Gulf Resources Inc (GURE) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Gulf Resources' fourth quarter earnings conference call. My name is Tawanda and I will be your coordinator for today. At this time, all participants are in listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Crocker Coulson.

Good morning, ladies and gentlemen, and good evening to those of you who are joining us from here in China, and welcome to all of you to Gulf Resources' fiscal year 2008 conference call. I am Crocker Coulson from CCG, the Company's investor relations firm.

With us today on the call are Mr. Xiaobin Liu, the Company's recently appointed Chief Executive Officer, and Mr. Min Li, the Company's Chief Financial Officer. Also joining us on the call is David [Joe], CCG, who will provide translation for your questions and answers at the end of the call.

I'd like to remind our listeners that, in this call, management's remarks do contain forward-looking statements, which are subject to risks and uncertainties. And management may make some additional forward-looking statements in response to your questions.

Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that's contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today, depending on a number of risk factors, including but not limited to the general economic and business conditions in China, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from existing and new competitors for bromine and other oilfield and power production chemicals, changes 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 that are detailed in the Company's public reports filed with the SEC. Accordingly, although Gulf Resources believes the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

In addition, any references to the Company's future performance represent management's estimates as of today, March 16, 2009. Gulf Resources assumes no obligation to update these projections in the future as market conditions change.

For those of you who aren't able to listen to the entire call at this time, a replay will be available for 14 days. Please refer to our press release issued earlier today for all the details.

Now it's my pleasure to introduce all of you to Mr. Liu, the Company's newly-appointed Chief Executive Officer, who will provide some initial remarks that will be translated by David Joe.

(interpreted) First of all, I want to welcome all of you to Gulf Resources' fourth quarter and fiscal year-end 2008 earnings conference call.

I am honored and pleased to be the new executive officer of Gulf Resources. For the past two years that I have been overseeing the operations of the Company, and I have seen us grow to become the leading producer of bromine in China. In addition to the strengthening our profile as a best-in-class provider of oil and gas exploration chemicals and other specialty chemicals to large customers such as Sinotech and PetroChina.

In addition to determining the strategic focus of the Company and executing our business plan, one of my tasks as Chief Executive Officer will be improve transparency of Gulf Resources and enhance our profile as a public company.

As we anticipated in our last conference call in November 2008, our quarterly revenue in the fourth quarter returned to levels we achieved in the first and second quarter of 2008 after the dip in customer orders caused by the Beijing 2008 Olympic Games. As a result, we were able to meet our guidance provided in October.

I will now turn the call over to Crocker Coulson, who will present an overview of our business development in the fourth quarter and fiscal year 2008.

Thank you, Mr. Liu, and thank you, David. I'd like to continue with presenting the Company's results for the fourth quarter and fiscal 2008 on behalf of Mr. Liu, CEO of Gulf Resources.

Our highlights for the fourth quarter include net revenues of $24.1 million, up 57.6% year over year. Gross profit of $9.9 million, up 61.4% year over year. Income from operations of $8.5 million, up 62.9% year over year.

As a result, our net income for the fourth quarter was $6.2 million, a 137% increase from net income of $2.6 million in the fourth quarter of 2007 with basic and diluted earnings per share of $0.06 a share compared to $0.03 per share for the fourth quarter of 2007.

Fiscal year 2008 highlights include net revenues of $87.5 million, a year-over-year increase of 61.8%, and net income of $22.4 million, or $0.22 per basic and diluted share, a year-over-year increase of 83.1% from $12.2 million, or $0.13 a share, in the prior year.

During the fourth quarter, our customer orders returned to levels obtained in the first and second quarters of 2008, allowing us to meet our revenue guidance of $84 million to $90 million and our net income guidance of $20 million to $23 million for the full fiscal year.

Our fourth quarter year-over-year revenue growth was mainly due to added bromine and crude salt production capacity from production assets acquired and integrated in early 2008, as well as production assets acquired in the fourth quarter of 2007 that were not fully operational until early 2008.

Our acquired bromine and crude salt production assets added about $24.8 million in revenue for 2008. Our bromine and crude salt segment contributed 66.4% of total revenues for the fourth quarter ended December 31, 2008.

Within this segment, the sale of bromine contributed 90.8% of revenue, a year-over-year increase of 44.9%, while the sale of crude salt contributed 9.2% of revenues, compared to less than 1% in the prior period.

The increase in revenue from crude salt was mainly due to us establishing halogen water pools and increasing the utilization rate of halogen water that was previously wasted or sold. Since crude salt is a byproduct of bromine, the production costs only include the establishment of pools, water pumps, aqueducts, and labor.

The general boom in raw material prices also increased prices of crude salt. Even though prices have decreased from their all-time highs of about CYR400, or $60 per metric ton, to approximately CYR200, or $30 per metric ton, the margins remain very attractive.

Building on economies of scale and expanding our bromine production capacity to meet growing demand in China is an important part of our growth strategy. In January 2009, we acquired bromine production assets that, when operational, will add 3,000 tons to our annual bromine production capacity, bringing our consolidated annual production capacity to 34,000 tons of bromine. We expect to start production utilizing these assets in April of 2009.

This acquisition also increases our crude salt capacity by 200%, bringing it to a total of 300,000 tons. We expect these assets to increase our bromine and crude salt production, and add incremental revenue of $3.7 million to $4.1 million from bromine sales and $3.5 million to $4 million from crude salt sales in fiscal 2009, based on the current market price of approximately CYR11,000, or $1,600, when we finished the acquisition of these bromine assets.

Bromine prices decreased during the fourth quarter, bottoming out at CYR10,000 per metric ton, or approximately $1,470 per metric ton, in January of 2009. Since then, we have seen prices rebound moderately, with bromine currently priced at approximately CYR13,000 per metric ton, equivalent to $1,920 per metric ton, after the Chinese New Year.

We believe prices will remain flat or trend slightly upward in the second half of 2009 as the supply of bromine in China remains stable due to the government-imposed restrictions on additional bromine exploration licenses. We further expect solid demand from many of the downstream industries that utilize bromine.

So far in 2009, we have received bromine orders valued at approximately $47.8 million and crude salt orders valued at approximately $5.9 million. We expect to deliver all these orders over the course of 2009.

In the fourth quarter of 2008, our chemical products segment contributed 33.6% of total revenues, compared to only 25.3% in the third quarter of 2008, due to added capacity from a second chemical production line that focuses on environmentally-friendly gas exploration -- oil and gas exploration chemicals.

In 2009, we plan to emphasize these more sophisticated products as the Chinese government encourages domestic production of high-end chemical products that, in time, we believe will replace imports. We began producing this line of products in September of 2008, resulting in products contributing approximately 13% to total chemical products revenue in Q4.

In March of 2009, we signed an agreement with a chemical products distributor, Kuerle City Xingdong Trading Company, to deliver follow-up orders of environmentally-friendly polyethylene lubricant and solid lubricant worth $7.5 million from March through December of this year. The feedback from end customers using our environmentally-friendly oil and gas exploration chemicals has been extremely positive, allowing us to increase capacity utilization of our environmentally-friendly production line.

Simultaneously, we're working to upgrade the technology and production process of our existing line to enable us to apply for VAT rebates from the Chinese government. We aim to submit our application during 2009, depending on the demand for our chemical products.

Our gross margin improved to 40.9%, from 40% in Q4 of last year, as we increased sales of crude salt and environmentally-friendly chemical products which all carry a higher gross profit margin compared to bromine. The Company's environmentally-friendly oil and gas chemical products generated a gross margin of approximately 42%, while crude salt had a gross profit margin of 85% in Q4 of 2008.

In comparison, the gross profit margin for bromine was 36.7% in Q4. Declining raw material prices in the fourth quarter of 2008 also supported our gross profit margins.

Our operating expenses for the fourth quarter of 2008 were $1.4 million, compared to $0.9 million in Q4 of '07. Operating expenses were driven by increases in G&A expenses due to higher land tax fees, amortization of technology, and compensation fees for mineral resources.

Our net -- our tax rate -- our income tax rate was 25%, compared to 33% in the year-ago period, due to reductions in the Chinese corporate income tax rates which became effective in January of 2008. As a result, our income taxes decreased 13.3% to $2.3 million from $2.6 million in Q4 of '07.

Our effective income tax rate in the year was significantly -- in the year prior was significantly higher due to certain adjustments made in the fourth quarter of '07.

Our net income was $6.2 million in Q4 of 2008, a 136.8% increase from $2.6 million in Q4 of '07. And basic and diluted earnings per share for Q4 were $0.06 a share, increased from 3% per diluted share in Q4 of '07. I should note the weighted average number of diluted shares for the three-month period ended December 31 was 99.6 million shares.

Next, I'll briefly cover our fiscal year 2008 highlights. Revenue for fiscal year 2008 was $87.5 million, an increase of 61.8% from $53.8 million in '07. 73% of our revenues came from the sale of bromine and crude salt, while the remainder came from chemical products.

In the chemical products segment, approximately 69% of revenues came from generic oil and gas exploration chemicals, while chemicals for papermaking and agriculture and environmentally-friendly oil and gas exploration chemicals contributed the remainder.

Gross profit was $35.2 million for the year, an increase of 58.9% from $22.1 million in '07. Gross margin for fiscal 2008 was 40.2 -- was 40.2%, compared to 41.2% for fiscal '07.

Operating income was $30.6 million, an increase of 52.7% from $20 million in fiscal '07. And our net income was $22.4 million, or $0.22 per basic and fully diluted share, an increase of 83% from $12.2 million, or $0.13 a share, in '07.

Now I'd like to touch briefly upon our balance sheet and cash flows. As of December 2008 -- 31, 2008, we had cash of $30.9 million, current liabilities of $18.6 million and long-term debt of $18.3 million, and shareholders' equity of $52.5 million. At fiscal year-end, we had working capital of $24.7 million and a healthy -- and a current ratio of 2 to 3.

In February, however, we entered into an agreement with a related company, Shenzhen Hua Yin Guaranteed Investment Limited, to issue 21 million shares of our common stock instead of paying approximately $21.3 million in existing loans payable in cash. These loans consisted of $3 million payable in May of 2009, and $18.3 million payable no earlier than January of 2011.

As part of this agreement, three unaffiliated companies assumed a loan from Shenzhen Hua Yin and received 21 million shares of our common stock at the beginning of March. We consider this transaction a sign that the beneficiary companies believe in the long-term value of our stock.

As a result of the transactions, the loans outstanding have been deemed paid in full and we will have no long-term debt outstanding on our balance sheet.

For the 12 months ended December 31, 2008, we generated $24.9 million in cash from operations, primarily attributable to net income, and used $17.4 million in investment activities, primarily due to the addition of a new chemical production line and the acquisition of additional manufacturing assets to increase our bromine resources and production capacity.

We plan to invest between $25 million to $30 million in CapEx in 2009, so as to increase our bromine capacity and upgrade our chemical production lines, of which $11.5 million has always -- has already been spent to acquire the bromine and salt production assets I referenced earlier.

Now I would like to turn to our business outlook. Even though the Chinese economy is affected by the global slowdown, we have seen only a minor slowdown in the demand for bromine. We expect that China's government stimulus package to increase investment in construction, which in turn would drive demand for fire retardants, the largest downstream industry for bromine.

We also expect to see ancillary revenue growth from crude salt sold to food and beverage and chemical industries.

Given the limited number of bromine properties left on the market, we believe that to continue to be competitive in this industry, we need to act quickly to emerge as a frontrunner as the industry consolidates. Therefore, we will continue to actively assess additional acquisition opportunities in 2009.

While we lack the visibility to provide guidance for the full year of 2009 at this time, I would like to discuss our outlook for the first quarter of 2009. We expect to record revenues of $22.4 million and net income in the range of $6.1 million, with diluted earnings per share of approximately $0.05 using a share count of $122.2 million.

I would like to conclude our fourth quarter earnings call by saying that Gulf Resources has managed to maintain its position as the strongest bromine producer in China, and is also a very strong generator of cash.

With that, we'd like to thank all our shareholders and open this call up to any questions that you may have for Mr. Liu or Mr. Li. Operator?

(Operator Instructions). Ezzat Jallad, Silver Rock Holdings LLC.

Congratulations on a great quarter. I have a couple of questions. First, on the pre-sales that Crocker (technical difficulty) on the bromine and the other products. For '09. How sure are we on those contracts? Are they --

We'll take one question at a time. So, Dave, why don't you translate that one? (multiple speakers) So, for the contracts that we announced for bromine and crude salt, how confident or how certain are we that they will materialize?

(interpreted) First of all, the Company has [do] more promotions to the chemical products [family], the newly-established chemical production line. So far, the Company has obtained the $7.5 million in U.S. dollar orders, and it's actually increased 1.5 times chemical production before the Q4 '08.

And secondly, the Company has obtained the 28,000 bromine orders from the large customers, so the company is very confident in those orders in 2009.

So just to reiterate, David, we're referencing -- we talked about the $47.8 million in bromine orders and the $5.9 million in crude salt orders. So he feels a high level of confidence?

$47.8 in million in bromine and $5.9 million in crude salt.

(interpreted) Due to the global financial crisis, the companies are not really -- it's not quite certain for the second half of the year, so the companies only give the guidance of the first quarter of 2009.

That's not the question. David, we're talking about the orders that they talked about, the orders that they've received.

Yes, they have already got those orders, I talked just now.

Okay, great. Next question?

On the debt, you mentioned that the $18 million was -- and the other $3 million were substituted for share, $21 million then. But I just looked at the results of '08, and the $18 million still shows as notes payable. (multiple speakers)

That was after the end of the quarter. So you'll see that on the Q1 balance sheet, and (multiple speakers)

The end-of-year balance sheet will not have this $18 million (multiple speakers)

That's right. The transaction happened in 2009. So you won't see it until Q1. (multiple speakers)

I understand. Thank you very much, gentlemen.

Thank you.

(Operator Instructions). At this time, there are no further questions in the queue. I would now like to turn the call back over to Mr. Crocker Coulson for the final remarks.

Thank you very much, Operator. On behalf of the entire Gulf Resources management team, we would like to thank all of you for your interest in our Company. The Company does plan to be visiting Hong Kong -- the Hong Kong money show this week, March 17 through 19. We encourage any of you who are based in Hong Kong to come visit us there.

And the Company also intends to come to New York for CCG's China Rising conference on May 18. And if you have any -- if you're traveling to China and have any interest in visiting Gulf Resources' facilities, please let us know and we will be happy to make those arrangements.

Again, thank you all so much for joining us on this call, and this now concludes Gulf Resources' fourth quarter 2008 earnings conference call.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.