Gulf Resources Inc (GURE) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Gulf Resources second quarter 2009 earnings conference call. I'll be your coordinator for today. At this time all participants are in a listen only mode. We'll be facilitating a question and answer session towards the end of this conference. (Operator Instructions)

I'd now like to turn the presentation over to our host for today's call, Mr. Crocker Coulson. You may proceed.

Thank you. 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 second quarter 2009 earnings conference call. I'm Crocker Coulson from CCG, the companies Investor Relations firm, and with us today are Mr. Xiaobin Liu, the Company's Chief Executive Officer; Mr. Min Lee, the Company's Chief Financial Officer; and Mr. David Wong, newly appointed VP of Finance. Also joining us on this call is David Zhou, CCG who will provide translation for your Q&A at the end of this call.

I would like to remind our listeners in this call managements remarks 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 and economic business conditions in China, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, competition from existing and new competitors for bromine and other oil field and power production chemicals, changes in technology, the ability to make future bromine asset purchases and various factors beyond the Company's control. All forward-looking statements are expressly qualified by this precautionary statement and risk factors detailed in the Company's reports filed with the SEC. Accordingly although the Company believes the expectations reflected in these forward-looking statements are reasonable it can provide no assurance they will prove to be correct.

In addition, any references to the Company's future performance represent managements estimates as of today, August 11, 2009, and Gulf Resources assumes no obligation to update these projections in the future as market conditions change. For those of you unable to listen to the entire call at this time we are going to make a replay available for 14 days and you can go to our press release for the details. Now, with those introductions out of the way it's now my pleasure to turn this call over to Mr. Liu, the Company's CEO, who is going to provide initial remarks translated by David Zhou.

(Foreign language spoken)

First of all, I want to welcome all of you to Gulf Resource second quarter 2009 earnings conference call. We are very pleased to be able to report a record quarter of revenues and earnings based on the recovery of industry demand in China, and the successful execution of our growth strategy.

(Foreign language)

On a year-over-year basis we have seen rapid growth from our chemical products segment and further developed our crude stock production which together drove our sales revenue to record levels. Moreover, due to increased sales of our high margin environmentally friendly Chemical Products, our gross margin rose by 3.6 percentage points from the second quarter of 2008, but most importantly, we have seen successful enhancing our bottom line.

(Foreign language)

Bromine sales increased from the first quarter of 2009 as our large customers have been confident in increasing their orders due to more favorable business conditions in the chemical industry, driven by a strong recovery of China's economy. We have continued to increase our market share partially through offering competitive prices to our existing clients.

(Foreign language)

On behalf of me, I would now like to turnover this call to Mr. Crocker Coulson, who will continue to present an overview of our present operations and business developments and our VP Finance, David Wong, will introduce the financial performance for the second quarter of 2009. Crocker?

Thank you, Mr. Liu. Thanks, David. Our bromine sales rebounded in the second quarter ended June 30, 2009, from a slow first quarter demonstrating a quarter-over-quarter increase of 39.8% due to strong pick up in burmine orders from our large customers supplying brominated fire retardant and pesticides manufacturers. Although demand for our Bromine products increased, Bromine prices decreased slightly to RMB11,575 or approximately $1697 per metric ton for the quarter which compares to RMB12,123 or approximately $1776 per metric ton in the quarter ended March 2009. The slight decrease in bromine selling prices was the rut of competitive pricing we offered to existing clients in order to maintain and expand our market share. Even though bromine prices are still below year ago levels, higher sales volume increased bromine sales by 1.6% year-over-year. For the second quarter, bromine sales contributed 18.2 million or 61.5% of total revenues compared to 17.9 million or 75.3% last year.

Furthermore, we continued to diversify our revenue stream by utilizing our existing crude sell production assets more efficiently and increasing crude soft production capacity from additional salt pans acquired in conjunction with bromine conjunction assets in February 2009. Consequently, sales of crude salt contributed 2.3 million or 7.9% of total revenue for the second quarter, which compares to about 100,000 for the corresponding period in 2008. We're also focusing on increasing output of crude salt as we expect continued support for crude salt prices from increased demand for this raw material. It's an important raw material sodium hydroxide that's widely used in chemical manufacturing, so the strong demand for crude salt was primarily attributed to more purchase orders from chemical manufacturing customers who also played bromine orders. In addition crude salt has a lower production cost compared to bromine and has a much higher gross margin up to 75%. Consequently we're planning to use our halogen water more effectively and we've brought our annual crude salt production to 95,540 metric tons in the second quarter of 2009 through the establishment of additional salt pans. As we continue to establish more salt pans we expect to reach an annual production capacity of 300,000 metric tons by the end of this fiscal year. We already possess the required land rights, the land use rights so establishing these salt pans requires minimal investments.

Expanding our bromine and crude salt production capacity to meet growing demand in China remains an important part of our growth strategy. While bromine prices have declined we've seen our end customers which is downstream chemical producers accelerate bromine purchases mainly due to the strong recovery of the chemical industry along with the overall Chinese economy, which has allowed them to raise prices for their products. As we continue to see domestic demand for bromine exceed domestic supply, we plan to leverage our production license by making additional acquisitions in 2009.

In the second quarter of 2009, we operated our most recently acquired bromine assets at approximately 80% of full capacity and we expect them to reach improved utilization rate by the end of the year. When operating at target utilization we expect them to add 3000 metric tons to our annual bromine capacity.

I'd now like to discuss developments in the chemical product segment. For the second quarter of 2009, revenue from our chemical products increased 57.4% year-over-year mainly due to added capacity from a second chemical production line we completed in September of last year and contributed 30.6% of total revenue compared to 24.2% in Q2 of 2008. The new production line focuses on environmentally friendly oil and gas exploration additive products and contributed approximately 22% of our chemical product revenues. The break down of chemical product sales according to industry application remains similar to the first quarter of 2009. The majority of our chemical products sales in Q2 were generic oil and gas exploration additives accounting for approximately 78% of sales while our paper making additives accounted for 14% of sales and sales for agricultural applications such as pesticides, contributed 8% to total sales in this segment.

We continue to enhance our production process and negotiate with our suppliers in order to improve profitability. While bromine selling prices decreased, raw materials 4% year-over-year, raw materials used in bromine production decreased 7%. For the second quarter 2009 our gross margin was 44.4%, up from 40.8% in the first quarter of this year, mainly because of increased sales of crude salt and environmentally friendly chemical products both of which have higher gross profit margin compared to bromine. Our environmentally friendly oil and gas exploration chemical products generated gross profit margin of approximately 42% and as I mentioned crude salt had a gross profit margin of approximately 75% in Q2. In comparison, the gross profit margin bromine was about 41% in the quarter.

We're also constantly improving our product portfolio by researching higher value-added products such as a new generation of environmentally friendly pesticides for agricultural applications. Over the next few months we plan to upgrade our existing agriculture application chemical production line to comply with the development of these environmentally friendly agricultural chemicals, and we expect to complete the upgrades by September of 2009 and start production towards the end of this year. We expect the new products to replace the currently produced generic agricultural chemicals and add approximately 4 million to 5 million in annualized revenue starting from January of 2010; however we're not expecting any significant impact on the revenue from these new products in 2009. We estimate the upgrade to require an investment of about $5 million which we plan to finance using our cash from operations.

With that introduction to the operations I'd now like to turn this call over to Mr. David Wong, Gulf Resources VP of Finance, and he's going to provide some more detailed financial information and discuss the Company's business outlook. David?

Yes. Okay, thank you, Crocker. Before I continue I'd like to introduce myself briefly. My name is David Wong, I was appointed Vice President of Gulf Resources in July 2009. My specialty is financial planning and (inaudible - highly accented language) and I will work on consolidated financial reporting, (inaudible) and the financial planning and analysis. I will also serve as the primary contact between the Company and the investors. Before I joined the Company I have worked for almost 10 years for Fortune 500 a NASDAQ listed Company as holding various financial management positions. Now, let's discuss our financial performance for the second quarter 2009.

Net revenue was 29.6 million for the second quarter for 2009, an increase of 10.4 million from 23.8 million for the second quarter of 2008. The increase was due to increased chemical product sales due to expansion of our chemical production line in the first quarter last year, as well as increased crude salt sales. Our gross margin for the second quarter 2009 was 13.1 million, up 75.5 from 9.6 million from the second quarter of 2008. For the three months ended June 13, 2009, gross profit margin was 14.4% compared to 14.8% for the corresponding period last year. The increased gross profit margin was due to lower raw material cost sales for Bromine production operation as we grow in sale and increased sales of high margin products.

Our operating expense for the second quarter of 2009 was 1.1 million and the decrease slightly from the second quarter of 2008. As a result our net income was 9 million for the second quarter of 2009 at 42.7 increase from 6.3 million for the second quarter of 2008. Risk and the diluted earnings per share were $0.07 in the second quarter of 2009 compared to $0.06 in the second quarter of 2008.

Now, I would like to touch briefly upon our balance sheet and cash flow. As of June 30, 2009, we had a cash of 38 million, current liability of 23.5 million and working capital of 27.6 million, a (inaudible) ratio of 2.17 and the shareholders equity of 90.2 million. We had no (inaudible) spending and at 122.2 million common shares outstanding as of June 30, 2009. For the six months ended June 30, 2009, we generated 19.3 million in cash flow from operations, primarily as net income and 19 million in investing activities, due to the acquisition of bromine and the salt manufacturing assets in February 2009 and the construction of new wells, Halogen, and (inaudible) disposal assistance. We plan to invest approximately 10 million for the second quarter of fiscal 2009 to upgrade our existing chemical production lines as well as continue the construction of our waster water disposal system. We will also make additional investments to acquire additional bromine and the cost for the production assets but have not yet finalized negotiation with any targets at this point of time.

I'll conclude by a discussion of expectations for fiscal year 2009, we expect bromine price to increase in the remaining months of 2009 in line with raw material costs, as we continue to see domestic supply for bromine exceed domestic supply and major customers seem prepared to accept high price in the future due to more optimistic market conditions, we expect environmentally friendly chemical salt to account for our increased share of revenue in 2009 compared to 2008. As a result we expect our gross margin to increase this year.

We have also made progress in our (inaudible) our shares on senior exchange and we made other requirements to list our shares on the senior stock market, accept for the share price. In the beginning of August, our Board of Directors adopted resolutions, a program (inaudible) of our common stock, within a range of 1.44 and net 1.49 and the issue of the timing (inaudible) is still subject to Board approval, but we expect to complete in September, this (inaudible) is part of our strategy to release our shares to senior stock market and it will better reflect the value of our Company due to the increased visibility and liquidity.

We would now like to reaffirm guidance for our fiscal year 2009, we expect revenue of approximately 98 million to $103 million, net income of approximately 27 million to $29 million, with diluted earnings per share between $0.22 and $0.24 using a share comp $122.2 million. This guidance does not include the impact of a potential additional acquisitions. While we clearly are ahead of plan based on our strong Q2 results, we prefer to take a conservative stance on outlook until we are better into the second half of the year.

I would like to conclude our second quarter earnings call by saying that Gulf Resources is a strong generator of cash that has (inaudible) demand for its chemical products portfolio while maintaining position as the largest bromine producers in China in the time of economic turbulence. With that I would like to thank our shareholders and open this call to any questions that you may have.

Thank you very much. (Operator Instructions) Our first question comes from the line of [Thomas Pann] from Euro Pacific Capital. Thomas, you may proceed.

Good morning and good evening, everyone. Thomas Pann from Euro Pacific Capital, I have a few questions. My first question is first of all congratulations on a great second quarter. It's a much better quarter than the first quarter of this year. My first question is now you achieved roughly $30 million revenue during the second quarter and is this sustainable for the remaining two quarters of this year? And I see your guidance for your revenue still around $100 million for 2009, so I'm wondering whether there's any seasonality that second quarter could tend to be your strongest quarter and you may not be able to deliver the same revenue, assuming of course a flat bromine price, so whether the third and fourth quarter for the rest of the year will be also at this level, this is my first question.

So let's translate that first.

Yes, sure. I will do the translation first. (Foreign language)

(Foreign language)

Okay, the second quarter, there was strong growth in the second quarter comparing to the quarter last year and the first quarter, and it is due to the recovery of the overall economic in China and the bromine, the sustainable bromine price as well as the more sales of higher value-added products. So in the third quarter and the fourth quarter of the business operations, the bromine price will, in August the bromine price increased, continued to increase based on the average level in the second quarter and the Company is confident that the third quarter and fourth quarter should maintain at the second quarters level but there is still uncertainties of the global and China international economics, so it might be further impact from the global financial crisis. So it's of course the Company will maintain the existing client base as well as executing the current strategic plans and in order to be well prepared to cope with the international crisis. So the Company is very confident for the second half of the year but to be conservative, the Company just maintained the guidance released before.

Great.

(Foreign language)

Okay regarding the second question that's about the bromine price, the global commodity price has steadily recovered. The bromine price is also increasing steadily, so in July and August the bromine price increased the average of the selling price of the second quarter, so we believe the bromine price will continue to increase steadily.

Thank you very much, Mr. Liu and Mr. Zhou, and now I understand due to this uncertainty of the global and the Chinese economic situation you tried to be conservative on your guidance on your full year revenue, so let's swim to chemical products. We already talked about bromine. Looks like for the chemical products, the profit margin over there at this business segment is also around 42% which is very similar to the bromine business if you exclude crude salt from the calculation. Can you comment on your chemical product segment, even is a small portion, smaller portion than your Bromine sector, whether you see any improvement in both the revenue side and also on the profit margin side.

(Foreign language)

(Foreign language)

Okay, the potential growth of the chemical products slowed definitely, higher than the bromine products, since the bromine was just a raw material off the chemical product, so it's the production may be limited due to the limited results in China, but for the chemical products they will be huge potential growth because the Company will produce the deep process of the bromine, so there will be a huge demand from the downstream market so the Company was put more efforts on research of the new technology of the chemical products and upgrading the existing chemical lines. As we said in the script, the Company was upgrading the agriculture application production line and in order to meet the strong market demand, so in addition the Company also has a plan to upgrade the existing non-environmentally friendly oil and gas additives production line, so it will help to -- so together, it will help to improve the chemical products in terms of total revenue as well as increase the profit margin.

Thank you very much. I think my last question, I don't want to take all of the time but my last question is on your reward spread announced 1.24to 1.29 ratio from an analyst standpoint, in our community, we tend to evaluate companies with say active trading volume, with enough liquidity, and first of all congratulations on Gulf Resources because you are very actively traded at the OTC bulletin board and probably one of the most active stock there and with 300 to 500 shares per day, my concern is if it goes through the worse spread, especially a high ratio like 1.29, are you concerned about your trading volume might shrink substantially?

Okay. (Foreign language)

(Foreign language)

Yes, the Company has noticed that the trading volume, trading was very active but the Board has decided the reverse split ranges between 1.44 and 2.149, but the exact ratio just really depends on how the share price goes and so if the share price increased, keeps increasing, and then at the very specific ratio up to and meet the requirement of the exchange market, so then they will decide the exact ratio, so it really depends on how the share price goes.

Thank you.

And our next question comes from the line of Ephraim Fields from Clarus Capital. You may proceed.

Hi. I had three quick questions. The first two regard the tax rate, so the first two questions are what is the assumed tax rate for 2009 and what does the Company expect the tax rate to be for 2010?

Okay, let me translate it first.

Sure.

(Foreign language)

(Foreign language)

Okay, the tax rate really depends on the tax policy of the Chinese government and the Company is able to benefit the (inaudible) for the investment in environmentally friendly production line. So in 2009, the Company will upgrade the agricultural environment friendly production lines, so the Company can benefit from it and the overall tax rate will decrease 1% as before, so in 2009 there will be no big changes to the tax rate.

Okay. And my next question is if we were in a normal economic environment what would be the typical seasonality of the Company? Are there some quarters that are typically stronger than others? In general.

Okay. (Foreign language)

(Foreign language)

Yes, the Company has the seasonality in the second quarter and the third quarter, it's a peak season while in the first quarter and the last quarter of the year will be relatedly weak than the second and third.

Okay. And just to follow-up on my first question, so the tax rate for 2010 should be about 25%; is that correct?

(Foreign language)

(Foreign language)

Yes, 25% for 2009.

Okay, thank you.

Ye.

And our next question comes from the line of [Bill Johnson] from China America. You may proceed.

Hello, David. It was good to meet you in Shenzhen a couple weeks ago and please send my congratulations to Mr. Liu on a fabulous quarter. The question that I have for you, you guys seem to be generating a lot of cash and appears that's going to continue to be the case. How aggressive in the next 12 to 24 months do you guys plan on being in mergers and acquisitions to increase, I know you're increasing the production capabilities but to actually increase the assets of producible assets or developed new assets?

Okay. (Foreign language)

(Foreign language)

Yes, the Company has sufficient cash on the balance sheet on account and the cash will be used for three parts, the first is the Company will spend the money to upgrade the environmentally friendly production line which has strong market demand and secondly, which is the Company was constructing a water disposal system which that can make sure the Company meets the environment production required by the Chinese government and the third, the Company has the potential acquisition of the bromine asset in the next 12 months.

Good.

So that's the plan.

Okay, well thank you very much and once again, congratulations on a good quarter, David.

Okay. (Foreign language)

And our next question comes from the line of Albert Lee from (inaudible). Albert, you may proceed.

Hi, thank you. Just two quick questions. Regarding gross margins, you note here that the bromine segment has a nice lift in gross margin due to higher crude salt sales which represented I think 16% of that segment versus 6% last year, so in terms of concentration, revenue concentration within this segment, how consistent do you see this kind of 75 to I'm sorry, 85 to 15% concentration going forward? And I have a follow-up after that.

Do you mean the bromine and the crude salt concentration?

Right. I think in the first paragraph you mentioned gross margins got a nice lift because of higher crude salt sales.

Okay.

And offset by lower pricing on the bromine, so I was curious you see that remaining relatively consistent in terms of concentration going forward?

Okay. (Foreign language)

(Foreign language)

Okay. First of all, the Company's bromine started was -- the raw material of the chemical production, so it can be used for the paper making additives, the freezing medium, and the water disposal -- water treatment, so along with the overall economic growth, the addition of bromine and the crude salt demand were definitely increasing but the overall bromine results was limited, so the--.

The amount of crude salt is a function of how much bromine is being produced basically, right?

Yes.

So what is the gross margin on crude salt?

Gross margin?

Yes.

Okay. (Foreign language)

(Foreign language)

Yes, the crude salt gross margin was about 70%. 7-0?

Yes.

Yes, 70 to 75 as we disclose in the second quarter the crude salt gross margin was about 75%. Okay, great. Second question is it was in your chemicals segment, I recall that customer concentration was pretty heavily tilted towards two major domestic oil and gas companies and their affiliates, roughly well over 60% of that particular segment. I was wondering if that has changed at all, I'm sure it has, but has it changed much and do you see that, do you see any customer concentration risk at all going forward within specialty chemicals segment?

Okay. (Foreign language)

(Foreign language)

Because the environmentally friendly, the chemical products was kind of new products to the Gulf Resource so if the Company would develop the clients by the Company itself will spend a lot of money and time consumed, so the Company was mostly sell the specialty chemicals through the distributors but in the future the Company will develop its own salesforce to directly selling the products to the customers.

Okay, so the concentration has remained relatively steady, I guess, is the answer, but you plan to diversify that going forward with more robust sales or is that--?

(Foreign language)

(Foreign language) At the first stage of selling the new products the Company definitely will sell products through the distributors so the concentration rate was definitely high. If the products become mature, then the Company will develop its own salesforce so the concentration rate would decrease.

Got it. And one last question I think we may have missed it but what was the average gross margin for the environmentally friendly chemical products roughly?

You mean overall?

No, just on the environmentally friendly products that you say is going to drive demand.

Okay.

Is it 70%, 60%?

Okay. (Foreign language)

(Foreign language)

It's about 43, 44% gross margin for the environmentally friendly products.

Great. Thank you very much.

Okay, thank you.

At this time we are showing no further questions available. Mr. Coulson, you may proceed.

On behalf of Crocker Coulson, I will conclude. I wanted to thank all of you for your interest in Gulf Resources, the Company's VP of Finance Mr. Wong will present at the Rodman & Renshaw conference in New York from September 9 through the 11th. If you have an interest in contacting or visiting the Company, please let us know. Again, thank you for joining us on this call. This concludes Gulf Resources second quarter 2009 earnings conference call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

Thank you.