Gulf Resources, Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Good morning, ladies and gentlemen. My name is Tam [ph] and I will be your conference operator today. Welcome to the Gulf Resources 2018 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Ms. Helen Xu. Ma'am you may begin your conference.

[Helen Xu:]

Okay. Thank you, operator. Good morning, ladies and gentlemen, and good evening to all of you who are joining us from China and we'd like to welcome all of you to Gulf Resources' third quarter 2018 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 will be offering translation for his comments for the company's operating results during the Q&A session. I would like to remind you to all of our listeners that in this call, certain management's remarks during the call with contain forward-looking statements information about Gulf Resources operation 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 1933 and are subject to the safe harbor created by those rules. Actual results may differ from those discussed today taking to account and now of risk factors, including, but not limited to, the general economic and b ns condition in China, future product development and production capabilities. Shipments to end customers, market acceptance of new and existing products, additional competition from the existing under the new competitors from the bromine and other oilfields, and power production chemicals and change in technology, the ability to make future bromine asset and various other factors beyond the its control. All forward-looking statements are expressly qualified in this entirety by this precautionary 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 the expectation 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, November 14, 2018. For those of you who 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 early for the details. So, before we start presenting our financial results, Mr. Xiaobin Liu, our CEO would like to make some comments about the past year for our shareholders and employees.

[Xiaobin Liu:]

Hello. Good morning, everyone. Thanks for attending Gulf Resources' 2018 third quarter earnings conference call. We cannot imagine a more difficult time for any collaboration. The Chinese government in a mission to improve our environment where one of our shareholders visited at the beginning of the year. He showed me his Apple Watch. The weather section that usually [indiscernible] with highly unhealthy. Weather is highly unhealthy, something really needs to be done and when leaving here note that the air needs to be improved and our citizens and farmers need to be protected from the polluting industries. We agreed with the steps and supported them have been taking few that had not made it any easier for our management team, our company, our employees and even our shareholders. When the government announced its new plan to improve the environment, we had to close all of our bromine, crude salt and chemical operation. We worked very hard to rectify our bromine and crude salt operation and develop plans for our new chemical factory in especially designed industrial pack. Then Shouguang City was hit by one of the worst Typhoon in recent memory. Crude salt plants were flooded, those were destroyed, products were damaged, factories were flooded and so on. Before we could even ask for approval to reopen our facility, we had to clean up the mess and repair the damages. Then we received a notice from the government that three of our factories, bromine factories were to be permanently closed, because they could not find a solution for the waste water discharge and reach the bromine and crude salt coal production papers [ph]. During this time, it would have been easy to discourage. However, our team has been united and highly motivated. Our managers have gone into the field to work together with our workers to get our facilities cleaned up after the flood. As little current revenue, large losses and a decline in stock price, it would have been easy to hide from investors for other companies, but we have worked very hard to communicate with you every step of the way. This year, we have issued more press releases than we had in the past. We very much want you to stay fully informed. After all these events, now we are becoming optimistic about the future. We have a large amount of cash, which is approximately $280 million. At the end of the third quarter 2018, this cash will enable us to rectify our bromine factories according to the new regulation to the advanced chemical factory and purchase the increment to get our natural gas sales operational and profitable. We believe many of our competitors will not be able to do the same. When our businesses return to operation, the level of competition may be reduced. In addition, the recurring RMB debt import will be more expensive. This should mean that profit margin could be higher than the past. We believe that we will emerge from the older as much stronger and more profitable company. If all goes according to our plan, we should end record profit in the next three years. So now, I would turn the call over back to Helen to review each of our business segments.

[Helen Xu:]

Thank you, Mr. Liu. So, I'll review our business segment one-by-one and financially profit numbers. So firstly, let's look at bromine and crude salt segment. While we have no guarantee by the government, we approved opening of our seven remaining bromine and crude salt factories. We are optimistic enough to increase our cash flows pending on bromine. Our initial estimate for rectification was around $35 million. As of September 30, 2018, we have spent around $28.1 million. We will spend another $7 million in the first quarter of 2018. In addition to the expenditures on rectification we have indicated that we will spend around $8 to $10 million to repay and rebuilding the damages from the flood. We will also spend around $30 million to drill more than 1,000 new wells, roughly more than 2,000 of our older wells are in the need of repair or are producing at less than acceptable levels. These older wells will be scrapped. Now more than 1,000 new wells will allow us to have more efficient production, this will bring the total expenditures in our bromine and crude to around $85 million. We will not be spending this money if we did not think we could get approvals for these factories. Since the end of third quarter 2018, we have signed around five contracts costing $14.6 million, which including $5.9 million to repair the flooded wells, $2.6 million to repay damaged acreage [ph], halogen reserves and $0.2 million for land for the waste water distract channels on Factory No 10, $5.1 million for waste water drainage and treatment for Factories, No 1, No 2 and subdivision of Factory No 1, and $0.81 million waste water drainage and treatment for our Factory No 10. As we have indicated, we will not be signing of these contracts if we did not believe that we will receive approvals to reopen our facilities. We believe that many of our competitors may not have the resources to complete the rectification and repair the damages from the typhoon. At the present time we believe that some of the production capacity in the market will be permanently revoked. Bromine prices have remained where have. At the moment they are around $79 per ton and may continue to go up. The devaluation of RMB making import into China more expensive which will also benefit our company. These factors may enable us to earn more than we have had in the recent years in this segment. As a frame of reference, in the year 2010 when bromine was priced at above RMB19,000 and the one we had nine factories, we earned $60.5 million in our bromine and crude salt segment. This is not a projection. We are providing this information to demonstrate the potential leverage in this business. At the present time, we believe we will complete rectification and clean-up at the beginning of the first quarter 2019, but we still need approvals for project approval, planning approval, land use rights approval and the environmental protection assessment approval. By working closely with the local government, we think the approvals will come shortly thereafter as long as our rectification and clean-up meets the new government specifications. We hope to commence operations in our seven factories by the end of the first quarter of 2019. So, now let's look at Chemicals segment. The plans for our new chemical factory are still on schedule. Our new chemical factory had already received part of the approvals, we are moving ahead on receiving the rest approvals for it. We still expect to build our factory in year 2019 and commence operations at the beginning of year 2020. The company's new factory under the plan may be smaller than the original two factories combined. We may have to discontinue some products that have higher levels of pollution in their manufacturing, such as chemicals for paper making and et cetera. Our focus may be on higher margin products that offer more downstream opportunities for bromine, such as pharmaceutical products. But all of these plans are subject to government approvals which we believe are in progress. While the product volume will be lower than the previous peak levels, we believe the profit margins will be higher, because we will be focusing on higher margin products and competition may also be reduced. Natural gas. Our natural gas well is still under testing. After we received the equipment we ordered, we found that we needed some equipment adjustments that could assist us in separating impurities, pressurizing the gas and removing the water. This equipment has been adjusted and re-installed. The initial testing has been positive. The well is firing, and the equipment is operating successfully. We expect to start test production in the next two weeks. We will begin trial production most likely before the end of 2018. Commercial production should commence in early 2019 and the ramp up production volume, depending on the results of trial production and the underground geography condition. We believe this will generate profits in year 2019. After six months of commercial production, we will consider plans for drilling additional wells depending on the first well operation results. So, now let's look at third quarter financial results. For the three months ending September 30, 2018, net revenues were approximately $343 million as compared to net revenues of $23.4 million in the same quarter of the previous year. We wrote off approximately $1.4 million in property, plant and equipment. We also wrote off $18.6 million to demolish the three factories that are permanently closed. Direct Labor and factory overhead were approximately $5.6 million. General and administrative expenses were approximately $1.2 million as compared to $2.6 million in the same quarter of fiscal year 2017. Our loss from operation was $26.8 million compared to a profit of $4.8 million in the same quarter of fiscal year 2017. Our net loss before taxes was approximately $26.7 million compared to a profit of $4.9 million in the same quarter of fiscal year 2017. We had the tax benefit around $7.2 million compared to a tax expense around $1.5 million in the same quarter of year 2017. We had a negative foreign currency translation adjustment approximately $14.7 million as compared to a positive adjustment around $8.5 million in a year to that in the prior period. This adjustment was related to the value of the U.S. dollar against the Chinese RMB. Our comprehensive loss was approximately $34 million compared to a profit of $11.9 million in the same quarter of fiscal year 2017. Our loss per share both primary and fully diluted was $0.42 compared to a profit of $0.07 in this same quarter of fiscal year 2017. Nine months, for the nine months ended September 30, 2018, net revenues were around $2.6 million as compared to $104.2 million in the same period of the previous year. And loss from operation was approximately $41.9 million compared to a profit of $34.1 million in the same period of the previous year. Our loss before taxes was $41.5 million, compared to a profit of $34.2 million in the same period of the previous year. We had an income tax benefit of $10.3 million, compared to expect of $9.2 million in the same period of the previous year. Our net loss was $31.3 million, compared to a profit of $25.3 million in the same period of previous year. We had a negative foreign currency translation adjustment of around $19.4 million compared to a positive adjustment of $17.7 million in the prior period of previous year. Our comprehensive net loss was approximately $50.7 million compared to a profit of $43 million in the same period of previous year. Our loss per share both primary and fully diluted were $0.60, compared to earnings of $0.54 in the same period of previous year. Now, look at cash flow statement. For the nine months ending September 30, 2018. Net cash flow provided by operating activities was approximate $23 million, compared to $23.5 million in the same period of the previous year. The major factors contributing to positive cash flow during a period when our loss from operating activities was approximately $31.3 million were depreciation and amortization. Our loss on demolition of factory decreased inventory and the decreased accounts receivable. We invested around $12.1 million in property, plant and equipment and the payment of land leases. Now, let's look at the balance sheet. As of September 30, 2018, we had cash of approximately $208.2 million roughly equaled to our cash of $208.9 million on December 31, 2017 with 46,803,791 shares outstanding, we ended the quarter with cash per share of $4.45. Current assets were around approximately $211.7 million compared to $241.5 million on December 31, 2017. Property, plant, and equipment were approximately $66.9 million, as compared to $95.1 million on December 31, 2017. Total assets were approximately $336.5 million as compared to approximately $387.5 million on December 31, 2017. Current liabilities were approximately $3.1 million largely unchanged from the level at the year-ended December 31, 2017. Working capital were approximately $208.6 million, working capital per share was $4.46, total liabilities were approximately $5.2 million down slightly from $5.5 million at the year-end on December 31, 2017. Net, net cash, which is cash minus liabilities were approximately $203 million. Net cash per share was approximately $4.34, stockholders' equity was approximately $231.3 million as compared to $281.9 million at the December 31, 2017. Book value per share was $7.08 - sorry the stockholders' equity was approximately $282 million at December 31, 2017. As now, we know that you our shareholders are very frustrated by the events that have occurred until now as this is very difficult to focus all of us to have all our facilities closed. But as we have indicated, and management indicated that the company is optimistic about the future with $2 billion of our seven remaining bromine and crude salt facilities may receive approval to open. When they do, we believe bromine prices and the product feasibilities maybe very high. We do believe our chemical factory will be built in year 2019 and opened at the beginning of the year 2020. Year two, we expected strong margins and profit. We expect that our natural gas values are maybe profitable in year 2019 as well. We are spending a lot of money to build advanced facilities in each of our segment. When the process is completed, we believe we will have a stronger and a much more profitable company. So, thank you. And operator I think we would like to open the call for question part.

[Operator:]

Sure. Thank you, Helen. [Operator Instructions] And there are no questions at this time. Presenters you may continue.

[Helen Xu:]

Hi operator. I think if there is no question can we just close the call for today?

[Operator:]

Sure. And this concludes today's presentation. Thank you all for your participation. You may now disconnect.

[Helen Xu:]

Okay, thank you.