Gulf Resources, Inc. (NASDAQ:GURE) Q3 2022 Earnings Call Transcript

Gulf Resources, Inc. (NASDAQ:GURE) Q3 2022 Earnings Call Transcript November 15, 2022

Operator: Good morning, ladies and gentlemen, and welcome to the Gulf Resources 2022 Third Quarter Earnings Conference. It is now my pleasure to turn the floor over to your host, Helen Xu. Helen, the floor is yours.

Helen Xu: Thank you, Tom. Good morning, ladies and gentlemen, and good evening to all of you for joining us from China. And we’d like to welcome all of you to Gulf Resources third quarter 2022 earnings conference call. I’m Helen Xu, the IR Director. Our CEO of the company, Mr. Xiaobin Liu; the COO, Mr. Naihui Miao, will also join this call today. I’d like to remind you to all of our listeners that in this call certain management statements during the call will contain forward-looking statements, about Gulf Resources Incorporation and its subsidiaries business and products within the meaning of Rule 175 under 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 a number of risk factors, including, but not limited to, the general economic and business condition in the PRC; the risks associated with the COVID 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; changing 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 estimate as of today, the 15th of November 2022. 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 I will review the quarter and the 9 months and then turn the call back to Mr. Miao and Mr. Liu for their commentary.

After which we will have a Q&A section. So firstly, let’s look at the quarter of the company for the third quarter operating results, which is an outstanding quarter for our company. Because for the 3 months, ended September 30, 2022, revenues increased 29% to approximately $22.8 million. Income from operations increased 68% to approximately $11.9 million. Profit before taxes increased 68% to approximately $12 million. Net income increased 66 percentage to approximately $9 million. Earnings per share increased 65% to $0.86. By segment for the quarter, bromine revenues increased 33% to approximately $19.8 million. Tonnes increased 6%, while the average selling price increased 26%. We had four factories in operation. We have set prepared factory number eight for opening.

We expect factory number eight to produce revenues in the fourth quarter 2022. Gross profits were approximately $12.5 million, an increase of 50.1 percentage from the results of the previous year. Profit margins increased to 63% from 56%. Income from operations increased 53% to approximately $10.6 million. Crude Salt segment. Revenues from crude salt increased 3% to $2.9 million. Volume increased 3%. Cost of net revenues declined to $1 million from $1.6 million, largely due to the relocation between bromine and crude salt. Income from operations increased 234 percentage to approximately $1.9 million from $561,000, largely due to the change in allocation of costs. On August 30, 2022, the company provided guidance for the third quarter for our bromine and crude salt segments.

Our projections were for revenues in these two segments of $20 million to $21.8 million. Actual revenues were $22.9 million. We projected profit before tax of $9 million to $10.3 million. Actual profit before tax were $12.4 million. We are very pleased to have exceeded our guidance. Chemical products, which had zero revenue and had a loss from operations of approximately $448,000 million. Natural gas segment had revenue of approximately $82,000 from the rental of some of our equipment. Direct labor and factory overhead. Investors should note that we incur cost for our closed factories approximately $1.9 million. As noted, even with this cost, we were able to report earnings per share of $0.86 versus the $0.52 in the previous year. For the 9-month period ending September 30, 2022, the company revenues increased 39% to approximately $47.5 million.

Income from operations increased more than 10% to $17 million. Net income increased more than 60 times to $12.7 million. Earnings per share increased to $1.22 from $0.02. By segment. Firstly, let’s look at the – bromine segment. Revenues in this segment increased 41% to approximately $41.9 million. The cost of net revenues was $18.1 million and the $2.2 million approximately of this increase was due to a reallocation of cost with crude salt. The gross profit was approximately $23.7 million compared to $13.8 million. Income from operations more than doubled to approximately $17.2 million. Crude salt segment. The revenues in this segment increased to approximately $5.5 million from $4.4 million. The cost in crude salt dropped to $2.9 million from $3.3 million, largely due to $2.2 million in lower cost allocation.

Gross profit more than doubled to $2.6 million from $1.1 million. Income from operations was $1.5 million compared to a loss of $1 million. Other businesses, chemical products lost approximately $1.4 million compared to approximately $2 million in the previous year. Natural gas lost approximately $69,000 compared to a loss of approximately $167,000 million in the previous year. Corporate costs were $187,000 million compared to $3.4 million in the previous year. In year 2021, the company incurred about $3.1 million in the cost related to stock grants. By September 30, 2022, we had no new stock grant. But as noted in our 10-Q, on October 7, 2022, the company issued 200,000 shares under its equity incentive plan at a cost of approximately $668,000.

For the 9 months cash flow, the company generated net cash from operations of approximately $37.1 million. Capital expenditures for the Bromine segment were $33.2 million. The effect of the decline of the RMB versus the U.S. dollar impacted our cash and cash equivalents by approximately $6.7 million. Balance sheet. During year 2022, the RMB declined sharply against the U.S. dollar. According to the website our exchangerates.org.uk, on January 1, 2022, $1 worth RMB 6.3557. On September 30, 2022, $1 worth RMB 3.1204 a decline of approximately 12%. The drop of the RMB against the U.S. dollar caused a resulting impact on balance sheet items. Despite the impact on our balance sheet, we ended the quarter with cash of $92.6 million or $8.85 per share.

Working capital was $94.1 million,113,446 or $8.99 per share. Book value was $268.6 million or $25.65 per share. So now let’s look at the update on our business operations. COVID, because COVID continues to significantly impact on our business, this has caused a softening of the bromine prices and a delay in receiving the equipment needed for our new chemical factory. We have no visibility as to when the impact of the COVID epidemic will abate. However, the company is aware that COVID is more dangerous in the winter months, so issues may continue. Bromine, during the third quarter, we prepared factory eight for production. Revenues are expected €“were generated in fourth quarter 2022. We have not heard anything from the local government about factories number two and 10 yet.

We remain optimistic that we may receive permission to open these factories, although some investment may need in the new wells, crude salt ponds, and aqueducts will be required. The Chemical segment, the COVID epidemic and resulting supply chain disruptions has impacted the opening of our chemical factory. While some of the equipment has been delivered, we are still lacking a few components. We expect these to be delivered in this quarter or at latest in the first quarter of year 2023. Once all of the equipment is delivered, it will take 3 to 4 months to get them installed. After installation, the testing process should take 2 to 3 months, after which we will apply for the environmental approval and other approvals from government. After we have all the necessary approvals, it will take 4 months to conduct trial production.

Full commercial production may start by the beginning of year 2024. The company regrets for this delay, but we could not have foreseen the continuing issues related to COVID. Natural Gas segment. The company is continuing to wait for the government of Sichuan Province to complete its plan. The company believes that Sichuan still represents a substantial opportunity for both natural gas and bromine. The company remains optimistic that it will eventually receive approval to drill for both products. However, the company is open to considering partnerships with state-owned enterprise. Fourth quarter 2022 projections for the bromine and crude salt segment only. The COVID pandemic and the early Chinese New Year, are likely to impact on the fourth quarter 2022.

The Chinese economy remains soft. Bromine prices dropped in the beginning of September and started to rise in the second week of October. On November 8, we were at RMB 49,800, which higher than that of September. 30, 2021, but lower the highs achieved in the fourth quarter of year 2021. The company expects the government to announce another winter closing. In the year 2022, Chinese New Year was on February. 1. In year 2023, it will be on January, 22, it was to the earliest to date in this This means there will be 10 less days of production in year 2022. By contrast, 2023 should have approximately 19 additional days of production because of the later Chinese New Year in year 2024. Given the potential of fewer days of production and a lower price for bromine, the company estimates revenues for bromine and crude salt will be in the range of $15.4 million $16.8 million, profit before tax will be in a range of $3.8 million to $4.2 million.

In our projections of August 30, 2022, the company indicated that bromine and crude salt would have annual revenues between $62 million to $63.7 million. With the results for the 9 months and the projections for the fourth quarter, we now project this segments will have revenue of $62.7 million to $64.1 million. We had also projected these segments would have profits before taxes of $20 million to $21.5 million. Based on the 9 months and the projections for the fourth quarter 2022, the company now project that these segments will have profits before taxes of $22.4 million to $22.8 million. So despite slowdown caused by COVID, we expect to exceed our original guidance for bromine and crude salt for both sales and earnings. So now I will turn the call back to Mr. Miao and Mr. Liu for your commentary.

Naihui Miao: So I will do the translation for Mr. Miao, he is now stating that hi, everyone, I am the COO of the company, Mr. Naihui Miao. First of all, welcome all of you to attend the year 2022 third quarter and 9 months earnings conference call ended September 30, 2022. I will join Mr. Liu later on for the Q&A section following up regarding the company’s operating question.

Xiaobin Liu: Okay. So hi, everyone. I’m company’s CEO, Mr. Xiaobin Liu. First of all, welcome all of you to attend Gulf Resources third quarter year 2022 earnings conference call. First of all, we are very pleased to have reported such a strong third quarter and 9-month results with $1.22 of earnings per share with a lower RMB making imports more expensive and the closing of some domestic facilities. We believe volume prices will continue to be strong. While we regret delay in opening our chemical factories, we are very confident in its long-term potential. We also believe that we will eventually receive approval to drill for natural gas and bromine in Sichuan province. We are very aware that our shareholders are unhappy with our share price.

We want to assure you that company management is even more unhappy because last year, company management repaid more than 11 years of a big portion of your cash compensation, and we do not believe that you can find another case where a company executive officers retained so many years of cash salaries for shares. Simply put, we are stating our carriers and the welfare of our families on the price of our shares. If the stock remains at its current depressed levels, no one will suffer more than we will. We know that our shareholders will like the company to buy back share stock. We wish we could, but unfortunately, we cannot get approval to take money out of China to buy back stock or to pay dividends. However, there are two things we think we can do to help the short-term – short, intermediate and long-term prices of the shares.

In the short term, the company may consider to pay executive officers in RMB and buy back some of their shares. If an executive officer needs to sell shares to pay for living expenses, then the executive could go to the company and offer his shares in a private transaction with the company, the company could pay the executives in RMB. We will keep you updated on this progress of this idea. Over the intermediate and the long term, we are committed to gaining increased financial flexibility. We know that many of the pharmaceutical intermediaries products were produced in our chemical factory, which are in demand throughout the world, especially in the emerging countries in Asia. Once we opened our chemical factory, we will consider to develop a plan to generate €“ generating exports in some methodically intermediate products and its byproducts that could enable us to have increased financial flexibility for buying back stock, or pay dividend.

So now we are open for Q&A section. Hi, operator. Tom?

Q – Unidentified Analyst: Yes. Good morning. And congratulations on a very strong quarter. I have two questions. The first is how many more dollars of capital spending is needed to complete the bromine facilities to bring the three that are not currently online and how much more capital is needed for the chemical business to get that up and running? That’s my first question. I’ll let you answer, and then I’ll ask my second question.

Q&A Session

Helen Xu: Okay. hi, Glenn, because I have one question because we have two more factories. Number two and number 10 did not have the permission from government yet. So I do not quite understand when you talk about the capital expenditure on bromine segment, do you need to include these two factories or just for factor number eight?

Unidentified Analyst: Let’s, at the moment, let’s do number eight. And then if you have a projection for the other two, that would be helpful.

Helen Xu: Okay. Thank you.

Xiaobin Liu: Hi, Glenn. So firstly, for your question on the bromine segment, you would like me to explain first. And firstly, let’s look at the bromine factory because as I mentioned before, the factory number eight, which got approval from government and the company already started preparation and the on these factories until now which have until like third – fourth quarter, which has spent approximately $3 million. And we will be a few more dollars to be spent on this factory, and it could maybe start production in fourth quarter and contribute revenue in this quarter as well. And regarding factory number two and number 10, because we did not have a government approval yet. So we do not know clearly how the government will permit.

We are not sure will they ask the only updates on our world chemicals – our bromine factors or do you have any other requirements. So the CapEx expenditure on these two factories, we cannot provide any details yet. So this is for the questions on bromine first. So chemicals, Mr. Liu will continue.

Xiaobin Liu: Secondly, regarding the chemical factory, which due to the COVID and the more strict environmental protection required by the government. So the process for this chemical factor may be delayed, but the CapEx expenditure are still the same as our budget. We are still under our budget. And this number, we have been disclosed in our 10-Q already.

Unidentified Analyst: Right. But my question is how much more capital spending is needed in the chemical facility that has not been spent to date? How much more remains? Just a dollar number, that’s all I’m looking for.

Helen Xu: I think I can check out for you in the 10-Q, but do you mind e-mail back or you want to take it now?

Unidentified Analyst: You can e-mail me back. But I just want to know how much is remaining to be spent on the chemicals before it’s open. My last question is in order to generate foreign currency, do you just need to make sales of products overseas? Or do you need to buy an overseas asset?

Helen Xu: Okay. Wait a moment.

Naihui Miao: Okay. So hi. Naihui Miao, stated that we hope after our chemical factory started production, we can sell some of our products or export them to overseas. And in the meantime, and we will have some overseas clients, and they pay us in dollar and then the company will have more flexible in its financials.

Unidentified Analyst: Okay. So you do – so you will export and you don’t need to buy an overseas business in order to generate foreign currency. Do I understand that correctly?

Helen Xu: Do you mean overseas assets? Or do you mean like if we want to do export, we need to buy a license for overseas…

Unidentified Analyst: No. I mean do you need to buy a overseas? Do you need to buy an overseas asset a distributor selling organization? Or can you just export?

Helen Xu: No. We cannot now export. We think we need a license for that. But we are not going to buy the – at this moment, we did not talk about buying asset in overseas.

Unidentified Analyst: Okay. Thank you. I’ll let someone else ask questions. Thank you very much.

Helen Xu: Okay.

Operator: Thank you. And there are no further questions in queue at this time.

Helen Xu: Okay. Do you mind to ask again if there’s still no questions, I think we can close the call for today.

Operator: Absolutely. And there are no questions in queue at this time.

Helen Xu: Okay. Thank you. hi, operator, Tom, I think we will close the call for today. If there is no more question. And thank you all for attending this conference call. Thank you very much.

Operator: Thank you, gentlemen. And thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.+