Earnings Call Transcript - GURE Q3 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Gulf Resources 2022 Third Quarter Earnings Conference. It is now my pleasure to turn the floor over to your host, Helen Xu. Helen, the floor is yours.

Helen Xu, IR Director

Thank you, Tom. Good morning, ladies and gentlemen, and good evening to all of you for joining us from China. We'd like to welcome all of you to Gulf Resources third quarter 2022 earnings conference call. I'm Helen Xu, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, and the COO, Mr. Naihui Miao, will also join this call today. I'd like to remind all of our listeners that in this call certain management statements during the call will contain forward-looking statements about Gulf Resources Incorporation and its subsidiaries business and products within the meaning of Rule 175 under 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 condition in the PRC; the risks associated with the COVID pandemic outbreak; 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 the other oilfields and the power production chemicals; changing technology; the ability to make future bromine assets; and the various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed within 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. Accordingly, our company believes expectations reflected in those 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 the management's estimate as of today, the 15th of November 2022. For those of you unable to listen to the entire call at this time, a replay will be available 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. I will review the quarter and the 9 months and then turn the call back to Mr. Miao and Mr. Liu for their commentary. After which we will have a Q&A section. Firstly, let's look at the quarter of the company for the third quarter operating results, which is an outstanding quarter for our company. For the 3 months ended September 30, 2022, revenues increased 29% to approximately $22.8 million. Income from operations increased 68% to approximately $11.9 million. Profit before taxes increased 68% to approximately $12 million. Net income increased 66% to approximately $9 million. Earnings per share increased 65% to $0.86. By segment for the quarter, bromine revenues increased 33% to approximately $19.8 million. Tonnes increased 6%, while the average selling price increased 26%. We had four factories in operation. We have prepared factory number eight for opening. We expect factory number eight to produce revenues in the fourth quarter of 2022. Gross profits were approximately $12.5 million, an increase of 50.1% from the results of the previous year. Profit margins increased to 63% from 56%. Income from operations increased 53% to approximately $10.6 million. Crude salt segment revenues from crude salt increased 3% to $2.9 million. Volume increased 3%. Cost of net revenues declined to $1 million from $1.6 million, largely due to the relocation between bromine and crude salt. Income from operations increased 234% to approximately $1.9 million from $561,000, largely due to the change in allocation of costs. On August 30, 2022, the company provided guidance for the third quarter for our bromine and crude salt segments. Our projections were for revenues in these two segments of $20 million to $21.8 million. Actual revenues were $22.9 million. We projected profit before tax of $9 million to $10.3 million. Actual profit before tax was $12.4 million. We are very pleased to have exceeded our guidance. The chemical products segment had zero revenue and had a loss from operations of approximately $448,000. The natural gas segment had revenue of approximately $82,000 from the rental of some of our equipment. Direct labor and factory overhead. Investors should note that we incur costs for our closed factories of approximately $1.9 million. Even with this cost, we were able to report earnings per share of $0.86 versus $0.52 in the previous year. For the 9-month period ending September 30, 2022, the company revenues increased 39% to approximately $47.5 million. Income from operations increased more than 10% to $17 million. Net income increased more than 60 times to $12.7 million. Earnings per share increased to $1.22 from $0.02. By segment, firstly, let's look at the bromine segment. Revenues in this segment increased 41% to approximately $41.9 million. The cost of net revenues was $18.1 million and approximately $2.2 million of this increase was due to a reallocation of cost with crude salt. The gross profit was approximately $23.7 million compared to $13.8 million. Income from operations more than doubled to approximately $17.2 million. The crude salt segment revenues in this segment increased to approximately $5.5 million from $4.4 million. The cost in crude salt dropped to $2.9 million from $3.3 million, largely due to $2.2 million in lower cost allocation. Gross profit more than doubled to $2.6 million from $1.1 million. Income from operations was $1.5 million compared to a loss of $1 million. Other businesses, chemical products lost approximately $1.4 million compared to approximately $2 million in the previous year. Natural gas lost approximately $69,000 compared to a loss of approximately $167,000 in the previous year. Corporate costs were $187,000 compared to $3.4 million in the previous year. In the year 2021, the company incurred about $3.1 million in the cost related to stock grants. By September 30, 2022, we had no new stock grant. On October 7, 2022, the company issued 200,000 shares under its equity incentive plan at a cost of approximately $668,000. For the 9 months cash flow, the company generated net cash from operations of approximately $37.1 million. Capital expenditures for the bromine segment were $33.2 million. The effect of the decline of the RMB versus the U.S. dollar impacted our cash and cash equivalents by approximately $6.7 million. Balance sheet. During the year 2022, the RMB declined sharply against the U.S. dollar. On January 1, 2022, $1 worth RMB 6.3557. On September 30, 2022, $1 worth RMB 3.1204, a decline of approximately 12%. The drop of the RMB against the U.S. dollar caused a resulting impact on balance sheet items. Despite the impact on our balance sheet, we ended the quarter with cash of $92.6 million or $8.85 per share. Working capital was $94.1 million or $8.99 per share. Book value was $268.6 million or $25.65 per share. Now let's look at the update on our business operations. COVID continues to significantly impact our business, causing a softening of the bromine prices and a delay in receiving the equipment needed for our new chemical factory. We have no visibility as to when the impact of the COVID epidemic will abate. However, the company is aware that COVID is more dangerous in the winter months, so issues may continue. During the third quarter, we prepared factory eight for production. Revenues are expected to be generated in the fourth quarter of 2022. We have not heard anything from the local government about factories number two and ten yet. We remain optimistic that we may receive permission to open these factories, although some investment may be needed in the new wells, crude salt ponds, and aqueducts. The chemical segment, the COVID epidemic and resulting supply chain disruptions has impacted the opening of our chemical factory. While some of the equipment has been delivered, we are still lacking a few components. We expect these to be delivered this quarter or at the latest in the first quarter of 2023. Once all of the equipment is delivered, it will take 3 to 4 months to get them installed. After installation, the testing process should take 2 to 3 months, after which we will apply for the environmental approval and other approvals from the government. After we have all the necessary approvals, it will take 4 months to conduct trial production. Full commercial production may start by the beginning of the year 2024. The company regrets this delay, but we could not have foreseen the continuing issues related to COVID. The natural gas segment, the company is continuing to wait for the government of Sichuan Province to complete its plan. The company believes that Sichuan still represents a substantial opportunity for both natural gas and bromine. We remain optimistic that we will eventually receive approval to drill for both products. However, the company is open to considering partnerships with state-owned enterprises. Fourth quarter 2022 projections for the bromine and crude salt segment only. The COVID pandemic and the early Chinese New Year are likely to impact the fourth quarter of 2022. The Chinese economy remains soft. Bromine prices dropped at the beginning of September and started to rise in the second week of October. On November 8, we were at RMB 49,800, which is higher than that of September 30, 2021, but lower than the highs achieved in the fourth quarter of the year 2021. The company expects the government to announce another winter closing. In the year 2022, the Chinese New Year was on February 1. In the year 2023, it will be on January 22, the earliest to date. This means there will be 10 fewer days of production in 2022. By contrast, 2023 should have approximately 19 additional days of production because of the later Chinese New Year in 2024. Given the potential for fewer days of production and a lower price for bromine, the company estimates revenues for bromine and crude salt to be in the range of $15.4 million to $16.8 million, with profit before tax in a range of $3.8 million to $4.2 million. In our projections of August 30, 2022, the company indicated that bromine and crude salt would have annual revenues between $62 million to $63.7 million. With the results for the 9 months and the projections for the fourth quarter, we now project these segments will have revenue of $62.7 million to $64.1 million. We had also projected these segments would have profits before taxes of $20 million to $21.5 million. Based on the 9 months and the projections for the fourth quarter 2022, the company now projects that these segments will have profits before taxes of $22.4 million to $22.8 million. Despite the slowdown caused by COVID, we expect to exceed our original guidance for bromine and crude salt for both sales and earnings. I will turn the call back to Mr. Miao and Mr. Liu for your commentary.

Naihui Miao, COO

So I will translate for Mr. Miao. He is now introducing himself as the COO of the company, Mr. Naihui Miao. First of all, I want to welcome all of you to the third quarter and nine months earnings conference call for the year 2022, which ended on September 30, 2022. I will join Mr. Liu later for the Q&A section to address any questions about the company's operations.

Xiaobin Liu, CEO

Okay. So hi, everyone. I'm the company's CEO, Mr. Xiaobin Liu. First of all, welcome all of you to attend Gulf Resources third quarter year 2022 earnings conference call. We are very pleased to have reported such a strong third quarter and 9-month results with $1.22 of earnings per share, with a lower RMB making imports more expensive and the closing of some domestic facilities. We believe volume and prices will continue to be strong. While we regret the delay in opening our chemical factories, we are very confident in its long-term potential. We also believe that we will eventually receive approval to drill for natural gas and bromine in Sichuan province. We understand that our shareholders are frustrated with the current share price. We want to emphasize that company management shares this frustration. Last year, management returned over 11 years’ worth of cash compensation, and it's rare to find a company executive who has foregone such significant cash salaries for stock. Our careers and our families’ well-being are directly linked to our stock price, and if the price remains low, we will be the ones who feel the impact the most. We know our shareholders would like us to buy back shares, and we wish we could do that, but we currently do not have approval to transfer funds out of China for stock buybacks or dividends. However, there are two things we think we can do to help the short-term, intermediate, and long-term prices of the shares. In the short term, the company may consider paying executive officers in RMB and buying back some of their shares. If an executive officer needs to sell shares to pay for living expenses, then the executive could approach the company and offer his shares in a private transaction; the company could pay the executives in RMB. We will keep you updated on the progress of this idea. Over the intermediate and long term, we are committed to gaining increased financial flexibility. We know that many of the pharmaceutical intermediary products are produced in our chemical factory, which are in demand throughout the world, especially in the emerging countries in Asia. Once we open our chemical factory, we will consider developing a plan to generate exports of some intermediary products and their byproducts that could enable us to have increased financial flexibility for buying back stock or paying dividends.