Gulf Resources Inc (GURE) 2009 Q4 法說會逐字稿

Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources fourth quarter 2009 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.

Ms. Salo, you may begin your conference.

Thank you, Kelly. Good morning, ladies and gentlemen. And good evening to those of you who are joining us from China and welcome to Gulf Resources' fiscal year end 2009 conference call. I am Linda Salo, from the CCG, the Company's Investor Relations firm. With us today are Mr. Xiaobin Liu, the Company's Chief Executive Officer, Mr. Min Li, the Company's Chief Financial Officer, and Mr. David Wang, VP Finance. Also joining us on the call is John Wang of CCG, who will provide translation for your questions and answers.

I would like to remind our listeners that in this call management's remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today depending upon a number of risk factors including, but not limited to, the general economic business conditions in China, future product development and production capabilities, shipments to customers, market acceptance of new and existing products, additional competition from existing and new competitors for bromine and other oilfield and production chemicals, 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 the precautionary statements and the 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, there can be no assurance that such expectations will prove to be correct. In addition, any reference to the Company's future performance represents management's estimates as of today, March 3rd, 2010. 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, a replay will be available for seven days. This call is also accessible through a Webcast with a link accessible through our website. Please refer to our press release issued earlier for the details. At this point, I would also like to state that in this call, the Company's management provides adjusted financial information to supplement the Company's condensed consolidated financial statements for the three and 12 months ended December 31, 2009. Please visit today's earnings press release for a complete reconciliation of these adjusted financial measures.

And now, it is my pleasure to introduce you to Mr. Liu, the Company's Chief Executive Officer, who will provide some initial remarks that will be translated by John Wang. Mr. Liu, please proceed.

(Spoken in Chinese)

First of all, I want to welcome all of you to join Gulf Resources fourth quarter and fiscal year end 2009 earnings conference call. Our quarterly revenue in the fourth quarter was stronger than we anticipated due to slightly stronger than expected bromine prices, and an earlier than anticipated production start of our new pesticides intermediates, leading us to exceed our revenue guidance and meet the high end of our net income guidance.

In addition to stellar financial performance, Gulf Resources met several significant milestones in the fourth quarter. In October, we successfully listed our shares on the NASDAQ Global Select Market. We completed important upgrades to new pesticides intermediates while paving the way for expansion into new end user markets such as the waste water treatment. We also raised capital to support us on our growth path.

Thank you. In the interest of time I will now continue with presenting the Company's results for the fourth quarter, fourth quarter and fiscal year 2009 on behalf of Mr. Liu, the Chief Executive Officer of Gulf Resources.

Our fourth quarter year-over-year revenue growth was mainly due to added bromine and crude salt production capacity from production assets acquired in January and September 2009. And integrated in the several months following the acquisition. Our bromine and crude salt segment contributed to 66% of total revenue for the fourth quarter. Within the segment, the sale of bromine contributed to the majority, or 84% of revenue. While the sale of crude salt contributed 16% of revenue in the segment, compared to 9% in the corresponding period in 2008. Our most recent acquisitions were the primary driver behind the dramatic increase in crude salt sales.

We now have annual crude salt production of 450,000 metric tons compared with only 100,000 metric tons a year ago. Bromine prices continued their recovery throughout the quarter, with Average Selling Prices per metric ton reaching $2,250 compared with $1,800 for the third quarter, and approaching year-ago levels. Although the slumping prices in the first half of 2009 resulted in slightly softer average selling price for fiscal year 2009 compared with 2008, we believe that a continued demand for bromine in China in relation to the limited supply will continue to support prices in the long term.

Demand in key end user industries suggest pesticide production and pharmaceutical intermediaries remain strong while a government imposed restrictions on additional bromine exploration licenses remain in place. In the near term we expect high volatility in bromine prices to persist to some end user industries that are receiving government stimulus funds after the Chinese New Year. An important part of our growth strategy is to expand our bromine and crude salt manufacturing production capacity to meet growing demand and allow us to build economies of scale. For the fourth quarter, our bromine factories with the exception of the factory acquired in September 2009, operated close to capacity as we took advantage of the higher bromine prices. We expect to continue ramping up capacity utilization at the latest factory to reach close to full utilization in the first half of 2010.

In the fourth quarter of 2009, our Chemical Products segment grew 22.6% year-over-year. We increased capacity utilization of our second chemical production line that focuses on environmentally friendly chemicals used in oil and gas field exploration and introduced our enhanced pesticide intermediates products ahead of schedule. In the fourth quarter, we completed a series of upgrades to our existing pesticide intermediate production line, increasing capacity by almost 65% and improving product quality.

We received our first orders in November, which we began delivering in December. Although still early in the production process, the feedback from end customers using our new pesticide intermediate products has been extremely positive, allowing us to quickly ramp up production. As a result, Chemical Products contributed to 33.5% of total revenue for the fourth quarter of which 30% was from environmentally friendly products and 8% was from pesticide intermediates. The remainder of sales in the Chemical Products segment was from generic oil and gas exploration chemicals, paper making chemicals, and other chemicals.

Another important part of our corporate strategy is moving up the value chain by involving our bromine resources in our chemical production. In January of 2010, we commenced the construction of a new chemical additives production line for waste water treatment chemicals that utilizes bromine as a raw material. We expect to start production in the second half of 2010, and estimate that it will contribute approximately $9 million to $10 million in revenues with estimated gross profit margin over 40% in the first year of operation. Total capital expenditure for the new line is approximately $8 million to $10 million, which we expect to finance with cash from operations.

And now I would like to hand over this call to our VP of Finance, David Wang, who will discuss our financial performance in greater detail.

Thank you, Johnny. Revenue for the quarter was $29.4 million, up 22%. The increase in net revenue was primarily attributable to growth in our bromine and crude salt segment as a result of the increase in sales volume. The increase in sales was the result of the increase in production capacity following our two acquisitions of bromine and crude salt production assets in 2009 which are now in full operation.

Revenue from the bromine and crude salt product segment was $19.5 million up 21%. Revenue from the chemical products segment was $9.9 million. For the fourth quarter, up 23%, this was due to increased sales of the environmentally friendly additive products and pesticide intermediate products. The contribution per business segment to total revenue remained similar to that of last year. Gross profit for the fourth quarter were $13.5 million, compared to $12.1 million a year ago. Gross profit margin for the fourth quarter was 25.9% compared to 14.9% last year, due to increase in net revenue. This enabled us to leverage our fixed costs. The increase was also due to the fact that increases in the selling prices were higher raw material cost and the general inflation in China.

Selling, general and administrative expense in the fourth quarter was $3.2 million compared to $1.3 million a year ago. This was mainly due to the non-cash expense of $1.4 million relating to warrants issued to the Company's placement agent for its December 2009 private placement and $0.2 million in expenses relating to its listing on NASDAQ Global Market in October 2009. Research and development expenses were $0.1 million, unchanged from the fourth quarter of 2008. As a result income from operations for the fourth quarter of 2008 were $10.2 million, up 20% year-over-year. Operating margin was 34.7% compared to 35.2% for the fourth quarter of 2008.

Other expense was $0.5 million in the fourth quarter compared with other income of $23,000 from a year ago. The expense was a result of $0.5 million loss on disposal of property and equipment which were outdated and not in operating condition. Income taxes were $2.9 million, up 29%. Our effective income rate was 30.4% compared to 26.9% in the year-ago period. The effective income tax rate increased due to the loss from the disposal of assets not being deducted from taxation in 2009 and was instead recorded as deferred tax asset.

Net income of $6.8 million, up 9%. Basic and diluted earnings per share in the fourth quarter of 2009 was $0.21 compared to $0.25 per fully diluted share a year ago. Excluding non-cash expense, our adjusted net income for the fourth quarter 2009, was $8.1 million or $0.25 per diluted share. For a reconciliation of adjusted net income to GAAP net income, please see the reconciliation table on our Press Release.

Now let's take a look at the financial highlights for the full year of 2009. Revenue for the fiscal year 2009 was $110 million, an increase of 26% from $87.5 million for fiscal year 2008. Gross profit was $48.9 million, an increase of 38.9% from $35.2 million for 2008. Gross margin for 2008 was 44.3% compared to 40.2% (sic -- see Press Release).

Net income was $30.6 million or $1 per basic and diluted share, an increase of 36.6% from $22.4 million or $0.90 per basic and diluted share for fiscal year 2008. Including non-cash expense our adjusted net income for fiscal year 2009 was $32 million. Or $1.04 a diluted share.

We continued to have (inaudible - heavy accent) December 31, 2009, Gulf Resources had cash of $45.5 million, current liabilities of $12 million. Shareholders equity was $134.4 million, at fiscal year end. We had working capital, $51.7 million, and a current ratio 5.3 for the 12 months ended December 31, 2009, we generated $39.8 million in cash from operations primarily attributable to net income. We used $38.2 million in investing activities, mainly due to acquisitions of mineral rights, property, plant and equipment for the bromine and crude salt business segment and upgrades to its chemical production lines.

For fiscal year 2010 we plan to invest $7.3 million (sic -- see Press Release) for the construction of new chemical additive products and lines for waste water treatment line. Looking ahead in 2010, we expect to see increased growth contribution from our chemical segment. We plan to continue develop, chemical process this year (inaudible - heavy accent) for encouraging domestic production of Chemical Products.

This year we hope to realize some of the potential measures (inaudible - heavy accent) commercializing Chemical Products which utilize bromine formulation. Utilizing our raw material results. Gross profits by beginning construction of the new production line for the waste water treatment chemicals, due to the limited number of bromine properties left on half of the market. Due to the need to be competitive in the industry, we need to act quickly to unite (inaudible - heavy accent) as our investor consolidates. We'll continue to assess additional acquisition opportunities, and expect to commence one or two additional acquisitions in 2010.

Bromine prices have continued increasing the beginning of 2010. Approximately $2,400 in January. We have experienced some past volatility since the Chinese New Year following the softness in raw material price. Therefore we have decided to provide guidance for 2010 and we have (inaudible - heavy accent) However, because production capacity in bromine and (inaudible - heavy accent), and the combined low environment compared to last year we started to see continued growth in revenue and net income.

I would like to conclude our fourth quarter analyst call by saying that there have been successful in obtaining our position as the strongest bromine producer in China. (inaudible - heavy accent) In the chemical industry. We are strong generator of cash which supports our expansionary strategy. With that, I would like to open this call to any questions you may have. Operator?

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jonathan Chung of Lord Abbett.

Hi, good morning, good afternoon and good evening I guess. Can you guys talk a little more about pricing? You had mentioned that selling prices for the fourth quarter was $2,250. Can you help me understand where it kind of ended and then also help me understand, is there a lag component to the contracts when kind of the spot prices move and how long it takes to kind of ripple through the P&L?

(interpreted) To answer your question, depending on different customer, depending on how large the customer and then the nature of the contract, it's different, the time lag, but on average is one to two months. And also, in terms of the pricing, towards the end of last year it was close to 20 -- the bromine pricing, of last year it was close to 20 -- the bromine pricing, $2,300 to $2,400.

$2,300 to $2,400.

Yes.

When you say that it's one to two month lag I'm assuming the larger customers are longer than that and if I remember correctly when they updated the bromine prices in October in the press release it sounded like there was a big concentration of, I don't know if it was 13 or 14 customers make up 75% of their business. I'm assuming those guys have a longer lag so we probably won't see all the pricing until the following quarter or the current quarter? Is that fair?

(interpreted) So it's fair to say the larger customer will have a longer lag period. However, the lag in time will limit to normally two months, within the first month the Company will observe the market to see if the volatility in the price is consistent and if it is, they'll enter into a negotiation phase with the customer to see how much to increase the price and that will go in the second month so normally it would not go beyond two months.

I got you. And then management talked a little about kind of volatility. I noticed some of your larger global competitors, a couple days ago talked about or announced $500 per ton price increase and I'm assuming ICL will follow that. If that $500 kind of goes through, what does that kind of mean for Chinese pricing? I know you're talking about volatility near term but just directionally would that $500 go up in China as well or is it less?

(interpreted) It's great to see that our peer companies have released such information, which is overall consistent with Gulf Resources' prediction, the price will increase anywhere around 15% in January and February alone, we've seen bromine prices increase 8 to 10%.

And I just wanted to ask one more question about bromine and I wanted to ask a few questions about water treatment. On bromine, the capacity that you guys have right now, production capacity is 43,300 tons, is that right?

(interpreted) This is the current capacity, but we are not at 100% utilization rate yet.

Okay. And then so on the water treatment, obviously you guys are after you have that pipe deal with one of your large investors earlier last year, at the end of last year, can you help me understand how much of the bromine will go into water treatment? And then also, help me understand the timing of it because you guys kind of talk about 9 to $10 million of revenue and I think if I read correctly in kind of the press release you guys gave us the capacity and the pricing of where those prices are right now. Just help me understand at full capacity was that will do for revenues if you guys get there and when could we potentially see that?

(interpreted) So to answer your question, the proportion to raw material in the water treatment is probably cost of capital is -- cost of product, cost of goods sold is probably going to be 30% bromine, and the full capacity, production capacity it's about 3,000 tons. When this production line is in full utilization, it will generate anywhere between $9 million to $10 million US dollars and for full year and the production line is going on to production hopefully this July.

So it's 3,000 tons, and you guys are selling this for $3,000 per ton? Is that how I should think about it. I was asking in terms of how much the actual -- how much bromine is actually used in there. Is it 10% of your bromine, elemental bromine or is it like 5%? What's the actual amount of bromine that's actually used, not so much the cost of goods sold.

(interpreted) So it's actually 6 to 8% of bromine will be used for the waste water treatment, and your calculation is correct, the 3,000-ton times $3,000 to $9 million to $10 million.

That can't be a full year run rate because you were saying for this year alone if this was producing in the second half, it's already 9 to $10 million run rate. That's why I'm getting a little confused there.

(interpreted) 9 to 10 is the full year.

For -- on a full running rate. Okay. All right.

Yes.

Great. That's all my questions. Thank you.

Your next question is from Wayne Brown of Brown Corporation.

Yes, hi, good evening, gentlemen. Congratulations on a good quarter. Couple quick questions. Since the last bromine asset purchase which was earlier last year, can you update us in terms of the acquisition landscape has changed in terms of the number of unlicensed players that are still available as a target and any sense their respective selling prices?

(interpreted) So there are about just ready to be acquired around Gulf Resources about six to seven bromine assets or bromine production companies, and due to the increase in the market price, the sell price has been increased as well. The Company has engaged in conversation with a couple of them but it's hard to say what the price might be.

Also, would the Company consider another use of their cash to be acquiring either existing chemical operations or facilities that would help accelerate or augment their already-existing line of Chemical Products?

(interpreted) There is this plan or the Company would like to if there are good targets in 2010, the Company will basically look at the market on an opportunistic basis. So basically the chemical, on the chemical aspect it's a lot more complex in terms of production of products than bromine so the Company is a lot more conservative when picking targets and making a decision.

So I'm assuming it's not being ruled out as a possibility that they would look at the chemical line as an area where they would make an acquisition given the opportunity?

That's correct.

Okay. All right. Well, thank you very much. Appreciate it.

Your next question comes from Liang Hsu of Brean Murray.

Hi. Congratulations on the great quarter. Basically I just have follow-up questions on the bromine pricing. You mentioned about for 2010 there will be like overall 15% increase. Is that 15% year-over-year or off the fourth quarter's level?

(interpreted) So the 15% increase is based on the price, the market price of December of last year.

Okay. And which --

(interpreted) So end of last December, which is about $2,350 per metric ton.

Okay. That US producer, they announced $500 price, increase, effective on April 1st. When do you expect that reflect in your selling price? You mentioned about -- earlier you mentioned probably one to two months time lag. Is that fair to say you actually won't see the effect until second half?

(interpreted) With the globalization, the transfer in pricing, especially the market resources, it's very fast. So the Company believes that the change or the up-change in price, you will see the impact in the price in China very soon as well.

Okay. But it's more of after June, right, mostly starting from -- I'm just, such a big increase, probably you won't see until like June as opposed to like second quarter; right?

(interpreted) The impact in China in terms of market price will reflect around May and then that will translate into the Company's numbers, financials, around end of June.

Got it. Thanks. Thank you. I have a follow-up question on the acquisition. You mentioned about it potentially is one to two transactions might close this year. Can you just give more specifics in terms of the timing and as well as the -- what's your -- I know because increasing bromine prices, the acquisition target gets more pricey but is there any sort of numbers in mind, what kind of valuation that you would pursue and you would go for it and what's the likely contribution from the potential acquisition? Thank you.

(interpreted) So the Company would like to first finish and close the acquisition as soon as possible. They would like to create value for the shareholders as soon as possible. And they will look after the shareholders' best interest in terms of pricing and shorten the integration period as soon as possible, to start production so the acquired assets can generate income and contribute to the overall financials. In terms of valuation, based on the previous acquisitions, the Company's looking at six times earnings but right now it's hard to say, maybe it will be a little higher because of the increase in bromine prices, so this is -- it could serve as a benchmark but it's likely to increase.

Okay.

(interpreted) The Company will try their best to keep it below seven times.

Okay. Good to know. And this one or two candidates you're evaluating, it's pure bromine production, nothing under the chemical space; right?

(interpreted) Yes, it's purely the bromine acquired target.

Okay. All right. Thank you so much.

(Operator Instructions). And your next question comes from Todd Douglas of Soleil Securities.

Yes, hi. Can you hear me?

Yes.

Hi. Okay. Good morning. Four questions, actually. You spoke very briefly in the press release about price supports going away post the Chinese New Year. Can you talk about that a little bit?

Talk about price?

There was a discussion in the press release of there being some price supports that were going away after the Chinese New Year.

Okay.

In China.

(interpreted) So the price has been increasing since the end of last year, especially around the Chinese New Year, it went from $2,350 per metric ton to $2,450.

Okay. All right. You also talked about bromine utilization. Can you tell us what the utilization was in the third quarter, the fourth quarter, and what you think it's going to be in the first quarter?

(interpreted) Utilization rate last year, third quarter is about 90%, fourth quarter is about 80%. The first quarter this year is due to the Chinese New Year and also some maintenance to production lines, so this first quarter currently sits at 65 to 70%.

Okay. And then you talked briefly about the capacity in bromine being about 43,300 tons. Do you have a year-end target for 2010?

(interpreted) The target for end of the year, the Company would like to reach is around 48,000 to 50,000 tons.

Okay. And then you also in your opening statement and in the press release you mentioned that the revenue and net income goals for 2010 were in the double-digit range. Is that going to be low double digits? Mid double digits? High double digits? Can you give us a better indication?

(interpreted) The Company will issue a press release on the guidance very soon, so they will not comment more on it for now.

And then just finally, my clients and I thank you very much, it was a great year, thanks a lot. Appreciate it.

(interpreted) So thank you very much and he would like to first of all thank you and then management team including all of his staff will work as hard as always, trying to maximize the shareholder value.

Thank you.

Your next question comes from Liang Hsu of Brean Murray.

Thank you for taking the call. Just a follow-up question on the utilization on the bromine side. You mentioned about Q3 running at about 90% of the utilization which is higher from the second quarter. Is that going to continue? I mean, what's your optimal utilization?

(interpreted) So this is likely the trend, the second and the third quarter is the peak season, and they will have high utilization rates. The fourth quarter is going to the winter so it will impact the production a little bit, and in the first quarter, also the fourth quarter, the maintenance and the first quarter is you usually the maintenance and also Chinese New Year so a double impact.

So we are talking about in Q1, Q4, we're talking about below 70 utilization?

I believe Mr. Liu mentioned the fourth quarter last year was 80% and the first quarter this year is expected to be about 65 to 70%.

First quarter this year is 65 to 70%.

Right.

Q4, 80%. Why if the Q2 is usually seasonally strong quarter then why Q2 last year was kind of below the normal range?

So due to the acquisition, the last second quarter, it wasn't -- the capacity wasn't reached until the end of this year so the number is not comparable.

Okay. Got it. And then just on the target production capacity, you mentioned about bromine is target of 48,000 to 50,000. How about on the crude salt?

(interpreted) So 600,000 tons is the end of the year target.

Okay. And just in terms of the kind of revenue mix between the chemical versus the bromine and crude salt, is this going to be very -- still stable, stays around like a 65, 35 range?

(interpreted) If the Company successfully closed bromine acquisitions, then that part of revenue will be a little higher. If not, with the new chemical production line in place, then that part of revenue will become higher.

Got it. Okay. Thank you very much. Congratulations again.

At this time, there are no further questions.

All right. If there are no further questions I think we can conclude this call. On behalf of the entire Gulf Resources management team, I would like to thank all of you for your interest in Gulf Resources. Those of you who are in Beijing may meet the Company at the Rodman and Renshaw conference on March 7 to 9, when the company is presenting. If you have any interest in contacting or reaching the company, please let us at CCG know. Again, thank you for joining us on this call. This concludes Gulf Resources fourth quarter and full year 2009 earnings conference call.

Thank you. You may now disconnect Editor: 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.