Gulf Resources, Inc.
Q4 2015 Earnings Call Transcript

Published: 17 Mar 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Gulf Resources 2015 Fourth 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 will now turn the conference over to the presenters.

[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’d like to welcome all of you to Gulf Resources fourth quarter and annual 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’d 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, 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 other chemical, other related 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 statement, 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 16th of March, 2016. Gulf Resources assumes no obligation to update these projections in the future and as market conditions change. For those of you unable to listen to the entire call at this time, a replay will be available for 14 days and the call is also accessible through the website, and the link is accessible through our website. Please look at the 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 [Foreign Language]

[Helen Xu:]

Okay. First of all, I will do the translation for the speeches by Mr. Liu just now. And thank you -- first of all, thank you for participating to Gulf Resources fourth quarter and annual 2015 earnings conference call. We are very pleased with our results for 2015. Every day you read stories about the weakness in Chinese tough economy. Our businesses are economically sensitive. When the Chinese economy is weak as it is now, our business will really suffer. However, 2015 turned out to be an excellent year for us. In a soft economy, our net revenues increased 43%; net income increased 91% ;and the earnings per share increased 63%. Our cash flow from operations was $1.51 per share. Even with the acquisition of Rongyuan, we ended the year with $2.89 per share in cash and the book value of $7.31 per share. Our strong results were recorded during a period in which the Chinese economy has been stagnating. I’m extremely proud of the way in which we have managed our business. Our team developed significant credit for producing the excellent results in such difficult environment. We made excellent progress in our major gas drilling projects and signed an agreement with government of Daying County in Sichuan Province. While the economy of China remains weak, we believe Gulf Resources will continue to show improvement in 2016, if our project in Sichuan works, as well as we believe it will, we think we will have an extremely strong future for Gulf Resources. And now, turn the call to me to review the financials and I will do the brief discussion on Company’s 2016 and the Q4 2016 financials. First of all, in 2015, the whole year, our net revenue increased 43% to $162.3 million from $113.7 million. Our gross profit increased 67% to $53.3 million from $31.9 million. Our income from operations increased 90% to $45.2 million from $23.8 million. Our net income increased 91% to $34.1 million from $17.9 million. Our primary EPS earnings per share increased 63% up to $0.75 to $0.46 while our fully diluted EPS increased 61% to $0.74. We achieved these results while maintaining our extremely strong balance sheet. At year-end, cash was around $133.6 million or $2.89 per share. Net net cash, which is cash minus all liabilities was approximately $115 million or $2.48 per share. Working capital was approximately $175 million or $3.78 per share. Shareholders’ equity was $338.1 million or $7.31 per share. Cash flow from operations increased 51% to approximately $70.4 million from $46.6 million. This equals to $1.51 per share. In the past two years, we have generated cash flow from operations of $117 million or $2.50 per share well in excess of our current stock price. Even though we project SCRC and spent almost $22.9 million in making capital improvements to our factories, we were almost cash flow neutral in 2015. And over the past two years, we have generated strong free cash flow, despite making our acquisitions and investing in our facilities. Our fourth quarter was quite strong. In the quarter, our net revenue increased 40.6% to $35.5 million. Our gross profit increased 67.5% to $11.2 million. Gross margin increased to 31.5% from 26.5%. Income from operations increased 140% to $9.6 million. Our operating margin was 27% compared to 15.9% for the fourth quarter of 2014. Net income was $7.3 million. EPS increased 152% to $0.16 from $0.07 per share. Gulf Resources revenue was $35.5 million for the fourth quarter of 2015, an increase of 40.6% from $25.2 million for the fourth quarter of 2014. Revenue from the bromine segment was $11.3 million, a decrease of 19%. Revenue from the crude salt segment was $2.6 million, a decrease 5%. Revenue from the chemical products segment was $21.5 million, an increase of 154% from the corresponding period in 2014. Gross profit for the fourth quarter of 2015 was $11.2 million, an increase of 67.5%, from $6.7 million of the fourth quarter from 2014. Gross margin was 31.5% compared to 26.5% for the fourth quarter last year. Income from operations was $9.6 million, as compared to $4 million in Q4 2014. Operating margins were 27.0% compared to 15.8% last year. Net income was $7.3 million for the fourth quarter of 2015, an increase of 153% from $2.9 million for the fourth quarter of 2014. Basic and diluted earnings per share in the fourth quarter of 2015 were $0.16 compared to $0.07 in the previous year. Weighted average number of basic shares for the three months ended December 31, 2015 was 46,007,120, as compared with 38,725,282 for the three months period ended December 31, 2014. We achieved this very strong result even though the Chinese economy continued to be weak. Now let’s look at the segments of our business. First of all, let’s look at bromine segment. Bromine sales to outside customers decreased 10% to approximately $52.4 million from $58 million. However, this decline is a little misleading because in 2014, Rongyuan was considered to be our outside customer, but from February 2015 onwards, it was part of Gulf, showing approximately $4.8 million sale of bromine from Haoyuan to Rongyuan are included. Bromine sales declined by only 1.3%. Sales volume in tons decreased 17% to 16,569 tons, once again a substantial portion of the decline was attributable to the acquisition of Rongyuan. The selling price of bromine increased 10% to $3,162. At the present time, bromine price remains strong. The decline in the value of the RMB has helped to increase prices. Even if the economy in China does not improve, we expect bromine prices to remain strong for full year 2016. Gross profit margin in the bromine segment was 30%, compared to 25% in the previous year. Income from operations increased 14% to $10.9 million. The government in China is kind of increasing the focus on the environment. They are making companies like ours upgrade their facilities. Raising investment should force some of our smaller competitors out of the business. In 2015, Gulf spent approximately $22.5 million to enhancement projects for the transmission channels and ducts, and our existing bromine extraction to enhance the productivity and improve environmental controls in factories number 10 and number 11. And the Company expects to spend $15 million on enhancement projects for factories number 1 to 9 in 2016. With its strong capital position, Gulf believes this spending will enable it to maintain an advantage over the smaller competitors. The decline in the value of RMB is also a strong net proceed for us because it makes imports, especially bromine, more expensive. In the fourth quarter, income from operations in the bromine segment increased 8.7%. Crude salt, revenue in crude salt declined by 2% to approximately $10.5 million. Sales volume declined by 3%. The price per ton increased by 1%. Gross profit increased by 32.7%. As percentage of sales, it was 21% compared to 15% in the previous year. Income from operations increased 65% to approximately $1.2 million. In the fourth quarter income from Crude salt increased 3.9%. At last, let’s look at the chemical segment. Sales of chemicals increased 121% to $99.4 million from approximately $45.0 million. Our original chemical business was quite strong with sales and selling price increasing in oil and gas, paper making -- manufacturing, and pesticides. We are especially pleased with these results, because the end markets in these industries were generally weak, and we believe we outperformed our competitors. Rongyuan reported sales of $51.2 million for the period of 2015 in which it was a subsidiary of Gulf. In the previous year, 2014, Rongyuan had sales of approximately $52.4 million but numbers are not strictly comparable since we did not own the company for the full 12 months. So Rongyuan’s business did perform very well, especially considering the fact that the factory was shutdown several times for inspections and upgrades. Gross margins in our traditional chemical business increased to 36% from 35%. Income from operations increased 129% to $33.0 million from $18.6 million. Rongyuan earned approximately $16.9 million while our traditional chemical business earned $16.1 million, an increase of 2.6% over 2014. Given the weakness in the segments of the Chinese economy, we are very pleased with these results. Net Income was $34.1 million and increased 91% compared to the results in the previous year. The effective tax rates for 2015 and 2014 were 25% and 26% respectively. In 2015, we generated $70.4 million from operations compared to $46.6 million during year 2014. We spent $66.3 million on the purchase of Rongyuan and $22.9 million on capital expenditures, principally on upgrading factories number 10 and 11, as mentioned early. In the fourth quarter, income from the chemical segment increased 194%. It leads to say we’re extremely pleased with our acquisition of Rongyuan as well as the performance of our traditional chemical business. Our current assets were $190.8 million, down slightly from $194 million in 2014. Total assets were $356.7 million, up from $323 million in the previous year. And the inventories declined as a percentage of sales. Accounts receivable days outstanding declined to 112 days from 135 days. Shareholders’ equity was $338.1 million or $7.31 per share despite the negative impact of the foreign currency translation adjustment cost as a decline in the dollar. Now, I’d like to update the current situation with our natural gas project in Sichuan Province. In order to build a strong and lasting business, we need to install infrastructure and build facilities. Our first well [ph] has ample natural gas but we need further infrastructure to commercialize the process. We have to separate the water and other chemicals from the natural gas to make sufficiently pure for commercial use, then we need to compress it for transportation. Finally, we need to build the roads that will accommodate the CNG trucks. We are currently in the process of building the roads, going to build the roads in this remote area. We’re also finalizing the comprehensive design for our factory bringing in the needed power. We expect this process will take a few months. Company is trying our best to start production as early as we can. As soon as the factory becomes operational and we can verify the profitability of this project, we will apply for permission to drill additional wells. Now, I’m going to turn back to Mr. Liu to make comments about dividend and our use of capital.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. Now, first of all, I will do the translation from Mr. Liu speak just now. Mr. Liu said that I would like to emphasize our previous taking a position on dividend and return capital to shareholders. We are very pleased with our strong cash flow in year 2015. We expect even stronger cash flow in 2016. Free cash flow in 2016 should be very strong despite investments we will be making in the trend and in improving our factories. We have an extremely strong balance sheet. Our cash is $2.89 per share. Our net, net cash is $2.48 per share. While our working capital include is $3.78 per share, we want to do what we can to enhance shareholders value. However, we believe opportunities for natural gas in Sichuan Province potentially transform Gulf Resources, enabling our Company to be worth lot more [ph] of its current price. We’re going to wait to get the progress of our project in Sichuan, before committing to pay any dividend. If this project is not transformative, we will commit to paying dividend; if it is transformative, we’ll explore alternatives for enhancing shareholder value. That must include among others, relisting on another exchange, timing of our natural gas, our gas business or entering into joint venture with major companies -- paying dividend. We know that many feel like to see us pay a dividend now, but we are focused on the long-term growth of Gulf Resources and think we have the opportunity to dramatically increase shareholder value. And after translation now, I want to discuss about the subject of Investor Relations. I want to make a few comments about the way we deal with investors because we recognize that we have not done enough to keep investors informed. We have listened to your complaints about website and are in a progress of completely upgrading and including information, photograph and other information that you have requested. We will be revising our PPT including photos of Rongyuan and Sichuan with the new letters from our Chairman and CEO and the updating all of the other information on the website. We are committed to doing much better job of investor relations from now on. Unfortunately, the programming language we were using 1.0 is out of date and is in a longer supported by our webcasting companies. So, our website unfortunately crashed. We feel very badly about it and are working hard to get our new and improved website operational, as soon as possible as we can. We want to make sure our website answers all of your questions. So we welcome your inputs. Please e-mail me if you have suggestion. Further once our natural gas well has become up and running, we’ll be actively going to see investors. At this point of time, our stock is so undervalued and our market cap is so small that few major investors are interested. However, with extent of our core business and opportunities in natural gas, we are confident, we can become a major company that attracts institutional investors and the sale for reasonable multiples. In closing, I’d like to say that we are very proud of the way our team has operated during this difficult period of time in China. We believe sales in 2016 will continue to improve. We are very optimistic about the natural gas [indiscernible]. We believe that next few years will be exciting and attributable for our Company and our shareholders. We want to thank you for the support you have in us and assure you that we are working as hard as we can for the continued strong results. So, operator, can we open for the question part?

[Operator:]

Yes, ma’am. [Operator Instructions] Your first question comes from the line of David Wang. [Ph]

[Unidentified Analyst:]

Hi. Thank you for taking my call. First of all, congratulations on a really spectacular quarter and a major growth in all spectrums, revenue, profit, gross margin et cetera. I missed the part about dividend. I understand, with the $133 million of cash, there is 46 million shares outstanding, even to take maybe -- I don’t know maybe from 9.2 million or even 4.6 million, basically $0.10 or $0.20 per share and just create a little dividend program just to start, beginning to give back a little bit to the shareholders, while that is really a drop in the bucket when you look at a $133 million of cash. And as you said, the cash flow keeps on growing and expected cash flow from operations in 2016 will just keep on growing. $133 million to take really a drop in the bucket and to start a little dividend program, so just to start little bit giving back to the shareholders that maybe a way -- also enhance shareholder value as other interested parties might take another look at this? Thank you.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Like we said early in this call script, and as we mentioned as well early in our press release that the Company has signed an investment plan with Sichuan local government. And considering this engagement, the Company’s future operational growth and the need, so until now, I did not want as we mentioned early -- we did not want to make the decision yet at this stage.

[Unidentified Analyst:]

Thank you for answering. Just as a follow-up question. Maybe I missed it earlier, again. At what time, will you take a much closer look at beginning a dividend program; would it be in the next -- should we expect it in the next quarter call?

[Helen Xu:]

Okay. So, do you mean, when do we have expected a dividend plan, maybe by next quarter or you mean this question -- the earliest distribution we can make?

[Unidentified Analyst:]

Yes, exactly, next quarter. Yes.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So, not -- I think instead of taking that, not the first quarter, the next quarter, maybe after 2016 after our investment plan completed.

[Unidentified Analyst:]

So, in two quarters, correct? Is that what you said? I didn’t catch that. In two quarters?

[Helen Xu:]

No. 2016, the year 2016, I think three quarters more. Now, it’s first quarter and two more quarters.

[Unidentified Analyst:]

In three quarters? You said three quarters?

[Helen Xu:]

Wait, let me confirm.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Yes, after 2016 finished and our investment plan investment plan finished completely, then we can make the decision. We will see that.

[Unidentified Analyst:]

Okay, for another year, after 2016?

[Helen Xu:]

Yes.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Jack Rukenbrod. [Ph]

[Unidentified Analyst:]

Good morning. Congratulations on a really great quarter and great year. I have followed your company for since ‘07, often on. And in my opinion the credibility is the problem with management. You strongly indicated you are going to do a $10 million buyback in, oh God, ‘08, ‘09, 2010 and then a smaller one but you never, in my opinion, utilized credibility with me at that time. Operationally, it’s a wonderful company. So, until you overcome that credibility with investors in this country, I really doubt your stock is going to continue to lag [ph]. Why don’t you do $5 million to $10 million buyback? It isn’t the amount of money, it’s just you’re following to what you said you were going to do originally. That’s all I have to say.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So, Mr. Liu answered that. First of all thank you very much, Jack to follow the Company and thank you very much for you advice. We think because that transaction year in 2010, we got approved by board of directors and we fully followed the instructions from the board concern during the period and the price range; we did our best to buy between that price range and that period. And we fully completed -- fully follow the instruction to buy back shares. But based on your pretty advice, maybe we will go back to how to balance actions and then we’ll continue, if we can may continue this buyback.

[Unidentified Analyst:]

Thank you. I hope you do.

[Helen Xu:]

Yes, because at times we have a price range at time period, range.

[Unidentified Analyst:]

Well, I got to refresh my memory. And I just think that you should -- it’s ridiculous not to buyback the stock here, and that’s not even worth. I understand as far as converting RMB in the dollars but I don’t know what the penalty is or -- but really that’s -- shareholder raise [ph] and everything else is great but that would go a long way towards getting your stock looking attractive to people, the credibility would come back.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. So first of all, Company did fully follow the instructions from board of directors to execute the buyback program. And secondly, Company in future will continue -- will consider to continue this buyback program. And thirdly, thank you for your comments about considering that time situation and that concern from board. We do not think we lost creditability to our shareholders by this reason.

[Unidentified Analyst:]

I was a shareholder and I had about 30 shareholders and I would like to tell you what they said and I don’t think [indiscernible] I think this cycle is total [ph] range at that time. Anyway, thank you for your consideration. That’s all I got. Thanks.

[Operator:]

The next question comes from the line of Joe Skie. [Ph]

[Unidentified Analyst:]

Yes, congratulations on the results from your fourth quarter. I have a question on the natural gas permit and plants. Is the permit approved by the province? And what is the timing of the plant before your getting natural gas, you are continuing with your growth? And my second question is, Mr. Liu, what does he see the stock valued at? That’s it.

[Helen Xu:]

Okay. Stock value. What was second question, sorry?

[Unidentified Analyst:]

The first question was the natural gas permit and the plants; are they approved, the activities, the investments, the timing? And the second question is what does Mr. Liu see the stock valued at?

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So, first of all, the Company currently does not have the license for this natural gas installation, because the -- at the beginning stage, the Company to fuel this well is to find halogen water and find bromine resources under this well. And then later on, Company find natural gas, supplies --- and natural gas is byproduct of the halogen water and bromine resources. So in China now, for the single well and at this kind of satiation, we do not need license yet. Okay. So, first of all, the Company plan for this natural gas project is that first of all we will use this natural gas well at that trial production first to see how much time we can explore for the natural gas and then how is on the growth structure like. So, if the result is good for this well, we will be looking for other more wells at times for exploration. And then we will apply for the license at that time.

[Unidentified Analyst:]

So, I don’t understand, you are building infrastructure roads, factories but there is no license approved yet?

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. So that like we explained early, with this kind of situation that the natural gas is a byproduct of halogen water and the bromine resources, and for single well, we do not need license at this stage, don’t need, then we can do the exploration. And even though you go to apply, government won’t give. So, they allow -- another stage can say, we can do it. We can see it, we are allowed to do the exploration of natural gas…

[Unidentified Analyst:]

I understand, yes. Okay, that you can do it. And the second question is the stock price that Mr. Liu, does he still believe the price upwards of $30 a share and are there any investor conferences scheduled for this year for 2016?

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

So, Mr. Liu said that I really think our Company’s current stock price was really undervalued. The major reason maybe because U.S. investors did not know China companies really well. And the key thing, the Company’s price, share price should be 10 times of what it is.

[Unidentified Analyst:]

Okay, great. And what about investor relations, are you doing any conferences this year, investor conferences?

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. Yes, the Company -- we’re looking for right options to attend the conference call in U.S. and may do some non-transaction road show to let U.S. investors and our shareholders know Company more and succeed them.

[Unidentified Analyst:]

Great, okay. Thank you. Congratulations and good luck. Thank you.

[Operator:]

At this time, there are no further questions.

[Helen Xu:]

Okay, operator. Thank you very much. If there are no further questions, then we’ll conclude and call it a day for the conference. Thank you very much.