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Kingold Jewelry (NASDAQ:KGJI)

Q2 2014 Earnings Call

August 14, 2014 8:31 am ET

Executives

Katherine Yao -

Zhi Hong Jia - Founder, Chairman, Chief Executive Officer and President

Bin Liu - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

Nathan Dardick

Justin Scott

Operator

Greetings, and welcome to the Kingold Jewelry Second Quarter Financial Results. [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. Ms. Yao, you may begin.

Katherine Yao

Thank you, operator, and good morning, everyone. We apologize for the delay. Thank you for joining us. Copies of the press release announcing the 2014 second quarter financial results is available on 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 is linked as an accompaniment, and that you are welcome to contact our office at (212) 836-9600, 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 the meanings 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 fully detailed in the Kingold Jewelry's filings with the Securities and Exchange Commission.

Regarding the disclaimer language, I would also like to refer you to Slide #2 of the broadcast presentation for further information. [Operator Instructions]

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

Zhi Hong Jia

[Chinese]

Katherine Yao

Thank you, and thank you, all, for joining us.

Zhi Hong Jia

[Chinese]

Katherine Yao

We are pleased to report sales volume of 17.9 metric tons of 24-karat gold products for the second quarter of 2014. Despite the interim effects on overall gold market pricing, we remain on track with our volume targets for the year.

Zhi Hong Jia

[Chinese]

Katherine Yao

In the second quarter, we continue to be flexible in our product mix with the direction towards increasing higher margins customized production. In 2013, we focused on newer line of products, which carry both our higher margin, but also meets the changing needs of our customers.

Zhi Hong Jia

[Chinese]

Katherine Yao

We are moving forward in our development of the industrial park in Wuhan, as the foundation has been laid. We can see update -- you can see update in the presentation and found on our website. We did have delays due to delays by the construction company in charge of the project, and deferred our payments by 2 to 3 months. However, construction has resumed and that we expect to accelerate the construction process for the remainder of 2014.

We continue to receive numerous increase and positive feedbacks from other jewelry companies, and anticipate any additional capital from advance rental fees. We have, at Slide 4, presale approvals from the local government and when they use the proportion any of the proceeds [indiscernible] as the result of such approval to fund the project. We will continue to give investor updates on quarterly basis.

Zhi Hong Jia

[Chinese]

Katherine Yao

With that, I will turn it over to Bin. I would now like to turn the call over to Bin.

Bin Liu

Thanks, Katherine.

Katherine Yao

I would now like to turn the call over to Bin.

Bin Liu

Okay. Thank you, Katherine. I'll start with an update of our sales volume for the period. Kingold sales are primarily composed of the sales of branded products and customized products. Kingold sells its products to customers at a price that reflect the marketed price of best material, as a markup of the design and the processing fees.

Among the 17.9 metric tons we processed during the second quarter, branded products accounted for 8.7 metric tons and the customized products accounted for 9.2 metric tons.

In branded products, we purchased gold directly from the Shanghai Gold Exchange once a customer has placed an order. And we recognize revenue on sales of branded products when the goods are delivered. Thus, the cost of gold is reported as part of our revenue.

In customized production, our customers supply the raw materials to us and we create the product per the customer's instruction. And thus, the cost of gold is not recorded as part of our revenue.

For the first half of 2014, we processed a total of 32.3 metric tons of gold, of which branded production accounted for 16.6 metric tons, representing 51.4%. And the customized production accounted for 15.7 metric tons, representing 48.6%.

Before I get into the financials, I believe it's important to explain how commodity prices impact Kingold's business, or more specifically, sales, as was the case in this quarter.

A rapid change in the market price have made it difficult to pass on current market costs competitively to customers. However, we have seen the prices rebound in recent weeks and throughout the shift did not see any lessening of demand.

The company reported revenues for the 2014 second quarter of USD 339.8 million, compared to USD 367 million for the same period in 2013. The slight decrease in revenues was primarily due to the overall decrease in the price of gold in the second quarter of 2014.

Gross profit was USD 24.5 million during the quarter, an increase of 139.6%, from USD 10.2 million in the prior year period. The substantial increase in gross margin for the second quarter of 2014 was due to a few primary reasons. Number one, we purchased large quantities of gold inventory at the year end of 2013 and in the beginning of 2014, at favorable market prices at that time. As the gold price fluctuates, gross margin in future quarters is not likely to be this high and may well retain the level of past quarters.

Number two, we increased the volume of higher-margin customized production. And lastly, in the second quarter of 2013, we had a USD 6.5 (sic) [5.2] million write-downs of inventory for the 6 months, raising cost of goods sold and reducing the gross margin, and similar adjustments were not required in the second quarter of 2014.

Kingold reported net income for the second quarter 2014 of $16.8 million, or $0.25 per diluted share, compared to net income of $6.3 million, or $0.10 per diluted share, in the prior year period.

Moving to the balance sheet. At June 30, 2014, Kingold's cash and cash equivalents was USD 6.8 million. Inventories, which is gold in our case, was USD 209.6 million, and shareholders' equity was USD 244.1 million. The company's book value per diluted share was $3.69 at June 30, 2014, compared to $3.35 at December 31, 2013.

I would like to close with a few words regarding the company's special cash dividend. On June 17, our Board of Directors announced a special cash dividend of $0.08 per share of common stock. This represents a total amount of cash distributed as part of the dividend of approximately USD 5.3 million. And in our financials, we reported a cash dividend payable as of June 30, 2014. We declare dividend as a means of rewarding our shareholders for our past financial success and as a means of thanking our shareholders for the past and the future support of Kingold.

As we announced last month, we made an adjustment to the payout date of the dividend, which will now be payable no later than August 28, 2014, to shareholders of record as of June 30, 2014. The change is due to the company requiring additional time to receive provisional government approvals in order to disperse the appropriate funds to stockholders, while working with Interwest Transfer Company as the paying agent to this dividend payment to stockholders.

With that, I'd like to turn the call over to our Chairman to provide some more detail on our outlook for the rest of fiscal 2014. Please go ahead, Chairman. [Chinese]

Zhi Hong Jia

[Chinese]

Katherine Yao

Thank you, Bin. Based on stable demand for 24-karat products in China, we are confident in achieving our previously announced 2014 guidance of between 60 metric tons and 70 metric tons of gold processed.

Zhi Hong Jia

[Chinese]

Katherine Yao

We continue to grow organically through solidifying our long-term customer relationships and establish new contacts. Our goal in the past months is to continue to make progress on our industrial park; to extend our partnership with major commercial banks to sell or invest in gold products to the market; and finally, to focus on design, sale and technology development of our business lines, and increasing our processing capacity.

Zhi Hong Jia

[Chinese]

Katherine Yao

Thanks, again, to all of you for joining us. As always, we welcome any visitors to our facilities in Wuhan, China. Thank you. With that, operator, let's open up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Nathan Dardick with Captiva Investment Company.

Nathan Dardick

I have 2 general questions. I understand your cautionary remarks regarding future margins. I'm hopeful that this excellent quarter and other future excellent quarters will enable you to pay more special cash dividends to shareholders. With respect to the most recent $0.08 per share reward, as you call it, and I do view it as a reward, for which I thank you. Is there any risk that you will not receive the provincial government approvals and that this dividend will not be paid, as expected, in the next 2 weeks?

Katherine Yao

[Chinese]

Zhi Hong Jia

[Chinese]

Katherine Yao

[Chinese]

Bin Liu

[Chinese]

Operator

One moment please, the Chairman has disconnected.

[Technical Difficulty]

Zhi Hong Jia

[Chinese]

Katherine Yao

The company has -- getting all the procedures from the government and that a cash dividend will be paid out according to our previously announced time.

Nathan Dardick

Okay. My second general question is for Bin. Bin, since we talked about 6 months ago, can you highlight what steps the company is taking to meet with institutional investors in the United States to get institutional support for the stock?

Bin Liu

Yes, this is Bin. Thank you. We have done a couple of things. First, we have been working with a couple of firms, and also have been reaching to a couple of institutional investors, both in New York, Boston and San Francisco. We are planning to have a -- probably a potential roadshow to this New York property. And we are working with the chairman's schedule, and we'll see what that might be. And also, we have been invite a couple of big shareholders to: A, visit the company; B, just sit down with them, to listen to them, what the company needs to be done. I'll give you a couple of these examples. So that's what we have done so far. And also, we have been trying to reach out to a couple of research institutions to have a potential coverage for -- on that.

Operator

[Operator Instructions] Our next question comes from the line of Justin Scott with Lammergeier.

Justin Scott

This is a question for the CFO. Looking at the revised payment schedules for the real estate development, you have about $40 million due in September and November of this year. I'd like to inquire a little bit about how you intend to finance those payments. I am looking at your debt structure, I noticed you borrowed USD 32 million, a trust loan, paying 13.5% of interest. But looking more recently at your total gold inventory, you had approximately USD 331 million of gold inventory, which you financed USD 122 million through lease agreements at 6%. And I was wondering whether you would consider increasing the amount of gold that you finance with the lease agreements, and thus, releasing cash from inventory. Is that a sort of strategy you are considering?

Bin Liu

Thank you, Justin. Yes, you're absolutely right. As our Chairman laid out, because of the construction company got a little bit delayed, so the payment is slightly delayed. And based on the current conversation with the construction company, everything in -- is facing up, and we supposed to be pay the next tranche in September, which is under the RMB 150 million, which is roughly 40 -- close to USD 25 million, not less than USD 40 million, something around that. But like you said, we have a couple of potential arrangements and choices. We are -- also get the preapproval. If we can get the preapproval from the local government to have a presale in the second quarter -- or third quarter, I'm sorry, then we will be able to finance the remaining with some of the presale [indiscernible] of the property, right? But again, it depends on whether we can obtain the approval from the local government. We are working on it, and hopefully, we'll give you an update pretty soon. That's one of the choices. And the second choice, largely, is that we can increase the gold lease and the release or free up some of the cash, working capital we have. And we've already have been in very, I would say, fruitful conversation with the 3 leading banks that has already been done with us, namely the Pudong Development Bank, the CITIC Bank and the China Construction Bank. The Pudong Development Bank and the CITIC Bank are pretty favorable to extend the relationship with us. And again, once we have any kind of concrete results, we will follow the SEC rules, we'll file an 8-K and make announcement, right? And it's very likely that, that will be one of the banks we can work on. That's our second choice. The third choice is, in a worse scenario, is that we might -- we have some of the cash we have. So we have a slight USD 7 million right now, right, at the end of June 30. And probably a slowdown of the production a little bit to free up the cash, because our inventory and the cash are pretty much interchangeable. So this is the 3 primary choices for us. And we are very confident that the first one or the second one will work out. But if we worked it out, we will make announcement.

Justin Scott

Great. Second question, and it's for either Bin or the Chairman. Would you expect the margins by the fourth quarter to be back towards your historical levels of 3%? Or do you expect them to still be higher than 3%, based on your comments about the mix of product?

Bin Liu

[Chinese]

Zhi Hong Jia

[Chinese]

Bin Liu

Hey, Justin, sorry about that. I just summarized what's your question for the Chairman. Basically, the margins, right? The margins highly depends on 2 things. One is the product mix, right? So if we have more of -- proportionally, more of the customized product, which is at very high margin, like 80-something, sometime 90%, right, because the gold is not part of the goods. So if we have slightly more mixture of the product margin, then the margin will normally higher. However, the customized production is not actually in our control. It's not in our control because they partly depends on whether the customer willing to give us more gold, right? But of course, we are trying to attract more, but that we cannot control. That's one thing. Number two is about the gold price. So if the gold price have a substantial increase, right, our sales volume will grow up. However, margin will probably get a little bit of pressured, right? That's what we saw in 2013. The third thing, probably, is like a very, I don't know, I wouldn't call it seasonal, no, but it's about -- associated with the gold price as well. Because it depends on where we are get in, of course, the gold inventory, right? If we bought -- after we -- and shortly after we bought the gold inventory, and then the gold price have sort of a substantial drop, which is very abnormal, but this could happen, like in April 17, 2013 and then June 20, June 21, 2013. This could happen. Then we will probably suffer a write-down or write-offs, right? So that's exactly what we have in Q1, Q2 last year, 2013. Hopefully, this year, we won't have this kind of surprise, so to speak, because hopefully, the gold market could be stabilized. And so far, this is the case, around USD 250 to USD 350 per ounce, the gold is pretty much in this range for this year. So if this continued to be -- it's still a big if, if the gold price continue to be this. And we -- it seems to be that we will have more customized products, this is still the trend, then our margin will be slightly better than last year. But I wouldn't say this will be as high as in Q1, Q2. Because Q1, Q2, remember that, we have like a couple of million dollar for a write-down last year. This was not this year, and I don't believe this could be the case again. But in general, I would expect or we would expect the margin will be slightly improved, but will not -- as high as like 7% or 6%, but will be slightly better than like the normal 3%.

Justin Scott

I guess my suggestion is we actually don't look at the margins in percentage. The best way to look at margin is really dollar per gram, because then it doesn't get affected. This is a markup business, you charge certain dollars per gram, and that's -- but then it's less affected by the mix between customized and branded. And the dollar per gram margin has been very, very good for the 6 months, and we'll see how it does for the next 6 months.

Bin Liu

Yes, I agree. And that's -- we talked before, right? So we'll try to talk with the auditors about this to see what's the best way to disclose it.

Operator

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Bin Liu

Thanks again for -- to all of you for joining us. We look forward to speaking with you again in November, after we report our third quarter financial results. As always, we welcome investors in the business to our facility in Wuhan, China. Thank you very much.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Kingold Jewelry's (KGJI) CEO Zhi Jia on Q2 2014 Results - Earnings Call Transcript

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