General Steel Forging Ahead Despite Challenging Macro Environment
08/08/2013 - General Steel Holdings, Inc., a leading non-state-owned steel producer in China, announced its results for the first quarter which was marked by a challenging macro environment.
"We are very pleased the first quarter marked significant milestones in our returning to profitability and quarterly reporting," said Henry Yu, chairman and chief executive officer of General Steel. "Despite the challenging macro environment, we were able to forge ahead with our strategies and operations, as we increased shipment, gained market share in our key market in Western China, improved internal purchasing, and won additional credit support from our suppliers."
"During the first quarter, we also began construction of an additional continuous advanced-rebar rolling production line with capacity of 1.2 million metric tons scheduled to commence production in the fourth quarter of 2013. This is in addition to our newly-completed 900,000 seismic-grade rebar-rolling production line that had already started trial productions in July. We believe the expanded capacity will further lower our production costs, thereby further improve our bottom line and market competitiveness in the second half of 2013."
First Quarter 2013 Financial Information
- Sales increased by 0.5% year-over-year to US$651.3 million, from US$648.0 million in the first quarter of 2012.
- Sales volume increased by 11.0% year-over-year to approximately 1.3 million metric tons, compared with 1.2 million metric tons in the first quarter of 2012.
- Gross profit totaled US$4.1 million, or 0.6% of revenue, compared with US$5.6 million, or 0.9% of revenue in the first quarter of 2012.
- Operating income turned positive to US$37.0 million, compared with an operating loss of US$(13.0) million in the first quarter of 2012.
- Net income attributable to the company was US$3.1 million, or US$0.06 per diluted share, compared with a net loss of US$(34.8) million, or US$(0.63) per diluted share in the first quarter of 2012.
- Operating cash inflow improved to US$3.9 million, compared with a net outflow of US$(167.0) million in the first quarter of 2012.
- As of 31 March 2013, the company had cash and restricted cash of US$336.0 million.
John Chen, chief financial officer of General Steel, commented, "The profitable financial results in the first quarter is a solid start for the new year, as we continued to grow sales, drive operational efficiencies, and lower finance expenses. Benefiting from a year-over-year improvement of nearly 600 basis points in our net margin and disciplined cash management, we were able to generate positive operating cash flow during the quarter. We anticipate a notable improvement in our overall gross margin in the second half of 2013, as our newly added rolling line will reduce unit production cost by up to approximately RMB 70 per metric ton, and as such, we feel confident that we can further build on the momentum achieved in the first quarter and generate healthy profits and cash flows in the second half of this year."
First Quarter 2013 Financial and Operating Results
Total Sales
Total sales for the first quarter of 2013 increased 0.5% year-over-year to US$651.3 million, compared with US$648.0 million in the first quarter of 2012. The year-over-year revenue increases were primarily attributable to increased sales volume, partially offset by a decrease in the average selling price of rebar.
- Total sales volume in the first quarter of 2013 was 1.3 million metric tons, an increase of 11.0% compared with 1.2 million metric tons in the first quarter of 2012.
- The average selling price of rebar decreased 12.5% to approximately US$515.3 in the first quarter of 2013 from approximately US$588.7 in the same period of 2012.
Gross Profit and Gross Margin
Gross profit for the quarter totaled US$4.1 million, compared with US$5.6 million in the first quarter of 2012. The decrease in gross profit was mainly attributable to a steeper decrease in average selling price, with the gross margin decreased to 0.6% of total sales in the first quarter of 2013, compared with 0.9% the same period a year ago.
Operating Expenses and Operating Income
Selling, general and administrative expenses for the first quarter of 2013 increased 1.7% to US$19.0 million, compared to US$18.6 million in the first quarter of 2012. General and administrative expenses increased to US$10.9 million, compared with US$9.7 million in the same period of 2012, due to increased expense in human resources and higher facility maintenance expense. Selling expenses decreased by 9.6% to US$8.1 million, compared to US$8.9 million in the same period of 2012. The decrease in selling expense was primary attributable to a savings in a special fund related to the sales of our products, which was no long imposed by the PRC tax authorities in 2013, while US$1.3 million of the special fund was imposed in the first quarter of 2012.
The company recognized other operating income of US$51.9 million due to change in the fair value of profit sharing liability during the first quarter of 2013, compared with US$0 in the same period of last year. On April 29, 2011, the company's subsidiary, Longmen Joint Venture entered into a capital lease agreement with Shaanxi Steel and Shaanxi Coal for the use of new equipment. The profit sharing liability is recognized initially at its estimated fair value at the lease commencement date, and the value of the profit sharing liability is reassessed each reporting period with any change in fair value accounted for on a prospective basis. As such, and in consideration of the recent changes inChina economic situation, the fair value of the company's profit sharing liability has been reduced as compared to its previous estimates, and the company recognized a gain of US$51.9 million accordingly.
Correspondingly, income from operations for the first quarter of 2013 totaled US$37.0 million, compared with a loss from operations of US$(13.0) million in the first quarter of 2012.
Finance Expense
Finance and interest expense in the first quarter of 2013 was US$30.0 million, of which, US$10.2 million was the non-cash interest expense on capital lease as compared with US$10.8 million in the same period of 2012, and US$19.8 million was the interest expense on bank loans and discounted note receivables as compared with US$37.5 million in the first quarter of 2012. The decrease in interest expense on bank loans and discounted note receivables was primarily attributable to less bank loans, benefiting from positive operating cash flow and financing support from suppliers during the first quarter of 2013.
Net Income and Net Income per Share
Net income attributable to General Steel for the first quarter of 2013 was US$3.1 million, or US$0.06 per diluted share, based on 54.8 million weighted average shares outstanding. This compares to a net loss of US$(34.8) million, or US$(0.63) per diluted share, based on 55.5 million weighted average shares outstanding in the first quarter of 2012.
Balance Sheet
As of 31 March 2013, the company had cash and restricted cash of approximately US$336.0 million, compared to US$369.9 million as of 31 December 2012. The company had an inventory balance of approximately US$247.9 million as of 31 March 2013, compared to US$212.7 million as of 31 December 2012. As of 31 March 2013, the company had total liabilities of approximately US$2.9 billion.
Outlook
"Looking ahead, we will continue to execute on our strategy to further upgrade our production capabilities, improve operating efficiencies and further strengthen our competitiveness in Western China. In addition, we will also explore other strategic opportunities to expand our scale and scope in the steel industry. Lastly, we intend to pursue other strategies and initiatives to enhance shareholder value, which may include restarting our share repurchase program. We aim to enhance shareholders' wealth, and we would like to thank our shareholders for their continued support," Mr. Yu concluded.
