Andatee China Marine Fuel Services Corporation (Andatee), a producer, distributor, and retailer of marine fuel for small cargo and fishing vessels in China, has announced that net income rose by 65% year-on-year during the first three months of 2011.
First quarter net income was US$2.3 million, or $0.23 per diluted share, an increase of 65.0% compared to the net income of $1.4 million, or $0.16 per diluted share, achieved in the prior-year period.
The company reported revenues for the first quarter of $44.3 million, a rise of 48.6% compared to $29.8 million in the corresponding period in 2010. The revenue increase was said to be largely due to total sales volumes increasing to 57,000 tonnes from 47,000 tonnes in the prior-year period.
Andatee said the volume rise was the result of increasing demand from the company's existing distribution network and ongoing efforts to promote its #1 blended marine fuel product, which is utilized by larger fishing vessels. Rising oil costs that the company passed on to its customers also contributed to the increased revenues during the quarter.
Gross profit increased 46.4% to $5.2 million from $3.6 million in the prior-year period. Gross margin remained relatively flat at 11.8% compared to 12.0% the previous year. The slight decrease was said to be largely due to a similar dip in sales to higher-margin retail customers, which resulted from the company's efforts to promote wholesale #1 marine fuel during the 2011 first quarter.
Commenting on the results, Mr.
An Fengbin, chairman, CEO, and president of Andatee stated: "We are pleased to report strong operational and financial growth during the 2011 first quarter, a period that is typically affected by seasonality due to the Chinese New Year holiday. During this time, both cargo and fishing traffic tend to decrease, which directly impacts demand for our marine blended fuel products. Despite this, Andatee's revenues grew over 48% from the prior-year period. We attribute this growth to the rising oil price environment, and, more importantly, our continued focus on improving all aspects of our operations, including raw material procurement through an expanding supplier network, expansion of blending capacity by building and acquiring additional facilities, improved distribution, and a diversified customer base.
"We continue to closely monitor the demand for our fuel products given a rising cost environment, especially in April 2011, as one of our competitive advantages is the cost efficiency for our customers compared with traditional diesel fuel. Despite these headwinds, we feel that the quality and recognition of our 'Xingyuan' brand continues to resonate with our customers. Our retail operations are expanding, and we are confident that the year and future quarters will show stable and steady growth," An Fengbin said.
Operational Review
As part of its effort to continue sales voume growth during the remainder of 2011, Andatee says it remains focused on enhancing its marketing efforts tailored to "retail", or individual, operations and expanding its distribution base in Southern China.
The company has continued to make progress in its plan to set up market development offices in large cities, opening offices in Shanghai and Shenzhen during the first quarter of 2011.
"The company expects to utilize these offices to establish an effective sales and marketing network to pursue organic expansion possibilities, such as new supply agreements and customer sales, while also providing solid foundations to pursue its acquisition-driven growth strategy in neighboring areas around major cities," Andatee said.
In September 2010, Andatee began the construction of new blending facilities in Panjin City, Liaoning province, and Zibo City, Shandong province, both of which Andatee expects will improve the company's production capabilities in blending.
The Zibo City facility has tanks with a capacity of 17,000 square metres and is scheduled to be completed in May 2011. This new facility's close proximity to a network of refineries in Shandong province should help to reduce the cost of procuring raw materials and the cost of transportation incurred by shipping products to customers in Shidao City, Shandong province. The Panjin City facility will provide an additional 15,000 square metres in tank capacity and is in close proximity to the operations of Andatee's current major suppliers. Construction is scheduled to be completed in June 2011.
Market Overview
In its market overview, Andatee pointed out that the average international oil price rose to $99 per barrel during the 2011 first quarter compared to $82 per barrel in the prior-year period, and this trend continued sharply upward in April 2011.
Mr. An added: "In spite of the first quarter's seasonality and rising oil prices, the company continued to see stable and strong demand from China's fishing industry throughout this period. Typically, a steady increase in oil prices causes little fluctuation for Andatee from suppliers / customers, as the company generally purchases its raw material from suppliers on a monthly basis and prices the current cost of these materials onto its customers on a weekly or daily basis. The rise in oil prices had a positive effect on our revenues, and to date, we have been able to mitigate the effects of our increasing raw material costs by increasing the price of our products and passing the entirety of the increase to our customers. However, a continued sharp increase in oil pricing over an extended period of time, which was the case from January to April 2011, may cause concerns over demand. We have not seen any shift in demand to date but remain conservative in our outlook."
Outlook for 2011
Mr. An concluded, "Andatee is reiterating its revenue guidance for 2011 as our operational and financial results during the seasonally slower first quarter were in line with expectations. We believe growing demand, improving brand recognition, and balanced fleet growth will continue to drive the marine fuel market in China. We will continue to focus on the company's organic growth through the opening of new regional facilities, new products, and expanded service offerings such as direct refueling at sea. We are also working to strategically identify, research, and if appropriate, will acquire target companies with desired facilities in areas that fit into Andatee's growth plans. We remain conservative in our approach to acquisitions and intend to maintain a balanced strategy for overall stable growth. However, the rising cost of raw material is substantial, as the purchasing cost in April increased by approximately 30% when compared to that of March, and we do not believe that the cost will go down considerably in the coming months. Coupled with the PRC government's policy of controlling inflation, which includes the price of diesel fuel, the increases in raw material costs may lead to margin pressure on our products in the near term. As a result, in a conservative measure, we have adjusted our internal projections and have revised the corresponding net income and sales volume guidance."
