Gulf Resources Inc (GURE) 2020 Q2 法說會逐字稿

Hello, and welcome to the Gulf Resources 2020 Second Quarter Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Helen Xu. Please go ahead, Helen.

Thank you, operator. Good morning, ladies and gentlemen, and good evening to all of you for joining us from China. I'd like to welcome all of you to Gulf Resources Second Quarter 2020 Earnings Conference Call. My name is Helen, the IR Director; our CEO of the company, Mr. Xiaobin Liu will also join this call today.

I'd like to remind you to all our listeners that in this call, certain management statements during the call will contain forward-looking statements and information about Gulf Resources, Inc. and its subsidiary business and products within the meaning of Rule 175 under Securities Act of 1933 and the 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 China, 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 our existing and new competition from the bromine and the other chemical production, changing technology, the ability to make future bromine assets and various of 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 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 the expectation reflecting in those forward-looking statements are reasonable, and there can be more 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 17th of August 2020.

For those of you unable to listen to this 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.

(foreign language)

(foreign language)

[Interpreted]

Thank you very much for -- to attend the Gulf Resources 2020 Second Quarter Earnings Release Conference call. So we had to close all of our facilities to -- so the down could move ahead on plans to improve the environment. Then just as we were getting some of our bromine and crude salt operations back on line, we were hit by one of the most destructive typhoons in Chinese history, then we were impacted by the COVID-19 pandemic, which forced the delay in reopening our facilities and the -- those of our customers.

(foreign language)

[Interpreted]

This quarter, however, was transformed make shift period for our company. E-commerce commercial production factories #1 and #7 on April 2020 and factories 4 and 9 on May 2020. We received approval to begin construction of our new chemical factory and commence the formal construction in June 2020. Petro China made one of the largest discoveries of natural gas in Chinese history in an area very near to the company's existing well in Tianbao Town of Daying County in Sichuan Province, which is only 2 kilometers away from the company's existing wells.

(foreign language)

[Interpreted]

While our revenues were small, and we sustained a loss during the second quarter of 2020, we were extremely optimistic that we will be able to scale our business and return to profitability in the near future because below reason. Firstly, we have tested the new commencement of our third bromine and crude salt factory and it will be tuning up production.

We hope to achieve good production in the fourth quarter 2020. We expect to receive permission to open our 3 remaining bromine factories by the end of this year or the beginning of next year. We believe our new chemical factory, which will focus on pharmaceutical intermediate products with higher margin. We also believe we will have strong opportunities to produce natural gas and bromine products in Sichuan Province.

We appreciate the support of our investors through this long process. We will provide you with financial projection, a 3- to 5-year plan and increased communications as we turn our company to profitability. So now I will turn the call back to Helen.

Thank you, Mr. Liu. So I will provide an update on the company's financial results and operating results. And we will cover the questions we have received from our investors. Even though our financial results in this segment may, at first, look weak, but we are very satisfied with our progress.

Firstly, let's look at bromine and crude salt segment. So during the second quarter of 2020, net revenues declined 11% to approximately $5.4 million as compared the results from year 2019. This decrease was mainly due to the lower volume of production and lower selling price in bromine segment.

During this quarter, we produced approximately 1,280 tons of bromine in our 4 factories. The total ranged from 215 to 395 tons. In all, we produced around approximately 15% of our total capacity. For the 3-month period ended June 30, 2020, the gross profit margin for our bromine segment was 5%. There was a 48% decrease as compared to the same period from year 2019.

I want to highlight here that there are 2 major factors impacted this margin in bromine. Firstly, bromine prices did come down from about $4,427 or $3,672 per ton, which caused by the slowdown in the domestic economy and the lack of exports, mainly caused by the COVID-19 pandemic. However, the current price is not far below the price in year 2017 and 2016 prices, and it's quite far above the price in year 2015 and 2014, which are $3,177 and $2,863, respectively, in the same quarter of previous years, even though our bromine prices were profitable at each of these price levels. So now that the Chinese economy is recovering and many of our downstream customers are beginning to reopen. We expect the selling part of bromine to stabilize and then increase. However, even if bromine prices remain at their current level, we should be able to generate profits as our production improves.

The other major contribution to the decline in margin was the reclassification of approximately $1.1 million in costs from direct labor and factory overhead incurred during plant shutdown to cost of revenue because 4 factories were open instead of 2, even though these factories were operating at a trial production levels. In other words, these factories had to assume a substantial amount of operating costs as well as depreciation and amortization for a limited amount of production.

Now let's look at our chemical factories. As Mr. Liu noted earlier, we received an approval to begin construction of our new chemical factory and commence formal construction in June 2020. As we promised, the company has placed photos of the construction taking place on our website. You can find the photos on the Corporate PPT section at the About Gulf tab and download this PPT file. The construction is expected to take approximately 1 year and an additional 6 months to complete its equipment installation and testing. The company expects to begin trial production at the beginning of 2022. While this factory will be smaller than the combined 2 old factories, the company expects it to make higher net profit margin, and we plan to focus more on the higher-margin pharmaceutical intermediate products. The cost of the chemical factory, including land, is expected to be $16 million. It has spent $16.5 million of the estimated 16 million on land, design and the initial construction.

Last, let's look at the natural gas segment. During the quarter, Petro China made one of the largest discoveries of natural gas in Chinese history in Tianbao Town in Daying County of Sichuan Province, the same Daying County in which the company had viewed our existing well and may further dig more additional wells. With Petro China is here to discovery, we believe that the government will more focus on finalizing the planning for exploration and exploitation of mineral resources in this area. Once the planning has been finalized, we plan to proceed with our applications for the natural gas and brine project approvals.

While we have not had any conversation with Petro China, and we believe we may be able to benefit at -- its built infrastructure, including pipelines in Tianbao Town of Daying County. The company remains very optimistic about the long-term potential of this project. So now let's look at this quarter's financial results.

During the quarter, the company sustained a loss from operation of approximately $2.95 million compared to a loss from operations of $1.2 million of the previous year 2019. The net loss in the current quarter was $2.2 million approximately compared to a net loss of $738,000 in the same period in the previous year. The loss per share was $0.24 in the current quarter compared to a net loss per share of $0.08. The comprehensive net loss, including the impact of currency translation was $2 million compared to a net loss of $7.3 million in the same period in the previous year.

For the year-to-date, the company generated positive cash flow from operations of $1.2 million compared to negative cash flow from operations of $6.8 million in the previous year. The company purchased $9.9 million of property plant and equipment in the first half of 2020 as compared to $11.5 million in the same period of the previous year.

So let's look at the balance sheet. Despite having most of its facilities closed for the past 33 months. A cost of buying all new equipment and spending $39.4 million drilling more new wells and approximately $16.5 million on the new chemical factory. The company's balance sheet remains very strong.

At the end of second quarter 2020, the balance sheet was as follow: cash, $90 million, cash per share, $9.45; working capital, $93.7 million; working capital per share, $9.85; net-net cash, cash minus all liabilities, $78.2 million; net-net cash per share, $8.22; shareholders' equity, approximately $253 million; and shareholders' equity per share, $26.59.

The company believes that it has adequate capital to complete the construction of its chemical factory, open all of its bromine and crude salt facilities, drill new natural gas wells and still make acquisition. A complete description of the financial results for the 3 and 6 months ended June 30, 2020, compared to the similar results recorded in the same period in the previous year is detailed in our 10-Q filing available at the SEC website.

So we want to highlight our communications with shareholders. Now that many of our factories are in operation, we will begin to provide shareholders its quarterly and annual guidance. We hope to begin this guidance when we report the third quarter. We are also commencing work on 3- and the 5-year plan. As soon as this plan is complete, we will present it to our shareholders. We also recognize that our website is outdated. We will provide updates on all of our facilities and we have on the chemical factory on our website. We also consider change on the website that will make it easier for investors to navigate.

It's concluded that the second quarter was a very important one for our company because we opened our 4 bromine and crude salt facilities and tested our new equipment. We believe we will scale up production this quarter and we achieve -- reach full productivity in the fourth quarter. We are also optimistic about getting approvals for our remaining 3 factories. We began construction on our new chemical factory, which should begin trial production at the beginning of 2022.

We are very excited about

(technical difficulty)

for natural gas in Sichuan Province, that national government has ruled that the private companies can mine and produce natural gas. With the massive discovery of Petro China in the same area as our well, we believe the new rules will be expedited in a manner that enables us to resume producing natural gas and drill new wells.

Now that we have increased visibility, we will work to provide shareholders with financial projections, including quarterly guidance and the 3- to 5-year plan. We appreciate the patience of our shareholders and believe, we will show strong growth in sales and generate profits in coming quarters. So operator, can we open for the Q&A section?

(Operator Instructions)

Our first question today is coming from [David Chu] from (inaudible)

I want to check, right now, you have such a huge pile of cash or working capital in your balance sheet, but your share price is so low. Is the company afraid being bought out by other companies or by other investors?

Sorry, I missed your last point, so you asked that is the company...

Yes. So will your company have any strategy or policy to avoid being bought up by other investors? Because your cash is so attractive, but your share price is so low.

Okay. (foreign language)

(foreign language)

No, we are -- I'm not talking about investing, but I'm talking about being buy out by other investors. If they offer to purchase your company, to buy your company.

Oh, sorry, sorry. I missed -- sorry, sorry, I -- it sounds -- I listened like attractive -- attract. Okay. Sorry.

(foreign language)

(foreign language)

Can I ask a question concerning the ownership, how much shares or how many shares does the insider owns your company?

Okay. (foreign language)

(foreign language)

[Interpreted]

Okay. So Mr. Yang, the Chairman...

Excuse me, does the...

Yes. Mr. Yang, the Chairman of the company and his affiliates including his son, wife and others...

So it is less than 50%?

30% -- more than 30%, around more than 30%. But the exact number, I think you can find on company's quarterly filings, which is filed with SEC.

Okay. And how about other institutional investors?

I don't have a clear, you're cutting...

You have no idea how many shares other institutional ownerships?

No, we don't have clarity on this one.

If other investors takes a hostile bid to buy your company, does the company have any strategy to fend that off?

Sorry, the line is not clear. I cannot hear your last question.

Yes. I mean if other investors with a hostile bid to buy out your company, does your company...

Other investors?

Yes. That's why other investors or institution or buyers begin a hostile bid, outstanding bid to buy your company in whole?

I think this question have been -- I think I've already answered. Currently, we didn't have -- hear any news or information who want to buy us as a company. But if later on anyone reaches out, we will discuss about it.

Okay. Say, for example, just from model, if I offer to buy your company at $6 each per share? Will your company accept that? Or will your company be able to fend off certain offer?

Do you mind say again because the line is really -- when you speak, it's not clear.

Okay. Can you hear me now?

Yes, just slowly. Otherwise, the sound is not clear. Just slowly say.

Okay. If I make an offer to buy your company at current share price of $6 per share. How can your company fend off such a hostile bid?

So you mean if you want to buy the company at its current price, $6 per share?

Yes. As an example only, okay?

For example, yes, that was your question?

How can your company handle this?

Okay. Okay. I got you. Okay. This is clear. (foreign language)

(foreign language)

(foreign language)

(foreign language)

[Interpreted]

Okay. So David, first of all, we think that Mr. Yang and his family, they will definitely not sell their shares, which is more than -- approximately more than 30%. Secondly, other shareholders or investors, we don't know clearly what they thought about it. But based on our understanding, we think not always show the shares based on this low-value now.

Okay. Fully understand that.

And further -- if they believe in the company -- if they believe on the -- have trust and the belief on the company's future.

There is always a danger that others will buy your company or offer a higher price to buy out all your company shares?

Yes. That's -- as we explained that Mr. Yang and his family definitely will not sale.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Helen, do you have any further comments.

Helen, do you read me?

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

(foreign language)

(foreign language)

Operator, so we are closed for the call today. If there is no more question?

Yes, that's it. We're all set. Thank you so much for your time.

Thank you. Have a good day.

You may now disconnect.

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