Gushan Environmental Energy Limited (GU)

Q3 2010 Earnings Call Transcript

November 29, 2010 8:30 am ET

Executives

Wilson Kwong – President

Analysts

JinMing Liu – Ardour Capital Investments

Presentation

Operator

Good morning, and thank you for participating in the third 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 conference over to Mr. Wilson Kwong, President of Gushan Environmental Energy. Please proceed.

Wilson Kwong

Good morning, ladies and gentlemen, and welcome to Gushan's third 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. Now, before opening the call to questions, I would like to briefly review our third quarter results.

Gushan’s earnings continue to be negatively impacted by a challenging operating environment and continued uncertainty over the consumption tax issue, and this is reflected in the company’s results for the third quarter of 2010. Total revenues for the quarter declined 63% year-over-year and 31.1% quarter-on-quarter to 6.2 million, due to declining sales volume of both biodiesel and by-products.

Sales volume of biodiesel was down 66.3% year-over-year and 34.8% quarter-on-quarter to 8,363 tons. Sales volume declined because production remained suspended at several of our plants including our Fujian, Chongqing and Hunan plants because of the consumption tax issue, our Shanghai plant because of environmental restrictions imposed by the Shanghai municipal government for the Shanghai Expo, and an ongoing dispute with a contractor, and our Sichuan plant where production was temporarily suspended as we relocate the production line to the site of our new plant.

During the quarter, diesel prices continued to rebound, as conditions in China’s refined oil market continued to improve. Average selling prices of our biodiesel products rose 13.7% year-over-year from the third quarter of 2009 and 5.2% sequentially from the second quarter of 2010. However, increases in our raw material costs continue to outpace the rebound in diesel prices. The average unit costs for our raw material feedstock rose 34.9% year-on-year and 11.3% quarter-to-quarter in the third quarter, reflecting a general cost inflation in China and higher costs faced by our suppliers.

Overall, cost of revenues dropped 58.3% year-on-year and 30.3% quarter-to-quarter to 9.8 million in the third quarter. This included a provision of 0.4 million made for potential consumption tax liability for the third quarter. Excluding the provision, our cost of revenues dropped 54.3% year-on-year and 30% quarter-to-quarter.

As a result, the company reported a gross loss of 3.6 million and a negative gross margin of 57.5%, of which 5.9% was attributable to the provision for consumption tax. This compares to negative gross margin of 55.8%, of which 6.4% was attributable to consumption tax during the second quarter of 2010, and a negative 39.8% of which 17.2% was attributable to consumption tax provision for the third quarter of 2009.

The deterioration in margins reflected both higher raw material costs relative to selling prices and fixed production cost spread over lower production volume. During the quarter, the company recognized an impairment loss of 142.1 million in property, plant and equipment to reflect the fair value of those assets in light of a persistently weak operating environment, the unresolved consumption tax issue and the increase in raw material costs over the past several quarters.

As a result, we reported a net loss of 149.3 million for the third quarter, representing a basic and diluted loss per ADS of $8.95. Please note that the value to the loss per ADS for the third quarter reflects on a pro forma basis the ADS ratio change which increased the number of ordinary shares represented by each ADS from two to 10.

The ADS ratio change which became effective on November 12 th, 2010 is intended to restore the company’s compliance with the New York Stock Exchange’ continued listing standard. Despite a difficult quarter, our balance sheet remains sound with cash on hand of 65.6 million and no bank borrowings as at the end of the third quarter.

As of the end of the third quarter 2010, Gushan’s annual biodiesel production capacity was 390,000 tons or 117 million gallons, which is expected to rise to 490,000 tons, 147 million gallons by the end of 2010, with a completion of a new plant in Sichuan and relocation of existing Sichuan production there. However, as results indicate, much of that production capacity is not currently being used. At present, only two of our plants, Beijing and Hebei, with a combined annual production capacity of 130,000 tons, representing just 33% of our current capacity are in operation.

Production at our Fujian plant remains suspended because of the unresolved 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 to comply with municipal restrictions during the Shanghai Expo. Although we expect it to resume production at the Shanghai plant at the end of October, we had to defer [ph] production until the first quarter of 2011 as we seek to resolve a legal dispute with a contractor.

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