Earnings Call Transcript - GURE Q3 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Gulf Resources 2021, Third Quarter Earnings Conference. At this time, all participants have been placed on listen-only mode. And the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Helen Xu, IR Director at Gulf Resources. Helen, the floor is yours.

Helen Xu, IR Director

Thank you, Paul. Good morning, ladies and gentlemen, and good evening to all those joining us from China. We would like to welcome all of you to Gulf Resources' Third Quarter 2021, Earnings Conference Call. I'm Helen Xu, the IR Director, and our CEO, Mr. Xiaobin Liu, is also joining 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 Corporation 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 several risk factors, including but not limited to, general economic and business conditions in the PRC, the risks associated with the COVID-19 pandemic, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition in the bromine and other chemical industries, changing technology, the ability to make future bromine assets, and various other factors beyond the company's 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, reference to the company’s future performance represents the management's estimates as of today, November 16, 2021. For those 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. Please locate our press release issued earlier for the details. Now, before we discuss the quarter, I'd like to discuss the recent developments in our three business segments and events that have occurred after the end of the quarter. Firstly, let's look at the Chemicals segment. The world and Chinese economies have been impacted by supply chain issues in many industries, including the energy industry. Shipping shortages have disrupted the delivery of many products worldwide. China has also been impacted by an energy shortage; for example, in some regions of China, the government has restricted electrical usage, including in Shouguang City. Some businesses under construction have also been restricted from electrical usage in Shouguang City. Consequently, the supply chain issues and electrical restrictions have delayed the production and delivery of equipment to the company's new chemical factory. In addition, the company's new Yuxin chemical factory has also been restricted from electrical usage. This means that the installation, timing of testing, and the beginning of trial production at the chemical factory will be delayed. At this time, the company is not in a position to determine the extent of the delay but will keep shareholders advised. This new chemical factory will focus on pharmaceutical intermediates and their by-products. We may produce other products, but pharmaceutical intermediates are in high demand and provide us with higher margins. Therefore, we expect this factory to be profitable with commercial production. Secondly, let's look at the bromine segment. As you may know, bromine prices have risen substantially throughout the world, and even more so in China. In the world market, shipping issues have disrupted delivery. As a result, China has been unable to import its normal share of bromine, leading to a shortage in supply; thus, the prices of bromine soared to the highest levels ever recorded. From the second quarter of 2020 to the end of the third quarter of 2021, bromine prices increased by 68.1%, reaching record levels. Since the end of the third quarter, bromine prices have increased approximately 40%. Given that raw material price increases are lower than the bromine price increase, we believe this pricing should be beneficial for our fourth quarter 2021 profitability. The company does not have an estimate on how long the current shortage will last; however, we will keep our shareholders informed of any changes we observe. If you look at the results from the third quarter, you will be able to understand the impact of bromine pricing and profitability. In the third quarter of 2021, we sold 2,511 tons of bromine, compared to 2,301 tons in the same quarter of the previous year. The average selling price was $5,939 versus $3,990, an increase of 48.8%. At present, market prices are at $10,787 per ton, an increase of 82% over the average selling price in the third quarter. Because there is a lag time between orders received and shipping, which causes higher prices to impact sales and margins in the fourth quarter of 2021. In the third quarter, gross profit per ton was $3,210 versus $1,569, an increase of 111%. If prices remain elevated, our bromine business could be very profitable. Given these prices, we expect higher gross margins in the fourth quarter of 2021. At this time, we expect production in the fourth quarter to be relatively the same as in the third quarter. The only potential issue is whether the government announces a winter shutdown, as the Chinese New Year in 2022 is 10 days earlier than in 2021, which could result in a small amount of production being shifted from the fourth quarter to the first quarter of 2022. However, at this moment, we have not heard anything about a winter shutdown. We expect production from our four operating factories to be slightly higher in the fourth quarter of 2021 than in the fourth quarter of 2020. Regarding our bromine factories number 2, number 8, and number 10, we have noted that the government is completing its planning process for all mining areas due to requirements for core production of bromine and crude salt, including prevention of flood risks. From our point of view, the major issue relates to the treatment and disposal of wastewater. While the plan is not yet complete, we have learned that we will not be able to send wastewater to the sea or deposit it on farmland. This may involve constructing treatment facilities, and while we cannot control the timing of government approval, we remain optimistic about being able to reopen the three bromine facilities. Next, let's look at our natural gas segment. The company also believes that the current energy issues affecting China could ultimately assist us in receiving approval for our natural gas project in Sichuan Province. China desperately needs new natural gas resources. There has been a large natural gas discovery in the Sichuan Province. The government has already ruled that private companies can drill for natural gas. We believe we will receive approval to drill for natural gas in Sichuan. Based on current bromine prices, the company expects sales and earnings in the fourth quarter to be substantially better than those of the previous year. While we are not providing specific guidance at this time, we anticipate that 2022 will be an excellent year for the company because we expect higher prices for bromine for the foreseeable future. We also believe our chemical factory and three other bromine facilities will be operational and we hope to receive approval to drill for natural gas. Now let's turn to the financial results for the third quarter. Revenues in the third quarter increased by $69.4 million to approximately $17.8 million, compared to approximately $10.5 million in the same period of 2020. Gross margins rose to 53.8% from 35.6%. Income from operations was $7.1 million compared to a loss of $2.7 million in the third quarter of 2020. Net profit was $5.4 million compared to a loss of $2.9 million in the previous quarter. Earnings per share were $0.52 compared to a loss of $0.30 in the same quarter of the previous year. For the nine-month results, revenues increased by 108.3% to $34.2 million. Gross margins improved to 43.5% from 22.6%. Income from operations was $1.4 million versus a loss of $10.5 million. Earnings per share were $0.02 versus a loss of $0.91. On the balance sheet, at the end of the third quarter, cash amounted to $98.9 million. Working capital was $104.7 million and shareholders' equity was $282.2 million. Based on the shares outstanding, the cash per share was $9.44, net cash per share was $7.31, working capital per share was $10, and book value per share was $26.9. Regarding cash flow, during the nine-month period ended September 30, 2021, cash flow provided by operating activities was approximately $11.1 million, mainly due to noncash adjustments related to depreciation and amortization of property, plant and equipment, and restricted stock expenses, offset by a net loss of $12.32 million and an increase in accounts receivable of approximately $6.89 million. For the same period in 2020, cash flow provided by operating activities was approximately $3.26 million. Now let's discuss the third quarter segment reporting. For bromine, sales increased by 62.4% to $14.9 million due to improved pricing. Production increased only 9%, with gross profit rising to 55.7% versus 39.3% in the previous year. Income from operations increased to $6.9 million, representing a 252% rise. In the crude salt segment, revenues increased by 118% to $2.8 million and gross profit increased by 921% to $1.2 million, with income from operations being approximately $561,400 versus a loss of $484,300 in the previous year. In the chemicals and natural gas segments, chemicals reported an operating loss of approximately $535,000, and natural gas reported an operating loss of $49,300. Now, I'd like to turn the call over to Mr. Liu for some remarks.

Xiaobin Liu, CEO

I'm now handing the call over to Mr. Liu for some comments.

Helen Xu, IR Director

Okay. I will do the translation. Thank you, Helen. I'm Xiaobin Liu, the CEO of the company. First of all, I'd like to welcome all of you to the Gulf Resources earnings call for the third quarter of 2021. The huge increase in pricing for bromine bodes well for our short-term profits. You can see how well we performed in the third quarter. However, prices are not reaching record heights. As Helen noted, the current prices are almost 82% higher than the average selling price in the third quarter of 2021. Since the raw material price increases are less than the bromine price increase, if prices remain elevated, we should have a profitable business. Although bromine prices could decline, we do not believe the supply chain will disappear. Some bromine facilities are shutting down, which will reduce market supply. Transportation issues will continue to impact imports. We believe we are entering a period of outstanding profitability for our bromine business segment.

Xiaobin Liu, CEO

In the third quarter of 2021, we observed that the increases in raw material prices are lower than the increase in bromine prices. If these prices stay high, we expect our business to remain profitable. While there is potential for bromine prices to decrease, we do not think the supply chain will vanish. The shutdown of some bromine facilities will lead to a decrease in market supply, and transportation challenges will persist, affecting imports. We anticipate that we are entering a phase of significant profitability for our bromine business segment.

Helen Xu, IR Director

So we believe we will receive permission. Yes, thank you. We believe we will receive permission to open our other three bromine plants. We continue to be optimistic about our chemical factory, located in a government-approved chemical park. We have followed all regulations and purchased most of the new equipment. Additionally, our end products focus on pharmaceutical intermediates and by-products, which are crucial for health reasons and offer higher profit margins. Finally, we remain optimistic about opportunities in Sichuan for our natural gas and bromine projects. We are waiting for Sichuan Province to complete its planning process. We continue to work closely with the government regarding permits. Based on our communications, we know that China urgently needs natural gas now. The national government has approved that privately owned enterprises are allowed to participate in natural gas production. We have installed our equipment for our first natural gas well and conducted a period of trial production. As soon as the land and resource planning for Sichuan Province is completed, the company plans to proceed with its application for the natural gas and bromine project approvals. Moreover, we have found a very high concentration of bromine in our well, and given the current bromine prices and the supply shortage, we are also very optimistic about this opportunity. We would like to thank all our shareholders for their patience, and I would like to emphasize that with our new compensation policy, the interests of the company management and shareholders are completely aligned. Before we open the call for questions, I'd like to remind all our shareholders that the company has a new website. As you have requested, we have worked diligently to update the design and information. We still have more to add, like our five-year plan and updates, along with some new pictures. We will continue to be active in issuing press releases and posting pictures and videos of our new facilities. I believe our previous discussions have covered most of the questions we received from our shareholders. Now, I would like to address several questions we received after last week's call. The first question came from an investor who asked about the restrictions that executive officers have regarding their shares. There are very strict rules for company officers to follow concerning SEC requirements based on our knowledge. To sell under Rule 144, there are five conditions that must be met. Firstly, the shares must be held for at least six months. Secondly, there must be a trading window where company management does not possess material non-public information. At this point in time, it is likely that the trading window will be extremely limited. Thirdly, trading volume. The maximum amount during a three-month period is limited to the greater of 1% of the outstanding shares or the average reported weekly trading volume over the past four weeks. Fourthly, executives must be able to open an account with a licensed dealer, which can be complicated due to current difficulties for Chinese companies. Lastly, if the executive officers want to sell 5,000 shares or more, they must file a notice to sell with the SEC. The second question from our investors was regarding why we have not been able to increase utilization. The answer is that we are pleased with the performance of our four operating facilities. However, some new rules regarding wastewater treatment limit our ability to increase utilization. The third question pertained to dividends and buybacks. We received a question about dividends and buybacks, and we would like to explain this issue once again. China has imposed controls on the export of currency, which affects all of our business operations in China. We would like to be able to buy back shares or pay dividends, but until we find a way to get money out of the country, we will be unable to do so. As for the question regarding acquisitions, we are not considering any acquisitions at this time. The last question asked if executive officers wanted to sell their shares, could the company buy them back? The answer is that the company may need cash on hand to support its further operation and investments. However, there might be an alternative concept where the company could reimburse managers in RMB, and the managers would then transfer the U.S. dollars to the company, which could use it to buy back stock. Although this is an interesting idea, the Chinese government may not favor it, interpreting it as the company trying to evade rules. This concept relies on the assumption that the company's operations return to normal and that it can generate good cash flows.

Operator, Operator

And we do have a question from Max.

Unidentified Analyst, Analyst

Helen, thanks a lot for your communication, which has greatly improved over the last month, and congratulations on the strong results reported. I have one more question: what do you plan to do to improve liquidity, particularly the daily volume of shares traded on NASDAQ? A major concern is that Gulf Resources only trades 10,000 to 30,000 shares daily, which is quite low. In my opinion, you should focus on improving this metric.

Helen Xu, IR Director

Thank you for your communication, which has greatly improved over the last month, and congratulations on the strong results reported. I have one more question: what do you plan to do to improve liquidity, particularly the daily volume of shares traded on NASDAQ? A major concern is that Gulf Resources only trades 10,000 to 30,000 shares daily, which is quite low. In my opinion, you should focus on improving this metric.

Xiaobin Liu, CEO

Thank you for your communication, which has greatly improved over the last month, and congratulations on the strong results reported. I have one more question: what do you plan to do to improve liquidity, particularly the daily volume of shares traded on NASDAQ? A major concern is that Gulf Resources only trades 10,000 to 30,000 shares daily, which is quite low. In my opinion, you should focus on improving this metric.

Helen Xu, IR Director

Max, Mr. Liu's response is that the company is currently in discussions with investor relations firms to find a better IR company that can assist Gulf Resources in introducing itself to the public to increase liquidity in the future.

Unidentified Analyst, Analyst

I have a second question that is very similar to the first one, but you have partially addressed it. It is also very important for financial analysts to begin covering Gulf Resources and provide a price target, as this will increase the firm's visibility. In my opinion, it is essential for management to prioritize acquiring financial analyst coverage and getting a timely price target.

Helen Xu, IR Director

Okay.

Xiaobin Liu, CEO

It is also very important for financial analysts to begin covering Gulf Resources and provide a price target, as this will increase the firm's visibility. In my opinion, it is essential for management to prioritize acquiring financial analyst coverage and getting a timely price target.

Helen Xu, IR Director

Thank you, we will consider it.

Operator, Operator

There are no other questions in the queue at this time. I would now like to hand the call back to Helen Xu for any closing remarks.

Helen Xu, IR Director

Paul, could you please ask one more time if there are any questions? Otherwise, can we close the call for today?

Operator, Operator

No other questions came in, Helen.

Helen Xu, IR Director

Okay. Thank you.

Xiaobin Liu, CEO

Thank you.

Helen Xu, IR Director

Thank you all for attending today's conference call. If you have any questions, feel free to email me later. Thank you very much. Have a good day. Bye-bye. Bye Paul. Thank you. It's a pleasure.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Helen Xu, IR Director

Bye-bye. Have a good day.