Kingold Jewelry, Inc. (OTC:KGJI) Q1 2019 Earnings Conference Call May 16, 2019 8:30 AM ET
Lucy Ma - The Equity Group
Bin Liu - CFO
Zhihong Jia - Chairman and CEO
Greetings and welcome to the Kingold Jewelry First Quarter 2019 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.
It is now my pleasure to introduce Lucy Ma of The Equity Group who will read the Safe Harbor statement and introductions. Please go ahead, Lucy.
Thank you, Kevin, and good morning, everyone. Thank you for joining us. A copy of the press release announcing the 2019 first 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 an accompaniment and you are welcome to contact our office at 212-836-9600, and we would 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 to refer you to slide number 2 of the 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 an 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 finishes the presentation, we will open the floor for questions.
With that, I will start to read the opening statement from Kingold Jewelry’s Chairman and CEO, Mr. Zhihong Jia.
Thank you for joining our 2019 first quarter conference call. In the first quarter of 2019, both of Kingold's operational and financial performances were affected by China's economic slowdown, which negatively impacted our customers' purchases of gold products and it was not until the end of the first quarter that the market gradually warmed up.
In the first quarter of 2019, we have witnessed the lower demand for gold for both jewelry and investment products. According to the World Gold Council, gold jewelry and investment products went down 2% and 8% respectively during the quarter. However, even China’s economy is lack of growth, 3D hard gold products and [indiscernible]. In addition, based on the World Gold Council’s recent gold demand trends for the first quarter of 2019 report published in early this month has stated that 3D hard gold will be a segment of the market to watch over the coming year.
In this regard, Kingold has been dedicated in the development and design of 3D hard gold jewelry products in past three years and we are proud to be a major manufacturer and supplier for basically refined products in China.
Every time when Kingold encounters the impact from challenging environment, we have always maintained a positive attitude and focused on our product research and development. We believe in our ability of providing good quality products to meet consumer demand once the market picks up, which is a key strength of Kingold.
On behalf of Kingold, I look forward to speaking to all of you in person and welcome to visit our facilities in Wuhan and take a tour. Thank you.
With that, I would now like to turn the call over to Mr. Bin Liu, Kingold’s Chief Financial Officer. Please go ahead, Mr. Bin.
Thank you, Lucy and welcome everybody again. Today, I will discuss Kingold's operation and financial results for 2019 first quarter. Kingold sales are primarily composed of the sales of branded products, and customized products. Kingold sells its products to 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 on sales and 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 customers’ instructions, and the cost of gold is not recorded as part of our revenue.
During the first quarter of 2019, we processed approximately 22 metric tons of 24 karat gold products, decreased 5.7% compared to 23.3 metric tons for the same period last year. Among the 22 metric tons, we processed during the first quarter of 2019, of which branded production accounted for 11.2 metric tons or 50.9% of the total volume and the customized production accounted for 10.8 metric tons or 49.1% of the total volume.
In the three months ended March 31, 2019, the company reported net sales of USD453.5 million, a decrease of approximately USD86 million or 15.9% from the net sales of USD539.5 million for the three months ended March 31, 2018. The decrease in net sales was mainly the result of the following reasons.
Number one, total sales volume in terms of quantity sold decreased from 23.3 metric tons in three months ended March 31, 2018 to 22 metric tons in three months ended March 31, 2019, causing 1.3 metric tons or 5.7% decrease. As a result, approximately $73.4 million decrease in our revenue was attributable to the decrease in our sales volume.
Secondly, the average unit selling price for our customized production sales increased from RMB258.3 per gram in three months ended March 31, 2018 to RMB266.6 per gram in three months ended March 31, 2019, causing 3.2% increase. In addition, the average unit selling price of our customized products and sales increased from RMB6.84 per gram in three months ended March 31, 2018 to RMB6.96 per gram in three months ended March 31, 2019, causing 1.7% increase.
As a result of the price change effect, the increase in average unit selling price led to approximately $17 million increase in our revenue. To compensate the revenue decrease throughout the firm, sales volume decreased to certain extent.
Thirdly, foreign currency adjustment effect was approximately $29.5 million of foreign currency translation loss of RMB into USD when the average exchange rate of USD versus RMB increased from USD1 equals to RMB6.3582 in three months ended March 31, 2018 to $1 equals to RMB6.7485 in three months ended March 31, 2019.
For the first quarter of 2019 ended March 31, 2019, gross profit was $55.3 million, decreased by 13.9% from $64.2 million in the prior year period. The decrease in our gross profit resulted from the following factors. First, due to decreased sales volume affected by decrease in market demand, the company's gross profit for the three months ended March 31, 2019 was negatively affected.
Secondly, our gross profit was affected by the unit costs of raw materials used in our production. The unit costs of our branded products and sales was RMB239.7 per gram for the three months ended March 31, 2019, or the unit cost of our branded product and sales was RMB232.2 per gram for the three months ended March 31, 2018.
In addition, the unit cost of our customized production sales was RMB0.34 per gram for the three months ended March 31, 2019 while the unit costs of customized production sales was RMB0.31 per gram for three months ended March 31, 2018. The increase in our unit cost of raw material used in our production reduced our gross profit for the three months ended March 31, 2019 compared to the same period of 2018.
The decrease in quantity sold and increase in our unit costs were the major reasons, which led the decrease in our gross profit. For the first quarter of 2019 ended March 31, 2019, gross margin was 12.2 compared to 11.8 for the same period in 2018. The primary reason for the increase was due to the increased average selling price of our branded production and customized products and sales, [indiscernible] branded production was RMB266.6 per gram for the three months ended March 31, 2019, increased by RMB8.33 or 3.2 from RMB258.3 per gram for the same period in 2018. Meanwhile, the average selling price of our customized production sales was RMB6.96 per gram for the three months ended March 31, 2019, increased by
RMB0.12 or 1.7% from RMB6.84 per gram for the three months ended March 31, 2018 to RMB6.96 per gram for the three months ended March 31, 2019.
For the first quarter of 2019 ended March 31, 2019, net income was USD6.4 million or $0.10 cents per diluted share compared to net income of $13.2 million or $0.20 per diluted share in the prior year period. The decrease in net income was a result in all above described factors.
Moving to the balance sheet, at March 31, 2019, Kingold’s cash and cash equivalents were 1.1 million.
Ladies and gentlemen, please standby. Once again, ladies and gentlemen, please standby. Ladies and gentlemen, please stand by while we reconnect Mr. Liu’s line. Please stand by. Thank you.
Moving to the balance sheet, on March 31, 2019, Kingold’s cash and cash equivalents [indiscernible] which is mainly gold in our case was $163.8 million. Stockholders’ equity was $632 million compared to cash and cash equivalents of
$0.23 million, inventories of 127 million and stockholders’ equity of $638.3 million at December 31, 2018.
To conclude, Kingold is dedicated in building its brand by continuing to expand in production capacity, designing capabilities and sales channels, invest on our existing resources and capacity along with strong demand of products in China, we reiterate our expectations that gold prices will be between 110 metric tons and 120 metric tons during 2019.
With that operator, please open it up for any questions. Thank you.
[Operator Instructions] If there are no questions at this time, I'll turn the floor back over to Mr. Liu for any further or closing comments.
Thanks again to all of you for joining us today. We look forward to speaking with you again in August after our 2019 second quarter and six month financial results. As always, we welcome investors and visitors to our facilities in Wuhan, China. Thank you.
Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.