Kingold Jewelry's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.14.13 | About: KINGOLD JEWELRY (KGJI)

Kingold Jewelry, Inc. (NASDAQ:KGJI)

Q2 2013 Results - Earnings Call Transcript

August 14, 2013 8:30 AM ET

Executives

Katherine Yao - Equity Group

Zhi Hong Jia - Chairman and CEO

Bin Liu - CFO

Analysts

John Tumazos - John Tumazos Very Independent Research

Paul Cooney - Maxim Group

Operator

Greetings and welcome to the Kingold Jewelry second quarter 2013 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Katherine Yao of the Equity Group. Thank you, you may begin.

Katherine Yao

Thank you Kristine and a good morning everyone. Thank you for joining us. Copies of the press release announcing the fiscal year 2013 second quarter financial results are available on Kingold Jewelry’s website at www.kingoldjewelry.com.

As part of this conference call, the company has an accompanying slide presentation available in PDF format on the company’s website. You’re also welcome to contact our office at 212-836-1600 and they will be happy to send you a copy.

Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigations Reform Act of 1995.

Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect Kingold Jewelry’s business and prospects and the results of operation. Such risks are fully detailed in Kingold Jewelry’s filings with the Securities and Exchange Commission. The company filed its quarterly report and Form 10-Q regarding the disclaimer language. I will also like to refer you to slide number two of the webcast presentation for the further information.

I would now like to take a moment to outline the format of today’s call. The company’s Chairman and the CEO, Mr. Zhi Hong Jia, will read a prepared opening statement in mandarin, which I will then read in English. I will then turn the conference call over to Mr. Bin Liu, Kingold Jewelry’s CFO, who will continue with the presentation and then I will turn the call over to Chairman for our outlook for the future.

With that, I will turn the call over to Kingold Jewelry’s Chairman and CEO, Mr. Zhi Hong Jia.

Zhi Hong Jia

[Foreign Language]

Thank you and good morning everyone and for those with me in China, good evening. We were pleased to report sales volume of 15.2 metric tons of our 24-karat gold product for the second quarter of 2013; the company achieved top-line growth and reminded [profitability] to such challenges in overall gold markets.

[Foreign Language]

As you all know gold prices have changed rapidly since the beginning of 2013, our business was negatively affected because of a high quality 24-karat gold jewelry designer and manufacturer we sell products at the price on the market price of the gold at the time of the sale.

[Foreign language]

As the result of the steep [decrease] in the price of gold, our customers have altered their buying presents and delayed orders. In addition, the company incurred a $2.4 million write down on the asset value for the second quarter.

[Foreign language]

However, sales increased dramatically as a result of the decrease in the price of gold in April and our customer taking advantage of the reduction in price, the increase in sales has also (inaudible) by the strong sales season of the May Day holiday in China.

[Foreign language]

In spite of the volatility in gold prices Kingold insists to the [mental] principle of focusing on what is going forward to properly do our business to all markets (inaudible). During the quarter, we shifted our product mix by slowing down sales of products where they are not able to fix the price at the time of sale, this will include our investment in gold products and the sale of certain jewelry to our customers, by doing, so we are able to avoid market risks, to best serve the value of our interest and the increase or cost efficient.

[Foreign Language]

I will now like to turn the call over to Mr. Bin Liu our Chief Financial Officer of Kingold. Please go ahead Mr. Bin

Bin Liu

Thanks Katherine and thank you Chairman Jia. Good morning and welcome everybody again. Today, I will discuss Kingold Jewelry's 2013 second quarter operational and financial results, beginning with slide three of the presentation.

Let me first start with overall gold market. In the second quarter of 2013, our net sales increased 36.7% to $367 million and we have processed 15.2 metric tons of 24-karat gold products compared to 11.8 metric tons of the same period of last year.

Kingold is a 24-Karat gold jewelry designer and manufacturer and our sales are primarily composed of the sales of branded products and customized products. Kingold sell products to customers at a price that reflect the marketing products of base materials plus a markup of design and processing fees.

In branded products, we purchase gold directly from Shanghai Gold Exchange once the customer has placed an order and we recognize revenue on sales on branded products when the goods are delivered that’s the cost of gold is recorded as part of our revenue, whereas in customized production, our customers supply the raw material and we create products per customers instructions and the cost of gold is not recorded as part of our revenue.

The next slide, slide four, you will see the second quarter of 2013 of our total processed, 15.2 metric tons, of which branded production accounted for 8.5 metric tons, roughly 56.2% and a customized production accounted for 6.7 metric tons or 47.2%.

For the first half of 2013, we processed a total of 23.8 metric tons of gold, of which branded production accounted for 13.2 metric tons, representing 55.3% and a customized production accounted for 10.6 metric tons or 44.7%.

Moving to the next slide, you will see the Chinese Yuan spot gold price since the beginning of the year till now, where you would [pause] to see the sharp decline in gold price in mid-April, as the Chairman just mentioned earlier. Our sales and volume increased substantially immediately after the drop in gold price combined with the strong seasonal sales due to a very strong May 1st and Labor Day holiday in China.

Moving to slide six, before I get in to the financials I believe it is important to explain how commodity prices impact Kingold’s business. It is crucial for this product. I would like to go through three scenarios to give a better sense of how the changes in the market price of gold affect Kingold’s previous results, which I believe we have experienced in the first half of 2013.

So scenario one, there is a steady increase or decrease in gold market price. This type of steady increase or decrease in gold prices typically causes little fluctuation for Kingold Jewelry from suppliers or customers, particularly the current cost of these materials onto our customers.

Scenario two, a rapid rise in the market price of gold. Depending on the timing of Kingold’s gold purchases, a rapid increase in prices is typically very positive for the company and result in higher sales as long as demand stays high. If demand stays high, volume stays high.

Scenario three, a rapid and a continuous decline in Kingold April market price. This scenario is what Kingold experienced in the April and June. Depending on the timing of the gold purchases, Kingold Jewelry will continue to pass on current market cost competitively to customers, but depending on timing customers may essentially wait for bottom. Therefore, as the Chairman just mentioned, we have witnessed a surge in demand and the gold prices stabilized. When the company has carried a large inventory, although the inventory is mainly against pre-orders, but a sudden and sharp drop in gold price might cause delays from customers on gold purchases. Also as Chairman mentioned, the company is taking caution in shifting product mix and working on different strategies to mitigate these risks, such as segmenting large orders into small portions, carefully examining the timing of taking orders is the scenario, asking for pre-payments if necessary.

Slide seven, the next slide you will see a summary of the company’s results for the second quarter of 2013. We have also detailed 2012 and 2013 first half financial and operational information in our press release and in this presentation. Net sales for the three months ended June 30, 2013 was $367 million, an increase of $98.5 million or $36.7 compared to net sales of $268.5 million in the same period last year. The increase in revenue was primarily driven by increase in production of $124.4 million which would have been higher had it not been offset by a decrease of approximately $31.3 million in cost of gold and the remaining is due to the translation gain from exchange rate fluctuations.

Our gross profit was $11.1 million for the second quarter of 2013, which was a decrease of 25.7% from $15 million as compared to the same period of last year. Our gross margins decreased to 3% from 5.6%. The decrease in gross profit and gross margin was primarily the result of $2.4 million write-down of Kingold’s gold inventory to reflect current market prices as well as a shift in product mix during the period to increased branded production as compared to customized production which typically has higher margins.

Moving to slide eight, let’s talk about the bottom line. The company reported net income attributable to Kingold shareholders for the second quarter of 2013 of $6.3 million or $0.10 per diluted share based on 64.3 million weighted average diluted shares outstanding as compared to the net income of $9.6 million or $0.18 per diluted share based on 54.6 million weighted average diluted shares outstanding for the second quarter of the prior year.

Moving to the balance sheet in the next slide, slide 8, as June 30, 2013, Kingold Jewelry’s cash and cash equivalents were $5.7 million, inventory, which is gold in our case, was $163.2 million and stockholders’ equity was $192.2 million.

With that, I will turn the call over to our Chairman for his outlook on the remainder of 2013. Mr. Chairman?

Zhi Hong Jia

[Foreign language]

We still remain confident that sales volume (inaudible) for the 2013 year. We have received favorable responses from our customers of late and we feel that by continuing to focus on beauty or client relationship and providing quick turnaround time, we will be able to meet the increasing demand similar to what we experienced in the second quarter.

Even though Kingold’s business is exposed to commodity risk, our goal is to maintain (inaudible) leading position within industry and maximize returns for our shareholders despite economic circumstances. We are constantly focusing on all aspects of our business, which include the [frozen] development of the jewelry designing field, processing techniques and the manufacturing capability. We strongly believe that our continuous efforts in these areas will add tremendous value to our trend and this retain customer loyalty.

We are confident that our experienced management team provides us the ability to adjust growth strategies to face most recent challenges and further qualifies our competitiveness of (inaudible) industry.

[Foreign Language]

Our gold is embedded in eastern cultures and (inaudible) products is key principle for the Chinese (inaudible) for either holidays as well as for major occasions. We're looking forward to new major sale season similar to the strong seasonal sales of the May 12 Labor Day Holiday in China to be major driver of revenue growth for the second half of ‘13.

[Foreign Language]

Thank you again all of you for joining us. As always, we welcome any visitors to our facility in China. Thank you all. For the question-and-answer session, please allow a moment for the company to translate each question and each (inaudible) and again management will respond to everyone in the call (inaudible). Mr. Operator lets open up for any questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you, our first question comes from Justin (inaudible). Please proceed with your question.

Unidentified Analyst

I see that we’ve had a great good increase in gold production in the second quarter at 29%, which is presumably faster than the market as a whole and therefore you are gaining market share. I wonder if you could say something about who you are gaining market share from; is it from the smaller competitors or from your two larger competitors and why is it your gaining market share and do you see that continuing?

[Foreign Language]

Zhi Hong Jia

[Foreign Language]

As you all know the main [growth] for gold in China has moved to 20% last year and there were about 10,000 decent jewelry manufactured and designed within the industry, and as I mentioned before that of 10,000 competitors as we just say not many actually specifically went through the 24-karat gold processing and for the last six years Kingold Jewelry has been the leader of the industry and that is from what happened (inaudible).

Unidentified Analyst

My second question is I wonder if you could say something little bit about the plan to open a Hong Kong showroom. What the plan was and why you decided not to go ahead with that?

Zhi Hong Jia

[Foreign language]

As early of 2013, the company decided to expanding our overseas market and that we found a partner in Hong Kong, but due to many difference reasons and factors which affected our decision to terminate this plan and so we get a refund of $7.5 million figure as [advancement].

Unidentified Analyst

My next question is about the growth targets for the firm where you have, you are well on track to growing very strongly to reach this 50-50 plus metric tons of production of 2013. A large part of that growth seems to be coming from the branded division which was up 52% in this quarter over last years’ quarter, which of course requires inventory. And I guess we [ourselves] were wondering, if the company at some stage will consider balancing its growth goals but also with goals to create value for shareholders which perhaps means having less ambitious growth gold’s?

Zhi Hong Jia

[Foreign language]

Well I think we see that we experienced a rapid changes in gold prices in the first half and from the complaint that we cannot predict the gold price for the second half however is that, of all the [four] escalated growth, we are still confident that we'll show (Inaudible) about [two] times for the whole year.

Operator

Our next question comes from the line of John Tumazos, a private investor. Please proceed with your question.

John Tumazos - John Tumazos Very Independent Research

As the customers buy more jewelry, do they buy heavy jewelry with much gold bullion or do they buy decorative adornment style jewelry? Are they buying bullion or they buying the jewelry?

Zhi Hong Jia

So, I am not quite understand by what do you mean heavy jewelry?

John Tumazos - John Tumazos Very Independent Research

Sometimes the gold is 90% of the value of the jewelry. Sometimes the gold is 20% of the value of the jewelry.

Zhi Hong Jia

Understand, I will translate it to --

John Tumazos - John Tumazos Very Independent Research

So I'm asking if the customers are buying bullion or are they adornment craftsmanship and art?

[Foreign Language]

Zhi Hong Jia

Okay. Honestly speaking that the development, (inaudible) King development in China’s economy that the Chinese customers are associating in buying especially 24-karat jewelry or more, it means for two purposes, one is for investment purpose and other one for artistic collection for purpose and generally that associated -- in general that our most customers (inaudible) prefer for the weight, what is the gold of the bullion.

John Tumazos - John Tumazos Very Independent Research

You said weight, they are buying the weight?

Zhi Hong Jia

I am sorry?

John Tumazos - John Tumazos Very Independent Research

You said that the weight is what they’re buying?

Bin Liu

This is Bin. I want to clarify as on the Chairman’s comment, the best (inaudible) it is the difference in terms of how we sell or buy gold. Say in the state side, we sell 14, 18 in majority of the place in China, 82% of the gold thus available in the retail store is 24-karat gold.

So basically in the U.S. people buy jewelry by pieces. So whatever dollar purchases in China basically first question people going to ask is how much they grand in terms of weight right these pieces is. So essentially this (inaudible) China majority of them are sold in terms of weight.

And of course if [you have a] very sophisticated designing for example you have brand name for example those sold in (inaudible) right the leading retailer in China from Hong Kong, some of the pieces of their jewelries were sold in pieces but majority of China people buy them mainly for weight, yes of course, they appreciate designing but still weight is dominant in the decision making process.

Operator

(Operator Instructions) Our next question comes from the line of Paul Cooney with Maxim. Please proceed with your question.

Paul Cooney - Maxim Group

Hey guys. First question why the decline in margins?

[Foreign Language]

Bin Liu

Hey, Paul so as we explained there is a two major drivers of the decline of gross profit range, if you look in the metrics of the branded versus customized right, branded margin declining by 1% to 2% because gold is part of the revenue, and processing fees a tiny part of it. And so the customized roughly is like a majority of the shipment out of the SG&A is always kind of same labor cost.

So if you look at the comparison 2013 versus 2012, for example, the second quarter Q2 in 2013, it crossed 8.5 which is 56% in 2012 it is 5.6 out of 11.8 so which is a only 7%. So you can see the percentage of why the branded is much higher in terms of the product mix range and once this happens a mix of branded the margin will probably going down, normally that's the case.

The second reason and we want to take a very cautious and a conservative approach, when the gold price goes down, so we to write down $2.4 million in future and $2.8 million in Q1. so and the growth stabilize and you can see, particularly in July, in July going up slightly and so we feel much more comfortable right now, but too from a conservative point of view we have to take some allowance that's why you see the gross margin goes down.

Paul Cooney - Maxim Group

All right, I guess the elephant in the room is the stock is trading $0.10 above; it’s pretty much all time low alright. And your sales have gone up pretty dramatically; we're looking at a company that's going to do pretty well north of $1 billion in sales this year alright. Your earnings have doubled from the first quarter to this quarter and stock is down 25% alright from where you guys closed last quarter.

Being a Kingold shareholder it's pretty frustrating from the standpoint, I think a lot of us hang around, because we see the value, but in this shareholder's opinion management has not done enough to support the share price. What are things that you guys are talking about or options that you have on the table to correct (inaudible) as and try to get the value out of the stock?

Zhi Hong Jia

[Foreign Language]

Well, as Kingold has been a popular company in the U.S. since three years and you have seen our operation has increased throughout these years. As you all know, a series would happen the two words of Chinese let’s say the company to exactly the many other companies stock price.

To the stock price, in this regard I am helpless and what we can say is that the company can only focus on operation and development. And in fact until the end, end of the year the stock price still hasn’t seen any to reflect our company’s value; we will consider a dividend or other options.

Paul Cooney - Maxim Group

Okay. Well to respect, I don’t think it’s just about being a Chinese listed company, I think the company has lost credibility in a couple of regards. I mean you guys, a year and a half ago, announced a stock buyback, a $10 million stock buyback. And if you listen to the tape of the call, I actually said on the call that you would not be credible if you didn’t buy back any stock and then you didn’t buy back any stock for a year, okay.

The company has got a $65 million line of credit and again you guys have discussions back and forth about what the writing to do, what are the -- you guys have a capital resources now to pay dividend, okay. Why aren’t you, what is the hold up from doing something like that?

[Foreign Language]

Zhi Hong Jia

Regarding to the dividend as I said before we will seriously consider it in the very near future and we will, I would like to tell our investors to be patient.

Paul Cooney - Maxim Group

Okay. What is the just - what would be the negative to paying a dividend or what are the hurdles to paying a dividend just out of curiosity what is your hesitation?

[Foreign language]

Zhi Hong Jia

Regarding to the dividend what I have asked, earlier in June 6 of our shareholders annual meeting remittance and I have answered the exactly same question to the other investors, that I have said that on dividend shall be, we are planning to issue dividends within this year, and there are no hurdles against we are to doing so, but we cannot disclose when and when is the exact time to issue the dividend.

Paul Cooney - Maxim Group

Okay, that’s it from me. Thank you.

Zhi Hong Jia

Well, just in addition that regarding the dividend that as the president of the company that I will bring this issue for to discussion with other all of the public shareholders.

Operator

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing or additional comments.

Bin Liu

Thanks again to all of you for joining us today and we look forward to speaking with you again in November after we report our third quarter financial results as always you're welcome to any Investor opportunities in Wuhan China. Thank you again, everybody thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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