China Gerui Advanced Materials Reports Results, Offers Outlook
08/28/2013 - China Gerui Advanced Materials Group Limited, a leading high-precision cold rolled steel producer in China, announced its unaudited financial results for the three months ended 30 June 2013.
Mr. Mingwang Lu, chairman and chief executive officer of China Gerui, commented, "Second quarter results reflected the continuing weakness in demand for steel in China and the pricing pressure resulting from the overcapacity of steel production in China. Our average selling price declined by 15.7% year-over-year in the 2013 second quarter, which exceeded the reduction in our raw material prices. The highly competitive pricing environment prevented us from increasing prices, which resulted in a lower 8.2% gross margin due to lower selling prices in the second quarter of 2013 compared with the same quarter in 2012. We continue to market our steel products on their premium performance qualities, but price sensitivity has become a factor with our customers.
"However, we believe we are maintaining our market share as all production lines are in operation and we are outperforming most of our competitors. The China Iron and Steel Association reported that for the first 6 months of 2013, its members reported a revenue increase of 0.94% with an average gross margin of 0.13%. For the month of June, members of the Association reported their first monthly net loss totaling RMB699 million due to decreasing steel prices. In contrast, we achieved another quarter of positive EBITDA with more stable volumes in this challenging environment. This temporary period of oversupply has forced us to postpone using our full production capacity, and to more aggressively introduce new products, to protect our pricing structure for the future.
"We remain optimistic for our chromium-plated steel and new laminating steel lines as we are building their presence in the steel markets. New products carry higher margins that will improve our average gross margin as sales grow in the future. The company believes the utilization of its wide- and narrow-strip cold-rolled steel capacity was 46–48% in the second quarter of 2013 compared with approximately 68–72% during the first quarter of 2013. The company's utilization of its chromium-plating production lines was approximately 43% in the second quarter of 2013 compared to 62% during the first quarter of 2013.
"With these new products, we offer a greater range of cold-rolled steel products to our current customers that can compete with higher-priced imports, and we can now provide steel solutions to new customers we could not service before. Our more comprehensive steel product line differentiates us from many smaller steel producers who do not have the technology, financial resources, or customer relationships to effectively compete with us.
"Our steel volume has been stable at approximately 62,000 tons per quarter over the first half of 2013. We have avoided increasing production to prevent more aggressive pricing being necessary. We expect recent pricing concessions are reversible when the market improves. Our specialty steel products continue to receive more interest and we remain optimistic that exports will become a more meaningful growth channel. We are seeking accretive acquisitions and partnerships to become a larger, more powerful global metals processor in the future, and to generate substantial positive cash flow which will translate into greater shareholder value for our investors," Mr. Lu concluded.
Second Quarter 2013 Results
Revenue decreased 43.9% to US$43.1 million in the second quarter of 2013 from US$76.8 million in the second quarter of 2012. The decrease in revenue was primarily due to a 15.7% decrease in the company's average selling price to US$692per ton for the second quarter of 2013 as compared to an average selling price of US$821 for the second quarter of 2012 as well as a 33.2% decrease in sales volume to approximately 62,500 tons for the second quarter of 2013 as compared to approximately 93,500 tons for the same quarter of 2012.
Gross profit decreased 82.2% to US$3.5 million in the second quarter of 2013 from US$19.8 million in the same quarter of 2012. Gross margin was 8.2% in the second quarter of 2013 compared to
25.8% in the second quarter of 2012. The decrease in gross profit compared with a year ago was due to lower sales as the economic slowdown in China continued and domestic consumption declined in the second quarter of 2013. Excess capacity and reduced steel demand continued to create the intense competition and pricing pressures currently in the marketplace during the quarter.
25.8% in the second quarter of 2012. The decrease in gross profit compared with a year ago was due to lower sales as the economic slowdown in China continued and domestic consumption declined in the second quarter of 2013. Excess capacity and reduced steel demand continued to create the intense competition and pricing pressures currently in the marketplace during the quarter.
Operating income decreased 93.4% to US$1.1 million in the second quarter of 2013, from operating income of US$16.8 million for the second quarter of 2012. The decrease in operating income in the second quarter of 2013 was primarily due to an 82.2% decrease in gross profit.
Net loss was US$0.64 million in the second quarter of 2013, or nil per fully diluted share, compared to a net profit of US$10.3 million, or US$0.18 per share in the second quarter of 2012.
Non-GAAP EBITDA was US$4.0 million in the second quarter of 2013, or 9.3% of revenue, compared to US$19.6 million, or 25.6% of revenue, in the second quarter of 2012. Non-GAAP EBITDA is defined as earnings before net interest expense, taxes, depreciation, and amortization incurred in the second quarter of fiscal year 2013.
Financial Condition
As of 30 June 2013, the company had US$203.6 million in unrestricted cash, US$28.0 million in current certificates of deposit, and an additional US$169.8 million in restricted cash, as compared to US$228.9 million in unrestricted cash, US$16.4 million in current certificates of deposit and an additional US$145.4 million in restricted cash as of 31 December 2012. The company's short-term debt consisted of notes payable and term loans that totaled US$377.5 million at 30 June 2013, compared to US$317.0 million as of 31 December 2012. The company had no long-term liabilities. Shareholders' equity was US$334.4 million at 30 June 2013 as compared to US$330.1 million as of 31 December 2012. Net cash used in operating activities for the first six months ended 30 June 2013 was US$22.5 million compared with US$25.0 million of net cash flow provided during the first six months of 2012.
Recent Developments
In June 2013, China Gerui was a gold sponsor at the AMM Steel Success Strategies XXVIII Conference which had attendees from major steel and steel-related companies and associations from around the world and was a virtual who's-who of the global steel industry. Participants benefitted from a high level conference program as well as expanded networking opportunities. China Gerui's CFO, Edward Meng was a panel presenter at the conference during two sessions.
In May 2013, China Gerui engaged Cambelle-Inland LLC, a company founded by Craig T. Bouchard to advise it on strategic planning and expansion in North America and around the world. Mr. Bouchard is an investor of China Gerui and he has expertise in building steel operations, especially through acquisitions. China Gerui is seeking accretive acquisitions to increase its market share domestically and to globalize the company's operations over time.
In April 2013, China Gerui announced it had captured three international customers placing regular commercial orders for its high-end and narrow-strip steel. Two customers are located in India and one customer is located in Turkey. The products purchased were both wide- and narrow-strip high-precision, chromium-plated, cold-rolled strip steel. Total orders could reach 3,000 tons based on current order rates. Three additional potential customers are currently engaged in trials with China Gerui's specialized steel products in three other countries, including the U.S.
Since the launch of the share repurchase program in April 2011, as of 30 June 2013 the company had repurchased a total of 2,010,918 ordinary shares at an average price of US$3.06 per share for a total repurchase price of approximatelyUS$6.2 million.
2013 Financial Guidance
Given current market conditions, volatility of raw material costs and the slower than anticipated price recovery for premium processed steel, the company revised its full year 2013 revenue guidance to the range of US$165 million to US$170 million. The company may adjust such guidance as changing macroeconomic conditions and operational and competitive challenges dictate.
Industry and Business Update
"Chinese GDP growth declined further to 7.5% in the second quarter of 2013 from 7.7% in the 2013 first quarter and 7.9% in the fourth quarter of 2012 according to the National Bureau of Statistics. This slowing growth combined with excess steel production capacity is causing severe price competition in China.
"However, in the first half of 2013, total consumption of crude steel increased by 6.8% year-over-year to 364.6 million tons, but national production of crude steel rose faster at 7.4% to 389.9 million tons according to the China Iron and Steel Association. Crude steel production has recently been running at a high average daily rate of 2.15 million tons rate, which equals approximately 786 million tons for the 2013 year. Additionally, the production of iron increased by 5.7% to 357.5 million tons and steel production rose by 10.2% to 517.0 million tons. Steel inventories in China decreased during the 2013 second quarter from the first quarter of 2013, but remained at a high level and were 3.6 million tons above the amount at the end of the second quarter of 2012.
"The central government is taking actions to encourage consolidation in the steel industry to create a more balanced steel production and price environment to alleviate the current market conditions over time. Smaller steel companies or those with older technologies may be forced to merge or cease operations. China Gerui will be a beneficiary of these actions with its comprehensive product line, high-quality brand name, established market position and management capabilities.
"Continued investment in real estate and fixed assets as well as relatively steady demand from certain industries such as automotive and heavy-duty equipment, offer the prospect of stronger steel demand in China in the future. We are further positioning China Gerui to become a substantial player in the global steel industry with a much larger global customer base through our comprehensive product mix and potential future opportunistic acquisitions to further our diversification and quickly build market share. By improving our production efficiency we expect to become an even more effective competitor and benefit from the next recovery in the Chinese steel market," Mr. Lu concluded.
China Gerui Advanced Materials Group Limited is a leading niche and high value-added steel processing company in China. It produces high-end, high-precision, ultra-thin, high-strength, cold rolled steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. China Gerui's products are not standardized commodity products. Instead, they are tailored to customers' requirements and subsequently incorporated into products manufactured for various applications. The company sells its products to domestic Chinese customers, with an emerging presence in international markets, in a diverse range of industries, including the food packaging, telecommunication, electrical appliance, and construction materials industries.
