Gushan Environmental Energy Limited (GU)

Q1 2010 Earnings Call

May 18, 2010 8:30 am ET

Executives

Wilson Kwong – President

Analysts

JinMing Liu – Ardour Capital

Presentation

Operator

Good morning and thank you for participating in the first quarter 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 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 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 the 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 first quarter 2010 results. Like the previous quarter, Gushan’s results in the first quarter were significantly impacted by continued uncertainty over potential consumption tax liability and a challenging operating environment. Total revenues for the quarter dropped 73.5% year-to-year, but remains stable quarter-on-quarter at $10.6 million. The year-to-year drop in revenue for the first quarter was largely attributable to the drop in sales volume of our biodiesel and biodiesel by-products and to a drop in average selling prices of our biodiesel by-products.

The drop in sales volume largely reflects two factors, firstly, the suspension of production at our Fujian plant where production stopped at the beginning in April of ’09 because of road work and remained suspended because of a continued uncertainty over consumption tax liabilities. As a result, production at the Fujian plant is down 100% on a year-to-year basis.

Secondly, we continue to shift our primary sales channel away from the refined diesel market to the chemical industry where sales are not subject to the consumption tax. Sales to the chemical industry accounted for 70.5% of biodiesel sales in the first quarter of 2010, up from 13.2% in the first quarter of 2009. Biodiesel prices continue to rebound during the quarter. Year-to-year, average selling price of our biodiesel products rose 8.7% from Q1 of ’09 and 1.6% quarter-on-quarter from the fourth quarter of ’09, reflecting continued recovery in Chinese refined oil market, in line with the pickup in economic activity.

The average selling price for our biodiesel by-products declined slightly on both year-to-year and quarter-on-quarter basis, largely as a result of the change in composition of sales volume of the individual biodiesel by-products. Cost of revenues for the first quarter dropped 56.6% year-to-year and increased 2% quarter-on-quarter to $15.6 million. These costs included a provision of $0.6 million for potential consumption tax liability for the quarter.

The average unit costs for our raw material feedstock rose 31.6% year-on-year, and 5.1% quarter-on-quarter to RMB 3,197 per ton in the first quarter of 2010. The rise in raw material costs reflected general cost inflation pressures particularly with regards to labor and transportation. As a result, the company reported gross loss of $5 million for the first quarter and a negative gross margin of 47.2%, of which 6% was attributable to the provision of consumption tax.

In comparison, the company reported a negative gross margin of 44.4% in the fourth quarter of ’09, of which 7% was attributable to a provision for consumption tax and a gross profit margin of 10.2% in the first quarter of 2009. The decrease in gross margin was mainly due to higher average raw material unit costs. We reported a net loss of $9.2 million for the first quarter of ’10, representing a basic and diluted loss per ADS of $0.11. Despite the difficult quarter and year, our balance sheet remains strong with cash on hand of $78.2 million and no bank borrowings as of the end of March 2010.

As at the end of the first quarter of this year, Gushan’s annual biodiesel production capacity was 450,000 tons or 135 million gallons, which will rise to 500,000 tons, which is 150 million gallons by the end of the first half of 2010, with the completion of the new second plant in Sichuan with an annual production capacity of 50,000 tons. Beyond that, the company has no plans to expand production capacity further, given the slow recovery in demand in prices for diesel in China and the uncertain consumption tax issue.

The consumption tax issue as well as the difficult operating environment continued to weigh heavily on a negatively impacted company’s results. The situation with regards to the consumption tax issue remains unchanged from our last earnings call. The PRC State Administration of Taxation have still not yet provided us with a decision on whether biodiesel products without petroleum-based diesel content are exempt from the consumption tax.

As a result, production remains suspended at our Fujian plant and we have not commenced production at our completed Chongqing and Hunan plant pending clarification of the consumption tax issues by the PRC State Administration of Taxation. We will of course provide you with an update as soon as we receive a determination.

Results for the second and third quarter of this year are likely to be negatively impacted by the suspension of production at our Shanghai plant. Production was suspended on April 15 th this year and it’s expected to remain suspended until October 31 st of this year because of more stringent control measures on various chemicals ordered by the Shanghai municipal government in preparation for the Shanghai 2010 Expo.

Read the rest of this transcript for free on seekingalpha.com