asset to develop an internal feedstock production capability and are actively looking for land in various regions of China that are suitable for cost-effective production of jatropha and castor bean. We will provide updates on our progress as developments warrant.

High and rising raw material cost are complicating our efforts to resume or commence production at our plant. The company is currently evaluating the possibility of each of its biodiesel plants and will continue to commence or resume production at each plant only as and when the plant is able operate on a positive cash flow basis.

With the exception of our Shanghai plant where resumption of production is pending a satisfactorily resolution of a legal dispute with a contester, we hope to continue to commence or resume production at other plants as soon as possible.

At this time we will be pleased to answer any questions that 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.

JinMing Liu – Ardour Capital

Hello, Wilson.

Wilson Kwong

Yes. Hi.

JinMing Liu – Ardour Capital

I have a question regarding your – the recycled copper business. It seems like you stopped production during March because of the significant drop in copper price?

Wilson Kwong

Yeah. We stopped for a little while, yes.

JinMing Liu – Ardour Capital

I observed similar price move in May and in this month I saw the copper price dropped significantly in China. Did you also stop production this month?

Wilson Kwong

For a little while as well.

JinMing Liu – Ardour Capital

Okay. So basically we're looking at your copper business as, basically you operate at full speed when the price goes up then if the price goes down you stop or curtail production.

Wilson Kwong

I think if the price movements are gradual, i.e., not very volatile. I think we only stop when it becomes – there are significant increase or decrease at a very fast pace.

JinMing Liu – Ardour Capital

Okay. And I saw you did some hedging in the first quarter.

Wilson Kwong

Yes.

JinMing Liu – Ardour Capital

Do you have any hedging position open for the second quarter?

Wilson Kwong

We have some, yes. We have some hedging position open.

JinMing Liu – Ardour Capital

Okay. And moving on to your biodiesel business, recently there is a B5 standard introduced in China. Can you elaborate on the impact on your business?

Wilson Kwong

It is – the B5 firstly, it is not a mandatory standard; i.e., it is only a recommended standard. And we understand the B5 is instigated by Sinopec. The – what one needs to do in order to fulfill that requirement is that you actually have to produce the B5 and then you are theoretically able to sell to the Sinopec network for example. But in order to produce the B5, you would need to also blend 95% diesel as well.

So for us it's not a very simple exercise. The problem is that we cannot just sell our B100 and then let them blend it to become a B5, if you see what I mean. We have to do it ourselves and then to sell it and that complicates matters and then also the fact that it is not a mandatory makes it difficult for us to operate.

JinMing Liu – Ardour Capital

Okay. And lastly, what is your current raw material cost?

Wilson Kwong

Yes. We mentioned that the raw materials have risen significantly. At the moment, it's now up to RMB4,700 per ton

JinMing Liu – Ardour Capital

Okay. Got that. Thanks.

Wilson Kwong

Okay. Thank you.

Operator

(Operator Instructions). Dale Leo of Sage Press [ph].

Dale Lio – Sage Press

Hello.

Wilson Kwong

Hi.

Dale Lio – Sage Press

Hi, Wilson, yeah. My question – I had a few questions. Regarding becoming the exclusive collector of oil, waste vegetable oil in Mianyang, what's the current status of your discussions with them?

Wilson Kwong

Our proposal has gone to the government and they're passing through various approval features. At the moment, we are uncertain exactly when that approval may come through as you know, in China these things take a while; timing is always a bit uncertain. But we are confident that – we hope that we are able to achieve this exclusive agency agreement for that.

Dale Lio – Sage Press

And are there other jurisdictions for which you are applying for the same exclusivity?

Wilson Kwong

We haven't actually applied for the other jurisdictions yet. That's because we feel that Mianyang, it's – we've been operating in Mianyang for many years and we do feel more confident in that area, in terms of talking to the government. And once we have established when we've got this agreement and show that we are able to operate professionally and then we feel that at that time the success of actually going to other governments will be strengthened, because previously we had tried to talk to Beijing and also Fujang [ph]. At that time, it wasn't successful and so we thought that maybe if we have done one well and then we can actually use that as a model to go back again and talk to them again.

Dale Lio – Sage Press

I see. Okay. You know, regarding your current suppliers of waste vegetable oil, I know you say that inflationary pressures, particularly labor, has been impacting their cost and, ultimately your supply costs. But, what of the total available supply of waste vegetable oil? Should it not be expanding overtime or if not where is it going, if it isn’t been stored or hoarded?

Wilson Kwong

Yes. The supply of used cooking oil, for example, is actually very abandoned. Unfortunately, I would say because, at the moment, virgin edible oil prices are very expensive and a lot of the used cooking oil has been illegally channeled to be refined and then resold at Virgin edible oil into the market. And that’s also one of the reasons why our suppliers are making us pay, trying to make us pay a high amount, because for them, they can actually sell at a high price to illegal processors, who would reprocess and then sell back into that market as an expensive virgin edible oil.

Dale Lio – Sage Press

I see. Interesting, so I don’t know if there is any economic reason to actually look at not merely working with a supplier but actually acquiring the supplier, but for the suppliers that you do work with, are there any that that may be reasonable to consider either a long-term project or actually outright acquiring them?

Wilson Kwong

Yeah. We thought that the best, actually is, we have to tackle this problem through the government and that’s why we are trying to negotiate with the Mianyang Government, because to get exclusivity agency and because without their support, it is very difficult to deal with these suppliers.

Dale Lio – Sage Press

Okay. And Wilson, I have two other questions on the copper side. On the Copper side, is the business currently cash flow positive and separately…?

Wilson Kwong

Yes.

Dale Lio – Sage Press

Okay. And then what is your anticipated investment as far as expanding capacity here? And what is your target capacity as far as expansion?

Wilson Kwong

At the moment with the copper business, we, let’s say for this year, we are not expecting to expand that capacity yet. Our capacity at the moment for this year alone is 50,000 tons. That’s full capacity, so 160 tons per day. What we are looking, maybe next year, it will be to try and increase that, maybe initially another 20,000 or 30,000 tons, depending on the situation, how we get on this year because, we are also looking to, as mentioned to acquire businesses related, either similar to Jin Xin or related to Jin Xin either upstream or downstream from Jin Xin on that front as well.

So, depending on – because, from our point of view, we believe if we are able to acquire something similar then the earnings impact will come quicker. That is if we had the financial resources to do that, obviously, building capacity will obviously take time and we will have to ensure that we are able to deal with this at the moment the current 50,000 tons, which is quite significant to be able to manage that well and before we do expand further.

Dale Lio – Sage Press

Okay. Excellent. Thank you.

Wilson Kwong

Thank you.

Operator

At this time, I’d like to turn the call back over to Wilson Kwong for closing remarks.

Wilson Kwong

Thank you all again for joining our first quarter 2011 earnings call and we very much look forward to speaking with you again on our next call. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Gushan Environmental Energy Management Discusses Q1 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts