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Kingold Jewelry Inc. (NASDAQ:KGJI)

Q1 2014 Earnings Conference Call

May 15, 2014 5:30 PM ET

Executives

Katherine Yao – IR

Zhi Hong Jia – Chairman and CEO

Bin Liu – CFO

Operator

Greetings and welcome to today’s teleconference of the Kingold Jewelry, 2014 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Katherine Yao of the Equity Group. Thank you. You may begin.

Katherine Yao

Thanks, operator and good afternoon everyone. Thank you for joining us. To begin, we recognize that this term of today’s call has changed from past conference call. This is due to change in travel schedule for management and the company expects to return to its usual practice in future quarters. Copies of the press release announcing the 2014 first quarter financial results are available at Kingold Jewelry’s website at www.kingoldjewelry.com. As part of this conference call, the company has a slide presentation available in PDF format on the company’s website. It [inaudible] as an accompaniment and you are welcomed to contact our office at 212-836-1600 and we’ll 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 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 results of operation. Such risks are found in Kingold Jewelry’s filings with the Securities and Exchange Commission. The company filed its quarterly report in Form 10-Q this afternoon. Regarding the disclaimer language, I will also like to refer you to slide number two of the webcast presentation for the following information.

I would now like to take a moment to outline the format for today’s call. The company’s Chairman and CEO, Mr. Zhi Hong Jia, will read the prepared opening statements 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 the Chairman for outlook for the future. When we finish, we will open the call for questions. For the question-and-answer session, please allow us a moment to translate to Mandarin some of the questions and then we will respond everyone on the call in English.

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

Zhi Hong Jia

Thank you for joining our first quarter conference call today. We are pleased to have achieved solid operating results during the first quarter of 2014 which was a result of expanded production, top-line growth and benefits in exchange in gold pricing that passively [ph] affect our margins. We reported considerable growth in gross margins as a result of processing large quantities of gold at lower market prices [inaudible] inventory at year end 2013. This was an unusual timing related event that we were pleased to have benefitted as CFO Mr. Bin Liu will describe [inaudible] leading this call. We have greatly increased our production volume during the first quarter. As we noted in the press release, we successfully designed and marketed the product Buddha Gold Coin at the Chinese New Year time. This piece was a huge success and we expect to create and design new gold products to meet Chinese market and consumer culture.

Let me describe and clarify some of our long term goals in [inaudible]. We are moving forward in our development of the Industry Park in Wuhan. When we initially bought [ph] this property with the value of the land as one portion but more importantly we saw the value of what the Industrial Park will mean for Kingold in the long term we are well on track for completing it in 2015 and look forward to additional updates in the coming quarters. Lastly, we continue to move forward to reach market and to develop market and distribute our products including national [ph] products and gold general products.

With that, I’ll turn over to Bin Liu.

Bin Liu

Thank you, Katherine. Welcome everyone. Today, I will discuss Kingold Jewelry’s 2014 first quarter financial results. During the first quarter 2014, we processed 14.5 metric tons of 24-karat gold product an increase of 67.8% compared to 8.6 metric tons for the same period last year. Kingold sales are primarily comprised on the sales of branded products and customized products. Kingold sell these products to customers at a price that refracts the marketed price of material plus a markup of design and processing fees. Among the 14.5 metric tons that we processed during the first quarter of which branded production accounted for 7.9 metric tons and the customized products accounted for 6.6 metric tons.

In branded production, we purchased gold directly from Shanghai Gold Exchange once the customer has placed an order. And we work [inaudible] revenue on sales of branded products when we move to deliver thus the cost of gold is recorded as part of our revenue. In customized products in our customer supplier of raw material and includes products as by the customers’ instructions and the cost of gold is not recorded part of revenue. Now I’d like to move to the financials starting from slide six. The company reported the revenues for the 2014 first quarter of $307.5 million, increased by 38.9% from $221.4 million for the same period in 2013. The increase in revenue was primarily due to expanded production to 14.5 metric tons of 24-karat gold products during the first quarter 2014 compared to 8.6 metric tons for the same period in 2013.

For the first quarter ended March 31, 2014, gross profit was 27.9 million, an increase of 392.8% from 5.7 million in the prior year period. The substantial increase in gross margins for the first quarter of 2014 was due to that we purchased large quantities of gold inventory at year end 2013 and at the beginning of 2014 at a lower market price. Of note, the gold price went up from $1,202 per ounce on December 31, 2013 to high as $1,379 per ounce on March 14, 2014. This was an [inaudible] in the price was lower when we bought a large amount of inventory and cost increased rapidly in of our business sales period. As the global gold price fluctuate, the gross margin in the future does not likely to be high as in the first quarter and we will retain to the level of past quarters. Aiding to the year-over-year increase was a 2.8 million write downs of inventory during the first quarter of 2013.

Moving to the bottom line, Kingold report a net income in the first quarter of 2014 $16.1 million or $0.24 per diluted share compared to net income of $3 million or $0.05 per diluted share in the prior year period. Moving to the balance sheet at March 31, 2014, Kingold cash and cash equivalence was 7.5 million inventories which is gold in our case was $217.9 million stockholders’ equity was $231 million.

With that I’d like to turn the call over to our Chairman to provide some more details on our outlook for the rest of fiscal year 2014. Please go ahead Chairman, Zhi Hong.

Zhi Hong Jia

We are very pleased with our operating performance during the period and remember our mistakes for the remainder of 2014. We feel we are very confident that our 2014 guidance will be between 60 metric tons and 70 metric tons of gold processed. We continue to grow organically to extend our sales channels, cooperation with large distributors to extend our sales network into new provinces and areas, and partner with major commercial banks to sell our investment gold products to additional banking retail branches.

Thanks again to all of you for joining us as always we welcome any visits to our facility in Wuhan, China. Thank you.

Katherine Yao

With that operator, let’s open it up for any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question is coming from the line of Mr. Nathan Dardick with Kateva [ph] Investment Company. Your line is now open. You may proceed with your question.

Unidentified Analyst

Thank you. It’s good to hear your voice again, Bin. As you know, I own a significant number of shares of Kingold and I was very pleased with the reported earnings today. I am a very friendly and supportive shareholder of Kingold, and I would like to see the company and my investment both grow in value. As we all know, following the last conference call, in early April an article appeared in Seeking Alpha stating that there are “red flags” that reflect possible problems at Kingold. The stock plummeted and has not recovered because investors in Kingold now need confirmation that the company and its reported earnings are reliable.

Highlight [inaudible] friendly and constructive conference call with CFO Bin Liu and Investor Relations consultant Adam Prior of the Equity Group in which I recommended two initiatives Kingold could take to gain credibility among investors. First, Kingold could put picture of Kingold’s manufacturing facility and the Wuhan Industrial Park development as it is proceeding on Kingold’s website. Two, and more importantly, to demonstrate that the earnings are real reliable and continuing, Kingold could return capital to shareholders by paying a cash dividend of let’s say $0.02 per share per quarter. So that the shareholders of Kingold would be compensated and have some demonstration that these earnings are real. My question gentlemen and lady is what is the company’s response to those constructive suggestions?

Zhi Hong Jia

Hello. Thank you very much for your valued suggestion, and thank you for your suggestion for putting up the pictures of construction of the Industrial Park as well as our facility and we are definitely considered and are putting some continuously putting our pictures of the construction of Industrial Park as well as our facility. And for your second suggestion regarding to the cash dividend, as we are traveling in the United States and what we’d like to [inaudible] us suggestion to be discussed in our annual meeting coming up in early June. Again, thank you very much for your suggestion.

Operator

Thank you. Ladies and gentlemen, at this time we are still polling for questions. [Operator Instructions]. There are no further questions at this time. I would like to turn the floor back over to the management team for any closing comments.

Bin Liu

Thanks again to all of you for joining us today, and we look forward to speaking with you again in August, after we report our second quarter financial results. As always, we welcome investors and visitors to our facility in Wuhan, China. And thank you for everybody for your time.

Operator

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

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