China Gerui Advanced Materials Group Limited Announces First Quarter 2011 Results

ZHENGZHOU, China, May 10, 2011 /PRNewswire-Asia-FirstCall/ -- China Gerui Advanced Materials Group Limited (NASDAQ: CHOP) ("China Gerui," or the "Company"), a leading high precision, cold-rolled strip steel producer in China, today announced unaudited financial results for the three months ended March 31, 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."  

Mr. Lu continued, "Our chromium plating line capable of processing 200,000 tons of cold-rolled steel per annum started normal operations in late March 2011.  The additional chromium plating capacity is currently being used on our narrow-strip output and will be used on our wide strip output beginning later this month when our two new cold-rolled, wide-strip steel production lines with 150,000 tons of total annual capacity are expected to come online.  We expect to begin to see a margin benefit from this additional capacity in the second quarter and a more pronounced margin impact in the second half of 2011."  

First Quarter 2011 Results

Revenue increased 1.4% to $62.7 million in the first quarter of 2011 from $61.8 million in the first quarter of 2010.  The increase in revenue was due to a 4.5% increase in the Company's average selling price to $909 per ton for the first quarter of 2011 compared to $870 per ton for the same period of 2010, partially offset by a 3.0% decrease in sales volume to approximately 69,000 tons for the first quarter of 2011 compared to approximately 71,000 tons for the same period of 2010.  

Gross profit decreased 3.7% to $18.0 million in the first quarter of 2011 from $18.7 million in the same period of 2010.  Gross margin was 28.7% in the first quarter of 2011 compared to 30.2% in the same period of 2010.  The decrease in gross margin was due to increased raw material costs as the new chromium-plating line was in test runs in first half of the first quarter and raw materials used for testing purposes were included in the cost.

Operating income decreased 38.4% to $10.0 million in the first quarter of 2011, or 16.0% of sales, from $16.3 million, or 26.4% of sales in the same period of 2010.  The decrease in operating income and margin is due to the aforementioned gross profit decrease and one-time warrant exercise expenses of $5.7 million.  Adjusted operating income, which excludes the aforementioned one-time warrant exercise expenses, was $15.7 million, or 25.1% of sales.*  

Interest expenses increased 161.7% to $2.8 million compared to $1.1 million in the prior year period.  The increase in interest expenses was primarily due to a one-time interest expense increase of approximately $1.7 million primarily due to taking out additional bank facilities during the quarter as the Company did not have certainty on the amount of cash proceeds that would be received from the warrant exercise.

Net income was $4.0 million in the first quarter of 2011, or $0.08 per diluted share, compared to $11.5 million, or $0.25 per diluted share in the same period of 2010.  Adjusted net income, which excludes the aforementioned one-time warrant exercise expenses, was $9.7 million, or $0.20 per diluted share.*

Adjusted EBITDA was $17.1 million in the first quarter of 2011, the same level as Adjusted EBITDA of $17.1 million in the prior year period.*  Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and one-time warrant exercise expenses incurred in the first quarter of 2011.  

Financial Condition

As of March 31, 2011, the Company had $210.1 million in unrestricted cash and an additional $83.1 million in restricted cash, as compared to $119.5 million and $66.5 million, respectively, as of December 31, 2010. Working capital was $133.1 million compared to $66.7 million at the end of 2010. Shareholder's equity was $239.7 million, as compared to $167.8 million at the end of 2010.  The Company has no long-term debt.  Net cash provided by operating activities in the first quarter of 2011 was $17.1 million compared to net cash used in operating activities of $0.9 million in the same period of 2010.  

Recent Developments

• The Company will participate in the following investor events later this month:

• In April 2011, the Company announced that its Board of Directors approved the repurchase of up to an aggregate of $10 million of its Ordinary Shares.  

Business Outlook

As previously disclosed, the Company's expansion plan is being implemented in two phases.  The first phase has involved 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, which started normal operations in late March 2011.  The two new cold-rolled production lines are expected to launch normal production operations later this month. The Company expects a relatively quick ramp-up after the full launch of production operations begin, with an initial capacity utilization for the two new cold-rolled, wide-strip steel production lines of approximately 50% rising to approximately 75% by the fourth quarter 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 2011.

Mr. Lu concluded, "Demand for our specialized, high precision steel products remains robust across the industries that we serve – food and industrial packaging, construction and decoration materials, electrical and home appliances, and telecom – and we look forward to our new wide strip lines starting normal production later this month.  With this additional capacity we will be able to serve as a one-stop shop for our customers as we expect the majority of our new wide-strip production orders to come from our existing customers.  We also expect to see an increase in gross margin from this new capacity as the new wide-strip and chromium plated products command gross margins of between 35% and 40% compared to 30% gross margins on our existing narrow-strip products.  We believe our above-industry average gross margin performance is sustainable as a result of our ability to pass through fluctuations in raw material costs, the customizable contract nature of our business, our strong brand name in China, and our complete in-house production process."    

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.  

Conference Call Information

The Company will also host a conference call at 8:00 am ET on Tuesday, May 10, 2011.

Listeners may access the call by dialing +1 (866) 395-5820 five to ten minutes prior to the scheduled conference call time. International callers should dial +1 (706) 643-8814. The conference participant pass code is 64941524.

A replay of the conference call will be available for 14 days starting from 10:00 am ET on Tuesday, May 10, 2011. To access the replay, dial +1 (800) 642-1687. International callers should dial +1 (706) 645-9291. The passcode is 64941524.

A live and archived webcast of the call will be available on the Company's website at http://www.geruigroup.com/Investors.html.  To listen to the live webcast, please go to the Company's website at least fifteen minutes prior to the start of the call to register, download and install any necessary audio software.

Use of Adjusted Financial Measures

This earnings release includes the use of adjusted net income, adjusted net income per share, adjusted operating income, and adjusted EBITDA, which are financial measures that are not defined by US GAAP. For purposes of Regulation G, a non-GAAP financial measure is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet, or statement of cash flows (or equivalent statements) of the issuer; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States. Pursuant to the requirements of Regulation G, the Company has included with this press release a table which includes a reconciliation of adjusted operating income to operating income, adjusted net income and adjusted net income per diluted share to net income, and adjusted EBITDA to net income, the most directly comparable GAAP financial measures, respectively. Adjusted EBITDA was defined as earnings before interest, taxes, depreciation, amortization and one-time warrant exercise expenses incurred in the first quarter of 2011. Adjusted operating income, adjusted net income, and adjusted net income per diluted share were calculated by excluding one-time warrant exercise expenses of $5.7 million from operating income, net income, and net income per diluted share, respectively. The Company's management believes that the presentation of these non-GAAP financial measures provides useful information regarding the Company's results of operations because it assists in analyzing and benchmarking the performance and value of the Company's business. The Company's calculation of adjusted EBITDA, adjusted operating income, adjusted net income, and adjusted net income per diluted share may not be consistent with similarly titled measures of other companies.

About China Gerui Advanced Materials Group Limited

China Gerui Advanced Materials Group Limited is a leading niche and high value-added steel processing company in China. The Company produces high-end, high-precision, ultra-thin, high- strength, cold-rolled steel products that are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. China Gerui's products are not standardized commodity products. Instead, they are tailored to customers' requirements and subsequently incorporated into products manufactured for various applications. The Company sells its products to domestic Chinese customers in a diverse range of industries, including the food packaging, telecommunication, electrical appliance, and construction materials industries. For more information, please visit http://www.geruigroup.com.

Safe Harbor Statement

Certain of the statements made in this press release are "forward-looking statements" within the meaning and protections of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, capital, ownership or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as "may," "will," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate," "expect," "estimate," "continue," "plan," "point to," "project," "could," "intend," "target" and other similar words and expressions of the future.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary notice, including, without limitation, those risks and uncertainties described in our annual report on Form 20-F for the year ended December 31, 2010 and otherwise in our SEC reports and filings, including the final prospectus for our offering.  Such reports are available upon request from the Company, or from the Securities and Exchange Commission, including through the SEC's Internet website at http://www.sec.gov. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date hereof, or after the respective dates on which any such statements otherwise are made.

Financial tables follow

SOURCE China Gerui Advanced Materials Group Limited