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Gushan Environmental Energy Limited (GU)

Q1 2011 Earnings Call

May 26, 2011 8:30 am ET


Wilson Kwong – President

Frank Chan – Principal Financial Officer


JinMing Liu – Ardour Capital

Dale Lio – Sage Press



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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.

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