Gulf Resources Inc (GURE) 2021 Q1 法說會逐字稿

Greetings, and welcome to Gulf Resources 2021 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Helen Xu, Director of IR.

Thank you, operator. Good morning, ladies and gentlemen, and a good evening to all those of you joining us from China. And we'd like to welcome all of you to Gulf Resources' First Quarter 2021 Earnings Conference Call.

I'm Helen Xu, the IR Director. The company's CEO, Mr. Xiaobin Liu, will also join this call today. I'd like to remind you to all of our listeners that on this call, certain management's statements during the call will contain forward-looking information about Gulf Resources Incorporation and its subsidiaries' business and products within in the meaning of Rule 175 under Securities Act of 1933 and Rule 3b-6 under the Security 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 conditions in the PRC, the risk 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 production chemicals, changing technology, ability to make future bromine assets and the various other factors beyond the company's 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 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 represents the management's estimates as of today, the 18th of May, 2021.

For those of you unable 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 look at our press release issued earlier for the details.

Before turning the call over to Mr. Liu, I'd like to place our first quarters from 2020 and 2021 in context. The first quarters of 2020 and 2021 were both significantly impacted by the government's forced closures related to winter weather and Chinese New Year. In year 2021, our factories were closed from December 25, 2020 to February 19, 2021. In addition, even though the factories were closed for a majority of the period, the company still had to pay salary, rent and incurred depreciation and amortization. In other words, the company had more than 1 month of production and 3 months of overhead. In addition, the company also incurred substantial cost for the facilities that were still closed. Finally, because of the process of salt crystallization, winter is always the slowest season for crude salt production.

Now let me turn the call over to Mr. Liu for some opening remarks. (foreign language)

(foreign language)

Thank you. I will do the translation for Mr. Liu.

[Interpreted] So thank you, Helen. I'm Xiaobin Liu, the CEO of the company.

First of all, I'd like to welcome all of you to the Gulf Resources earnings conference call for the first quarter of year 2021. Despite all of the 4 operating bromine and crude salt facilities being closed for a majority of the quarter, the 3 other bromine and crude salt facilities are waiting for government approval. The chemical factory has been under construction. And the Sichuan facilities also awaiting government approval.

Our company was still able to generate $3.3 million in free cash flow with our [fourth] facility fully operational and with bromine prices nearing record levels. We are very optimistic that our second quarter and full year 2021 will be profitable even if our other facilities remain closed.

So now let's look at -- start a discussion of the results for this quarter, which I believe will answer most of the questions we received from the company's investors recently.

Firstly, let's look at the balance sheet. Despite 2.5 years of closure of most of our facilities, the impact of Typhoon Lekima, the most destructive typhoon ever to hit China, the cost of constructing our new chemical factory, the cost of drilling new wells and all the costs related to new government environmental policies, our balance sheet remains in excellent shape. The company ended the first quarter with cash of $96.7 million, approximately $9.67 per share. Net-net cash, which is cash managed, all liabilities of $76.4 million.

Current assets were $104.6 million versus current liabilities of $10.5 million. Working capital equaled $94.1 million. Shareholders equity equaled to $272.3 million. We had enough capital to finish the construction of our chemical plant, open our remaining bromine and crude salt facilities, expand our natural gas and the brine project in Sichuan, making acquisitions and then make -- consider taking other actions that will help the price of the company's shares.

Now let's turn to the income statement. Net revenues for Q1 2021 increased by 843% to $5.1 million compared to $557,700 in the previous year. The company had 2 factories operating in year 2020 and the 4 factories in year 2021. In the period in which we were operating in year 2021, our factories produced positive results. Cost of goods sold in year 2021 was 79.5% as compared to 165% in the previous year.

Loss from operations were $2.3 million versus $4.8 million. Our net loss was $2.5 million versus $3.5 million. Loss per share was $0.25 versus $0.37.

Several factors contributed to these losses. Firstly, because only our 4 facilities were opened in the quarter, the company spent $2.6 million on direct labor and factory overhead costs compared to $3.6 million in year 2020 for facilities that were closed.

General and administrative expenses increased to $892,900. The majority of which was related to an unrealized foreign currency translation loss compared to a gain in the previous year. While the cost of closed factories, depreciation and amortization and foreign currency losses caused the company to report a loss, the company did generate free cash flow.

In the quarter, net cash from operating activities was $3.3 million. We had no [pending] expenditures. That means our free cash flow was out of $[2.2] million. The impact of the change in exchange rates was a negative of $865,000.

Now let's look at our operating segment. Bromine, firstly. Bromine revenues increased 939% to $4.8 million from $463,000. Bromine production increased to 955 tonnes compared to 122 tonnes, an increase of 683%. The average price of bromine increased 33% to $5,037 per tonne from $3,794 per tonne.

In the past, 19 (sic) [9] to 10 months, bromine prices have increased sharply. Since July 2020, bromine prices are up 52%. Since the end of first quarter, bromine prices have been up 15%. Higher prices are important factors attributable to our profitability.

While we do not know where bromine pricing will go in the future, we are very encouraged by the strong price increase. During the quarter, the utilization reach -- rate in our bromine manufactures were 17%. As noted, our factories were closed until February 19, 2021. We expect to continue strong production through the second quarter and third quarter. For the fourth quarter, the primary unknown is whether the government will again force a winter time closure. If it does, the closure is likely to be about 10 days earlier than last year.

However, potential sales lost in the fourth quarter are likely to be offset by higher sales in the first quarter of 2022 because of likely earlier reopening. We have no way of knowing if the government will enact another winter shutdown, but we are trying to be conservative.

Now let's look at crude salt segment. Crude salt revenues increased 373% to $448,000. Because the factories were open for a short period of time and because mining crude salt in the winter is difficult, first quarter revenues in both years are not very significant. Nonetheless, as with bromine, crude salt profitability was impacted by overhead and closed facilities.

To our knowledge, the government is currently continuing to finalize the planning for all mining areas, including that for prevention of flood. We continue to be optimistic that we will receive permission to open our remaining 3 factories. Should we receive approval, we may have to make some modification to these factories.

Lastly, we continue to be optimistic about these facilities. Unfortunately, we cannot make any estimates on timing. We are not currently considering any acquisition in bromine and crude salt segment. With the current high bromine prices, operating companies are not anxious to sell. With the government still developing its planning and environmental standards, we are not willing to risk purchasing facilities that do not have clear paths to operation. Our goal is to protect our capital from our shareholders.

Chemicals segment. We had no revenues from chemicals in the first quarter. The loss in our chemical segment was $746,500. We are making excellent progress in the construction of this new chemical factory. We estimate the relocation process will cost approximately $64 million. The company has already incurred costs of $35.6 million, comprising prepaid land lease, professional fees related to the design of the new chemical factory, purchase of plant and equipment, construction costs and the installation costs. Most of the remaining expenditures will be incurred in year 2021.

We continue to believe construction will be completed by the end of second quarter or immediately thereafter. Once construction is completed, we will install the machinery and test the equipment during the remainder of the year. We expect to begin trial production by the start of the year 2022. While this new factory will be smaller than the combined 2 old factories, the company expects it to make a higher net profit margin as the company plans to focus on higher-margin pharmaceutical intermediary products.

We are very optimistic by the progress we are making on constructing our new factory. We will continue to post photos on the company website so investors can track the progress of the construction of the chemical factory. When the factory opens and production has begun, we'd like to have an Investor Day to show investors in person -- and our new factory.

Now let's look at the natural gas business segment. We have no revenue in our natural gas segment in the first quarter. Our natural gas business lost approximately $54,800 in the quarter. We are working with government of Tianbao Town, Daying County and Sichuan Province closely, and plan to proceed with our application for the natural gas and the brine project approvals with related government departments after the government has finalized the land and the resources planning for Sichuan Province. As we noted previously, there are important gas discoveries in Tianbao Town, Daying County. Natural gas is a cleaner fuel than coal. China is in short supply of natural gas. We continue to be optimistic about the approval for our project.

Our natural gas business plans currently include 3 wells. Our initial well located at Tianbao Town, Daying County, Sichuan Province in China. And 2 others may be in nearby locations. In addition to natural gas, the company also plans to produce bromine and crude salt. We have found rich concentration of bromine in Sichuan. However, because the areas are mountainous, we will have to develop additional plans for the handling of crude salt and wastewater.

Guidance. Because of the closures in the first quarter, the company believes it should be useful to offer guidance for the second quarter and the 2021 fiscal year. For the second quarter, the company estimates its net revenue will be in the range of $12 million to $14 million.

Net income will be estimated to be in the range of $2 million to $2.4 million without considering nonoperational factors.

For the full year 2021, the company estimates net revenue will be in the range of $45 million to $47 million and net income will be in the range of $4.2 million and $4.7 million without considering nonoperational factors.

These estimates include only revenues from the 4 facilities currently in operation. No estimate revenues are included for -- from the remaining 3 bromine and crude salt facilities, the new chemical factory under construction or the natural gas and the brine projects in Sichuan.

In addition, these estimates assume bromine price could decline from the current levels and that the government will, again, suspend production for the winter season and the Chinese New Year holidays. Because the 2020 Chinese -- 2022 Chinese New Year is 11 days earlier than the year 2021 Chinese New Year, the closure may have more impact on the fourth quarter of year 2021 as compared to the same quarter of year 2020. The first quarter of 2022 could benefit from these additional days.

We do not know when we will receive approvals for our closed facilities or if the government will again force a winter closure, but we believe that we should be as conservative as possible.

Shareholders relations. As you can see that the company has been working hard to upgrade and update its website. We plan to have it completely updated this quarter. We intend to continue to be very active in communicating with shareholders. As we noted, we plan to have a conference when our chemical factory opens. We are also considering other important and virtual events. We are exploring various technologies we can utilize.

Now let me turn the call back to Mr. Xiaobin Liu for closing remarks.

(foreign language)

Thank you, Mr. Liu.

[Interpreted] So based on the strong results in the first half of the second quarter, we have confidence that our quarter and fiscal year will -- both will be profitable. With the projected opening of our chemical factory, with some of our other facilities, we look forward to a strong financial results from the year 2022.

Over the past 3.5 years, we have struggled with the closure of all of our facilities with environmental remediation as well as the impact of Typhoon Lekima. Even with all of our difficulties, our balance sheet remains very strong. It has almost $97 million in cash, which can be used to build our chemical factory, open our closed facilities and develop our business in Sichuan.

We also believe that with the exception of the remaining expenditures for our chemical factory, we will return to generating free cash flow and will achieve profit. As soon as we have visibility on the timing of production in our chemical factory as well as opening of our closed facilities, the company will present to the investors our 5-year plan for growth and development in future. And the company will also organize virtual events, so shareholders can better know and appreciate the company.

Now let's open for the QA section. Hi, operator.

(Operator Instructions) Our first question is from [Keegan Winesmith], a retail investor.

My name is Keegan. I had one question for you. So Gulf Resources repurchased shares in 2011, 2014 and 2015. The company has $97 million in cash. And if I'm interpreting the latest 10-Q correctly, it will take $28.5 million to finish the chemical factory, leaving a large amount of cash remaining. Given the shares are so undervalued from a shareholder equity perspective and we expect a strong second quarter, can we return to purchasing shares? Repurchasing shares will provide significant investor confidence in the company's financials.

Okay. I will translate and -- to Mr. Liu.

(foreign language)

(foreign language)

[Interpreted] So this question, Mr. Liu says, the company always been explaining to our investors that even though company has this cash -- in cash, but besides the expenditures for the chemical factory, the company also had to get back the rest 3 bromine and crude salt facilities back in operation. If there is any further upgrade need by the government and our Sichuan project, which also needs funds in the future. The company also consider expand its business by doing acquisition in future. So firstly, company wants to keep enough cash on hand for all of this and its normal business operations and growth first.

Okay. I understand. Can I make a request then? I mean, for the next 10-Q to put a plan of what it would take to repurchase shares or at least put what you just told me in writing into the 10-Q? I think a lot of investors are watching the share repurchase pretty closely. So just an idea.

Our next question is from [Randy Widget], a private investor.

Just a quick question. Can you all expound a little bit just very briefly on why the approvals on the gas and the other factories are taking so long? And maybe explain what all goes into that? I realize you're dealing with governmental people. But it sure does seem like it's taking a long time. And as usual, I appreciate it.

Okay. (foreign language)

(foreign language).

Okay. Okay. (foreign language)

[Interpreted] So firstly, let's look at the Sichuan projects. We'll provide a very detailed explanation on this background and the current situation. Firstly, starting in the beginning, the company signed a investment agreement with county level governments. That time, it was allowed that company signed with these county level government investment agreement and it was allowed the company can do mining. But later on, the Chinese mining policy changed after some years.

It needs provincial level approval and the planning approval. Then, the company can do mining in Sichuan Province. So company had to temporarily stop its agreement with previous county level government agreements. Now the county level government is organizing all its planning and submit its application to provincial governments and are waiting for provincial government's feedback approval -- and approval on this mining and the planning. This is the current situation. I hope I explained it clearly.

Okay. Now let's look at the second question. On the rest, 3 bromine and crude salt facilities, Mr. Liu will explain further. (foreign language)

(foreign language)

Okay.

[Interpreted] So for the rest 3 bromine and the crude salt facilities, because this [crude salt] better in many years ago, the acquisition the company did with these 3 factories, they -- with lower price, but without -- they don't have mining permits that time. But that time, the government policy allowed previous -- allowed to use one parent company permit can do mining. But now after some years, the government policy also changed. It means individual bromine facilities have each individual permit and assessment.

So company have to do for each bromine facility it's project planning, lending, environmental protection and all relevant approval again and submit to government. Then the company's recent years, like 3.5 years, we're doing this and upgrading its facilities. We already get all of these factories approvals. So we believe with our continuing work and experience, we will get our remaining 3 facilities approval and back in operation. Because the company -- no, the government is also finalizing the planning for all areas, also including the prevention of flood. So it may take a longer time, but these are in process.

There are no more questions at this time. Helen, Would you like me to -- would you like to make any closing remarks?

No more questions?

No.

Okay. Thank you. (foreign language)

(foreign language)

[Interpreted] Operator. Thank you for carrying forward all the calls today. Thank you for attending the earnings conference call. And thank you very much. Have a good night and have a good morning in the U.S. Thank you. Bye-bye.

Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.

Thank you, and have a good day.

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