Hanwei announces fiscal 2011 first quarter financial results

TSX: HE

VANCOUVER, Aug. 11 /CNW/ - Hanwei Energy Services Corp. ("Hanwei" or the "Company") today announced its financial results for the three months ended June 30, 2010. All currency amounts referred to in this news release are in Canadian dollars unless stated otherwise.

    
    Summary Financial Highlights:

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    In thousands of Canadian dollars except
     shares and per share data                   For the three months ended
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                                                June 30, 2010  June 30, 2009
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    Sales                                              $3,429        $12,910
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    Operating profit (loss)                            (4,298)           811
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    Net loss                                           (5,199)           158
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    Income (loss) per share (basic and diluted)         (0.08)          0.00
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    Weighted average number of shares
      Basic                                        66,958,000     60,781,000
      Fully Diluted                                66,958,000     61,699,000
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Sales revenues decreased to $3.4 million for the three months ended June 30, 2010 versus $12.9 million in the same period in 2009. Net loss in the first quarter of fiscal 2011 was $5.2 million compared to net income of $0.2 million in the comparative period in 2009. Loss per share was $0.08 versus earnings per share of nil for the same period in 2009.

Overall performance was affected by several factors in the quarter including: a significant year over year decline in FRP pipe revenues due to the timing of deliveries in the Chinese and Kazakhstan markets; no revenue contribution from the wind power segment during the quarter; approximately $1.3 million in costs associated with the delivery of wind power equipment to complete an order from the Company's customer, which was not recorded as revenue due to the continued uncertainty of the customer's ability to meet its financial obligation to Hanwei. In addition, during the three months ended June 30, 2010, the Company identified certain defects in its FGD products, which may result in warranty repair costs. Based on current estimate of potential risks, the Company recorded an additional warranty provision of $0.8 million. Issues causing the defects are limited to the FGD business and are not expected to affect the Company's FRP pipe and wind power business. The Company is evaluating the business plan of FGD business.

As at June 30, 2010, the Company had cash and short-term investments of $3.2 million. As of July 30, 2010, the Company had cash and short-term investments of approximately $2.8 million. The Company's 2011 growth plan requires additional working capital and investments totalling approximately RMB100 million ($16 million). This primarily includes working capital to support the estimated growth of the FRP pipe businesses. Management plans to finance this additional working capital need with cash on hand, cash from operations and debt facilities which have been arranged and is expected to be arranged with Chinese banks and third parties.

FRP Pipe

During the first quarter of fiscal 2011, virtually all the Company's revenue was generated from the FRP pipe business. For the three months ended June 30, 2010, the Company experienced reduced deliveries for both the Chinese market and the Kazakhstan markets. Management believes that the slower pace of deliveries is temporary. On a full year basis, the Company expects sales of its FRP pipe products to be stable overall.

    
    The Chinese market
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In the Chinese market, certain traditional oil and gas markets that the Company serves, such as the Jilin oilfields, have passed their peak oil output cycles and thus are reducing their overall investments in oil fields. Even though such reduction is a gradual process, this has resulted in reduced demand for pipe products including FRP pipes. However, new oil fields are being developed in southern and western China. The Company is increasing its marketing efforts in the southern and western provinces of China to expand its customer base. The Company is also making progress in promoting its FRP products for new applications in the salt mining and the water transmission industry.

    
    The Kazakhstan market
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The Company did not make any deliveries to the Kazakhstan market for the three months ended June 30, 2010 as compared to deliveries of $4.8 million for the same period last year. The Company's sales to the Kazakhstan market are currently concentrated in a major customer. Timing of sales orders from and deliveries made to this customer significantly impacts the recognition of the Company's pipe sales. However, with the successful installation of the Company's products in certain Kazakhstan oil fields in the past, the Company is expanding its customer base in Kazakhstan and has been able to secure sales orders from these new customers for deliveries to be made later in the fiscal year.

    
    The Middle-East market
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The Company has entered the Middle Eastern market, receiving an order for FRP pipe from an oil field project in Kuwait for USD$9.56 million (C$9.9 million). The Company is scheduled to deliver to this customer starting from the second quarter of the current fiscal year. The Company is actively pursuing sales to other oil field projects in the Middle-East market.

Wind Power

The Company did not recognize any revenues for the wind power business for the three months ended June 30, 2010 as compared to revenues of $1.4 million for the three months ended June 30, 2009. During the most recent quarter, the Company delivered seven sets of blades (21 blades). However, due to the ongoing uncertainty in the customer's ability to obtain funding, no revenue was recognized for these deliveries. The cost of the blades, in the amount of $1.3 million, was accounted for as cost of revenues in the Company's statement of operations. In Management's opinion, the customer can make significant progress in its funding solution once its wind farm installation is completed. The delivery of the seven sets of blades by Hanwei is expected to assist the customer with its wind farm completion. The Company has continued its efforts to collect its outstanding accounts receivable amount of $37.4 million, of which $27.0 million was allowed for during the 15 months ended March 31, 2010. Once the customer secures its funding, Management expects to collect its outstanding accounts receivable with this customer in part or in full. However, currently there is no certainty that the customer will obtain funding and there is no certainty that the Company can collect its outstanding accounts receivable amount with this customer.

As disclosed in the previous MD&A, the Company is restructuring its wind power business due to changes in market and industry conditions. The rules regarding Chinese content for wind power turbines have been relaxed allowing foreign competitors to enter the Chinese market. Domestic manufacturers of wind power turbines have increased capacity to a point where there is excess supply that has put downward pressure on prices and has made it more difficult for early stage manufacturers to gain market share. Management is considering and reviewing alternatives to reposition its wind power business. The Company's objective in repositioning its wind power business is to ensure any continued participation is viable from a business perspective, to alleviate the amount of working capital devoted to such business by the Company and to collect on its outstanding receivable from its wind power customer.

The Company is continuing its discussion with a Chinese state-owned enterprise on a potential repositioning of the wind power business. To date, the discussions are ongoing and no agreement in principal has been reached.

FGD

Revenues from the FGD business were $0.2 million for the three months ended June 30, 2010 as compared to $0.3 million for the three months ended June 30, 2009. All revenues in this segment were from the Company's spray header products. New products based on the technologies that the Hanwei Ershigs joint venture licensed from Ershigs are currently being introduced to the Chinese market. As discussed above, certain product quality issues were identified during the period and the Company recorded a provision to cover potential repair costs.

Results of Operations:

Gross Profit (Loss)

Gross loss for the three months ended June 30, 2010 was $1.0 million, a decrease of $6.2 million as compared to a gross profit of $5.2 million for the three months ended June 30, 2009. This decrease was primarily driven by a decline in revenues for the pipe business, the delivery of seven sets of wind power blades that was not recognized as revenues, and the provision for potential warranty costs for the FGD business.

Expenses

Sales and marketing

Sales and marketing expenses for the three months ended June 30, 2010 were $0.6 million, or 18 percent of revenues, compared to $1.0 million or 8 percent of revenues for the three months ended June 30, 2009. The decrease in sales and marketing expenses was driven by a decline of revenues because certain expenses correlate to revenues. The increase of selling expenses as a percentage of revenues was due to a greater decline of revenues for the pipe business.

Research and development

Research and development ("R&D") expenses for the three months ended June 30, 2010 were $0.4 million as compared to $0.3 million for the three months ended June 30, 2009. The R&D expenses are primarily related to pipe development activities.

General and administrative

General and administrative ("G&A") expenses for the three months ended June 30, 2010 decreased by 23 percent to $2.3 million as compared to $3.0 million for the three months ended June 30, 2009. The decrease in G&A expenses was driven by the downsizing plan that the Company executed in the early 2010 calendar year.

Operating Income (Loss)

The Company had an operating loss of $4.3 million for the three months ended June 30, 2010 compared to operating income of $0.8 million for the three months ended June 30, 2009. The decline in operating income was due to lower revenues and the warranty provision for the FGD business.

Interest Income and Expense

Interest income decreased to $40,000 for the three months ended June 30, 2010 from $59,000 for the three months ended June 30, 2009 due to a reduction of short-term investments.

Interest expense was $0.8 million for the three months ended June 30, 2010 as compared to $0.9 million for the three months ended June 30, 2009. The decrease in interest expense was due to favourable interest rates this period as compared to last period.

Income Tax Recovery

Income tax recovery for the three months ended June 30, 2010 was $14,000 as compared to $18,000 for the three months ended June 30, 2009. The Company recorded income tax recovery of $71,000 relating to Harvest for the current period, offset by other adjustments, and recorded a valuation allowance against future income tax assets relating to all other entities. The Company expects to realize the benefit of the income tax assets relating to Harvest.

Hanwei will be holding a conference call to discuss its financial results for the three months ended June 30, 2010. Mr. Yucai (Rick) Huang, Chief Financial Officer will host the call.

Date: Wednesday, August 11, 2010

Time: 10:30 a.m., Eastern Time

Dial in number: 1-888-287-5516 or 1-719-457-2727

Taped Replay: 1-877-870-5176 or 1-858-384-5517 (available for 14 days)

Taped Replay Pass Code: 2726747

Live Webcast Link: http://viavid.net/dce.aspx?sid=00007953

    
              FORWARD-LOOKING INFORMATION AND NON-GAAP MEASURES
    

Certain information in this MD&A is forward-looking within the meaning of certain securities laws, and is subject to important risks, uncertainties and assumptions. This forward-looking information includes, among other things, information with respect to to warranty repairs for product defects, the sales of FRP pipe products, deliveries of FRP pipe products in Kazakhstan and the Middle East, the recovery of the industries in which the Company operates, the growth prospects of the Company's business segments in the near future, the demand of the Company's products in each of the geographic markets, the potential repositioning and downsizing of the Company's wind power business, the collection of outstanding accounts receivable, the arrangement of debt facilities or other financing to fund cash requirements, as well as information with respect to the Company's beliefs, plans, expectations, anticipations, estimates and intentions. The words "may", "could", "should", "would", "suspect", "outlook", "believe", "anticipate", "estimate", "expect", "intend", "plan", "target" and similar words and expressions are used to identify forward-looking information.

The forward-looking information is based on certain assumptions, which could change materially in the future, including the assumption that the Company will need to address warranty repairs for product defects, the sales of FRP pipe products will stabilize, deliveries of FRP pipe products will be made in Kazakhstan and the Middle East, the Company will be able to repay its short-term loans or have such loans renewed, the industries in which the Company operates will recover, the Company's business segments may or may not experience growth in the near future, the demand for the Company's products in each of the geographic markets may or may not be as expected, the sales order from the Middle East market may not be fulfilled, the repositioning or downsizing of the Company's wind power business may or may not proceed, the outstanding accounts receivable will be collected, and the Company will be able to arrange for debt facilities or other financing to fund cash requirements. The forward-looking information in this MD&A describes the Company's expectations as of the date of this MD&A.

Material factors or risks which could cause actual results or events to differ materially from a conclusion in such forward-looking information include the risks that the Company is unable to address the warranty repairs for defective products, the sales of FRP pipe products will not stabilize, the Company is unable to make deliveries of FRP pipe products in Kazakhstan and the Middle East, the Company will not be able to repay its short-term loans or to have such loans renewed, the industries in which the Company operates will not recover, the Company's business segments will not experience expected growth in the near future, the Company may not be able to fulfill its sales orders, the Company is unable to reposition or downsize its wind power business, the Company is not able to meet its capital and financing needs, the creditworthiness of the Company's customers deteriorates and the Company is unable to collect on outstanding accounts receivable, as well as the risks set out in the risk factors section of the Company's Annual Information Form dated June 29, 2010 filed with Canadian securities regulators and available on SEDAR at www.sedar.com.

The Company has included in this press release figures based on, gross profit working capital, sales orders and expressions of interest, which are non-GAAP measures. Readers are cautioned that such measures are not recognized under Canadian GAAP and should not be construed to be an indicator of performance or liquidity or cash flows. The Company's method of calculating this measure may differ from the method used by other entities and accordingly the Company's measure may not be comparable to the measure used by other entities.

THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS PRESS RELEASE PRESENTS THE EXPECTATIONS OF THE COMPANY AS OF THE DATE OF THIS PRESS RELEASE AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE. READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE. WHILE THE COMPANY MAY ELECT TO, THE COMPANY DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME, EXCEPT AS REQUIRED BY APPLICABLE SECURITIES LEGISLATION.

For further information: Yucai (Rick) Huang, Chief Financial Officer, [phone], [email protected]; Kevin O'Connor, Investor Relations, [phone], [email protected]