Gulf Resources' (GURE) CEO Xiaobin Liu on Q4 2016 Results - Earnings Call Transcript

| About: GULF RESOURCES (GURE)

Gulf Resources, Inc. (NASDAQ:GURE)

Q4 2016 Earnings Conference Call

March 20, 2017 08:00 AM ET

Executives

Helen Xu - IR

Xiaobin Liu - CEO

Analysts

Operator

Good morning, my name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources 2016 Fourth Quarter and Annual Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

I will now turn the conference over to Helen Xu. Please go ahead.

Helen Xu

Thank you, operator. Good morning, ladies and gentlemen and good evening to those of you who are joining us from China and we would like to welcome all of you to Gulf Resources' fourth quarter and fiscal year 2016 earnings conference call. And we are sorry for the delay to joining this call due to the line problem from China. And my name is Helen, the IR Director. Our CEO of the company Mr. Xiaobin Liu will also join this call today. I will be offering translation for the management’s comments for the company’s operating results.

And I would like to remind you, to all our 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 competition from the existing and new competitors for the bromine and other oilfields, agriculture and flame production chemicals and changing technology, the ability to make future bromine asset purchase and 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 believe that a expectation reflecting in these forward-looking statements are reasonable and there can be no assurance of such will prove to be correct. In addition, any reference to company’s future performance represents the company management estimates as of today, the 20th of March, 2017.

Gulf Resources assumes no obligation to update these projections in the future as market conditions may change. For those of you who unable to listen to this entire call at this time, a replay will be available 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 early for details. [Indiscernible] this cash earned for the financial statements can be part and later Mr. Liu will give the summery and the business forward looking.

So first of all on Friday afternoon, the company had issued a press release with our earnings and other financial information. We also filed our 10-K, we want you to have the opportunity to read our press release well via the route of our call this morning.

I would like to start today by covering some of the important highlights. 2016 was a year of substantial accomplishments and significant domestic economic headwind. However we are very pleased to have ended the year with an increase in profits in the earnings per share as well as an increase in larger cash position. We have completed the construction of our first natural gas and the bromine well in Sichuan. We have built the [indiscernible] equipment, trained the workers, begun fast production and applied for product quality inspection report. We believe we will often report in the value of the future and then we'll be able to secure customer for the natural gas production.

Mr. Liu will be talk about our future plans for this evening later in the call. Near the end of fourth quarter 2016, the company -- near the end of the first quarter of 2016, the company showed a substantial slowdown in order. Management believes that despite the continuing down turn in the company -- in the Chinese economy, many of its customers face liquidity constrains from the local banks. Because of these constraints many customers postponed their orders, the timing of Chinese New Year also appears to have had impacted on the quarter.

Since the Chinese New Year was in January and was earlier than last year, it appeared that many customers choose postpone their orders until after the new year. This downturn was reversed in the first quarter of 2017, once the New Year was over we began to see strong increase in orders in our business segments. While the first quarter is not yet complete, the company ultimately take of the current state of its business.

About the financial results for the fiscal year ended December 31, 2016, the net sales was approximately $149.2 million, a decline of 8% compared to $162.3 million in a previous year. Sales of bromine product increased 8% to approximately $56.8 million compared to $52.4 million approximately. Sales of crude salt declined 14% to approximately $8.99 million as compared to approximately $10.5 million, while sales of chemical products declined 16% to approximately $83.5 million from approximately $99.4 million approximately.

Gross profit totaled $54.5 million, an increase of 2% compared to $53.3 million in the previous year. The write off of properties, plant and equipment declined to $106,500 from $969,600. However the company also took a loss on the demolition of factory 6 including the value of property, plant and equipment, and mineral rights of total $1.1 million approximately. Taken together, the total write-offs for 2016 were $1.2 million, an increase of 20%. General & Administrative expenses were $5.4 million, a decline of 19% from $6.7 million in the previous year. Other operating income was $433,800 compared to $553,700.

Income from operations was $47.7 million, an increase of 6% compared to approximately $45.2 million. Income before taxes was $48 million, an increase of 6% compared to $45.4 million. After tax earnings were $36.2 million, an increase of 6% compared to $34.1 million.

Basic earnings per share were $0.78, an increase of 4% compared to $0.75. Fully diluted earnings per share were $0.78 compared to $0.74, an increase of 5%. We are pleased to have exceeded our net income guidance slightly for 2016 despite the continuing downturn in the Chinese economy and the financial tightening that has impacted many of our customers.

For the cash flow part, our cash flow remained very strong. Our net income was approximately $36.2 million. Depreciation and amortization, including prepaid land leases was $25.7 million. Accounts receivable increased by $6.2 million. Unrealized translation losses were $1.7 million. And total, net cash provided by operating activities was $55.2 million. This equals to almost $1.18 per share.

We invested approximately $16.9 million -- 17 million in property, plant and equipment and received approximately $2.8 million, the compensation from the government. All totaled we spent $14.96 million in investing activities. Our free cash flow before the impact of exchange rates was $39.97 million or $0.85 per share. The change in exchange rates cost almost $9 million and $9.7 million.

Even with the negative exchange rate, our cash increased approximately $30.3 million or $0.65 per share to $163.9 million or $3.50 per share. We are very proud of our ability to generate strong free cash flow while continuing to grow our earnings and build new businesses.

Now looking at the balance sheet. As noted, we ended the year with almost $163.9 million in cash. Our current assets were $221.8 million almost $4.74 per share. Excluding the change in cash, our current assets were essentially unchanged. Non-current assets declined to approximately $143.9 million from $165.9 million reflecting lower investment in PP&E and lower goodwill. Current liabilities were $13.9 million down from $16.1 million. Working capital was $207.8 million approximately $4.44 per share. Net, net cash, which is cash minus all liabilities was approximately $147.7 million. This equals $3.19 per share. We do not think there are another profitable companies [indiscernible] large discount to their net, net cash. Shareholders’ equity increased to $349.5 million or $7.55 per share.

We are extremely pleased to have continued to improve our cash balance sheet. Our very strong cash position should put us in a position to develop our natural gas and bromine resources in Sichuan while continuing to look for further acquisitions in the bromine and chemical industries. Now we look at fourth quarter 2016 results. For the fourth quarter, net revenues were approximately $28.4 million compared to $35.5 million approximately a decline of 20%.

The primary reason for the decline was the capital constraints of many of our customers. The company has seen a good resumption of orders in all segments during the first quarter 2017. Income from operations was approximately $7.8 million a decline of 19% from the year earlier period. Net income was $6.0 million approximately a decline of 17% from the year earlier period. Primary earnings per share were $0.13 versus $0.16. Fully diluted earnings per share were $0.13 versus $0.16.

Now I would like to turn the discussion to our business by segment. First, we look at bromine segment. For 2016, net revenues in bromine were $56.8 million and increase of 8% compared to $52.4 million in 2015. The major contributor to the gain was the selling price that increased 20% to $3,799 from $2,162. The sales volume of bromine decreased 10% to 14,955 ton, the decrease was caused by slowdown in the Chinese economy and the financial tightening which had affected our customer's industry. The cost of revenue per ton of bromine declined to $2,292 from $2,334 despite a lower utilization rate of our factories, much higher selling prices and the lower cost. A profit in our bromine segment increase to approximately $21.2 million, an increase of 96% [ph] from approximately $10.9 million in 2015.

As noted, prices have continued to rise in 2017. In 2016 [indiscernible] utilization rate was well under 40%. Our orders have been improving, if the Chinese economy debt improve we could have significantly upside leverage in our bromine sector. During the year 2016, we sought to close our factory number 6, so account dated at 12 days impairment of the [indiscernible] government. The government paid us approximately the book of value of the property, plant and equipment of our factory. However, the company took a total loss of the demolish of factory six including a value of property, plant and equipment, and the mineral rise of total approximately $1.1 million.

As noted during the year 2016, the price of bromine continued to improve for the year as a whole, the average selling price per ton increased 30%. It was an addition to a 9.6% increase in the previous year. In 2014 to 2016, bromine prices increased 31.6%, the strength was continued into 2017. In early March 2017, the price of bromine was $4,142, a 9% increase from year 2016. From 2014 to March 2017, the price of bromine has increase 43.5%.

The number of factors have been driving the period of -- the price of bromine worldwide demand continued strong [indiscernible], traditionally constrains, the shift of [indiscernible], perhaps the largest producer in the world have more than doubled in the last five years. The decrease in the value of the RMB versus the U.S. dollar has further supported the pricing impairment as a significant portion of the bromine consumed in Chine is important.

Several factors impacted higher selling price. The worldwide supply demand equation continue to be matter of fact favorable as we continue from the price increase of major international producers. Supply in China continued to be reduced both the cost of wells a less productive and because the government enforcing the closer of some facilities for environmental in other reasons.

We are also investing substitution money to improve our production facilities. In 2016, we have invested approximately $15.23 million to carry out enhancement project for our bromine production and crude salt production facilities. We expect to spent similar amount of money for 2017, we believe this enhancement project will reduced [indiscernible] and attempt to recover the annual production capacity of bromine and crude salt to a hair [ph] level in the future.

While we are essentially pleased with the improvements of earnings we have out bromine sector. The current that feel only about half of what we have earned in the past. Our bromine facilities are currently operating at a [indiscernible] 40% of utilization rate. As the Chinese economy begins to improve and the utilization rate increased, we should have substantial leverage in our bromine business.

Finally, we would like to remind investors that when we begin powering Sichuan Province, our initial exploration was for bromine in our initial test in on bromine in concentration that were many times higher than those in Sichuan Province, because the areas were so remote on the mountain, we could know if we could have profitability produced its bromine. As we continue to through our test in [indiscernible], we discovered natural gas. Most of our discussion and our press releases relating us to [indiscernible] are focused on natural gas because of this in both the new business and the very last business opportunities.

However, our trading license has to both bromine and natural gas, if we are able to fill a number of wells [indiscernible] infrastructure for natural gas, we may also be able to utilize this growth in our infrastructure to profitability product bromine, a key issue will be deciding how larger a fracture to use. The financial projections we have given for our wells income only relates to natural gas. However, if the bromine constitution are as technically they appear, we could also develop a substantial new bromine and crude salt mining and production capacity.

We have not yet decided how and where we are going to develop our bromine facilities in [indiscernible]. Our initial focus in [indiscernible] and producing natural gas. However, we are actively focusing on potential large broadening opportunities in Sichuan Province.

So, we now we have crude salt segment, for is a byproduct of bromine. 2016 was not a good year for crude salt. As you can see from the press release crude salt revenue was $8.9 million a decrease of 44% from $10.5 million in 2015. That increased net revenue from our crude salt segment was due to the decrease in both the sales volume and selling price of crude salt. The sales volume of crude salt decreased by 4%, while the average selling price decreased by 11%. Income from operation in crude salt declined to approximately 9.1 million, approximately $39,076 from $1.2 million.

Now, we look at chemical product. Revenues in Chemical Products were approximately $83.5 million, a decrease of 16% from $99.4 million in 2015. By volume in tones, chemical products declined 17%. The steepest declines were in oil and gas exploration, paper manufacturing, and pesticides manufacturing additives, each of which declined between 28% and 30%. Pharmaceutical intermediaries and byproducts declined 6% and 0.2% respectively. This decrease was primarily attributable to the slowdown in the Chinese economy and the financial tightening, which has affected our customers’ industries.

Net revenue declined in all segments, except byproducts, which showed a small increase. Net revenue from our oil and gas exploration chemicals contributed approximately $99 million. Net revenue from our paper manufacturing additives contributed approximately $3.5 million. Net revenue from our pesticides manufacturing additives contributed approximately $19.2 million. Net revenue from our pharmaceutical intermediates contributed approximately $34.2 million, while net revenue from our byproducts was $14.8 million.

Income from operations in our Chemical segment equaled to approximately $25.5 million, a decline of 23% from approximately $33.0 million in 2015. The decline in our chemical segment were essentially attributed in the first quarter, when sales were decline, the major decline was oil and gas, paper and the pesticides manufacture addictive decline 38%. Pharmaceuticals declined by 11%, while byproducts declined by 1%, they attributable a [indiscernible] of the decline to a slowdown in the Chinese economy and the financial tightening, which has affected our customers’ industries.

Since the beginning of the current quarter the company has seen an increase in sales of chemical product, there is no way of knowing if this increase will continue, however the company believes that economy is slowly starting to improve, the addition to financial and environmental condition that are impacting the bromine investment also impacting the [indiscernible].

In year 2016 the company announced a merger of true chemical subsidiary, because of the paper work has not been completed and the company is still represented by separate businesses, the company expect the merger of this businesses were completed in the near future.

Now I like to turn the call over to Mr. Liu our CEO of the company to discuss about our natural gas and Brine project in Sichuan Province.

Xiaobin Liu

We are continuing to make excellent progress with our natural gas and brine project in Sichuan Province. And we have seen from our press release for the fourth quarter on company Web site, the company had installed all of the media equipment and also begin trial production and begin training its workers. We have applied for the needed operational and safe production certificates in other to begin production. The company has also applied product quality inspection report, after we get this report company will [indiscernible] customers for the natural gas production. Based on everything the company has seen now up-to-date, it believes the natural gas and brine opportunity in Sichuan will be extremely profitable.

The current plan is for the company to apply for the permission to begin exploration and drilling of between two and five new wells in year 2017. The costs of these wells will depend on the geographic underground structure in each of the locations of bromine. However, on a conservative basis, company does not expect the average cost of a well approximately $10 million.

In addition, we’d like to reiterate that the company approval permission for drilling includes both natural gas and brine resources in to bromine and crude salt. Based on earlier tests, it appears that the concentration of brine is many times higher than the concentration of brine water in Shandong Province. Given the current strong price of bromine and the actions by the Chinese government to limit production for environmental reasons. We believe it could have substantial opportunity for the development and production of bromine in Sichuan Province. We will wait until we have sufficient number of wells drilled before deciding how it will move ahead to develop these brine resources.

About the future business comments, we are very optimistic about our future, with half our environmental requirement, most [indiscernible], licensing vendors and the tightening of financial, we believe that many smaller producer of bromine and relate chemical maybe forced too close. In addition barriers to entry to the new -- for the new participates are getting much higher, this meanings that the price should continue to improve and that we should be able to increase our share of the market. It also means that we will be able to make objective decision in both our bromine and chemical segment and prices.

In Sichuan we are now considering the potential of export related business. Exports offers us opportunities to expand our business. In addition, exports could lead to a diversification of our financial and currency base. We are recognizing that Chinese government has put in place constraints that make it difficult to take money out of China. As such we are actively exploring trade free that we are enable us to take steps to diversify our business in a manner that we are intense shareholder's value. To date, we have been unable to pay dividends or buyback large amount of stock, because of this cash flow control. If we could succeed in developing export related business, we would have much more flexibility which could enable us to have investors recognize some of our underline values.

However, there is no guaranty that we will be able to develop this export business. The company will like to assure our investors that we will be -- this will be a focus in the future of the company.

So now I’ll turn the call back to Helen.

Helen Xu

So now I would go back to a discussion on the 2017 guidance. We will provide full 2017 guidance when we report the first quarter 2017 results, however at the present time we are optimistic, we believe that both our bromine and chemical segments should show gains over 2016. We are seeing structural changes in our industries because of government regulations and capital constraints that should restrict competition and lead to better pricing. We also expect to begin producing natural gas at our first well in Sichuan in a relatively short period of time.

So, now I would like to open the call to questions. Operator let's start with question-and-answer part.

Question-and-Answer Session

Operator

[Operator Instructions] I'm not showing any questions in queue. Actually, now you do have a question. It comes from the line of John Wells [ph].

Unidentified Analyst

Two question. The volume in both your major businesses seem to have decreased in the fourth quarter of 2016. Is the volume of sales being experienced in the current quarter higher than that of the first quarter of 2016?

Helen Xu

Hi, John I just want to make clear of your question, do you mean 2016, as compared to 2016 quarter fourth and the 2017 first quarter the volume of both segments had been increased/decreased, right?

Unidentified Analyst

Your volume decreased in both the bromine and chemical sectors in the fourth quarter of 2016, you stated some grounds for optimism in the current quarter, the first quarter of 2017, and my question is, is the volume in the first quarter of 2017 higher than that of the corresponding first quarter of 2016?

Helen Xu

Do you mean all segments, or just for chemicals?

Unidentified Analyst

Bromine and chemical.

Helen Xu

[Foreign Language]

Xiaobin Liu

[Foreign Language]

Helen Xu

Hi, John here is answer from Mr. Liu, he said that, and if you note, it's not [indiscernible] 2017 first quarter clearly financial results yet, but from the trend up to date we can see that the volume, setting volume of bromine and chemical segment will be higher than the first quarter of 2016.

Unidentified Analyst

How about compared to the first quarter of 2016?

Helen Xu

First quarter 2016, [Multiple Speaker], hello hi John.

Unidentified Analyst

I want to make sure the volume of sales we’ve experience in the current quarter is higher than that of the same quarter of last year.

Helen Xu

[Foreign Language].

Xiaobin Liu

[Foreign Language]

Helen Xu

Hi John, so as compared to the '16 first quarter and first quarter of '17 from now the thing that we can see the bromine will be higher than last year in terms of revenue and volume. But chemical situation is not clear yet; we're doing to best to increase it.

Unidentified Analyst

Okay thank you, my other question has to do with the wells, when do you expect revenues from natural gas from your first well to begin. And what is the schedule for installing the 2017 wells, [indiscernible] transition to operations.

Helen Xu

[Foreign Language].

Xiaobin Liu

[Foreign Language]

Helen Xu

Hi John, first regarding your first question of the -- first well when it contribute to revenue. We have explained in our press release and this call as well. The company has applied to the natural gas products quality inspection report. Once we have this report than we can show customer and then we will be able to secure customer and sign the formal selling -- sales agreement. So it can generate revenue. We believe this won’t be long maybe approximately within amount, we can have this done.

[Foreign Language]

Xiaobin Liu

[Foreign Language]

Helen Xu

Okay. Regarding the 2017, new wells spent. We also have discussed before in our press release previously that. We say that the company will start the next step for this new well within half a year since the formal production of the first well started.

Unidentified Analyst

Okay. Thank you.

Helen Xu

Okay. Thank you. You’re welcome.

Operator

Your next question comes from the line of Joe Ski [ph].

Unidentified Analyst

Yes. So I’m just wondering, so a company, are you planning on doing any buyback, any buying [indiscernible]?

Helen Xu

Is this the question? Thank you.

[Foreign Language]

Xiaobin Liu

[Foreign Language]

Helen Xu

Hi Joe, the response from Mr. Liu says that until now we do not have clearly expected plan yet for this buyback.

Unidentified Analyst

Okay. Thank you.

Operator

At this time, there are no further questions.

Helen Xu

Okay. Operator, if there is no questions can we close the call for today. Thank you.

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