Gulf Resources Inc (GURE) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Gulf Resources 2015 fourth-quarter earnings conference call.

(Operator Instructions).

Thank you.

I will now turn the conference over to the presenters.

Thank you, Operator.

Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China.

We'd like to welcome all of you to Gulf Resources' fourth-quarter and annual 2015 earnings conference call.

My name is Helen, the IR director.

Our CEO and CFO of the Company, Mr. Xiaobin Liu and Mr. Min Li, will also join this call today.

I will be offering translation for the management's comments for the Company's operating results.

I'd like to remind you to all our listeners that in this call management's remarks will contain forward-looking statements, which are subject to risks and uncertainties.

The management may make additional forward-looking statements.

Therefore, the Company claims the protection of Safe Harbor for the 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 business condition in China; future product development and the production capabilities; shipments to end customers; market acceptance of new and existing products; additional competition from the existing and new competition from the bromine and other oilfield, agriculture, and [flame] production chemicals and other chemical -- other related chemicals and changing technology; the ability to make future bromine (multiple speakers) 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, our Company believes the expectations reflected in these forward-looking statements are reasonable and there can be no assurance of such will prove to be correct.

In addition, any reference to the Company's future performance represent the management's estimate as of today, March 16, 2016.

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 14 days, and the call is also accessible through the website and the link is accessible through our website.

Please look at the press release issued early for details.

It's now my pleasure to turn this call to Mr. Liu, the Company's CEO, who is going to provide some initial remarks and then I will translate for him.

(Interpreted).

Thank you for participating in this first quarter and annual 2015 earnings conference call.

We are very pleased with our results for 2015.

Every day, you'll read stories about the weakness in Chinese economics.

Our business is economically sensitive.

When the China's economy is weak, as it is now, our business usually suffers.

However, 2015 turned out to be an excellent year for us.

In a soft economy, our net revenues increased 43%, net income increased 91%, and our earnings per share increased 63%.

Our cash flow from operations was $1.51 per share.

Even with the acquisition of Rongyuan, we ended the year with $2.89 per share in cash and a book value of $7.31 per share.

Our good results were recorded during a period in which the Chinese economy has been stagnating.

I'm extremely proud of the way in which we have managed our business.

Our teams deserve significant credit for producing these stellar results in such a difficult environment.

We made excellent progress on our major gas drilling projects and signed an agreement with the government of Daying County in Sichuan Province.

While the economy of China remains weak, we believe Gulf Resources will continue to show improvements in 2016.

If our project in Sichuan works as well as we believe it will, we think we will have an extremely strong future for Gulf Resources.

And now, Mr. Liu turns the call to me to review the financials and I will do a brief discussion on the Company's 2015 and Q4 2015 financials.

First of all, in 2015, the whole year, our net revenue increased 43% to 163 point -- $162.3 million from $113.7 million.

Our gross profit increased 57% to $53.3 million from $31.9 million.

Our income from operations increased 90% to $45.2 million from $23.8 million.

Our net income increased 91% to $34.1 million from $17.9 million.

Our primary EPS, earnings per share, increased 53% to $0.75 to $0.46, while our fully diluted EPS increased 61% to $0.74.

We achieved these results while maintaining our extremely strong balance sheet.

At year end, cash was around $133.6 million, up $2.89 per share.

Net net cash, which is cash minus all liabilities, was approximately 140 -- $150 million, or $2.48 per share.

Working capital was approximately $125 million, or $3.78 per share.

Shareholders' equity was $338.1 million, or $3.30 per share -- $3.31 per share (sic - see Press Release - "$7.31 per share").

Cash flow from operations increased 51% to approximately $17.4 million from $46.6 million, taking costs to $1.61 per share.

In the past two years, we have generated cash flow from operations of $117 million, or $2.50 per share, well in excess of our current stock price.

Even though we protect SCRC and its [system] almost for $22.9 million in making [tactical] improvements to our [sections], we were almost cash flow neutral in 2015, and over the past two years, we have generated strong free cash flow, despite making our acquisitions and investing in our facilities.

Our fourth quarter was quite strong.

In the quarter, our net revenue increased 14.6% to $35.5 million.

Our gross profit increased 67.5 million -- sorry, 67.5% to $11.2 million.

Gross margins increased to 31.5% from 26.5%.

Income from operations increased 140% to $9.6 million.

Our operating margin was 27%, compared to 15.9% for the first quarter of 2014.

Net income was $7.3 million.

EPS increased 152% to $0.16 from $0.07 per share.

Gulf Resources revenue was $35.5 million for the fourth quarter of 2015, an increase of 40.6% from $25.2 million for the fourth quarter of 2014.

Revenue from the bromine segment was $11.2 million, a decrease of 19%.

Revenue from the crude salt segment was $2.6 million, a decrease of 5%.

Revenue from the chemical product segment were $21.5 million, an increase of 154% from the corresponding period in 2014.

Gross profits for the fourth quarter of 2015 were $11.2 million, an increase of 67.5% on $6.7 million of the fourth quarter from 2014.

Gross margin was 31.5%, compared to 26.5% for the fourth quarter last year.

Income from operations were $9.6 million, as compared to $4 million in Q4 2014.

Operating margins were 27%, compared to 15.8% last year.

Net income was $7.3 million for the fourth quarter of 2015, an increase of 153% from $2.9 million for the fourth quarter of 2014.

Basic and diluted earnings per share in the fourth quarter of 2015 were $0.16, compared with $0.07 in the previous year.

Weighted average number of basic shares for the three months ended December 31, 2015, was 46,007,120, as compared with 38,725,282 for the three-month period ended December 31, 2014.

We achieved this very strong result even though the economy continued to be weak.

Now let us look at the segments of our business.

First off are (inaudible) bromine segment.

Bromine sales to outside customers decreased 10% to approximately $52.4 million from $58 million.

However, this decline is a little misleading because in 2014 Rongyuan was considered to be an outside customer.

But from February 2015 onward, it was half of Gulf.

(Inaudible) approximately $4.8 million sales of bromine from Haoyuan to Rongyuan are included.

Bromine sales declined by only 1.3%.

Sales volume in tonnes decreased 17% to 16,569 tonnes.

Once again, a substantial portion of the decline was attributable to the acquisition of Rongyuan.

The selling price of bromine increased 10% to $3,162.

At the present time, bromine price remains strong.

The decline in the value of the RMB has helped to increase prices.

Even if the economy in China does not improve, we expect bromine prices to remain strong for the year 2016.

Gross margin -- gross profit margin in the bromine segment was 30%, compared to 25% in the previous year.

Income from operations increased 14% to $10.9 million.

The government in China is becoming increasingly focused on the environment.

They are making companies like ours upgrade their facilities.

These investments should force some of our smaller competitors out of the business.

In 2015, Gulf spent approximately $22.5 million to enhancement projects for the transmission channels and ducts and our existing bromine extraction to enhance the productivity and improve environmental controls in factories number 10 and number 11.

The Company expects to spend $15 million on enhancement projects for factories number one to nine in 2016 (sic - see Press Release - "one and nine").

With its strong capital position, Gulf believes this spending will enable it to maintain an advantage over the smaller competitors.

The decline in the value of RMB is also a strong net positive for us because it makes imports, especially bromine, more expensive.

In the fourth quarter, income from operations in the bromine segment increased 8.7%.

Crude salt, revenue in crude salt declined by 2% to approximately $10.5 million.

Sales volume declined by 3%.

The price per tonne increased by 1%.

Gross profit increased by 32.7%.

As percentage of sales, it was 21%, compared to 15% in the previous year.

Income from operations increased 65% to approximately $1.2 million.

In the first quarter, income from crude salt increased 3.9%.

Now look -- at last, let's look at the chemical segment.

Sales of chemicals increased 121% to $99.4 million from approximately $45.0 million.

Our original chemical business was quite strong, with sales and selling price increasing in oil and gas, paper making, manufacturing, and pesticides.

We are especially pleased with these results because the end markets in these industries were generally weak and we believe our -- we outperformed our competitors.

Rongyuan reported sales of $51.3 million for the period of 2015 in which it was a subsidiary of Gulf.

In the previous year, 2014, Rongyuan had sales of approximately $52.4 million, but numbers are not strictly comparable since we did not own the company for the full year of -- for the full 12 months.

So Rongyuan's business performed very well, especially considering the fact that the factory was shut down several times for inspections and upgrades.

Gross margins in our traditional chemical business increased to 36% from 35%.

Income from operations increased 129% to $33.0 million from $18.6 million.

Rongyuan earned approximately $16.9 million, while our traditional chemical business earned $16.1 million, an increase of 2.6% over 2014.

Given the weakness in this segment of the Chinese economy, we are very pleased with this result.

Net income was $34.1 million, an increase of 91% compared to results in the previous year.

The effective tax rate for 2015 and 2014 was 25% and 26%, respectively.

In 2015, we generated $30.4 million (sic - see Press Release - "$70.4 million") from operations, compared to $46.6 million during the year 2014.

We spent $66.3 million on the purchase of Rongyuan and $22.9 million on capital expenditures, principally on upgrading factories number 10 and number 11, as mentioned earlier.

In the fourth quarter, income from the chemical segments increased 194%.

Needless to say, we are extremely pleased with our acquisition of Rongyuan, as well as the performance of our traditional chemical business.

Our current net debt was $190.8 million, down slightly from $194 million in 2014.

Total assets were 35 point -- $256.7 million, up from $223 million in the previous year, and inventory has declined as a percentage of sales.

Accounts Receivable days outstanding declined to 112 days from 135 days.

Shareholders' equity was $338.1 million, or $7.31 per share, despite the negative impact of the foreign-currency translation adjustment caused by the decline in the dollar.

Now I would like to upgrade the current situation with our [maytroget] project in Sichuan Province.

In order to build a strong and lasting business, we need to install infrastructure and build facilities.

Our first [will] has (inaudible), but we need further infrastructure to commercialize the process.

We had to separate the water and other chemicals from the natural gas to make it sufficiently pure for commercial use.

Then we need to compress it for transportation.

Finally, we need to build the roads that will accommodate the [C&T] trucks.

We are currently in the process of building the roads -- going to build the roads in this remote and rough area.

We are also finalizing a comprehensive design for our factory, including bringing in the needed power.

We expect this process will take a few more months.

The Company is trying our best to start production as early as we can.

As soon as the factory becomes operational and we can verify the possibility of this project, we will apply for permission to do additional roads.

Now I am going to turn back to Mr. Liu and he'll make a comment about dividends and our use of capital.

(Interpreted).

I would like to emphasize our previous stated position on dividends and return of capital to shareholders.

We are very pleased with our strong cash flow in the year 2015.

We expect even stronger cash flow in 2016.

Free cash flow in 2016 should be very strong, despite the investment we will be making in Sichuan and in improving our factories.

We have an extremely strong balance sheet.

Our cash is $2.89 per share.

Our net net cash is $2.48 per share, while our working capital is $3.78 per share.

We want to do what we can to enhance shareholder value.

However, we believe the opportunities for natural gas in Sichuan Province potentially transform Gulf Resources in making our Company to be worth much [more] of its current price.

We are going to wait to gauge the progress of our project in Sichuan before committing to pay any dividend.

If this project is not transformative, we will commit to paying dividends.

If it is transformative, we will explore alternatives for enhancing shareholder value that might include, among others, relisting on another exchange, the [timing] of our natural gas -- our gas business, or entering into joint venture with major companies [who are] all paying dividends.

We know that many of you would like to see us pay a dividend now, but we are focused on the long-term growth of Gulf Resources and think we have the opportunity to dramatically increase shareholder value.

After this translation, now I want to discuss about the subject of Investor Relations.

I want to make a few comments about the way we deal with investors because we recognize that we have not done enough to keep investors informed.

We have listened to your complaints about the website and are in the process of completely upgrading and including information, photographs, and other information that you have requested.

We will be revising our [PTC], including photos of Rongyuan and Sichuan, issuing new letters from our Chairman and CEO, and updating all of the other information on the website.

We are committed to doing a much better job of Investor Relations from now on.

Unfortunately, the programming language we were using, [Trumlau] 1.0, is out of date and is no longer supported by our web hosting company, so our website unfortunately crashed.

We feel very badly about it and are working hard to get our new and improved website operational as soon as possible as we can.

We want to make sure our website answers all of your questions, so we welcome your input.

Please email me if you have a suggestion.

Further, once our natural gas [rail] in Sichuan up and running, we will be actively going to see investors.

At this point of time, our stock is so undervalued and our market cap is so small that few major investors are interested.

However, with a mix of our core business and opportunity in natural gas, we are confident we can become a major company that attracts institutional investors and the sales for a reasonable multiple.

In closing, I'd like to say that we are very proud of the way our team has operated during this difficult period of time in China.

We believe sales and earnings in 2016 will continue to improve.

We are very optimistic about the natural gas opportunity in Sichuan Province.

We believe that the next few years will be exciting and profitable for our Company and our shareholders.

We want to thank you for the support you have given us and assure you that we are working as hard as we can to produce continued strong results.

So Operator, we open for the question part?

(Operator Instructions).

[David Wing].

First of all, congratulations on a really spectacular quarter.

It's -- major growth and all, stock in terms of revenue and profit, gross margin, etc.

I missed the part about the dividend.

Now, I understand -- with $133 million of cash, there's 46 million shares outstanding, even to take maybe, I don't know, maybe 9.2 million or even 4.6 million, basically $0.10 or $0.20 a share, and just create a little dividend program just to start beginning to give back a little bit to the shareholders.

While that is really a drop in the bucket when you look at $133 million of cash, and as you said, the cash flow keeps on growing and the expected cash flow from operations in 2016 to just continue growing, I mean, $133 million, to take really a drop in the bucket and to start a little dividend program.

So just to start a little bit giving back to the shareholders, that may be a way to also enhance shareholder value, as other interested parties might take another look at this.

Thank you.

(Interpreted).

Like we said early in the call script and as we mentioned as well early in our press release, the Company has designed an investment plan, which is to turn local [governments] to, and considering this engagement, the Company's future operational growth and the needs.

So as you know, I did not want -- as was mentioned early, we do not want to make the decision yet at this stage.

Thank you for answering.

Just as a follow-up question -- maybe I missed it earlier, again, at what point will you take a much closer look at beginning a dividend program?

Would it be in the next -- can we expect it in the next quarter call?

So do we -- when do we have an expected dividend plan?

Maybe by next quarter or do you mean this question, the (multiple speakers)

Yes, exactly.

Next quarter, will we -- yes.

So no to -- I think Mr. Liu stated that not in the first quarter -- the next quarter.

Maybe up to 2016 as to our investment plan completed.

So you mean two quarters from now, correct?

Is that what you said?

I didn't catch that.

In two quarters?

2016, the year 2016.

I think three quarters more.

For now, it's (multiple speakers) quarters.

(multiple speakers)

Three quarters?

In three quarters?

Is that what you said?

Three quarters?

Wait, I double confirm with him.

(Interpreted).

Yes, after 2016 is finished and our investment plan finished completely, then we can make the decision.

We will see at that time

Okay.

For another year, after 2016?

Okay.

Thank you.

[Jack Rukenbroad].

Good morning.

Congratulations on a really great quarter and nice year.

I've sold your company since 2007, off and on, and in my opinion, the credibility is the problem with management.

You strongly indicated you were going to do a $10 million buyback in 2008, 2009, 2010, and then a smaller one, but you never, and in my opinion you lost credibility with me at that time.

Operationally, it's a wonderful company, but until you overcome that credibility problem with investors in this country, I really doubt your stock is going to -- it's going to continue to languish.

Why don't you do a $5 million, $10 million buyback?

It isn't the amount of money.

It's just you are following through on what you said you were going to do originally.

That's all I had to say.

Okay.

Thank you, Jack.

(Interpreted).

First of all, thank you very much, Jack, to follow the Company and thank you very much for your -- this advice.

Back in the year 2010, we got approved by the Board of Directors and we fully followed the instructions from the Board concern during the period and the price range.

We did our best to buy -- to change that price range and that period.

And we fully completed -- fully followed the instructions to buy back shares.

But to face down your today advice, maybe we will go back, how to follow directions, and may we will continue, if we can, may continue in this buyback.

Thank you.

I hope you do.

Yes, because that time they have a price range and a time period range.

Well, I've got to refresh my memory, but I just think it's ridiculous not to buy back stock here.

That's not even worth -- I understand it's hard converting RMBs into dollars, but I don't know what the penalty is or -- but really, that's -- shareholder relations, everything else is great, but that would go a long way toward getting your stock looking attractive to people.

The credibility would come back.

(Interpreted).

So first of all, the Company did fully follow the instructions from Board of Directors to execute the buyback program and, secondly, the Company in the future will continue -- will consider to continue this buyback program.

Thank you for your comments, but considering that time situation and that concern from Board, we do not think we lost our credibility to our shareholders by [considering] this.

I was a shareholder and I had about 30 shareholders in it at that time, and all I can tell you is what they said and I don't think the (technical difficulty).

I think the stock was at the three and four range at that time.

Anyway, thank you for your consideration.

That's all I got.

Thanks.

[Joe Gee].

Congratulations on the results from your fourth quarter.

I have a question on the natural gas permit and plans.

Is the permit approved by the province?

And what is the timing of the plan before you are getting natural gas -- you are continuing with your growth?

And my second question is Mr. Liu, what does he see the stock valued at?

That's it.

Okay.

What's the stock value?

What's the second question?

Sorry (multiple speakers)

The first question was the natural gas permit and the plans.

Are they approved?

The activities, the investments, the timing?

And the second question is, what does Mr. Liu see the stock valued at?

Okay.

(Spoken in foreign language)

(Interpreted).

First off, the Company currently does not have the license for the natural gas exploration.

Because at the beginning stage, the Company tool [field as well] is to find (inaudible) water and find bromine resources under this well.

And the [later] company find natural gas surprising and natural gas is a byproduct of this (inaudible) water and bromine resources.

So in China now for the single well in this kind of situation, we do not need a license yet.

Okay.

So first of all, the Company's plans for this natural gas project is that, first of all, we will use this natural gas well as that trial production first to see how much time we can explore for the natural gas and then how is the underground structure like.

So the results is good.

So [through] this, we will be looking for added more wells at hand for exploration and then we will apply for the license at hand.

So I'm to understand you are building infrastructure -- roads, factories, but there's no license approved yet?

(Interpreted).

So like we explained earlier, for this kind of a situation, natural gas is a byproduct of [halogen] water and bromine resources, and for a single well, we do not need a license at this stage -- don't need it, then we can do the exploration.

And even though you feel those were (inaudible), so they allow -- another stage can say that we can do it.

We can't see -- we are allowed to do the exploration on this natural gas at (multiple speakers)

I understand, yes, that you can do it.

Okay.

The second question is the stock price that Mr. Liu -- does he still believe the price is upwards of $30 a share?

And are there any investor conferences scheduled for this year, for 2016?

(Interpreted).

I really think our Company's current stock price was really undervalued.

The major reason may be because US investors did not know China companies really well and [I] think the Company's price -- share price should be 10 times of EPS.

Okay.

Great.

And what about Investor Relations?

Are you doing any conferences this year, investor conferences?

(Interpreted).

So the Company, we are looking for rights to the continued opportunities to [enhance] the conference call in the US and we may do some long transaction road show to let investors and our shareholders know companies more and to see them (multiple speakers)

Great.

Okay.

Thank you.

Congratulations and good luck.

Thank you.

At this time, there are no further questions.

Okay, Operator, thank you very much.

If there are no further questions, we will conclude and close today for the conference.

Thank you very much.

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 presenting the Event.