Gulf Resources Inc (GURE) 2022 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gulf Resources 2022 First Quarter Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Helen Xu. Ma'am, the floor is yours.

Thank you, operator. Good morning, ladies and gentlemen, and good evening to all those of you for joining us from China. And we'd like to welcome all of you to Gulf Resources First Quarter 2022 Earnings Conference Call. I'm Helen Xu, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, is also joining us in this call today.

I'd like to remind you, to all of our listeners, that in this call, certain management's statements during the call will contain forward-looking information about Gulf Resources, Inc. and its subsidiaries' business and products within the meaning of Rule 175 under 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.

Actual results may differ from those discussed today, taking into account a number of risk factors, including, but not limited to, the general economic and business condition in the PRC; the risks associated with the COVID-19 pandemic outbreak; future product development and production capabilities; shipments to end customers; market acceptance of new and existing products; additional competition from existing and new competition from the bromine and the other oilfields and power production chemicals; changing technology; the ability to make future bromine assets; and various other factors beyond its control.

All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed with the company's reports filed with the SEC. Gulf Resources assumes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes expectations reflecting those 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 represents the management's estimates as of today, the 16th of May 2022. For those of you who aren't able to listen to the entire call at this time, a replay will be available at the company's website. The call is also accessible through the webcast, and the link is accessible through our website. So please locate our press release issued earlier for the details. Xiaobin?

(foreign language)

Thank you, Mr. Liu. So I will do the translation for Mr. Liu's comments just now he provided.

[Interpreted] So first of all, I'm Xiaobin Liu, the CEO of the company. I'd like to welcome all of you to Gulf Resources earnings conference call for the first quarter year 2022.

Interpreted Since the year 2017, our company has been forced to deal with new government rules, which involved closing our facilities for environmental planning and protection and rectification, permanently closed 3 bromine factories and relocating our chemical factories. We were also hit with the most destructive typhoon in Shandong province. During this period, we have been in a short-term react mode dealing with one crisis after another.

Interpreted As a result, we have not been able to provide investors with a framework to understand our long-term potential nor have been able to [stress our] measures for enhancing our shareholder value. Now we are in a position to share our plans with our investors. Our team is trying to develop a 6-year plan division by division through year 2027. Before the end of next month, we will put a detailed presentation on our website and host the conference call, during which we will review all of our projected assumptions.

Interpreted Our plan will demonstrate the earnings potential for our company, and we believe investors will be pleased because we will be presenting this plan. So we will not provide second quarter or full year guidance on this call for year 2022. However, our company is positioned to profitable operations in coming quarters and for this year. So now let me turn the call over to Helen to review the first quarter of 2022.

So thank you, Mr. Liu. The company tried to answer most of the questions we received from our investors during this call, and some may relate to our future planning may be discussed with our 6-year plan conference call later on.

So for the first quarter 2022, revenues increased 70 percentage to approximately $8.9 million from approximately $5.3 million. Our factories were closed for environmental reasons until February 21, 2022. In the previous year, they were closed until February 19, 2021. We had 39 days of operations in year 2022 versus 41 days in year 2021. So our daily revenues increased 78.5 percentage.

The gross profit increased 306% to approximately $4.4 million from approximately $1.1 million. Direct labor and statutory overhead incurred during the planned shutdown were approximately $2.2 million. General and admin expenses increased 29 percentage to approximately $2.2 million. A major factor impacting this G&A expense was a swing in the unrecorded foreign translation losses.

The loss from operations decreased 98 percentage to approximately $65,100 from approximately $3.3 million. If the direct labor and factory overhead of approximately $2.2 million and the foreign translation losses of approximately $283,800 are excluded, the first quarter of year 2022 would have been very profitable, even with only 39 days of operations.

So now look at our business segment data by segment. Firstly, let's look at our bromine segment. The revenues in this bromine segment increased 69 percentage to approximately $8.1 million. Tonnes produced increased 5% to 1,005 tonnes. The average selling price increased 60.5 percentage to $8,086. At the present time, based on the spot price from sunsirs.com and the current exchange rate, the selling price of bromine is $8,270, which is higher than in the first quarter.

Gross profits were approximately $4.2 million compared to $1.3 million, an increase of 224 percentage. As a percentage of sales, gross margins were 51 percentage compared to 27 percentage. Our utilization rate was 19% compared to 17% in the previous year. Given that our factories were only open for 39 days versus 41 days in the previous year, our utilization rate was much improved. Net profit in bromine were approximately $1.2 million versus a loss of approximately $1.7 million. These numbers included overhead costs of the closed factory, G&A expenses and negative noncash foreign currency adjustments.

The total assets in our bromine business increased to approximately $186 million from $144.7 million in the previous year. We have been treating new wells, building aqueducts and making other improvements. We believe we will receive approval to open at least one and potentially more of the closed factories in year 2022.

Secondly, let's look at the crude salt segment. Crude salt -- as with bromine, the crude salt facilities were open only 39 days of 90 days in the quarter. In addition, because of low temperatures, winter is a very slow time for crude salt production.

Lastly, crude salt revenues increased 68 percentage to $754,000. Despite the substantial revenue increase, the cost of revenues declined 6% to $629,560. Gross profit was approximately $124,500 compared to a loss of $219,100. For the quarter, including its shares of cost from closed facilities, corporate overhead and unrecorded foreign exchange losses, crude salt lost approximately $522,000 versus $1 million.

Third, let's look at the chemicals segment. Chemicals had 0 revenues and an operating loss of approximately $513,000. The construction of our new Yuxin chemical factory has been delayed by electricity restrictions as well as by the winter shutdown. On February 22, 2022, we announced that we believe that electricity restrictions were being eased. As a result, the company has contacted its suppliers and will have the remainder of the equipment produced and delivered, so we can complete installation and begin testing initial production. At this time, the company may begin commercial production during the year 2023.

Now let's look at the natural gas segment. Our natural gas business reported revenue of approximately $15,700 on the rental of some of our equipment. The business reported a loss of $26,739. The company is still waiting for the provincial government of Sichuan to finalize the land and resource planning for Sichuan Province. The company has no assurance on the timing of this plan. However, since the government of China has approved that privately enterprises are allowed to participate in natural gas production and since there is a great demand for natural gas in China, the company remains optimistic about this project.

Now let's look at the company's balance sheet. The company ended the quarter with cash of approximately $105.7 million at an increase of approximately $9.9 million from the level in the previous year. Cash per share was $10.05. Shareholders' equity was approximately $288.1 million. The shareholders' equity per share was $27.39. Cash flow, despite the closure of our facility for more than half of the quarter, the company generated strong cash flow from operating activities of approximately $8.5 million. We spent approximately $395,100 on property, plant and equipment. Free cash flow, excluding the impact of foreign currency translation was approximately $8.1 million.

There is one question regarding the accounts receivable after the company's [10-Q] sales. The investor is asking why there was approximately $2.4 million of receivable older than 90 days in our 10-Q, and I just want to let all our investors in this conference call noted that these receivables have been received in the month of April 2022.

So now let's turn the call back to Mr. Liu for some concluding remarks. Xiaobin?

(foreign language)

Okay. Thank you, Mr. Liu. So I will do the translation based on Liu's concluding remarks.

[Interpreted] So first of all, the company, we're very pleased with this quarter's operation results. We're almost breakeven in -- and without the winter closure, we would have earned a strong profit. Bromine pricing -- price remained extremely strong. Imports have become more expensive. Capacity in China has been reduced. Because of environmental controls and the demand remains strong, we are seeing increased use of bromine in pharmaceuticals and other products such as zinc-bromine factories and flame retardants. We also expect to open at least one of our closed factories in year 2022.

Interpreted Based on the improvements we have made and our current outlook on pricing, the company are extremely bullish on the opportunity in this sector. Results in crude salt should improve as weather warms. We are optimistic with our Yuxin chemical business. We are planning to finish the construction and begin testing and trial production and then may start our commercial production in year 2013. We are also optimistic that we will receive permission to drill for natural gas and brine in Sichuan Province.

Interpreted China faces great shortage of natural gas. We hope to be part of this solution. Our team has been working diligently to produce detailed financial projections by division through year 2027. We will share these plans with investors before the end of next month. So now let's turn the call back to Helen for Q&A section.

(Operator Instructions) Your first question for today is coming from [Glenn Krevlin].

[Glenn Krevlin]. I'm an individual. I was wondering if you could go through each of your business segments and discuss how many plants are currently open, how many plants are currently closed and when you expect the closed plants to be reopened. If you could do that for the bromine business, the salt business and the chemical business individually, how many plants are currently open, closed and when you expect them to reopen.

[Glenn], do you mean this is your question or you mean we put this in our 6-year plan?

No. Currently, in the quarter.

In the quarter.

You gave utilization, but I want to know how many plants, how many actual plants are open in each of those businesses, how many are closed and when you expect the closed plants to reopen. That's my first question.

Okay. Okay. (foreign language)

(foreign language)

[Interpreted] [Glenn], here's the response from Mr. Liu. First of all, there are 3 business segments in the company. We have bromine, firstly. Secondly is -- bromine and crude salt, firstly. Secondly is our chemical segment. The third is natural gas. So currently, we only have our bromine and crude salt segment opened. The rest 2, including chemical and natural gas, are closed. So they are one segment opened. And in this one segment, we have bromine and crude salt.

Interpreted For bromine business, we have 4 bromine factories are open currently. And there are -- rest 3 are closed. So by this year, we hope to open at least one more before the end of the year. So before the end of the year, we would have some 5 factories, bromine factories in operation.

Interpreted Secondly, if we look at the crude salt, which have a similar case as our bromine segment, it also has [4] crude salt plants in operation. And before the year -- end of the year, we try to get another crude salt plant in operation. So we would have some -- add some to 5 crude salt plants.

Okay. Let me ask the question slightly differently. If all your plants were open, give me some metric on how much capacity you have, will have and how much of that is open today. So if all the bromine plants were fully open, what's the capacity when they're all open and how much is open today for bromine and salt only?

Okay. Do you mean capacity in tonnes?

Yes. You can give to me tonnes of capacity, what the capacity would be if all the plants were open and then what is -- and how much capacity is open today in bromine and salt only.

Okay. Got you. Thank you. (foreign language)

(foreign language)

[Interpreted] [Glenn], so the biggest capacity for 7 bromine factories would be [13,000 tonnes] per year 1-3 thousand, 13,000. And for the crude salt, it would be [50,000 tonnes]. So 7 bromine factories, crude salt factories.

So 13,000 pounds of bromine capacity if all 7 were open and 60,000 pounds in salt. And how much is open today for bromine? And how much is open today for salt? How many pounds?

Okay. Okay. [50,000 tonnes] of crude salt.

And how much is open today?

(foreign language)

(foreign language)

[Interpreted] So currently, the bromine production per annum is 8,000 tonnes. And the crude salt is 32,000 tonnes per annum.

Great. One last question. You said that there is $186 million of assets in the bromine invested. How many dollars are invested in the salt? You did not give the Salt number, only bromine at $186 million.

Okay. (foreign language)

(foreign language)

[Interpreted] [Glenn], I think for this detailed number, I may e-mail back. How do you think -- because we do not have this number on hand currently. Or maybe we can disclose it in our 6-year plan when we put it out.

Okay. Current liabilities in the quarter were -- sorry, current payables were $35 million in the quarter. At year-end, they were $10 million. Can you explain why they went up $20 million -- $25 million?

$25 million. Okay.

The growth in payables.

(foreign language)

(foreign language)

[Interpreted] So majorly because the company purchased equipment and materials.

For what? For plant openings? What was it bought for?

(foreign language)

(foreign language)

[Interpreted] Majorly because our chemical segment, we have ordered some equipment. And for our bromine segment, we have some projects on construction. So we have some payables and some materials for our bromine production needed.

Okay. My last question is, what is your projection for capital spending in 2022? What's your capital spending plan for 2022?

Okay. (foreign language)

(foreign language)

[Interpreted] [Glenn], so for this question, we may discuss it in our 6-year plan later on in more detail. How do you think?

Okay. What is depreciation going to be for this year? What's your plan for depreciation?

(foreign language)

(foreign language)

[Interpreted] [Glenn], so regarding this year, like we explained at the beginning of this call, we will provide a 6-year financial plan. So later on, on the company website, and we will hold a conference call later on when the presentation will be put on the company website, and [Rich] will discuss all these questions on that presentation and during the call later on, including all these depreciation, cash expenditures and detailed by segment -- by business segment.

Okay. Why 6-year plan and not 3-year plan or a 5-year plan, why 6?

(foreign language)

(foreign language)

[Interpreted] [Glenn], because first of all, if we look at the company's chemical business segment, which may start commercial production in year 2023. And for the initial year because it's just startup, so in order to experience the business value of this segment, we think a 6-year would be more valuable to our shareholders. And a similar case to our share -- to our natural gas segment because we would put like the approval -- need the approval from the government and the company needed to do some more projections on this project as well, and in order for our shareholders to see the business value of these projects as well, so the sixth year would be more reasonable year for us to do the assumption.

Okay. I'll let someone else ask. I've been asking a lot of questions.

Your next question for today is coming from [Asher Stein].

I'm an individual. My first question is a follow-up to the previous caller's question about the $25 million in payable expenses. So you answered that part of that is due to expenses relating to the chemical factory. But in the notes to the balance sheet, it says that the expense incurred in relation to the chemical plant didn't increase from the end of year 2021, still at around $45 million. So how do you reconcile that? Meaning if it's a $25 million in that was incurred in relation to the chemical factory, shouldn't that number $45 million have increased also?

Okay. (foreign language)

(foreign language)

[Interpreted] [Asher], to explain that, just now, we did mention that the major increase are due to the construction projects for our bromine business segments.

Right. But you also said that it was because of expenses -- equipment for the chemical plant. So why was on that...

That is like a minor part. There is some, but not a major part. And because Mr. Liu did not put this one in -- first, maybe my translation did not put his comments on the first.

And those expenses for the bromine plants, are those -- was that going towards reopening the closed plants? Or is that going to improvement on the open plants?

(foreign language)

(foreign language)

[Interpreted] These expenses are on the operating plans, for the improvement.

The operating plans. Okay. Got it. My second question is about share buybacks. So we were told -- we were first told that it couldn't be done. And then we were told that it could be done, but the company is holding on to their cash in case an investment opportunity arises. I just want to know, does the company feel that shares of their own company at [$3.20] is not a good investment that the company should jump on with the $105 million in cash? Why does the company now feel that their own share is a good investment?

I didn't get your point.

My question was that at the last earnings call, you said that the reason why you -- the company wasn't pursuing share buybacks at this time was they want to have cash on hand in case investment comes up. I want to know, does the company not feel that their own shares at [$3.20] is a good investment?

Okay. (foreign language)

(foreign language)

[Interpreted] So actually, firstly, the company wants to position itself as its business operation. So our chemicals segment, which may need more investment and for cash and our natural gas business segments also need more investment as well, so we need to keep our cash on hand in order to make sure our future business can operate well when they need cash.

Okay. I would just suggest for the company to reconsider its position on that because no matter how well the company is operating, as we see now, it's operating great, and we appreciate that, but the company has yet to find a way to return the value to the shareholders. So as well as the company is operating, I think the owners of the company would appreciate some of return of their investments.

Okay. Thank you. (foreign language)

(foreign language)

[Interpreted] Okay. Thank you.

(Operator Instructions) Your next question for today is coming from [Bill Bender].

Individual and investor for over 11 years. And as some of the previous people have mentioned, your numbers are terrific this quarter. I'm sure the 6-year plan is going to look terrific. The outlook always has been with the cash balance and the book value per share. But I'm concerned with the focus on shareholder value. We know the businesses. We know they're profitable. My question is, if we're not going to do buybacks, is it possible to pay a dividend?

Obviously, just performing isn't bringing the value to us. I've been a patient shareholder since the beginning. And I do recall a few quarters ago Chairman making some comments about the awareness. I know they've changed their compensation. And I just would like to know without deferring to the 6-year plan that there is a plan to bring shareholder value back to this company so that we can see a runway here of potential success in general. Would there be a dividend? Would there be a buyback? What the plan is in general, if you could answer that rather than defer to the 6-year plan, I'd appreciate it.

Okay. Thank you, [Bill]. (foreign language)

(foreign language)

[Interpreted] [Bill], yes, we will consider this, like the plan to reward our shareholders. Based on that, we can make sure our business operations can go well.

Well, currently...

Rewarding our shareholders is part of the plan.

Well, currently, it appears to be going very well. So I don't -- I guess my second question would be, how well do we have to be doing to be considering? Because earnings are clearly going to be back this year. Balance sheet is better than any. We have positive cash flow. So when we say the business is doing well, we compare that to other companies here in the United States. How well is well, I guess, would be my question. And is there a concern that -- our business is located in China, and there's a lot of concern about technology. But do we have any concern at all with the geopolitical of where we're located? Is that causing us any issues as shareholders on a regulatory basis that we should be made aware of?

Okay. (foreign language)

(foreign language)

[Interpreted] So the company's major concern is the continuing impact of the national policies on the company. For example, with the government policy changes, we still have 3 bromine factories closed and which did not start operation yet. And for years, our natural gas projects in Sichuan still did not get the government approvals yet. These are the company's major concerns.

Okay. I would suggest in the 6-year plan that they could tie in their plans as a company for those items that we're all concerned with. For example, if we open another plant or 2, we do plan buybacks and/or dividends, so that as the 6-year plan rolls out, we all as shareholders can have an idea of the runway for us, the shareholders. So thank you for the call today.

Okay. Thank you. You're welcome. (foreign language)

(foreign language)

[Interpreted] Okay. Well noted. Thank you, [Bill].

There are no further questions in queue.

Okay. (foreign language) Hi, operator, if there is no more question, can we close the call for today? Thank you. Thank you. Welcome, attending this call, and have a good night.

Thank you very much.

Thank you. Bye-bye.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]