China Gerui Advanced (NASDAQ:CHOP)

First Quarter 2012 Results

• Revenue increased 9.6% to $68.7 million in the first quarter of 2012 from $62.7 million in the first quarter of 2011.
• Adjusted net income in the first quarter of 2012 was $0.24 compared to $0.20 in first quarter 2011

"We achieved sound financial performance in the first quarter and an increase in gross profit and gross margin from the same period of 2011," said Mr. Mingwang Lu, Chairman and Chief Executive Officer. "Our first 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."

"Consistent with our strategy in 2011, we continue to monitor closely the macroeconomic conditions in China and strive to optimize our product mix which is tailored to the evolving demand change of our end markets, including food and industrial packaging, construction and household decoration materials, electrical and home appliances, and telecommunications wire and cable," Mr. Lu continued. "While the market environment has been challenging, we believe that our competitive advantages as a premium producer and ability to customize production to meet our customers' needs will enable us to generate continued solid results and an advantageous return on investment from our new capacity."

Mr. Lu concluded, "The strength of our balance sheet and fluid nature of our business model has enabled us to better adapt to market conditions than most of our competitors, even as we add new capacity and capabilities to our product and service platform. We anticipate that we will continue to effectively compete in the high-end spectrum of the specialized steel segment despite current macroeconomic challenges."

For fiscal year 2012, China Gerui continues to expect revenue of between $395 million and $410 million and diluted earnings per share of between $1.32 and $1.37. The Company will continue to provide updates of its 2012 outlook in view of the uncertainties associated with macroeconomic conditions in China and other risk factors.

Fourth Quarter Results

• Revenue increased 39.0% to $91.9 million 
• Gross profit increased 42.5% to $28.0 million 
• Gross margin was 30.4%
• Operating income increased 42.1% to $24.0 million 
• Net income was $18.2 million, or $0.31 per diluted

"We are very pleased to report a record year in terms of revenues and profits as our expanded cold-rolled steel production capacity drove record levels of sales volume in 2011. Our specialized steel precision product offerings were further enhanced with the year's increase in chromium plating capability to 250,000 tons per year which is applicable to both our wide- and narrow-strip steel products," said Mr. Mingwang Lu, Chairman and Chief Executive Officer. "The construction and equipment installation of 100,000 tons of annual cold-rolled steel capacity has been completed as of the first quarter of 2012 and is undergoing testing and fine-tuning of its production processes. This added capacity now aggregates to a total of 500,000 metric tons of both wide- and narrow-strip cold-rolled steel production per year."

"We believe that the new capacity will enable us to better service our existing customers as well as to secure new business as we are better positioned than ever to offer one-stop shopping in the specialized high-end cold-rolled steel sector. Our objective in 2012 is to continue building upon our strong capabilities so as to further penetrate our specialized steel sector and build market share. Our in-house production processes have contributed to China Gerui's excellent reputation as a high-quality steel producer in China as we continue to experience strong demand for our end-use products across a variety of industries," Mr. Lu continued. "Although our fourth quarter results were lower than we expected primarily due to macroeconomic issues, following the ramp-up of our new production lines, we believe that our cost-plus pricing strategy and business model of specialized customization of our products will continue to contribute towards positive results in the years ahead."

Business Outlook

The Company executed a substantial capacity expansion plan in fiscal year 2011 and the first quarter of fiscal year 2012. The plan was implemented in two phases: Phase I involved the construction of two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity and a new chromium plating production line capable of processing an additional 200,000 tons of cold-rolled steel per year. These lines began normal operations as of July 2011 and are currently running at an approximate 65% utilization rate, reflecting a gradual increase in utilization consistent with the Company's quality control standards. Phase II of the expansion plan involved the addition of 100,000 tons of cold-rolled steel production capacity per year which occurred during the first quarter of 2012, which resulted in a total of 250,000 tons of total additional annual capacity.

For fiscal year 2012, China Gerui expects revenue of between $395 million and $410 million, and diluted earnings per share of between $1.32 and $1.37. The Company may adjust this guidance as changing macroeconomic issues and operational and competitive challenges dictate.

Third Quarter 2011 Results

• Revenue increased 63.4% to $101.1 million in the third quarter of 2011 from $61.9 million in the third quarter of 2010.
• Net income increased 76.2% to $21.4 million in the third quarter of 2011 from $12.1 million in the same period of 2010. Net income per diluted share in the third quarter of 2011 increased to $0.37 from $0.25 per diluted share in the same period of 2010, which factors in the significant increase of number of shares outstanding from the warrants exercised by March 21, 2011.

"We achieved a strong increase in operating cash flow in the first quarter of 2011 as a result of improved working capital management, while our sales growth increased slightly, constrained by our production capacity limitations as we continued to run our production facilities at near full capacity," said Mr. Mingwang Lu, Chairman and Chief Executive Officer. "Our first quarter profitability was negatively impacted by three expenses that we believe are of a non-recurring nature.  Firstly, our chromium-plating line was in test runs in the first half of the first quarter and raw materials used for testing purposes were included in the cost, thereby impacting our gross margin.  In addition, we incurred one-time interest expenses as we took out additional bank facilities during the quarter because we did not have certainty on the amount of cash proceeds that we would receive from the warrant exercise.  Finally, we incurred one-time expenses related to recent warrant exercises of $5.7 million.  As such, we are reporting certain non-GAAP numbers with this quarter's earnings release that we believe more appropriately reflect the fundamental health and profitability of our business."  

• Revenue increased 1.4% to $62.7 million in the first quarter of 2011 from $61.8 million in the first quarter of 2010
• Adjusted net income, which excludes the aforementioned one-time warrant exercise expenses, was $9.7 million, or $0.20 per diluted share.*
• For fiscal year 2011, China Gerui expects revenue of between $330 million and $345 million, gross profit of between $115 million and $120 million, adjusted net income of between $65 million and $70 million, adjusted diluted earnings per share of between $1.10 and $1.15. Adjusted net income and adjusted diluted earnings per share exclude one-time warrant exercise expenses incurred in the first quarter of 2011.  

Third Quarter 2010 Highlights (From November 15,2010)

• Revenue increased 4.4% to $61.9 million compared to the same period last year
• Gross profit increased 2.3% to $18.6 million
• Operating income increased 1.8% to $16.5 million
• Net income increased 5.6% to $12.1 million, or $0.25 per diluted share vs.

"There continues to be robust demand for high precision steel in China supported by the country's fast growing economy," said Mr. Mingwang Lu, Chairman and Chief Executive Officer.  "There is a limited domestic supply of this type of product in China because Chinese manufacturers lack the equipment and expertise to produce high end specialty cold rolled steel.  As a result, even though China is a net exporter of crude steel, the country is actually a net importer of cold rolled narrow strip steel. Our business has benefited from an increasing movement toward import replacement in China.  Domestic Chinese customers are turning to our high-end precision steel products because our products are more competitively priced and, equally important, are also of the same quality as the premium priced imported products that domestic Chinese customers have historically relied on.

"As a result of this robust demand, our current production facility continues to operate at near-full capacity and we very much look forward to having our additional capacity come online.  Despite existing capacity constraint, we were able to increase our production volume slightly year-over-year which was the main driver of our revenue growth.  Our average selling price during the third quarter was lower than last year but higher than in the second quarter of 2010, mirroring the pricing trends in the raw steel market.  Rising steel prices mean higher revenues for our company due to the fact that we have adopted a cost-plus pricing strategy and we can pass on the raw material increase to our customers while maintaining a gross margin equivalent to our current 30% level, if not higher.  The decline in our operating margin was the result of our additional staffing and training costs as we prepare for the opening of our new production facility.  With our new capacity coming online, we will be able to offer our customers new, higher value-added products, such as chromium and zinc coated products and wide strip products.  Our customers are asking us to produce these products so we are confident the demand will be there once our new production capacity comes online.  These products will increase our sales and our profitability as they are higher margin than the products we make now."

Outlook from December 9, 2010

For fiscal year 2010, China Gerui expects

• revenues of $252 million
• net income of $48 million.

For fiscal year 2011, China Gerui expects

• revenues of between $330 million and $345 million
• gross profit of between $115 million and $120 million
• net income of between $70 million and $75 million
• capital expenditures to complete its previously announced expansion plan of between $12 million and $15 million.

Mr. Mingwang Lu, Chariman and Chief Executive Officer, commented, "Our current production facility continues to operate at near-full capacity and we very much look forward to having our additional capacity come online. By December 2011, we plan to double our existing production capacity to 500,000 tons per annum, and increase our chromium plating capability to 250,000 tons per annum, covering 50% of our total annual steel production capacity.

Phase I of the expansion plan involves the construction of two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity and a chromium plating line capable of processing 200,000 tons of cold-rolled steel per annum. We expect that the two new cold-rolled production lines will be completed by January 2011, to be followed by test production runs and a full launch of production operations by March 2011. We expect a relatively quick ramp-up after the full launch of production operations begin with an initial capacity utilization of the two new cold-rolled wide-strip steel production lines of approximately 50% rising to approximately 75% by September of 2011. Phase II of the expansion plan involves the construction of a third cold-rolled wide strip steel production line with 100,000 tons of capacity by the end of the third quarter of 2011.

"We expect demand in China for the type of high precision steel that we produce to continue to grow at a healthy pace due to the continuing improvement of the standard of living in the country and the growth of the Chinese middle class, who are the ultimate end-users of our products. In addition the Chinese government is continuing to encourage domestic consumption throughout the economy. With our new capacity coming online, we will be able to offer our customers new, higher value-added products, such as chromium and zinc coated products and wide strip products. Our customers are asking us to produce these products so we are confident the demand will be there once our new production capacity comes online. These products will increase our sales and our profitability as they are higher margin than the products we make now."

Second Quarter 2010 Summary:

• Revenue increased 15.5% to $64.0 million compared to the same period last year.
  
• Gross profit increased 13.0% to $19.1 million.
  
• Gross margin decreased 60 basis points to 29.9%.
  
• Net income increased 5.8% to $12.1 million, or $0.26 per diluted share vs. $0.33 per diluted share in the prior year comparable quarter.
  
   "Our second quarter results were driven by increased sales volume as compared to the same period last year," said Mr. Mingwang Lu, Chairman and Chief Executive Officer.  "During the quarter, we fulfilled large orders for some of our lower margin products.  This enabled us to post a double-digit increase in sales as well as higher net income, but also resulted in a decrease in our margins.  We continue to see strong demand for our products and as our new production lines focused on higher priced, higher margin products commence production later this year, we expect to achieve sustained increases in sales, margins, and earnings performance."

Business Outlook:

 As previously announced, by December 2011, the Company plans to double its existing production capacity to 500,000 tons per annum, and increase its chromium plating capability to 250,000 tons per annum, covering 50% of its total annual steel production capacity. Phase I of the expansion plan involves the construction of two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity and a chromium plating line capable of processing 200,000 tons of cold-rolled steel per annum. The Company expects total capital expenditures for Phase I to be $42 million, of which approximately 65% has been spent to date. The foundation for the building housing the two new cold-rolled steel production lines was completed in August 2010 and the building will be completed by mid-September 2010. 

The two cold-rolling machines are expected to be completed by October 2010. The acid pickling, annealing, and temper rolling facilities relating to the Company's new steel production lines are expected to be completed by the end of September 2010. As for the chromium plating line, the building to house this line was completed in August 2010; installation is currently underway; testing is scheduled for mid-September 2010; and the line is expected to be ready to begin production in mid-October 2010. The chromium plating line can handle both narrow and wide-strip cold-rolled steel. 

For Phase II of the project, the Company expects to construct a third cold-rolled wide strip steel production line with 100,000 tons of capacity by the end of the third quarter of 2011. The Company expects the capital expenditures for Phase II to total $12 million.  
 
Mr. Lu commented, "Our expansion project remains on track and we look forward to bringing this new capacity online later this year.  Our business outlook remains strong as the sale of our products are driven by domestic purchasing power in China, which continues to rise, and the import replacement trend in our industry.  With our new facility we will be able to produce both narrow and wide-strip cold-rolled steel for a wider range of high-end applications than we do currently.  We see the demand in the market and are confident in our ability to ramp up production once our expansion is complete."   

"We are pleased with our fourth quarter and full year results," said Mr. Mingwang Lu, Chairman and Chief Executive Officer. "Our top line growth was driven by our ability to increase the volume of our sales to meet continued robust customer demand and rising average selling prices for our products. The majority of our revenues come from the domestic consumer market in China, which we believe will continue to exhibit growth. Additionally, our continued focus on operational efficiency and cost controls helped us increase our gross and operating margins and achieve strong bottom line performance. We continue to improve the overall utilization rate of our production capacity and better mobilize existing resources towards higher-margin product offerings to further increase our profitability."

Mr. Lu added, "Our immediate focus for 2010 is increasing our production capacity and expanding our product portfolio into higher margin coated steel and wide strip products. We also expect to continue to benefit from the sustained rise in the purchasing power of the Chinese consumer, who is the ultimate buyer of the products our customers produce. Another market trend that we expect to benefit from is the continuing movement toward import replacement in our industry. Our customers are increasingly turning to our high-end precision steel products, which are more competitively priced but of the same quality as the premium priced imported products that they have historically relied upon."

 For the first quarter of 2010, the Company expects to achieve revenues of between $54 million and $56 million and net income of between $10.5 million and $11 million. The Company expects to file its Annual Report on Form 20-F for the fiscal year ended December 31, 2009 on or before April 30, 2010.

Source: PR Newswire (March 10, 2010)