Gulf Resources Inc (GURE) 2011 Q1 法說會逐字稿

Good afternoon, good evening, my name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources quarter one 2011 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). I would like to turn the call over to Mr. Coulson. You may begin.

Thank you, operator. Good morning, ladies and gentleman. Good evening to all of those of you who are joining us from China, and we would like to welcome all of you to the Gulf Resources first-quarter 2001 earnings conference call.

I am Crocker Coulson from CCG, the Company's investor relations firm. Joining us on the call are Mr. Xiaobin Liu, the Company's CEO; and Mr. Min Li, the Company's Chief Financial Officer. Also with us on the call is Johnny Wang of CCG who will provide translation on the call.

I would like to remind our listeners before we get going that in this call, management's remarks do 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 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 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 field, agricultural and flame retardant production chemicals; changes in technology, the ability to make future bromine asset purchases and other factors beyond the Company's control.

Therefore 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 reports that are filed with the SEC. Although the Company believes the expectations contained in these forward-looking statements are reasonable, there can be no assurance that the expectations will prove to be correct.

In addition, references to the Company's future financial performance represent management's estimates as of today May 17, 2011. Gulf Resources assumes no obligation to update these projections in the future as market conditions change.

For those of you who don't have time to listen to the entire call, we're going to make a replay available for 14 days. The call is also available through webcast with a link accessible through our website. Please refer to our press release issued earlier today for all the details.

With those formalities now out of the way, it is my pleasure to turn the call over to Mr. Liu, the Company's CEO who is going to provide some brief initial remarks that will be translated by Johnny.

(interpreted) First of all, thank you for participating in our first-quarter 2011 earnings conference call on such short notice.

As in the previous quarter, the remarkable price environment for both bromine and crude salt was the main driver of the performance in the first quarter of 2011 as demand in traditional industries utilizing bromine have experienced competition for supplies from new bromine applications such as mercury and sulfur removal. Therefore the tight supply and ongoing demand has helped us maintain high selling prices throughout the quarter.

We are also very pleased to announce the commencement of operations at our waste water treatment chemical additive production line following the close of the first quarter. I would now like to hand over this call to Crocker Coulson who will present an overview of Gulf Resources business development in the first quarter of 2011.

Thank you Mr. Liu and thanks Johnny. In the interest of time, I will now continue with presenting the Company's results for the first quarter 2011 on behalf of Mr. Liu.

Gulf's growth momentum in the first quarter was mainly due to strong price environment in the bromine market. The increase in selling prices of bromine reflects the continued demand for brominated flame retardants, fumigants, water purification compounds, dyes, medicines, disinfectants, and other bromine products as the chemical and medical industries have continued to blossom following the strong economic conditions and market reforms.

As a result, our average selling price for bromine was approximately $4600 per ton in Q1 of 2011. Which is up by 86% from approximately $2500 per ton in the same period last year. Since the close of the quarter, market prices have remained steady at approximately $4600 per ton based on our observations in May. As a consequence of high bromine prices, our bromine segment grew 76.7% and contributed 66.4% to our total revenue mix in the quarter.

While the development in bromine prices propelled growth for the quarter, we experienced a slight decrease in production volumes year over year as we increased the frequency of inspections of our production facilities in order to ensure proper operation following enhanced environmental and safety requirements from the government. The added downtime resulted in our facilities operating at 58% of total capacity compared with 66% in the corresponding period last year.

In general, winter is a slow season for production as the cold weather and ice limit the proper operation of pumps and as customers also slow down their operations during the period surrounding Chinese New Year. In light of the recent price increases, some customers have decided to postpone orders which further contributed to the decrease in bromine sales volume.

While we believe the long-term demand outlook for bromine-based chemicals and compounds coupled with limitations of supply will continue to support robust pricing, we expect bromine prices to remain around the current levels for the remainder of the year following the fast-paced increases that we saw in the second half of last year.

Given the current characteristics of production and demand and following the increased government imposed safety requirements spurred by the earthquake in Japan, we target utilization of bromine capacity at 65% to 75% for the full year 2011. Although bromine production has experienced a slowdown due to higher prices, crude salt sales, the other driver of revenue growth in the quarter, have maintained their momentum.

Our crude salt segment contributed 11.1% of revenue in the segment and grew at 77.6% year over year on the back of both increases in pricing and volume. We sold more than 100,000 tons of crude salt at $50 per ton in the first quarter of 2011 compared with 78,000 tons at $38 per ton in the same quarter last year.

Our profitability has improved due to increased economies of scale from production and higher selling prices for both bromine and crude salt. As inflation remains high in China, we expect profitability for the coming quarters to remain roughly around current levels as we expect bromine prices to remain flat but as crude salt prices are expected to increase faster than general inflation.

We still consider the expansion of bromine crude salt production assets an important part of our growth strategy and expect to evaluate additional targets for acquisition or lease. Our latest expansion of a facility that we finalized the lease agreement for in March is expected to start operations in the second quarter. As this restructuring work is still ongoing, we've not yet determined the annual production capacity of this property.

Contribution of our chemical products was at a level with last year as sales of our upgraded pesticide additives and environmentally friendly oil and gas exploration chemicals remain solid. In April we started production of our new wastewater treatment chemical additives following several months of trial production and we are in the process of assessing the expected financial contributions from this new line. Now I'll go into a little bit more detail on the financial metrics for the quarter.

Revenues were $45.4 million for Q1 of 2011, up 52.8% from Q1 of 2010. The increase in net revenue was mainly due to the strong performance in the bromine and crude salt segments as I noted earlier.

Gross profit for the first quarter of 2011 was $24.8 million, an increase of 84.2% from $13.5 million for the first quarter of 2010. And gross profit margins for the first quarter was 54.6%, up significantly from 45.3% for the corresponding period last year. The improved gross margin was due to the rise of margin percentage in our bromine and crude salt segments.

Sales, marketing and other operating expenses for Q1 of 2011 were $24,000 compared with $28,000 in the prior corresponding year. The increase was mainly due to increased sales commissions.

Our selling expenses are historically low because we have few customers with whom we have cultivated solid relationships over a number of years. General and administrative expenses for Q1 of 2011 were $4.3 million compared to $2.3 million in the first quarter of 2010.

The increase was mainly due to $3.1 million in non-cash expenses related to employee stock options and warrants expenses related to professional service fees. Research and development expenses were $180,000 for Q1 of 2011 compared to $125,000 for the period last year.

The increase in R&D was mainly due to research activities related to our new production line focusing on wastewater treatment chemical additives. The R&D expenses also include construction of a new production line and consumption of bromine produced by SCHC.

Net income was $14.4 million for the first quarter of 2011, an increase of 79.7% from $8 million in Q1 of 2010. Diluted earnings per share in Q1 of 2011 were $0.40 respectively compared with $0.23 per fully diluted share a year ago.

Now I will quickly review the balance sheet. As of March 31, 2011 the Company had cash of $87.9 million, current liabilities of $19.3 million and shareholders equity of $212.2 million. Working capital was a positive $98.3 million and the current ratio was a very healthy 6 to 1.

For the three months ended March 31, 2011 we generated $21.7 million in cash flow from operations primarily due to net income and we used $3.1 million in investing activities to reconstruct and renovate the bromine production facilities and channels acquired under capital lease in Q1 of 2011. These projects were financed by opening cash balances as of December 31, 2010 and cash generated from operations during the first quarter.

I'd now like to conclude Mr. Liu's remarks by discussing the business outlook for 2011. The Company expects an increase in utilization rates from current levels as our production and customer orders pick up in the second quarter.

However due to the more frequent inspection of bromine production assets following the heightened safety concerns [the government] has resulted in increased downtime of production coupled with some increased price sensitivity from customers. We therefore estimate overall utilization rate of 65% to 75% for fiscal 2011 in terms of bromine production.

As we move into more intensive production season, we decided to maintain our guidance of revenue between $195 million and $198 million and net income of between $64 million and $66 million for fiscal year 2011. We will expect to update the investment community if and when our estimates change.

While production capacity expansion remains an integral part of our long-term growth strategy to further establish our leadership position in the bromine market by acquiring additional high-quality assets, acquiring the additional high-quality assets has proved more challenging due to this recent environment of high bromine prices.

Therefore, we hope to realize more of the potential synergies between our bromine chemical subsidiaries by commercializing additional chemical products that utilize bromine. We are still assessing opportunities in the pharmaceutical industry as China's healthcare reform and favorable demographics offer an attractive backdrop in addition to our accumulated experience in this field in terms of development of bromine-based pharmaceuticals. We believe our current cash balance is more than sufficient for our working capital purposes and to expand our production capacity.

And now I would like to take any questions that you may have. Mr. Liu and Mr. Li are available to respond and Johnny Wang will be providing translation. Operator, can we now open up the call to questions?

(Operator Instructions) Wayne Chang.

Just really quickly, could you just perhaps comment a little bit about what was the primary drivers for strength around bromine pricing in recent months, if not recent quarters? And perhaps talk a little bit about your thoughts about what's perhaps related to some of the outlook of instability for pricing, and perhaps comment also about the current state of the competitive landscape in terms of the existing license holders and the overall marketplace locally. Thanks.

(interpreted) Just to answer the first part of your question, the major drivers behind the increase in bromine prices in the past couple of months is mainly still the demand as we mentioned in our earnings release. The demand from traditional industries that uses bromine as an additive such as pharmaceutical, oil and gas, dye, color dye, these are the traditional industries; and also the new industries such as mercury and sulfur removal are also coming to play which increase the demand overall volume for bromine. That's what is driving the prices.

In terms of the outlook, the bromine prices remain at such high levels for a short period of time. For the rest of the second half of the year or in the beginning of next year, there's a possibility that the price will continue to go up.

But as of now, from what we can see, the bromine prices will remain around this range. In terms of competitive landscape, they are still smaller production -- there's still smaller bromine production companies around the area, but they're not going to affect the Company, Gulf Resources competitiveness or leadership in the industry.

At the same time, the government is still supporting larger players to acquire these smaller production companies if they have limitation on their production capacities. We are still receiving this kind of message from the government.

Okay, fantastic, and just touching on the strategic front of the comments, could you talk a little bit more about how the opportunity or the landscape from an acquisitions standpoint looks like in the back half of this year? Or is it due to the high pricing, is it something that's probably going to be delayed until 2012?

(interpreted) So you are correct in terms of it is a little challenging given the high bromine market price. The acquisition, the Company is still looking to acquire bromine assets or companies that make sense in terms of valuation.

So the Company is still engaged in dialogues and they are observing the window of opportunities whenever it makes sense in terms of valuation [they could do to] a lot of different elements such as the Company's own stock valuation or the bromine prices change in the marketplace, whenever it makes sense that the Company will still pursue the acquisition strategy.

Can you also just talk about I guess perhaps the prospect of a buyback this year and the possibility of [any undecided buying] either by the management team or through the Board of Directors?

(interpreted) So, the management has issued a press release regarding the buyback program before and the tradition is management would like to deliver on what they promised in public filings. So they will evaluate carefully and they will find the right moment of opportunity and the entire transaction will be according to regulations and compliance from the SEC. So right now, they can't say exactly what time or what amount they will buy back, but they are working to achieve this goal.

Jerry Fishman.

Congratulations. My question was pretty close to what was just asked.

I wanted to know more about the buyback. I know that in September you guys felt pretty significantly undervalued. So just to be clear, you guys are looking to buy back stock? That is the plan at this point?

(interpreted) So (inaudible) provides the answer to the previous question, first they will try their best to deliver what they promised. Second, they will do it at the optimal opportunity or timing. And third, they will do it in compliance with the US regulations.

Thank you, and one last question if you don't mind. There was a little bit of confusion at least on my end on the last conference call. On the last conference call, there was no question-and-answer and I'm very glad that today there is. Could you speak to why there was no question-and-answer period on the last conference call?

(interpreted) During the time when the Company was about to host their conference call, the Company received a lot of suggestions and recommendations from different shareholders and investors. And they had a lot of meetings going on and the Company's management were thinking the best answer to provide but couldn't reach a decision. So the Q&A was canceled at the last moment.

Okay.

James Hardy.

Good morning, gentlemen, and congratulations on a terrific quarter. And I'd say congratulations on a successful and consistent long-term plan that the Company's maintained over the years to accomplish it. Well done.

Having said that, I think I speak for all shareholders particularly shareholders who want to be long-term shareholders with you that would like to see you address directly the substantial level of disbelief with regard to the stated earnings and balance sheet of the Corporation. You speak a great deal about the difficulty purchasing additional bromine assets.

Well it wouldn't be very hard for you to buy back $25 million worth of your shares. That would be a substantial signal that the Company believed in itself and it's less cash than you generated in the first quarter.

So, bluntly, I don't understand -- I think by the back of my calculation, bromine prices at this level would have to do something like go up an additional 2.5 times. They're going to return as much as buying back your own shares at (inaudible) levels. I'm sure you have done the math. I just don't understand why you're not doing something.

(interpreted) First of all, thank you for your kind words in the very beginning and thank you for your suggestion. They received a lot of similar ones in terms of the share buyback.

The Company's use of capital would like to be consistent with the Company's long-term growth goals. And at this time, they would like to definitely look to secure more supply for the bromine and also in terms of new investment opportunities which including acquisition and also downstream product development.

So before they use any part of the capital, they would like to run through the entire management and Board and see if it will impact or interference with their long-term growth plan. And they are seriously looking to buy back shares but at this moment they cannot make an announcement.

But they are definitely taking everybody's suggestions into consideration and seriously looking at this. And once -- if and when that happens, and Mr. Liu emphasized the three aspects he mentioned before and it will make a public announcement.

Okay. Well, we appreciate that but you spent a lot of time on the call telling us that bromine prices aren't going up in the near future, and we certainly want you to look at things in the long term. But in the short term, there is a screening opportunity for the benefit of the Company to buy back shares and mathematically it so compelling, I don't know what else to say.

(interpreted) Thank you again for your comment. The management will definitely seriously take a look into this and will make announcement once they reach a decision.

Amy Chan.

Congratulations on a good quarter. (inaudible) management and continue to like your story and will be a long-term shareholder of your Company. So I just have two questions, one on the vertical integration side and one on the new product side.

On the vertical integration side, you mentioned experiencing downstream chemical production. So could you give us an update on that? Is there like any acquisition in the pipeline?

And also I noticed that the growth in the downstream chemical production will be a lot slower and the competition will be tougher and margin will be lower than your bromine business. So can you give us a big picture of how you see like five years down the road, how do you see the promising area for that -- promises for that area and that you'd be willing to compromise slow growth and lower margins? Thanks.

(interpreted) To answer your question, the first part in terms of vertical integration, the Company is optimistic on the pharmaceutical industry. They believe that both traditional and new medicines will use more brominated in the production process and this is one of the industries that the Company is currently spending a lot of energy on.

They're actively talking to potential customers as well as acquisition targets. And hopefully they can make an announcement soon.

In terms of the chemical segment, the Company understands that currently the margin may be lower than the bromine or crude salt business area. But however they are looking at the long-term growth.

In terms of the margin if they only focused on bromine or crude salt, then the overall margin will be impacted heavily by the market price. So the Company has to invest in downstream products or brominated chemical products in order to preserve their margin to provide a more stable and long-term growth or value for the shareholder.

Thanks. And I have a follow-up question. So you guys had preliminary talks with local government of Dayi County to be the exclusive contractor. Can you give us some update on that?

Amy, I'm sorry, exclusive contractor for which company? Dayi company?

No, it's Sichuan Dayi County local government to extract bromine in that area.

(interpreted) So, the company is still speaking with the Sichuan government, nothing official has been decided or no conclusion has been reached. The Company is talking with the local government because it has a name called the Dead Sea of China. So there's a high proportion of salt and they would like to have the opportunity to explore for bromine. So the conversation is still going and the Company is hopeful but it will make an announcement once anything is decided or once a conclusion is reached.

Thanks again and congratulations.

Ken Bidsy.

Think you very much for taking my question. There was an Internet story that suggested that GFRE might be building a new facility, a pretty significant facility somewhere in the range of I believe $230 million. Can you comment if there is any validity to that story?

(interpreted) If the information is true then the Company will make an announcement. So if you have not seen an official announcement or press release from the Company, then it is not true.

Amy Walker.

My question's already been answered.

Leo Libby.

The previous 10-K and 10-Qs have talked about the vision of the Company for bromine to lock in these major customers with multiyear contracts. Can you give us some sort of sense of what percentage of your bromine production is locked into multiyear contracts?

(interpreted) So, the Company management have never stated that they sign multiyear contracts with customers. I believe what they mentioned before was they have customers that have worked with the Company for multiple years. So they are long-term customers with a great relationship. Each customer's contract is one year. And these so-called long-term relationship customers who have worked with the Company for multiple years, the aggregate value of their contract probably accounts for 60% or more of the overall bromine revenue.

And that 60% of -- roughly 60% of your annual production is in one-year contracts? Is that what you are saying?

60% comes from customers with long-term relationship with Company who worked with the Company for more than one year.

So they're not locked up in a contract. I'm trying to get an estimate of what percentage (multiple speakers)

Sorry go ahead.

As far as pricing, easier to build a pricing model if I know what percentage, and I'm almost certainly in the 10-Ks and 10-Qs, they said the strategy was to do multiyear contracts for bromine to ease out the price volatility and that's what I'm just trying to figure out.

(interpreted) So to answer your question just to clarify, the Company enters into one-year contracts only. In terms of the price fluctuation, the price will be adjusted once there is a huge increase or decrease in the market price. So the value of the contract is locked but the pricing of the contract depends on the market price.

Jerry Kristin.

Sorry to be redundant. One thing was a little bit confusing. Are you guys teetering on buying back stock or have you made the decision that you will be buying back stock? Thank you.

(interpreted) The Company has reached the decision to buy back stock when they initiated the program -- when the program is approved by the Board of Directors. Right now they're trying to find a window of opportunity which they think is appropriate to buy back shares.

John Harrell.

In reading the last -- in reading the 10-Q last night, I see where the litigation against HAP has been settled but the terms of the settlement appear to be confidential. Don't you think that shareholders who are also partial owners of Company have the right to know the terms of the settlement? And can you comment on why HAP appears to have sold virtually everything regardless of what the stock price was at the time they sold on the way down? Thank you.

(interpreted) In terms of the trading activities by HAP, Mr. Liu has no knowledge as to the reason why they were -- they chose to sell at a certain price at a certain time. He only understands that they are a trading house, so they make profit over trading activities.

In terms of the settlement everything that can be disclosed has already been disclosed in the press release. The Company is right now trying to focus on the future, trying to help to build their business, trying to help deliver value. They want to put everything behind them. This is as much as we can say.

At this time, I'm showing no further questions.

Thank you, operator. Thank you Johnny and Mr. Liu for the response to questions.

On behalf of the entire of Gulf Resources management team, we would like to thank all of you for your interest in the Company. The management team will be presenting today at the Oppenheimer Dragon Call conference later on today.

If you are interested in securing a one-on-one meeting with the Company, we would encourage you to contact Oppenheimer directly. In case you would like to visit the Company during a trip to China, please contact the management or CCG to arrange that.

Again we would like to thank all of you for joining us on this call and this now concludes Gulf Resources first-quarter 2011 earnings conference call. Operator?

Thank you for joining today's conference. You may now disconnect.