Earnings Call Transcript - GURE Q3 2023

Operator, Operator

Greetings. Welcome to the Gulf Resources Third Quarter 2023 Earnings Conference. Please note, this conference is being recorded. I will now turn the conference over to your host, Helen Xu. You may begin.

Helen Xu, IR Director and CEO

Thank you, operator. Good morning, ladies and gentlemen, and good evening to all those joining us from China and the U.S. I would like to welcome all of you to Gulf Resources Third Quarter 2023 conference call. I am Helen Xu, the IR Director and CEO of the company; Mr. Xiaobin Liu will also join this call today. I would like to remind all our listeners that in this call, certain management statements during the call will contain forward-looking information about Gulf Resources Incorporated and its subsidiary 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 conditions in the PRC, 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 existing and new competitors from the bromine and other oilfields and power production chemicals, changing technology, the ability to make future bromine assets, and other factors beyond its 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 revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes the 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 management's estimates as of today, the 20th of November 2023. For those of you unable to listen to the entire call at this time, a replay will be available on the company's website, and the call is also accessible through the website and link that is available through our website. Please locate our press release issued earlier for the details. Before focusing on the major contents of this conference call, I would like to briefly discuss the proposed change in our chairmanship. Mr. Yang founded our company, and Mr. Liu joined the company in 2007 and became CEO in 2009. Mr. Liu, who has investments in many companies in Sichuan Province, has decided not to stand for reelection as Chairman at the annual meeting on November 30, 2023. The board has nominated Mr. Liu to serve as our next Chairman. We would also like to refer to a recent press release discussing our flood prevention plan. As we issued earlier that in the year 2018, Shouguang city experienced the impact of a typhoon regarded as one of the most destructive typhoons in history, which resulted in the region receiving 14.9 inches of rainfall, and the overflow of three major surveys along the Miho River led to extensive flooding in farmland, residential routes, and industrial factories. All of the company's bromine factories, crude salt tanks, and mining areas were seriously impacted. The company incurred substantial expenses amounting to more than $40 million, including write-offs and costs for road repairs, equipment replacement, salt pan reconstruction, and redrilling of flooded wells. A year later, Typhoon Lekima struck Shouguang city again, surpassing the destructive force of its predecessor. Once again, the company had to spend more than $6 million to rectify the aftermath, involving road repairs, equipment replacement, salt pan reconstruction, and flood mitigation. To mitigate the risk of similar damages in the future, the company has commenced a flood protection initiative. Our strategy involves the renovation of the channels of four major rivers within our mining area, combating the tributary of the Miho River. The aim is to prevent flooding that could damage the wells, aqueducts, and crude salt pans at our plant. The projected expenditure for this initiative amounts to approximately $50.5 million. As of this quarter, ending September 30, 2023, the company disbursed approximately $15.15 million for the initial phase of this project. Apart from reducing risk to surrounding regions, we anticipate there are three notable advantages from this flood prevention plan. It is expected to enhance the probability of opportunity approvals to reopen factories number two and number ten. Secondly, it will enable the drilling of additional wells across our five operating factories. Thirdly, it mitigates the risks and associated expenses related to future stoppages caused by flooding. Given the company's current financial position and its substantial cash resources, the company believes that the flood protection plan will yield favorable returns over the long term. So now let's turn to the results of the third quarter and the nine months. During the third quarter, sales declined by 74%. Net income after tax was a loss of approximately $1.8 million compared to approximately $9.0 million. Net loss per share was $0.17 compared to a net profit of $0.86. Shareholders' equity was approximately $260.8 million or $24.99 per share. Total results for the three months ended September 30, 2023; in the third quarter of 2023, revenue only declined by 74% to approximately $5.9 million from approximately $22.9 million. Specifically, bromine revenues declined by 75% to approximately $4.9 million from approximately $19.8 million. The decrease in net revenue was primarily due to the reduction in the volume of tons sold, which was down 43%, and a 57% decrease in the average selling price of bromine. During the quarter, the average selling price was $3,237 compared to $7,474. As of November 16, 2023, based on sensors.com data, the price of bromine has seen an increase of approximately 7.4% to $3,477. The decrease in the selling price of bromine reflects both economic weakness in China and excess inventory. Following the aftermath of COVID, the reduction in tons sold reflects the company's strategic decision not to engage in aggressive competition, aiming to safeguard the long-term value of its resources. Additionally, crude salt revenues declined by 70% due to an 18% decline in pricing and a 63% decrease in tons produced. As crude salt is a byproduct of bromine, the decreased production of bromine also resulted in a reduction in the production of crude salt. There were no revenues generated from our chemical products business yet, while our natural gas business obtained approximately $68,000 in revenue through equipment leasing. Gross profit for the quarter amounted to a loss of $580,000 compared to a profit of approximately $14.5 million in the previous year. Specifically, our bromine business suffered a gross profit loss of approximately $1.1 million compared to a profit of $12.5 million, while crude salt achieved a gross profit of $511,500 compared to $1.9 million previously. The company incurred direct labor and factory overhead amounting to approximately $1.0 million during the plant shutdown, compared to approximately $1.9 million previously. General and administrative expenses were approximately $762,900 compared to $584,500 previously. Consequently, our loss from operations amounted to approximately $2.3 million, compared to a profit of approximately $11.9 million in the prior year. The net income after tax was a loss of approximately $1.8 million, compared to a profit of approximately $9.0 million, and the net loss per share was $0.17 compared to a net profit of $0.86. Results for the nine months ended September 30, 2023, revenues over nine months declined by 51%, a decrease of approximately $23.2 million from approximately $47.5 million. Specifically, bromine revenue also fell by 51% from approximately $20.7 million to approximately $41.9 million. Notably, there was a 9% increase in bromine costs, reflecting the addition of section number eight. However, despite this, the gross profit margin decreased to 7%, down from 57%. Throughout the nine months, the average selling price of bromine was $3,493 per tonne compared to the previous record of $7,674 per tonne. Revenues from crude salt also declined by 51% to approximately $2.3 million from approximately $5.5 million. While the production volume declined by 31%, no revenue was generated from the chemical business yet. Conversely, revenue from natural gas increased by 13% from the equipment leasing. The gross profit for nine months totaled approximately $2.7 million compared to $26.4 million. Specifically, the bromine business accrued a gross profit of approximately $1.5 million compared to approximately $27.7 million in the previous period. Our crude salt business achieved a gross profit of approximately $1.0 million compared to approximately $2.6 million. Meanwhile, the chemical business recorded no gross profit, and the natural gas business marked a gross profit of approximately $150,000 compared to approximately $132,600 previously. The company incurred direct labor and factory overhead during the planned shutdown amounting to approximately $4.5 million compared to approximately $6.0 million in the previous period. General and administrative expenses were approximately $2.3 million compared to approximately $3.4 million previously. As a result, our loss from operations amounted to approximately $4 million compared to a profit of $17.0 million previously. Net income was a loss of approximately $3.0 million, compared to a profit of $12.7 million previously. The net loss per share was $0.29, compared to a profit of $1.22. Cash flow during the nine months ending September 30, 2023, we generated approximately $9.9 million from operating activities and invested approximately $15.2 million, primarily in our flood protection program. As for our balance sheet, as of September 30, 2023, our cash balance was approximately $103.8 million, based on the shares issued and outstanding as of September 30, 2023, that translates to $9.95 in cash per share. The net cash, which is cash minus our liabilities, was $8.21 per share. Working capital was approximately $10.07 per share. Shareholders' equity was approximately $260.7 million or $24.99 per share. So now let me turn the call over to Mr. Liu for his additional commentary.

Xiaobin Liu, CEO

Helen Xu, IR Director and CEO

Here is the remark from Mr. Xiaobin Liu, the company's CEO. First of all, welcome all of you to attend the Gulf Resources Third Quarter 2023 Earnings Conference Call. In the third quarter, our results were adversely impacted by the diminished price of bromine. We attribute this drop in price to two major factors. First, the sluggish state of the construction market in China led to reduced purchases of bromine for fire retardant applications. Secondly, the lingering impact of the COVID pandemic resulted in decreased demand for bromine in medical instruments and sterilization. Despite these challenges, our company remains optimistic about the long-term equilibrium of bromine's demand and supply. We anticipate a resurgence in the demand for bromine-based products, and emerging products such as zinc bromine batteries and new medical products present opportunities for sustained demand growth. However, the supply of bromine continues to be constrained. Notably, based on 2022 production data, we estimate that over 75% of global bromine production is concentrated in regions like Israel, Jordan, and Ukraine, which are currently facing military conflicts or wars. We adopt a prudent strategy while navigating the market. We have held back seeking approvals to open section number two and section number 10 as we await improved pricing. Additionally, we have postponed the procurement of the final equipment for our chemical factory, awaiting clearer insights into opportunities for innovative bromine products. We have scaled back our sales, anticipating higher returns from future bromine sales. Since the end of the quarter, we have observed a gradual but consistent uptick in the market price of bromine. We are monitoring the events in the Middle East, recognizing that any disruption in the Dead Sea region could certainly alter the market dynamics. Looking ahead, we are ambitious in our plan to return to profitability in the upcoming fourth quarter. Moreover, we aim to progress with the opening of our chemical factory and obtaining approvals for our remaining two bromine factories and ideally resume our natural gas exploration in Sichuan Province. Now we are open for the question-and-answer section.

Operator, Operator

Thank you. The first question comes from Alan Perkaca, a private investor. Alan, please proceed.