Earnings Call Transcript - GURE Q3 2020

Operator, Operator

Greetings, and welcome to the Gulf Resources 2020 Third Quarter Earnings Conference. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Helen Xu. Thank you, Helen. You may begin.

Helen Xu, IR Director

Okay. Thank you, operator. Good morning, ladies, and good evening. For those of you joining us from the U.S., I would like to welcome all of you to Gulf Resources' Third Quarter 2020 Earnings Conference Call. My name is Helen, I'm the IR Director. The CEO of the company, Mr. Xiaobin Liu, also joined us on this call today. I would like to remind 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 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 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 in 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 reflected in those forward-looking statements are reasonable, and there can be no assurance of such which prove to be correct. In addition, any reference to the company's future performance represents the management's estimates as of today, the 16th of November 2020. For those of you who are able to listen to the entire call every time, a replay will be available on the company's website. The call is also accessible through the webcast, and the link is available 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.

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

[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.

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

[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 fully operating bromine and crude salt factory. We believe this factory earned a good profit in the third quarter. Further, over the past four months, the price of bromine has increased by more than 21%. With the continuing upward change, this could bode well for us in the fourth quarter. While we are not making quarterly estimates, if bromine prices remain at their current level, we should have a profitable fourth quarter.

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

[Interpreted] Okay. With our shutdowns for rectification, Typhoon Lekima, and COVID-19, it has been a long time since we achieved our even improved profitability. With a strong market for bromine and our fully operational factory, we are increasingly optimistic. We look first to getting approval of our other three factories, completing construction of our new chemical factory, and the natural gas production. In the near future, we will consider issuing long-term guidance so that our investors 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 the third quarter results. Let's look at the revenue first. Revenue was $10.5 million, which is an increase of 130% from the same quarter of 2019 and 96% from the second quarter of 2020. We are very pleased to be successfully ramping up production at our current four 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 nine months from $69.9 million to $6.6 million. Our income statements may be confusing to investors because so many of our businesses 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 has 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 four operating factories 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, was $81.3 million or $8.30 per share. We have enough cash to complete the construction of our chemical factory, do more wells, build more aqueducts in our three closed bromine and crude salt factories, and drill additional natural gas wells in Sichuan. Our book value was $363.6 million or $26.37 per share. We have analyzed eight 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 an 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 were fully operational. As Mr. Liu said, we look forward to providing investors with long-term projections as soon as we have better visibility. Now let's look at the cash flow part. We had a significant improvement in cash flow in 2020. For the nine 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 $9.9 million on property, plant, and equipment compared to $57.3 million in 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 production 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% from 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 1,222 tons in the 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 around approximately RMB 26,700 per ton. By the end of September, it was about RMB 30,000 per ton. In 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 to that in the third quarter, with higher prices impacting revenues, and profits will continue to increase as demand grows. If bromine prices remain at current levels, we expect profitability in the fourth quarter. The company continues to be optimistic about getting approvals for factories #2, #8, and #10 by the 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 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. While waiting for this approval, we are making good progress on the construction of our chemical factory. The facility will have three 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 six months to install and test all of the equipment, which should begin trial production in early 2022. Management expects a strong return from this investment. In the two years before the shutdown for rectification, our chemical business had operating earnings before corporate cost of $25.5 million in 2016 and $33 million in 2015. While this new factory will be smaller than the combined old factories, the company expects it to have a higher net profit margin as we plan to focus more on the higher margin from intermediate products. We are optimistic about the progress we are making on the construction of our new chemical factories. Now at last, let's look at the natural gas projects. The company continues to be encouraged by the opportunities to produce natural gas and brine products in Sichuan Province. As previously disclosed, Petro China discovered natural gas close to our current natural gas well. We believe this discovery could have a materially positive impact on the company and may open opportunities for the 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 departments 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 products 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 accurate. We should also consider redesigning the website. We are currently encountering some issues with the original website designer that we hope to resolve soon. As Mr. Liu indicated, we are working on a long-term plan that we can share with investors. One of the challenges is that we have to understand timing and the actions 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 focus on flood control. However, we are working to develop a methodology that will allow investors to understand our long-term plan and the issues involved. Once our chemical factory is completed, we will continue to focus on ways to increase our stock price and will focus on attracting new investors. So at last, let's look at the management's closing remarks. As you can see, the company is making exciting progress in ramping up the current bromine and crude salt facilities. We are pleased that 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 and think it will benefit the company. As you can see from our press release and from the comments made in this call, 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 employees 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, Operator

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

Unknown Attendee, Investor

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

Helen Xu, IR Director

[Elaine], can you speak -- sorry to interrupt you. Would you mind speaking slowly because the voice sounds too far for me?

Unknown Attendee, Investor

Okay. My question is about the stock award that you had 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 invested immediately. Can the recipients, the officers or directors, sell their stock? Or is there any kind of restriction?

Helen Xu, IR Director

Okay. Got you. [Foreign Language] Thank you for the question. These shares are restricted with certain conditions, and there are restrictions on selling conditions that have to meet the Rule 144, which requires a minimum of 6 months to 1 year depending on the conditions dictated by Rule 144.

Unknown Attendee, Investor

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

Helen Xu, IR Director

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

Unknown Attendee, Investor

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?

Helen Xu, IR Director

No, there is a limitation on the trading volume as the office sales are considered affiliates, so there are limitations on selling volume.

Unknown Attendee, Investor

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

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

[Interpreted] Because based on previous year's experience, the company issued options to its officers and directors. Recently, the Chinese government required more restricted tax filing for individuals, which made options quite difficult for individuals to evaluate and do their own tax filings. So this time, based on consideration of the tax policy in China, the company decided to issue shares instead.

Unknown Attendee, Investor

Okay. Are you planning to file an 8-K just for the ownership of the officers and directors?

Helen Xu, IR Director

Sorry?

Unknown Attendee, Investor

Are you planning on filing an 8-K with the SEC just showing the allocation to the directors and officers? Because I didn't see any yet.

Helen Xu, IR Director

We believe it has already been filed.

Unknown Attendee, Investor

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

Helen Xu, IR Director

We knew it has already been filed.

Unknown Attendee, Investor

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.

Helen Xu, IR Director

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

Unknown Attendee, Investor

Okay. And can I ask another question?

Helen Xu, IR Director

Yes, sure. Please.

Unknown Attendee, Investor

Okay. My question is related to the weather in Q3. I read an industry report that because of a lot of rain in July and August, production has been impacted by many companies. Was Gulf Resources impacted by such bad weather in Q3, July and August?

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

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

Unknown Attendee, Investor

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

Helen Xu, IR Director

Do you mean the weather in July?

Unknown Attendee, Investor

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 any impact on your production?

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

[Interpreted] So the rain this year in July and August had a small impact on the company, which is why it is not mentioned specifically.

Operator, Operator

Our next question comes from Jordan Warren, a private investor.

Unknown Attendee, Investor

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

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

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

Unknown Attendee, Investor

Alright. I have one last question. Are you all still trying to buy back shares?

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

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

Operator, Operator

Our next question comes from Max Warren, a private investor.

Unknown Attendee, Investor

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

Helen Xu, IR Director

Do you mean -- because now we only have four factories in production?

Unknown Attendee, Investor

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

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Min Li, Unknown

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

Unknown Attendee, Investor

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

Min Li, Unknown

Across a year. [Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

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

Unknown Attendee, Investor

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?

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

[Interpreted] Until now, we have not received any offers yet. But we think this kind of question is not responded to by company management; it should be better considered or provided by the company's board of directors.

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

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

Operator, Operator

Our next question comes from Randy Leggett, a private investor.

Unknown Attendee, 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 a few quarters ago. There's no volume in the stock, and 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.

Helen Xu, IR Director

Okay. Randy, I think for your first question, you mean why doesn't the company hire somebody like external IR to handle this, which would make the company more visible?

Unknown Attendee, Investor

Yes. 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.

Helen Xu, IR Director

Okay. So what's your second question?

Unknown Attendee, Investor

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

Helen Xu, IR Director

Okay. I'll translate to Mr. Liu.

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

[Interpreted] So for your first and third questions, we definitely consider your suggestions, but our company wants to wait until its operations are more specific and confirmed. Then we think at that time, if we continue to hire external IR or talk to an investment bank, we can discuss their experience and consulting to help the company to grow its share price and add long-term value to our shareholders.

Unknown Attendee, Investor

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

Helen Xu, IR Director

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

Operator, Operator

Our next question comes from John Rowells, a private investor.

Unknown Attendee, Investor

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

Helen Xu, IR Director

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

Unknown Attendee, Investor

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

Helen Xu, IR Director

Okay. Just hold on, I'll translate. [Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

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

Unknown Attendee, Investor

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

Helen Xu, IR Director

[Foreign Language]

Xiaobin Liu, CEO

[Foreign Language]

Helen Xu, IR Director

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

Operator, Operator

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

Helen Xu, IR Director

Okay. I think if there are no more questions, can we close the call for today? [Foreign Language] So thank you for attending this call. Have a good night.

Xiaobin Liu, CEO

[Foreign Language]

Operator, Operator

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