Gulf Resources, Inc. (NASDAQ:GURE) Q3 2023 Earnings Call Transcript

Gulf Resources, Inc. (NASDAQ:GURE) Q3 2023 Earnings Call Transcript November 21, 2023

Operator: Greetings. Welcome to the Gulf Resources Third Quarter 2023 Earnings Conference. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Helen Xu. You may begin.

Helen Xu: Thank you, operator. Good morning, ladies and gentlemen, and good evening to all those joining us from China and U.S. And I like to welcome all of you to Gulf Resources third quarter 2023 conference call. I am Helen Xu, IR Director and CEO of the company; Mr. Xiaobin Liu, will also join this call today. I would like to remind you to all our listeners that in this call, certain management statements during the call will contain forward-looking information about Gulf Resources in corporation, and its subsidiary business and products within the meaning of Rule of 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, taking into account a number of risk factors, including but not limited to the general economic and business condition in the PRC, the risk associated with COVID-19 pandemic outbreak; future product development and production capabilities, shipments to end customers, and market acceptance of new and existing products, additional competition from existing and new competitors from the bromine and the other oilfields and power production chemicals, changing technology, the ability to make future bromine assets and the risk other factors beyond its control.

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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 of circumstances after the date of this call. Accordingly, our company believes expectation 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, represent the management’s estimates as of today, the 20th of November 2023. For those of you unable to listen to the entire call at this time. A replay will be available on company’s website, the call is also accessible through the website and link is accessible through our website.

So please locate our press release issued earlier for the details. Before focusing on the major contents of this conference call, I would like to briefly discuss the proposed change in our chairmanship Mr. Yang founded our company and Mr. Liu joined the company in 2007 and become CEO in 2009. Mr. Liu who has investment in many companies in Sichuan Province, has decided not to stand for reelection as Chairman at the annual meeting on November 30, 2023. The board has nominated Mr. Liu to serve as our next Chairman. We would also like to refer to a recent press release discussing our prevention plan. As we issued earlier that in year 2018, Shouguang city experienced that in last impact of typhoon of India [ph] regarded as one of the most destructive typhoons in history, resulted in the region receiving 14.9 inches of rainfall, and the overflow of three major surveys along the Miho River led to extensive flooding in farmland, residential routes and industrial factories.

All of the company’s bromine factories, crude salt tanks, and mining areas it was seriously impacted, the company incurred substantial expenses amounting for more than $40 million including the write-offs and the road repairs, equipment replacement, salt pan reconstruction and redrilling of flood wheels. A year later, the Typhoon Lekima struck Shouguang city again, surpassing the destructive force of its predecessor. Once again, the company had to spend more than $6 million to rectify the aftermath involving the road repairs, equipment replacement, salt pan reconstruction and the feeling of offsetting will. So, to mitigate the similar damages in the future, the company had commenced of the provision initiative. Our strategy involves the renovation of the channels of four major rivers within our mining area, in combating the Tributary of Miho River.

The aim is to prevent flooding that could have the wells, aqueducts, and crude salt pans at our plant. The projected expenditure for this initiative amounts to approximately $50.5 million. As of this quarter, ended by September 30, 2023, the company disbursed amounted approximately $15.15 million for the initial phase of this project. Apart from reducing risk to surrounding regions, we anticipated that there are three notable advantages from this flood provision plan. It is expected to, firstly, enhance the probability of opportunity approvals to reopen factories number two and number 10. Secondly, enable the drilling of additional wealth across our five operating factories. And number three mitigates the risks and associated expenses related to future stops induced flooding.

Given the company’s current financial position and its substantial cash resources, the company believes that the floor protection plan will yield favorable returns over the long-term to the company. So now let’s turn to the results of the third quarter and the nine months. During the third quarter, the sales declined by 74%. Net income after tax was a loss of approximately $1.8 million compared to approximately $9.0 million. Net loss per share was $0.17 compared to a net profit of $0.86. Shareholders’ equity was approximately $260.8 million or $24.99 per share. Total results for the three months ended September 30, 2023, in the third quarter of 2023, revenue only declined by 74% to approximately $5.9 million from approximately $22.9 million.

Especially the bromine revenues declined by 75% to approximately $4.9 million from approximately $19.8 million. The decrease in this net revenue was primarily due to the reduction in the volume of tons sold 43% and a 57% decrease in the average selling price of bromine. During the quarter, the average selling price was $3,237 compared $7,474. As of November 16, 2023, based on the sensors.com data, the price of bromine has seen an increase of approximately 7.4% to $3,477. The decrease in selling price of bromine reflects both economic weakness in China and an excess inventory of anticipated. Following the aftermath of COVID, the reduction in tons sold reflects the company’s strategic decision not to engage enterprise competition, aiming to safeguard the long-term value of its resources.

Additionally, crude salt revenues declined by 70% due to an 18% decline in pricing and a 63% decrease in tonnes produced. As crude salt is a byproduct of bromine, the decreased production of bromine, resulting in a reduction in production of crude salt as well. There were no revenue generated from our chemical products business yet, while our natural gas business obtained approximately $68,000 in revenue through its equipment leasing. Gross profit for the quarter was amounted to a loss of $580,000 compared to a profit of approximately $14.5 million in the previous year. Especially, our bromine business suffered a gross profit loss of approximately $1.1 million compared to a profit of $12.5 million while crude salt achieved a gross profit of $511,500 compared to $1.9 million previously approximately.

The company incurred direct labor and factory overhead amounting to approximately $1.0 million during the plant shutdown, compared to approximately $1.9 million previously. General and administrative expenses were approximately $762,900 compared to $584,500 previously. Consequently, our loss from operations was amounted to approximately $2.3 million, compared to a profit of approximately $11.9 million in the period prior year. The net income after tax was a loss of approximately $1.8 million, compared to a profit of approximately $9.0 million, and the net loss per share was $0.17 compared to a net profit of $0.86. Results for the nine months ended September 30th, 2023, revenues over nine months declined by 51%, decrease of approximately $23.2 million from approximately $47.5 million.

Specially, bromine revenue also fell by 51% from approximately $20.7 million from approximately $41.9 million. Notably, there was a 9% increase in bromine cost, reflecting the addition of section number eight. However, despite this, the gross profit margin decreased to 7%, down from 57%. Throughout the nine months, the average selling price of bromine was $3,493 per tonne compared to the previous of $7,674 per tonne. Revenues from crude salt also declined by 51% to approximately $2.3 million from approximately $5.5 million. While the production volume declined by 31%, no revenue was generated from chemical business yet. Conversely revenue from natural gas increased by 13 percentage from the equipment levy. The gross profit for nine months totaled approximately $2.7 million, compared to $26.4 million.

Especially the bromine business accrued a gross profit for approximately $1.5 million, compared to approximately $27.7 million in the previous period. Our crude salt business achieved a gross profit of approximately $1.0 million compared to approximately $2.6 million. Meanwhile, the Chemical business recorded no gross profit and the natural gas business marked a gross profit of approximately $150,000, compared to approximately $132,600 previously. The company incurred direct labor and factory overhead during the planned shutdown amounted to approximately $4.5 million compared to approximately $6.0 million in the previous period. General and administrative expenses were approximately $2.3 million compared to approximately $3.4 million as previously.

As a result, our loss from operations were amounted to approximately $4 million compared to a profit of $17.0 million as previously. Net income was a loss of approximately $3.0 million, compared to a profit of $12.7 million previously. And the net loss per share were $0.29, compared to a profit of $1.22. Cash flow during the nine months ended by September 30, 2023, we generated approximately $9.9 million from operating activities and invested approximately $15.2 million, primarily in our floor protection program. Balance sheet, as of September 30, 2023, our cash balance was approximately $103.8 million based on the shares issued and outstanding ended by September 30, 2003 that translated to $9.95 in cash per share. The net, net cash, which is cash minus or liabilities was $8.21 per share.

Working capital was approximately $10.07 per share. Shareholders’ equity was $260.7 million approximately or $24.99 per share. So now let me turn the call over to Mr. Liu for his additional commentary. Liu?

Xiaobin Liu : [Foreign Language].

Helen Xu: So here is the remark from Mr. Xiaobin Liu, the company’s CEO. First of all, and the company’s CEO, Mr. Xiaobin Liu. Welcome all of you to attend the Gulf Resources Third Quarter 2023 Earnings Conference Call. In the third quarter, our results were adversely impacted by the diminished price of bromine, we attribute this drop-in price to two major factors. First, the sluggish state of the construction market in China led to reduced purchase of bromine for fire retardant application. Secondly, the warning impact of COVID pandemic resulted in decreased demand for bromine in medical instruments and sterilization. Despite these challenges, our company remains optimistic about the long-term equilibrium of bromine’s demand and supply, we still continued.

We anticipate a research in demand of bromine-based products and emerging products such as zinc and bromine batteries and new medical products presents opportunities for sustained demand growth. However, the supply of bromine continues to be constrained. Notably, based on 2022 production data, we estimate probably over 75% of global bromine production is concentrated in regions like Israel, Jordan, and Ukraine, which currently states military conflicts or wars. We adopt a prudent strategy in navigating the market. We have held back seeking approvals to open section number two and number 10 as we await improved pricing. Additionally, we have postponed the procurement of the final equipment of our chemical factory, clear insights into opportunities for innovative bromine products.

We have scaled back our sales, anticipating higher returns from future bromine sales. Since the end of the quarter, we have observed a gradual, but consistent uptick in the market price of bromine. We are monitoring the events in the Middle East, recognizing that any disruption in the better sea region could certainly unload the market dynamics. Looking ahead, the ambition returning to profitability in the fourth, coming quarter. Moreover, we aim to progress with the opening of our chemical factory, obtaining approvals for our remaining two bromine factories, and ideally resuming our natural gas and broad exploration in Sichuan Province. So now we are open for the question-and-answer section.

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Q&A Session

Operator: Thank you. [Operator Instructions]. The first question comes from Alan Perkaca [ph], she is a private investor. Alan, please proceed.

Unidentified Analyst: Good morning, Helen. Good morning, management. I given what happened in Q3, I have couple of quick two or three questions. My first question is, could you explain why there was a delay in the 10-Q filing in Q3?

Helen Xu: [Foreign Language]. Okay. Hi, Alan. This quarter’s delay in filing was because that auditors, they need more documents or materials when they are doing their review.

Unidentified Analyst: But yes, that’s, okay. It is not a fully audited quarter. It’s not like a 10-K. So, I am curious to know, what we are concerned about in the quarterly filing. But, okay. So, the auditors are the reason why you have some delay. My second question, if you don’t mind. My second question is regarding this flood prevention investments. And as just as I have already mentioned in the past that definitely we wanted the company to consider some action to mitigate the risk of flooding and I think that’s great. We are happy about that. The only thing that surprised us is that, we learned that last minute, so I don’t know when the decision was taken, but to learn last minute that we have a $50 million investment and that’s already $15 million against paying Q3. That was kind of a surprise to shareholders. So, when was the decision taken to make this $15 million underlying investment?

Helen Xu: [Foreign Language]. It was during the September in Q3.

Unidentified Analyst: And you were able to spend $15 million in September?

Helen Xu: No. I mean the decision you mean the final decision when was…

Unidentified Analyst: The decision to plan I mean to spend $15 million, when was the decision made towards? I just find it that shareholders find it interesting that we just learned about it and suddenly we are told $15 million has already been spent. So, we would have liked to have a little more of a warning, when you have made the decision to do this investment? The big question is how much do you expect to spend in Q4 of the $15 million?

Helen Xu: [Foreign Language]. Maybe in Q4, rest of the projects will be spent next $35 million approximately.

Unidentified Analyst: $35 million in Q4.

Helen Xu: Approximately.

Unidentified Analyst: The last point is regarding the bromine pricing and market. You have restricted production in Q3 because the price went pretty low. It was at a very low price at the beginning of Q3. Are you still restricting production in Q4? Or do you expect to go to full production in Q4? Whatever is full production, because it’s winter, so I know it’s not as high as in the summer.

Helen Xu: [Foreign Language]. Okay. So, hi, and here’s the response from you. Firstly, because we think the bromine price is in its recovery stage, and we think it’s under its current stage and we should not launch passion of our production alone. So, we estimate the production volume maybe will be similar as last year Q4, quarter-four focus. Secondly, we think because the Dead Sea region, the situation could alert market dynamics and the pricing of bromine as well. So, we are monitoring the events in the Middle East.

Unidentified Analyst : Yes. And regarding that, I mean, I’ve seen that the price of bromine outside that’s coming from the legalities are coming from the U.S. is higher than the price of bromine in China. Is the export team looking at the possibility of exporting some bromine to Asia, like to India or to Singapore? Has the export task force looked at that?

Helen Xu: [Foreign Language]. Hi, Allen. Firstly, because you know, the downstream of bromine industry are majorly in China area, but not in Asia. So, the main demand are here. And secondly, because bromine is very dangerous to transport, and the transportation cost is very high. So, based on these two factors we think if we wanted to translate, like you said, Asia and other countries and also Singapore, maybe we have to evaluate and monitor the market condition and to evaluate the cost and the benefit.

Unidentified Analyst : I think if the export platforms could look at that, that would be a great thing. Okay. Sorry for all these questions have been so long. Okay. But thank you very much for your answers.

Operator: The next question comes from John Smith with Gulf Resources. Please proceed.

Unidentified Analyst: Hello? Can you hear me?

Helen Xu: Yes. Hi, John.

Unidentified Analyst : Hi. My question — first thing I just want to say, thank you to the Chairman who has been with the company for a long time. He has done a good job building the business and I think the current CEO is in a good spot to take a spot and continue the good management. So, the first off is just thank you. After that my question goes off of Elaine’s question on the bromine. Look, thinking that we just spent $50 million in the flood prevention, that’s good. But if we could export some of that bromine, I understand the cost would be bad, and I think looking at it from an economic standpoint it might not make sense. But if you could just export $2 million, $3 million, $4 million, $5 million a year, you could use that money to buy back shares.