Gulf Resources Inc (GURE) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Gulf Resources 2020 Third Quarter Earnings Conference. (Operator Instructions) As a reminder, this conference being recorded.

It is now my pleasure to introduce your host, Helen Xu. Thank you, Helen. You may begin.

Okay. Thank you, operator. Good morning, ladies, and good evening. For those of you joining us from U.S., and I would like to welcome all of you Gulf Resources' Third Quarter 2020 Earnings Conference Call. My name is Helen, I'm the IR Director. The company's -- CEO of the company, Mr. Xiaobin Liu also join us this call today. I'd like to remind you to all our listeners that in this call certain management statements during the call will be forward-looking information about Gulf Resources, Inc and its subsidiaries business and products within the meaning of Rule 175 on 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. 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 China. The risks associated with the COVID-19, 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 other chemical product fields, changing technology, the ability to make future bromine assets and the various other factors beyond 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 review or update any forward-looking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes expectations reflecting in those forward-looking statements are reasonable, and there can be no assurance of such which proved to be correct. In addition, any reference to the company's future performance, represent the management's estimates as of today, the 16th of November 2020.

For those of you are able to listen to the entire call every 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.

Before I reveal the quarter, I'd like to turn the call over to Mr. Xiaobin Liu, our CEO, for some opening remarks.

(foreign language)

[Interpreted] Welcome all of you to Gulf Resources Third Quarter 2020 Earnings Conference Call. Three years ago, the government forced the closing of mine and chemical companies in Shandong for rectification, so it could improve environmental protection as some of our facilities are returning to production. Our province was hit by Lekima, one of the most destructive typhoons in history. Then we were impacted by the COVID-19 virus. It has been a period of unprecedented difficulties for the company, its employees and its shareholders. There is no precedent for what we have been through.

(foreign language)

[Interpreted] Now we are beginning to see the light at the end of the tunnel. As you can see from our press release, we have reported improved results for the third quarter. We have continued to ramp our production at our full operating bromine and crude salt factory. We believe this factory earned a good profit in the third quarter. Further, over the past 4 months, the price of bromine has increased by more than 21%. And with the continuing upward change, this could going well for us in the fourth quarter. While we are not making quarterly estimates, if bromine prices remain at its current level, we should have a profitable fourth quarter.

(foreign language)

[Interpreted] Okay. With our shutdowns of for rectification, Typhoon Lekima and COVID-19, it has been a long time since we achieved our even approved profitability with a strong market for bromine and our full current factory in operation, we are increasingly optimistic we look first to getting approval of our other 3 factories, completing construction of our new chemical factory and the natural gas production. In the near future, we will consider to issue long-term guidance so that our investor will be able to understand the opportunities the company believes we have in front of us.

So now let me turn the call back to Helen to review the third quarter results.

So now I will discuss about the third quarter results. Let's look at the revenue first. Revenue was $10.5 million, which is an increase of 130% from same quarter of 2019 and 96% from second quarter of 2020.

We are very pleased to be successfully ramping up production at our current 4 operating factories. We reduced loss from operations to approximately $2.9 million from $30 million last year and approximately $8.3 million in the previous quarter. We reduced our negative cash flow for the 9 months from $69.9 million to $6.6 million. Our income statements may be confusing to investors because so many of our business are closed or under construction. It sustained operating losses on our chemical factory, natural gas projects and closed bromine and crude salt factories.

In addition, with business also have substantial depreciation and amortization to provide investors with a better understanding, we are providing a measurement of profit and loss of the operating businesses. These numbers represent the best estimate of management, but are not audited here. So we estimate that the 4 operating factors made a net profit in the third quarter of approximately $3.1 million. This business also had $2.3 million in depreciation, which we're providing an estimated EBITDA earnings before interest, tax and depreciation of approximately $5.4 million.

So now let's look at the balance sheet. Although most of our facilities were closed for several years because of rectification, Typhoon Lekima and COVID-19, and although we have spent a lot of money building new factories and drilling new wells, our balance sheet remains strong. Cash at the end of the quarter was $95.6 million or $9.06 per share-based on the number of shares outstanding. Our net cash, which is cash minus liabilities, which was $81.3 million or $8.30 per share. We have enough cash to complete the construction of our chemical factory, do more wells and build more aqueduct in our 3 closed bromine and crude salt factory and drill additional natural gas well in Sichuan.

Our book value was $363.6 million or $26.37 per share. We have analyzed 8 years from 2009 through 2016 before the shutdown. During these years, our return on shareholders equity ranged from a low of 5.7% to a high of 26.6%, with an average of 12.7%. Based on our current book value and the shares outstanding, this could give us earnings per share range from $1.44 to $6.73, with an average of $3.21. We're not suggesting that we will earn any of this amount, we are merely using this as a reference. Cost performance does not guarantee future results, but these were our results in good years and bad when we are -- we were fully operational, as Mr. Liu said it, we look forward to providing investors with long-term projections as soon as we have a better visibility.

Now let's look at the cash flow part. We had a significant improvement in cash flow in 2020. For the 9 months, we had positive cash flow from operations of $3.2 million compared to a loss from operations of $12.3 million in the previous year, with a $9.9 million on property, plant equipment compared to $57.3 million in year 2019. In total, our net free cash flow was $6.6 million compared to $69.6 million, with many of our investments behind us and profitable operations from our operating properties, we look forward to generating positive cash flow in the future.

So now let's look at the segment information. Firstly, let's look at bromine and crude salt. Our bromine and crude salt factories ramped up products in the third quarter. Revenues increased to $10.5 million from $4.5 million, an increase of 130% on a sequential basis, the revenue increased 36% of debt in the second quarter. In the third quarter, bromine revenues increased to $9.2 million, an increase of 115% compared to the previous year and 105% compared to the second quarter of 2020. During the quarter, we sold 2,301 tons of bromine compared to the 1,222 tons in second quarter and 1,022 tons in the same quarter of the previous year. The bromine business had an operating profit of almost $2 million compared to a loss of $5.2 million in the same quarter of the previous year and a loss of $1.5 million in the second quarter of 2020. Management is pleased with the progress it is making in its bromine business.

The price of bromine continued to increase. In July, it was RMB around approximately RMB 26,700 per ton. By the end of September, it was about approximately RMB 30,000 per ton. And November, it reached RMB 32,278. The upward trend in bromine price may bring the company future revenue. We expect that production in the fourth quarter will be similar than that in the third quarter, with higher prices impact revenues and profit will increase continue as (inaudible). If bromine prices remain at current levels, we expect the profitable in the fourth quarter. So the company continues to be optimistic about getting approvals for factory #2, #8 and #10, by the first part -- first half of next year. There has been a delay in getting approvals as the government focuses on flood prevention as well as rectification so that another like Typhoon Lekima does not injure the population. Flood prevention regulations may require the company to modify some of the company's current aqueducts and wells. However, despite this delay, we are still optimistic about receiving approval and do not (inaudible).

Waiting this approval, chemicals were making good progress on the construction of our chemical factory. The facility will have 3 buildings, all of which are under construction -- have 3 major buildings, all of which are under construction. We continue to estimate the cost at $60 million. To date, we have spent about $18.5 million. We still are planning to complete construction in the middle of 2021. We estimate it will take 6 months to install and test all of the equipment should begin trial production in early 2022.

Maintenance expects a strong return from this investment. In the 2 years, before the shutdown for rectification, our chemical business had operating earnings before corporate cost of $25.5 million in the year 2016 and $33 million in year 2015. While this new factory will be smaller than the combined to old factories, the company expects it to make higher net profit margin as we plan to focus more on the higher margin from a (inaudible) intermediate product. We are optimistic by the progress we are making on construction of our new chemical factories.

Now at last let's look at the natural gas projects. The company continued to be encouraged by the opportunities to produce natural gas and brine products in Sichuan Province.

As discussed -- disclosed previously, Petro China discovery of natural gas in (inaudible) is close to our current natural gas well. We believe its discovery could have a material positive impact on the company and may open opportunities for company. The company believes that the government will be more focused on finalizing the planning for exploration and exploitation of mineral resources in this area.

In addition, the company plans to proceed with its application for the natural gas and brine project approvals with related government department. After the government has finalized the land and resources planning for Sichuan Province. At the moment, we are not able to estimate when we can return to production but we remain quite optimistic that we will be able to produce both natural gas and brine product in Sichuan Province.

Corporate development. We are aware that our website is outdated. Our first step will be to improve the content and make sure it is up-to-date and correct. We should also consider to redesign the website. We are currently encountering some issues with the original website designer that hope to have (inaudible) soon.

As Mr. Liu indicated, we are working on a long-term plan that we can share with the investors. One of the problem is that we have to understand timing and the action of the government. For example, we thought we would have our remaining bromine and crude salt factories approved by this time until the government received a mandate to consider flood control. However, we are working to come up with the methodology that will allow investors to understand our long-term plan and timing issues involved. Once our chemical factory is completed, we will continue to focus on ways to increasing our stock price and will focus on attracting new investors.

So at last, let's look at the management closing remarks. As you can see that the company is making exciting progress in ramping up the current bromine and crude salt facilities. We are pleased our operating business made a profit this quarter and look forward to the entire company finally making a profit. We are very excited about the opportunities in our chemical business. This business will focus on high-margin pharmaceuticals. We are encouraged by what we see Petro China doing (inaudible) and think it will benefit the company.

As you can see from our press release and from the comment to this call that we are working hard to provide our investors with more and more useful information. We look forward to sharing our long-term plan with you. At the start of this call, if you think this period has been difficult for you as investors, imagine what it has been like for the management and employee of the company. However, we now have strong visibility into the future, and I'm very excited by what we see.

So now let's open up for the Q/A section.

(Operator Instructions) Our first question comes from [Elaine Parka], private investor.

And first of all, I want to thank you for -- I mean congratulate for the results. They are pretty good. But mainly the month that have a question about is the largest billing month that was kind of a surprise, is a stock award that you had. It's about 50% of the award that you have for the 2019 plan. And it's...

[Elaine], can you speak -- sorry to interrupt you. Do you mind just speak slowly and because of voice sounds too far for me.

Okay. My question is about the stock award that you had in this quarter, the $2.35 million in general and admin. The amount is pretty large, and it's -- you said in restricted stock. So I wanted to have a better understanding of what kind of restrictions you had on these stocks. You said they are investing immediately. Can the people just -- I mean, the officers or directors can they sell their stock? Or is there any kind of restriction?

Okay. Got you. (foreign language) Thank you for the question. These shares are restricted with (inaudible). And they have restrictions on selling condition had to meet to the Rule 144, which required minimum 6 months to 1 year depends on the conditions by Rule 144.

So you mean recipient of these shares could sell their shares in 6 months to a year?

At least 6 months, but it depends on the Rule 144 specific requirements, we are not 100% but have to consult with the company legal counsel.

Okay. Could 5% of the outstanding shares -- and 5% of outstanding shares if the people have the possibility to sell them could have a huge impact on the share price?

No, there is a limitation on the trading volume as the office sales, we consider as affiliate or inside their limitation like selling volume.

And why did you choose shares versus what you had in the past which was stock options?

(foreign language)

(foreign language)

[Interpreted] Because based on previous year's experience, the company issued options to its (inaudible) officers and directors. And recently, Chinese government required a more restricted tax on individuals, tax filing on individuals. So the options are quite difficult for the individuals to evaluate and do their own tax filing. So based on the consideration and the tax policy in China local. So that's why company consider this time to issue tax.

Okay. I mean, are you planning filing (inaudible) 13 just for the ownership of the officers and directors?

Sorry?

Are you planning on filing (inaudible) 13 with the SEC just showing the allocation to the directors and officers? Because I didn't see any yet.

Do we find a new director?

No. I mean, you are supposed to -- when you have change in share ownership by the directors and officers, you are supposed to file an (inaudible) 13. So I'm just asking when are you going to file it?

Already filed.

Okay. I didn't see anything, that's why. Because I mean, it's important for you...

We knew they are already filed.

Okay. So I'll wait to see how it was allocated. I'm curious to see how much was given to the officers versus directors.

Okay. If you need, I think I may send you the link.

Okay. And can I ask another question?

Yes, sure. Please.

Okay. There's a question. I mean, it's related to the weather in Q3. I read an industry report that because of a lot of rain in July and August, production has had been impacted by a lot of companies. Was GURE impacted by such bad weather in Q3, July and August?

(foreign language)

(foreign language)

[Interpreted] [Elaine], because the construction on chemical factories, the payment was based on the progress. So by end of second quarter, company made few payments to this construction contractors and beginning of third quarter, also made some to further construction for -- to the contractors, by first quarter, company plans to buy equipment and pay a big part of the construction to this contractor.

I don't think you understood my question. My question was about the weather, the rain in July and August and if it impacted the production?

Do you mean the weather in July?

The weather in July and August. I understand there was a lot of rain and a lot of companies have reported that their production was impacted by the rain. I wanted to know if you were impacted by the rain and if it had an impact on your production?

(foreign language)

(foreign language)

[Interpreted] So the rain this year in July and August, the impact -- had impact on the company was small. So that's why it is not mentioned specifically.

Our next question comes from [Jordan Warren] with -- a private investor.

I was wondering when are you going to release -- the 3- to 5-year plan going to be released?

(foreign language)

(foreign language)

[Interpreted] Okay. So we will provide preliminary guidance maybe by end or beginning of next year for the year 2021. But for this 3 to 5 year's guidance, we had to wait until our chemical factory back to its production, then we can provide.

All right. I have one last question. Are you guys still trying to buy back shares?

(foreign language)

(foreign language)

[Interpreted] We are not considering about it currently because we want to use the cash on hand to bring back the company factories back in operation. We may consider about it when all our factories have been back in operation.

Our next question comes from [Max Warren], private investor.

How many tons of bromine can these 4 factories produce a year at peak performance?

Do you mean -- because now we only have 4 factories in production.

Yes. I'm just talking about these 4 factories.

So you mean the maximum production which we can have?

Yes, yes, yes.

(foreign language)

(foreign language)

So Max, do you mean a year or every month?

A year. How much bromine can you produced in a year?

Across a year. (foreign language)

(foreign language)

(foreign language)

(foreign language)

[Interpreted] We didn't do special analysis yet for next year. But we think for next year, the amount would be around 5,000 pound for this full current bromine factory.

Awesome. Okay. And I have one more question. Would management be willing to sell the entire company to Petro China or any other company for book value, $26 a share?

(foreign language)

(foreign language)

[Interpreted] Okay. So until now, we did not receive any offer yet. But we think this kind of question is not responded by company management, it should be better considered or provided by company's directors of the Board.

(foreign language)

[Interpreted] But I personally think I have confidence in this company. I and my team want to work hard to improve -- continually improve the company's long-term value.

Our next question comes from [Randy Leggett], a Private investor.

Thank you for putting up with me, Helen. Just a couple of questions, and I'm not going to keep this long because some of them have already been answered. But how about a PR firm? I know we discussed that few several, several quarters ago. There's no volume in the stock. It's kind of just so lethargic right at the moment, there just doesn't seem to be any interest. You've got a good story to put out there. Why can't we hire somebody? You can't do it all.

Second quick question is, have you all discussed anything with Petro China about the natural gas field, what their plans are going forward, things like that?

And third of all, have you all even thought about asking Morgan Stanley, Goldman Sachs, all the big investment banking guys are there, including Bank of China, and just throw out options that you all will try to do something to -- I would think the officers and the majority shareholder would want to make money, and we just haven't made any money in a long time. So those are my 3 questions. And thank you.

Okay. Randy, I think for your first question. Just want to make it clear. First question, you mean why don't the company higher somebody like external IR to handle this, makes the company more...

Yes. You couldn't do it all. I mean you can't do it all. And for U.S. investors, your story is obviously not out there. And I know we talked about it. I thought we paid. I thought we gave somebody some stock. I don't know, sometime last year maybe.

Okay. So what's your second question?

It was about -- have you all had any discussions with the executives of Petro China about the natural gas field? Have they talked to you all about anything they're thinking about? I mean, what is taken so long up there? Is that just local governments just kind of taking their time? I know that's probably a big deal, but you would think we're Petro China involved, they would probably hurry along a little bit faster.

And the third one was with all the big investment banks, I just wish at some point, we might interact with one of those, just to discuss other options out there to get the stock price up a little bit. I would think the majority shareholder -- I can't remember what his name is right off the top of my head, I would think he'd want the stock to go up like the rest of my shareholders. Like you all would, too, as shareholders. So those are the 3 quick questions, and I appreciate as usual, Helen.

Okay. I'll translate to Mr. Liu. (foreign language)

(foreign language)

[Interpreted] So for your first and third question, we definitely consider your suggestion, but our company wants to wait until its operation, more specific, more confirmed, then we think at that time, if we continue to hire the IR or talk to the investment bank. Based on their experience and consulting to help the company to grow its share price of being -- long-term value to our shareholders, which is for question one and three.

Second question, the company is talking to local government and the related government departments. But because this process is complicated. We have to wait until the government finalized its planning on this Sichuan Province for the land and resources, then we can do something for our application. Otherwise, we cannot do anything until government finish its plan.

One quick question here. I thought you all said in the press release you had already -- you were going to start the application process. Did I misread that?

No, no, no. You can see, again, until the government finalized its land and resources planning. In our preparation side.

Our next question comes from [John Rowells], private investor.

Yes. You're halfway through quarter 4. Can you tell us approximately how many tonnes of bromine you expect to ship in quarter 4?

It will be, like I said in our -- this call, it will be similar to this quarter -- the third quarter.

It was my impression that your capacity was increasing as you commission these factories. So I thought your capacity in quarter 4 might be higher than quarter 3.

Okay. Just hold on, I'll translate. (foreign language)

(foreign language)

[Interpreted] Yes. Okay. We hope it can be higher than third quarter. But in our fourth quarter because of there are still some uncertainties due to the weather and the holidays, so we cannot say it will be definitely higher. So to be conservative, we think it will be similar at the third quarter.

Okay. One related question. Are your bromine sales limited by factory capacity or by customer demand?

(foreign language)

(foreign language)

[Interpreted] Currently, we are based on our capacity.

There are no further questions at this time, Helen. I would like to turn the call back over to you for any closing comments.

Okay. I think if there is no more question, can we close the call for today. (foreign language) So Thank you for attending this call. Have a good night.

(foreign language)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great night.