Gulf Resources, Inc. Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the Gulf Resources 2022 First Quarter Earnings Conference. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. 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 of you joining us from China. We would like to welcome all of you to Gulf Resources' first quarter 2022 earnings conference call. I'm Helen Xu, the IR Director. Our CEO, Mr. Xiaobin Liu, is also joining this call today. I'd like to remind all of our listeners that in this call, certain management statements will contain forward-looking information about Gulf Resources Incorporation and its subsidiaries' business and products. Actual results may differ from those discussed today due to a number of risk factors, including general economic conditions in China, the risks associated with the COVID-19 pandemic, future product development, market acceptance of products, competition, technological changes, and various other factors beyond our control. Gulf Resources assumes no obligation to revise or update any forward-looking statements. For those unable to listen to the entire call, a replay will be available on our website. So, let me turn the call over to Mr. Liu.

Thank you, everyone. I am Xiaobin Liu, the CEO, and I'm pleased to welcome you to Gulf Resources' earnings conference call for the first quarter of 2022. Since 2017, our company has been navigating new government regulations that required us to close our facilities for environmental planning. This included permanently shutting down three bromine factories and relocating our chemical operations. Moreover, we faced the impact of the most destructive typhoon in Shandong province. Throughout this challenging time, we have been managing multiple crises, which hindered our ability to offer investors a clear picture of our long-term potential. We are now prepared to share our plans moving forward. Our team is working on a six-year plan, divided by division, through 2027. We will provide a detailed presentation on our website and schedule a conference call to discuss our projected assumptions. This plan will emphasize our earnings potential, and we believe it will be encouraging for investors. Although we will not be providing guidance for the second quarter or the full year during this call, we are optimistic about our company's profitability in the upcoming quarters and this year. Now, I will hand it over to Helen for an overview of the first quarter of 2022.

Thank you, Mr. Liu. We will address most of the questions we've received from our investors during this call, and some may relate to our future planning, which will be discussed in our six-year plan conference call later on. For the first quarter of 2022, revenues increased 70% to approximately $8.9 million from $5.3 million. Our factories were closed for environmental reasons until February 21, 2022. Last year, they were closed until February 19, 2021. We had 39 days of operations in 2022 compared to 41 in 2021, resulting in daily revenues increasing by 78.5%. Gross profits surged 306% to approximately $4.4 million from $1.1 million. Direct labor and factory overheads incurred during the plant shutdown were approximately $2.2 million. General and administrative expenses increased by 29% to around $2.2 million, primarily due to a swing in unrecorded foreign translation losses. The loss from operations decreased by 98% to approximately $65,100 from about $3.3 million. Excluding direct labor and factory overheads of approximately $2.2 million and foreign translation losses of around $283,800, the first quarter of 2022 would have been very profitable, even with only 39 days of operations. Now, let's review our business segment data. Starting with the Bromine segment, revenues increased 69% to approximately $8.1 million, with production increasing by 5% to 1,005 tonnes. The average selling price surged by 60.5% to $8,086. Currently, the selling price of bromine is $8,270. Gross profits were approximately $4.2 million compared to $1.3 million, an increase of 224%. Gross margins were 51.8% compared to 27%. Our utilization rate was 19% compared to 17% in the previous year. Net profits in bromine were approximately $1.3 million versus a loss of approximately $1.3 million. These figures include overhead costs, G&A expenses, and negative non-cash foreign currency adjustments. The total assets in our bromine business rose to $186 million from $144.7 million in the previous year as we continued to drill new wells, build aqueducts, and make improvements. We believe we will receive approval to open at least one of the closed factories in 2022. In the crude salt segment, revenues increased 68% to $754,000, although production facilities were open for only 39 days due to low temperatures, which slow down crude salt production in winter. The cost of revenues fell by 6% to $629,560, resulting in a gross profit of approximately $124,500, compared to a loss of $219,100. Crude salt lost approximately $522,000 versus a loss of $1 million previously. In the Chemicals Segment, revenues were zero with an operating loss of approximately $513,000. The construction of our new Yuxin chemical factory has faced delays due to electricity restrictions and winter shutdowns; however, we believe these restrictions are easing. We expect to start commercial production in 2023. In the natural gas segment, our business reported revenues of approximately $57,000 from equipment rentals and a loss of $26,739. We are waiting for the provincial government of Sichuan to finalize resource planning, and while there is uncertainty, we remain optimistic about participation in natural gas production as demand increases in China. Now, let's review our balance sheet. The company ended the quarter with approximately $105.7 million in cash, an increase of about $9.9 million from last year. Cash per share was $10.05, and shareholders' equity was approximately $288.1 million, or $27.39 per share. Even amid facility closures for over half the quarter, the company generated robust cash flow from operating activities of approximately $8.5 million while spending about $395,100 on property, plant, and equipment. Free cash flow, excluding the impact of foreign currency translation, was approximately $8.1 million. One concern raised was about accounts receivable. An investor asked why there was approximately $2.4 million of receivables older than 90 days in our 10-Q, and I want to assure investors that these receivables were received in April 2022. Now, let's send the call back to Mr. Liu for concluding remarks.

Thank you, Mr. Liu. I will provide translation for Mr. Liu's concluding remarks. First off, we are very pleased with this quarter’s operational results. We are almost breakeven, and without the winter closure, there would have been additional profit. Bromine pricing remains extremely strong, with imports becoming more expensive and capacity in China reduced due to environmental controls while demand stays strong. Increased use of bromine in pharmaceuticals and other products, such as zinc-bromine batteries and flame retardants, is evident. We expect to open at least one closed factory in 2022. Based on our improvements and outlook on pricing, the company is extremely bullish about opportunities in this sector. Results in crude salt should improve, and we are optimistic about our Yuxin chemical business, planning to finish construction and begin testing and trial production, with potential commercial production starting in 2023. We are also hopeful to receive permissions for drilling natural gas and brine in Sichuan Province due to the pressing shortage of natural gas in China. Our team is diligently working on detailed financial projections by division through 2027, which we will share with investors before the end of next month. Now, let’s return to Helen for the Q&A session.

Ladies and gentlemen, the floor is now open for questions. Your first question is from Glenn Krevlin. Please announce your affiliation, then pose your question.

Good morning. 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 are closed, and when you expect the closed plants to reopen?

Hi, Glenn. Are you referring to your question in the context of our planned updates or the current quarter?

No, currently in the quarter.

In the quarter, okay.

Hi, Glenn. Here is Mr. Liu's response. First, we have three business segments: bromine and crude salt as one segment, chemicals as the second, and natural gas as the third. At present, only the bromine and crude salt segments are operational, while the other two segments, chemicals and natural gas, are closed. We currently have four operational bromine factories with three closed, and we aim to reopen at least one more this year, bringing the total to five operational bromine factories by the end of the year. For crude salt, we have a similar situation with four plants currently in operation and we plan to open another before the end of the year, also achieving five operational crude salt plants.

Okay. Please provide an estimate of total capacity for the open and closed plants.

Okay. The overall capacity for seven bromine factories would be 13,000 tonnes per year, and for crude salt, it would be 60,000 tonnes from the seven crude salt factories.

If 13,000 tonnes of bromine capacity is available when all seven are open, how much capacity is open today for bromine and salt only?

Currently, the bromine production per annum is 8,000 tonnes and the crude salt is 32,000 tonnes per annum.

Right. One last question, you mentioned there is $186 million of assets in the bromine segment. How much is invested in the salt segment? You didn't provide that number.

Hi, Glenn. I can email that detailed number back to you since I do not have it on hand.

Okay. Current liabilities in the quarter were $35 million, while at year-end, they were $10 million. Can you explain the increase of $25 million?

A $25 million increase, okay.

This is mainly due to the company purchasing new equipment and materials.

For what purpose were these items bought?

The investments were primarily for our chemical segments and ongoing projects within our bromine segments.

My last question concerns capital spending projections for 2022. What is the plan?

We will discuss these projections in our future presentations, specifically in our six-year plan update.

And what is the depreciation forecast for this year?

As mentioned earlier, we will provide a full financial plan detailing these figures before the end of the month during our presentation.

Why a six-year plan versus others, such as three or five years?

We believe six years will allow us to better address emerging segments like chemicals and natural gas. Given the current investment requirements, this extended period will provide a clearer picture for our shareholders.

I'll let someone else ask. Thanks for the responses.

Thank you. You're welcome.

Your next question is from Asher Stein. Please announce your affiliation, then pose your question.

Hi, good morning. I'm an individual. My first question is related to the previous caller's concern about the $25 million in payables.

Hi, Asher. Let me explain that. The major increases are primarily due to construction projects in our bromine segment.

Your previous mention included expenses for equipment but how does this reconcile with the $45 million that hasn't changed?

That was minor and not the major factor. My translation may not have conveyed Mr. Liu’s point early on.

Are expenses linked to reopening the closed plants or improvements on the operational ones?

The expenses relate to improvements in the operating plants.

Regarding share buybacks, what position does the company currently hold?

Our focus remains on maintaining operational readiness in business segments that require investments and ensuring we have cash available for future opportunities.

As an owner, I would appreciate some return through dividends or buybacks. When can we expect to see that?

We will consider shareholder returns in our future plans based on operational capabilities.

How well do we need to be performing to consider returning value to shareholders?

Our primary concern is the impact of national policies affecting our operations, as we still have three closed bromine manufacturers and pending approvals for our natural gas project.

I suggest linking any potential plans for dividends or buybacks to our six-year plan, enabling shareholders to see the runway for success.

Your points are noted, and we appreciate your input. Thank you, Bill.

There are no further questions in the queue.

Hi operator, if there are no more questions, can we close the call for today? Thank you everyone for attending this call. Have a good night. Thank you. Bye-bye.

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

Thank you, operator. Bye-bye.