Transcript of
Andatee China Marine Fuel Services (AMCF)
Third
Quarter 2011 Conference Call
November 15, 2011
Carolyne Yu, Investor Relations Executive –
The Equity Group
Fengbin An, Chairman and Chief Executive Officer
Bill Wen, Chief Financial Officer
Operator
Greetings and welcome to the Andatee China
Marine Fuel Services third quarter 2011 conference call. At this time all
participants are in a listen-only mode. A brief question and answer session
will follow the formal presentation. If anyone should require operator
assistance during the conference, please press *0 on your telephone keypad. As
a reminder, this conference is being recorded. It is now my pleasure to
introduce your host Carolyne Yu of the Equity Group. Thank you, Ms. Yu you may
begin.
Carolyne Yu – The
Equity Group – Investor Relations Executive
Thank you operator
and good morning everyone. Thank you for joining us. Copies of the press
release announcing the third quarter and nine month results are available on
Andatee’s website at www.andatee.com. As
part of this conference call, the company has an accompanying slide
presentation available in PDF format on the company’s website. You are also
welcome to contact our office at 212-836-9600 and we would be happy to send you
a copy. In addition, this broadcast will be made available at Andatee’s
website for the next 30 days.
Before we get
started, I would like to remind everyone that this conference call and any
accompanying information discussed herein contains certain forward-looking
statements within the meaning of the Safe Harbor Provision of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements involve risks and uncertainties that may affect
Andatee’s business and prospects and results of operations. Such risks are
fully detailed in Andatee’s filings with the Securities and Exchange Commission
including the form 10Q for the third quarter and nine months ended September 30th, 2011 which the company filed yesterday. Regarding the
disclaimer language, I would also like to refer you to slide number 2 of the
presentation for further information.
I would now like to
take a moment to outline the format of today’s call. The Company’s chairman
and CEO Mr. Fengbin An will read a prepared opening statement in Mandarin,
which I will then read in English. I will then turn the conference call over
to Mr. Bill Wen, Andatee’s CFO who will continue with the presentation. When
he is finished, we will open the floor for questions. With that, I will turn
the call over to Andatee’s CEO, Mr. Fengbin An. Go ahead Mr. An.
Fengbin An – Andatee China Marine Fuel Services – CEO
Speaking in Mandarin.
TRANSLATION BY:
Carolyne Yu – The
Equity Group – Investor Relations Executive
We were pleased with
the healthy double-digit growth we saw on the top line during the 2011 third
quarter. However, Andatee still faced some challenges during the period, given
the continued elevated levels of global oil prices and its subsequent effect on
demand from the industry. Still, the Company saw an increase in sales volume,
with 5% year-over-year growth, during the three months ended September 30, 2011. We continue to
closely monitor oil prices and demand within the marine industry. As I
mentioned in last quarter’s call, when international oil prices rise, Andatee
has historically been able to pass on the entirety of this rising cost of raw
materials to its customers, ultimately having a positive effect on our
revenues. Though oil prices and their fluctuations stabilized somewhat during
the 2011 third quarter, we were unable to pass the entirety of this increase in
inventory costs to our customers due to the adverse effect on demand. This led
to continued margin pressure on Andatee’s products, though improved from that
of Q2 2011. Still, Andatee
remains profitable, cash flow-positive, and focused on strengthening and improving all
aspects of its operations. The Company continues to explore opportunities for
potential M&A activity but remains conservative in its approach. Our goal remains to
become a one-stop shop for marine services, providing our customers with fuel
and other value-added port services, such as maintenance and supplies.
As Bill will discuss
further in the call, Andatee continues to make progress in the gradual
relocation of its headquarters to Shanghai. We expect to leverage Shanghai’s strategic location to seek new access to raw material suppliers, while maintaining
our current relationships in northern China with our existing partners. For
the remainder of this year, we continue negotiations with suppliers outside of China, as a means of diversifying our sourcing of raw materials. By doing this, we believe
we can improve our profit margin even further.
I thank all of you
for joining us this morning and look forward to speaking with you again soon. I would now like to
turn the call over to Bill Wen, Chief Financial Officer of Andatee.
Bill Wen – Andatee China Marine Fuel Services – CFO
Thanks Carolyne.
Good morning and welcome everyone. Beginning on slide 3 we reported steady growth in revenue for the
third quarter. As with the second quarter, this was largely due to the
increased sales volume of our fuel products and increased oil prices. At November 14, 2011, the Company offered six separate blended fuel products, which service
smaller fishing vessels to larger Handysize cargo ships. Andatee’s blended marine fuel products
require oil refinery by-products as raw materials for production, such as tar
and heavy diesel. Andatee blends these products at its facilities, and then
sells its “Xingyuan” brand to customers at a favorable rate to the market. Our fuel burns longer, is consistent and is
less damaging to the vessel. We feel that our Xingyuan brand’s following has grown
significantly compared to this time last year, largely thanks to our customers’
loyalty and positive word-of-mouth feedback. This is a testament to the
quality of our fuel products, as well as the good service and reliability we
provide. During Q3 2011, the
Company’s sales
volumes of its blended fuel products grew 5% to 90,000 tons, from 86,000 tons
in the prior-year period.
For the nine months
ended September 30, 2011, sales volume of its blended fuel products increased
by 11% to 228,000 tons from 205,000 tons in the prior-year period. The primary
drivers behind the increase in sales volume for the nine-month period were
increased demand for the Company’s blended fuel products, specifically for the
#4 blended fuel product in Q3 2011, demand driven by our new blending
facilities in the Shandong and Liaoning provinces, expansion of the Company’s
distribution network and continued marketing efforts for our #1 blended marine fuel
product. As our costs of inventory, or oil prices, have become more stable
over recent months, we are reiterating revenue guidance for the year of between
$225 million and $275 million. And we are raising our net income guidance to
between $7 million and $9 million from the previously announced net income
guidance of between $5 million and $8 million, for the year ending Dec. 31, 2011. We continue to make progress on our plan of setting up market development
offices in large cities, which the Company expects to utilize for establishing
an effective sales and marketing network to pursue organic expansion
possibilities, such as new supply agreements and customer sales. These offices
may also provide a foundation on which to pursue an acquisition-driven growth
strategy in the neighboring areas around major cities.
Let’s move to the
next slide. This slide illustrates the fluctuation in global oil prices over
the past three years. We used the average of the Brent and WTI spot prices to
create this graph. As we stated during our previous quarterly conference call,
oil prices this year surged in April, and as this graph shows, tapered off in
May and June. Oil prices continued to stabilize during the three months ended September 30, 2011. But the average international oil price during this period was still
significantly higher than the prior-year period, at $91 per barrel during Q3
2011 versus $78 per barrel in Q3 2010. Higher oil prices mean higher raw
material costs for Andatee. But depending on the timing of Andatee’s fuel
purchases, a rapid rise in prices is typically very positive for the Company as
long as demand stays high. Though we observed some stabilizing of oil prices
during the 2011 third quarter, higher oil prices and continued fluctuations in
oil prices had a negative impact on demand during the period and prevented
Andatee from passing the entirety of the Company’s rising raw material costs to
its customers, as was the case with the previous quarter. However, this
stabilization in our inventory costs does translate into less pressure on our
margins, which is why we have adjusted our net income guidance for the year.
Let’s move to slide
5. We are continuing to ramp up operations at our new blending facilities in
Panjin City, Liaoning province, and Zibo City, Shandong province. Andatee
expects these facilities to be fully operational by the end of the year,
improving the Company’s production capabilities in blending with an additional
30,000 cubic meters in tank capacity. The Company also believes these
facilities will help to reduce the cost of procuring raw materials and shipping
products to customers because they are strategically located near refineries
and Andatee’s current major suppliers. As I mentioned last quarter, the
Company is in the process of relocating its headquarters to Shanghai, which is
more central to Andatee’s various operations in mainland China. We have decided to take a gradual approach to this relocation to ensure that our
suppliers in northern China feel comfortable that we will remain committed to
our working relationships with them. At the same time, we can begin
establishing relationships with new suppliers in central and southern China. The Company plans to maintain a small staff at offices in Dalian, where Andatee
currently has its headquarters. Like Chairman An mentioned earlier, we feel it
is crucial to maintain an established supplier base in both areas. As always,
we welcome visitors to any of Andatee’s facilities.
Slide 6 is financial
highlights.
Let’s move to slide
7. Now, I’d like to move to the financials. On slide 7, you will see a
summary of the Company’s revenue and gross profit for the third quarter. The
Company reported revenues for the 2011 third quarter of $65.8 million, an increase of
14.3% compared to $57.5 million in the prior-year period. The increase was
largely due to increased sales of Andatee’s #4 blended fuel product, which was
contributed by the additional capacity from the new blending facilities in Liaoning and Shandong provinces. Rising oil costs that the Company managed to partially
pass through to its customers also contributed to the increased revenues during
the quarter. For the third quarter ended September 30, 2011, gross profit was $6.3 million, compared to $5.8 million in the prior-year period. Gross
margin was 9.5% for the third quarter of 2011, compared to 10.0% in the
prior-year period. This decrease was largely due to increased costs of raw
materials, only a portion of which the Company managed to pass through to its
customers during the 2011 third quarter. For the nine months ended September 30, 2011, the Company reported revenues of $173.2 million, an increase of 31.8%
compared to $131.4 million in the prior-year period. During these nine months,
the Company’s gross margin was 9.1%, compared to 11.1% in the prior-year
period.
In the next slide, I
will discuss net income. Andatee reported net
income for the third quarter of 2011 of $2.3 million, or 23 cents per diluted
share based on 9.8 million weighted average diluted shares outstanding,
compared to net income of $2.6 million, or 27 cents per diluted share based on
9.8 million diluted shares outstanding, in the prior-year period. During the
2011 third quarter, selling, general and administrative expenses totaled $2.8
million, or 4.2% as a percentage of revenues, compared to $1.9 million, or 3.3%
as a percentage of revenues in the prior-year period. This increase in
SG&A expenses was primarily due to the increased compensation expenses for
sales employees due to increased sales, an increase in promotional expenses to
market the Company’s products produced at its new blending facilities in Liaoning and Shandong provinces, and expenses related to the Company’s ongoing relocation
of its headquarters from Dalian to Shanghai. The Company reported net income
for the nine months ended September 30, 2011, of $5.9 million, or 61 cents per
diluted share based on 9.7 million weighted average diluted shares outstanding,
compared to net income of $6.7 million, or 72 cents per diluted share based on
9.3 million diluted shares outstanding, in the prior-year period. Net income
for the first nine months of 2011 was impacted by the increased costs of raw
materials, as well as the increased SG&A expenses incurred during the 2011
third quarter.
Moving quickly to the
balance sheet on slide 9. At September 30, 2011, Andatee’s cash and cash
equivalents (excluding $10.7 million in restricted cash) were $6.3 million,
total debt was $27.9 million, and stockholders’ equity was $57.6 million,
compared to $10.8 million, $36.3 million, and $49.9 million, respectively, at
December 31, 2010. As you can see, we have spent the majority of the year
focused on utilizing our free cash flow to further de-leverage our balance
sheet. In the current market climate, we feel this is a very prudent and
conservative measure. Thus far, we have been successful. In September, the
Company announced that Chairman An had adopted a share repurchase plan. Under
this plan, Mr. An may purchase up to a value of $2 million of the Company’s
common stock through September 19, 2012, subject to certain conditions. As of October 31, 2011, Mr. An had repurchased 78,059 shares of common stock at an average stock
price of $2.77, for a total purchase of approximately $216,000.
The Company continues
to carefully monitor the overall economic environment, as well as the movement
of global oil prices. As we have seen global oil prices somewhat stabilize
over the past few months, we are reiterating the revenue guidance and raising
net income guidance for 2011, which is outlined on slide 11. To summarize, we
have reiterated revenue guidance of between $225 million and $275 million and
are raising net income guidance to between $7 million and $9 million, from
between $5 million and $8 million. We are reiterating sales volume guidance to
an increase of between 7% and 24% for the year. We are basing this guidance on our own
internal growth projections, exclusive of any potential acquisitions. We
remain confident in the long-term prospects of the marine fuel industry and
believe that our business will continue to grow. We continue to look at new
expansion plans, such as the opening of new regional facilities, new products,
and expanded service offerings such as direct refueling at sea. We also
continue to look at potential acquisition opportunities but remain conservative
in our approach. We are researching, and if appropriate, will acquire target
companies that have facilities in areas that fit into Andatee’s growth plans.
We intend to maintain a balanced strategy for overall stable growth.
With that operator,
let’s open it up for any questions.
Operator
Thank you. We will
now be conducting a question and answer session. If you would like to ask a
question, please press *1 on your telephone keypad. A confirmation tone will
indicate your line is in the question queue. You may press *2 if you would
like to remove your question from the queue. For participants using speaker
equipment, it may be necessary to pick up your handset before pressing the *
keys. One moment please while we poll for questions. Again it is *1 if you
would like to ask a question, *1 on your telephone keypad if you would like to
ask a question. I would now like to turn the floor back to management for
closing comments.
Bill Wen – Andatee China Marine Fuel Services – CFO
Thanks again to all
of you for joining us. We look forward to speaking with you again during our fourth
quarter and year-end results call. As always, we welcome any visitors to our
facilities in China. Thank you.
Operator
This concludes
today’s teleconference. You may disconnect your lines at this time and thank
you for your participation.
