Gulf Resources Reports Third Quarter 2008 Results

Published Nov 13th, 2008

Gulf Resources Reports Third Quarter 2008 Results

    * Reaffirms full year 2008 revenue and net income guidance of $84 - $90 million and $20 - $23 million, respectively

New York & Shandong Province, November 13 2008 - Gulf Resources, Inc. (OTCBB: GFRE) ("Gulf Resources" or the "Company"), a leading manufacturer of bromine, crude salt and specialty chemical products in China, today announced its financial results for the three and nine months ended September 30, 2008.

Third Quarter Highlights

    * Net revenue was $17.6 million, a year-over-year increase of 6.9%
    * Gross profit was $6.2 million, a year-over-year decrease of 10.1%
    * Net income was $3.7 million, or $0.04 per fully diluted share, down slightly from $3.9 million, or $0.04 per fully diluted share a year ago  
    * Cash totaled $22.9 million as of September 30, 2008
    * Initiated an environmentally friendly additive production line
    * Received $23 million in placed orders for the fourth quarter of 2008

Third Quarter 2008 Results

"During the third quarter, we experienced an expected slowdown in sales due to government imposed restrictions on production and distribution at many chemical factories in Beijing and Qingdao because of the Beijing 2008 Olympic Games held in August. However, we are happy to report that we have recently seen a significant recovery in purchase orders, particularly for bromine products and additives for oil and gas exploration and our capacity utilization has returned to pre-Olympic levels," said Ming Yang, Chief Executive Officer of Gulf Resources. "We are still confident in our full year’s performance as we continue to see robust demand for bromine and chemical products, especially for environmentally friendly chemical compounds in China. Our rapidly expanded production capacity and increased production efficiency will further support our full year outlook."

Gulf Resources' net revenue in the third quarter of 2008 was $17.6 million, an increase of 6.9% from $16.4 million in the third quarter of 2007. The increase in net revenue was primarily attributable to the increased sales of the bromine and crude salt segment as a result of three bromine producing facilities acquired and integrated during the fourth quarter of 2007 and in the beginning of 2008.
 
Sales within the bromine and crude salt segment were $13.1 million, or 74.7% of the Company's net revenue in the third quarter of 2008, a 20.5% increase from sales of $10.9 million or 66.2% of the Company’s net revenue in the third quarter of 2007 due to increased bromine production capacity. Sales in the chemical products segment were $4.5 million in the third quarter of 2008, compared to sales of $5.5 million in the third quarter of 2007. The restrictions on chemical manufacturers and transportation in the Beijing and Qingdao areas before and during the Olympic Games impacted sales of both bromine and chemical products during the quarter.
 
Gross profit in the third quarter of 2008 totaled $6.2 million, compared to $6.9 million in the third quarter of 2007 and gross profit margin was 35.1%, compared to 41.8% in the third quarter of 2007. The decrease in gross profit margin was due to increases in raw material and energy prices in China during the third quarter of 2008.

Operating expenses in the third quarter of 2008 were $1.1 million, compared to $0.7 million in the third quarter of 2007. Operating expenses were driven by increases in general and administrative expenses due to higher land tax fees and mineral resources compensation fees.
 
Income from operations in the third quarter of 2008 was $5.1 million, compared to $6.2 million in the third quarter of 2007. Operating margin was 29.0% in the third quarter of 2008, compared to 37.7% in the third quarter of 2007.
 
Income taxes were $1.4 million, a 37.6% decrease from $2.2 million in the third quarter of 2007. The Company's effective tax rate was 26.8% compared to 35.8% in the year ago period due to reductions in the Chinese corporate income tax rates, which became effective January 1, 2008.
 
Net income was $3.7 million in the third quarter of 2008, a 5.3% decrease from $3.9 million in the third quarter of 2007. Basic and diluted earnings per share in third quarter of 2008 were $0.04, maintaining the level of the third quarter of 2007.
 

Nine Month Financial Results

Revenues for the first nine months of 2008 were $63.4 million, up 63.0% from $38.9 million in the first nine months of 2007. Gross profit was $25.3 million, up 58.0% from $16.0 million for the nine months of 2007. Gross margin was 39.9%, compared with 41.2% for the first nine months of 2007. Operating income was $22.1 million, up 49.1% from $14.8 million for the first nine months of fiscal 2007. Net income was $16.2 million, or $0.16 per basic and fully diluted share, an increase of 68.4% from $9.6 million, or $0.10 per basic and fully diluted share, for the same period a year ago.

Financial Condition

As of September 30, 2008, Gulf Resources had cash of $22.9 million, current liabilities of $17.5 million, long term debt of $18.3 million, and shareholders' equity $45.7 million. At quarter end, working capital was $16.7 million and current ratio 1.95. During the nine months ended September 30, 2008, the Company generated $17.6 million in cash flow from operations, primarily attributable to net income. For the same period, the Company's cash flow from investing activities totaled $17.4 million, mainly due to the addition of a new chemical production line and to the acquisition of additional mineral rights, property, plant and equipment to increase its bromine manufacturing capacity.

Recent Developments

In September 2008, Gulf Resources started production at a newly completed chemical production line particularly focusing on environmentally friendly additive products, such as solid lubricants and polyether lubricants, for use in oil and gas exploration. The line has an expected annual production capacity of 5,000 tons.

In September 2008, the Company also signed a three-month purchase agreement with Kuerle City Xingdong Trading Co., Ltd., a distributor of additive materials for oilfields in Xinjiang province, to deliver 800 tons of the recently developed oil and gas exploration additive products worth a total of $1.6 million. The Company expects to complete these orders by the end of fiscal 2008.

In October 2008, the Company announced that it has received approximately $23 million in customer orders for the fourth quarter of 2008. As a result, capacity utilization has recovered to levels achieved in the beginning of the year.

Business Outlook

Gulf Resources expects to continue expanding its bromine segment through both acquisitions and increased operating efficiencies. The Company is also looking at expanding its specialty chemicals production capacity to commercialize its recently developed pharmaceutical intermediate products.

The Company expects to increase profitability by the end of fiscal year 2008 as pressure from high raw material prices is likely to ease, due to the slowdown of the Chinese and global economy. Since mid-September 2008, raw material prices have decreased by an average of 30%, and gross margin is expected to recover to above 40% as a result.

"Long term demand for bromine is expected to remain strong in China even in a cooling economy, as the outlook for many of the downstream industries utilizing bromine, such as oil and gas exploration, continues to be promising. Raw material costs have demonstrated a decrease in October, which will likely boost our gross margin in the fourth quarter. We are also expecting to widen our industry exposure by expanding our chemical business into pharmaceutical intermediates in the near future," concluded Mr. Ming Yang. "In terms of developing our business further through potential acquisitions and organic growth, our strong cash position will provide an advantage in today’s volatile market conditions."

Gulf Resources reaffirms revenue and net income guidance for its fiscal year 2008 financial results, with expected revenue between $84 million to $90 million expected net income between $20 million to $23 million, and expected diluted earnings per share between $0.20 and $0.23. This guidance does not include the impact of any unusual charges.


Conference Call

Gulf Resources’ management will host a conference call at 10:00 a.m. ET on Friday, November 14, 2008 to discuss its results for the period ended September 30, 2008. To participate in this live conference call, please dial 888-419-5570 five to ten minutes prior to the scheduled conference call time. International callers should call 617-896-9871. The conference pass code is 114 091 16.

A replay of the conference call will be available for 14 days starting from 12:00 a.m. ET on Friday, November 14. To access the replay, call 888-286-8010. International callers should call 617-801-6888. The conference pass code is 446 528 39.

About Gulf Resources, Inc.

Gulf Resources, Inc. operates through two wholly-owned subsidiaries, Shouguang City Haoyuan Chemical Company Limited ("SCHC") and Shouguang Yuxin Chemical Industry Co., Limited ("SYCI"). The Company believes that it is one of the largest producers of bromine in China. Elemental Bromine is used to manufacture a wide variety of compounds utilized in industry and agriculture. Through SYCI, the Company manufactures chemical products utilized in a variety of applications, including oil & gas field explorations and as papermaking chemical agents.

Forward-Looking Statements

Certain statements in this news release contain forward-looking information about Gulf Resources and its subsidiaries business and products within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. The actual results may differ materially depending on a number of risk factors including, but not limited to, the general economic and business conditions in the PRC, 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 oilfield and power production chemicals, changes in technology, the ability to make future bromine asset purchases, and various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this Cautionary Statement and the risks factors detailed in the Company's reports filed with the Securities and Exchange Commission. Gulf Resources undertakes no duty to revise or update any forward-looking statements to reflect events or circumstances after the date of this release.

- Financial tables to follow-

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

 September 30,

 December 31,

2008

2007

(unaudited)

(audited)

ASSETS

CURRENT ASSETS

Cash $22,874,360
$10,773,875

Accounts receivable
8,868,590
3,945,000

Inventories
2,124,304
413,391
Prepaid expenses
145,484

Prepayment and deposit

353,572
236,269

Prepaid land lease

15,806
13,521

Other receivable
    2,000

TOTAL CURRENT ASSETS

34,238,632

   15,527,540

PROPERTY, PLANT AND EQUIPMENT, Net

46,571,703
30,105,185
PREPAID LAND LEASE, Net of current portion
739,651
697,107

TOTAL ASSETS
$81,549,986

$46,329,832

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses