Gushan Environmental Energy Limited (GU)

Q4 2010 Earnings Call Transcript

March 30, 2011 8:30 am ET

Executives

Wilson Kwong – President

Frank Chan – Principal Financial Officer

Analysts

JinMing Liu – Ardour Capital Investments

Presentation

Operator

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Good morning, and thank you for participating in the fourth quarter and fiscal year 2010 earnings conference call of Gushan Environmental Energy. At this time all participants are in a listen-only mode. After the call, we will conduct a question-and-answer section. Today's conference is being recorded. I would now like to turn the call over to Mr. Wilson Kwong, President of Gushan Environmental Energy. Please proceed sir.

Wilson Kwong

Good morning, ladies and gentlemen, and welcome to Gushan’s fourth quarter 2010 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 the Safe Harbor Provisions of US Federal Securities laws. Please also see today’s press release under the section Safe Harbor statement for a discussion of risk and uncertainties that may affect our results. Before opening the call to questions, I would like to briefly review our fourth-quarter and full-year 2010 results.

Gushan reported strong revenue growth and a return to profitability in the fourth quarter of 2010. The improvement is attributable to the impact of the company's acquisition in November 2010 of a majority stake in Mianyang Jin Xin Copper Limited, which operates the recycled copper product business. Gushan acquired Jin Xin as part of its ongoing efforts to diversify into related environmental and energy businesses. As a result, total revenues for the quarter rose 223.9% year-to-year and 463.4% quarter-on-quarter to 35.4 million.

For the full year, total revenues declined 35.1% to 61.8 million. Contribution from Jin Xin accounted for the entire growth in fourth-quarter revenue, and because the Jin Xin acquisition closed in the fourth quarter, its revenue contribution was not sufficient to offset the full-year decline in revenue in the company's biodiesel business.

Fourth-quarter revenues from the company’s biodiesel business declined 59.2% year-to-year and 29.1% quarter-on-quarter to $4.5 million. For the full year, biodiesel revenues totaled $30.8 million, a decrease of 67.6% from 2009. Biodiesel sales volume in the fourth quarter was down 63.8% year-over-year, and 32.6 quarter-on-quarter to 5635 tons. For the full year, biodiesel sales volume decreased 70.5% to 42,391 tons.

The declines in biodiesel revenues in sales volume were attributable to two main factors. Firstly, the company temporarily suspended operations at its Shanghai plant and Sichuan plants in April and August 2010 respectively. Production was suspended at Shanghai because of heightened enforcement of control measures relating to poisonous hazardous and flammable chemicals adopted by the Shanghai Municipal Government in conjunction with the hosting of 2010 Expo in Shanghai from May through October 2010.

The company extended the suspension of production at Shanghai because of an ongoing lawsuit filed against the company by a construction contractor. Production at Sichuan was suspended, while production lines were relocated to the company's new plant in Sichuan. Production at both Shanghai and Sichuan is expected to resume in the second quarter of 2011. The second reason for the drop in sales volume was our strategic decision to shift our primary sales channel away from the refined diesel market to the chemical industry in response to uncertainty over the consumption tax issue.

Even though the proportion of biodiesel sales going into the chemical industry rose from 24.1% of total volume of biodiesel sold in 2009 to 67.9% in 2010, sales volume dropped because of the smaller size of our chemical industry customer base relative to the refined oil market. Biodiesel prices continued to improve in the quarter and for the full year. For the fourth quarter, the average selling price of our biodiesel products rose 12.9% year-over-year and 3.5% quarter-on-quarter to 4835 RMB/ton. For the full year, our average biodiesel selling price rose 11.5% to 4505 RMB/ton, reflecting the improvement in both world oil prices and a gradual increase in diesel demand in China.

Cost of revenues increased 107.1% year-to-year, and 230.3% quarter-to-quarter to 32.7 million, largely reflecting the impact of Jin Xin, which accounted for 29 million of those costs. Cost of revenue for the biodiesel business totaled 3.7 million in the fourth quarter, including a reversal of 1.6 million of consumption tax provisions made in the first three quarters of 2010. Reversal of consumption tax provisions made in 2009 totaling 15.7 million was reported at other operating income.

The consumption tax provisions were reversed after the PRC State Administration of Taxation issued a formal notice, which clarified that subject to fulfillment of certain conditions pure biodiesel made from waste animal fat or used vegetable oil is exempt from consumption tax. Excluding the reversal of consumption tax provision, cost of revenues for the biodiesel business dropped 64.6% year-over-year and 44.2% quarter-on-quarter in the fourth quarter of 2010.

For the fourth quarter of 2010, the average unit cost for our raw material feedstocks rose 30.8% year-on-year and decreased 0.67% quarter-on-quarter to 3981 RMB/ton. For the full year, our overall average unit cost of raw materials increased 35.6% to 3573 RMB/ton. For the fourth quarter of this year – of last year, the company reported gross profit of 2.7 million of which $0.7 million was attributable to the biodiesel business and the remainder to the recycled copper product business.

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