Gulf Resources Inc (GURE) 2011 Q2 法說會逐字稿

Good morning. My name is Arnika and I will be your conference operator today. At this time I would like to welcome everyone to the Gulf Resources second-quarter 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Wang, you may begin your conference.

Thank you, operator. Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China. I welcome all to Gulf Resources' second-quarter 2011 earnings conference call. I am Johnny Wang from CCG, the Company's Investor Relations firm.

With us today are Mr. Xiaobin Liu, the Company's Chief Executive Officer, and Mr. Min Li, the Company's Chief Financial Officer. The management will proceed with the prepared remarks only during today's call.

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 and business conditions in China; future product development and production capabilities; shipment to end customers; market acceptance of new and existing products; additional competition from existing and new competitors for bromine and other oilfields, agricultural and flame retardant production chemicals; changes in technology; the ability to make future bromine asset purchases; and various other factors beyond the Company's control.

All forward-looking statements are expressly qualified in their entirety by this precautionary statement and the risk factors 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 references to the Company's future performance represent management's estimates of today, August 16, 2011. Gulf Resources assumes no obligation to update these projections in the future as the market conditions change.

For those of you who are unable to listen to the entire call at this time, a replay will be available for 14 days. This call is also accessible through a webcast with a link accessible to our website. Please refer to our press release issued earlier today for the details.

Now it is my pleasure to introduce to you Mr. Liu, the Company's CEO. (spoken in foreign language).

(interpreted). First of all, thank you for participating in our second-quarter 2011 earnings conference call.

Higher bromine and crude salt prices, the higher crude salt production volumes compare with the corresponding quarter last year remained the primary driver for performance for the second quarter. However, despite our added production capacity, our bromine production volume remained lower compared to last year, and as a result, our growth for the quarter was lower compared to previous periods.

Because of restructuring and renovation of our production facilities, we incurred certain non-cash impairment and write-off charges in the period that impacted our bottom line.

As we believe that a long-term demand potential for bromine will remain in China in an environment of capped supply, we also started exploring underground brine resources in Sichuan Province, a project we expect to maintain throughout the end of the year.

I will know like to hand over this call to Johnny, who will present an overview of Gulf Resources' business development in the second quarter. (spoken in foreign language).

In the interest of time, I will now continue with presenting the Company's results for the second quarter 2011 on behalf of Mr. Liu.

As Mr. Liu mentioned, bromine prices remained the primary growth driver of our second quarter as average selling price for bromine was approximately $4,333 per ton in the second quarter of 2011, an increase of 49% from $2,901 in the same period of last year, but slightly below levels obtained last quarter.

Prices have continued to decrease somewhat since, and they're currently around $3,750 per ton. Our bromine segment contributed 65% of our total revenue for the quarter.

While the demand for bromine remains high from manufacturers of brominated flame retardants, fumigants, water purification compounds, dyes, medicines, disinfectants and other bromine-based products, as particularly the pharmaceutical industry has fared well in the wake of market reforms.

The tighter credit environment has cooled down investment, especially in real estate and related industries. Therefore, we expect bromine prices to remain around current levels for the remainder of the year.

We believe the long-term demand outlook for bromide-based chemicals and compounds, coupled with the higher production cost will prevent a radical decrease in prices.

Regardless of the higher bromine prices, our production volume fell to 7,670 tons compared to 10,666 tons for the second quarter last year because of less bromine being extracted from brine water during the production process due to a decrease in bromine concentration of our brine water, a condition affecting all bromine producers around Shouguang; government restrictions on the supply of electricity to industrial users in May because the usage of electricity in the area of our facilities was high, water supply was limited; and enhancements to our production facilities.

This added downtime and lower production efficiency resulted in our bromine production facilities operating at approximately 66% of full utilization.

In order to improve the quality of brine water being extracted from our wells, we completed enhancements of our facilities during the second quarter to pump brine water from deeper underground.

Crude salt sales have remained robust on the back of higher crude salt prices and sales volume, and as a result, our crude salt segment contributed 12% of revenue and grew 48% year-over-year.

We sold almost 125,000 tons of crude salt at $48 per ton in the second quarter of 2011 compared with 100,000 tons at $40 per ton in the same quarter last year, as we acquired an additional crude salt field in the second half of 2010, and as demand of the raw material continued to increase.

Our profitability remained stable due to lower increase in raw material costs compared to the increase in bromine and crude salt prices. As raw material costs remained the largest component of our cost of goods sold, and as the inflation remains high in China, and we expect bromine prices to remain at current levels, we expect a slight compression in gross profit margin in the coming quarters.

As access to high-quality bromine supply and expansion of bromine and crude salt assets remain an important part of our business strategy, we initiated discussions with the government in Daying County and Sichuan Province for the development of potential underground brine resources.

During the second quarter we started drilling exploratory wells and set up associated facilities in order to confirm the occurrence of resources. We expect to complete a construction of exploratory wells by the end of this year. The Daying County government will help us obtain exclusive mining rights once the brine resources with high commercial value have been confirmed.

After perspective brine resources have been confirmed, we consider to invest approximately CNY1.5 billion or approximately $220 million over the next three to five years for development of resources. We expect to use cash on hand and cash generated by operations in combination with debt to finance the project.

Contribution of our chemical products was at level with last year, as sales of our upgraded agricultural additives increased, offsetting the decreased sales of oil and gas exploration chemicals, coupled with the added contribution of wastewater treatment chemical additives, which we started producing in April of 2011.

In June we converted production of our wastewater treatment chemical additive production line to pharmaceutical and agricultural chemical additives, because we experienced issues related to extraction purity, which resulted in a lower than expected gross margin for wastewater treatment chemical additives. As we believe the outlook for wastewater treatment chemicals is positive, we expect to resume production once we have overcome the technical limitations.

Now I would like to discuss our financial performance for the quarter in greater detail. Our revenue was $51.3 million for the second quarter of 2011, an increase of 10% from the second quarter of 2010. The increase in net revenue was mainly due to the growth in the Company's bromine and crude salt segments.

Gross profit for the second quarter of 2011 was $26.3 million, an increase of 13% from $23.3 million for the second quarter of 2010. And gross profit margin for the second quarter was 51%, an increase on 50% for the same period of a year ago.

Research and development expenses were $133,519 for the second quarter of 2011 compared with $596,151 for the corresponding period last year. The Company incurred research and development costs related to the new production line for wastewater treatment additives in the second quarter of 2010. The new line began operation in April 2011.

We incurred exploration cost of $3.9 million for the second quarter due to the drilling of exploratory wells and associated facilities in order to confirm and measure brine water resources in Sichuan Province.

General and administrative expenses for the second quarter of 2011 were $1.7 million compared to $0.7 million for the second quarter of 2010. The increase was mainly due to the demolition and reinstallation expense of $500,000 for relocating Factory No. 4; the inclusion of depreciation of owned property, plant, equipment, and property under capital lease, which we acquired in last quarter of 2011, but have not put into use; and an increase in legal fees.

We incurred a non-cash write-off and impairment charges of $7.6 million for the second quarter of 2011 due to an impairment loss of $1.4 million on property, plant and equipment that could not be relocated to the new Factory No. 4; an impairment loss of $1.8 million on property, plant and equipment related to the conversion of our production line from wastewater treatment chemical additives to the production of pharmaceutical and agricultural chemical intermediates; an impairment loss of $700,000 on property, plant and equipment and a capital lease for idle plant and machinery; and the write-off of certain crude salt field protection shells and retransmission pipeline replacing through renovation work in the amount of $1.6 million and $2.1 million, respectively.

Net income was $10 million for the second quarter of 2011, a decrease of 39% from $16.4 million for the second quarter of 2010. Diluted earnings per share in the second quarter of 2011 were $0.29 respectively compared with $0.47 per fully diluted share in the second quarter of 2010.

Excluding the aforementioned non-cash write-off and impairment charges, net income for the second quarter of 2011 was $17.6 million or $0.51 per basic and diluted share.

Now let's turn to our balance sheet. As of June 30, 2011, Gulf Resources had cash of $59.7 million, current liabilities of $17.5 million, and shareholder equity of $224.7 million. As of June 30, 2011 the Company had working capital of $81.8 million and a current ratio of 5.6 to 1.

For the six months ended at June 30, 2011 we generated $29.4 million in cash flow from operations, primarily attributable to net income, and used $39 million in investing activities to enhance bromine and crude salt production facilities.

I would now like to conclude by discussing our business outlook for 2011. We do not expect further increases in bromine prices this year following the rapid price increase in the second half of last year, as our customers are becoming more price sensitive.

Due to the ongoing renovation of our production assets and interruption production due to the relocation of some of our production facilities, we expect lower resource utilization this year compared to last. For the full year we estimate an overall utilization rate of between 65% to 75% in terms of bromine production.

Given the lower production and non-cash operating expenses in the quarter, we have revised our guidance and now expect revenue between $156 million and $158 million, and net income between $48 million and $49.5 million for fiscal year 2011. We expect to update the investment community as our estimates change.

We believe our current cash balance and cash flow from operations is sufficient for our working capital purposes, and to upgrade and expand our production capacity in moderation. As of the market close on June 22, 2011 we had acquired 100,500 shares of its common stock through open market transactions. The Company will continue to implement share repurchase plan subject to restrictions on price, volume, timing, applicable legal requirements and other factors.

Now I would like to take any questions you may have. Operators.

(Operator Instructions). [Amy Newkirk], Private Investor.

Yes, I was wondering, could you tell me again how many shares have been repurchased in this quarter?

(spoken in foreign language). Okay. So, Amy, to answer your question, as of the end of June 22, 2011, we have acquired 100,500 shares.

Why aren't they doing a more active buyback due to the price per share. Do they think they're showing their value?

(spoken in foreign language).

(spoken in foreign language). The Company was in a quiet period before. They had intentions to acquire more shares; however, the price hasn't reached what they originally thought. However, going forward, the Company will be active in monitoring the market and continue to acquire shares at the price and the timing within the applicable laws that a company can.

Okay, and I didn't quite hear -- where did the $30 million go from last quarter to this quarter on the cash balance on hand?

Amy, can you explain your question? The $30 million go from -- are you talking about the cash on balance -- the cash on hand?

Yes.

(spoken in foreign language).

(Operator Instructions).

Operator, just a second. (spoken in foreign language).

(spoken in foreign language).

Amy, to answer your question, out of the normal working capital that the Company mainly used the cash for one exploratory work conducting a (inaudible) for -- in order to look for additional bromine resources.

And the second, they were used to -- for the upkeep and the maintenance of the equipment and production facility. Operator, next question.

Jack Rukenbrod, Financial America.

Good morning. I am trying to understand during the quarter you mentioned there had been an impairment in the amount of $7.6 million. Could you explain what the hell that was for? And does that -- okay, your recovery of the brine was lower. I mean, is that going to continue or what are you doing to correct that situation? Answer my first question first -- how the hell does that $7.6 million affect the quarter?

(spoken in foreign language).

(spoken in foreign language).

So to answer your first question, the $7.6 million write-off and impairment charges are -- the purpose is to ensure that the Company's equipment are in good condition to ensure the long-term viability of the Company's production. So most of that went into production restructuring and maintenance of its equipment and production line.

This was an expense item?

(spoken in foreign language). Yes, that would be kind of an expense item.

That was an expense for the quarter. That is one of the reasons your earnings were down, is that correct?

That is correct.

Why didn't you point it out? What was the other impairment on there? You talked about $1.9 million.

(spoken in foreign language).

Hold on a minute. Hey, sir, what I'm trying to get at, what nonrecurring items hit your expense column during the quarter?

(spoken in foreign language).

(spoken in foreign language). (multiple speakers).

So the $7.6 million will be a nonrecurring expenses, will not happen in the future quarters.

Then without that -- I mean, you should clarify that. As far as the recovery rate, what -- what you have done to this point -- what have you done to this point to increase that or is that a -- can we expect that to be ongoing or what?

Can you explain what you mean by recovery rate?

Well, you talked about your brine -- I don't know. [Cripes], I read it real quick. The amount of bromine you're getting out of what you produce. I don't know how else to put it. I'm not a chemist.

Okay.

You're not getting bromine -- as much bromine out of what you were producing. What you were --.

(spoken in foreign language).

(spoken in foreign language). (multiple speakers).

To answer your question, (inaudible) providing a three-part. Extraction rate or the concentration of bromine in its raw resources decreased. The management noticed that, they are going to inform the government or an expertise in this area, and to come and -- come to the Company and see exactly what is going on and do a formal report. And then the Company will then use the resulting data to re-estimate of the production. That is one reason for the decreased production.

And two is the slower growth -- economic growth in China, and also the lost -- the shortage of electricity in the northern part of China, which is required for factories to run their production line.

Okay, you mentioned three. Could you put a percent? Like was the extraction problem 60% or 50% or 90%, what --?

(spoken in foreign language).

(spoken in foreign language).

The first reason, the extraction rate or the concentration of bromine is -- caused about 20% of the lower production. And then the slow growth of economic conditions and also the shortage of electricity combined is responsible for about 80%.

Alright, so it is not as bad as what it -- you know. Alright, when you talked about your gross margins -- I'm looking your statements, okay? Your gross margins for the quarter actually were up 13%, correct? Yes.

If you take out the nonrecurring -- the exploratory costs and your write-offs -- now the write-offs related to the changing from water treatment to pharmaceuticals?

Excuse me, what is your question?

Well, if you -- you add $10 million's worth of nonrecurring costs in there, is that correct? So really -- I mean, those nonrecurring costs are added back in or your quarter wouldn't have been as bad.

There is a -- if you take out the nonrecurring charges for the non-cash write-off impairment charges there is a non-GAAP table in the press release -- in the earnings release that compares the Company's actual results without these charges. And you can see the net income is actually -- the non-GAAP number is $17.6 million, and that is $0.51 for basic diluted share.

Oh, okay. I am just looking at your 10-K. I didn't -- okay. Alright, regarding the buyback, I understand you weren't buying back because of the quiet period. Assuming the stock is going lower today, do you anticipate a pickup in your buyback activity?

That is actually one of the questions Amy asked in the very beginning. Mr. Liu said they are definitely going to monitor the market. They will actively monitor the market to see if it is a good opportunity for the Company to buy. So the Company is interested in buying more shares.

They're going to monitor the market. Well, what -- you're going to monitor as to price? What do you mean by monitor?

(spoken in foreign language).

(spoken in foreign language).

So the stock price of Gulf Resources is one of the more important elements that the Company is going to monitor.

Okay, thank you. I don't have any more questions.

(Operator Instructions). [John Simonov], [Gold Forge].

Two very quick questions. Number one, has the Company considered, or is it looking for, or is interested in any partnerships with non-Chinese bromine producers as far as -- I understand that this Daying County project will be fairly substantial from what has been represented, should they find what they're looking for.

Would that be done solely by the Company or would the Company be interested in partnering up with other companies, whether they be Chinese or non-Chinese to bring in other technologies? Has that been something that has been considered?

(spoken in foreign language).

(spoken in foreign language).

The Company has considered working with non-Chinese or other bromine producers in different countries. They are actively looking, and also they are available to have conversations with other producers.

Okay, and as a follow-up, obviously without going into the entire history of the past year, we all know that many Chinese firms have been punished in the American and non-Chinese markets, brought to extremely low values compared to their earnings, their book values and all these other metrics.

Has the Company considered other than the share buyback and other things perhaps other nonfinancial ways of boosting confidence, for example, tours of the facilities, investor days, perhaps video tours of the facilities that American shareholders would find more accessible perhaps than literally traveling to China, and other shareholder-friendly elements such as what I have described? Has that been considered as an option to perhaps boost confidence in the shares and the share price?

Sure. (spoken in foreign language).

(spoken in foreign language).

Sure, the Company actually has entertained or has welcomed different groups of investors to visit the facilities. And as of now the Company is preparing videos and pictures of its facilities to put on its website for the investors and shareholders.

Very good. One final thing about Daying County. I haven't really been able to get a handle on this, what -- obviously we are now -- this question is now dealing with pure speculation, so I understand what I am asking.

What is the potential scope of this investment in regards to the Company's current production? Could it double it, triple it, make it only increase 20%? I am trying to have an estimate in my mind as to what the potential of such a large investment would be for the Company.

(spoken in foreign language).

(spoken in foreign language).

So if the management is really optimistic the potential of this project may increase 50% to double the production for the Company. But it is too early to definitely confirm this number, and the management still has a lot of testing and exploration to do.

Very good. Thank you for the answers, gentleman.

[Stanley Pharr], Private Investor.

Not to belabor the share buyback, but I think the frustration is that almost one year ago you announced a $10 million share buyback. You have spent less than $400,000 in the share buyback. So it seems to me at this low price that the stock has been, you should be buying back more shares at this point. I mean, that suggests to investors confidence by management.

Sure. (spoken in foreign language).

(spoken in foreign language).

So, thank you for again your emphasis on the importance of share buyback. And he will go back and put in serious consideration with the rest of the management team and also Board of Directors.

All right, thank you.

(Operator Instructions). At this time there are no further questions.

Thank you, operator.

Excuse me, you do have --.

On behalf of the entire Gulf Resources management team I want to thank all of you for your interest in Gulf Resources. In case you would like to visit the Company, and please let the management team or us at CCG know.

Again, thank you for joining us on this call. And this concludes Gulf Resources' second-quarter 2011 earnings conference call. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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.