Gulf Resources, Inc.
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Operator:]

Good morning. My name is Shunick and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources 2017 First 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]. Thank you. I would now like to 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’d like to welcome all of you to Gulf Resources’ first quarter 2017 earnings conference call. My name is Helen, the IR Director. Our CEO of the company Mr. Xiaobin Liu will also join this call today. The company had released its results for the first quarter ending March 31, 2017 on last Friday, that covers the results of the quarter. Mr. Xiaobin Liu, our CEO will also make comments, then we will open the call for questions. I would like to remind you to all of 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 reflected 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 15th of May, 2017. Gulf Resources assumes no obligation to update these projections in the future and as market conditions may change. For those of you who are unable to listen to the entire call at this time, a replay will be available for 14 days 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. So now, let me turn the call over to Mr. Liu for some introduction remarks. Xiaobin?

[Xiaobin Liu:]

[Interpreted] First off all thank you for you all to attending Gulf Resources first quarter 2017 earnings conference call. And I had never been more excited about the opportunities for Gulf Resources. We have especially signed the first natural gas customer in Sichuan. At the present time, we don’t fully know the potential of this project. However, based on the test we have done and the discoveries in neighboring areas, we believe we could have the opportunity to drill 90 wells and earn tens of millions of dollars per year from natural gas projects alone. Bromine prices continued to strengthen further with depletion and increased government regulation. Bromine supplier continue to be cost change with our existing production resources in Shandong Province and a potential in Sichuan Province. We believe our bromine business should do extremely well in future. Our chemical business is starting to sign of improvement. We believe the worst time is behind us. And that by year end, we will be showing increases in sales and earnings. No matter how hard we tried and we have been trying. [indiscernible] continue to lastly undervalue our shares based on the closing price of May 10, 2017, last trading at $0.26 on a dollar of book value $0.63 on a dollar of cash, $0.60 on a dollar of net-net cash, and 2.4 [indiscernible] earnings. I do not think there’s another company in the world who is selling at such low valuation. We know you are frustrated by our low share price. We’re even more frustrated for our unhealthy business companies our life. We only can win if you, our shareholders win as well. We’re working on strategy to help recognize shareholder value. At the same time, we’re working to build our business, so that we will be large enough to attract the interest of Chinese companies or investors. As we have said before, our goal is to build our natural gas and other business. So that our company has an end value of 20 – between $20 to $30, based on the opportunities we see ahead of us. And the valuation of companies in China we believe this is a reasonable goal. So now, I will turn the call back to Helen to cover the result of the first quarter.

[Helen Xu:]

Thank you, Mr. Liu. So now, I will cover the first quarter results, 2017. First of all for highlighting first quarter 2017. The company’s operating income increased 25%, as compared with second quarter 2016. Net income increased 25%, earnings per share increased 21%, free cash flow equaled to $0.17 per share, cash balance increased to approximately $172.8 million, or around $3.69 per share, net-net cash per share equaled to $3.29 and working capital per share equaled to $4.76. Book value per share equaled to $7.68. For the first quarter results, revenues declined 5% to approximately $32.8 million from approximately $34.5 million. Cost of goods sold declined by 15%. As a result gross, margin dollars improved 18%. As a percentage of sales, gross margins increased to 38% from 31%. Sales expenses declined by 7%. Research and Development costs increased by 3%. General admin expense declined by 10%. Total expenses declined by 15%. Income from operation increased 25% to approximately $10.8 million from approximately $8.7 million. Earnings before taxes also increased by 25% to approximately $10.9 million. Net income increased by 25% to approximately $8.1 million. Earnings per share increased by 21% to $0.17 from $0.14. Mr. Xiaobin Liu, the President and CEO of company stated that, we’re extremely proud of our much improved margins, cost controls, and profitability during the seasonably slow first quarter. We believe we will continue to produce strong results during the remainder for 2017. So now, let’s look at segment results. Firstly, we will look at the Bromine segment. Revenue in this segment increased by 6% to approximately $14 million. Volume in bromine declined by 0.2%. The average selling price per ton increased 6% to $4,071 continuing the strong increases the company has been experiencing. Cost per tonne of bromine declined 10% to $2,522. Overall costs in bromine declined by 14.8% to approximately $7.8 million. With higher pricing and lower costs, gross margins increased 52.6% to approximately $6 from approximately $4. Gross margin as a percentage of sales increased to 44% from 30%. Income before taxes in the Bromine segment increased 75.4% to approximately $5.3 million. As a percentage of revenues, income was 37.9% versus 22.9%, an increase of 1500 basis points. Income after taxes increased 75% to approximately $3.9 million. As a percentage of revenues, income after tax was 28.3% versus 17.2%. We are very pleased with the results of our Bromine segment. Mr. Liu Xiaobin stated, bromine pricing continues to increase. It is even up since the end of the quarter. We expect prices to remain strong in the future. We are investing in our facilities to improve the utilization in our facility. We believe we can continue to increase both sales and profits in Bromine segment. Stricter government regulations are forcing many smaller competitors to close, which should allow us to increase our market share. While we are not making projections, Mr. Liu continued, we would like to remind investors that our Bromine segment has historically had significantly higher earnings from operations during year 2009-2011. We are very optimistic about the opportunities in this segment. Secondly, let’s look at the Crude Salt segment. Revenue in this segment increased 3% to approximately $1.8 million from approximately $1.8 million. Gross profits in crude salt were approximately $962,000 compared to $322,000, an increase of 198%. Gross margins were 53% compared to 18%. Income from operations for crude salt equaled to approximately $885,900, an increase of 289%. Income after tax was approximately $662,300, an increase of 285%. We are very pleased, Mr. Liu stated, to see a stabilization and improvement in our crude salt sector. Thirdly, let’s look at a Chemical segment. Revenue in this segment declined 12.8% to approximately $17.1 million from approximately $19.6 million. By product line, revenues in oil and gas additives decreased 15% to approximately $4.0 million. Paper manufacturing additives declined 15% to $688,000. Pesticides additives declined 16% to approximately $2.2 million. Pharmaceutical intermediaries declined 13% to approximately $7.0 million, while pharmaceutical by products declined 7% to approximately $3.2 million. This decrease was primarily attributable to the decreased sales volume of all of our chemical products due to the slowdown in the Chinese economy and the financial tightening, which has affected our customers’ industries. With regard to pricing, oil and gas, and paper additives had pricing declines of 2% and 3%, Pesticides had a 3% increase in pricing. Pharmaceutical intermediaries had a 6% increase in pricing. This was caused largely by a change in mix to slightly lower quality products. Pharmaceutically – pharmaceutical by products had a 1.4% decrease in pricing. The cost of revenues declined by 12.9% to approximately $11.6 million. Gross margins were flat at 32%. Income from operations declined 13.6% to approximately $4.9 million. Net income declined 13.7% to approximately $3.7 million. While our chemical business is still showing declines over the previous years – previous year, Mr. Liu stated, the declines were much lower than in the fourth quarter of 2016 when sales and gross profits increased 3% and 3%, respectively, as compared to the fourth quarter of 2016. Although the economy in China is still soft and although some of our customers still have capital constraints, we believe we have reached the bottom and we are starting to see real improvements. We believe we are becoming cautiously optimistic about these businesses. So now let’s look at the natural gas project in Sichuan Province. The company had signed a contract with Sichuan Heshun Natural Gas Sales Co., Ltd, its first customer for its natural gas production in Sichuan Province. It received the production quality inspection report, and trained its labors got operator certificates. We are very pleased to have secured our first contract for natural gas, stated Liu Xiaobin, the CEO. During this initial period, it’s very important that we can deliver the natural gas we are promising. We believe our first well can produce a large amount of natural gas. We further believe that there will be opportunities to drill many more wells. However, we must be careful to make sure that we can successfully deliver on all of our commitments. We do not want to take any short cuts that could jeopardize the substantial opportunity that we believe we have before us. And now let’s look at the common cash flow and balance sheet. During the first quarter of 2017, the company generated approximately $8 million from operations. This equals to approximately $0.18 per share. We spent approximately $384,700 on PPE and prepaid land leases. Free cash flow equaled to approximately $8.0 million, or $0.17 per share. Our balance sheet continues to strengthen. We ended the quarter with cash of approximately $172.8 million, or $3.69 per share. This is an increase in cash of approximately $8 – $9.0 million. Net net cash per share equaled to around $3.29. Current assets per share were $5.11, while current liabilities were $0.35 per share. As a result, working capital per share equaled to approximately $222.5 million, or $4.76 per share. Book value increased to $359.6 million, or $7.68 per share. We have maintained a flexible policy with our accounts receivable. Receivables of over 90 days old increased 16.6% to approximately $23.2 million as compared to the fourth quarter 2016. Virtually all are with customers we know very well. During this period of strong capital constraints in China, we believe it is in our interest to give our good customers at little extra leeway. Unlike many other companies, we have a balance sheet that will allow us this luxury. However, we are constantly reviewing the credit worthiness of all of our customers. Now, let’s look at the company’s capital expenditures plan in 2017 In the year 2017, we expect to spend about $10 million on drilling two to three new wells in Sichuan Province. We will also spend some money on improving our bromine and chemical production facilities. The amount of these expenditures will depend on regulations by the local government. While we do not know what new regulations will be enacted, we believe any further regulations will enhance our competitive position versus our less well-financed competitors. We are continuing to look for vertical and horizontal acquisitions. At the present time, we believe we may have the opportunity to acquire more bromine assets and factories at very attractive prices. In addition, we are considering acquisitions of companies that export chemical products. If we can acquire companies that export, we will be able to gain financial flexibility that will enable us to help improve shareholder value. Lastly, let’s look at our 2017 guidance. For the second quarter of 2017, we expect continued strong pricing in bromine. We also believe we should be able to slightly increase the volume of bromine sold. The chemical business should be slightly lower in sales and earnings than in the previous year, however, the gap should continue to close. Earnings for the quarter should be higher than those in the previous year. For the year as a whole, we expect sales to increase between 3% to 8%. Bromine should continue to be strong. The chemical business should improve and show an increase by the fourth quarter. Net Income and earnings per share should increase by at least 10%. We believe, Mr. Liu continued, there are a number of factors that could lead to larger increases in earnings, however, because many things are currently unknown, we prefer to remain conservative. So now, I will turn the call over to Mr. Liu, for closing remarks.

[Xiaobin Liu:]

[Foreign Language] [Interpreted] So the company have continued to deliver on our promises. We have many exciting things ahead of us. We are going to see real revenues from our natural gas project. We believe we have significant leverage in Bromine. We think our chemical business has bottomed and is starting to show improvement. We see very exciting acquisition opportunities that could significantly add to earnings, and we are committed to finding ways to help recognize shareholder value. We appreciate the support of our shareholders. We are implementing our plan that we believe will lead to significantly higher sales and earnings in the years ahead and will give us the opportunity to help our shareholders recognize the value they see in our company. So now, we would like to open the call for questions.

[Operator:]

[Operator Instructions] And your first question is from the line of John Wells [ph].

[Unidentified Analyst:]

Yes, you said you may be able to buy companies at attractive prices, including some with export markets. Any such discussions in progress?

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Yes, they are some under discussions, but there isn’t any specific progress yet. As long as we have, we will issue the press release to let our shareholders and investors know at first time.

[Unidentified Analyst:]

Okay. I want another question.

[Helen Xu:]

Yes.

[Unidentified Analyst:]

You said that two or three new wells will be added soon – natural gas wells. When will these new wells begin production? And when will bromine production begin at the Sichuan site?

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Yes, this is a response from Mr. Liu. Firstly, regarding the bromine production, the company now has started natural gas production on its first well. So depending on the natural gas output from this first well and the condition then we would decide the bromine production as a next step, but now it’s not clear yet in this situation. Secondly, regarding the two to three wells production as to certainly, because company had planned the next half year of 2017, we will invest on trailing of this two to three wells. But when it’s started to product natural gas, the time is not sure yet.

[Unidentified Analyst:]

Okay. Thank you.

[Helen Xu:]

Okay. Thank you.

[Operator:]

[Operator Instructions] The next question is from the line of Glenn Krevlin.

[Glenn Krevlin:]

Yes, good morning. I have a series of questions. The first is, the company has been discussing acquisition opportunities for several years. You’re now talking about a recovery in your markets. And it doesn’t make sense to me that someone would sell when things are recovering, it would make sense for them to sell when things are depressed. So why are you more optimistic now than several quarters ago, it seems inconsistent to me?

[Helen Xu:]

Hi, Glenn, do you mean only Bromine segment acquisition, or you mean all segments?

[Glenn Krevlin:]

Well, I think you’ve said that your focus is on bromine, and you’ve talked about in the past competitors who don’t have capital. But now that the prices are up a lot, it seems like you’ve missed the window of potentially buying things at the right price, and I’d like you to address that?

[Helen Xu:]

Okay, help you. Thank you. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. Hey, Glenn, this is a response from Mr. Liu. He stated that even the bromine price was lower before than now, and the company was always looking for opportunities in the past several years and this cost with potential sellers that is not confirmed even though we were always on the discussion in the past few years. And in long-term, if company’s long-term like objective of vision to increase its bromine we love and the company still optimistic about its industries and the bromine price, including its invested potential in the future. So if you continually looking for acquisition, as they have it in this industry.

[Glenn Krevlin:]

I have several other questions. Second question is, what is your projection for capital spending for this year?

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

We have like expanded this one in our 10-Q release.

[Glenn Krevlin:]

Yes. What do you estimate your spend for the full-year for capital spending? What’s your estimate for the full-year?

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So as we discussed early that the company expected to have $10 million project at its eastern projects this year, which is almost concurrent. But the excess anchorageacquisition in this year, which is not confirmed yet, since the potential discussion is going on. This is second year percentage – the first-half of second year about the [acreage initiatives] [ph]. And the last one is about the company’s Chemicals and Bromine segment upgrade depends on government environmental regulations, so this amount is uncertain amount.

[Glenn Krevlin:]

Okay. Third question, given your focus on bromine salt and natural gas, would you consider selling the chemicals business?

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. So because the chemical segment is a downstream industry in bromine of bromine industry. So this segment, which makes the company’s cost section change go longer, go deeper, and it’s also increased the company’s anti-risk abilities against bromine price alone. Even though now this industry is little weak in our other segments, but until now considering the company’s long-term objectives, we don’t think we’re selling, yes, considering this option yet.

[Glenn Krevlin:]

That would be true for paper and oil and gas, but there’s a downstream connection with bromine in paper and oil and gas?

[Helen Xu:]

Sorry, in paper and gas, we would downstream, it’s not.

[Glenn Krevlin:]

You’re making the argument that it’s integrated to your bromine business chemicals. And my question is, is that true or relevant for paper and oil and gas end markets, which are big end markets for you? Is that a relevant mix?

[Helen Xu:]

Okay. I got you, I got you. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. So these two products like paper making intermediaries and oil and gas, it’s intermediaries. This was a company’s tradition of chemical products as the company had established like several years ago. So this part may consider, which is not that much relevant to Bromine segment. And the companies may consider to decrease the production of selling these two, as until now, it’s not in their considering options yet.

[Glenn Krevlin:]

Okay. Several years ago, you made an acquisition in the pharmaceutical industry that uses bromine. You indicated at that time there was a business that was secularly growing. Can you tell me what – how that business has done this quarter?

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. So waiting for this bromine expect the traction come here quite several years ago. It almost meets the company’s expecting – expectation, sorry, because the – based on the Chinese economic condition now considering the chemical industry recently even though around [indiscernible] a little bit. But considering the last from company’s growth strategy, we think it best meets the company’s expectations.

[Glenn Krevlin:]

Okay. I have a last comment or question. You start every call talking about how undervalued your equity is, and you continue to build cash. Yet, you complain about your stock price, but frankly, you do not think about it. And so I don’t think, I think, you should stop complaining, and I think you should figure out a plan to enhance shareholder value. I would suggest that you maintain your cash levels – current levels to support your bidding in exploration and gas. And I think you should work to return capital in excess of that going forward. But I really don’t appreciate the comments about the undervalued stock when frankly you’ve done nothing about it for several years, it’s frankly frustrating.

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Right.

[Xiaobin Liu:]

Yes.

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay, perfect. So as we all explained in our earnings call and in our press release that the company really think we should do some action suite with our shareholders value. But the first thing company think we should do is confirm or ensure the company can make its short-term and middle-term objectives, while during – it may considering to take out some cash to do well our cash, our shareholders. So by the – we think by the end of this year, 2017, and when all the conditions become clearly for the company for its middle and short-term objectives, then the company will consider to take out some cash to reward its shareholders.

[Glenn Krevlin:]

Okay. I implore you to take action and stop complaining.

[Helen Xu:]

Thank you. [Foreign Language] Okay, thank you.

[Operator:]

There are no further questions at this time.

[Helen Xu:]

[Foreign Language] Otherwise we may close.

[Operator:]

Please stay for other questions.

[Helen Xu:]

Okay. So, I think, we can close for the call today. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Thank you for the questions.

[Operator:]

This dose conclude today’s conference call. You may now disconnect.