Gulf Resources, Inc.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Welcome to the Gulf Resources 2016 First Quarter Earnings Conference Call. [Operator Instructions]. Thank you. I will now turn the conference over to Helen.

[Helen Xu:]

Okay. 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 first quarter 2016 earnings conference call. My name is Helen, the IR Director. Our CEO and CFO of the company Mr. Xiaobin Liu and Mr. Min Li will also join this call today. I will be offering translation for the management comments for the Company’s operating results. 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 number of risk factors including, but not limited to, the general economic business conditions in China; future product developments 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 change in technology; the ability to make future bromine asset purchases and various other factors beyond the Company’s control. All forward-looking statements are expressly qualified in their entirety by this precautionary statements, and the risk factors detailed with the Company’s reports filed with the SEC. Accordingly, our Company believes that the expectations reflected in these forward-looking statements are reasonable and there can be no assurance of such will be prove to be correct. In addition, any reference to the Company’s future performance reflects the management estimates as of today, the 12th of May, 2016. Gulf Resources assumes no obligation to update these projections in the future and as market conditions may 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. The call is also accessible through the webcast and the link is accessible through our website. Please look at our press release issued earlier for details. It’s now my pleasure to turn this call to Mr. Liu, the Company’s CEO, who’s going to provide some initial remarks and then I will translate for him.

[Xiaobin Liu:]

First of all, thank you for participating in Gulf Resources first quarter 2016 earnings conference call. We’re very pleased with our first quarter 2016 results. Following the continuing soft economy, in China our net income increased 22%, our strong results were recorded appeared in which the Chinese economy had been stagnating. And extremely proud of the way in which we have managed our business, our team is significant credit for produce in this day and result is such a difficult economic environment in China. Considering the timing issue now I will turn the call over to Helen to review the financials in 2016 first quarter the Sichuan project progressed firmly and at last she will forward a message later from company management team for shareholders.

[Helen Xu:]

So first off I will do the financial review. For the three months ended March 31, 2016 the company net revenue were approximately 34.5 million, a slightly 1% decrease as compared to the same period in 2016, cost of net revenue was approximately 23.9 million a decrease of 6%, this decrease was primarily attributable to the decrease volume of products sold into the macro-economic tightening policy improved by the PRC government which has affected our customers, industries as well. As gross profit was approximately 10.6 million or 31% of net revenue compared to 9.4 million or 27%. Turning now to [indiscernible] were approximately 1.9 million, a decrease of 65,000 or 3% income from operations was approximately 8.7 million or 25% of net revenue, an increase of approximately 22% of our same store in 2016 and effective tax rate was 26% in both periods. Net income was approximately 6.5 million for the three months period ended March 31, 2016 and increase of approximately 22% as compared to the same period in 2015. Earnings per share were $0.14 compared to $0.12 and increase of 16.7%, this continued weakness in the Chinese economy. We’re very pleased to show increases in the net profit and our earnings per share. Now I will discussion on the tax segment. First of all for bromine segment revenue from the bromine product segment increased around 19% to approximately $13.2 million from approximately $11 million tied to weak economic condition in China. The increase in net revenue from our bromine segment were due to the increase in the selling price of bromine since volume decreased 7% to 3428 metric ton but the average price increase 28% to $3481 from $3006. We expect selling cost of bromine can remain at current levels through the remainder of the 2016, the cost of net revenue for the bromine segment was approximately 9.2 million, a decrease of 4% over same period in 2015. Gross profit margin was 30% as compared to 13% for the same period in 2015. This 17% increase is mainly due to sales price of bromine. We expect that the average selling price and gross profit margin of bromine will be at its current level in the year 2016. Our utilization ratio decreased by 2% for the three months period ended March 31, 2016 to reduce the leakage rate and increase production capacity of bromine. We plan to carry out assessment projects for transmission channels and ducts, and our existing bromine extraction in 2016 fueled the first quarter 2016 no such enhancement work was carried out yet due to the active weather tradition. We expect to resume the enhancement work in the second and third quarters of 2016 when weather conditions permit. Income from operation were approximately $3 million an increase of approximately $2.9 million compared to same period in 2015, this increase is mainly due to 28% increase in the selling cost of bromine. We expect strong results from our bromine segment in the year 2016. From the crude salt segment revenue from crude salt segment decreased 10% to approximately $1.8 million from approximately $2 million, the cost of the revenue was approximately $1.4 million a decrease of 10% compared to approximately $1.6 million for the same period in 2015. The gross profit margin was 18% less than the prior year. Income from operation was $227,613, an increase of 21%. From chemical segment, the net revenue from chemical segment decreased 11% through approximately $19.6 million from approximately $22 million, within the segment oil and gas, paper making and pesticide all declined by 29% but [indiscernible] cost and the 8.9% to approximately 11.4 million however our pro forma basis from the [indiscernible] 2016 we only own [indiscernible] chemical for two months in 2015. There were two major reasons for the decline in revenue in the chemical segment, the first was because of weakness in the Chinese economy had an impact especially in natural gas and paper making industry. In addition with the slightly earlier hedges and some economic uncertainties, many customers appear to have cost back on their inventory. They do not know how the Chinese economy will fair during the remainder of 2016 however we’re seeing recovery orders after Chinese New Year. In addition much of specification behind that, we’re seeing good orders in our pharmaceutical business. Overall we believe some fixed cost will recover while some of the other segment will lag in 2016. Gross profit margin in chemicals decreased by 3%, we saw pricing increase in oil and gas, paper making, paper manufacturing and pesticide additive as well as in by products. The main cause of the decline was lower margins in our pharmaceuticals intermediary products. We expect this margin to improve during the remainder of the year, cost of net revenue was approximately $13.3 million, a decrease of 7% increase from operations were approximately $5.7 million a decrease of 19%, we have seen some improvements in the chemicals especially in pharmaceutical. Given the current weakness in the Chinese economy we expect a small decline in earnings of this segment during the year 2016 should the Chinese economy improve this economically safe industry could provide positive surprises. Other expenses, general and administrative expenses declined by 3% primarily because of a number of onetime issues, research and development expenses increased 24% for approximately $80,000. There were no additional [ph] cost in [indiscernible] approximately 325 and 8000 in the same quarter of 2015, other operating income which we represented sales of which was to some of our customers were around $110,000 a decrease of 6%. Now I would discuss on the cash flow and the balance sheet, during the three months period ended March 31, 2016 we had cash flow from operating activities of around $14.4 million. We invested around [indiscernible] the change in exchange rate was 116,906 as a result our net cash flow was around $14.8 million. As a result our strong free cash flow we had cash of approximately $148.4 million as approximately $3.21 per share, current assets of approximately 207.4 million approximately $4.48, working capital around $189.7 million which cost to around $4.09 per share and shareholders' equity of approximately $346.5 million which would cost to around $7.49 per share, our net-net cash, cash from liability were around $127.7 million. We do not believe there are any profitable private companies spending as large as it becomes to the net-net cash. Now I will do a summary on the [indiscernible] projects summary. The company is making sale in progress on our natural gas and grant projects in Sichuan province. We have hired a leading design firm to be design our drilling and production facilities. We expect to place an order for the equipment from one of China's leading manufactures and begin to build workhouse housing and other infrastructure. At the present time we expect to begin drilling in September and November 2016. Once we begin drilling we should be able to quickly understand the opportunities, if there are as much natural gas as we expected, we should be able to apply for permission to drill additional 10 to 13 wells soon. While it's difficult to project how much profit we can generate from each well, the original estimate for the first well is around $2.3 million in annual net income based on the segment report. We would like investors to understand how this project impact our capital allocation evident and stock buyback policy. With the opportunity in bromine pricing and the opportunities in the anti-biotics and the potential recovery of the Sichuan province we believe our core business is well-positioned. It's the natural gas and the opportunity is to improve as set for we expect it to be, [indiscernible] for transfer into a major company that could attract institutional investors, the investment bankers and other stock exchanges are potential JV partners, it's the initial there do not saw that revenues and profits as we expect. We will then consider other ways of utilizing our extremely strong benefit to enhance shareholders’ value. Now I will provide a letter from company management team to company's shareholders. Over the past years the company management team have received many calls and emails from investors suggesting that management and the Board of Directors should not care about the price of the stock, this calls an email very upsetting to me, to us because that couldn’t be further from the truth. The company management team have worked for recovery service for more than nine years. Last year salary as a CEO was only $48,000, our CFO and COO were paid $32,000. This salaries wasn’t administrative assistant of actual work in the U.S. that gets paid. If this were a land [ph] company of the same price and profitability. Our salaries would have been five times or 10 times higher and are now - our Chairman was getting paid $37,000 a fraction of what a Chairman in the U.S. are paying. We have remained these salaries for two reasons, first, we believe in the company, we believe our options will eventually be worth a lot of money and will be worth us for all of our hard work. We cannot control effect that U.S. investors now distrust Chinese companies. We only went public in the U.S., our investment center because the U.S. market would be good for us and we would be rewarded by a higher stock price. Since we have published, we have produced solid results below our businesses and improved our balance sheet, so it is strong as that of any listed company. We have had the coverage cost, have investment center and have attended conferences and work hard to keep investment in form. Sadly our investor bankers were wrong, we’re far more distressed than any of the - by the low price of our stock, O-U.S. this is an investment thus for us this is our life we worked for. This reflects nice that investors want us to use our cash, [indiscernible] our buyback stock, other Chinese companies that have followed this strategy are still selling FX firmly long haul [ph]. We have not worked here for decades to see our shares go to $2.50 or $3 a share. We have come to recognize that the U.S. market will not give up fair value to small U.S. listed Chinese companies. Large companies are faring better. If we can grow large enough perhaps we can find analysis and the institutional investors who will appreciate the value of our company. We also know that other markets at Hong Kong we have minimum must capitalization of $200 million as China companies have long to list of companies that wanted to go public. Our strategy is very simple and we have been very direct in explaining it to investors. Our goal is to produce enough sales and earnings so that we can be reduced either by institutional investor in U.S. large enough so we can list in Hong Kong successful we can merge from our transaction with the major enterprise in industry. Our Sichuan projects offer us at least great opportunities. If we’re successful trailing for cost [Technical Difficulty] we believe we have a stock that could be selling for $20 or $30 a share. I believe we own it for sales and for our patient shareholders who make these attempts. While many of you would be happy to see the shares go to $2.50 we believe our company can be worth many times more than that. If the opportunities in Sichuan does not perform as expected we can see the rate of returning cash flow to shareholders if dividends, stock buybacks or other matters we’re at present exploring measures of diversifying our business so it will be easier for us to get money out of China. We desperately care about stock price as we say, we have devoted much of our life to this company and the stock price is the only way in which we can be compensated. If someone has a better idea we relate them at every stage we have been direct and honest about our plans to maximize shareholders’ value. We’re confident that by this time next year we will know more about trends and we will move ahead because large scale development programs our focus on other ways regarding our shareholders including the maintenance and the [indiscernible]. Okay, operator. Thank you very much. So can we start the Q&A session?

[Operator:]

[Operator Instructions]. At this time there are no questions in queue. Actually now you do have a question. It comes from the line of John Wallace [ph].

[Unidentified Analyst:]

Do you have a forecast for the year 2016?

[Xiaobin Liu:]

Yes we will issue the guidance soon after this earnings release and to tell the investors about our guidance from year 2016.

[Unidentified Analyst:]

When can we expect that guidance?

[Xiaobin Liu:]

I think in the next 2 or 3 days.

[Operator:]

[Operator Instructions]. At this time there are no questions.

[Xiaobin Liu:]

Okay. Thank you, Operator. Thank you very much. If there are no further questions then I will conclude the conference call. Thank you very much.

[Operator:]

This concludes today's conference call. You may now disconnect.