Gulf Resources, Inc.
Q1 2020 Earnings Call Transcript

Published: 22 May 2020

[Operator:]

Greetings, welcome to Gulf Resources 2020 First Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I'll now turn the conference over to Helen Xu. Please go ahead, Helen.

[Helen Xu:]

Great, thank you, operator. Good morning ladies and gentlemen. And good evening to all of you joining us from China, and we'd like to welcome all of you to Gulf Resources’ First Quarter 2020 Earnings Conference Call. My name is Helen, the IR Director. Our CEO of company, Mr. Xiaobin Liu is also joining us this call today.I'd like to remind you to all of our listeners that in this call certain management's statements during the call will contain forward-looking statements but our sorties in corporation and its subsidiaries business and its subsidiaries business and products using the mean of rule when compared 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 a number of risk factors, including, but not limited to, the general economic and business condition in PRC. The risks associated with COVID-19 pandemic outrage, future product development and production capabilities, shipment to end customers, market assortment of new and existing products, additional competition from existing and new competition from the bromine and the oilfields and power production chemicals, changing technology the ability to meet future bromine assets and various other factors beyond its control.All forward-looking statements are expressly qualified in their entirety by these cautionary statements and the risk factors detailed with the company's reports filed with 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. According to our company's beliefs, expectations reflected in these 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 22 of May, 2020.For those of you unable to listen to the entire call at this time, a replay will be available for 14 days 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 we like to start the call the call with some introduction remarks introduction remarks by our CEO, Mr. Xiaobin Liu.

[Xiaobin Liu:]

[Foreign Language]Thank you all attending this call. So for the past 13 months have been long because of our company as we had to close all of our facilities for the several regions. During this fiscal time we were hit by one of the most distractive pandemics in the history of China. We were getting production back. We were adversely impacted by the COVID-19 pandemic. Now however, at last we can see real signs of progress.[Foreign Language]We have four of our [indiscernible] in commercial production, we are optimistic about remaining three bromine factories. The company had filled more new wells and brought new agreements. Now we are about reduction of our new Tencent, which is re-planned to focus more on higher margin from a surgical intermediate product. And Petro China has also discovered one of the biggest natural gas belts. Sales in Chinese history in the same time that our existing natural gas well and two additional registered belts are located.[Foreign Language]Despite the fact that all of our facilities closed for most time of the past 30 months and the cost of buying all new equipment and drilling more new wells, we are still in a strong financial position with approximately $93.6 million in cash. We have enough capital to build our new chemical factory, reopen our remaining bromine and crude salt facilities, and drill our wells in Sichuan Province.[Foreign Language]We look forward to returning to profitability in the near future. We appreciate the support of our shareholders. Once we start construction on our chemical factory and get a better sense of timing for the approval of our remaining bromine factories, we will provide investors with further updates on our three-year plan for growth and profits. We are very optimistic about our future.So now let’s look at our first quarter 2020 financial results and major events. Because of the pollution issue, Chinese, Mea and circumstances related to the COVID-19 pandemic of fleet. The company's roaming facilities were closed for most time on the first quarter 2020. On November 25, 2019, the government of Shouguang City issued a notice ordering all of the bromine factories in Shouguang City to temporarily stop production from December 15, 2019, to February 10, 2020, for environment provision.Due to the COVID-19 outbreak, the Company received an approval dated on February 27, 2020 allowing the Company to resume its bromine production issued by Shouguang Comprehensive Coordination Group for Epidemic Prevention and Control. In January 2020, the Company obtained an environmental protection assessment approval issued by the government of Shouguang City, Shandong Province for the proposed new Yuxin chemical factory.On January 27, 2020, the Company completed a one-for-five reverse stock split of its issued and outstanding shares of common stock, which was effective for trading purposes as of the commencement of trading on January 28, 2020. On February 12, 2020, the Company announced that it received a notice from Nasdaq on February 11, indicating that the Company has regained compliance with the minimum bid price requirement under Nasdaq Listing Rule for continued listing on The Nasdaq Global Select Market.On March 5, 2020, the Company received a governmental approval allowing the Company to resume production at bromine factories number one, number four, number seven and number nine.In the mid-March 2020, the company began trial production at bromine factories number one and number seven. Since the company’s factories were closed for most time of the first quarter 2020, the company generated relatively little revenue and sustained operating losses. For the first quarter 2020, ending March 31, 2020, the company reported net revenue of approximately $557,000 up from approximately $38,600 in the same quarter of the previous year.The loss from operations was approximately $4.8 million compared to approximately $6.4 million in the same quarter of the previous year. The net loss after tax was approximately $3.5 million compared to approximately $5.0 million in the same quarter of the previous year.The net loss per share was $0.37 compared to $0.52 in the same quarter of the previous quarter. Despite the closure of the facilities for 30 months in the past, the company’s balance sheet for the first quarter 2020 remained strong. As of March 31, 2020, the company had cash of approximately $93.6 million. Cash per share was $9.84. Current assets were approximately $96 million, and current liability was approximately $2.5 million. Working capital per share was $9.85. Shareholder equity was approximately $255.1 million and book value per share was $26.80.Our income statement, balance sheet and our cash flows are included in our press release in our 10-Q. So since the end of the quarter, the company has made substantial progress in reopening its business.Now, we will look at each of our business segments. Firstly, let’s look at the Bromine and Crude Salt segment. As announced on April 6, 2020, the company section number one, number seven has commenced commercial production, because this section has been operational back in year FY 2019. So the opening and commercial production has been relatively easy.On May 6, we commenced commercial production for section number four and number nine, expect the ramp-up of these two factories would be slightly slower than the ramp-up of factories number one and number seven, because they were not operational in the year 2019. We have installed new equipment in all of our factories and want to be certain that everything is operating perfectly.However, we expect to achieve full production by the end of the third quarter 2020. While in discussions with the local government for the opening of factories number two, number eight and number 10, these factories had issues related to the crude salt feed and aqueduct. For example, we try to add some neighboring crude salt feeds, are still in approval from the village government for the aqueducts. Lastly, we are optimistic that we will receive approval and we will be able to open these factories in year 2020.After we get a better sense of the exact timing of the opening of these factories, we will communicate with our shareholders. Over the past year, we have invested approximately $39.5 million to build more new wells. Many of the older wells have accumulated not or need to be disposed [indiscernible] that has limited our production. Some of the wells have also been damaged by Typhoon Lekima. These new wells have been drilled around all of our factories, including factory number two, number eight and number 10, would not have drilled wells around these factories, if we have not been and continue to be opportunistic about receiving approvals from the government.To the company’s knowledge, some of the bromine factories in China are still closed and some of them may be closed permanently due to the strict measures being taken by the Chinese government in an effort to battle against environmental pollutions. The company expects the demand and pricing for bromine to increase. The company is optimistic about the future of the bromine market. At the present time, there is somewhat mixed pictures, some domestic demand for products for papermaking in other industry has been stopped. Exports of downstream products also have been slowed.On the other hand, bromine is disinfectant that is used for both humans and animals. This COVID-19 pandemic has put an increased focus on – increased use of this disinfectant. In the past, people might not have been diligent about the use of disinfectant, but now government regulations and increased health awareness appear to be creating what we believe will be a continuing increase in the demand.Bromine is also used in pharmaceuticals. We are seeing an increasing demand in these two markets, which we expect to be continued. Despite the closure of many of our downstream customers, the current price of bromine remains at over and 30,000 per ton, significantly higher than it was when our factories were closed and almost twice the level from five years ago. We expect that both demand and pricing will increase as Chinese economic recovers. We also expect our Crude Salt business to be strong.During this period of COVID-19, we would like our investors to know that we are operating with the highest possible levels of protection for our employees. All of the company's employees had to wear mask and had to be disinfected, both before and after work. In addition, we are constantly disinfecting our factories and other facilities.So next look at the company's chemical products segment. The company is planning to begin construction of its new Yuxin Chemical factory in the immediate future. It had received full environmental approval as announced from the government, and now it's just waiting on the construction permission, due to this COVID-19. Construction is expected to take approximately one year and another additional six months should be required for equipment installation and testing. The company expects to begin trial production at the beginning of the year 2022.Our chemical factory will not produce lower margin products such as chemicals for papermaking. Instead, we have planned to focus more on higher margin pharmaceutical intermediate products. Bromine is widely used in pharmaceuticals and pharmaceutical by-products. Bromine has had ability to increase activity of the central nervous system, which makes them effective for [indiscernible], and many other medicines and other medical solution. These products which are having high demand opt for the opportunity for much higher pricing and margins with some of our traditional products, while this factory will be smaller than with some of our products. While this factory will be smaller than the combined two previous factories, but the company expects – this company to make higher net profit margin with its products.We continue to estimate the cost of this factory to be around $60 [ph] million, with an increase in the cost as we communicated with our investors. As Mr. Liu also previously mentioned in prepared remarks, we have enough cash on hand to construct restructuring and open our bromine facilities, [indiscernible] natural gas and bromine in Sichuan Province.On May 11, 2020, PetroChina announced one of the largest discoveries of natural gas in China, in Tianbao, Daying County in Sichuan province. Its discovery which is estimated to be in excess of 1 trillion cubic meters and its approximately five miles from the company's current natural gas well site as well as its two additional registered sites. We believe that it will be a substantial benefit for the company.As our investors may recall that on May 29, 2019, the company received a verbal notice from the government of Tianbao Town, Daying County, Sichuan Province, whereby the company is required to obtain project approval for its natural gas and brine water project, and approvals for the safety production, inspection, environmental protection assessment and land issue, further also need exploration license and mining license for bromine and the natural gas respectively based on the government requirement.At time, we were basically the only company seeking to operate in this extremely remote in new area. As a result, the province has not yet formalized all of its environmental regulations and mining exploration policies for this area. A discovery of over 1 trillion cubic meters of natural gas by PetroChina is accelerating the provincial government's focus on Tianbao Township of Daying County.The discovery of one of the largest natural gas signed in Chinese history by a major state-owned China company should ensure that the process is accelerated. Our company is very confident in its position by which recent Chinese quality audit say that private companies can explore and produce natural gas. We have one more field and have three more sites already registered with the government.The fact that PetroChina has found this natural gas reserves in the same formation gives us to believe that the gas in this area of our wells may be more reserved down its first, we believe PetroChina discovery also the company’s significant advantages.In addition, the company would periodically explore the possibility of working with PetroChina with us. We are in active discussion with local and provincial government, and we will keep shareholders informed about any update.So now let's look at the corporate commentary, because we have received a number of questions from shareholders about property issues. That we'd like to answer before turning the call back to Mr. Liu, even we already cover most of the questions in our previous discussion.There is one question about the company's general and administrative expense. He is asking the company's general and administrative expenses have gone up significantly in the last two years from $5 million in the year 2017 to $17.3 million in the year 2019, a 56% increase. We know that both years 2019 and in 2018, we had exceptional repair expenses, electrifications in Thypoon. This past year 2020 and year 2021 to be back to the levels similar to 2017.So the answer, there was one time cost such as electrification cost and repairment cost of the pipeline may be reduced. But due to the inflation and there are some costs, which had been increased, such as employees compensation and salary, which increased for the recent years, which had to decreased, but in the coming years we are looking into this nature and finding other ways try to saving cost and maintain the general and administrative expenses to be at a similar level to year 2017.Strategic plan. The company is currently working on a three-year strategic plan. As soon as we get clarity about the opening of our bromine and crude salt factories, the construction timing of our chemical factory and the timing of opening our natural gas and dry operation in Sichuan, we will complete the plan and share with our investors. Communication with shareholders, as you can see, the company has been very proactive in issuing press releases this year. We will continue to work very hard to keep our shareholders informed.In addition, we will update the company's website continuously, and also to get better clarity on the timing of opening the remaining business, we will also provide our sales and earnings guidance to investors.So now let's turn this call back to Mr. Liu for the Q&A session. Operator, can we open the call for the Q&A session?

[Operator:]

Yes, Helen, thank you. [Operator Instructions] Helen, it appears we have no questions at this time.

[Helen Xu:]

Okay, thank you, operator.

[Operator:]

Excuse me, I am sorry. We did get a question from a John [indiscernible], a private investor. [Foreign language] Please go ahead sir.

[Unidentified Analyst:]

Yes, we are now half way through the second quarter of the year. Do you have a forecast for revenue and profit in this quarter?

[Helen Xu:]

Hi, sorry. I cannot hear you clear. Would you mind repeat your question?

[Unidentified Analyst:]

We are now half way through the second quarter of the year. Do you have a forecast for revenue and profit in this quarter?

[Helen Xu:]

For the second quarter? Okay. May I know your name, I think the operator may be lost the line. John [indiscernible] …

[Operator:]

Yes, Mr. John currently he asked his question already, Helen. Mr. John, I am sorry, could you please repeat that, I am having a technical difficulty with hearing you sir.

[Helen Xu:]

I got his question.

[Operator:]

Thank you, please continue Helen. Excuse me.

[Helen Xu:]

Thank you. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay. Thank you. [indiscernible] yes, even though there are only four factories in commercial production currently [indiscernible] probably the investors we say that we may provide like a prediction in revenue, prediction of guidance for public issued the press release on the company website.

[Unidentified Analyst:]

Hello?

[Operator:]

Hello?

[Helen Xu:]

Hi operator, I think his line is not clear.

[Operator:]

Yes. This line is clear now. Yes, thank you. There are no additional questions at this time, Helen. Would you like to make some additional remarks?

[Helen Xu:]

Okay, well.

[Operator:]

Thank you, Helen. We have no additional questions.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

[Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

[Foreign Language] Hi, operator. Do we have any more questions, otherwise we can close the call for today.

[Operator:]

Yes. There are no additional questions, Helen. You may close the call.

[Helen Xu:]

Okay. Thank you. Thank for attending this call. Thank you all. Take care.

[Operator:]

Thank you. This concludes today's conference.

[Helen Xu:]

Thank you.

[Operator:]

You are welcome. You may disconnect your lines at this time everyone. Thank you for your participation.

[Helen Xu:]

Thank you.