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Gushan Environmental Energy Ltd. (NYSE:GU)

Q2 2011 Earnings Call

August 23, 2011 8:30 am ET

Executives

Wilson Kwong – President

Frank Chan – Principle Financial Officer

Analysts

Jin Ming Liu – Ardour Capital

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2011 Gushan Environmental Energy Limited Earnings conference call. My name is Iana and I’ll be the operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host, Mr. Wilson Kwong, President of Gushan Environmental Energy. Please proceed, sir.

Wilson Kwong

Good morning ladies and gentlemen and welcome to Gushan’s Second Quarter 2011 Earnings call. Joining me on the call is Frank Chan, Principle Financial Officer of Gushan. Please note that today’s discussion may contain forward-looking statements made under the 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 second quarter of 2011. Gushan reported its third consecutive quarter of revenue growth in the second quarter of 2011, reflecting the contribution of the Company’s recycled copper product business, Mianyang Jin Xin Copper Company Limited, which was acquired in November 2010 as part of Gushan’s ongoing diversification strategy. Total revenues for the quarter rose 443% year-to-year and 32% quarter-on-quarter to 50.6 million. Jin Xin Copper contributed 47.2 million in revenue, up 37.2% quarter-to-quarter from the first quarter of this year and accounted for all the growth in revenue in the second quarter of 2011.

Sales volume of recycled copper products rose 33.9% quarter-to-quarter to 4,958 tons. The higher volume in the second quarter of 2011 reflected an increase from lower production in the first quarter of 2011 which was impacted by the Chinese New Year holiday in February and a temporary contraction in our business operations during a period of significant market volatility immediately following the earthquake in Japan in March.

For the second quarter of 2011, revenues from the Company’s biodiesel business declined 63% year-to-year and 12.9% quarter-on-quarter to 3.4 million. Biodiesel sales volume in the second quarter of 2011 was down 73.8% year-to-year and 25.8% quarter-on-quarter to 3,361 tons. The year-to-year decline in biodiesel revenue and sales volume were attributable to suspension of production at the Company’s Sichuan plant in August 2010 while production lines were relocated to the Company’s new Sichuan plant. The quarter-to-quarter declines were attributable to a decrease in production and sales volume at our Beijing and Hebei production plants as a result of the Company’s strategy to avoid negative operating cash flows due to increasingly high raw materials costs.

During the second quarter, we saw rises in average selling prices in both our recycled copper products business and biodiesel business. Average selling prices for our recycled copper products for the second quarter of 2011 rose 1.8% quarter-to-quarter to RMB 60,638 per ton. Average selling prices for biodiesel also rose significantly during the quarter. In the second quarter of 2011, the average selling price of our biodiesel products rose 38.7% year-to-year and 14.6% quarter-on-quarter to RMB 6,156 per ton, continuing the improvement in average selling prices which began in the fourth quarter of 2009.

Cost of revenues for the second quarter of 2011 increased 242.5% year-to-year and 32% quarter-to-quarter to 49.7 million, largely reflecting the impact of Jin Xin which accounted for 45.6 million of those costs. Cost of revenues at Jin Xin increased 39.2% quarter-to-quarter largely as a result of higher raw material costs, which rose 4.4% quarter-to-quarter to RMB 58,657 per ton and an increase in sales volume by 34% to 4,958 tons.

Cost of revenues for the biodiesel business totaled 4.1 million in the second quarter of 2011, representing a decrease of 71.9% year-to-year and 16.5% quarter-to-quarter. Excluding the effects of the provision for consumption tax in the second quarter of 2010, which was reversed in the fourth quarter of that year, cost of revenues for the biodiesel business decreased 70.7 year-to-year. Whilst biodiesel selling prices rose in the second quarter of 2011, that rise was offset by a continued increase in the cost of our raw material feedstock. The overall average unit cost of our raw material input increased 32.5% year-to-year and 16.3% quarter-to-quarter to RMB 4,770 during the second quarter of 2011.

For the second quarter of 2011, the Company reported gross profit of 0.9 million comprising a gross profit of 1.5 million attributable to the recycled copper products business and a gross loss of 0.6 million from the biodiesel business. This translated into a gross profit margin for the quarter of 3.3% for the recycled copper products business, down slightly from a gross profit margin of 4.7% in the first quarter of 2011. The gross loss margin for the biodiesel business in the second quarter of 2011 was 18.6% compared to a gross loss margin of 23.7% in the first quarter of 2011 and a gross loss margin excluding the effects of the consumption tax provision of 49.4% for the second quarter of 2010.

The slight quarter-to-quarter drop in margins in our recycled copper products business reflects a narrowing spread between selling prices and raw material costs, both of which are rising. The year-to-year improvement in gross margins in the biodiesel business largely reflects a decrease in depreciation expenses due to the lower cost base of assets that were impaired in 2010, while the quarter-to-quarter improvement was mainly due to a change in the product mix where we sold a higher proportion of crude glycerin which yielded a higher margin.

We reported a net loss of 4.1 million for the second quarter of 2011, representing diluted net loss per ADF of $0.24. As at June 30, 2011, we had cash on hand of 17.9 million and short term bank borrowings of 12.4 million, mainly incurred by Jin Xin from our recycled copper products business. Though margins in our recycled copper products business narrowed slightly during the quarter, we remain confident in the outlook for that business, underscored by our recent announcement that the Company has acquired a controlling interest in Hunan Yin Lian Xiangbei Copper Company Limited, a Hunan-based company that manufactures copper products primarily from recycled copper for the power wire and cable industry. Xiangbei currently has a daily production capacity of 50 tons of recycled copper products. We are continuing to explore strategic acquisitions that will further strengthen and complement our recycled copper products business.

The outlook for our biodiesel business remains uncertain. While biodiesel prices have continued to improve since late 2009, inflationary pressures in China have remained high and have significantly impacted our raw material costs. Although we have seen some year-over-year improvement in the spread between our average biodiesel selling prices and raw material costs, quarter-to-quarter average raw material unit costs still rose faster than average biodiesel selling prices. At current market prices for biodiesel and its raw materials, biodiesel production is not profitable for the Company, which is why production remains suspended at most of our plants. The Company will continue, commence or resume production at each plant only if and when production can be undertaken on a positive cash flow basis at that plant. As indicated on previous calls, we are taking a number of steps to try and control our raw material costs; however, these measures are unlikely to have an impact in the near term and we expect production and sales of biodiesel to remain low until such time as those cost control measures are able to yield positive results. We will provide updates on our progress as developments warrant. In the meantime, we will continue to focus on expanding our growing recycled copper products business.

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

Ladies and gentlemen, to ask a question, please press star followed by one on your telephone. To withdraw your question from the queue, please press star followed by two. We’ll take questions in the order received. Please press star, one to begin.

And the first question will come from the line of Jin Ming Liu, Ardour Capital.

Jin Ming Liu – Ardour Capital

Hi Wilson.

Wilson Kwong

Hello. Hi, Jin Ming.

Jin Ming Liu – Ardour Capital

Yeah, first question is regarding your Xiangbei acquisition. So that subsidiary will sell into the power industry. Will their final products have higher price compared to regular recycled copper?

Wilson Kwong

Yes. It will have slightly higher price but not a lot – maybe RMB 2,000 higher.

Jin Ming Liu – Ardour Capital

Okay. Okay, so basically that will give that division slightly higher margins.

Wilson Kwong

Hopefully. Yes, I think—on average, we are looking at probably 4% on average, maybe slightly higher for Xiangbei.

Jin Ming Liu – Ardour Capital

Okay. And I noticed in your second quarter numbers, your accounts receivable numbers increased relatively significantly. Is there any—is that normal or there is something we should be concerned of?

Wilson Kwong

No, I think that is normal. What normally happens in this industry is if we look at the first quarter, generally there’s a normal collection—sort of huge collection exercise being done prior to Chinese New Year, and therefore whatever accounts receivable which goes on from that point until the pay date end of the first quarter would not be a high number. So that’s why the accounts receivable number, if you look at in the second quarter, will be higher than the first quarter.

Jin Ming Liu – Ardour Capital

Okay. And regarding your biodiesel business, based on the current price, it looks like it’s not very profitable. Are you planning to shut down that division completely?

Wilson Kwong

Not at the moment. As I mentioned, we are still working on various exercises to try and control the raw material costs, although we don’t see those results coming through very soon. And in the meantime, we intend—at least for the rest of this year, to operate on a positive cash flow basis so as to minimize any sort of financial cost to the overall financial performance of the Company.

Jin Ming Liu – Ardour Capital

So just to be clear, you just have your Hebei and Beijing plant (inaudible)—

Wilson Kwong

Yes, yes. I think as long as we are able to source slightly more reasonable price raw materials, because at the moment prices—it goes in ranges, and if we’re able to achieve that, then we can produce whatever we can if that is going to generate positive cash flow.

Jin Ming Liu – Ardour Capital

Okay, thanks.

Wilson Kwong

Thank you.

Operator

And now I’d like to turn the call back to Mr. Wilson Kwong for closing remarks.

Wilson Kwong

Thank you again for joining our second 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 call. Thank you for your participation. You may now disconnect and have a great day.

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