Earnings Call Transcript
GULF RESOURCES, INC. (GURE)
Earnings Call Transcript - GURE Q2 2020
Operator, Operator
Hello and welcome to the Gulf Resources 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Helen Xu. Please go ahead, Helen.
Helen Xu, IR Director
Thank you, operator. Good morning, ladies and gentlemen, and good evening to all of you joining us from China. We'd like to welcome you to Gulf Resources’ second quarter 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 our listeners that during this call, certain management statements will contain forward-looking statements and information about Gulf Resources, Incorporation, 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, considering 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 developments and production capabilities, shipments to end customers, market expectations of new and existing products, additional competition from our existing and new competitors in the bromine and other chemical productions, changing 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 these cautionary statements 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 these 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 17th of August, 2020. For those of you unable to listen to this 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. So please locate our press release issued earlier for the details.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
Hi, thank you very much for attending the call regarding the 2020 second quarter earnings release conference call. So we had to close all of our facilities, so the government could not move ahead on the plans to improve the environment. Just as we were getting some of our important and crucial operations back online, we were hit by one of the most destructive typhoons in Chinese history. Then we were impacted by the COVID-19 pandemic, which caused a delay in opening our facilities and affected both of our customers.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
Okay, this caused a transformative period for our company. The commercial production sites #1 and #7 opened in April 2020, and sections #4 and #9 in May 2020. We received approval to begin construction of our new chemical factory and commenced formal construction in June 2020. PetroChina made one of the largest discoveries of natural gas in Chinese history in an area very near the company's existing well in Tianbao Town of Daying County in Sichuan Province, which is only two kilometers away from our existing well.
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
Okay, while our earnings were small and we shipped a lot during the second quarter of 2020, we were extremely optimistic that we will be able to scale our weaknesses and return to profitability in the near future for several reasons. Firstly, it has tested the mill, our four bromine and crude salt flagship, and we will be gearing up production. We hope to achieve good production in the fourth quarter of 2020. We expect to receive permission to open our remaining bromine factories by the end of this year or the beginning of next year. We believe our new chemical factory, which will focus on pharmaceutical intermediate products with higher margins, will create strong opportunities for us to produce natural gas and bromine production in Sichuan province. We appreciate the support of our investors through this long process. We will provide you with a financial projection of a three to five-year plan and increase communications as we return our company to profitability. So now, I will hand the call back to Helen. Thank you, Mr. Liu. I will provide an update on the company's financial and operating results, and we will cover the questions we have received from our investors. Even though our financial results in the second quarter may initially look weak, we are very optimistic about our progress. Firstly, during the second quarter of 2020, net revenues declined 11% to approximately $5.4 million compared to the results from 2019. This decrease was mainly due to a lower volume of production and the lower selling price in the bromine segment. During this quarter, we produced approximately 1,280 pounds of bromine in our first factory, with total production volume reaching between 215 to 295 pounds. Overall, we produced approximately 16% of our total capacity. For the three months ended June 30, 2020, our gross profit margin for our bromine segment was 5%, which represents a 14% decrease compared to the same period in 2019. I want to highlight that two major factors impacted this margin in bromine: firstly, bromine prices declined from about $4,427 to $3,672 per ton, which caused a decrease in domestic volume and a lack of exports mainly due to the COVID-19 pandemic. However, the current price is not far below the price in 2017 and 2016, and it is still significantly above the prices in 2015 and 2014, which were $3,177 and $2,863 in the same quarter of previous years. Even though our bromine prices were profitable at each of these levels, now that the Chinese economy is recovering and many of our downstream customers are beginning to reopen, we expect the selling price of bromine to stabilize and then increase. Even if bromine prices remain at their current levels, we should be able to generate profits as our production improves. Additionally, there have been substantial declines in margins due to approximately $1.1 million in costs from labor and overhead incurred during plant shutdowns added to the cost of revenues. Our factories also faced costs at low production levels, meaning substantial operating costs along with depreciation and amortization despite limited production. Now let's look at our planning cost actions. As Mr. Liu noted earlier, we received approval to begin construction of our new chemical factory and commenced formal construction in June 2020. As promised, the company has posted photos of the construction process for investors to view on our website. The construction is expected to take approximately one year with an additional six months for installation and testing. The company expects to begin trial production at the beginning of 2022. While this factory will be smaller than the combined other two factories, we expect it to yield higher net profit margins as we plan to focus more on higher margin pharmaceutical intermediate products. The estimated cost of the chemical factory, including land, is $60 million, of which we have spent $16.5 million on land design and initial construction. Last, let me touch on the natural gas segment. During the quarter, PetroChina made one of the largest discoveries of natural gas in Chinese history in Tianbao Town in Daying County of Sichuan Province, which is the same county where our company has several wells. With PetroChina's discovery, we believe the government will focus more on finalizing the planning for the exploration and exploitation of the new wells starting in this area. Once the planning has been finalized, we plan to proceed with our applications for natural gas and brine project approvals. While we have not had any conversations with PetroChina, we believe we may be able to collaborate as it builds its infrastructure, including pipelines in Tianbao Town of Daying County. Our company remains very optimistic about the long-term potential of this project. Now let's look at this quarter's financial results. During the quarter, the company sustained a loss from operations of approximately $2.95 million compared to a loss of $1.2 million in the previous year. The net loss in the current quarter was $2.2 million, compared to a net loss of $738,000 in the same period in the previous year. The loss per share was $0.24 in the current quarter compared to a net loss per share of $0.08. The comprehensive net loss, including the impact of currency translation, was $2 million compared to a net loss of $10.2 million in the same period last year. Year-to-date, the company generated positive cash flow from operations of $1.2 million compared to cash flow from operations of $6.8 million last year. The company purchased $9.9 million worth of property, plant, and equipment in the first half of 2020, compared to $11.5 million in the same period last year. Now let's look at the balance sheet. Most of the factories were closed for the past three months, impacting the costs associated with buying new equipment, and we spent $39.4 million to drill new wells and approximately $16.5 million on the new chemical factory. Despite this, the company's balance sheet remained strong. At the end of the second quarter of 2020, our total cash was $90 million, with cash per share at $9.45, working capital of $93.7 million, and working capital per share at $9.85. Net cash available after all liabilities was $28.2 million, with net cash per share at $8.22 and shareholders’ equity approximately $253 million, yielding equity per share of $26.59. Our company believes that it has adequate cash flow to complete the chemical factory, open all of its bromine and crude salt facilities, drill new natural gas wells, and still make acquisitions. Our company now discloses the financial results for the three and six months ended June 30, 2020, compared to the similar results recorded in the same period from the previous year as detailed in our financial filings available at the SEC. We want to highlight our communications with shareholders. Now that many of our factories are operational, we will begin to provide quarterly and annual guidance to shareholders. We hope to begin this guidance when we report the third quarter. We are also commencing work on a three to five-year plan. As soon as this plan is completed, we will present it to our shareholders. We also recognize that our website is outdated. We will provide updates on all of our facilities as we have done with the chemical factory on our website. We also aim to improve the user experience on our website to make it easier for investors to navigate. We can conclude that the second quarter was a very important one for our company because we opened our four bromine and crude salt facilities and tested our new equipment. We believe we will scale up production this quarter and reach full productivity in the fourth quarter. We are also optimistic about getting approvals for our remaining three factories. We began construction on our new chemical factory, which we expect to commence full production at the beginning of 2022. We are very excited about the third quarter for natural gas in Sichuan Province, considering the massive discovery by PetroChina in the same area as our wells. We believe the new rules will be expedited in a manner that facilitates our natural gas production. Now that we have increased visibility, we will work to provide shareholders with financial projections, including quarterly guidance and the three to five-year plan. We appreciate the patience of our shareholders and believe we will show strong growth in sales and generate profits in the coming quarters.
Operator, Operator
Absolutely. [Operator Instructions]
Helen Xu, IR Director
Hello, operator?
Operator, Operator
Yes, our first question today is coming from David Xu from Group. Your line is now live.
Unidentified Analyst, Analyst
Thank you. Hi, good morning.
Helen Xu, IR Director
Thank you.
Unidentified Analyst, Analyst
I want to check, right now you have such a huge pile of cash or working capital on your balance sheet, but your share price is so low. Is the company afraid of being bought out by other companies or by other investors?
Helen Xu, IR Director
Hi, sure. Sorry about your last point. So you’re asking about a buyout of the company?
Unidentified Analyst, Analyst
Yes, will your company have any surety or policy to avoid being bought up by other investors, because your cash is so attractive, but your share price is so low?
Helen Xu, IR Director
Okay. [Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Unidentified Analyst, Analyst
No, I am not talking about investing, but I am talking about being bought out by other investors if they offer to purchase your company.
Helen Xu, IR Director
Oh, sorry, sorry. I heard [indiscernible] check, okay, I am sorry. [Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
Okay.
Xiaobin Liu, CEO
[Foreign Language]
Unidentified Analyst, Analyst
When I answer the question concerning how many shares insiders own in your company?
Helen Xu, IR Director
Okay. [Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
Okay, so, Mr. Yang, the Chairman of the company, and his family, including his son, wife, and others...
Unidentified Analyst, Analyst
So it is less than 50%?
Helen Xu, IR Director
More than 30%, but the exact number I think you can find in the company documents we filed with the SEC.
Unidentified Analyst, Analyst
Okay, and how about other institutional investors?
Helen Xu, IR Director
Which I don't have a clear cut…
Unidentified Analyst, Analyst
You have no idea how many shares other institutional ownerships?
Helen Xu, IR Director
No, we don't have a clear understanding.
Unidentified Analyst, Analyst
So if other investors take a hostile bid to buy your company, does the company have any strategy to fend them off?
Helen Xu, IR Director
Sorry? The line is not clear. I could not hear your last question.
Unidentified Analyst, Analyst
Yes, I mean, if other investors, with a hostile bid, keep an eye on your company, does the company...
Helen Xu, IR Director
As an investor...
Unidentified Analyst, Analyst
Yes, that’s why I asked. If institutions or buyers made a hostile bid and planned to buy your company in whole...
Helen Xu, IR Director
As in the question... Okay, the answer is, currently we don't have any deals or information about anyone wanting to buy out the company, but if later on anyone wishes, we will talk about it.
Unidentified Analyst, Analyst
Okay, great. For example, if I also can buy your company at $6 each share, will your company accept that or will your company be able to fend off such an offer?
Helen Xu, IR Director
Do you mind saying again? Because the line is really unclear.
Unidentified Analyst, Analyst
Okay, can you hear me now?
Helen Xu, IR Director
Yes, please talk slowly; otherwise, the sound is unclear.
Unidentified Analyst, Analyst
Okay. Just for example, okay? If I make an offer to buy your company at the current share price of $6 per share, how can your company fend off such a hostile bid?
Helen Xu, IR Director
So, you mean if you want to buy the company at the current price of $6 per share?
Unidentified Analyst, Analyst
Yes, just as an example only.
Helen Xu, IR Director
For example, yes. Now what's your question?
Unidentified Analyst, Analyst
Okay, how can your company handle this?
Helen Xu, IR Director
Okay, okay, I understand. [Foreign Language]
Xiaobin Liu, CEO
[Foreign Language]
Helen Xu, IR Director
First of all, when you think of that, Mr. Yang and his family will certainly not sell their shares. They own more than approximately 30%. Secondly, other shareholders or investors, we don’t have clarity on what they think about it. Based on our understanding, we believe that if shareholders shift their focus, it is based on the value now.
Unidentified Analyst, Analyst
Okay, I fully understand that.
Helen Xu, IR Director
And then Mr. [indiscernible] will lead the company; we really live with the trust and belief in the company's future.
Unidentified Analyst, Analyst
There is always a danger that others will buy your company or offer a higher price to buy out all your company shares.
Helen Xu, IR Director
Yes, but I've mostly explained that Mr. Yang and his family definitely will not sell.
Unidentified Analyst, Analyst
Okay then. Thank you so much for your answer.
Helen Xu, IR Director
Okay, thank you. You're welcome.
Operator, Operator
Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. Hello, do you have any further comments?
Helen Xu, IR Director
I apologize. We are wrapping up the call today if there are no more questions.
Operator, Operator
Yes, that's it; we are set. Thank you so much for your time.
Helen Xu, IR Director
Thank you.
Operator, Operator
You may now disconnect.