Earnings Call Transcript - GURE Q1 2023

Operator, Operator

Good morning, everyone, and welcome to Gulf Resources First Quarter 2023 Earnings Conference Call. At this, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Helen Xu, Director of Investor Relations. Helen, over to you.

Helen Xu, Director of Investor Relations

Thank you, Jenny. Good morning, ladies and gentlemen, and good evening to all those of you joining us from China. We would like to welcome all of you to Gulf Resources first quarter 2023 conference call. I'm Helen Xu, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, will also join this call today. I'd like to remind all our listeners that in this call, certain management statements will contain forward-looking information about Gulf Resources Incorporated 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 the COVID-19 pandemic outbreak, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, and additional competition from existing and new competitors in bromine and other oilfields and power production chemicals, changes in technology, the ability to make future bromine assets, and various other factors beyond our 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 that the expectations reflected in those forward-looking statements are reasonable, but there can be no assurance that such expectations will prove to be correct. Furthermore, any reference to the company's future performance represents management's estimates as of today, the 16th of May 2023. For those of you unable to listen to the entire call at this time, a replay will be available at 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. So first of all, we will review the results for this quarter. And then I'd like to turn the call over to Mr. Liu for his comments. It could be easy for shareholders to look at our results and think this was the best quarter. However, we believe this quarter actually shows the strength of our business model and the significant opportunities for our company. In this quarter, our chemical factory and Natural Gas facilities were still closed due to the winter shutdown, resulting in a loss of one month of production. Bromine prices plunged by the highest percentage we can remember, and crude salt prices were also down sharply. Things could not get much worse. Yet despite these problems, we only lost $558,000. Excluding the costs of our closed factories and costs during the plant shutdown of $2.4 million, we would have actually earned a profit. We generated almost $5 million in cash, concluding with a cash position of almost $116 million or $11.10 per share. When bromine prices go back up, which we expect they will, when our new chemical factory opens, and when we begin to produce natural gas and brine in Sichuan, which we believe will happen, we think investors will be very pleased with the returns we generate. With our plans to develop export businesses in chemicals, we will have the financial flexibility to take actions to increase our shareholder value. We are looking forward to this exciting future. The revenues for this quarter are approximately $9.3 million, representing an increase of 4% over the same period in 2022. The net loss was approximately $557,000, compared to a net loss of $119,900 for the same period last year. Earnings per share featured a loss of $0.05 versus a loss of $0.01 for the same period last year. Cash flow was approximately $4.8 million. Ending cash was $115.8 million. Cash per share stood at $11.10. Net cash was $9.09 per share, and shareholders' equity was $26.35 per share. Now let’s look at our business segment. First, let's analyze our bromine and crude salt segment. For the three-month period ended March 31, 2023, net revenue for the bromine segment was approximately $8.5 million compared to $8.1 million for the same period last year. This increase was attributed to a 101% increase in tonnes sold and a 48% decrease in average selling price. The gross profit margin was 27%, compared to 52% for the same period last year. The decrease in gross profit margin was primarily attributable to the lower average selling price of bromine. In that same period, cost of net revenue was approximately $6.1 million compared to $3.9 million last year. The loss from operations was $409,700 compared to approximately $1.3 million for the same period last year. The net revenue for crude salt was $748,700 and $754,000 for the periods of 2023 and 2022, respectively. This increase in net revenue for crude salt was due to a 32% increase in tonnes sold and a 25% decrease in average selling price. Cost of net revenue was approximately $620,000 versus $629,600 for the same period last year. Crude salt earned a profit of $42,930 compared to a loss of $521,921 for the previous year’s same period. In May 2022, we separated bromine and crude salt business to comply with government regulations, requiring different cost allocations. The net impact was an increase in the cost allocation to bromine relative to crude salt. Next, let's review the chemical segment. There was no revenue in chemicals. Loss from operations from our chemical products segment was approximately $417,900 for the three-month period ended March 31, 2023, compared to a loss of approximately $513,000 in the same period last year. Regarding our natural gas segment, there was no revenue from production because we did lease some of our equipment. As a result, income from operations from our natural gas segment was approximately $12,700 for the same period in Q1 2023, compared to a loss of approximately $26,700 for the same period in 2022. Now, let’s consider our business and strategic outlook for this year. Initially, the bromine and crude salt prices dropped substantially this quarter due to three major reasons. Firstly, the economy's closure resulted in a sharp downturn in domestic demand and a steep drop-off in export sales and downstream products. Additionally, many individuals were home during the COVID-19 pandemic, resulting in lower need for disinfectants. It seems companies manufacturing disinfectants did not anticipate the economic shut down, leading to excess inventory. We believe bromine prices have bottomed and may rise from current levels. The supply and demand dynamic remains advantageous. Some factories have been permanently closed, the economy is improving, and exports are beginning to return to normal. At this time, we are unable to project the timing or extent of the price rebound; however, we are optimistic about the opportunities our bromine mine will provide. The company is working with local governments regarding efforts to potentially open one of its two closed factories in 2023. For the operating factories, the company has completed a substantial portion of its capital expenditures, with expenditures for bromine and crude salt in 2023 limited to basic maintenance. Regarding the chemicals segment, the company is still awaiting the arrival of customized machinery, mainly involving environmental compliance equipment, including waste gas treatment, solid waste treatment, and wastewater treatment equipment. The remaining equipment is expected to arrive by the second or third quarter of 2023. Once the equipment arrives, we will inform shareholders and post photos on our website. The company believes that once all equipment is in place, installation will take approximately three to four months, along with an additional two to three months for testing. Afterwards, we will be in a position to apply for environmental and safety approvals, which, following approval, will take another four months for trial production, before we may start commercial production. For all the chemical export projects, Mr. Naihui Miao, our COO and Director, has been appointed as Chairman of our task force to explore export opportunities for chemicals. The management team has started researching which products and markets present the best export opportunities. The company will pursue these opportunities to enhance financial flexibility and increase shareholder value. In selecting specific products and markets, we must also consider which products can be produced with high quality at our new chemical factory. Regarding our Sichuan Province project, as previously disclosed, the company plans to advance its applications for natural gas and brine project approvals with relevant government departments, following the finalization of government planning and resource allocation. Due to this complexity, we are exploring the option of a joint venture with the Daying County government for extracting bromine water and related products, as this joint venture could help alleviate some government-related challenges. We will keep investors updated on our progress. Now, I will turn the call back to Mr. Liu for his comments on this quarter.

Xiaobin Liu, CEO

First of all, welcome all of you to attend the first quarter 2023 earnings conference call. The sharp decline in the price of bromine significantly impacted our earnings this quarter. We expect these prices have hit bottom and may rise from here. Nonetheless, despite the decline, we generated free cash flow and increased our cash position. As of the close of business on May 12, 2023, our cash was almost four times our market capitalization, and our book value per share was almost nine times our market capitalization. We believe bromine prices will rebound, and we will strive to open one more facility this year. We are very optimistic about the opportunities for our chemical business. In 2015 and 2016, our chemical business generated income from operations of $33 million and $25.5 million, respectively. We believe our new chemical facility will be profitable, and we also expect to obtain permission to drill for natural gas and brine in Sichuan Province. While there is no certainty, our discussions with local government representatives are proceeding well. Finally, the company has established a task force this year, led by Mr. Naihui Miao, the company's COO, to identify potential opportunities for the export of our chemical business so we may gain the financial flexibility to undertake critical actions and enhance our shareholder value.

Helen Xu, Director of Investor Relations

So, operator, can we start our Q&A section for today?

Operator, Operator

No problem, Helen. At this time, we're opening the floor for questions. We don’t appear to have anyone in the queue at the moment, Helen. I can let you know if someone comes in.

Helen Xu, Director of Investor Relations

Okay. Thank you, operator. Hi operator, do you mind just asking once more? If there are no questions, we can close the call for today.

Operator, Operator

No problem. We don’t appear to have anyone in queue, Helen.

Helen Xu, Director of Investor Relations

Okay. I think that’s all for today. Thank you very much, Jenny, and thank you all for attending the call today. Have a good night, and good day. Wish you all well. Thank you. Goodbye.

Operator, Operator

Thank you very much. This does conclude today’s conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.