Gulf Resources, Inc. (NASDAQ:GURE) Q1 2023 Earnings Call Transcript May 16, 2023

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. [Operator Instructions] 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 : Thank you, Jenny. Good morning, ladies and gentlemen, and good evening to all those of you who joining us from China. And we’d 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 you to all our listeners that in this call, certain management statements during the call will be — contain forward-looking information about Gulf Resources Incorporation and its subsidiaries business and products within the meaning of the Rule 175 on the Securities Act of 1933 and the 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, take 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, additional competition from existing and new competition from the bromine and the other oilfields and the power production chemicals, change in technology, the ability to make future bromine assets and the various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed with 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 expectations reflecting in those forward-looking statements are reasonable, and there can be no assurance of such will prove to be correct. In addition, any reference to the company’s future performance represents the management’s estimates as of today, the 16 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. So 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. So it would be easy for shareholders to look at our results and think this was a best quarter. But 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. Because of the winter shutdown we lost one month of production. Bromine prices plunged by the highest percentage we can remember. Crude salt prices were also down sharply. Things could not get much worse. Yet despite these problems, we only lost $558,000. If we exclude the cost 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 cash and ended up 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 believe investors will be very pleased with the type of 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. So we look for this exciting future. So the revenues for this quarter, which is almost approximately $9.3 million, representing an increase of 4% over the same period of year 2022. The net loss was approximately $557,000 as compared to a net loss of $119,900 for the same period of last year.

Earnings per share were a loss of $0.05 versus a loss of $0.01 for same period last year. Cash flow was approximately $4.8 million. Ending cash was $115.8 million. Cash per share was $11.10. Net-net cash was $9.09 per share, and shareholders’ equity were $26.35 per share. So now let’s look at our business by segment. So first of all, let’s look at our bromine and crude salt segment. For the three month period ended by March 31, 2023, the net revenue for the bromine segment was approximately $8.5 million compared to $8.1 [ph] million for the same period in the same previous year. This increase was due to 101% increase in tonnes sold and a 48 percentage decrease in average selling price. The gross profit margin of 27% compared to 52% for the same period last year.

The decrease in the gross profit margin was primarily attributable to the lower average selling price of bromine. As compared for the same period last year, cost of net revenue were approximately $6.1 million compared to $3.9 million. The loss from operation was $409,700 compared to a profit of approximately $1.3 million for the same period last year. The net revenue for the crude salt was $748,700 and $754,000 for the same period of 2023 and 2022, respectively. This increase in the net revenue for the crude salt was due to a 32 percentage increase in tonnes sold and a 25 percentage decrease in the average selling price. The cost of net revenue was approximately $620,000 compared to $629,600 for the same period last year approximately. Crude salt earned a profit of $42,930 compared to loss of $521,921 for the same period in the previous year.

In May 2022, we separated bromine and crude salt business to confirm with the government regulation. This separation required different allocation of costs. The net impact was to increase the cost allocation to bromine and between the crude salt. So now let’s look at the chemical segment. There was no revenue in chemicals. Loss from operations from our chemical products segment worth approximately $417,900 for the three month period ended March 31, 2023, compared to a loss from operations of approximately $513,000 in the same period. Natural gas. Our natural gas segment had no revenue from production because we did lease some of equipment. So as a result, income from operations from our natural gas segment was approximately $12,700 for the same period for the first quarter of 2023, compared to a loss of approximately $26,700 in the same period of year 2022.

So now let’s look at our business and strategic plan outlook for this year. First, we look at the bromine and crude salt. The price of bromine has dropped substantially this quarter. We believe there are three major reasons. Firstly, because the economy closed. There was a sharp downturn in domestic demand and a sharp drop off in export sales and downstream products as well. So in addition, because more people were home and not working during COVID-19 pandemic, there was less need for disinfectants. We believe that companies manufacturing disinfectants did not expect the economy to close and thus had too much inventory. We believe prices of bromine has bottomed and may rise from current levels. The supply and demand equation is still very advantageous.

Some factories have been permanently closed. The economy is improving and exports are starting to return to normal. At this time, we are not in a position to project the timing or extent of the rebound in prices. However, the company believes that [indiscernible] bromine mine will offer it with stronger opportunities. The company remains optimistic about the ability to try to open one of its two closed factories in year 2023. The company is currently working with the local government on the related issues. For the existing operating factories, the company has completed substantial of its capital expenditures. Capital expenditures for bromine and crude salt in 2023 will be limited to basic maintenance. So for chemicals segment, the company is still waiting for the customized machinery majorly includes that related to environmental issues, such as the waste gas treatment equipment, solid waste treatment equipment, and wastewater treatment equipment.

The remaining equipment will be delivered as soon as the [indiscernible] available. This equipment is expected to be delivered by the second quarter or three quarter of 2023. Once this equipment is delivered, the company will inform shareholders and post photos on its website. The company believes that once all of the equipment is delivered, it will take three to four months to get them installed. And then take another two to three months for testing. And the — which will be in a position to apply for the environmental and safety approval. After the approval, it will take four months to conduct trial production. And then, we may start commercial production. So for all this chemical export project, Mr. Naihui Miao, our COO and Director has been named as the Chairman of our task force to explore export opportunities for chemicals.

Management team began to research which products and the markets offer the best opportunities to export. The company will try to find this export opportunities, so we can gain the possible and greater financial flexibility to enhance shareholder value. Before selecting the specific products and the markets, we will also have to consider which of the products can be produced in the high quality by all this new chemical factory. So for Sichuan Province project, as we have disclosed the company plans to proceed with its applications for the natural gas and brine project approvals with related government department, until after government planning has been finalized, land and resource planning for the Sichuan Province. Because of this complexity, we are discussing the possibility of a joint venture with the government of Daying County for the extraction of bromine water and related products.

We believe such a joint venture could help us to overcome some of the government-related issues. We will keep investors informed of our progress. So now let me turn the call back to Mr. Liu for his comments on this quarter. [Non-English]

Xiaobin Liu : [Non-English]

Helen Xu : [Non-English]

Xiaobin Liu : [Non-English]

Q&A Session

Helen Xu : So hi, everyone. So this was the comments from the company’s CEO, Xiaobin Liu. So I will do a translation for his comments. 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 for the close of business on May 12, 2023, our cash was almost four times of our market capitalization and our book value per share was almost nine times our market capitalization. We believe bromine price will rebound, and we will try to open one more facility this year.

We are very optimistic about the opportunities for our chemical business. In year 2015 and year 2016, our chemical business had income from operations of $33 million and $25.5 million, respectively. We believe our new chemical facility will be profitable and we also believe that we will get permission to drill for natural gas and brine in Sichuan Province. While there is no certainty yet, but our discussions with the local government are going well. So finally, the company has established our task force this year, led by Mr. Naihui Miao, the company’s COO, that will the identify the opportunities for the export of chemical business. So we can — may gain the possible financial flexibility to undertake critical action and to enhance our shareholder value.

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

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

Operator: No problem. [Operator Instructions] We don’t appear to have anyone in queue, Helen.

Helen Xu : Okay. I think that’s all for today. Thank you very much, Jenny, and thank you all for attending the call today. You have a good night, and good day. Wish you all. Thank you. Bye-bye.

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.