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Gulf Resources, Inc. (NASDAQ:GURE)

Q3 2012 Earnings Conference Call

November 09, 2012 08:00 a.m. ET

Executives

Max Ma – IR Manager

Xiaobin Liu – CEO

Min Li – CFO

Analysts

Peter Cyrus

Operator

Good morning, my name Felicia, and I will be your conference operator today. At this time I would like to welcome everyone for the Gulf Resources 2012 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) And please Ms. Ma, you may begin your conference.

Max Ma

Thank you, operator. Good morning, ladies and gentlemen and good evening to those of you joining us from China. And I would like to welcome all of you to Gulf Resources Third Quarter 2012 Earnings Conference Call. My name is Max, the IR Manager of the company. Our CEO and CFO of the company is Mr. Xiaobin Liu and Mr. Min Li will also join our call today.

I will be offering translation for the managements comment for the Company’s operating results. I wanted to remind you, who are listening in this call, our managements remark will contain forward-looking statement, which are subject to risk and uncertainty. The management may make additional forward-looking statement before the Company claims the protection of Safe Harbor for forward-looking statements and contains in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today depending upon a number of risk factor, 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 competition from the existing and new competitors for bromine and other oilfield, agricultural and power production chemicals and changing technology, ability to make future bromine asset purchases and various other factors beyond the Company’s control.

All forward looking statement are expressly qualified in their entirety by this cautionary statement and the risks factors detailed in the Company’s reports filed with the SEC. Accordingly, our company believes the expectation reflected in these forward-looking statements are reasonable. And there can be no assurance of such exhibits proved to be correct.

In addition, any reference for the company’s future performance represents the management estimate as of today the 9th of November, 2012. Gulf Resources assume no obligations after 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. That is also accessible to broadcast and the link accessible through our website. Please look at press release issued earlier for details.

It is now my pleasure to turn this call to Mr. Liu, the Company’s CEO, who is going to provide some initial remark and then I will translate.

Xiaobin Liu

First of all, thank you for participating in our third quarter 2012 earnings conference call. The Chinese economy occurring at a lower paces mainly as a result of percentage in private investments and tight control over housing prices. The past few months of the fiscal year 2012 had also been regarded as the slowest growth period, (inaudible) the bromine prices have recorded the lowest selling prices in mid September in the recent years.

Our all other present segments were also negatively affected, any less or decrease in market demand in the varying degrees for all our segment products and comparisons to the same period last year, we recorded a significantly lower operating performers in the third quarter of this year. Primarily due to the reduction of bromine price volumes, while the average bromine prices are declined on $3,597 per ton in the same period of last year, $2,899 per ton in the third quarter of this year.

The sales price of the presto remains almost unchanged compared to the third quarter of 2011 however, the sales volume had decreased due to an unfavorable market condition in the chemical segment despite an increase achieved in the sales price of oil and gas additives and the sales volumes of pesticides manufacturing additives, chemical product had a recorded lower performance in terms of those sales price in the sales volume.

In the near term, we are exposed to the influence on the slowdown in economy and uncertainty of the economic policies after the leadership change in the central government. And we cautiously express economic conditions as far as the bromine prices to remain at a constant level but slightly down in the rest of the year and we will manage cost changes and we’re confident and we’ll try to accomplish performance target set forth in the 2012 earning comparable chart.

Max Ma

Thank you, Mr. Liu. I’m going to continue with presenting financial results for the third quarter of 2012 on the behalf of the CEO. The slowdown in the economy growth in China have affected the chemical industry, and caused the selling price and sales volume in bromine to be lower than the same period of last year, due to the weakening lost demand and with the main factor that caused the company to report a lower performance in the third quarter of this in comparisons to the same period of last year.

The average selling price of the bromine had decreased from 3,597 per metric ton for the third quarter in 2011 to 2,899 per metric ton, per dollar per metric tons for this quarter, representing a decrease of nearly 20%, the company believes the bromine prices will slightly increase by a small degree, should the economic conditions remains constant in the rest of the year.

Crude salt prices have remained approximately unchanged at $37.7 per ton in the third quarter of this compared with roughly $37.1 per ton for the same period a year ago. However, the sales volume will decrease 30% to 4,815 tons in the third quarter of this year from 6,900 tons in the same period of last year. And the third quarter of 2012, the company’s bromine and crude salt segment had each contributed $14 million and $2.4 million, or nearly of 67.0% of the total revenue for an aggregate amount of the $16.4 million in total.

In the third quarter 2012, $8.2 million of total revenue comes from the sales of chemical products. The average selling price and sales volume have both decreased in the varying degree among the three types of different products in the chemical segment, compared to the same quarter last year.

Expect sales volume of testifying manufacturing additives and the sales price of oil and gas exploration additives which have increased 7% and 19% in the third quarter of this year respectively.

Now, I would like to provide some more detail on the financial performance. The company’s total revenues was $24.5 million for the third quarter of 2012, a decrease of 35.0%, from $37.8 million for the third quarter of 2011. The decrease in net revenue was primarily attributable to the reduction of overall demand for all of the segment products, especially in bromine segment.

Gross profit for the third quarter of 2012 was $7.4 million, a decrease of 47%, from $13.9 million from the third quarter of last year. And our gross profit margin for the third quarter in 2012 was 30.3%, compared to 36.9% for the corresponding period of last year. The decrease in gross margin was mainly due to the decrease in selling prices in bromine segments.

Sales, marketing and other operating expenses for the third quarter of 2012 was $20,327 compared with $20,116 for the same quarter last year. The decrease in the cost in the third quarter of 2012 was mainly due to a decrease in sales to have cost reduced in sales related expenses.

General and administrative expenses for the third quarter of 2012, was $2.3 million, compared to $5.5 million for the third quarter of 2011. The decrease of $3.2 million was primarily due to the inclusion of a non-cash expense related to cancellation of non-vested stock options in the third quarter 2011.

Income from operations for the third quarter of 2012 was $5.6 million, compared to $8.7 million for the same quarter of 2011. The operating margin was 23.0% for the third quarter of 2012, which is almost the same as to the operating margin a year ago.

Other operating income was $0.7 million for the third quarter of 2012 as compared to $1.4 million for the same period in 2011. For the third quarter of 2012, the Company incurred other income of $13,661 compared to income of $17,647 for the corresponding quarter last year.

Income tax was $1.5 million for the third quarter of this year, representing a decrease of 52% from $3.2 million for the third quarter of 2011. The Company’s effective tax rates were 27% and 36% for the third quarter 2012 and 2011, respectively.

The company’s net income was $4.1 million for the third quarter of 2012 as compared to $5.6 million for the third quarter of 2011. Diluted earnings per share for the third quarter of this year, was $0.12 per share compared to the $0.16 per share in the third quarter of 2011.

And now for the company’s business outlook for the year 2012 and onwards. Given the bromine in September and gradual recovery to have followed and management believes that bromine prices are likely to stay constant or slightly have to rise further supported by a stabilized market and business conditions. From the outset of business risks and overall economy our business are subject to operating risk and they arise on the slowdown of the economy and uncertainties of the policies from the central government by the new leadership.

Therefore the company intent to reserve the cash on hand in order to prepare for the quality constraint of change in the need of working capital and an unforeseeable future conditions. However, as investment opportunities arises from current economy conditions, featuring undervaluation of strategically fits or a long term growth, that would also be duly evaluated and considered for the goal of profit enhancements and shareholder’s value maximizations.

The company has held 2012 a new shareholders meeting on October 16 in Shouguang, China. For information related to the voting results of the meeting, please refer to our current report on Form 8-K filed on October 16 on the website of the U.S. Securities and Exchange Commission.

Since the launch of the internal IR Department in April this year, Gulf Resources has received many positive feedback and helpful suggestions. For further investor inquiries, investors may continue to reach our IR manager and CEO’s Assistant at the email address disclosed at our website.

With that we will like to open up the call for any questions pertaining to the third quarter financial and operating performance. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line Peter Cyrus

Peter Cyrus

Yeah, I would like to ask about bromine prices and bromine demand. Two questions, first, are you being impacted the same as everybody else or different from everybody else, that’s my first question?

Max Ma

Okay. (Foreign Language).

Xiaobin Liu

(Interpreted) Peter, to answer your first question, our CEO Mr. Liu answered that. We are generally having the same impact as everybody else by the slowdown of the economy which leads to a lower bromine demand, which leads to a lower bromine prices.

Peter Cyrus

And what are issues that need you to believe that price is stabilized to go up a little bit?

Max Ma

Okay. (Foreign Language)

Xiaobin Liu

(Interpreted) Peter, to answer on the second question, our management believes that are from the economy indicator in October, it had showed the signs from couple of in the, the economy indicator that shows that our economy has started to stabilize compared to September and October and in the past few months. And secondly, he also saw the signs of expansion of the credit bromines and as far as the losing control on bromine prices and he believes those are the factors that’s going to help the economy with recovery and they will further lead to slightly increase in the bromine prices.

Peter Cyrus

And my last question is because of the weakness, has he seen other competitors go out of business so on the economy approved – market share?

Max Ma

Peter, do you mind repeating the other question I’m sorry because I was talking, I didn’t really hear it very clearly?

Peter Cyrus

Okay.

Max Ma

Of the weakening of the…

Peter Cyrus

Okay. Have competitors, they slowdown perhaps smaller competitors going out of business and would that give you an opportunity to pick-up share when the market improves.

Max Ma

Okay. (Foreign Language).

Xiaobin Liu

(Interpreted) Peter, to answer your final question, our management Mr. Liu, he thinks this is absolutely possible as it might bring new opportunity to us, due to the weakening demand on bromine price than it was in economy, because those companies in the smaller size compared to (inaudible) to the economy and shift in the policy and therefore there could be more opportunities that arise for the emerging and acquisition purposes.

Operator

(Operator Instructions) And there are no further questions at this time.

Max Ma

Okay, operator. Thank you very much, if there are no further questions then I’ll 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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