Wyndham Hotels & Resorts, Inc.
Q3 2008 Earnings Call Transcript

Published: 14 Nov 2008

[Operator:]

Good day ladies and gentlemen and welcome to the third quarter 2008 WSP Holdings Limited earnings conference call. My name is Delphi and I’ll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and- answer session before the end of the conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Mr. Crocker Coulson. You may proceed sir.

[Crocker Coulson:]

Thank you. Good morning ladies and gentlemen, good evening to those of you who are joining us from China and welcome to all of you to Gulf resources third quarter 2008 conference call. I’m Crocker Coulson from CCG the company’s Investor Relations firm. With us today on the call is Mr. Longhua Piao, the Chairman and CEO of WSP Holdings; Mr. Xizhong Xu, Director and Assistant General Manager; Dr. Henry Chang, Vice President of Startegy, Planning and General Counsel; and Mr. Yip Kok Thi, the company’s Chief Financial Officer. Before we get started, I’d like to remind our listeners that management’s prepared remarks in this call contain forward-looking statements that are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, WSP Holdings claims the protection of the Safe Harbor for forward-looking statements that’s contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, due to such risks but not limited to fluctuations in customer demand, management of rapid growth, intensity of competition from other providers of OCTG products and services, general economic conditions, geopolitical events and regulatory changes and other information detailed from time-to-time in the company’s filings and future filings with the SEC. Although, WSP Holdings believe that the expectations in such forward-looking statements are reasonable, there’s no assurance that such expectations will prove to be correct. In addition, any projections as to the company’s future performance represents management’s estimates as of today, November 14, 2008 and WSP Holdings assumes no obligation to update these projections in the future as market conditions change. With those formalities out of the way, it’s now my pleasure to turn this call over to Mr. Piao, the Chairman and CEO of WSP Holdings, for opening remarks that will be delivered in Chinese with Dr. Chang translating. Mr. Piao.

[Longhua Piao [Interpreted]:]

Thank you Crocker and hello everyone. I would like to thank everyone for joining us for WSP Holdings third quarter 2008 conference call. I am pleased to report that the company has a record quarter and continues to grow despite recent volatility in international commodity products in what has become a worldwide economic slowdown. Our third quarter 2008 net revenue was about $280 million which is 124.4% higher than in the third quarter of 2007 and 41.7% higher than in the second quarter of 2008. Our third quarter net income was $29.8 million which is 41.9% higher than in the third quarter of 2007 and 14.7% higher than in the second quarter of 2008. Our revenue and net income grew because of our continuing focus on manufacturing and sales in high quality, high technology, Oil Country Tubular Goods. Given the recent high prices that we recently saw for oil and gas have come down, we are still seeing substance demand for our product, while the global economic slowdown, which is currently taking place has infused demand for energy. Demand for our product continues to be strong because our customer’s wants to be sure that they have dependable asset to oil and gas. Countries throughout the world are concerned about their effect to energy and the future energy security. WSP Holdings makes product used in difficult selling and product environment. Our higher quality, higher technology products are used by the fast growing part of the oil and gas exploration industry. Though our gas and oil markets will not change the overall need to search for and accept new supplies of oil and gas in difficult environment. Dr. Henry Chang will now provide to you on my behalf with the rest of WSP’s operational performance. He will be followed by our CFO Mr. Thi, who will discuss our financial performance for the third quarter ended September 30, 2008. Thank you everyone.

[Henry Chang:]

Thank you, Mr. Piao and hello everybody. WSP’s operational performance can be exclusively reviewed in four sections

[Yip Kok Thi:]

Thank you Dr. Chang. I would like to thank you all for joining this third quarter 2008 earnings conference call. Our third quarter 2008 results continue to reflect the growing importance of our non-API product sales compared to API product sales. Going forward, our acquisitions of Mengfeng steel will allow us to control the most important raw material that we use in our manufacturing processes, while we expand our productions, enter new markets and acquire new customers. Our net revenue in the third quarter of 2008 was $282.4 million, up 124.5% from $125.8 million in the third quarter of 2007. Increased sales revenue continued to result from greater non-API sales compared to API sales. Our average selling price in the third quarter of 2008 was 1,576 metric tonnes compared to 1,219 metric tonnes in the third quarter of 2007 and 1,437 metric tonnes in the second quarter of 2007. Total sales revenue was 179,175 metric tonnes of total productions for the third quarter of 2008, up 73.6% from 103,216 metric tonnes of production for the third quarter of 2007. Non-API products have higher selling prices than ever the API products and accounted for 34.9% of net revenue in the third quarter of 2008 compared to 33.6% in the third quarter of 2007. Sales of non-API products were $98.7 million in the third quarter of 2008, an increase of 135.4% from sales of $41.9 million in the same period of 2007. API product sales were $140.9 million, an 84.2% increase from sales of $76.5 million in the third quarter of 2007. Non-API product sales volume was 49,822 metric tonnes, an increase of 88.2% from 26,475 metric tonnes sold in the third quarter of 2007. API product sales volume was 94,935 metric tonnes, a 35.3% increase from the 70,148 metric tonnes sold in the third quarter of 2007. Gross profit in the third quarter of 2008 was $55.8 million, an increase of 97.9% from $33.2 million in the third quarter of 2007. Gross profit margin was 33.2% compared to 36.4% in the third quarter of 2007. Gross profit margin decreased mainly because of higher production costs due to higher raw material prices, which was partially offset by the increased sales of higher margin non-API products in the third quarter of 2008. Operating expenses in the third quarter of 2008 were $17.6 million, an increase of 336.9% from $4 million in the third quarter of 2007. Operating expenses increased because of higher marketing and selling expenses related to on-site technology support and increased sales commissions to sales representatives involved in overseas sales. General and administration expenses increased because of the increased provisional fees of being a publicly listed company and the overall skew of operation expanded, new facilities were acquire and salary expenses were higher because we hired additional employees. We expect operating expenses to remain as this leverage in the future. Income from operations in the third quarter of 2008 was $48.2 million, an increase of 65.1% from $39.2 million in the third quarter of 2007. Operating margin was 17.1% in the third quarter of 2008 compared to 33.2% in the third of 2007. Net interest expense was $44.3 million in the third quarter of 2008 compared to $3.3 million in the third quarter of 2007. Our increased sale of operation requires more working capital, which we managed through bank borrowings. The interest expense associated with bank borrowings was partially offset by interest income earned by deposit from the company IPO. Income tax expenses were $11.7 million, an increase of 131% from $5.1 million in the third quarter of 2007. Income tax expense increased in the third quarter of 2008 because of the growth of income before tax and a higher tax rate of 25% compared to 15% in the third quarter of 2007, as well as accrual of deferred tax related to withholding tax on unlimited dividends from subsidiaries in China. Net income for the quarter was $29 million in the third quarter of 2008, an increase of 41.9% from $21 million in the third quarter of 2007. Basic and diluted earnings per EDS were both $0.29 for the third quarter of 2008, compared to $0.28 for both in the third quarter of 2007. There were 205,789,800 diluted weighted average ordinary shares outstanding in the third quarter of 2008, compared to $150 million in the third quarter of 2007. Turing to the balance sheet, as of September 30, 2008, we had $279 million in cash, restricted cash and bank balances compared to $300.9 million as of December 31, 2007. Inventory and accounts receivable increased proportionately with an increase in overall operations. Working capital was $158.3 million as of September 30, 2008, compared to $203 million recorded as of December 31, 2007. Total assets were $1.2 billion as of September 30, 2008 compared to $827.2 million as of December 31, 2007. Total shareholder equity was $451.8 million as of September 30, 2008, up from $341.1 million as of December 31, 2007. Our capital expenditure in the third quarter of 2008 was $38 million. We expect our capital expenditure in the third quarter of 2008 to exceed $20 million. We estimate that our 2009 capital expenditure with expanded production capability in China and USA will be $230 million. We plan to finance our capital expenditure through existing cash resources, cash from operations and further bank facilities. I would like to conclude by discussing the income guidance. We believe that high domestic demand for our product will persist and that we will be able to control our cost of production and consequently we are raising our net income guidance to at least $110 million for the fiscal year 2008. We expect both our revenue and net income to continue to grow in 2009 based upon robust level of explorations and production as we see in China from domestic oil and gas explorations and production industries. We increased sales from our expanded production capacity and our continuing ability to provide high quality product at competitive prices to our domestic and international customer base. Thank you, Mr. Henry.

[Henry Chang:]

Thank you, Mr. Thi. In summary WSP Holdings is implementing its capacity for becoming an increasing vertically integrated lot of companies. The upstream pressure of Mengfeng Steel will begin to have a positive impact on our product costs in the fourth quarter of the year of 2008. We expanded production and of course capacity in Northern China where it will be available soon. We are actively marketing our product to new domestic and international customers. We are expanding our manufacturing facilities to meet domestic and international demand for our product, while we are taking greater control of our cost of production. Prices for oil and gas have recently fallen from high level. Instead of being given by high quality, the oil and gas industry is now concentrating on energy facility. With that, we would like to open this conference call to your questions. Mr. Piao, Mr. Xu, Mr. Yip and myself. Operator.

[Operator:]

(Operator Instructions) Your first question comes from Ian Zaffino - Oppenheimer & Company.

[Brian Werdesheim:]

This is Brian Werdesheim for Ian. I have a couple of questions. One would be, as far as demand for the non-API products. I mean your customers use those in the harsh and further offshore drilling environment and I assume that they have a higher marginal cost per barrel to operate there. Do you have any idea, what the marginal costs available for your customers to produce in those harsh environments are?

[Yip Kok Thi:]

Brian, could you repeat the question, please?

[Brian Werdesheim:]

My question, I guess more simply put would be demand for your non-API products, I know that your customers use non-API products in really the higher cost areas to produce and I was wondering if you knew the marginal cost per barrel for your customers to produce in the harsher environment areas where they use your non-API product?

[Longhua Piao [Interpreted]:]

Normally, for exploration and production in China, the economic threshold will be around $40 or maybe less that $40 per barrel. In the northern part of China, it’ll be much lower and for our non-API products, we would assume the cost would be higher in Northern American areas and less expensive in Asia, in China. So it will be much lower in Asia as well as in Russia. Regarding, the cost I would assume it to be around $20 to $30 per barrel in China whereas the price for API product maybe nearly half of that price.

[Brian Werdesheim:]

Also as far as volumes in the quarter, can you tell me what percentage was domestic and what percentage was export?

[Yip Kok Thi:]

For the third quarter of 2008, the share of export market is still higher than the domestic market, but moving forward in the fourth quarter we expect to sell more to the domestic market and for 2009 we are actually looking at the more present market share for both the export and domestic market.

[Brian Werdesheim:]

I have understanding of what’s driving domestic demand, but what is it that’s driving your international demand or that you expect to drive your international demand with oil prices at where they are? Where is that demand coming from internationally?

[Henry Chang:]

For the international market currently our major focus is in North America, especially the United States.

[Brian Werdesheim:]

And are you still seeing strong demand there?

[Henry Chang:]

The demand is for OCTG product has been strong in North America.

[Brian Werdesheim:]

And as far as your backlog, is there any possibility of customers coming and renegotiating or have you seen any delays in projects and therefore delays in your backlog or any cancellations?

[Henry Chang:]

We don’t have any problem with steel buyers, but on small distributors, we have some delays or renegotiations on the product.

[Operator:]

Your next question comes from Darwin Young - Harvard Management.

[Darwin Young:]

Brian asked one or two questions about the breakeven point, but I don’t think that question is answered, so I’m going to ask the question again in Chinese?

[Crocker Coulson:]

So, Dr. Chang can you just summarize, what Mr. Piao before we go forward.

[Longhua Piao [interpreted]:]

In terms of economic slowdown for exploration, he just mention that the number for domestic market in China, the economic threshold will be a wrong time to purchase U.S. dollars per barrel, while in Northern America it could be around and above $0.5 per barrel, while in Russia it could be lesser that $20, while in the Middle East it can be around $5 to $10. In relating to backlog we just mentioned it has some small distributors who delayed or relocated the orders business, but as you might notice in our report we have a lot of the specifics. In addition in terms of the sale for example because we are dealing with some six oil and exporting companies, so we wouldn’t the worry about our order. 60% of our sales through the phase are non-API product. In terms of distribution in the United States, we have numerous distributors. We normally sell our product to distributors in the States. Normally the order take place according to the variety of our products such as API and non-API and as well as a plan of the exploration and production companies. As far as the inventory is concerned it changes from time-to-time in this States. Last of Mr. Piao remarks is, to the best of my knowledge in September in the USA there were $1.8 million metric tonnes of OCTG product in September, this can be our guideline.

[Operator:]

You have no further questions at this time. I’d like to turn it back to management for closing remarks.

[Crocker Coulson:]

Thank you, operator. On behalf of the entire WSP Holdings management team I want to thank all of you for your interest in WSP Holdings. If you have any interest in contacting or visiting the company, please let us know. Contact information is available on the company’s website www.wsphl.com. Again, thank you for joining us on this call. This concludes WSP Holdings third quarter 2008 earnings conference call. Thank you gentlemen.

[Operator:]

Thank you for attending in today’s conference. This concludes the presentation. You may now disconnect. Good day.