Gulf Resources Inc (GURE) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gulf Resources first-quarter earnings conference call. My name is Heather, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's conference, Mr. Crocker Coulson. Please proceed, sir.

Thank you very much. Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China. I would like to welcome all of you to Gulf Resources first-quarter 2009 earnings conference call.

I am Crocker Coulson from CCG, Gulf Resources Investor Relations firm. And with us today on the call are Mr. Xiaobin Liu, the Company's Chief [Financial] (sic -- see press release) Officer. Also joining us is David Zhou, CCG, who is going to be providing translation for your Q&A for Mr. Liu at the end of this call.

I would like to remind our listeners that in this call, management's remarks contain forward-looking statements that 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 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 or production capabilities; shipments to end customers; market acceptance of new and existing products; additional competition; changes in technology; and other factors that are 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 filings with the SEC. Accordingly, although Gulf Resources believes the expectations reflected in these forward-looking statements are reasonable, we can provide no assurance that they will prove to be correct.

In addition, any references as to the Company's future performance represent management's estimates as of today, May 12, 2009, and 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 the entire call at this time, we are going to make a replay available for 14 days, and you can refer to our press release for the details.

It is now my pleasure to turn this call over to Mr. Liu, the Company's CEO, who will provide some initial remarks that will be translated by David Zhou. Xioabin?

(Interpreted) First of all, I want to welcome all of you to Gulf Resources first-quarter 2009 earnings conference call. In the first quarter, revenue remained relatively stable from the first quarter of last year, but gross margin rose by 1.8 percentage points due to increased sales of higher-margin crude salt and environmentally friendly chemical products introduced in the fourth quarter of '08.

More recently, we have noticed a recovery in the sales price of downstream chemical products utilizing bromine as raw material, such as bromine-aided flame retardants and pesticides, which has resulted in increased demand of bromine and additional orders from our large customers. Our bromine sales has been strongly recovered since March of 2009.

I will now turn the call over to Crocker Coulson, who will present an overview of our financial and business developments in the first quarter of 2009. Crocker?

Thank you, Mr. Liu, and thank you, David. I would like to continue with presenting the Company's results on behalf of Mr. Liu.

Our highlights for the first quarter include net revenues were $23.6 million, exceeding our guidance and up 7.3% year-over-year. Our gross profit was $10.1 million, up 7% year-over-year. Income from operations was $8.9 million, up 5% year-over-year. And as a result, net income for the quarter was $6.5 million, a 6.3% increase from net income of $6.1 million in Q1 of 2008, with basic and diluted earnings per share of $0.06 per share for both quarters. Both net income and earnings per share were in line with the guidance we provided during the quarter.

In 2009, we continued to diversify our revenue sources by utilizing our existing crude salt production assets more efficiently and increasing crude salt production capacity from additional salt pans acquired, together with bromine production assets, in February of 2009.

Because crude salt production is very straightforward and involves directing halogen water to salt pans, where the liquid evaporates, leaving behind salt, we were able to start the production process immediately upon acquiring these assets. Our crude salt sales in Q1 also included crude salt accumulated in 2008. Consequently, sales of crude salt contributed $2.5 million, or 10.7% of total revenues, in Q1 compared to less than $100,000 in the corresponding period last year.

Crude salt is widely used in the food and beverage industry, and is also a component of sodium hydroxide, which is a common chemical base used in soap and detergent production, papermaking chemical production and other chemical products. Crude salt prices have tripled year over year from RMB85, or approximately $12 per metric ton, in Q1 2008 to RMB245, or approximately $36 for Q1 of 2009, which is why we've decided to further develop this segment.

The significant increase in crude salt sales partially offset a year-over-year decline in bromine sales for the quarter. Bromine contributed $13 million, or 55%, of total revenues, down 28.8% from $16.4 million, or 74.4%, of revenues in Q1 of '08. The decline in volumes of bromine was mainly due to more cautious bromine orders from downstream chemical manufacturers and lower bromine prices, which bottomed out in January of 2009 at RMB10,000, or approximately $1465 per ton.

However, after Chinese New Year, we've seen an increase in follow-up orders from our customers, and consequently, bromine prices increased to RMB13,000 per metric ton, or approximately $1900 per metric ton, as of March 2009.

As we expect the stimulus package of the Chinese government to boost construction, which in turn should support demand for brominated flame retardants, we expect to see bromine prices fluctuate between RMB13,0000 and RMB14,000 per metric ton in Q2 of 2009, which would put them roughly in line with the prices in October of 2008.

Expanding our bromine and crude salt production to meet growing demand in China is an important part of our growth strategy. We started bromine production using our most recently acquired bromine production assets in April of 2009, and we expect these assets to reach a utilization rate of 70% by the end of 2009. When operating at target utilization, we expect to add 3000 metric tons to our annual bromine capacity.

Now I would like to discuss the developments in our Chemical segment. Due to the added capacity from a second chemical production line that focuses on environmentally friendly oil and gas exploration additives, sales from our Chemical Products increased 46.8% year over year in Q1 of 2009, and contributed 34.3% of total revenue, compared to 25.1% in Q1 of '08. Our environmentally friendly oil and gas additive products introduced in September of 2008 contributed approximately 19.6% of total revenues from this segment.

The majority of our Chemical Products were generic oil and gas exploration additives, accounting for approximately 56.8% of total sales, while our papermaking additives accounted for 16.8% of chemical sales. Sales of chemicals for agricultural applications, such as pesticides, nearly doubled year-over-year and contributed 6.9% of Chemical sales.

For the first quarter of 2009, our gross margin was 42.7%, up from 40.9% for the fourth quarter of 2008, mainly because of the increased sales of crude salt and environmentally friendly chemical products, which both have higher associated gross profit margins.

Our environmentally friendly oil and gas exploration chemical products generated a gross profit margin of approximately 43%, while crude salt had a gross profit margin of 68% in the quarter. In comparison, the gross profit margin on bromine was 39% in the (technical difficulty).

Our operating expenses for Q1 2009 were $1.2 million compared to $1.3 million in Q1 of 2008. The increase in operating expenses was primarily due to warrants granted to employees.

Our net income was $6.5 million for Q1 of 2009, a 6.3% increase from $6.1 million in Q1 of 2008. Basic and diluted earnings per share were $0.06 in both quarters.

Now I would like to touch briefly on our balance sheet and cash flow. As of March 31, 2009, Gulf Resources had cash of $30 million, current liabilities of $17.4 million and working capital of $24.9 million. The Company had a current ratio of 2.5 times, and shareholders' equity of $81.1 million. We had no long-term debt outstanding as of March 31, 2009, and we are now exempt from paying off the $21.3 million in related party debt by issuing 21 million shares in February of 2009.

Consequently, we have 122.2 million shares in common stock outstanding at March 31, 2009. And we are pleased to announce that on May 10, we negotiated a lockup agreement with these new shareholders that prevents them from selling their shares in the public markets for a period of 22 months. The agreement also prevents these shareholders from further selling common stock in an amount greater than 2% per month in the public markets in a 12-month period following the lockup.

For the three months ended March 31, 2009, we generated $9.1 million in cash flow from operations, primarily attributed to net income, and used $10 million in investing activities due to the acquisition of additional manufacturing assets to increase our bromine and crude salt manufacturing capacity.

Now I would like to say a few words about our business outlook and expectations for 2009. While bromine prices are lower compared to the same period last year, we've seen our end customers, downstream chemical producers, become increasingly confident, partly due to the stimulus package issued by the Chinese government that will drive them to raise prices on their products.

As we continue to see domestic demand for bromine exceed domestic supply, we expect to leverage our production license by accessing additional acquisition opportunities in 2009. Our plan is to invest approximately $15 million in 2009 to increase our bromine production capacity, and we plan to finance this from cash from operations.

We are also focusing on increasing the output of crude salt, as we expect continued support for crude salt prices from increasing demand for this raw material in China. Consequently, we are planning to utilize our halogen water more effectively, in addition to establishing additional salt pans in conjunction with our existing bromine factories. This would bring our annual crude salt production capacity to 300,000 metric tons. As we already possess the required land-use rights, establishing these salt pans requires relatively minimal investments.

Because of the excellent reception of our environmentally friendly polyether lubricants and as the Chinese government encourages companies to focus on higher-value-added chemical products, we've decided to develop our product offerings by introducing a new generation of environmentally friendly chemicals for agricultural applications, as well, such as pesticides. To produce these products, we are planning to upgrade the technology and production process of our older production line.

The introduction of these products and the transfer to a cleaner production process will enable us to apply for VAT rebates from the Chinese government. We plan to complete the upgrade by September of 2009, with production starting by the end of the year. We estimate the upgrades will require an investment of $4 million to $5 million, which we plan to finance using cash from operations.

We expect bromine prices to fluctuate slightly in 2009, in line with raw materials costs, while we expect environmentally friendly chemicals and crude salt to account for an increasing share of our revenues this year. As a result, we expect on balance that our gross margin will increase in 2009.

At this point, we would like to provide guidance for our fiscal year 2009. We expect revenues of between $98 million to $103 million, and we expect net income of between $27 million to $29 million, which would result in diluted earnings per share of between $0.22 and $0.24, using a share count of 122.2 million shares.

I would like to conclude our first-quarter earnings call by saying that the Company has successfully managed to develop its chemical product portfolio while maintaining its position as one of the largest bromine producers in China.

With that, I would like to thank our shareholders, and we will now open this question to any calls that you may have. Operator, could you now prepare for us to take the first question?

(Operator Instructions) There are no questions at this time, sir.

Operator, let's queue one more time and just give -- it may take them a few minutes to queue up -- to request a question.

(Operator Instructions) [Robert Ostrovsky], Gulf Resources.

Hi. Thank you. The other day, I noticed the UN came out with a ban on nine chemicals. Four of them relate to flame retardants including the word bromine in them. And I just wondered if you could comment on that, if that would have any effect on the sale of bromine in China.

Okay. This is David from CCG. I will translate for Mr. Liu. (Spoken in Chinese)

(Interpreted) The bromine-aided -- the flame retardant has a huge demand -- has a huge market in China. We use the flame retardant -- it will be used in the construction, the house appliance and the furnitures. All of these products need the fire retardants. Along with the strong economic growth in China, these goods will be -- the demand of these goods will become strong in China, which will stimulate the demand of the bromine.

All right. Thank you.

So, just to clarify, David, I think Mr. Liu is saying he doesn't see any impact from any restriction in the US. Is that basically what you're saying?

Restriction in the US?

Yes, I think just to clarify, the caller was saying that he had heard there was some restriction on these fire retardants in the US, and I don't think that -- was that your point, sir?

Yes, that was my question.

And I don't think that impacts the Company's market in China. But may just want to clarify that point.

(Spoken in Chinese)

(Interpreted) Firstly, there is no restrictions of the brominated fire retardants in China. And secondly, the brominated fire retardants may have some negative impacts in US markets, so US government has imposed restrictions. But the technology was still improving, so in some day, the technology will remove the negative impacts and the restriction will be removed.

Okay, that's great.

(Inaudible) Capital.

I was wondering, the $15 million that the Company is going to spend to increase the bromine capacity, what impact will that have on earnings for this year?

(Interpreted) The Company has -- did forecast after they invested $15 million to acquire the new bromine manufacturing capacity. The expected net income in next -- each year will be $2.5 million to $3 million.

If the bromine price will keep increasing, these results will be much better.

Okay. I just want to make sure I understand. You are saying that the EPS guidance for this year is not contingent upon spending the $15 million for the bromine, but once the Company does invest that $15 million, they expect it to increase net income by $2.5 million to $3 million per year. Is that correct?

(Interpreted) Actually, the forecast of the guidance of the $27 million to $29 million net income for '09, it is actually exclude the potential newly-acquired bromine capacity. The acquisition is still in -- under negotiation. There would be uncertainties. So this is just the Company's forecast -- the prediction.

I think the bottom line is if and when they are able to complete that transaction, they would then provide an update to their guidance. But the guidance we provided does not assume any acquisitions.

Okay. And when you say acquisitions, that is the $15 million that you talk about, to increase the bromine?

Yes, to increase the resources.

Perfect. Thank you.

(Operator Instructions) [Brian Palmer], Park Financial.

Hello. First of all, I would like to say congratulations on a great quarter in light of a very hard economic situation.

I have several questions. First is, are you seeing any competition for the bromine assets, and are there -- the other licensees actively pursuing the bromine properties at this time? And what is your current market share?

(Interpreted) To answer your question, so far, the Gulf Resources has three to four competitors at the same time acquiring the small bromine manufacturing assets. And second, the Chinese government has decided not to issue any new licenses to any bromine manufacturers.

Thirdly, in 2007, the Company's market share is 22%. And in 2008, the Company's increased the production capacity for about 3000 metric tons. The Company did some rough estimate it's between 23% to 24%.

Okay. And my next question is if you could briefly discuss your plans on uplisting to another exchange, and also talk about the China Rising conference and the roadshow that as upcoming, as far as what -- who you will be meeting and those sort of things, what the plans are for those events.

Go ahead, David. Maybe I will take the first part and then we can let Mr. Liu talk about the plans for potentially upgrading.

So, the Company will be coming to the US next week, and they are presenting at the China Rising conference in New York. And then we will be spending several days meeting with other investors in both the New York and Boston areas. And if anybody has a particular interest in meeting with the Company, they can feel free to contact us after this call. In addition, the conference presentation will be available via webcast to anybody who wants to listen to it.

So David, with that, maybe you can ask Mr. Liu to comment on the Company's plans or thoughts with respect to upgrading to a major exchange.

(Interpreted) Recently, the Company has completed the assessment of upgrading the NASDAQ, so the Company is definitely targeting the NASDAQ exchange market. So, so far, the Company has only one condition needs to be satisfied. It is the independent director.

The Company has plans to recruit two more independent directors, one residing in China and the other one from US. And the nomination of the Board of Directors will be completed shortly, and the Company will start to apply the NASDAQ upgrade in June or July of this year.

Okay. And I would assume that there would be a reverse split necessary. Is that correct?

(Interpreted) Thinks Company filed the application to listing on the NASDAQ in June or July; then the Company will do the reverse stock split.

Okay, great. Thank you very much.

Thank you.

There are no further questions in queue at this time.

Great. Well, we would like to thank everybody for their participation in this call and their interest in Gulf Resources' results. We, as Mr. Liu indicated, see improvement in demand for bromine, and we look forward to coming back to you and reporting our second-quarter results later this year.

In addition, as we just discussed, the Company will be meeting with investors in the US next week. And if anybody has any interest in arranging a meeting, please give us a call at 646-213-1915, and we will be more than happy to arrange that for you.

Thank you very much. This now does conclude Gulf Resources' first-quarter conference call.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the presentation. You may now disconnect. Have a great day.