Earnings Call Transcript
GULF RESOURCES, INC. (GURE)
Earnings Call Transcript - GURE Q4 2020
Operator, Operator
Greetings. Welcome to Gulf Resources 2020 Annual and Fourth Quarter Earnings Conference. Please note that this conference is being recorded. At this time, I'll turn the conference over to Helen Xu. Helen, you may now begin.
Helen Xu, IR Director
Thank you, operator. Good morning, ladies and gentlemen, and good evening to all those of you joining us from China. We'd like to welcome all of you to Gulf Resources Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. My name is Helen, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, will also join this call today. I'd like to remind you all that during this call, certain management statements will contain forward-looking statements. Forward-looking information about Gulf Resources Incorporation and its subsidiaries, business and products within the meaning of Rule 175 on the Securities Act of 1973 and Rule 3b-6 under the Securities Exchange Act of 1934, 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 conditions in the PRC, 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, additional competition from existing and new competition in the bromine and other oilfield and chemicals, changing technology, the ability to make future branding bromine assets, and various other factors beyond control. All forward-looking statements are expressly qualified in their entirety by the 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 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 9th of April 2021. 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 available through our website. Please look at our press release issued earlier for details. Before we review the fourth quarter and the full year, which I believe have covered all of the questions from the company's investors and shareholders, I'd like to turn the call over to Mr. Liu for some introductory comments.
Xiaobin Liu, CEO
Yes. Hi.
Helen Xu, IR Director
[Interpreted] Thank you, Helen. The past 3 years have been extremely difficult for our company. We had to comply with all the new government regulations, which required us to rectify all of our bromine factories and construct a new chemical plant. Shortly after the first of our bromine and crude salt facilities opened, we were hit by the most destructive typhoon in Chinese history. This has not only forced us to rebuild our bromine and crude salt facilities and drill new wells and aqueducts, but it also forced the government to implement full control due to another environmental aspect. Then we had to face the COVID pandemic.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] Now after 3 years, we have finally reported a profitable quarter and generated positive cash flow from operations. We did this despite our bromine and crude salt factories being in a seasonally slow period due to cold temperatures and during a quarter in which the government enforced an early closure for environmental reasons.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] As we look to the future, we are becoming increasingly optimistic. The Chinese economy is recovering. Bromine prices continue to increase, and our opportunity costs mean that many of our smaller competitors will never be able to reopen. We also expect to resume the approvals for the remaining bromine and crude salt factories in the second half of 2021. However, there is no assurance that we will be able to get the necessary approvals to operate those factories from the government. The construction of our new chemical factory is on schedule. We expect this factory will yield higher net profit margins as the company plans to focus more on higher-margin pharmaceutical intermediate products. The company is optimistic about its project in Sichuan province and plans to proceed with its application for the natural gas and brine projects once the government planning has been finalized.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] In the past 2 years, we have spent over $60 million on property, plant, and equipment, yet our balance sheet remains in excellent shape. We have over $94 million in cash and no debt. Although the closure for Chinese New Year will impact our first quarter, we believe we will be able to generate profits and cash flow in future quarters. Now let me turn the call back to Helen to review the fourth quarter and the fiscal year 2020 results. Thank you, Mr. Liu. So now let's look at the fourth quarter 2020 results first. In the fourth quarter, Gulf Resources had revenues of approximately $11.8 million. Cost of revenues were $6.7 million. Total expenses were approximately $7.97 million. We earned a profit of $808,000 before taxes. Our loss for the 12 months was 4% less than our loss for the 9 months, meaning that we earned 4% in the fourth quarter of 2020. These results also include approximately $1.3 million of direct labor and factory overhead incurred during the planned shutdown. This means they were attributable to operations that were not yet open. If this total is added back to our income, our operating businesses earned approximately $2.2 million during the fourth quarter. Furthermore, our operating factories had to close on December 25, 2020, for environmental reasons, meaning we lost one week of operations. Our bromine business earned $3.5 million in the quarter. This was offset by a loss of approximately $527,000 in crude salt. As we have noted, the crude salt business is normally weak in the winter because it is difficult to mine crude salt in low temperatures. Our chemical and natural gas businesses, which were not operational, generated losses of $106,000 and $54,000, respectively. In the fourth quarter, we generated cash from operations of approximately $6 million compared to a negative of approximately $3 million in Q4 2019, an improvement of approximately $9 million over the previous year. As the Chinese economy continues to recover and production has resumed after the Chinese New Year, the price of bromine has continued to increase based on the monthly prices from relevant sources. The price of bromine on April 7, 2021, was RMB 36,667 per ton. This is an increase of 25% from Q2 2020, 30.9% from Q3 2020, and 10.5% from Q4 2020. Since our costs are relatively fixed, this type of price increase could significantly increase the company's profitability. Now let's look at the fiscal year 2020 results. In year 2020, the company generated revenue increased by 166% to approximately $28 million. Net profit increased 70% to approximately $8.8 million. Our loss from operations declined by 58% to approximately $10.2 million. The loss included approximately $8.2 million of direct labor and factory overhead incurred during the plant shutdown. These losses were attributable to businesses that were not operating. General and administrative expenses declined by 23% to approximately $10.2 million. Our loss from operations declined by 58% to approximately $10 million. Our net loss declined by 67% to approximately $8.4 million. We lost $0.87 per share compared to $2.73 per share in 2019. Cash flow showed significant improvement. We generated net cash from operations of approximately $9.3 million compared to a loss of $15.3 million in 2019. During the year 2020, the company spent approximately $21.7 million on property, plant, and equipment. In year 2019, the company spent approximately $60.6 million on PPE. This includes major investments in our new Yuxin chemical factory, new bromine and crude salt factory, and dozens of newly drilled wells and aqueducts. The company's balance sheet remains strong. As of December 31, 2020, cash equaled approximately $94 million. Cash per share equaled $9.43. Net-net cash, which includes cash minus our liabilities, equaled approximately $77 million. The net-net cash per share equaled approximately $7.72 per share. Current assets equaled approximately $107.3 million. Current liabilities equaled approximately $7.1 million. Working capital equaled approximately $100.2 million. Working capital per share equaled approximately $10.02. Shareholders' equity equaled approximately $277 million. Shareholders' equity per share equaled approximately $27.71. Now let's look at the updates on operations by segments. This is an important discussion which will cover most of the questions from the company's investors and shareholders. Firstly, let's look at bromine and crude salt. The company is very optimistic about the opportunities in bromine and crude salt segments, particularly due to strong price increases since the third quarter and through the beginning of April. We expect prices to remain elevated because demand is increasing, especially with COVID-19, as bromine can be widely used in contamination, and there are few competitors in the market. If bromine prices remain at this level, we should have a good year for 2021. Because our factories were closed for the first 6 weeks of the first quarter and because we needed a few days to get our factories fully operational, our first quarter may be the lowest quarter of the year. However, we have seen excellent demand, and we believe we will see strong quarters for the remainder of the year. The company is working with local authorities in Shandong Province, Shouguang City, to finalize issues related to our 3 remaining bromine and crude salt factories. At this time, the major issues appear to relate to securing land for the company's crude salt accounts and constructing aqueducts to move water to areas away from population centers while following the government's further control policy because the government is still considering which modifications they would like the company to make. From the company's judgment, most of the modifications will not be that complex. However, we cannot be certain when the approvals will come, as the timing of the new factories is subject to government-accepted standards. We think excellent progress is being made, but the company has to receive permission for the bromine and crude salt factories in the second half of 2021. However, there is no assurance it will obtain these approvals from government. In terms of 2021, we expect our utilization to be higher than 25% in year 2020. We are not making projections at this time but will do so when we release our first-quarter results, which will be in approximately 1 month. As we have indicated, we expect bromine prices to remain high. As an example, on April 2, bromine prices were RMB 35,772. Two days later, they were RMB 36,222. Yesterday, they reached RMB 36,667. As we have noted, the Chinese economy is recovering. Bromine is a powerful disinfectant, and there is significantly reduced competition as many competitors have not been able to conduct their rectifications. Now secondly, let's look at the chemical segment. The company is also making excellent progress in the construction of the Yuxin chemical factory. We expect to have construction completed by the second quarter of year 2021. At this point, the company will restore machinery and test equipment through the remainder of the year, and we expect to begin trial production by the start of 2022. Our current cost estimates remain around $60 million, excluding the land lease for this new chemical factory. We expect this factory to produce a higher net profit margin as we plan to focus more on higher gross margin pharmaceutical intermediate products. As a reference, our 2 factories had operating earnings averaging $29.2 million from 2015 to 2016. The last 2 years prior to the shutdown, we were not yet in a position to make projections for 2020. The key issue is how quickly the company will be able to ramp up production. However, with less competition and more demand, we are optimistic about this new chemical factory. The company will continue to post new photos of the progress of its chemical factory on its website. At last, let's look at the Natural Gas segment. We are also committed to our natural gas and brine projects in Sichuan. Petro China has made one of the largest natural gas discoveries in Chinese history at the same time as our well. We are waiting for Sichuan Province to finalize all its planning rules regarding natural gas and brine. However, we are encouraged by our discussions and believe in a recent ruling allowing private companies to participate in this project. We are in a slightly different position than other companies because our approvals encompass both natural gas and brine. While Sichuan has huge natural gas deposits, it also has the most concentrated brine reserves we have encountered. Our plan is to drill for both products at the same location. Once we receive approval for our projects, we may submit applications for 2 additional wells. Furthermore, once we receive approval, we may consider partnering with other companies or enterprises, such as Petro China. Finally, we have a message for our shareholders. The company has worked very diligently to respond to the requests of our shareholders. We have updated our website, and please take a look at the changes and updates we have provided. We will continue to make improvements to ensure all information is current. We also posted a new letter from the Chairman. Furthermore, we will commit ourselves to planning investors' events; at this point, travel is still difficult. We will also consider expanding our shareholder base by reaching out to institutional investors as our market capitalization increases. As all our factories, including the new chemical factory, open, we should be in a position to generate free cash flow. Once we are in this position, we can consider how to recognize this free cash flow to benefit our shareholders. We understand that right now, the focus is on opening plants and building a new chemical factory. But what steps are you prepared to take to help make the share price more reflective of the company's value? The company will also provide our shareholders with a 5-year plan in the near future once all businesses are back on track. We appreciate your support and hope to have continued positive news. Lastly, the company management would like to thank our shareholders for their patience during this extremely hard period. In September 2020, we could not have anticipated how many difficult problems we would have to address. Now, however, we have excellent visibility towards the future, and what we see is very exciting. We believe we are in a position to produce record earnings for our company once all of the company's facilities are back in operation.
Operator, Operator
Can we open up for the Q/A section? [Operator Instructions] Our first question is coming from the line of [indiscernible] Research.
Unknown Analyst, Analyst
You say the factory will have higher margins, the chemical factory will have higher margins. But will the factory have higher revenues as well?
Helen Xu, IR Director
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] We feel responsible, and we believe that, yes, we will focus on higher margin products. We will have higher net profit margins.
Unknown Analyst, Analyst
Okay. So you'll have higher net profit margins? And then -- okay. And then the other question is, I know the company -- you just said the company is focusing on rebuilding factories before buying back shares and anything, but is the company allowed to buy back shares? I know a while ago, you guys weren't allowed to buy back shares. Are you allowed to now?
Helen Xu, IR Director
I think we didn't state very clearly what we will do, but we mentioned that once the company considers how it can utilize free cash flow to benefit shareholders in the future.
Unknown Analyst, Analyst
Okay. Yes. But are you just -- are you allowed to buy back shares?
Helen Xu, IR Director
Okay. Okay. Thank you. I will ask again.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] As we stated, as all our factories, including the new chemical factories, opened, we should be in a position. However, we need free cash from these chemical factories and for natural gas and for our bromine factories to resume operations. At this point, we have not submitted our application yet to the government for shares buyback, so we are uncertain about your answer based on current government policy.
Operator, Operator
Our next question comes from the line of a private investor.
Unknown Attendee, Investor
Yes. Congratulations on returning to profitability.
Helen Xu, IR Director
Thank you.
Unknown Attendee, Investor
Is there any timetable for decision to build additional wells in Sichuan Province?
Helen Xu, IR Director
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] John, here is the response from Mr. Liu: the company is still waiting for the government to finish its plans. The Sichuan Province government is doing its first round of mining resources planning for the whole province. Once the government finishes its plan, then the company can continue with its application and submit it to the relevant government department for approval. After that, we can have a more specific and clear timetable on the company's plan. Currently, we cannot provide a specific timetable until the government completes their work.
Unknown Attendee, Investor
You seem to be in a similar position with regard to your unopened factories that you're waiting for the government or the province to make...
Helen Xu, IR Director
Yes.
Unknown Attendee, Investor
Are there any -- they're...
Helen Xu, IR Director
No, it's not a decision -- it's not a decision. It's that we are doing the planning for the whole province regarding its mining and land resources.
Unknown Attendee, Investor
Yes. Usually, there's some schedule for the government to make a decision. You don't have such a schedule?
Helen Xu, IR Director
Just wait a minute; I have to check with Mr. Liu.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] Okay. Based on our understanding, the plan is that this year, 2021, the cities and accounts will be submitting their plans to provincial governments in Sichuan Province, and the provincial government may finish its plan by the beginning of 2022. At that time, the company may submit its application for further approvals and additional wells.
Operator, Operator
Our next question is from the line of an investor.
Unknown Analyst, Analyst
Yes, my question is, what is the development plan for the natural gas? Will you try to develop that on your own, or will you bring in one of the SOEs as partners?
Helen Xu, IR Director
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] This is a long-term planning discussion. The company may consider partnerships with other enterprises or state-owned enterprises or separating the natural gas projects into a different company as part of our long-term strategy. However, the most important aspect is that we need to wait for the government to finish its plan. Then the company can secure additional approvals for new wells.
Operator, Operator
Next question is from the line of a private investor.
Unknown Attendee, Investor
I've been a shareholder for the past 10 years on and off. My question is what measures the company is planning to take in order to meet the most stringent auditing requirements set by the Securities and Exchange Commission?
Helen Xu, IR Director
Sorry, I think I did not get you clearly. Do you mind just repeating your question?
Unknown Attendee, Investor
Yes. What is the company's long-term or short-term plan in order to meet the stringent auditing requirements set by the Securities and Exchange Commission? That's the main concern from the shareholder's perspective.
Helen Xu, IR Director
Okay. Do you mind if I just repeat your question? So you mean what's the company's long-term and short-term plan to comply with the SEC rules regarding the mix of the company?
Unknown Attendee, Investor
Yes.
Helen Xu, IR Director
Okay. Thank you. [Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Unknown Attendee, Investor
But that didn't directly answer my question. Your CEO, Mr. Liu, mentioned what he was trying to do to increase shareholder value. But does he understand the requirements set by the Securities and Exchange Commission?
Helen Xu, IR Director
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] Firstly, the company's operating business needs to perform well. As Mr. Liu mentioned, every business segment must recover to increase shares. Of course, this is what we want to do best for our investors. We will follow the SEC rules strictly and ensure our filings are timely. We will continuously learn to meet the requirements of the SEC and NASDAQ. This entire process will be aided by the company’s legal counsel and closely monitored by the auditors.
Unknown Attendee, Investor
What message are you going to pass on to the investors? I know some of my Chinese friends are concerned about whether the company is meeting the stringent auditing requirements set by the SEC.
Helen Xu, IR Director
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Unknown Attendee, Investor
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Unknown Attendee, Investor
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Unknown Attendee, Investor
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Unknown Attendee, Investor
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Unknown Attendee, Investor
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
[Interpreted] For the fairness of all listeners, I want to give a brief translation between Mr. Liu and Mr. Kim. Firstly, they discussed when the company's bromine operations will resume and the scale it will reach. Mr. Liu stated that once our remaining bromine and crude salt companies are operational, it will be at 2 out of 3 compared to the operations before the factories shutdown. By next year, the company can achieve this target. The chemical factory is expected to resume trial production by the end of next year. Mr. Kim asked why bromine and chemical product prices are increasing in China and what the reasons are. Mr. Liu explained several factors. The first is that the Chinese economy is recovering, leading to higher demand for bromine and basic chemical materials. The second reason is that there are fewer competitors due to many bromine and chemical factories being shut down due to rectification. Lastly, the prices of basic chemical materials are rising in China. Mr. Kim inquired whether bromine prices were solely dependent on the company’s production scale. Mr. Liu responded that it does not solely depend on the company; bromine prices are determined by market demand. Lastly, Mr. Kim asked about Gulf Resources' market share in the bromine industry. Last year, the company held 4-5% of the market share for bromine. When both the bromine and crude salt factories resume operations, it may reach 6-7% market share. This is a brief translation of the conversation between Mr. Liu and Mr. Kim for your information.
Operator, Operator
There are no additional questions at this time, Ms. Xu.
Helen Xu, IR Director
Okay. Thank you. [Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
Thank you. That's all for today. Thank you for the call. Have a good night, and enjoy your day.
Operator, Operator
Thank you. This will conclude today's conference.
Helen Xu, IR Director
Thank you.
Operator, Operator
You're welcome, and you may disconnect your lines at this time. Thank you for your participation.
Helen Xu, IR Director
Thank you.