China Gerui Advanced Materials Group Announces Second Quarter 2012 Results
08/15/2012 - China Gerui Advanced Materials Group Limited, a high precision cold rolled steel producer in China, achieved reasonable revenue and cash flow generation in the second quarter despite a weak pricing environment and challenging domestic market conditions.
China Gerui Advanced Materials Group Limited, a leading high precision cold rolled steel producer in China, announced unaudited financial results for the three and six months ended 30 June 2012.
"We achieved reasonable revenue and cash flow generation in the second quarter of the year despite a very weak pricing environment and challenging domestic market conditions," said Mingwang Lu, Chairman and CEO. "Our second quarter saw further utilization of our 250,000 tons of chromium-plating capacity, and a steady ramp-up of production from our recently added highly specialized cold-rolled steel capacity."
"We will closely monitor the macroeconomic conditions in China and seek to diversify our customer base by exploring new export markets as well as by enriching our product base and expanding the range of our end-use products and materials," Lu continued. "We believe that the adoption of a wider customer base fits our strategy of being a high-end global steel producer and enables us to fully optimize our new capacity and specialized value-added capabilities."
Second Quarter 2012 Results
Revenue decreased 10.8% to $76.8 million in the second quarter of 2012 from $86.1 million in the second quarter of 2011. The decrease in revenue was primarily due to an, 18.2% decrease in the company's average selling price of $821 per ton for the second quarter of 2012 as compared to an average selling price of $1,004 for the same period of 2011 partially offset by a 9.2% increase in sales volume to approximately 93,500 tons for the second quarter of 2012 as compared to approximately 85,600 tons for the same period of 2011.
Revenue decreased 10.8% to $76.8 million in the second quarter of 2012 from $86.1 million in the second quarter of 2011. The decrease in revenue was primarily due to an, 18.2% decrease in the company's average selling price of $821 per ton for the second quarter of 2012 as compared to an average selling price of $1,004 for the same period of 2011 partially offset by a 9.2% increase in sales volume to approximately 93,500 tons for the second quarter of 2012 as compared to approximately 85,600 tons for the same period of 2011.
Gross profit decreased 16.0% to $19.8 million in the second quarter of 2012 from $23.6 million in the same period of 2011. Gross margin was 25.8% in the second quarter of 2012 compared to 27.4% in the same period of 2011. The decrease in gross margin was due to market driven price declines and an associated profit margin contraction as China's economic growth continued to slow in 2012, as well as the testing associated with the continued ramp-up and improved precision production of the added 100,000-ton wide-strip production line.
Operating income decreased 19.5% to $16.8 million in the second quarter of 2012, or 21.9% of revenue, from operating income of $20.8 million, or 24.2% of revenue, in the same period of 2011. The decrease in operating income in the second quarter 2012 as compared to operating income in the comparable year-ago period is primarily due to the corresponding decrease in gross profit and relatively higher operating expenses as a percent of revenue in the second quarter of 2012 compared to the same period of 2011.
Net income was $10.3 million in the second quarter of 2012 compared to $14.0 million in the same period of 2011.
Business Update
In the second quarter of 2012, the company experienced a contraction in its average selling price relative to previous quarters as the steady deterioration of steel prices over the last twelve months have led to a decrease in the company's average selling price. The company notes that iron ore prices, from which the company's raw material of hot-rolled steel coil is derived, have steadily decreased over the last year from a spot price of $172.98 per tonne in September of 2011 to a price of $127.94 per tonne as of July 2012, a drop of 26.0%. Through various manufacturing processes, the company processes hot rolled steel coil and converts it into high precision cold-rolled wide and narrow strip steel products that is customized according to customer specifications. The currently challenging pricing environment has caused the company to offer price discounts to its customers. This, in combination with the continued testing of new wide-strip capacity coming online, resulted in a lower average selling price and a decrease in the company's gross profit margin for the second quarter.
In the second quarter of 2012, the company experienced a contraction in its average selling price relative to previous quarters as the steady deterioration of steel prices over the last twelve months have led to a decrease in the company's average selling price. The company notes that iron ore prices, from which the company's raw material of hot-rolled steel coil is derived, have steadily decreased over the last year from a spot price of $172.98 per tonne in September of 2011 to a price of $127.94 per tonne as of July 2012, a drop of 26.0%. Through various manufacturing processes, the company processes hot rolled steel coil and converts it into high precision cold-rolled wide and narrow strip steel products that is customized according to customer specifications. The currently challenging pricing environment has caused the company to offer price discounts to its customers. This, in combination with the continued testing of new wide-strip capacity coming online, resulted in a lower average selling price and a decrease in the company's gross profit margin for the second quarter.
Given current conditions, the company found it necessary to revise its guidance for the year 2012. We plan upon adapting our strategic focus so as to effectively compete in our market segment despite a macroeconomic environment reflective of slowing consumer demand, competitive industry participants and declining raw material prices. However, during the second quarter the company was able to successfully sustain its sales volume levels and we are intent upon optimizing our product mix as well as maintaining our reputation for quality products and top-notch service with both current and future customers.
In terms of the current competitive environment, growth in the Chinese economy has continued to slow which has caused large Chinese steel companies to continue to cut prices throughout the domestic steel sector. However, among the strategies that the company is deploying to address this trend, China Gerui is intent upon diversifying its revenue by proactively pursuing global market opportunities and penetrating the high-end cold-rolled steel sector worldwide. As a step in this direction, the company had announced that it began to export its high end specialized steel products to customers located in Turkey and India in the second quarter. Further, China Gerui recently announced that it received a purchase order from a leading U.S. packaging company for its high precision cold-rolled steel strip products. We note that the purchase order is for testing and trial purposes by the customer, which is a fairly standard buying procedure, and while not immediately having a material impact on operating results the company believes that the purchase order will lead to regular and continuous orders going forward. We believe that the testing of the company's new wide-strip specialized production lines has resulted in an increasing proportion of our capacity having reached its design specifications, which has improved our prospects for procuring new business domestically as well as internationally.
As previously announced, the company completed its addition of 100,000 tons of annual cold-rolled steel production capacity during the first quarter of 2012 as part of Phase II of its capacity expansion plan. The company's total production capacity now totals 500,000 tons of specialized wide- and narrow-strip cold-rolled steel, of which 400,000 tons are fully operational. The company believes that its overall utilization of its 400,000 tons of fully operational cold-rolled wide- and narrow-strip steel production capacity is approximately 83%, reflecting a gradual increase in utilization consistent with the company's quality control standards. The company's chromium-plating production lines, which can accommodate a total of 250,000 tons of either narrow-strip or wide-strip specialized steel, are fully operational as of the second quarter of 2012 and are running at a 55% utilization rate. The addition of 100,000 tons of annual cold-rolled steel capacity in the first quarter of 2012 is undergoing further testing and refinement, and this facility is expected to start normal operation in the third quarter of 2012.
"Although the rest of 2012 continues to look challenging, we are confident that our current strategies will enable us to weather current market conditions and succeed in our specialized steel segment in the long-term," Lu concluded. "We are intent upon executing upon our new initiatives so as to leverage the new capabilities and technologies that we have in place as well as those currently being developed."
