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Gushan Environmental Energy Limited (NYSE:GU)

Q3 2011 Earnings Call

December 21, 2011 08:30 am ET

Executives

Wilson Kwong - President

Analysts

Operator

Thank you for standing by and welcome to the Gushan Environmental Energy third quarter 2011 earnings conference call.

At this time all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, December 21, 2011. I would now like to hand the conference over to your speaker today, Mr. Wilson Kwong, President of Gushan Environmental Energy. Please go ahead.

Wilson Kwong

Good morning ladies and gentlemen and welcome to Gushan’s third 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 US 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 third quarter of 2011. Gushan reported its fourth consecutive quarter of revenue growth in the third quarter of this year, reflecting the contribution of the company’s recycled copper products business operated through the company subsidiaries Mianyang Jin Xin Copper Limited, which was acquired in November 2010 and Hunan Yinlian Xiangbei Copper Company Limited which was acquired in August 2011.

Total revenues for the quarter rose 1044.7% year-to-year and 45.3% quarter-on-quarter to $74.5 million. Jin Xin Copper contributed $66.1 million in revenue for the third quarter, up 38.4% quarter-to-quarter from the second quarter of 2011. Xiangbei contributed $10 million in revenue for the quarter including $1.9 million in the company sales from Xiangbei to Jin Xin. Combined revenue from the company’s recycled copper product business net of in the company sales total $74.2 million, an increased of 55.3% quarter-to-quarter from the second quarter of 2011.

Sales volume of recycled copper products at Jin Xin rose 36.4% quarter-to-quarter to 6761 tons. Sales volume of Xiangbei since the acquisition date of August the 1st this year totaled 874 tons during the quarter. During the third quarter of 2011, revenues from the company's biodiesel business declined 95.8% year-to-year and 92.1% quarter-on-quarter to $0.3 million. Biodiesel sales volume in the third quarter of 2011 was down 97.6% year-to-year and 94% quarter-on-quarter to 203 tons.

The declines in biodiesel revenues and sales volume were attributable to continuous suspension of production at most of the company's biodiesel plants due to unfavorable market conditions and current shortages of raw materials due to local government cracking down on vendors of used cooking oil that forced some of our suppliers to suspend operations.

During the third quarter we saw a slight drop in average selling prices in our recycled copper business. Average selling prices for our recycled copper products decreased 1.9% quarter-to-quarter to RMB59,473 per ton. Biodiesel prices however continued the upper trend which began in the fourth quarter of 2009. For the third quarter of 2011, the average selling price of our biodiesel products rose 44.9% year-to-year and 10% quarter-on-quarter to RMB6771 per ton.

Cost of revenues for the third quarter of 2011 increased 620.9% year-to-year and 46.7% quarter-to-quarter to $73.9 million of which $72.8 million was attributable to our recycled copper products business. Cost of revenues in the recycled copper products business increased 57.5% quarter-to-quarter largely due to an increase in sales volume which rose 54% to 7635 tons and a slight increase in unit raw material cost which rose 0.3% quarter-to-quarter to RMB5,6023 per ton.

Cost of revenues for biodiesel business totaled 1.1 million in the third quarter of 2011 representing a decrease of 89.3% year-to-year and 73.5% quarter-to-quarter. Excluding the effects of the provision for consumption tax in the third quarter of 2010 which was reversed in the fourth quarter of 2010, cost of revenues for the biodiesel business decreased 88.9% year-to-year.

While biodiesel prices, selling prices rose in the third quarter that rise was partially offset by a continued increase in the cost of raw material feedstock. The overall average unit cost of our raw materials input increased 25.7% year-to-year and 5.6% quarter-to-quarter to RMB5,039 per ton during the third quarter.

For the third quarter of 2011, the company reported a gross profit of 0.6 million comprising a gross profit of 1.4 million attributable to our recycled copper products business partially offset by a gross loss of 0.8 million from our biodiesel business. This translated to a gross profit margin for the third quarter of 1.9% for the recycled copper products business, down slightly from the gross profit margin of 3.3% in the second quarter. The gross loss margin for the biodiesel business in the second quarter was 298.7%.

The slight drop in margins in our recycled copper business reflect the narrowing of the spread between the zinc prices and raw materials costs and a provision for inventory write-downs because of decrease in the average selling prices. The deterioration in gross margins in the biodiesel business largely reflects a provision for inventory write-downs due to higher fixed manufacturing cost used to calculate inventories as a result of low utilization rate. We reported a net loss of 3.2 million for the third quarter, representing diluted net loss per ADSL of $0.19.

As at 30th of September 2011, we had cash on hand of 13.8 million and short-term bank borrowings of 17.2 million. Though margins in our recycled copper products business narrowed slightly during the quarter, we remain confident in the outlook for that business and continue to see growth opportunities in that industry as reflected in our recent acquisition of control of Guangzhou Taiyue Communications Cable Company Limited, a Guangzhou-based company that manufactures and sells copper cable for applications that include communications and personal computing. Taiyue currently has a daily production capacity of 24 tons of communications cable product. We will continue to explore strategic acquisitions that we further strengthen and compliment our recycled copper products business.

In our biodiesel business, diesel prices have continued to rebound that began in late 2009 and we expect this trend to continue inline with overall macroeconomic conditions in China and globally. During the third quarter, we also saw signs of inflationary pressures in China were moderating and this trend has continued to-date. This has resulted in a lower rate of increase in our raw materials cost during the quarter which seemed to be stabilizing.

However, during the third quarter, local governments in the PRC began cracking down on collectors of used cooking oil for the alleged sale of used cooking oil to processes who illegally process and resell the used oil as virgin edible oil for public consumption. As a result of the crack down, many used cooking oil collectors, including our suppliers have suspended operations resulting in the shortage of raw material input.

This contributed significantly to the reduction in the company’s biodiesel production during the quarter. We believe that the raw material shortages are temporary and that overall the crack down on illegal sales of used cooking oil ultimately will be beneficial to the company, as our biodiesel represents a legitimate channel for the proper processing of used cooking oil.

We are monitoring the raw material situation closely and we’ll heavily evaluate increasing production at our plants as and when production can be undertaken on the cash flow positive basis at each plant. We will continue to provide update on our progress in both our recycled copper products and biodiesel businesses as developments warrant.

At this time, we would 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) And there are no audio questions at this time. I would like to turn it back over to Mr. Kwong for any closing remarks.

Wilson Kwong

Thank you again for joining our third quarter 2011 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. This concludes today’s conference. You may now disconnect.

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