Gushan Environmental Energy Limited (GU)

Q2 2010 Earnings Call

August 18, 2010 8:30 AM ET

Executives

Wilson Kwong – President

Frank Chan – Principal Financial Officer

Analysts

Robert Lahey – Ardour Capital

Presentation

Operator

Good morning. And thank you for participating in the Second 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 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 second 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 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 second quarter results.

As with the past several quarters, the challenging operating environment and continued uncertainty over the consumption tax issue negatively impacted Gushan’s results for the second quarter of 2010.

Total revenues for the quarter dropped 64.8% year-to-year and 16.6% quarter-on-quarter to $8.9 million. The revenue decline was mainly the result of a drop in the sales volume of both biodiesel and biodiesel by-products.

Sales volume of biodiesel was down 68% year-to-year and 17.5% quarter-on-quarter to 12,833 tons. Sales volume declined because production remained suspended at our Fujian plant due to the consumption tax issue and because production was suspended at our Shanghai plant beginning in April of this year due to environmental restrictions imposed by Shanghai municipal government for the Shanghai Expo of 2010.

We are continuing to see a slow recovery in diesel prices as conditions in China’s refine oil market continue to improve. Average selling prices of our biodiesel products rose 12.1% year-to-year from the second quarter of 2009 and 2% sequentially from the first quarter of 2010.

Unfortunately, those price increases were more than offset by higher raw material costs. The average unit costs for our raw material feedstock rose 41.6% year-to-year and 12.6% quarter-on-quarter in the second quarter of 2010, reflecting general costs inflation in China and higher costs faced by our client.

Overall, costs of revenues dropped 64% year-to-year and 11.8% quarter-on-quarter to $13.8 million in the second quarter. This included a provision of $0.6 million made for potential consumption tax liability for the second quarter of 2010. Excluding the provision, our costs of revenues dropped 50.3% year-to-year and 11.8% quarter-on-quarter.

As a result, we reported an operating loss of $16.6 million and a negative gross margin of 55.8% of which 6.4% was attributable to the provision for consumption tax. This compares to negative gross margin of 47.2% of which 6% was attributably devoted to consumption tax provision during the first quarter of 2010, and 52.3% of which 46.4% was attributable to consumption tax provision for the second quarter of 2009.

The deterioration in margins reflect both higher raw material costs relative to selling prices and fixed production costs spread over a lower production volume, as well as the provision for consumption tax.

We reported a net loss of $16 million for the second quarter, representing a basic and diluted loss per ADS of $0.192. Just like the difficult quarter, we have maintained cash on hand of $73 million and have no bank borrowings as of the end of the second quarter of 2010.

As of the end of the second quarter of 2010, Gushan’s annual biodiesel production capacity was 450,000 tons or 135 million gallons, which will rise to 490,000 tons, which is 147 million gallons by the end of 2010, with the completion of the new plant in Fujian under relocation of our existing Fujian production lines there.

As our results indicate, much of that production capacity is not currently being used, production at our Fujian plant remain suspended indefinitely because of the consumption tax issue. For the same reason we have not commenced production at our completed Chongqing and Hunan plants.

Production at our Shanghai plant was suspended in April of this year to comply with municipal restrictions during the 2010 Shanghai Expo. We expect production to remain suspended at Shanghai until October 31, 2010.

More recently on August 1st, this year, we suspended production at Sichuan Gushan in preparation for the relocation of all its production to our new larger plant, which will have an annual production capacity of 1000 tons.

We expect to commence production at our relocated production line in Sichuan in the fourth quarter of this year and in order to prudently manage our cash flow in the current operating conditions. We’ll delay bringing the new capacity totaling 50,000 tons online in Sichuan until the end of this year.

The consumption tax this year as well as a difficult operating environment continues to weigh heavily on our results. The situation with regards to the consumption tax issue remains unchanged from our last earnings call.

We’re still awaiting a determination by the PRC State Administration of Taxation on whether biodiesel products without petroleum-based diesel content are exempted from the consumption tax. We will of course provide you with an update as soon as we receive a determination.

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