Kingold Jewelry, Inc. (OTC:KGJI) Q4 2018 Results Earnings Conference Call April 3, 2019 8:30 AM ET
Katherine Yao - The Equity Group
Bin Liu - CFO, Principal Accounting Officer & Secretary
Zhihong Jia - Founder, Chairman, CEO & President
Conference Call Participants
Allen Barbarich - Spartan Trading Group
Greetings. Welcome to Kingold Jewelry 2018 Fourth Quarter and Year End 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]. Please note this conference is being recorded.
I would now like to turn the conference over to your host, Katherine Yao of The Equity Group. You may begin.
Thank you, Sherry, and good morning, everyone. Thank you for joining us. A copy of the press release announcing 2018 fourth quarter and year-end 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 an accompaniment 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 meaning of the Safe Harbor provision of the Private Securities Litigation 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 Kingold Jewelry's filings with the Securities and Exchange Commission. Regarding the disclaimer language, I would also like you to refer to Slide number 2 for this webcast presentation for further information.
Management presenting on the call today are Kingold Jewelry's CFO, Mr. Bin Liu; and Kingold Jewelry's Treasurer, Mr. Xiao Hu.
Now I would like to take a moment to outline the format for today's call. First, I will read our opening statement prepared by company's Chairman and CEO, Mr. Zhihong Jia. And I will then turn the conference call over to Mr. Bin Liu, Kingold Jewelry's CFO, who will continue with the presentation. When the company has finished the presentation, we will open the floor for questions.
With that, I will try to read the opening statement from Kingold Jewelry’s Chairman and CEO, Mr. Zhihong Jia.
Good morning, everyone. Thank you for joining our 2018 fourth quarter and year-end conference call. We are proud to have achieved all aspects of financial and operational growth for the year 2018 and surpassed our previously provided processing volume while gaining double-digit percentage growth in all indices. Our CFO will provide financial details later in our presentation.
According to the World Gold Council, in 2018, the annual jewelry demand in China increased by
3% as the retail industry continued to expand and innovate, and certain sectors of the gold jewelry market were robust and ultra-high purity products performed well in some regions and 3D hard gold continues to grow. I have reported to everyone in the past earning conference calls that we have made tremendous efforts toward development and designing of 3D hard gold jewelry products.
As of today, we processed about more than 2,000 of own 3D hard gold jewelry products designed and was well received by our customers. Also based on our management's analysis on the gold market trend, we intend to continue to expand market coverage by diversifying our sales channels for gold jewelry and investment products and continue to explore gold investment to further implement our strategic expansion.
Looking ahead, we are dedicated in building the Kingold brand as an increasingly important participant in the gold industry in China, while continuing to expanding our production capacity, designing capabilities and sales channels. Meanwhile, we expect to explore both upstream and downstream markets to optimally utilize resources within China’s gold industry, thus to advance our company’s position as a leader in furtherance of the gold industry development, along with our peers.
To conclude; based on our existing resources and capacity along with strong demand for 24-karat gold products in China, we believe that our gold sales are expected to be between 110 metric tons and 120 metric tons during fiscal year 2019.
On behalf of Kingold, I look forward speaking to all of you in presence and welcome to visit our facility in Wuhan to take a tour. Thank you.
With that, I would now like to turn the call over Mr. Bin Liu, Kingold’s Chief Financial Officer. Please go ahead, Mr. Liu.
Thank you, Katherine, and welcome again. Today I will focus on Kingold's fourth quarter and year-end operating and final results for 2018. Kingold sales are primarily composed of the sales of branded products and customized products. Kingold sells its products to the customers at a price that reflects the market price of base material plus a markup of design and processing fees.
In branded production, we purchased gold directly from Shanghai Gold Exchange, once a customer has placed an order. And we recognize revenue of sales on branded products when the goods are delivered, thus the cost of gold is recorded as part of our revenue. In customized production, our customers supply us the raw materials and we create products per the customer's instructions. And the cost of gold is not recorded as a part of our revenue.
During the fourth quarter of 2018, we processed approximately 33.7 metric tons of 24-karat gold, increased 8% compared to 31.2 metric tons for the same period last year. Among the 33.7 metric tons we processed during the fourth quarter of 2018, of which branded products accounted 16.4 metric tons or 48.7% of the total volume, and the customized production accounted for 17.3 metric tons or 51.3% of the total volume.
For the year ended December 31, 2018, we processed approximately 114.2 metric tons of 24-karat gold products, an increase of 10.4% compared to 103.4 metric tons for the same period last year. Among the 114.2 metric tons we processed during 2018, of which branded production accounted for 62.9 metric tons or 55.1% of the total volume, and the customized production accounted for 51.3 metric tons or 44.9% of the total volume.
In the three months ended December 31, 2018, the company reported net sales of approximately [$633.1 million], an increase of 3.9% from US$657.1 million for the same period in the prior year.
For the year ended December 31, 2018, the company’s net sales was approximately US$2.48 billion, an increase of 41% from approximately $2.01 billion for the same period in 2017. The overall increase in our revenues in 2018 as compared to 2017 was due to the following combined factors:
A, our total sales volume in terms of quantity sold for branded production increased from 51.5 metric tons in 2017 to 62.9 metric tons in 2018, causing 11.4 metric tons or 22.1% increase. However, the average unit selling price for the branded production remained stable in
2018, which was RMB 254.8 per gram in 2018, compared to RMB 257.2 per gram in 2018, resulting a slightly decrease of 0.9%. The total sales volume in terms of quantity sold for customized production remained stable in 2018, which was 51.3 metric tons in 2018, compared to 51.8 metric tons in 2017. However, the average unit selling price for customized production increased from RMB 6.38 per gram in 2017 to RMB 6.89 per gram in 2018, causing an 8.1% increase.
For the fourth quarter ended December 31, 2018 gross profits was approximately $75 million, increased by 33% from $56.4 million in the prior year period. Gross margin was 11.9% compared to 8.6% for the same period in 2017.
For the year ended December 31, 2018, our gross profit was approximately $264.3 million, increased from approximately US$199.9 million in the prior year period of 2017. Our gross margin was 10.6% compared to 9.9% for the same period in 2017. A slight increase in gross margin was due to above reasons.
For the fourth quarter ended December 31, 2018, net income was approximately $9.5 million or $0.14 per diluted share compared to net income of approximately US$10.5 million or $0.15 per diluted share in a prior year period.
For the year ended December 31, 2018, our net income was approximately $49.5 million or $0.75 per basic and diluted share compared to net income of approximately $26.2 million or $0.39 per basic and diluted in the same period of 2017.
Moving to the balance sheet, at December 31, 2018, Kingold's cash and cash equivalents were US$0.23 million for us. Inventories, which is gold in our case was $127 million. Stockholders’ equity was US$638.3 million compared to the cash and cash equivalents of $5 million and inventories of US$135 million and stockholders’ equity of US$390.2 million at December 31, 2017.
With that operator, please open it up for any questions. Thank you.
Thank you. [Operator instructions]. Our first question comes from the line of Allen Barbarich with Spartan Trading Group. Please proceed.
I have one first housekeeping question. The yearly revenue you said was up 41% from $2.01 billion to $2.47 billion. I calculate that as 23%. Am I missing something there or is that …?
Yes, I misread it, sorry, yes, you are right, yes. From $2.2 billion to $2.47 billion, yes, you are right.
Okay, so it’s just ….
Yes, yes, I apologize, my fault.
Another question is, do you have any plan changes in your levels of gold investments going forward or do you expect it to just stay similar to what it is right now?
The plan is to gradually, probably lower the level. And we -- the company has already tried because most of the gold investment was funded by the loans, right, from the banks in China and the truth is; A, the gold prices are likely to remain at this level for a while and there’s more uncertainty over there, right? And B, the Chinese economy is still like in the end of the process for restructuring, right? And to maintain that high level of loan wouldn't be an optimal choice for the company. So the company is moving to other direction of lowering this kind of investment in gold.
Okay, great. As a shareholder I agree with that approach. And you obviously have some significant unrealized gains in gold for the fourth quarter as the gold price increased. So those should flow through to your gross margin as the gold shifts from inventory into cost of sales, is that -- at a lower cost basis, is that -- am I doing the accounting correct there?
Yes, you're absolutely right, yes. That case is happening. As you know that's sequential of gold the company acquired, right, at different cost level and as we try to move out of this -- not move out, reduce this level, yes. These things are going to be watched and delivered, yes.
Is there any particular reason for the slight decrease in fourth quarter sales year-over-year despite the increase in production? Is that just a timing issue or was there a reason?
Yes, the reason, one is a timing issue. For 2018, as you might know there is a huge kind of tense in the Chinese -- in general the stock market if you recall. Right now there is a huge rebound, right, in entire market of China in Q1 versus Q4 last year. So Q4 last year that the consumer demand sure was not like kind of must have day-to-day stock people have to, right? So this year, for Q4, there is more of a pressure for this demand. So that's one of the reasons, yes.
Okay. That makes sense. And last question, if there are any positive changes in the trade agreements between China and the United States which allow for loosening of capital controls regarding conversion of renminbi into dollars and allow potentially distributions to shareholders, either through dividends or share buybacks. Is that something that you will consider going forward? Do you anticipate that there might be any loosening of capital controls with the trade agreement? Is that something that you're monitoring?
Yes, that's a great question, actually, this has been raised multiple times if I recall correctly during the December 7th Annual Shareholders Meeting and our shareholders from both USA and China raise the same questions. At that meeting people were talking about these options because it looks like the company has stable business and if the consumer demand comes in back, right, for jewelry and our business should be stable as well looking into 2019 and even 2020.
So if the gold price is stable as well, so the company should negotiate and as the record, the company paid one-time dividend before. And the company does have cash, right? So the constraint mainly relies on those government constraints, not only for Kingold Jewelry, in general across for many Chinese companies that are listed here.
So you mentioned about the trade agreement. Since like it's -- it looks like it’s kind of moving towards a very positive direction, because in both sides, on the US side, for example, led this conversation, and also the senior officials or exchange, this is quite often, right, between the US and China now is a ninth round, the China's last premiere will come here actually on next week as well.
So it sounds like we’re moving toward to close deal. And hopefully, there's loosening of the controls of this currency, because this allow in the company to have a chance to reward the shareholders. B, and also companies have some -- also have some time to grow, right? Even in the international word, we don't have this kind of liability. So hopefully, that's going to have impact.
Back to your question, the company is thinking about, we -- how did it perform and there's a lot of requests from shareholders including yourself with many of others, requesting same thing. So that means, the Board has discussed this and we're waiting for any kind of things from a government control point of view, exchange. Yes, so definitely this is one of the things that the company is listening and it’s planning to do this or allow to do so.
[Operator Instructions]. There are no more questions at this time. I would like to turn the call back over to management for closing remarks.
Thanks again to all of you for joining us today. We look forward to speaking with you again in May of 2019 first quarter financial results. Otherwise, we welcome investors and visitors to our facility in Wuhan, China. Thanks a lot.
Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.