Earnings Call Transcript - GURE Q4 2021

Operator, Operator

Good day, everyone, and welcome to the Gulf Resources Conference where we will discuss the financial results for the fourth quarter and full year of 2021. I would now like to hand it over to your host, Helen Xu. Helen, please take it away.

Helen Xu, IR Director

Okay. Thank you, operator. 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 Fourth Quarter and Full Year 2021 Earnings Conference Call. I'm Helen Xu, the IR Director. Our CEO, Mr. Xiaobin Liu, is also joining us for this call today. I'd like to remind all our listeners that during this call, certain management statements will contain forward-looking information about Gulf Resources Incorporation and its subsidiary business and products, which are subject to the safe harbor provisions under the Securities Act of 1933 and the Securities Exchange Act of 1934. Actual results may differ from those discussed today, taking into account several risk factors, including but not limited to general economic and business conditions in China, risks associated with the COVID pandemic outbreak, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, competition from existing and new entrants in the bromine and other chemicals markets, changing technology, and other factors beyond the company's control. All forward-looking statements are expressly qualified 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 that the expectations reflected in forward-looking statements are reasonable, though there can be no assurance that such expectations will prove to be correct. Additionally, any references to the company's future performance represent management's estimates as of today, April 30, 2022. For those unable to listen to the entire call now, a replay will be available on the company’s website. A link is also accessible through our press release issued earlier for more details. First, I'll start by reviewing the fiscal year and fourth quarter of 2021, and then I'll update investors on each of our segments. For the fiscal year 2021, revenues exceeded approximately $5 million, an increase of 95% compared to the previous fiscal year. The gross profit was approximately $21.9 million, an increase of 217% year over year. Gross margins were 50.7% versus 31.2%. Profit before taxes improved approximately $14.9 million, reaching $5.2 million from a previous loss of approximately $9.7 million. Taxes were approximately $6.3 million, or 117% of profits, largely due to the cancellation of deferred tax assets. The loss after taxes declined by 89% to $924,718. Three main factors contributed to this net loss: first, depreciation expenses of approximately $4.3 million for closed factories #2, #8, and #10; second, approximately $2.7 million for the cancellation of deferred tax assets; and third, about $3.1 million in compensation charges for shares issued to management, consultants, and staff. Now, let's review the operating results by segment. First, looking at the bromine segment, revenues increased by 78% to approximately $48.8 million due to a volume increase of 24% and a pricing increase of 57%. For the year 2021, the average selling price of bromine was RMB 42,644, and the current price is RMB 55,600. Gross profit increased by 182% to approximately $26 million, with gross profit margins at 53% compared to 37% previously. Net income in the bromine segment surged by 727%, reaching approximately $13.4 million. For the crude salt segment, revenues increased by 101% to around $6.1 million. However, for the fiscal year, the crude salt segment reported a loss of approximately $1.1 million compared to a loss of $3.6 million in the previous year. Regarding the chemicals and natural gas segments, the chemicals products segment sustained a loss of approximately $2.5 million, which is consistent with the previous year’s loss, while the natural gas segment also experienced a loss of approximately $167,000. Now let's review our fourth quarter 2021 results. In the fourth quarter, revenues increased 76.7% to approximately $20.9 million, and gross margins improved by 156.2%, reaching 62.4% compared to 43.1% in the previous year, reflecting the higher prices for both bromine and crude salt. Income from operations increased by 350%, while taxes rose by 718.1%. The company incurred a loss of approximately $1.1 million versus a profit in the previous year. A number of unique accounting factors impacted the fourth quarter results. Firstly, the depreciation in the fourth quarter was approximately $4.5 million higher than the previous year due to the depreciation for three closed factories being accounted for within one quarter. Secondly, the tax rate was 129% of profit rather than the traditional 25% because of the cancellation of certain deferred tax assets. Excluding this one-time event, we would have shown a profit in the fourth quarter and throughout the year. Now let's look at our cash flow. For the year, the company generated $23.3 million in cash from operations compared to $9.3 million in the previous year. Capital expenditures were $30.1 million compared to $21.7 million the previous year, with around $20.3 million spent upgrading wells, aqueducts, and other resources for the chemical and crude salt segments, and approximately $8.4 million spent on equipment for the new chemical factory. Turning to the balance sheet, the company ended the year with cash of approximately $95.8 million. On a per-share basis, using 10,471,924 shares issued and outstanding as of December 31, 2021, this equates to $9.15. The net cash per share was $7.82, with working capital per share at $9.70 and shareholders' equity at $27.37. Next, let’s review our business by segments, starting with bromine and crude salt. While bromine prices have declined from record highs when all factories were closed, they remain substantially higher than last year. According to data from SunSirs.com, bromine prices per tonne were RMB 36,222 on April 5, 2021, and RMB 55,600 on April 5, 2022. We anticipate higher prices to continue for several reasons: first, the permanent closure of bromine factories; second, some of our customers have not yet resumed production due to winter shutdowns and new COVID-19 restrictions; third, demand for bromine products, particularly pharmaceuticals and their byproducts, is on the rise; and fourth, market factors may lead to significant price increases in the use of zinc and bromine in hybrid batteries, which are becoming more widely used in electric vehicles and power storage. We still cannot determine the full impact of this application. However, market data recently published indicates that the zinc and bromine battery market is projected to grow from $8.6 billion in 2021 to $20.6 billion by 2027. Although we are not making any predictions, the increasing adoption of these batteries could significantly positively impact bromine prices. Concerning factories #2, #8, and #10, the government is actively pursuing environmental planning to mitigate pollution concerns. Recent developments suggest we are increasingly optimistic that the company will receive approval to reopen one or more of its factories in 2022. We will need to invest in new wells and aqueducts, and the total cost of this work will depend on government requirements, which cannot be estimated until we receive specific instructions. However, given the current price of bromine, we expect this factory to be a strong contributor to profits. Regarding the chemical factory segment, following the easing of electricity restrictions in 2022, we are expediting the delivery of equipment to the Yuxin chemical factory. We are uncertain about the exact timeline for when all the equipment will be delivered since some vendors are still closed due to renewed COVID-19 restrictions in China. However, we believe that all equipment should be delivered and installed by the third quarter of 2022. Delays caused by electricity issues may increase the total cost of the chemical factories by approximately $5 million. As previously noted, once the equipment is installed, we will begin test and trial production, which should take around six months. Assuming there are no further winter closures, we expect commercial production to commence in 2023. We have seen strong demand for the types of pharmaceutical intermediate products this chemical factory will produce, and pricing remains extremely robust. The company believes this factory will generate sales and profit by 2024. We will actively update investors with photographs of the factory to showcase our progress. Lastly, let’s discuss our Sichuan natural gas and brine projects. The company is still waiting for the provincial government of Sichuan to finalize its land and resource planning. We hope investors understand that this planning affects the entire province, covering approximately 84 million people, not just our project. Consequently, we are unable to predict when this work will be complete. However, we remain optimistic about the long-term potential of this project. Investors have asked why we remain hopeful about this project despite the delays. There are two reasons for our optimism. Firstly, the central government has approved private enterprises' participation in natural gas production. Given this approval, we believe our application is unlikely to be denied. Secondly, while waiting for the province to complete its plans, the fundamentals of this project have strengthened, as natural gas prices continue to rise amidst China's energy shortages, particularly for clean energy. Furthermore, bromine prices are also increasing. The company would like to remind investors that the bromine concentrations in Sichuan are exceptionally high. When asked why we are not investing our substantial cash reserves in long-term financing instruments to generate additional income, the answer is that we lack clarity on the timing of government decisions or opportunities to capitalize on. We are proceeding to complete construction of our chemical factory while we expect to receive approval to reopen one or more of our bromine factories in 2022. The reopening will necessitate capital expenditures, as will the initiatives in Sichuan Province. We aim to be very aggressive in pursuing natural gas and brine resources—not only at our existing sites but also in other identified locations. Additionally, we are open to acquisitions. Regarding our guidance, we will provide full-year guidance when we report our first-quarter results in about a month. Due to winter closures and the cold weather's impact on crude salt production, the first quarter of 2022 is expected to be the weakest of the year. However, in the first quarter of 2022, we anticipate revenues to exceed those of previous years, alongside a significant reduction in losses, although these estimates exclude any potential nonrecurring factors or write-offs. Now let me turn the call over to Mr. Liu.

Xiaobin Liu, CEO

Thank you. I am Mr. Xiaobin Liu, the CEO of the company. First of all, I'd like to welcome you all to Gulf Resources' earnings call for the fourth quarter and fiscal year 2021. The last four years have been very challenging for our company. We could not have predicted the impact of one of the worst typhoons in Chinese history, nor could we have envisioned COVID or its recurrence, nor the effect that COVID would have on the government's planning processes. Nonetheless, we believe we are starting to see significant progress across all fronts. We are very optimistic about the continuing high price of bromine. As noted in our press release, we are observing increased demand for bromine while supply remains constrained. At these levels, our bromine and crude salt businesses should be profitable. Additionally, we anticipate getting approval for at least one of our bromine factories this year. With the electricity restrictions now eased, we are moving forward as quickly as we can to complete construction and begin testing and trial production in our new chemical facility, which will primarily produce pharmaceutical intermediate products with higher gross margins. Despite delays, we remain confident in our ability to produce natural gas and bromine in Sichuan. China has significant needs for both natural gas and bromine, and we expect to play a pivotal role in this development. While we cannot specify if or when this will happen, we recognize the potential opportunities are immense. With our substantial cash reserves and a new auditor in place compliant with PCAOB standards, we believe sales and profits will increase in 2022 and beyond. Now, let me turn the call back to Helen for questions.

Helen Xu, IR Director

So operator, can we open our Q&A section?

Operator, Operator

Your first question for today is coming from Asher Stein.

Unknown Analyst, Analyst

My question relates to buybacks and dividends. I know you've addressed it before, but it appears that the net current assets of the company are around $9 per share. I received an email from you over this quarter stating that there are no actual restrictions on share buybacks or dividends, just that it’s quite difficult. But in my opinion, if the company can execute any buybacks or issue dividends, these shares would be essentially worthless, and the company would be better off liquidating and returning all the cash to its shareholders. What is your opinion on that?

Helen Xu, IR Director

Okay. So I need to clarify your question: if the company considers any buybacks, given the current net asset per share is around $9, is that correct?

Unknown Analyst, Analyst

Yes. The question is that the net current assets per share are around $9, and obviously, the share price is well below that. The issue appears to be that the company is not returning value to shareholders through buybacks or dividends, hence my concern regarding the absence of visible value generation.

Helen Xu, IR Director

Understood. I will translate Mr. Liu's response concerning your question.

Xiaobin Liu, CEO

The question is about the net current assets per share being around $9, and the share price being significantly lower than that. The concern is that the company is not providing value to shareholders through buybacks or dividends, which raises issues about visible value generation. I will translate Mr. Liu's response regarding your question.

Helen Xu, IR Director

Asher, in response to your question, as we explained in our earnings call and in our press release, the company wants to focus on its operations first because it currently consists of three major business segments. Our bromine factories need to be reopened, and we may require cash on hand to facilitate this. Our chemical factories are also under construction now, along with our natural gas project in Sichuan, which may necessitate funds at any moment once we receive government approval. Hence, the company's priority is improving and normalizing operations. Once everything is on track, we can consider buybacks or paying dividends to reward our shareholders and investors.

Operator, Operator

Your next question today is coming from Frank Manning.

Unknown Analyst, Analyst

I have a suggestion that should dramatically increase Gulf Resources' share price and liquidity: you should hire a good investment banker to facilitate the sale of Gulf Resources to an appropriate buyer. This could be executed using the buyer's shares as currency. A suitable buyer would be a publicly traded company with a solid business model, a reasonable share price, and significantly higher trading volume than Gulf Resources. I believe a reasonable sale price should be at least $12 per share, considering the company's cash, working capital, shareholders' equity, and the business as recently reported. The buyer could retain current Gulf Resources employees to manage operations. Mr. Liu, what are your thoughts on this idea? Will you discuss it with your Board of Directors?

Helen Xu, IR Director

Okay, I will translate.

Xiaobin Liu, CEO

I believe a reasonable sale price should be at least $12 per share, considering the company's cash, working capital, shareholders' equity, and the business as recently reported. The buyer could retain current Gulf Resources employees to manage operations. Mr. Liu, what are your thoughts on this idea? Will you discuss it with your Board of Directors?

Helen Xu, IR Director

Frank, in response to your suggestion, Mr. Liu mentioned that an investor had previously approached the company chairman with this idea. The chairman and the board have discussed it. However, the chairman, who has invested significant effort and hard work into building the company, is hesitant to sell. That said, they may look into hiring an investment bank to increase the company's value and attract reliable investors once the COVID situation improves and is managed better.

Unknown Analyst, Analyst

Everyone who follows Gulf Resources understands that a significant issue is the share price and liquidity. I recognize that the difficulty around dividends is one concern. However, consider that selling the company to a publicly traded company with higher trading volume and reasonable prices might be a beneficial option for investors.

Helen Xu, IR Director

We understand your suggestion, and discussions with the chairman and the board have already taken place. They think they may find investment bankers to increase the company's value when the COVID situation improves and the market stabilizes, enabling efforts to enhance value for our investors.

Operator, Operator

Your next question is coming from Randy Liggett.

Unknown Analyst, Analyst

I wanted to follow up on the idea of contracting a reputable worldwide PR firm to amplify Gulf Resources' narrative. Previous speakers have highlighted the current volume issues. While the company is achieving strong financial results and managing operations effectively, the narrative seems lost. I wonder what progress has been made on this front.

Helen Xu, IR Director

Thank you for your comments, Mr. Liggett. First, I will translate it to Mr. Liu.

Xiaobin Liu, CEO

Thank you for your comments, Mr. Liggett. First, I will translate it to Mr. Liu.

Helen Xu, IR Director

Mr. Liu acknowledges your suggestion. The company has always considered this possibility and has been actively seeking a well-known global PR firm. However, due to the current COVID control policies in China, we face challenges in arranging face-to-face discussions with potential PR firms. Once the COVID situation improves and policies relax, discussions with overseas firms will be more manageable.

Operator, Operator

There are no further questions in queue.

Helen Xu, IR Director

Okay, if there are no further questions, can we conclude the call for today? Thank you all for attending.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your phone lines now, and have a wonderful day. Thank you for your participation.

Helen Xu, IR Director

Thank you. Kelly.

Xiaobin Liu, CEO

Bye-bye.