ShengdaTech, Inc. Q2 2008 Earnings Call Transcript

|
 |  About: Shengdatech, Inc. (SDTH)
by: SA Transcripts

ShengdaTech, Inc. (OTC:SDTH) Q2 2008 Earnings Call Transcript August 18, 2008 9:00 AM ET

Executives

Crocker Coulson – IR, CCG

Anhui Guo – CFO

Xiangzhi Chen – President & CEO

Analysts

Robert Desnit – Bentley Capital

Edward Yang – Oppenheimer

John Ma – Roth Capital Partners

Ping Lu [ph] – Global Hana Securities [ph]

David Dooley – Merrill Lynch

Craig Allen

Operator

Good day, ladies and gentlemen, and welcome to ShengdaTech Second Quarter Earnings Conference Call. My name is Erica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Crocker Coulson. You may proceed, sir.

Crocker Coulson

Thanks so much, Erica. Good morning, ladies and gentlemen, good evening to those of you joining us from China. And welcome to all of you. I'm Crocker Coulson from CCG Investor Relations, the company's investor relations firm. I'd like to welcome all to the ShengdaTech second quarter 2008 conference call.

With us today are ShengdaTech's Chief Financial Officer, Ms. Anhui Guo, joining us from the company's headquarters in China. Also joining us is CCG's Jenny Zhang [ph] who will provide translation during the question-and-answer session of this call.

I would like to remind our listeners that in this call, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties; and management may make additional forward-looking statements in response to your questions.

Therefore, the company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to various risks including, but not limited to, such factors as unanticipated changes in product demand, especially in the tire and PVC industry; pricing and demand trends for the company's chemical products; the ability to attract new customers; ability to increase our product application; and other information detailed from time to time in the company's filings with the SEC.

Accordingly, although the company believes the expectations reflected in these forward-looking statements are reasonable, we can provide no assurance that they will prove to be correct.

In addition, any projections as to company's future performance represent management estimates as of today, August 18, 2008. ShengdaTech assumes no obligation to update these projections in the future as market conditions change.

For those of you unable to listen to the entire call at this time, we're make recording available via webcast for 90 days. And you can find that in ShengdaTech's corporate Web site.

I'm now going to provide the management discussion section on behalf of ShengdaTech's Chairman and CEO, Mr. Chen.

Xiangzhi Chen

(Interpreted) Welcome, everyone, and thank you for joining ShengdaTech's Second Quarter 2008 Conference Call. We're very pleased to announce in the second quarter 2008 we achieved record financial results, driven by our aggressive NPCC capacity expansion, increased market penetration of NPCC market, and also increased sales of our chemical products.

Our revenue for the second quarter was a record $39.8 million, up 75.7% compared to Q2 of 2007. This outstanding growth was driven by increased demand for both our chemical and NPCC products. Revenues generated from NPCC segment increased 76.4% to $19.1 million representing 48% of revenue. This was a direct result of our increased NPCC capacity which we utilized to increase our market penetration.

We also saw higher average selling prices for NPCC products, due to our ability to produce one of the highest quality NPCC particles available on the market. Our chemical segment also posted a strong quarter with revenue of $20.7 million, up 75% from a year ago, representing 52% of revenues. This was due to higher sales volume and insignificant increases in ASP's across all product lines.

Gross profit was a record $14.6 million, up 91% from the second quarter of 2007. And gross margin increased 300 basis points to a record 36.8% driven by strong price performance of our chemical segment.

Net income was a record $10 million or $0.18 per diluted share, up 66.3% from $6 million or $0.11 per diluted share, a year ago.

During the quarter, we were successful in expanding our NPCC customer base, both domestically and internationally. We added six new domestic customers including one tire manufacturer, three adhesive producers, and a paper manufacturer.

On the international front, we added four new customers, bringing our total international customers to nine. Our new international customers include a Korean tire manufacturer, and automobile undercoating company in Singapore, and in Vietnamese, and it’s really polyethylene manufacturer.

We are confident in our ability to win new customers and expand our share of the NPCC market, both domestically and abroad and have an aggressive plan to expand production capacity and cash this growing demand.

In April, the three new stainless steel NPCC production lines in our facility in Shaanxi Province were brought online and ramped up to 70% utilization by the end of the quarter. I'm happy to report that in keeping with our original timeline this facility is now operating at 100% utilization levels.

We're excited about these new stainless steel lines as they utilize our patent protected membrane dispersion technology co-developed with Tsinghua University, allowing from higher purity NPCC particles, they yield better and product performance. This is important as we are able to charge a premium for our higher end NPCC products. In June, we announced our plan to increase our NPCC production to 310,000 metric tons by the end of 2009.

We intend to build a new NPCC facility in Zibo with the nano capacity of 120,000 metric tons. We plan to invest $56 million to purchase to mine these rights for 58 acres of land, fund construction for 120,000 metric tons facility, and for the purchase of equipment to the first 60,000 metric tons of NPCC production capacity, which we expect to begin production in July of 2009. Zibo second phase of 60,000 metric tons is planned to begin production by the end of 2009.

We plan to fund the construction to Zibo facility and the initial 60,000 metric tons of equipment in a portion of $115 million gross proceeds generated from the sale of our 6% senior convertible notes in May.

As with our new lines with the Shaanxi facility, the Zibo facility, we utilize membrane dispersion technology and all stainless steel equipment. Another attractive facility – attractive quality of this facility is its location close to our current and prospective customers and providing easy access to a shipping board we see it to serve our growing international customer base.

In addition, Zibo is in close proximity to very high quality limestone mine. Within the next 12 months, the local government of Zibo will provide us with mining rights for 150 million metric tons of limestone reserves and priced significantly below that of our existing facilities. This is expected to yield approximately 107 million metric tons of NPCC.

As we expand our NPCC capacity, we continue to develop new customers and new applications for this product. We are currently in the testing process with a number of new potential customers including 26 domestic customers and five international customers. We are also in discussions with 47 potential customers and expect to begin the testing process soon.

In the phase of rising commodity prices in China, our ability to manage our raw material cost is vital to maintaining our profitability in the NPCC segment. We carefully select high quality suppliers and work with them to obtain the lowest possible prices.

A good example of this is a recent contact we made with – contract we made with the leading supplier of anthracite to provide us with a 25,000 metric tons of anthracite in the month of July and August and is just kind of price. As a result, we expected to save about $1.1 million over the two months period.

We are confident that in spite of rising raw materials costs, based on a proving industry experience, and we will be able to minimize any associated risks.

We continue to focus our R&D efforts and develop a new NPCC product applications. We are very pleased to report another successful innovation by our R&D team in Shanghai with the development of a new NPCC products called NPCCA301 for use in automobile undercoating paints.

We used an NPCC in the manufacturing of automobile undercoating paints, improves the quality in other products, reduces damage caused by stone chips, rough weather conditions and also can help prevent rusting.

We believe this new product has potential to replace NPCC imported by domestic producers of automobile undercoating paint as in addition to its superior quality we provide a cost savings of 6% to 8% as compared to the imported NPCC. We're also excited about the growth and prospects for this product.

We already have two customers using it in production of automobile undercoating paints for certain models and are in discussions with other potential customers. According to our estimates the current domestic demand for this new NPCC is approximately 100,000 tons annually. Our R&D facility continues to work on applications including those who are asphalt, epoxy resin and Paper.

Now, I would like to turn to a discussion of our chemical segment. During the second quarter our coal bed chemical business enjoyed another quarter of increasing demand for fertilizer products in China. We achieved growth in revenue across all product lines with liquid ammonia, comprising the largest portions of the chemical segments product mix at 37.5% of sales.

We are pleased with the significant improvements in revenue and profitability in the segment during the quarter. In June 2008, new developments occurred in our coal based chemical business. First, we received a reallocation notice from the Tai'an City government which requires us to close our existing chemical factory by November 1st 2008.

We have been expecting this notice and have been actively seeking an acquisition target which would provide us with the opportunities strengthen our position in the coal-based chemical industry and relocate our existing operations.

We're very pleased to report that we've identified what we feel is the ideal acquisition target to accomplish both of these goals, Jinan Fertilizer Company Limited. Jinan Fertilizer was founded back in 1958 as the first state-owned mid-scale nitrogenous fertilizer enterprise in China.

It's currently the second largest nitric acid fertilizer company in China. Its seven subsidiaries hold 16% share of the domestic concentrated nitric acid fertilizer market and account for about 50% of China's nitric acid fertilizer exports.

Jinan Fertilizer's products are sold and is very well-known Quangcheng brand name. It includes nitric acid, liquid ammonia, methanol, and ammonium bicarbonate. And these account for about –so nitric acid 66% of sales, liquid ammonia, 28% of sales, methanol 11%, and ammonium bicarbonate about 2% of revenue respectively.

Our estimates also indicate the approximate annual capacity at this time for nitric acid is 200,000 metric tons, for liquid ammonia, 75,000 metric tons, for methanol, 40,000 metric tons, and for ammonium bicarbonate 30,000 metric tons respectively.

Jinan Fertilizer currently operating in a loss and suffers from inefficient operations, both of which are not in common for Jinan Enterprises. ShengdaTech has a turnaround plan, designed to acquire proven expertise, superior production capabilities and experiencing converting state on enterprises into profitable businesses.

According to our estimates, after Jinan Fertilizer achieves full operations in 2008, it can yield annual sales of approximately three times the current sales of our existing chemical business. In addition, the gross margin is estimated to be equal to or slightly higher than our current chemical business at these targeted production levels.

We plan to finance the acquisition using a portion of the proceeds from our recent offering of senior convertible notes. Jinan's facilities are located in Tai'an City, the capital of Shandong Province, and are close to our headquarters and our existing chemical plant and have good access to rail transportation.

We expect relatively seamless transition as we relocate our existing operations to this new location. There will be cost associated with the location as well as an equipment impairment cost and impairment cost for equipment is not transferable to the new facility. However, the exact amount of these expenses are still being determined. We do not believe based on the information available at this time that any adjustment to our earlier 2008 guidance is required.

Jinan Fertilizer is one of the 12 largest nitrogen manufacturers in China and has a fully equipped production facility. We believe there is a huge scope for improvement in the production operations and process and technology. We are confident we can make meaningful improvements in the utilization rate over time and that our production capacity could reach the highest level soon after the acquisition is completed.

We will share more information about the acquisition and relocation including potential cause and the impact on our 2008 financial results once we complete the financial audit, business case analysis, and receive board approval for this transaction. We expect to complete all related activity in August or September and will provide update as further developments are made.

Now, I'm going to provide a brief review of ShengdaTech's financial results on behalf of the company's CFO Ms. Guo.

Anhui Guo

(Interpreted) Again our revenues for the second quarter 2008 increased to $39.8 million, up 75.7% from $22.7 million in Q2 of 2007. The strong revenue growth was due to higher selling price and increased demand for both chemical and NPCC products. This revenue growth was also attributable to our NPCC capacity expansion. NPCC now makes (inaudible) 47.9% of sales with 52.1% coming from the chemical segment as compared to 47.7% and 52.3% respectively a year ago.

Revenue from NPCC products increased 76.4% to 19.1 million in the second quarter of 2008 from 10.8 million a year ago. The increase in revenues was due to the addition of the 60,000 metric tons of NPCC capacity added in April 2008 which ramped up 70% utilization by the end of Q2 and is currently operating in a 100% of capacity.

Total volume NPCC sold in the second quarter was 44.744 metric tons or up from 16,714 metric tons, an increase of 59.6% from the 28,030 metric tons in Q2 of 2007. NPCC for use in tires and PVC represented the majority of NPCC sales at 44.9% and 32.6% of NPCC revenues respectively.

NPCC for use of latex increased 59.7% sequentially representing 11.9% of NPCC revenues. Sales from NPCC use in production of printing, ink, paint, paper, polyethylene and automobile undercoating paints combined to generate 10.6% of these revenues.

Our revenue from the chemical segment for the second quarter of 2008 was $20.7 million, up 75% from $11.9 million a year ago. Sales of liquid ammonia which represented 37.5% of the chemical segment increased 53.8% as a result of increased selling prices. Ammonium bicarbonate and methanol represented 29.5% and 18.7% respectively of our chemical revenues. And melamine contributed the remaining 14.3%.

Our gross profit in Q2 was $14.6 million, up 91.1% from $7.7 million, a year ago. Gross margin for the quarter was 36.8% compared to 33.8% in Q2 of 2007. The chemical segment benefited from increase in ASPs for liquid ammonia, methanol, melamine, ammonium bicarbonate and ammonia representing a gross margin of 33.1%, up 7.4 percentage points from 25.7% in the same period of 2007.

Gross margin for the NPCC segment was 40.8% in Q2, a decrease of 1.9 percentage points from 42.7% in Q2 of last year. As a result, a higher average coal prices which were not fully offset by the increases in NPCC ASPs.

Selling expenses in the second quarter of 2008 were $600,000, and remain at 1.6% of revenue as compared to $400,000 or 1.6% of revenue in the same period last year. Primarily due to higher sales commissions reflecting the growth in sales in both chemical and NPCC segments.

General and administrative expenses were $1.3 million or 3.2% of revenues, up from $0.7 million or 3.2% of revenues for the same period last year. The increase was mainly due to additional NASDAQ listing fees and increased R&D expenses.

Operating income in the second quarter of 2008 was $12.7 million, up 92.9% from $6.6 million in the same period, a year ago. Our operating margin was 31.9%, compared to 29% in Q2 of 2007.

Interest expense in the second quarter was $0.6 million due to interest payment on the convertible notes issued in June of 2008. Provision for income taxes in the second quarter was $2.1 million, up from $600,000 in the second quarter of 2007.

The significant increase was due to the end of our two-year phase of our income tax holiday at our Xiangyang factory which began paying taxes at 16.5% of taxable income beginning 2008 and through 2010. Our facility in Xiangyang began to pay tax rate of 16.5% in 2007 and will continue to enjoy this rate through 2009.

Net income in 2Q was $10 million, up 66.3% from $6 million in the same period last year, and fully diluted earnings per share of Q2 was $0.18 compared to our fully diluted EPS of $0.11 in Q2 of 2007.

Now turning to the balance sheet, as of June 30th we had $138.2 million in cash and equivalents, a $133.8 million in working capital, and $115 million in long-term convertible notes. Net cash provided by operating activities during the first six months was $25.2 million.

Shareholders equity stood at $113 million, up from $89 million at year-end. As I mentioned earlier, during the second quarter 2008, including full allotment of exercise with the Over-Allotment option we generated $115 million in gross proceeds from the sale of 6% senior convertible notes thereto in 2018. The proceeds will be used to fund the expansion of the NPCC production capacity and the acquisition of Jinan Fertilizer.

Now I provide some final remarks before we open the call for your questions. I like to conclude by saying that ShengdaTech's success this quarter was result of our proven management team's ability to lead the country to become the largest NPCC producer in China. We clearly demonstrate our ability to develop, manufacture, and commercialize the unique product, NPCC as a functional filler in ever broadening range of high-end and high volume applications.

We're in a strong competitive position as we utilize our patented and technologically advanced membrane dispersion process to manufacture NPCC particles. This provides us with a strong competitive edge and our focus on manufacturing high-quality products, working with our customers during the testing process, developing innovative new applications and successfully selling our proven value proposition has helped us to achieve this dominant position in the industry.

We're working very hard to complete the acquisition of Jinan Fertilizer and are excited about the opportunity to strengthen our position in the chemical segment. We're confident that the relocation of our existing facilities will be completed with minimal disruption to our business and that the acquisition of Jinan Fertilizer will provide very significant long-term value to our shareholders.

With that, we would like to open up the call to your questions. And I should add that the company has announced a proxy statement that we do plan on holding annual shareholders meeting and the analysts day in New York City on September 15th, and we hope to be able to provide significantly greater detail on the Jinan acquisition at that time. And we certainly encourage anybody in the area to attend and visit with us at that time.

With that we now like to close by thanking for your support and opening up the questions – any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Robert Desnit [ph] from Bentley Capital [ph]. You may proceed.

Robert Desnit – Bentley Capital

Can you hear me?

Crocker Coulson

Line is clear, Robert. Thank you.

Robert Desnit – Bentley Capital

Great. I've got two questions on when the company talks about Jinan, and the contribution that it could make in terms of being three times the size of its chemical business, when they say three times are they referring to the $54 million the chemical business to last year or are they referring to the current run rate of the chemical business which is closer to $75 million?

Anhui Guo

(Foreign Language)

(Interpreted) Robert, in terms of the three times the size of the current chemical segment, they are talking about revenue that was generated last year, $53 million.

Robert Desnit – Bentley Capital

And can I have one follow-up on that? When – is what Crocker was indicating that Jinan could be operating at – would be operating at full capacity by the end of 2008?

Anhui Guo

(Foreign Language)

(Interpreted) Robert, Ms. Guo said currently, Shengda Group is currently managing the company. It's managing Jinan Fertilizer and for a three month. So they have excellent results. So, as far as they think that once ShengdaTech is able to acquire the Jinan Fertilizer, then they would be able to turn around the table very quickly and I assure you therefore they are 100% of capacity in a short time.

Robert Desnit – Bentley Capital

Thank you very much.

Anhui Guo

Thank you.

Operator

Your next question comes from the line of Edward Yang from Oppenheimer. You may proceed.

Edward Yang – Oppenheimer

Hi, good morning and congratulations for the very nice results. My first question is on the average selling price increase on the NPCC side. Was that a function more of end market mix, greater percentage of sales coming from exports or raw material cost pass-through?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) The reason for the average size increase is because during the second quarter there is a price increase on the raw material. That's why the second quarter average price is higher than the first quarter average selling price.

Edward Yang – Oppenheimer

And do you expect to raise prices for the rest of the year?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) The actual the companies are selling price that not only depend on the price of the raw material, it depends on a lot more fact. The one of the fact that she talks about is they compare the pricing, if – it depends on – and also it depends on the quantity of NPCC, most of the customers who choose a higher quality of NPCC more than the average price they are paying. So it depends on the quality as well. And also depends on the market penetration, the market of NPCC increases, and the company expects to enter the market in a faster speed. So therefore, the price of the raw materials is not only fact that the size, the average price, the average selling price of the NPCC products. And also, the NPCC product – the higher end of NPCC products will probably have a higher NPCC – higher ASP and the lower NPCC product like lower ASP as well as so.

Anhui Guo

(Foreign Language)

(Interpreted) Unless the price of the raw material increases drastically, the company will obviously adjust the ASP accordingly.

Edward Yang – Oppenheimer

Thank you. And I heard that base in the past quarter there was some restrictions of power supply in Shandong and Shaanxi, was the company affected by that? And I will bet let's take that question first.

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) The power restriction was where target toward their consumer and energy by know the energy for the production. So, they didn't really have any restriction, I mean, the production is then really done, really start toward something.

Edward Yang – Oppenheimer

And then my last, my final question is on the PVC side of the business. PVC, NPCC sales to the PVC market has – it's declined as a percentage of the total sales mix. What's happening in that market? Is it growing as faster the tire and other end markets?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) The PVC in terms of the sales for the second quarter actually slightly decreased about – it really does like demand, demand from our customers, so, there is really – we feel very confident on the PVC market and have estimated that the yearly percentage – the yearly demand for the NPCC for use – for PVCs around 500,000 tones per year. So, these markets still are very large. It's still are very large market.

Edward Yang – Oppenheimer

But the decline in this quarter year-over-year you're saying?

(Interpreted) It's just a slight decline and it's really like a consumer – it's a client demand, demand thing.

Edward Yang – Oppenheimer

Thank you very much.

Anhui Guo

Thank you.

Crocker Coulson

Maybe just clarify that, although had confirmed with Ms. Guo. I believe that NPCC for PVC was slightly less as a percentage of sales, but was very significantly higher in terms of absolute sales from the prior year period. So, it's a very big increase year-over-year in terms of absolute sales.

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) The volume has increased although the percentage has decreased slightly.

Anhui Guo

Just to clarify, we had sales about 6.2 million in Q2 of '08, up from 3.9 million in Q2 2007. So, strong growth year-over-year although as a percentage of 36% of sales this year as compared to 38.4% in the prior year period.

Operator

Your next question comes from the line of John Ma from Roth Capital Partners. You may proceed.

John Ma – Roth Capital Partners

Good morning, Crocker. Good evening, Ms. Guo.

Crocker Coulson

Good morning, John.

John Ma – Roth Capital Partners

Congratulations on a good quarter. I have a (inaudible) questions and my last question you answered. Number one is that I'm curious about the automobile undercoating paint market. You have said in a press release – it says that total market demand for that in a paint products about 100,000 tons, I'm just curious and how many kilograms in the NPCC would it be applied to the automotive undercoating paint? (Foreign Language)

Anhui Guo

(Foreign Language)

(Interpreted) In terms of the 100,000 tons of demand was from like – we utilize like about 20% is used for the NPCC for automobile undercoating. And then we calculated the yearly demand is about – it's about 500,000. Therefore, the numbers that we get is 100,000 in demand for the NPCC – for the automobile undercoating paints.

John Ma – Roth Capital Partners

My second question is on the latex. I have seen your latex – NPCC sale to latex, more than 50% of both year-over-year and sequentially. So I was just curious you give us a little bit more color on this and whether or not it's sustainable. (Foreign Language)

Anhui Guo

(Foreign Language)

(Interpreted) The latex was increased by 15% in the Q2 compared to the first quarter, and this increase was due to the increase in demand for latex glove using in glove.

John Ma – Roth Capital Partners

My last question relate to your – I just want to make sure on your (inaudible) provision on the convertible notes offering, it says all these noteholders are entitled to additional interest either in cash or common stock to including June 1st of 2011 you have the conversion. I just want to make sure if I understand correctly. (Foreign Language)

Anhui Guo

(Foreign Language)

John Ma – Roth Capital Partners

I just want to clarify.

(Interpreted) And the answer was yes.

John Ma – Roth Capital Partners

Thank you.

(Interpreted) Thank you.

Operator

Your next question comes from the line of Robert Desnit from Bentley Capital. You may proceed.

Robert Desnit – Bentley Capital

Hi. Can I follow-up the question I asked earlier about Jinan. And that is if Jinan is operating at full capacity by the end of 2008, is the implication that the Jinan revenues could be $150 million in 2009 with margins equal to or greater than their current chemical business?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) In terms of the product, product portfolio also the product from the Jinan Fertilizer similar to the current product is that for the nitric acid which is about 65 – around 65% of their total revenue and this product has a higher growth margin, any of the products that they have right now, so therefore the gross margin might be a bit higher.

Robert Desnit – Bentley Capital

But that's not really answering my question. What I'm asking is if Jinan is going to operate at full capacity by the end of 2008, could it generate revenues of $150 million in 2009 which is what the company said when they said that this Jinan operation could generate revenues three times last year's chemical business which would apply revenues of $150 million, I'm asking can they reach a $150 million in 2009?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) This is the estimate based on 2007 and based on the current management under their Shengda Group. So, as they have managed about three months, they estimated that at full capacity by the Jinan Fertilizer is able to actually achieve US$150 million in revenue.

Robert Desnit – Bentley Capital

Can they reach that in 2009 is what I'm asking?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) This is an estimation and we cannot – the company is now able to say that they will be able to achieve it, achieve this number or not, they are currently under – they are currently doing the business plan, and, and doing so research and studies for this acquisition. Therefore, they are now able to provide yes or no to your question, but the management is confident that they will be able to achieve this number by the end of 2009.

Robert Desnit – Bentley Capital

Can I – Crocker?

Crocker Coulson

I know it's – it may seem, but the fact is that they are still in the process of completing the audit on Jinan Fertilizer, they still are in the process of board review for this transaction and so I think your surmise is very much correct. They think that's achievable, but they are not in a position to provide kind of formal guidance at this point. And so, they completed that entire process.

Robert Desnit – Bentley Capital

I totally understand. Crocker, can I – you may know the end to this right, is this $150 million incremental to their current business or is some of this replacing their current business so that you cannot add their current business and the $150 million?

Crocker Coulson

So I think we should get that clarified by Ms. Guo. So, Jenny [ph] did they expect that they will be able to preserve the entire existing chemical revenues and based the ad listing business on top or is there some overlap in loss?

Anhui Guo

(Foreign Language)

(Interpreted) The 150 million is really like revenue generated by Jinan Fertilizer which does not include a current chemical business.

Robert Desnit – Bentley Capital

That answers it. Thank you very much.

Crocker Coulson

Thanks so much

Operator

Your next question comes from the line of Ping Lu [ph] from Global Hana Securities [ph]. You may proceed.

Ping Lu – Global Hana Securities

Good morning. Congratulations. Very, very strong quarter. My question I just want to follow-up with the coal-based chemical business. I understand that you're going to relocate this business at end of October. I want to know how will that visibly what kind of business disruption will be incurred due to that relocation? Is any – how much revenue could be lost at the time?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) The government has given a notice to –for the company that – for the company to actually to close down their chemical business in Tai'an City on October 31st. So if the acquisition is completed before the date, then the company will be able to move some of these equipments to Jinan Fertilizer which is will be like process in which they are doing. So, it is basically that the company will be like relocating – relocating probably at the same time to the Jinan Fertilizer and once the relocation is complete, the Tai'an chemical will be closed down. And right now they are not able to actually – the impact their costs of this relocation and they are still in the process of assessment. So, the company is currently not able to actually disclose – not able to disclose this number yet.

Ping Lu – Global Hana Securities

And for the next question. You talked about in the second quarter you – actually for the coal-based chemical business actually increased, your ASPs that's why you have (inaudible) quarter, I just want to know basically in your findings you also – are you talking about a government putting price cap on the fertilizer products in order to protect funds? So I just want to know with that pricing cap, how can you what latitude it will have to increase your ASP? And also please comment on the pricing trend for the coal-based chemical products?

Anhui Guo

(Foreign Language)

(Interpreted) The prices done by the government is not like a definite action. Although this action might protect the farmers, the companies, but technically, the farmers actually are getting richer as their products are increasing the price, and because their raw material price increase, so, the company sees that the average selling price of their fertilizers will actually increase instead of like have like a price ceiling done by the government.

Ping Lu – Global Hana Securities

Thank you. My last question do you really (inaudible) slow season touch on the 29, but this is slow quarter, looking at '06, '07, the Q2 always the lowest number compared to other quarters, but obviously, this quarter had a very strong (inaudible) and I think also particularly, (inaudible) I want to ask is this one exceptional good quarter? Or does this also still represent the seasonality which means, Q3 and Q4 might be much higher than the Q2?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) Because this year the government has allowed restrictions in terms of the (inaudible) fertilizer provide a – manufacturers in China had been shut down. Therefore, ShengdaTech would able to sell higher volume of chemical product this quarter compared to the previous years and as the price of the similar product is quite like, is quite unstable, pretty much like a market-oriented. Therefore, the company is very difficult to actually predict the sales, the revenue for Q3 and Q4. The company actually thinks that the quarter three and quarter four we have a stable – stabilized quarter comparing to the second quarter.

Ping Lu – Global Hana Securities

Thank you very much.

Operator

Your next question comes from the line of David Dooley [ph] from Merrill Lynch. You may proceed.

David Dooley – Merrill Lynch

Thank you. Congratulations on a nice quarter. I have a couple of questions. First, just real simple clarification question. What should the tax rate for Q3 and Q4 in 2009?

Anhui Guo

(Foreign Language)

(Interpreted) For both 2008 and 2009 the income tax is 16.5%.

David Dooley – Merrill Lynch

And maybe I missed in the press release, but could you tell us how – what – how many tons were shipped in the chemical business? I think it talks about revenue, and doesn't talk about tonnage?

Anhui Guo

(Foreign Language)

(Interpreted) Because the chemical products have different products and there no every single product is a measure with the same measurement, so they don't really count the chemical – the single product by volumes, they count by the revenue that the chemical business generate.

David Dooley – Merrill Lynch

And when we look out into Q3, could we—

Crocker Coulson

Sorry, I just – before your next question, just to clarify on the tax rate. The two current facilities are at 16.5% taxable rate. The facility in Zibo is expected to – which should come on second half of 2009. It's expected to be a 20% and then for the first two years and then 22.5% for the volume tonnage.

David Dooley – Merrill Lynch

So second half of '09 you may have a slightly higher tax rate—

Crocker Coulson

Yes quietly as that facility ramps up.

Anhui Guo

For '08 and '09 we should probably just use 16.5, once that facility ramps up then we will bump it up a little bit later.

Crocker Coulson

I think, I don't know it maybe too early to predict tax rate on the Jinan at this point.

David Dooley – Merrill Lynch

So what I was asking – was about to ask is when we look at the tonnage output or tonnage shipped in Q3, it sounds like your commentary on the utilization rates and NPCC is that we're going to have a slight uptick in tonnage shipped in the NPCC business probably 5,000 or 6,000 tons? And then in the chemical business what can we expect as far as output goes in Q3?

Anhui Guo

(Foreign Language)

(Interpreted) (inaudible) about the revenue generated by the chemical business for this quarter three?

David Dooley – Merrill Lynch

Yes. I started to asking about the number of tons you shipped in Q3 in both NPCC and chemicals that will give us an idea as to what the revenue will be in that time frame.

Anhui Guo

(Foreign Language)

(Interpreted) In terms of the NPCC the 130 tons of production line will actually – is actually at full capacity during the second quarter and the 60,000 tons which is the new production line of your Shaanxi. It was actually a 70% of capacity. And this is expected to achieve the full capacity in August. So, in terms of like the volume, I mean the tons, the volume achieved for the third quarter is probably like adding a little bit more to the second quarter since the 60,000 tons of NPCC would be at full capacity.

David Dooley – Merrill Lynch

Yes. I would ask for 5,000 tons.

Anhui Guo

(Foreign Language)

(Interpreted) They predicted NPCC production by like tons for the third quarter would be like about 47,000 tons per quarter which is a bit more than the second quarter.

David Dooley – Merrill Lynch

No, I think that (inaudible) pretty clear from your utilization rate, say, – I am trying to understand what do you think will happen on the chemical side of the business?

Crocker Coulson

Let me try and answer the question you can see if Ms. Guo agrees. During the third quarter, we have two big moving parts. One is potentially beginning some of the – I should say during the second half we have two big moving parts. One is the relocation of the existing chemical facility, and the management said that they believe there will be some disruption associated with that, but they are doing their best to make sure it's minimal. And the second is the – what they expect will be the closing of the Jinan acquisition, but they do not yet are able to predict exactly when that will be and if they not received – they have not completed the process yet on audit and board approval. So I think with those two pieces, they are not in a position to provide you with a very tight forecast on the chemical side of the business. And that's why for now, the company has taken the position that we don't see any reason to change our initial full year guidance, but we are not yet in a position to have all the facts to provide a update to it either.

Anhui Guo

(Foreign Language)

(Interpreted) Yes. Ms. Guo agrees with Crocker that they are not able to really provide very detailed information on the chemical products and output

David Dooley – Merrill Lynch

Let me ask a different question. If you weren't having to move your facility, just to assume, that you didn't have to move your facility what is the demand picture look like in the chemical business? If you weren't moving your facility would tonnage shipped be up or down?

Anhui Guo

(Foreign Language)

(Interpreted) Ms. Guo saying that the volume would definitely increase.

David Dooley – Merrill Lynch

Thank you. I have one final clarification on Jinan. And I just want to make sure I understand this. It sounds like the – what is the monthly run rate of Jinan's business now? And in order to make it as profitable as yours, it sounds like you have to lower operating expenses, is that thee right way to think about it?

Crocker Coulson

Go ahead and answer his question. I will take the first part and answer it.

Anhui Guo

(Foreign Language) Are you talking about run rate – about the capacity?

Crocker Coulson

No, he is asking for the run rate revenues. And again, we have to say that right now, they are in the middle of completing the audit, they are preparing all the materials to – for review by the board, and so, they are not able to give you sort of accurate or current financial in terms of monthly run rate. We can't say that historically, the company has operated something like 40% of capacity so obviously, significantly below its potential and as you heard earlier the management based on now, month and half of experience or two months in place and it feels very optimistic about the ability to achieve the targeted utilization within a relatively short period of time.

David Dooley – Merrill Lynch

So what you are saying is it's not doing anywhere close to $100 million of revenue at this point? And in order—

Crocker Coulson

The capacity is approximately $150 million – and yes, you're right. They are not doing – they are not – we are not close to that prior to Shengda Group beginning to manage it.

David Dooley – Merrill Lynch

So I just want to summarize kind of what I heard here is that we can do – you think you can do $150 million in the chemical business, $100 million from Jinan, but at this point, it's not doing anywhere close to that revenue run rate (inaudible) find the customers in order to achieve that run rate from that business, it's not doing it now.

Crocker Coulson

Again, the run rate for Jinan is about $150 million or is it three times existing chemical business and – why don't you get Ms. Guo's perspective on what steps they would need to take to meet the potential full utilization on that facility?

Anhui Guo

(Foreign Language)

(Interpreted) Just to give you like a rough number of the current capacity, the highest historical revenue that the company – that the Jinan Fertilizer was able to achieve was about US$63 million and the production capacity that they achieved to about 40%, so the company will be able to turn around a table and that they have – they do have a plan and the current plan is that the Shengda Group will like signed acquisition contract with the government have taken over all the liabilities from Jinan Fertilizer. And then after like they start partly assessment – the ShengdaTech, we purchased Jinan Fertilizer asset from the Shengda Group at a price which is no higher than quite acquired – than the acquired price. And after the acquisition is completed the company plans to leverage their expertise on converting like the state-owned enterprise to profitable and efficient operations with a proper like human resource management, technological improvement. So it's really like – they will make like a series of reforms in the price management and improving their working conditions, efficiency and effectiveness and ensure pretty much enterprise like running at full capacity and because also Jinan Fertilizer is one that elected 12 biggest nitrogen manufacturer in China, so which gives a company like the advantage of to have like a very fully acquired their production facility and very like talented employees and their great pace of improvement in the production line and the process – and the processing technology. So they do believe that Jinan Fertilizer has like a very promising future and also because the Jinan Fertilizer is located in the city – in the capitols city of Shandong Province which gives access to railway, and order like public transportation, so, like after ShengdaTech acquired Jinan Fertilizer, they do think they will be able to achieve like full capacity in a very short time.

David Dooley – Merrill Lynch

Thank you.

Anhui Guo

Thank you.

Operator

Our next question comes from the line of Craig Allen [ph], a private investor. You may proceed.

Craig Allen

Congratulations on another fine quarter.

Crocker Coulson

Thank you.

Craig Allen

I want to ask you last quarter you mentioned about the asphalt that you (inaudible) for the formulation for asphalt application for various – you said you had lot of pavee [ph] going on in China to other parts of the country, how are we doing that right now?

Anhui Guo

(Foreign Language)

(Interpreted) The company's currently feel on their R&D process, the detecting process, with the special client, and they are hoping to in the third quarter they will be able to have new results during the third quarter.

Craig Allen

So in other words, we expect to have risen in the production by then or the formulation by the third quarter?

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) During the third quarter the company hopes to actually to gain to the production of asphalt.

Craig Allen

Great. Next question. In this product, being you're working with asphalt, can this also be applied to asphalt shingles?

Anhui Guo

(Foreign Language)

Craig Allen

Shingles stuff, for the top of roofing material

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) It's obviously able to be used for the asphalt that you mentioned, but they think the asphalt they are used to afford the pabbing [ph] is quite more promising and as these products have more like as higher in NPCC requirements and so forth.

Craig Allen

Few quarters ago, you mentioned that you were working with varsities in California, if I remember correctly. You're trying to come up with a formulation for NPCC and making paper out of the product which will be quite revolutionary, where we are with that?

Crocker Coulson

Operator, this will be our last question.

Anhui Guo

(Foreign Language) are you talking about university in California?

Craig Allen

Yes. You're working on – with them and coming up some sort of making NPCC turn into paper, if I understood you correctly in a few quarters ago.

Anhui Guo

Do you mean NPCC as a similar for the paper?

Craig Allen

Yes, some along those lines.

Anhui Guo

(Foreign Language)

Unidentified Company Speaker

(Foreign Language)

(Interpreted) We are – it's actually a paper manufacture in Canada, and we are currently in the – doing like a very beginning process. So, we have a reason send some post to them and we are hoping to address the testing process with them, probably July or August or so.

Craig Allen

I have a quick follow-up on that. Going back to the undercoating, what is that undercoating, is it exactly – does that go under the car or when you say undercoating, is it what we think about we're hearing nice phases of primer that goes under the paint?

Anhui Guo

(Foreign Language) It's automobile undercoating which goes under the car and the paint and the NPCC actually goes inside the tank for that. I mean the NPCC starts filler, so it makes with the thing that goes –

Craig Allen

So you are actually putting – you are actually mixing it to the automobile paint as well?

Crocker Coulson

Into the paint. So, operator, I'm afraid we have now run out of the time that we had allocated for today's call. So I think we are going to have to bring the Q&A to close. But again, if anyone has any additional questions they like to explore with the management we are happy to take your calls on offline and again, the company does plan on holding annual shareholders meeting and analyst day in mid-September New York and we hope that many of you will be able to attend that event. So with that I thank you for your participation and this does conclude our review of the second quarter results for ShengdaTech. Thank you.

Operator

Everyone have a wonderful 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!