Gulf Resources' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.11.13 | About: GULF RESOURCES (GURE)

Gulf Resources, Inc. (NASDAQ:GURE)

Q3 2013 Earnings Call

November 11, 2013 8:00 AM ET

Executives

Helen Xu – CEO Assistant

Xiaobin Liu – CEO

Operator

Good morning. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources’ 2013 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Ms. Xu, you may begin your conference.

Helen Xu

Okay, thank you, operator. Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China. And we’d like to welcome all of you to Gulf Resources’ Third Quarter 2013 Earnings Conference Call. My name is Helen, the Assistant of company’s CEO. Our CEO and 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. And I’d like to remind you for 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 the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today depending upon a number of risk factors, including but not limited to, the general economic business condition in China, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional contributions from the existing and new competitors for the bromine and other oil fields, agriculture and the production chemicals and the change in technology; the ability to make future bromine asset purchase and the 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 with 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 if proved to be correct. In addition, any reference to the company’s future performance represents management’s estimates as of today, November 11, 2013. Gulf Resources assumes no obligation to update these projections 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 webcast and the link is accessible through our website. Please look at our press release issued earlier for details.

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

Xiaobin Liu

Analysts

[Foreign Language – Chinese] First of all, thank you all for participating in our third quarter 2013 earnings conference call. We are pleased to report that company’s net revenue for the third quarter of 2013 had increased 34%. Income from operations increased 94% and net income increased 97% as compared with the same quarter of 2012, which is mainly due to the increased sales revenue from all segments of the company and a gain on relocation for bromine Factory No. 3. As compared with same period of 2012, the sales revenue of chemical products segments largely increased 45%. Crude salt segment increased 65% and bromine segment slightly increased 22%.

The chemical products segment, it had a great performance for the third quarter of 2013, as compared to the same period of 2012, as gross profit margin increased from 29% to 34%. We also noted an upward trend in the average selling price of crude salt, since the third quarter of 2011, due to the stable demand of the crude salt. The average selling price increased from $37.19 per tonne in the third quarter of 2011 to $41.39 per tonne in the third quarter of 2013.

In fact, the average selling price of crude salt remain at the current levels towards the end of 2013, since we are still impacted by China’s macroeconomic conditions, our bromine price still remains at a competitively low price which resulted in gross profit margins only increased 2% in the condition, our sales volume has increased 20%. The company will be continually looking for growth of horizontal and vertical acquisition targets, try to expand sales market, increase its product utilization rate and decrease management and administration expenses.

Helen Xu

Thank you, Mr. Liu. And I’m going to continue with presenting the company’s results for the third quarter of 2013 on behalf of the company’s CEO, Xiaobin Liu.

The company’s net revenue was approximately $32.9 million for three-month period ended September 30, 2013, an increase of approximately $8.4 million or 34% as compared to the same period in 2012. This increase was primarily attributable to the increase of revenues from all of our segments, and actually including an increase of revenue from bromine segment from $14 million for the three-month period ended September 30, 2012 to $17.1 million for the same period in 2013, an increase of around 22%.

Secondly, the increase for revenue from the crude salt segment was $2.4 million for the three-month period ended September 30, 2012 to $3.9 million for the three-month ended in September 30, 2013, an increase of around 65%. And thirdly, the increase of revenue from the chemical products segment from $8.2 million for three-month period ended September 30, 2012 to around $12 million for the same period in 2013, an increase of around 45%.

Gross profit was $11.9 million or 36% of net revenue for the three-month period ended September 30, 2013, as compared to $10.4 million or 30% of net revenue for the same period in 2012. The increase in gross profit percentage was mainly due to the increase in the margin percentage in all of our three segments.

The total research and development costs incurred for this three-month periods ended September 30, 2013 and 2012 were $33,198 and $28,478 respectively, an increase of 17%. These costs for the three-month period mainly represented the raw materials used by Yuxin Chemical for testing the manufacturing routines.

And another major cost, write-off of on property, plant and equipment for the three-month period ended September 30, 2013 and 2012 were $214 and $130,143 respectively, a decrease of 99.8%. Write-off on property, plants and equipment of $130,000 and $143 for the three-month period ended September 30, 2012, represented the write-off of certain machinery and equipment replaced during the enhancement work to our bromine production facilities in Factor No. 2 completed in September 2012.

General and administrative expenses were around $2 million for the three-month period ended September 30, 2013, an increase of 15% as compared to the $1.7 million for the same period in 2012. This increase was mainly due a to sum of around $628,000 for insurance compensation received for legal case in 2012, which offset the legal fee included in general and administrative expenses, partly offset by a non-cash expense related to some options granted to employees which decreased to $4,100 for the three-month period from $477,000 in the same period of 2012.

And another major gain on relocation of Factory No. 3 was around $1.9 million for the three-month period ended September 30, 2013. In late September 2013, the company’s press release issued the Transportation Bureau of Dongying City and other local government agencies requested to requisition of the land where the original Factory No. 3 was located for railway construction. So we recognized such amount in this quarter, so it means the third quarter of 2013.

Other operating income was $107,006 for the three-month period ended September 30, 2013, an increase of around 26% as compared to the same period of 2012, which is $85,000 for the sales of wastewater. Income from operations was $10.9 million for the three-month period ended September 30, 2013, approximately 33% of net revenue an increase of $5.3 million or approximately 94%, over the income from operations from the same period in 2012. The increase resulted primarily from the increase in the demand of all our segment products.

Other income, net of around $35,653 representing the bank interest income, net of capital lease interest expense for the three-month period ended September 30, 2013 an increase of 161% as compared to the same period in 2012.

Net income was $8.1 million for the three-month period ended September 30, 2013, an increase of around $4 million or approximately 97%, compared to the same period in 2012. This significant increase was primarily attributable to the overall increase in demand for our products and a gain on relocation of bromine Factory No. 3.

Income taxes were $2.8 million for the third quarter of 2013, an increase of 84% from $1.5 million for third quarter of 2012. The company’s effective tax rate was 26% and 27% for the three-month period ended September 30, 2013 and 2012 respectively.

And now, I would like to give a quick highlight on the nine-month ended September 30, 2013 results. In September 30, 2013 net revenue was around $88.3 million, which represented an increase of around $8.6 million or 11% over the same period in 2012. This increase was mainly due to the increase of revenue from all of our segments. And gross profit was $25 million or 28% of net revenue for the nine-month period ended third quarter of 2013 as compared to $24 million or 30% of net revenue for the same period in 2012. This decrease in gross profit percent was primarily attributable to a drop in the margin percentage of bromine and crude salt.

Income from operations was around $20.9 million for the nine-month period ended September 30, 2013, a 24% of net revenue, an increase of around $3 million or approximately 17% over income from operations for the same period in 2012. The increase resulted primarily from the increase in the demand of all of our segment products and the gain on relocation of original Factory No.3.

Net income was $15.3 million or $0.40 per basic and diluted share respectively, as compared to $13.1 million or $0.38 per basic and $0.37 per diluted share respectively for the same period a year ago.

And now we are going to discuss about company’s financial condition currently. As of September 30, 2013, Gulf Resources had cash of $97.2 million, total liabilities of $15 million and stockholders’ equity of $286.7 million. Ended September 30, 2013, the company had working capital of $135.7 million. As of September 30, 2013, the company generated $31.4 million in cash flow from operations and we used around $0.6 million cash for the prepayment of the land leases and $0.3 million cash for the construction of our new Factory No. 3 due to the as we already mentioned the lease land by the – resumption of the lease land by the Transportation Bureau of Dongying City and other local government agencies for railway construction.

For further investor inquiries, investors may continue to reach our IR Manager and the company’s CEO Assistant at the email address disclosed at the our company’s website. With that we would like to open up the call to any questions pertaining to the third quarter of 2013 financial and operating performance. Operator? Hello, operator?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll pause for just a moment to compile the Q&A roster. Your first question is from the line of Peter Sheriff [ph].

Unidentified Analyst

I have a couple of questions. First question is what’s the – how is the price of bromine now and what you expect over the next six months?

Helen Xu

[Foreign Language – Chinese] Okay. Currently the bromine price is competitively at the low price. It’s around RMB 18,000 – more than RMB 18,000 currently. And due to the China’s macroeconomic condition and the financial crisis, the export of China has decreased. So in the future six months, we do not expect that it will increase a lot, but it will fluctuate at the current level.

Unidentified Analyst

Okay. Will the [indiscernible]. A second question is, you have right now just a huge amount of cash and no debt at all on your balance sheet. And so I’m curious to hear what your ideas are for using all this money to grow your business or what your plan is with all the cash?

Helen Xu

[Foreign Language – Chinese] Okay. I can translate this. He said that, company has actually already mentioned that we are always actively looking for acquisition targets, horizontally and vertically which includes the similar as the bromine production factories or downstream productions as well. We see the first thing we can do.

Secondly, that we can give some over to our customers to encourage them increase their inventories from the companies and [indiscernible] will think that try to engage in two ways which is good for company’s long-term growth. And we have good results on the company’s operations as well – operation results as well.

Unidentified Analyst

Great. Actually, let me just follow-up on that and then I ask one more question. Is he finding good acquisition targets now at cheap prices, because there must be lot of smaller companies still to buy?

Helen Xu

Do you mean bromine or the downstream ones?

Unidentified Analyst

It’s either way. Are there good acquisitions, good prices now?

Helen Xu

Do you mean easy to find them?

Unidentified Analyst

Easy to find at good prices, yes.

Helen Xu

Okay. [Foreign Language – Chinese] Okay. So he feels that if we look at horizontally acquisition targets such as – for example the bromine factories, because currently bromine is at a competitively low price as compared to history price. So it’s easier to find the appropriate acquisition target. And because for low bromine prices and if we look in for the downstream of the bromine factories, it’s also to have company perfect our production chain and give the company therefore future long-term growth.

Unidentified Analyst

Right. Final question, I apologize for many questions.

Helen Xu

It’s okay.

Unidentified Analyst

In Sichuan your – was the bromine plant in Sichuan?

Helen Xu

So do you want to ask about the Sichuan projects, right?

Unidentified Analyst

Yes, last question.

Helen Xu

Okay. [Foreign Language – Chinese] Okay. And regarding the Sichuan projects, the company is currently doing analysis and evaluations on the warehouse and doing trial drilling to evaluate the amount and – future amount and the commercial production possibilities. And secondly, we’re also doing discussion with local government to try to get their support if we go – this well can go for commercial production in future. Hello, operator?

Operator

Yes, ma’am. Are you ready for the next question?

Helen Xu

Yes.

Operator

(Operator Instructions) We have a question from the line of Jon Ralph [ph].

Unidentified Analyst

Yes. Has there been any further developments with regard to the privatization initiatives from SHIG announced earlier in 2012?

Helen Xu

Sorry? Hello.

Unidentified Analyst

Yes.

Helen Xu

Hi, John. Okay.

Unidentified Analyst

In early 2012, there was a press release saying that there was a preliminary privatization offer from SHIG.

Helen Xu

Okay.

Unidentified Analyst

Has there been further developments on this project?

Helen Xu

Okay. Thank you. [Foreign Language – Chinese] Okay. So Mr. Liu stated that, actually at beginning of 2012, there is a press release regarding the intention agreement from SHIG and the company’s chairman Mr. Yang Ming. As we received this notice from Mr. Yang and we did a press release regarding their intention letter – intention agreement around future, we did not receive any notice or letter from Mr. Yang yet till now. So we are not clear what he is having now and we didn’t asked Mr. Yang Ming as well. And [indiscernible] until now he does not have any development yet. If he has, he will notify us at the first minute and we will do a press release.

Unidentified Analyst

Thank you.

Helen Xu

Okay, thank you.

Operator

(Operator Instructions) We have no questions at this time.

Helen Xu

Okay. [Foreign Language – Chinese] So operator, thank you very much. If there are no further questions, we conclude and call the day for the conference. Thank you very much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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