Earnings Call Transcript - GURE Q1 2020

Operator, Operator

Greetings, welcome to Gulf Resources 2020 First Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the conference over to Helen Xu. Please go ahead, Helen.

Helen Xu, IR Director

Great, 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 2020 Earnings Conference Call. My name is Helen, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, is also joining us on this call today. I'd like to remind all of our listeners that in this call, certain management's statements during the call will contain forward-looking statements regarding our company's business and its subsidiaries. These statements are subject to the safe harbor created by the rules under the Securities Act of 1933 and the Securities Exchange Act of 1934. 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 risks associated with the COVID-19 pandemic, future product development and production capabilities, shipment to end customers, market acceptance of new and existing products, additional competition from new entrants in the bromine and oilfields, and changed technology. The ability to meet future bromine demand and various other factors beyond our control. All forward-looking statements are expressly qualified in their entirety by these cautionary statements and the risk factors detailed in 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. According to our company's beliefs, expectations reflected in these forward-looking statements are reasonable, and there can be no assurance that such will prove to be correct. In addition, any reference to the company's future performance represents management's estimates as of today, May 22, 2020. For those of you unable to listen to the entire call at this time, a replay will be available for 14 days on the company's website. The call is also accessible through the webcast, and the link is accessible through our website. Please locate our press release issued earlier for the details. Now, let's start the call with some introductory remarks by our CEO, Mr. Xiaobin Liu.

Xiaobin Liu, CEO

[Foreign Language] Thank you all for attending this call. The past 13 months have been challenging for our company as we had to close all of our facilities for an extended period. During this time, we were impacted by one of the most destructive pandemics in the history of China. We are now getting production back, and we have been adversely affected by the COVID-19 pandemic. However, we now see real signs of progress. [Foreign Language] We have four of our facilities in commercial production, and we are optimistic about the remaining three bromine factories. The company has drilled new wells and established new agreements. We are adjusting our focus towards higher-margin products, particularly surgical intermediates. Moreover, PetroChina has discovered one of the largest natural gas reserves in Chinese history at the same time our existing natural gas wells are operational. [Foreign Language] Despite our facilities being closed for most of the past 30 months, and considering the costs of acquiring new equipment and drilling more wells, we are still in a strong financial position with approximately $93.6 million in cash. We have sufficient capital to construct our new chemical factory, reopen our remaining bromine and crude salt facilities, and drill our wells in Sichuan Province. [Foreign Language] We look forward to returning to profitability in the near future. We appreciate the support of our shareholders. Once we start construction on our chemical factory and have better clarity on the timing for the approval of our remaining bromine factories, we will provide investors with further updates on our three-year growth and profit plan. We are very optimistic about our future. Now, let’s review our first quarter 2020 financial results and major events. Due to pollution issues and circumstances related to the COVID-19 pandemic, our bromine facilities were closed for the majority of the first quarter of 2020. The government of Shouguang City ordered all bromine factories to stop production from December 15, 2019, to February 10, 2020, for environmental reasons. Following the COVID-19 outbreak, we received approval on February 27, 2020, allowing us to resume bromine production. On January 27, 2020, we completed a one-for-five reverse stock split for our outstanding shares, effective for trading purposes on January 28, 2020. On February 12, 2020, we announced that we received a notice from Nasdaq indicating that we regained compliance with the minimum bid price requirement for continued listing on the Nasdaq Global Select Market. On March 5, 2020, we received governmental approval to resume production at our bromine factories. In mid-March, we began trial production at certain factories. The company's revenue was relatively low during the first quarter as our facilities were closed for most of the time. For the first quarter of 2020, ending March 31, 2020, we reported net revenue of approximately $557,000, an increase from approximately $38,600 in the same quarter of the previous year. The loss from operations was approximately $4.8 million compared to approximately $6.4 million in the same quarter of the previous year. The net loss after tax was approximately $3.5 million compared to approximately $5.0 million in the same quarter of the previous year. The net loss per share was $0.37 compared to $0.52 in the previous year. Despite the closures, our balance sheet for Q1 2020 remained strong. As of March 31, 2020, we had cash of approximately $93.6 million. Current assets were approximately $96 million, with current liabilities around $2.5 million. Shareholder equity stood at approximately $255.1 million and the book value per share was $26.80. Our income statement, balance sheet, and cash flows are included in our press release and our 10-Q. Since the end of the quarter, we made significant progress in reopening our business. Now, let’s review each of our business segments, starting with the Bromine and Crude Salt segment. As announced on April 6, 2020, sections number one and seven have commenced commercial production. On May 6, we began commercial production for sections four and nine, with expectations of slightly slower ramp-up for these two sections compared to one and seven, as they were not operational in FY 2019. We've installed new equipment in all factories to ensure everything operates perfectly. We anticipate achieving full production by the end of Q3 2020. We are in discussions with the local government regarding the opening of factories two, eight, and ten, which have been facing challenges related to crude salt feed and aqueduct issues. Over the past year, we invested approximately $39.5 million in new wells. Some older wells required disposal, limiting our production. The demand and pricing for bromine are expected to increase despite many bromine factories in China currently closed. The current price for bromine is over $30,000 per ton, almost double the price from five years ago. We also expect strong performance in our crude salt business. During the COVID-19 period, we are prioritizing the safety of our employees, who wear masks and undergo regular disinfection both before and after work. Our factories and facilities are also being disinfected regularly. Now, let’s look at our chemical products segment. We plan to begin construction of our new Yuxin Chemical factory soon. We have received full environmental approval and are only waiting for construction permission due to COVID-19. Construction is expected to take around one year, followed by an additional six months for equipment installation and testing. We expect to begin trial production at the start of 2022. The factory will focus on higher-margin pharmaceutical intermediate products, avoiding lower-margin products such as chemicals for papermaking. Bromine is widely used in pharmaceuticals, and we anticipate much higher pricing and margins. While this factory will be smaller than previous ones, we expect it to yield higher net profit margins. It is estimated that the cost of the factory will be around $60 million, which may increase as we communicate with investors. As previously mentioned, we have sufficient cash on hand to construct, restructure, and reopen our facilities in Sichuan Province. On May 11, 2020, PetroChina announced a significant discovery of natural gas in Sichuan Province, estimated at over 1 trillion cubic meters, which is in proximity to our natural gas well sites. This discovery is expected to benefit us significantly. We are in active discussions with local and provincial governments and will keep shareholders informed of updates. Now, let’s address shareholder inquiries regarding the company’s administrative expenses, which have increased significantly from $5 million in 2017 to $17.3 million in 2019 due to exceptional repair expenses and electrifications from Typhoon damage. We expect to return to levels similar to 2017 this year and in 2021. We are working on a three-year strategic plan, which we will complete and share with investors once we have more clarity on our operational timelines. We remain proactive in communicating with shareholders and will continue to update our website regularly for better clarity on the opening of remaining operations.

Helen Xu, IR Director

Now, let's begin the Q&A session. Operator, can we open the call for questions?

Operator, Operator

Yes, Helen, thank you. [Operator Instructions] It appears we have no questions at this time.

Helen Xu, IR Director

Okay, thank you, operator.

Operator, Operator

Excuse me, I am sorry. We did get a question from a John [indiscernible], a private investor. [Foreign language] Please go ahead, sir.

Unidentified Analyst, Analyst

Yes, we are now halfway through the second quarter of the year. Do you have a forecast for revenue and profit in this quarter?

Helen Xu, IR Director

Hi, sorry. I cannot hear you clearly. Would you mind repeating your question?

Unidentified Analyst, Analyst

We are now halfway through the second quarter of the year. Do you have a forecast for revenue and profit in this quarter?

Helen Xu, IR Director

For the second quarter? Okay. May I know your name? I think the operator may have lost the line. John [indiscernible]…

Operator, Operator

Yes, Mr. John has already asked his question, Helen. I am sorry, could you please repeat that? I am having technical difficulties with hearing you, sir.

Helen Xu, IR Director

I got his question.

Operator, Operator

Thank you, please continue, Helen.

Helen Xu, IR Director

Thank you. [Foreign language]

Xiaobin Liu, CEO

[Foreign language]

Helen Xu, IR Director

Okay. Thank you. [indiscernible] even though there are only four factories in commercial production currently, we want our investors to know that we may provide a revenue prediction and guidance in a public issued press release on the company website.

Unidentified Analyst, Analyst

Hello?

Operator, Operator

Hello?

Helen Xu, IR Director

Hi operator, I think his line is not clear.

Operator, Operator

Yes. This line is clear now. Yes, thank you. There are no additional questions at this time, Helen. Would you like to make some additional remarks?

Helen Xu, IR Director

Okay, well.

Operator, Operator

Thank you, Helen. We have no additional questions.

Xiaobin Liu, CEO

[Foreign language]

Helen Xu, IR Director

[Foreign language] Hi, operator. Do we have any more questions, otherwise we can close the call for today?

Operator, Operator

Yes. There are no additional questions, Helen. You may close the call.

Helen Xu, IR Director

Okay. Thank you. Thank you all for attending this call. Take care.

Operator, Operator

Thank you. This concludes today's conference.

Helen Xu, IR Director

Thank you.

Operator, Operator

You are welcome. You may disconnect your lines at this time, everyone. Thank you for your participation.

Helen Xu, IR Director

Thank you.