Gulf Resources, Inc.
Q3 2016 Earnings Call Transcript

Published: 14 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Gulf Resources 2016 Third Quarter 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 Ms. 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 like to welcome all of you to Gulf Resources third quarter 2016 earnings conference call. My name is Helen, the IR Director. Today 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 our listeners that in this call, management’s remarks may 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 from the bromine and other chemical fields, 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 statements and the risk factors detailed with the company’s reports filed with the SEC. Accordingly, our management believes that the expectations 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 represent the company management estimates as of today, the 14th of November, 2016. Gulf Resources assumes no obligation to update these projections in the future as market conditions change. For those of you who are 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. 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 I will translate.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

First of all, thank you all for participating in Gulf Resources third quarter 2016 earnings conference call. We are very pleased with our results for 2016 third quarter, considering the time issue now I will turn the call over to Helen to review the major financial and I will do the remarks for this quarter at the end. Good morning. Thank you all for participating on this call. So now I am going to do - review on the major financial. Earlier today we have issued a press release with our unaudited and other financial information. We also filed 10-Q with the SEC. In order to leave more time to answering the question, our 2008 at 80 in order to give more time to answer the question and other important development. So today we have included more information than normal in our press release. We urge you to read it completely, so we do not have your valuable time reading this you need during the call. However, I like to start today by covering some of important highlight. For the three-month ending September 30, 2016 our revenues declined due to softness in the Chinese economy. However, our income from operation did increase slightly to $13.6 million. Net income was virtually flat and earnings per share was flat at $0.23. For the nine-months, income from operation increased 12% to $39.95 million. Net income increased 13% to $30.80 million and fully diluted earnings per share increased 12% to $0.65 from $0.58. Our balance sheet continues to strengthen, we ended the quarter with cash of approximately $141 million, and it accounts to approximately $3.02 per share well in excess of our current stock price. Net, net cash, which is cash minus all liabilities equals to approximately $2.59 per share. Also, we are in debt of our current stock price. We do not think there is another profitable company selling at large a discount to its cash and its net, net cash. Working capital record total $0.30 per share. Shareholders equity reached $7.65 per share. We are very proud of the scale of our balance sheet and believe it will enable us to do many things to improve our shareholders value. Our good the performance was driven by the strong result of bromine segment. In the third quarter our bromine increased 7% to approximately $15.97 million, while volume decreased by 5% to around 4,511 tonne to the slowdown in the Chinese economy. The average selling price increased 12% to $3,541 tonne. Cost of production declined 22%. Gross profit increased 51% to approximately $8.9 million. Gross margin increased to 56% from 39%. Income from operations increased 83% to approximately $7.9 million. As a percentage of revenue, income from operations increased to 49% from 29%. For the nine months, revenue in bromine increased 15.9% to approximately $47.6 million. Cost of revenue declined 39.4%. The gross profit margin was 46% compared to 31% for the same period in 215. Incomes from operations were approximately $19 million, an increase of 113%. While we are very pleased with the result of our bromine sector, we believe that there could technically more effect in this business, despite our strong earnings, our capacity utilization was only 40%. As a frame of reference, in 2010, we had a pre-tax earnings of approximately $48.25 million in our bromine segment, as well as $11.4 million in the related crude salt segment. In 2010, our utilization was 79%, since that time, we have invested significant amounts of money to improve our factory and mining facility. The decline in the RMB is also making important occupancy, all of this would indicate that if the Chinese economy does recover we could have bromine earnings impact to or even better than we had in 2010. We are not making any projections, but if prices remain constant and we can increase our capacity utilization there is significant upside leveraging in this sector. Crude salt continues to be flat on sales and earnings. Crude salt revenue declined 24% for the quarter and approximately 19% for the nine-month. The average selling price decreased 16% for the quarter and 11% for the nine months. This segment lost around 382,917 in the quarter and $665,403 for the nine-month. Crude salt is very economy sensitive, as I mentioned before, in 2010 this segment had pretty strong profitability. Again, as frame of reference, in the first three quarter of 2010, bromine and crude salt had a combined income of approximately $42.5 million, in the same period of 2016 we had combined income of less than $90 million and this bromine and reforming we didn’t show our yield capacity that it can leverage if the economy improves. The weakness in the Chinese economy also lead to really impacted our chemical business. Our original chemical business had a decrease in revenue of 27% in the quarter and 25.3% in the nine months. The weakness was relatively constant between oil and gas. Income of money amount and paper manufacture and pesticide additive incomes of the percentage change, not only were end sales impacted on manufacturing were also out of control engagement indeed and by more closer to the amount. Our SCRC pharmaceutical business faired likely better, revenues in this segment declined by 5% for the quarter and approximately 4% for the nine-months, with solid theoretical intermediaries declined 2% and byproduct declined 10% for the quarter. New Chinese policies are increasing health care expenditures, which should benefit this business. Cost of net revenue for our chemical products segment declined 14% for the quarter and approximately 11% for the nine-months. Operating income declined 23% for the quarter to approximately $6.4 million and 21% for the nine-months to approximately $20.7 million. The company remains optimistic about the opportunities in the chemical segment. The Chinese economy appears to be stabilizing and there are significant opportunities in pharmaceutical and healthcare spending increases, we believe we have reached the low point in this business and that future results may improve from current level. In the third quarter, the company announced its intention to market two chemical subsidiaries, SYCI and SCRC, because this integration had not been completed, the company is continuing to report these two businesses as separate entities. Once the merger is completed, the company expects to be able to reduce overhead cost and improve potential leverage. Later again, as we indicated in our recent press release, the drilling of our first natural gas well is in Sichuan was the delayed by unreasonable bad weather, the [indiscernible] back in June, we see the rainy season, while drilling was not - we expected the amount of rain and the flood was virtually uncreative. At the time of our last conference call in mid of August, we knew about the flood, but we believe we still had ample time to complete the contract of the loss and the facility in order to meet our time commitment. Unfortunately, there were significant subsequent flood and rains during the end of August and they again in the last two weeks of September, this flood were quite severe and they were outside of what is normally considered to be the raining season. Unfortunately still had been dry for the past month, we have made excellent progress contracting the facility and are confident that we will be able to achieve our main schedule new beginning at the end of this month we will photograph of our construction on our website. So investor can follow our progress. We intend to be as transparent as possible. We expect to have our first well into operation by January, based on the trial production results from this well will dictate if we intend to fuel additional wells during 2017 while working closely with the government of Daying County to assure this project, expand as quickly as possible. We would also like to make comments about natural gas business in China, as many of you may know that China has limited oil reserve, coal is the major field by the coil of the serious pollutant. China has significant pollution problem. The government is taking that to promote natural gas get in light of other resources of EU. This mean demand and pricing of natural gas should continue to improve. They believe we are perfectly partitioned to capitalize on the chain. Now I would like to turn the call over to Mr. Liu, our CEO for some closing remarks.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

The company remains opportunistic about the opportunities ahead of us. Bromine prices have remained very strong, we are seeing stabilization in the Chinese economy, which should ultimately benefit some of our more economically safety sector. Healthcare expenditures are increasing, which should benefit our pharmaceutical, chemicals business, the company making excellent progress in the trend, and we continue to believe that earnings and earnings per share in 2016 may exceed that in 2015.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

While company is not yet giving guidance for 2017, but we are optimistic with strong pricing in bromine and this segment should be strong, if the economy improves, we have configurable average, the same applies to the salt and the chemical. We believe the bottom has been reached, the key question is how soon do we see significant improvement? We should expect to have revenues and proceeds in our strong cap in next 2017 - of 2017, well, it is too soon to know the timing of exact result based on our third-party report. We are very optimistic.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

The company recognized that the shareholder would like it to take it either or - and buyback stock. As the company mentioned before, no more realize the stock to appreciate more than the amendment, the company's chairman is the largest shareholder. The management team draws very low salary and its relying on stock option to compensate them for their efforts.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Our plan is very simple, we have committed our current cash to the drilling project in Sichuan. If this project proceeds as we hope that we have 30 or more well and be any more than $2 a share for this business alone. If the economy improves the leverage in our bromine boost up and chemical business could unable the company's outflow from current level in this segment. If all of this comes to path, we will have a company earning a very large amount of money that would be able to lease in China or Hong Kong of sale to a major field of enterprise.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

However, if the project Sichuan is not as successful as currently hoped, we will consider to utilize our cash balance to help and enable enhance shareholder value. [indiscernible] extremely patient, we only ask you to be patient for few quarters more, once we see the results of our first well, we will be able to provide you with much more clarity as to how we will enable shareholders value. And now I will turn the call back to Helen, so we can open lines for questions. Hi, operator?

[Operator:]

[Operator Instructions] You have a question from the line of Hernandez Huari [ph]

[Unidentified Analyst:]

Hello. This is Hurta [ph] I think that accounts receivable has grown a lot during the last question, can you explain us why?

[Helen Xu:]

Sorry? I missed your question.

[Unidentified Analyst:]

Sure, no problem. I have seen that in this last quarter accounts receivable has grown a lot compared to last year, can you explain us why?

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. Hi, Mr. Liu stated. We all know that the Chinese economy is going through a difficult time and our customers as well. So they try to win - they are having some difficulties in their cash, so it can be their accounts receivables so it makes this initial increase as compared to last year.

[Unidentified Analyst:]

Okay. Thank you very much. Can you also explain us…

[Helen Xu:]

You're welcome.

[Unidentified Analyst:]

Thank you. Can you also explain us where is the cash invested, in which banks, which securities and which currencies?

[Helen Xu:]

Sorry, I think we are lodged at the back, so I missed your part.

[Unidentified Analyst:]

Okay. Yes, the question is can you also explain us where the cash is invested, in which banks, and which foreign - if it’s just holding in a savings account or is invest any short time securities?

[Helen Xu:]

You mean the company's cash which account is holding, right?

[Unidentified Analyst:]

That’s it, that’s it…

[Helen Xu:]

Okay, I got it. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. The cash in Chinese - in Chinas domestic bank account under the under the company's operating name because we have this cash for the income that we offer and the need for demand and income, so we did not make investment of this money.

[Unidentified Analyst:]

Okay. Thank you very much. And last question, can management - the management has a view of wider market, or its not properly valuing the firm, and if they expect a change in the short term?

[Helen Xu:]

Do mean the share price?

[Unidentified Analyst:]

Yes. Why the management thinks that the share price is not properly valuing the real value of the firm?

[Helen Xu:]

Okay. And when do you think the price…

[Unidentified Analyst:]

That’s it, any risk if they expect to change in the short term?

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. This was from Liu, in fact, if you think that there are two major factors which makes the company's volume lot is expect - reflected there by market. First, we think maybe because of prejudice from different - from two countries US [ph] and China because of our different cultures and different side of views, they may not come in well and based on the contract. The second major reason maybe because the communication with them, because the company did not to commission directly as was committed for our Chinese local investors. So there may be some communication issue cut the value. As this timing goes by, and goes through - the two countries know each other more well, by the company also increasing its communication with the investors let them know and understanding the company's story and background more well, the value of the company may be reflected more fair by the market from US.

[Unidentified Analyst:]

Okay. Thank you very much.

[Helen Xu:]

You're welcome.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator Instructions] And at this time there are no questions.

[Helen Xu:]

Okay. [Foreign Language] Hi, operator, I think if there is no more questions we can close the call for today.

[Operator:]

You have one now. Would you like to take it?

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. I think we can answer this question.

[Operator:]

Okay. It comes from the line of Joe Ski [ph]

[Unidentified Analyst:]

Here is about the infrastructure for the gas wells, if the infrastructure completed, the well completed and the drillings complete?

[Helen Xu:]

Hi, Joe. Just wait a moment, I've got to confirm with Liu. I think it’s a very early to answer, just wait. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So - hi, Joe. This comes from Mr. Liu. The wells have been constructed and there is a major warehousing also we completed, so now the underground pipe also being build. Now there are some decorations still going on.

[Unidentified Analyst:]

Great. So how do we - how do you plan on transporting to natural gas?

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. Because we are not like sure about the underground gas, natural gas condition and how much it can produce yet. So at the beginning of the stage we will use the trucks first to make the natural gas in DNG format and then by truck could be reversed to outside.

[Unidentified Analyst:]

Okay. Thank you. Good luck.

[Helen Xu:]

Thank you.

[Operator:]

Thank you. There are no further questions.

[Helen Xu:]

Okay. If there is no further questions, can I close the call for today.

[Operator:]

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