Gulf Resources, Inc.
Q2 2020 Earnings Call Transcript

Published: 17 Aug 2020

[Operator:]

Hello and welcome to the Gulf Resources 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Helen Xu. Please go ahead, Helen.

[Helen Xu:]

Thank you, operator. 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’ second quarter 2020 earnings conference call. My name is Helen, 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 of our listeners that in this call certain management's statements during the call will contain forward-looking statements and information about Gulf Resources, Incorporation 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 a number of risk factors, including, but not limited to, the general economic and business condition in China, the risks associated with COVID-19 pandemic outbreak, future product developments and production capabilities, shipments to end customers, market expectations of new and existing products, additional competition from our existing and new competition from the bromine and the other chemical productions, changing technology, the ability to make future bromine assets and various of 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. Accordingly, our company believes the 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 17th of August, 2020. For those of you unable to listen to this 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.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Hi, thank you very much to attending the call results 2020 second quarter earnings release conference call. So we had to close all of our facilities, so the government [ph] could not move ahead on the plans to improve the environment when just as we were getting some of our important and crucial operations back on line we were hit by one of the most destructive typhoons in Chinese history. Then we were impacted by the COVID-19 pandemic which caused a delay in the opening our facilities and both of our customers.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay, this caused [indiscernible] transformation period for our company the commercial production sites #1 and #7 on April 2020 and sections #4 and #9 on May 2020. We received approval to begin construction of our new chemical factory and commenced formal construction in June 2020. PetroChina made one of the largest discoveries of natural gas in Chinese history in an area very near to the company at [indiscernible] well in Tianbao Town of Daying County in Sichuan Province, which is only two kilometers away from the company's existing well.

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay, while our earnings [ph] were small and we shipped in a lot during the second quarter of 2020, we were extremely optimistic that we will be able to scale our weakness and return to profitability in the near future because below reasons. Firstly it has tested the mill [ph] [indiscernible] our four bromine and crude salt flagship and will be gearing up production. We hope to achieve good production in the fourth quarter 2020. We expect to receive permission to open our still remaining bromine factories by the end of this year or the beginning of next year. We believe our new chemical factory, which will focus on pharmaceutical intermediate products with higher margins. We also believe that we have strong opportunities to produce natural gas and the bromine production in Sichuan province. We appreciate the support of our investors through this long process. We will provide you with financial projection of three to five years plan and increase communications as we return our company to profitability. So now, I will hand the call back to Helen.

[Helen Xu:]

Thank you, Mr. Liu. So I would provide update on the company's financial results and operating results and we will cover the questions we have received from our investors. Even though our financial results in the second quarter may at first look week, but we are very [indiscernible] our progress. Firstly, let me confirm and across our segments. So during the second quarter of 2020, net revenues declined 11 percentage to approximately $5.4 million as compared to the results from year 2019 is decreased relative to mainly due to a lower volume of production and the lower selling price in bromine segment. During this quarter, we produced approximately 1280 pounds of bromine in our first factory. The total reached from 215 to 295 pounds. In all we produced around approximately 16 percentage of our total capacity. For the three months period ended June 30, 2020, our gross profit margin for our bromine segment was 5%. There was a 14% decrease as compared to the same period from year 2019. I want to highlight here that there are two major sectors impacted this margin in bromine. Firstly, bromine prices have come down from about $4427 [ph] to $3672 [ph] per ton which caused [indiscernible] in the domestic volume and the lack of exports mainly caused by the COVID-19 pandemic. However, the current price is not far below the price in the year 2017 and 2016 prices and is quite far above the prices in the year 2015 and 2014 which are $3177 and $2863 which [indiscernible] in the same quarter of previous years. Even though our bromine prices were profitable at each of these price levels, so now that the Chinese economy is recovering and many of our downstream customers are beginning to reopen, we expect the selling price of bromine to stabilize and then increase. However, even if bromine prices remain at their current levels we should be able to generate profits as our production improves. While other major contributions the decline margins [indiscernible] of approximately $1.1 million in costs from [indiscernible] labor and especially overheads incurred during plant shutdown to cost of revenues. The costs for factories were also instead of two, meaning low the expenses were operating at a total production level. [Indiscernible] the factories had to assume substantial amounts of operating costs as well as depreciation and amortization for limited amount of production. Now let's look at our planning cost actions. As Mr. Liu noted earlier, we received approval to begin construction of our new chemical factory and commenced formal construction in June 2020. As we promised, the company has placed the photos of the construction kicking [ph] investor to be [indiscernible] on our website. You can find the photos on the corporate PPT section of About Gulf tab and with PPT file. The construction is expected to take approximately one year and additional six months to complete its [indiscernible] installation and testing. The company expects to begin trial production at the beginning of 2022. While this factory will be smaller than the combined two other factories, the company expects it to make higher net profit margins as we plan to focus more on the higher margins from [indiscernible] intermediate products. While cost of the chemical factory including land is expected to be $60 million, we have spent $16.5 million of the estimated $60 million on land design [ph] and the initial construction. Last, let me take the natural gas segment. During the quarter, PetroChina made one of the largest discoveries of natural gas in Chinese history in Tianbao Town in Daying County of Sichuan Province. The same [ph] County in which our company had a few that our 15 wells and made further involve additional wells. With PetroChina's huge discovery we believe that the government will more focus on finalizing the planning for exploration and exploitation of new wells started in this area. Once the planning has been finalized, we plan to proceed with our applications for the natural gas and brine project approvals. While we have not had any conversations with PetroChina, but we believe we may be able to validate as it builds its infrastructure including pipelines in Tianbao Town of Daying County. Our company remains very optimistic about the long-term potential of this project. So now let's looks at this quarter's financial results. During the quarter, the company sustained a loss from operations of approximately $2.95 million compared to a loss from operations of $1.2 million over the previous year 2019. The net loss in the current quarter was $2.2 million approximately compared to a net loss of $738,000 in the same period in the previous year. The loss per share was $0.24 in the current quarter compared to a net loss per share of $0.08. The comprehensive net loss including the impact of currency translation was $2 million compared to a net loss of $10.2 [ph] million in the same period in the previous year. For the year-to-date the company generated positive cash flow from operations of $1.2 million compared to last year cash flow from operations of $6.8 million in the previous year. The company purchased $9.9 million of property, plant and equipment in the first half of 2020 as compared to $11.5 million in the same period of the previous year. Now let's look at the balance sheet. [Indiscernible] most of its factories closed for the past three months, the cost of buying of new equipment and spending $39.4 million to drill more new wells and approximately $16.5 million on the new chemical factory. The company's balance sheet remained strong. At the end of the second quarter of 2020, the balance sheet was at total cash $90 million, cash per share of $9.45, working capital $93.7 million, working capital per share $9.85. Net-net cash spend to minus all liabilities $28.2 million, net-net cash per share $8.22, shareholders' equity approximately $253 million and shareholders' equity per share $26.59. Our company believes that it has adequate cash flow to complete its chemical factory, open all of its bromine and Crude Salt facilities, drill new natural gas wells and still make acquisitions. Our company discloses now the financial results for the three and six months ended June 30, 2020 compared to the similar results recorded in the same period in the previous year as detailed in our financial filing available at the SEC NASDAQ. So we want to highlight our communications with shareholders. Now that many of our factories are in operations, we will begin to provide shareholders its quarterly and annual guidance. We hope to begin this guidance when we report the third quarter. We are also commencing work on three and the five year plan. As soon as this plan is completed, we will present it to our shareholders. We also recognize that our website is outdated. We will provide updates on all of our facilities as we have on the chemical factory on our website. You also can see that change on the website that we are making it easier for investors to navigate. We can conclude that the second quarter was a very important one for our company because we opened our four bromine and crude salt facilities and tested our new equipment. We believe we will scale up production this quarter and achieve - reach full productivity in the fourth quarter. We are also optimistic about getting approvals for our remaining three factories. We began construction on our new chemical factory which should begin full production at the beginning of 2022. We are very excited about 3Q for natural gas in Sichuan Province [indiscernible] that the private company can mine and then produce natural gas with the massive discovery of the PetroChina in the same area as our wells. We believe the new rules will be expedited in a manner that enables us to assume producing natural gas and give newer, now that we have increased visibility we will work to provide shareholders with financial projections including quarterly guidance and the three to five year plan. We appreciate the patience of our shareholders and believe we will show strong growth in sales and generate profits in the coming quarters. So, operator, can we open for the Q&A session?

[Operator:]

Absolutely. [Operator Instructions]

[Helen Xu:]

Hello, operator?

[Operator:]

Yes, our first question today is coming from David Xu [ph] from Group [ph]. Your line is now live.

[Unidentified Analyst:]

Thank you. Hi good morning.

[Helen Xu:]

Thank you.

[Unidentified Analyst:]

I want to check, right now you have such a huge pile of cash or working capital in your balance sheet, but your share price is so low is the company afraid being buyed out by other company or by other investors?

[Helen Xu:]

Hi, sure sorry and to your last point, so you're asked buy the company?

[Unidentified Analyst:]

Yes, so will your company have any surety or policy to avoid being bought up by other investors, because your cash is so attractive, but your share price is so low?

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Unidentified Analyst:]

No we are, I am not talking about investing, but I am talking about being buyout by other investors if they offer to purchase your company, the buyer?

[Helen Xu:]

Oh, sorry sorry, I have listened like a attractive [ph] a check, okay I am sorry. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay.

[Xiaobin Liu:]

[Foreign Language]

[Unidentified Analyst:]

When I answer the question concerning the, how much share, how much shares or how many shares does the insider owns in your company?

[Helen Xu:]

Okay. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay, so, Mr. Yang, the Chairman of the company and his [indiscernible] including his son, wife and others.

[Unidentified Analyst:]

So it is less than 50%?

[Helen Xu:]

30, more than 30% around more than 30%, but the exact number I think you can find on the company document we filed in [indiscernible] with the SEC.

[Unidentified Analyst:]

Okay, and how about other institutional investors?

[Helen Xu:]

Which I don't have a clear cut…

[Unidentified Analyst:]

You have no idea how many shares other institutional ownerships?

[Helen Xu:]

No we don't have a [indiscernible]

[Unidentified Analyst:]

So, if other investors take a hostile bid to buy your company, does the company have any strategy to fend them off?

[Helen Xu:]

Sorry? The line is not clear. I could not hear your last question.

[Unidentified Analyst:]

Yes, I mean, if other investor, with a hostile bid keeps eye on your company, does the company…

[Helen Xu:]

As an investor…

[Unidentified Analyst:]

Yes that why I asked, the investors or institutions or buyers became a hostile bid and planning to buy your company in whole…

[Helen Xu:]

As in question. Okay, the answer, currently we didn't have here any deals or information who want to buyout the company, but if later on, anyone wishes we will talk about it.

[Unidentified Analyst:]

Okay, great. For example, just for example, if I also can buy your company at $6 each a share, will your company accept that or will your company be able to fend off such an offer?

[Helen Xu:]

Do you mind say again, because the line is really when you speak it is not clear?

[Unidentified Analyst:]

Okay, can you hear me now?

[Helen Xu:]

Yes, talk slowly, otherwise the sound is not clear, you talk slowly, so…

[Unidentified Analyst:]

Okay. Just for example, okay? If I make an offer to buy your company at the current share price of $6 per share, how can your company fend off such a hostile bid?

[Helen Xu:]

So, you mean if you want to buy the company at the current price $6 per share?

[Unidentified Analyst:]

Yes, as an example only. Okay?

[Helen Xu:]

For example, yes. Now what's your question?

[Unidentified Analyst:]

Okay, how can your company handle this?

[Helen Xu:]

Okay, okay, I got you. Okay little clear. [Foreign Language]

[Xiaobin Liu:]

[Foreign Language]

[Helen Xu:]

Okay, so that is - first of all when you think of that Mr. Yang and his family they will certainly not sell their shares. If you could - more than, approximately more than 30%. Secondly, other shareholders or investors, we don’t know clearly that they thought about it. In fact based on our understanding we think now the only if shareholders shift, based on this no value [ph] now.

[Unidentified Analyst:]

Okay, I fully understand that.

[Helen Xu:]

And then Mr. [indiscernible] will lead the company, we really live on the trust and believe on the company's future.

[Unidentified Analyst:]

There is always a danger that others will buy your company or offer a higher price to buy out all your company shares.

[Helen Xu:]

Yes, but I've mostly explained that Mr. Yang and his family definitely will not sell.

[Unidentified Analyst:]

Okay then. Thank you so much for your answer.

[Helen Xu:]

Okay, thank you. You're welcome.

[Operator:]

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. Hello, do you have any further comments? Hello, do you read me? Thank you. That does conclude today's teleconference. You may disconnect our line at this time and have a wonderful day. We thank you for your participation today.

[Helen Xu:]

I apologize. So we are [indiscernible] through the call today if there are no more questions.

[Operator:]

Yes, that's it we are set. Thank you so much for your time.

[Helen Xu:]

Thank you.

[Operator:]

You may now disconnect.