Gulf Resources CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.13.13 | About: GULF RESOURCES (GURE)

Gulf Resources, Inc. (NASDAQ:GURE)

Q2 2013 Earnings Call

August 12, 2013 08:00 am ET

Executives

Xiaobin Liu – Chief Executive Officer

Min Li – Chief Financial Officer

Helen Xu – Investor Relations

Analysts

Dave Shannon – Analyst

John Rawls – Analyst

[Peter Sarik] – Analyst

Operator

Good morning. My name is Therese and I will be your Conference Operator today. At this time I would like to welcome everyone to the Gulf Resources Q2 2013 Earnings Conference Call. (Operator instructions.) Thank you. I will now turn the conference over to Helen Xu. Go ahead, Helen.

Helen Xu

Okay, thank you Operator. Good morning ladies and gentlemen, and good evening to those of you who are joining us from China. I’d dearly like to welcome all of you to Gulf Resources Q2 2013 Earnings Conference Call. My name is Helen, the sister of the company’s CEO. Our CEO and the CFO of the company, Mr. Xiaobin Liu and Mr. Min Li will also join this call today.

I will be offering translation for the management’s comments for the company’s operating results. I’d like to remind you and all listeners that in this call management’s remarks will contain forward-looking statements which are subject to risks and uncertainties. The management may make additional forward-looking statements. Therefore the company claims the protection of Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed depending upon a number of risk factors, including but not limited to the general economic climate and condition in China, future product development and production capabilities, shipments to our customers, market acceptance of new and existing products, additional contributions from the existing and new competitors for the bromine and other oil fields, the culture and the flame production chemicals and the changing technology; our ability to make future bromine asset purchases and various other factors beyond the company’s control.

All forward-looking statements are expressly qualified in their entirety by this precautionary statement and the risk factors detailed in the company’s reports filed with the SEC. Accordingly our company believes the expectations reflected in these forward-looking statements are reasonable and there can be no assurance of such will prove to be correct. In addition, any reference to the company’s future performance represents management’s estimates as of today, the 12th of August, 2013. Gulf Resources assumes no obligation to update this protection in the future as market conditions change.

For those of you unable to listen to the entire call at this time, a replay will be available for 14 days at the company’s website. The call is also accessible through the webcasting and the link is accessible through our website. Please look at our press release issued earlier for details.

It’s now my pleasure to turn this call to Mr. Liu, the company’s CEO who is going to provide some initial remarks. And I will do the translation for him. Xiaobin?

Xiaobin Liu

First of all, thank you for participating in our Q2 2013 earnings conference call. We are pleased to report that the company’s net revenue for Q2 2013 has increased 5% as compared with the same quarter in 2012, which is mainly due to the increase of sales efforts of the company. And compared with the same period in 2012, net sales revenue of 10 product segments largely increased 18%; and the sales volume of bromine increased 13% as well. The selling price of some products also increased.

But due to the acquisition assets we did in the year 2012 and the depreciation and amortization costs, which caused the company’s net income to decrease 6% as compared with the same quarter of 2012. Even the net income of Q1 2013 compared to the same period of 2012 decreased 43% each, so the year-over-year net income decrease in this year has largely slowed down. The company’s operations is turning (inaudible) into a good change.

We are still impacted by China’s macroeconomic conditions. Some of our materials’ prices increased. The average bromine price in this quarter has increased to $3084 a ton as compared to $2954 at end of 2012. Crude salt price is a steadily upward trend which reached $41 a ton in Q2 2013. The gross margin of our chemical product segment also increased to 33% in Q2 2013 as compared to the same period in 2012 at 31%. The company will continually try to expand its sales market interest, its product utilization rate, and decrease management and administration expenses.

We are confident that we can achieve the earnings targets set forth in the financial guidance announced at the beginning of this year.

Helen Xu

Thank you, Mr. Liu. I’m going to continue with (inaudible) the company’s results for Q2 2012 on behalf of Mr. Liu, the company’s CEO. The company’s net revenue was $32,853,896 for the three-month period ended June 30, 2013, an increase of approximately $1.5 million as compared to the same period in 2012 which (inaudible) 5%. This increase was primarily due to the growth in our chemical products segment’s products, which increased from $9,995,759 for the three-month period ended June 30, 2012, to $11,750,644 for the same period in 2013; an increase of approximately 18%.

Revenue from the crude salt segment decreased from $3,779,658 for the three-month period ended June 30, 2012, to $3,629,976 for the same period in 2013, a decrease of approximately 4%. Revenue from the bromine products segment slightly decreased from approximately $7.5 million for the three-month period ended June 30, 2012, to approximately $7.5 million for the same period in 2013, a decrease of approximately 0.4%.

Gross profit was $9,539,695 or 29% of net revenue for the three-month period ended June 30, 2013, compared to $9,925,195 or 32% of net revenue for the same period in 2012. The decrease in gross profit percentage was primarily due to the drop in the margin percentage of bromine and the crude salt segment.

The total research and development costs incurred for the three-month periods ended June 30, 2013 and 2012 were $54,480 and $62,526 respectively, a decrease of 13%. Research and development costs for the three-month period ended June 30, 2013 and 2012 (inaudible) raw materials (inaudible) chemicals for use in the manufacturing routines.

General and administrative expenses were $4,422,452 for the three-month period ended June 30, 2013, an increase of 77% as compared to the $1,317,866 for the same period in 2012. Income from operations was $7,778,775 for the three-month period ended June 30, 2013, a decrease of approximately 3% of income from operations from the same period in 2012. And our operating income was $287,127 for the three-month period ended June 30, 2013, which is dependent firstly on the sales of wastewater to some of our customers in the amount of $116,035 and a sum of $171,092 for legal fees incurred in 2012. By the way we received the insurance compensation in 2013.

Other income net of $25,846 (inaudible) banking share income net of capitalized interest expense for the three-month period ended June 30, 2013. Net income was $5,355,899 for the three-month period ended June 30, 2013, a decrease of approximately 6% as compared to the same period in 2012. This decrease was mainly due to the non-cash expense related to stock options which was granted to employees recognized in the three-month period ended June 30, 2013.

Income taxes were $2.05 million for Q2 2013, an increase of 4% from $1.98 million for Q2 2012. The company’s effective tax rate was 28% and 26% for the three-month period ended June 30, 2013 and 2012 respectively.

The six-month period ended June 30, 2013 results: net revenue for the six-month period ended June 30, 2013, were $55,356,476 representing an increase of approximately 0.6% over the same period in 2012. Gross profit was $40,110,803 or 25% of net revenue for the six-month period ended June 30, 2013, compared to $16,617,987 or 30% of net revenue for the same period in 2012.

Income from operations was $9,984,223 for the six-month period ended June 30, 2013, a decrease of approximately 18% over income from operations for the same period in 2012. Net income was $7.2 million or $0.19 per basic and diluted share compared to $9.0 million or $0.26 per basic and diluted share respectively for the same period in 2012.

As of June 30, 2013, the company’s balance sheet has cash of $86.4 million, total liabilities of $14.4 million and stockholders’ equity of $277.1 million. As of June 30, 2013, the company had working capital of $119.9 million. As of June 30, 2013, the company has generated $20.7 million in cash flow from operations and used around $0.6 million cash for the prepayment of land leases.

For further investor information, investors may continue to reach our IR Manager and the CEO’s assistant at the email address disclosed on the company’s website. With that we would like to open up the call to any question pertaining to the Q2 2013 financial and operating performance. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) Your first question comes from Dave Shannon.

Dave Shannon – Analyst

Good morning from the United States. Congratulations on a good quarter showing improvements in sales revenue. Can management discuss further what they are doing differently to improve sales team performance?

Helen Xu

Do you mean in the future what the company’s going to do with the sales force or what we did in Q2 2013?

Dave Shannon – Analyst

I guess during Q2 and going forward.

Helen Xu

Okay. Okay, hi David. This is the response from Xiaobin. Firstly, for the increase in sales force in Q2 2013, there are two major things the company did to increase their sales force. Firstly, they’ve tried to increase and try to find some new customers for the chemical products segment, and secondly they did try to convince the bromine customers to increase their bromine inventory because now bromine is listing at a low price. But in the future bromine prices might continue to increase, so some of our bromine customers increased their bromine inventory. Importantly, regarding future sales force company increases the company said that they continue to follow these two strategies and try to increase the number of customers and to increase the quality of the products from the chemical segments and bromine segments, even to include crude salt and try to compete with its competitors.

Dave Shannon – Analyst

Very good, thank you. I have one additional question: can management provide any updates for the following items? Number one, the share repurchase program; number two, the lawsuit settlement; and number three, if there’s any updates on potential acquisitions or joint ventures. Thank you.

Helen Xu

Okay, hi David. Here is the answer from management. Firstly, for your first question regarding the share repurchase program, management comments that the company always is ready to fund other projects and to fund the share repurchase. And the one major plan of this share repurchase program is they had a set purchase price target and we’ll do it when it’s met – when the share price meets our target.

Secondly, regarding the lawsuit we’re still in discussion and the filing is [passed]. Regarding the potential acquisition targets of (inaudible) management stated that the company always is continually looking for potential acquisition targets in order to increase its market share in the industry and increase the company’s competitive advantage. Once there is an appropriate acquisition target then the (inaudible) may be accumulated (inaudible).

Dave Shannon – Analyst

Very good, thank you.

Helen Xu

Thank you.

Operator

Thank you. Your next question comes from John Rawls.

John Rawls – Analyst

Hello, thanks for taking my question. The question concerns whether you can provide any update on the development of a higher concentration bromine find that was announced early last year in Sichuan Province.

Helen Xu

Okay. So since the company hasn’t built a well from Sichuan and we’ve had (inaudible) from Sichuan the company still is doing the halogen water-base evaluation observation and the communication with the government, because it’s the local government that puts many restrictions on the further drilling and the communication with the company. So this project is still in discussion, and once we have any news from the local government and from the (inaudible) projects we will announce it for investors and shareholders.

John Rawls – Analyst

Thank you.

Helen Xu

Thank you.

Operator

Thank you. Your next question comes from [Peter Sarik].

[Peter Sarik] – Analyst

It says that the average bromine price during the quarter was $3084. I wonder where the bromine price is now and where you see it going over the next six months.

Helen Xu

Currently the bromine price is (inaudible) the last time was around the same time. We think in the next six months (inaudible) that Israel has increased their bromine price 10% to 20% so we think it is moving past trends in the market soon. In the next six months we are very positive about bromine prices.

[Peter Sarik] – Analyst

So Israel’s increased their price 10% to 20%, so you and with the economy getting a little bit better you should see a higher bromine price in the next six months, right?

Helen Xu

Yes.

[Peter Sarik] – Analyst

Okay. The second question I have is you’re sitting right now with $86 million in cash, no debt. And so I’m curious in terms, I mean people have asked about acquisitions, people have asked about stock buybacks, things like that. Just generally where do you see the company going in the next year or several years? What are you going to do with the cash? What are your plans for growth?

Helen Xu

Okay. So as we mentioned earlier and we always mention this, the company is always continually looking for acquisition targets. We think that in the near future if there is an appropriate target we might do some more acquisitions and the share buyback, as the Board approved the share buyback we need the share price to meet our targets and we’ll do it then.

[Peter Sarik] – Analyst

But just to follow up, in the past you’ve been able to make very attractive acquisitions. I’m not asking if you’re going to announce one, but are there good acquisition candidates out there right now for cheap prices?

Helen Xu

Yes, actually there are some potential opportunities in the market but it also depends on our efforts in the negotiation.

[Peter Sarik] – Analyst

Thank you.

Operator

Thank you. (Operator instructions.) At this time I’m not showing any further questions.

Helen Xu

Okay, Operator, thank you very much. If there are no further questions then I will conclude and call the day for the conference. Thank you very much.

Operator

Ladies and gentlemen, thank you for joining today’s conference. Thank you for your participation, you may now disconnect.

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