Longhai Steel, a leading producer of high-quality steel wire in eastern China with annual capacity of 1.5 million metric tons, today provided the transcript for its second quarter 2012 earnings conference call. The entire transcript is presented below.
Operator: Good day ladies and gentlemen. Thank you for standing by. Welcome to the Longhai Steel’s Second quarter 2012 Earnings call. Joining us today for Longhai Steel’s Second quarter 2012 Earnings conference call is the Company’s Executive Vice President, Mr. Steven Ross. Mr. Ross will review and comment on financial and operational results for the second quarter 2012.
I’d like to remind our listeners that on this call, prepared remarks may contain forward-looking statements which are subject to risks and uncertainties, and that management may make additional statements in response to your questions; therefore, the Company claims the protection from the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of Longhai Steel and its subsidiaries can be identified by common use forward-looking terminology, and those statements involve unknown risks and uncertainties including all business-related risks that are more detailed in the Company’s filings on Form 10-K, 10-Q, and 8-K with the SEC.
A playback of the call will be available until 9:00 am ET on August 30, 2012. To listen, call 1-877-344-7529 within the United States or 1-412-317-0088 when calling internationally. Please use the replay pin number 10017460.
At this time, I’d like to turn the call over to Steven Ross, Executive Vice President of the Company, and he’ll provide opening remarks. Steve, the floor is yours.
Steven Ross: Good morning and thank you for joining us for Longhai Steel’s second quarter 2012 Earnings conference call. Before I discussed our results for the second quarter, I’d like to provide a brief overview of our company for investors who are new to the Longhai Steel story.
Headquartered in Xingtai, Hebei province in the People’s Republic of China, Longhai steel is a leading producer of high-quality steel wire, with annual capacity of 1.5 million metric tons. Longhai’s wires are manufactured into screws, nails, and wire mesh used for fencing and to reinforce concrete. We recently expanded our production facility to include specialized applications such as steel wire rope, steel strand, steel belted radial tires, and steel welding rod.
We are able to compete effectively against domestic steel wire manufacturers and exporters due to our advanced production equipment and process technology, high product quality, expedited production capabilities, and close proximity to distributors and end users. We recently opened a second production line, which increased our overall capacity by 67%. Equally important, the new state-of-the-art product line expands our product portfolio into higher quality steel wire for specialized applications such as steel wire rope, steel strand, steel belted radial tires, and steel welding rods.
Our growth strategy focuses on organic growth through capacity expansion, product diversification, operational efficiencies and expansion of our technical expertise. Additionally, we intend to capitalize on policies by the Chinese government to further consolidate the industry through accretive acquisitions of competitors in Hebei and surrounding provinces.
Now that you have a better understanding of our core competencies and growth strategies, I will go right into our second quarter results.
Our record second quarter results reflect strong demand for our products and continued benefits from our expanded capacity. We achieved record shipment volumes for a second consecutive quarter while our total sales volumes for the first six months of 2012 increased by approximately 13% to 538,011 MT.
Looking at the second quarter income statement items in greater detail, net revenues came in at $160.5 million, down 3% from $165.7 million a year ago. We sold 295,635 MT of steel compared to 267,938 MT in the second quarter of 2011. Higher sales volumes were offset by lower prices.
Gross profit increased 34% to $4.8 million, while gross margin increased by 90 basis points to 3.0%. We achieved higher gross margins due to an increase in the spread between still wire prices and steel billet prices. Steel billet accounts for over 95% of our cost of goods.
Selling, general and administrative expenses for the three months ended June 30, 2012 were $1.1 million, up from $0.3 million in the year-ago quarter. Operating income increased 13.3% to $3.7 million, with an operating margin of 2.3%.
We reported a net income attributable to common shareholders of $2.4 million, an increase of 32%. EPS was $0.22 compared to $0.18 in last year’s second quarter. Our weighted average shares outstanding were 10.7 million shares.
Our balance sheet was in great shape at the end of the second quarter. We had $18 million of cash and cash equivalents and $9.5 million of banker’s acceptance outstanding at June 30, 2012. We generated $4.6 million of cash flow from operations in the first six months of 2012 and raised $1.2 million of gross proceeds through an equity financing in the second quarter of this year. We have sufficient capital to fund our growth for the foreseeable future.
I’ll summarize the key financial highlights for the first half of 2012 before closing with a few business updates. Please note that all of the comparisons are year-over-year versus the first half of 2011.
– Sales increased 1.5% to $296.3 million
– Gross profit increased 37% to $10.3 million; gross margin was 3.5% vs. 2.6% in 1H 2011
– Net income and EPS were $5.1 million and $0.49, up 37% and 32%, respectively
We made further progress in our operations during the second quarter. Staring at the end of the second quarter, we commenced initial production of high quality steel wire in our second production facility. The state-of-the-art facility has a high-speed production line capable of producing a wide variety of conventional and higher value steel wire used in a variety of specialized applications. We have received positive feedback from customers in Hebei, selling all of our initial production. We expect to ramp production of high quality steel wire to full capacity by the end of 2012.
As I commented at the beginning of this call, we expect the additions of these new products to expand our product offering and generated higher margins. We are extremely pleased that we were able to get this line up and running on time and on budget.
That concludes my prepared remarks. On behalf of the entire Longhai Steel management team, we want to thank you for your interest and participation in this call. We have a lot of positive momentum, and we are confident that the long-term dynamics driving demand for steel wire products in China will provide a positive backdrop for our business.
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