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| 8-K - GC China Turbine Corp. | v195587_8k.htm |
Exhibit
99.1
Operator
Good day
morning everyone, and welcome to GC China’s Second Quarter Conference Call. This
call is being recorded. All participants will be in a listen-only mode until we
reach the question and answer session.
With us
on the call this morning are GC China’s Chairman Mr. Hou Tiexin, Mr. Marcus
Laun, Director and the host of the call, and Todd Pitcher, investor relations
representative of Aspire Clean Tech Communications, an affiliate of Hayden
Communications, International.
For
opening remarks, I would like to turn the call over to Mr. Todd Pitcher. Please
go ahead sir.
Todd
Pitcher
Thanks,
and welcome to the call. Before we begin, please note that various remarks
management may make on this conference call about GC China Turbine’s future
expectations, plans and prospects constitute forward-looking statements for the
purpose of the Safe Harbor provisions under the Private Securities Litigation
Reform Act of 1995.
Actual
results may differ materially from those indicated by such forward-looking
statements, as a result of various important factors, including those discussed
in the Risk Factors section of our annual report on Form 10-K for the fiscal
year ended December 31, 2009, which is filed with the SEC. These forward looking
statements represent the company’s expectations only as of today and should not
be relied upon as representing the company’s views as of any subsequent date.
While GC China Turbines anticipates that the subsequent events and developments
may cause the company’s views to change, the company specifically disclaims any
obligation to update these forward-looking statements.
All of
our SEC filings can be accessed from the Investors’ page of our website at www.gcchinaturbine.com
And now,
I’ll turn the call over to Marcus.
Marcus
Laun
Thanks
Todd, and good morning everyone. We’ve had a strong first half in fiscal year
2010 and I look forward to filling you in on all of the details. I would like to
mention to those who are new to the story, the company commercialized its wind
turbines toward the end of last year so you won’t see any revenues in the
corresponding year ago periods.
From a
financial perspective, our second quarter was solid. We generated $11 million in
revenues and increased the orders which are under execution to a new record
level approaching $70 million (tax incl). This provides us with visibility and a
strong platform for profitable growth going forward. We delivered gross margins
of 25.2% and pre-tax operating income margins of 18.1%, net profit margin of
14.7% and net income was $1.6 million. We believe with higher volumes we will
see margins improve.
As a
result of a strong first half and demand for our products in the markets we are
serving, we are making efforts according to the plan in order to meet the $12.5
million net income goal which we promised during our last capital raise,
although there are certain difficulties and risks existing, we still confident
sparing no efforts to realize the said goal. We estimate revenues of at least
$58 million (tax excl) for 2010. I will go over the financial details in a few
moments.
First, I
will speak to the key factors that are driving our expectations for financial
results. Spending in the end markets we serve remains strong and we believe this
will continue over the next several years. In addition, demand for our products
is increasing as the market is becoming more aware of the advantages of our
technology from a cost perspective and the performance characteristics. We are
executing to plan and expect to continue ramping the business into 2011 as we
launch our new product line. Our cash on hand and cash equivalents has increased
to $12.4 million from $3.8 million at December 31, 2009 enabling us to execute
on current orders and to accelerate our near- and long-term profitable growth.
Working capital on June 30 was $23 million and with $29 million in accounts
receivable we expect a strong collection quarter during Q3, which will provide
incremental capital to build new units. The Company has obtained 60 million RMB
bank loan for working capital and another 30 million RMB performance security,
and will seek from local bank and other financial institutions for larger
amounted and diversified financial supports to help accommodate the large
anticipated ramp in new orders as we look forward.
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Asia’s
wind market continues to grow, driven primarily by China. According to the
Global Wind Energy Council, China was the largest turbine market in 2009, more
than doubling its wind farm capacity from 12.2 GW in 2008 to 25.8 GW, adding a
13.8 GW of capacity, and just passing Germany to become the world’s number two
in total installed capacity, behind the US.
Driving
this growth are factors including the need for more electricity in China, the
need for greater energy independence and the goal of increased job creation, as
well as China’s targets for emissions reduction. Recently, China’s National
Energy Administration said that it will spend up to $740 billion over the next
decade to develop and deploy clean energy solutions in the country. Its intents
to double the percentage of power it gets from non-hydro renewable by 15% by
2020. Wind power will be a central theme in the achievement of that
goal.
Some of
you on the call are more familiar with how China works over others. The Central,
municipal and local governments play a large role in passing policy and ensuring
that this policy is carried forward to meet the near term and 5-year Plan
objectives. We believe actions speak louder than words and the shear size of the
spend by Chinese Utility companies, which are State Owned Enterprises, on Wind
Power shows that this plan is in fact playing out.
We
believe that GC China Turbine is well-positioned to benefit from these trends
and we have begun to capitalize on this growth opportunity, as demonstrated in
our financial results. At present, the 100 plus turbines we expect to build and
ship this year come from 2 key customers, Guoneng Fengshen New Energy Technology
Co. and the subordinate of Guodian Group - Tianhe Wind Power Development Co.,
Ltd. These are very large companies with the ability to generate
multiple and larger re-orders. We are late state discussions with 2 new
customers and initially plan to begin selling our larger units in Europe by next
year.
Our
customers are multi-billion organizations and thus the receivables are of the
highest quality. I want to provide some background on our current 2
customers:
Tianhe
Wind Power, the subordinate of Guodian Group
On June
28, we announced that we have been selected by Tianhe Wind Power Development
Co., Ltd which is a project company under the Guodian Group to supply fifty wind
turbines to the China Guodian Inner Mongolia Xilinguolemeng Tianhe Wind Farm for
its 49.3MW Phase 1 stage. The contract is valued at approximately $34 million
(tax incl) with all units to be delivered and connected to the grid as well as
completes the final testing before the end of this year. During the first half
of 2010, twenty have been delivered for such contract.
It is
worth noting that China Guodian is one of China's five-largest power generation
groups with 110,000 employees located across 16 regions and provinces, 13 large
subsidiaries, 2 scientific research institutes and nearly 200 primary power
generation enterprises; it has 4 domestic A-share listed companies and a Hong
Kong H-share listed company within the organization.
It has a
total electrical installation generation capacity of 82,030,000kW (8.3GW), of
which 5,345,200kW (5.3GW) is dedicated for wind power thereby accounting for
6.52% of the noted capacity ranking the company as fifth in the world and first
in Asia. As of the end of December 2009, the total assets of China Guodian
reached $61.6 billion.
This is a
great endorsement for our company and we are focused on executing flawlessly on
this order. We hope to have a long lasting and more comprehensive relationship
in the future.
Guaneng
Fengshen
In April
we announced initial shipment of twenty 1MW wind turbines out of a total order
for fifty turbines to be implemented in the 200 MW Yongmao wind farm project in
Baicheng, Jilin Province, on behalf of Guoneng Fengshen (Beijing) New Energy
Technology Co., Ltd. All fifty units are to be shipped and connected to the grid
this year. Through the end of the first half of 2010, twenty have been produced
and shipped for such order.
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In
addition, the agreement conditionally calls for GC Turbine to be the single
source supplier. As a result, if the project is completed and all orders met,
the anticipated order of two hundred units of 1.0MW 2-blade wind turbines is
projected to result in sales to GC China in excess of US$146
million.
Guoneng
Fengshen is a high-tech joint-stock enterprise specializing in wind farm
projects investments and operation. The enterprise holds an agreement
with the People's Government of Taonan of Jilin Province for the development of
500 megawatts of wind farms in Yongmao, Taonan. Currently, 200MW of the project
has been established under the auspices of the Jilin Provincial Government. 50MW
out of the aforementioned 200MW has obtained construction approval from the
Jilin Provincial Development and Reform Commission. An additional 50MW has
entered into the approvals process with the Jilin Provincial Gird Connection
System and we expect approval by the first half of next year.
Our
Technology
In term
of design, our core product is the 2-bladed wind turbine, with soft technology
which offers significant advantages over 3-blade turbines, reducing vibration
and overheating, lower transportation costs and improved service life and
utilization rates as well as lowering the costs of manufacturing, installation
and maintenance. We believe our approach offers tremendous opportunities for
large scale wind farms including remote onshore and offshore
installations.
We hold a
license to manufacture a groundbreaking technology which meets rigorous
requirements for low-cost and high reliability. The technology was developed
through a 10 year European research project costing over US$75
million.
In order
to sustain our low-cost advantage, we continue to actively seek and identify
domestic suppliers of all key components making us 100% Chinese-content. Our
initial product is a 1MW utility scale turbine, and we have designs for a 2.5MW
and 3MW utility scale turbine in development. We are developing a track record
and brand-awareness through the execution of our initial sales
contracts.
We will
continue to capitalize on opportunities in the market with installations where
light weight and easy installation of our 2-bladed wind turbine offers
advantages over our competition. We believe we are well positioned with inland
wind farms which have less resources and mountainous terrain, as well as in
offshore installations which are more technically difficult and where the
simplicity of a 2-blade turbine has obvious appeal.
To walk
you through our model - at the time a purchase order is signed we receive a 10%
deposit. We receive 20% of the purchase price at the time construction
commences, 30% when construction is completed, 30% after installation and
testing is completed with a 10% warrant holdback for a period of a year. On
average from the time we take an order until the time ship the order it takes
about 8 months. We are able to produce 10 units per week when operating at full
capacity which includes 2 shifts. This equates to a blended DSO
average of approximately 11 months.
In terms
of the economics of our business, our current production capacity is 480 units
of 1.0MW turbines per year. Due to the limited working capital, the current
production capacity has not been fully operated. At an average tax included
selling price of $670,000 or tax excluded selling price of $570,000 per 1MW
turbine this represents a revenue run rate of $273 million (tax
excl). The largest component of our cost of sales is raw materials,
representing about 68%. We expect that as manufacturing capacity for these raw
materials increases, and as our sales and production volumes ramp, we will be
able to negotiate better prices and drive down costs of production per
unit.
We are
currently adding new capacity and expect to have this completed by November. To
date, we have invested approximately $3.7 (25million RMB) in this production
ramp and expect to have invested a total of $6 million by completion. In
addition to providing incremental capacity for 1MW units, the new production
area will enable us to produce 2.5MW and 3MW units, which carry an average
selling price of approximately three times our 1MW turbines. We feel that our
entrance into the 2.5MW and 3MW market will expand our ability to compete in the
wind power market both in China and Europe. We expect to sign orders and begin
shipments of these larger turbines by the second half of 2011. The strategic
alliance we announced in April with a European renewable energy partner is
focused initially on securing business in Poland, but we expect to expand this
across other areas of Europe. We see this as being another growth conduit to
complement our efforts in China during the next several years.
This new
capacity will enable us to increase production capacity by approximately 200
units of 2.5MW of wind turbines annually equating to approximately $285 million
in revenue. The actual amount will depend on product mix as the larger turbines
sell for more. The market is clearly large enough and growing to
support full capacity utilization, which will be governed by our ability to get
purchase agreements signed.
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Financial
Review
Now, let
me turn to a financial review. We had another strong quarter in Q2, for the
three months ended June30. Revenues were approximately $11 million, compared to
no revenues for the same period last year. We started mass production based on
orders from our customers during the second half of 2009 and sold 20 turbines
during the quarter. Gross profit for the quarter was $2.7 million, and gross
margin were 25.2%.
R&D
expenses were just shy of $200 thousand, compared to $16 thousand for the second
quarter of fiscal 2009. The increase was primarily due to increased R&D
activities associated with the 2.5MW and 3MW wind turbine during the
quarter.
SG&A
expenses for the second quarter were about $600 thousand, compared to $250
thousand for the same period last year. These expenses have increase as a
consequence of our increased efforts to develop the business. We have a strong
core management with significant depth and experience in the wind power and
energy industry, led by Chairman, Hou Tiexin.
We are in
the process of interviewing CFO candidates at present and intend to have a
bilingual team member hired before the end of the year. Our independent public
accounting firm is Deloitte and our SEC legal representative is Greenburg &
Traurig. We believe having top notch professionals in place provides the proper
foundation so we can grow to the next level as a public company.
Sales for
the six months ended June 30, 2010 were approximately $23 million, compared to
no revenues for the same period last year. We sold 40 turbines during the first
half of 2010. Gross profit was $5.7 million, and gross margin was
24.7%.
R&D
expenses were approximately $400 thousand, compared to about $40 thousand for
the first half of 2009, which were primarily attributable to development of the
2.5 and 3MW turbines. SG&A expenses increased during the first half of
fiscal 2010 to approximately $1.2 million, from about $340 thousand for the same
period last year.
We are
pleased to have reported $3.5 million in net income for the first six months of
2010 and expect to more than double this during the second half of the
year.
To expand
on our balance sheet statements from earlier – Our accounts receivables
consisted of billed receivables of $13.8 million and unbilled receivables of
$15.3 million, totaling $29.2 million. We expect to collect approximately $14.6
million of these prior to year end.
Let me
turn now to our financial forecast. Based on the strength of our second quarter
and first half of 2010, and our core markets, we are guiding revenue for the
fiscal year ended December 31, 2010 in a range of $58 million and $86 million,
with expected net profit between $8.2 million and $12.5 million. Certainly, we
will spare no efforts to achieve the net profit of $12.5 which we promised
during last financing. With 60 million shares outstanding as of June 30, this
would equate to approximately between $.13 and $.21 in EPS.
This
means for the second half of the year we expect to show sequential growth with
revenues between $35 million and $63 million, net profit is between $4.7 million
and $9 million.
We plan
to be on the road meeting investors this fall and if you would like to schedule
a time to have a call with management or to me us please call Todd Pitcher of HC
International.
With
that, we will open the call to questions.
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