Gulf Resources, Inc. (NASDAQ:GURE) Q2 2022 Earnings Conference Call August 15, 2022 7:30 PM ET
Company Participants
Helen Xu – IR Director
Naihui Miao – Secretary, COO, VP & Director
Xiaobin Liu – CEO & Director
Conference Call Participants
Operator
Greetings, ladies and gentlemen, and welcome to the Gulf Resources 2022 Quarter Earnings Conference. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Helen Xu. The floor is yours.
Helen Xu
Thank you, operator. Good morning, ladies and gentlemen, and good evening to those of you joining us from China or U.S. And we’d like to welcome all of you to Gulf Resources Second Quarter 2022 Earnings Conference Call. I’m Helen Xu, the IR Director. The company CEO, Mr. Xiaobin Liu; 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, information about the Gulf Resources Inc. 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 completion from existing and new completion from the bromine and the other oilfields and the power production chemicals; changing technology; the ability to make future bromine assets; and various other factors beyond its control.
All forward-looking statements are extremely 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 estimates as of today, the 15th of August 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.
Note that the company has reported a strong quarterly profit, with hopefully stronger quarterly numbers in the coming quarters. We are going to increase our efforts to communicate with our investors. We welcome you provide suggestion to our IR management team.
On this call, I will review the second quarter and the 6 months results first and then turn the call over to Mr. Miao and Mr. Liu for their commentary.
So now firstly, let’s look at the 3-month period ending June 30, 2022. We are pleased to have reported a strong and profitable second quarter in year 2022. Revenues increased 41 percentage to $15.7 million. Gross profit increased 80% to approximately $7.6 million. Income from operations were approximately $5.1 million, compared to a loss of approximately $2.4 million. Net income was $3.9 million, compared to a loss of $2.7 million. Earnings per share were $0.37, compared to a loss of $0.26. 6-month period ending June 30, 2022, net revenue increased 50% to approximately $24.6 million. Gross profit increased 126% to approximately $7 million. Income from operation were approximately $5 million, compared to a loss of approximately $5.7 million. Net income was $3.8 million, compared to a loss of $5.2 million. Earnings per share were $0.36, compared to a loss per share of $0.50.
Now let’s look at the second quarter business segment, firstly related of bromine. Bromine revenue in the second quarter increased 38% to $13.9 million. The primary contributor to the higher revenue versus increase in the selling price. In second quarter, the average selling price was $7,740, compared to $5,556 in the same quarter of the previous year. There is always a lag in average selling price compared to the market price, and the company fulfilled orders based on when they are received.
During the quarter, the company sold 1,795 tonnes of bromine, slightly lower than 1,805 tonnes in the previous year. During the second quarter, in order to control COVID-19, the government made a series of unannounced inspections that caused the company to shut and then reopen facilities. During the second quarter of 2021, there was 1 full inspection. The company believes the inspection in 2022 had a more significant impact on production than it did in the inspection in the year 2021. The cost of revenues in bromine were approximately $6.9 million, an increase of approximately $1.3 million from the same quarter of the previous year.
The price of bromine in China, the RMB has appreciated approximately over 100 percentage since September 2020, although the Chinese economy has slowed, bromine prices remained very strong for 2 primary reasons. Firstly, the demand remained strong for fire retardants [indiscernible] and pharmaceuticals. Secondly, supply constraints, both because older fields may have lower utilization and because many countries like China have forced the closing of bromine facilities for environmental reason. In a recent press release, as of now we are one of the world’s largest producers of bromine, which stated that tight market conditions continue to drive strong demand and favorable pricing for bromine. We believe the supply and demand balance for bromine remains extremely promising.
To comply with the new government directive, the company separated bromine and crude salt into 2 business separate entity. As a result of this relocation, bromine received a significant higher allocation of expenses than in previous years. Even with the higher allocation of cost, income from bromine segment increased 98.5% to approximately $5.3 million from approximately $2.7 million. In the quarter, the company spent approximately $32.8 million, mainly in its bromine wells, aqueducts and the installation of high- and low-voltage lines for bromine wells. The company believes this expenditures may enable it to maintain a slightly increased utilization in the bromine segment in future quarters.
The company continue to believe it will receive permission to open one of its closed facilities in the near future. And hopes to be able to open a second in the first half of year 2023. On August 3, 2022, as of now, as we discussed early, it stated in its press release, that the market conditions continue to drive strong demand and favorable pricing for bromine. The company also believes the same condition may apply to its business in China.
Now let’s look at the second quarter results for crude salt segment. Crude salt revenues increased 62 percentage to approximately $1.8 million. There was a 10% increase in production in tonnes and a 47% increase in average standard price. The cost of net revenue decreased by 9%, largely as a result of the reallocation of costs. Crude salt reported income from operations of $142,968, compared to a loss of $578,435.
Now let’s look at the chemical segment in the second quarter 2022 results. The chemicals segment revenues were 0. The net loss were for $475,000 in the previous — in this quarter. During the quarter, COVID restrictions as well as supply chain issues caused the delays in receiving some of the previous ordered machinery and equipment, including wastewater treatment and solid waste treatment equipment. The company is working with existing suppliers and may identify new suppliers so it can complete construction of its factory based on the delivery.
To date, the company has spent approximately $45.6 million on its new factory. It’s believed the total cost will be approximately $69 million. The company cannot currently project when construction will be completed and production will begin, but does not believe delays will impact the cost of the projection. Our long-term profitability, the company will update our investors as soon as the wastewater treatment and solid waste treatment equipment is delivered.
Now let’s look at natural gas in this quarter. Natural gas segment had zero revenue and a net loss of $61,699. That’s equal to the loss in the previous year. Pursuant to the opinion of the Ministry of Natural Resources and several issues in promoting the reform of these mineral resource management, trial by the Ministry of Natural Resources and Forestry on January 9, 2020, which came in effect on May 1, 2020. Privately owned enterprises are allowed to participate in the natural gas production. The company plans to proceed with its application for the natural gas and provide project approvals with related government departments until the government planning has been finalized.
Now let’s look at the balance sheet. The company had cash of approximately $79.1 million. Total assets were approximately $298.6 million. Total liabilities were approximately $23 million. Shareholders’ equity was approximately $275.6 million based on the shares issued and outstanding, which is 10,471,924 shares. Book value per share or shareholders’ equity per share was $26.32.
Cash flow. The company generated approximately $18.5 million in cash flow from operations versus $7 million in the previous year. The company invested approximately $33.2 million in its bromine business, mainly for bromine wells, aqueducts and the installation of high- and low-voltage lines for bromine wells. The change in the value of RMB to the U.S. dollar cost reduction in cash. And the cash equivalents of approximately $1.6 million versus a credit of $1.9 million.
For other financials in the second quarter. Direct factory and overhead costs for closed factory were approximately $1.9 million versus $1.4 million in the same period of previous year. Corporate costs declined to $67,987 from approximately $3.2 million. In the second quarter of year 2021, the company incurred approximately $2.1 million in [indiscernible] charges for the stock grant to management. There were no stock grant in the second quarter of 2022.
Foreign currency translation adjustment. For the quarter, the company had a negative foreign translation adjustment of approximately $16.4 million versus a positive adjustment of approximately $5.3 million in the previous year. This adjustment was caused by an approximately 6.1 percentage decline of RMB versus the U.S. dollar. Adjustment impact all balance sheet translation into U.S. dollar.
Now let’s look at our 6 months results by segment. Firstly, the revenue in bromine segment increased 48 percentage to approximately $22 million. Net selling price increased 39%. Costs increased 19% to approximately $10.8 million. Income from operations increased 376% to approximately $6.7 million despite the higher allocation of costs as a result of separating salts from bromine segment.
Crude salt. The loss from crude salt segment from operation was approximately $379,000 versus a loss of $1.6 million. Chemical and natural gas. Chemical products lost approximately $988,000, and natural gas lost approximately $88,000, as neither business had revenue in this 6 months.
Now let me turn the call back to Mr. Miao and Mr. Liu for their commentary.
Naihui Miao
So I will do the translation for Mr. Miao’s commentary. Mr. Miao say that hello, hi, everyone. I’m the company’s COO, Miao Naihui. So welcome to attend the Gulf Resources Second Quarter and First Half Year 2022 Earnings Conference Call.
With our new wells updated and other bromine facilities updated, the company should be able to maintain or slightly increase its utilization rate and production. In the remainder year of 2022, prices continue to be very strong for bromine. Our average selling price in the second quarter was $7,740. As COVID-19 abate, we expect increase in demand for bromine and related products. The combination of higher utilization and higher pricing should lead to significant improvement in the profit in the third quarter and beyond in our bromine segment.
We would, however, like to remind our investors that Chinese New Year is 10 days earlier in year 2023 than it was in year 2022. We do not know if the government will require closing of facilities. But if it does, a small amount of fields could be transferred from the fourth quarter 2022 to — into first quarter 2023. In addition, we are hopefully receiving approval to reopen 1 factory in the near future because we have already made a lot of work in this factory. We expect further CapEx expenditures will be raising the factory side only. We look forward to strong profit improving in coming quarters.
Xiaobin Liu
Now we’ll do the translation for Mr. Liu’s commentary. Mr. Liu said that, Hello, everyone, I’m the company’s CEO, Mr. Xiaobin Liu. First of all, welcome all of you to attend the Gulf Resources Second Quarter and First Half Year 2022 Earnings Conference Call. We are very pleased to have reported earnings of $0.37 per share in this quarter despite the COVID disruption. We believe earnings will continue to be strengthened. We are working hard to solve supply chain issues with our wastewater and solid waste treatment equipment for our new chemical factory. Once this equipment is delivered, we will be able to complete the construction and begin [indiscernible] production and test production based on the market for pharmaceuticals and thereby products as well as the market for other chemicals using bromine. We believe our chemical factory will produce strong returns.
We also believe that we will be able to produce natural gas and bromine [indiscernible]. At this time, management has not received any stock grant for year 2022 yet. If it does receive stock grants in coming quarters, the grants will be lower. Grant numbers will be lower than last year. We appreciate the patience of our shareholders while we are not making projections based on the current price of bromine. We expect remainder of the year will be extremely profitable. We know that our investors will like company to pay dividend or buy back stock. As we have said before, we would be very much to be able to do this. But unfortunately, with currency controls, we cannot get money out of China.
Our long-term plan is to be able to produce pharmaceutical chemicals that can be exported to other countries, especially those in Asia, where there is a high demand for these products. Once we are producing this pharmaceutical chemicals, we believe we will be able to use export revenues to buy back stock or pay dividend. We appreciate the patience of our shareholders. While we are not making projections based on the current price of bromine, we expect the remainder of the year will be profitable. Is the likelihood of another bromine factory may begin to open soon potential of our chemical business and the opportunities in the transformation? We believe our future will be very bright. So, operator?
Operator
Yes, Helen.
Helen Xu
Can we open up for the QA section?
Operator
Absolutely.
Question-and-Answer Session
Operator
[Operator Instructions]. And the first question is coming from James Holtz [ph], Private Investor.
Unidentified Analyst
Yes. What percentage of the $33 million of bromine capital expenses in Q2 was for currently operating bromine factories? And what percentage was for the closed factories?
Helen Xu
Jim, I didn’t get your question very clearly. Do you mind just explain again?
Unidentified Analyst
What percentage of the $33 million of bromine capital expenses for Q2 was for currently operating bromine factories? And what percentage was for the closed factories?
Helen Xu
Okay. This is $33 million was the 6-month expenditure, right? Okay.
Unidentified Analyst
No, is this for the quarter? But go ahead.
Helen Xu
32 or something, I think.
Unidentified Analyst
32.6. Average — rounds to $33 million.
Helen Xu
Yes. Got it. James, basically, these expenditures are mainly for current operating facilities. Because if those closed facilities, we do not have yet — we cannot put a large investment on it. And this major investment are for the reasons because we have some old wells and aqueducts which have been used — need to be — it’s lifetime long. So we need to write off it.
In order to maintain the utilization and the production, we had to do new wells and aqueducts. The 2 the electricity for this wells, like we say, for the high- and low-voltage lines for these wells and aqueducts as well.
Unidentified Analyst
So there was no money spent on the closed facility? Is that correct? For capital? No money spend on closed facilities?
Helen Xu
Yes, there are maybe 2 percentage around approximately, but we did not do the clearly calculation, maybe around 2 percentage. Mainly for the Beijing site, like the supervision control and the safety production. That’s all.
Unidentified Analyst
Okay. I have a second question, and that is, what capital expenditures you expect for the remainder of this year? And what percentage will be for the Chemical segment? What percentage for the current bromine factories? And what percentage for the closed factories? Or just what dollars do you expect to spend on the bromine segment and what dollars do you expect to spend on the chemical factory for the remainder of the year, capital dollars?
Helen Xu
Jim, maybe I can answer your question first, then Mr. Liu [indiscernible]. Firstly, if we look at our chemical segment, the total cost estimates we predicted were $69 million, and the company has spent $46 million. So there will be like totally $23 million for budget for our chemical business. But this $23 million…
Jim, I may continue to explain the comments from Mr. Liu. As I explained earlier that the total budget for chemical business is $69 million. And until today, the company has spent $45.6 million on this new factory. So there will be approximately $23 million left for its chemical budget. It depends how — when we can get the equipment fully delivered and when we can start our continued production — continued construction on this project for chemical segment.
So if we look at the bromine segment, we will not have any like expenditure plan for our current producing facilities [indiscernible] for the rest of the year. But if we have got one factory approval to reopen in the next half year. There will be around 1 million investment for this factory, which need to restart up its production. So we need to update some of its equipment.
Unidentified Analyst
So if I understand you correct, for the bromine segment for the rest of this year, you expected most $1 million. And for the chemicals segment, you expected most $23 million. Although if you don’t get the equipment delivered, it will be some less — some amount less than the $23 million. Is that correct?
Helen Xu
Yes. Yes, that’s correct.
Operator
The next question is coming from Randy Liggett [ph], Private Investor.
Unidentified Analyst
A couple of quick questions. I can’t remember, but upward the natural gas, the potential was up there in PetroChina up there. And if they are, I think there’s some big company out there. I mean, are they doing natural gas right at the moment? And trying to think what my other question was. Also, what is the holdup? I mean, are they coming — is the government coming back on these factories and everything and saying, “You need to do this. You need to do that.”? That’s been going on for a long time. And just wondering about that. And how often — how many days were you all shut down because of the COVID inspections? And that’s it for the time being.
Helen Xu
Okay. Randy, I want to just repeat your question, if I get it clear. Firstly of your question is, in Sichuan, if the Petroleum China are there? If it is here, are they producing natural gas now, right?
Unidentified Analyst
Yes, ma’am. Right.
Helen Xu
And the second question is regarding the COVID-19 inspection. You say that how long is it had for this quarter — for the second quarter?
Unidentified Analyst
Yes, ma’am.
Helen Xu
Randy, firstly, let’s look at your first question regarding the natural gas projects. So as we know that Petroleum China, they have located in Sichuan, which is not far from our company site, which is around 2 kilometers only far. And they are doing their coproduction currently still, they did not start formal production yet. And based on our understanding because Petroleum China, which is a state-owned enterprise, and they have a special policy. They can start with production.
Now currently, the Chinese government they have restrictions to natural gas and halogen water in Sichuan province. [indiscernible] restrict and prices like us, which like, they even go state, promote the — and privately owned enterprise to participate in this area. So until now, we are still waiting for the government approval on this area for us. This is the first question.
Second question is, in the second quarter, because there are many times unexpected, due to this COVID-19, unnoticed inspections from government to our producing — to our company site, sometimes for 1 day, sometimes for 2 days. So…
Unidentified Analyst
Yes. So they’re just coming in there and just…
Helen Xu
For many times, yes. Yes, they come and check. They do not tell you, “Okay. In 2 days we are going to come to check.” Because COVID-19 come very quickly and they just say, okay, we’ll come to check 1 or 2 days, onetime. It’s not like last year second quarter, which lasts for long time, but this lasts for a very short time, but unnoticed. So totally, we calculated it may be around 11 to 12 days for this quarter.
Unidentified Analyst
Okay. One last question. Have you made any inroads with any of the EV car manufacturers about their batteries or the battery makers? Because I keep reading about bromine is very important to those. And that will be the end, my last question.
Helen Xu
Okay. Thank you. Randy, currently, our customers are still the old relation customers. So we do not see any, like you said, this situation. But next half year, our production will be increased, and we may look for opportunities in this area.
Operator
The next question is coming from [indiscernible] with Capital.
Unidentified Analyst
My question is that recently 5 major state-owned Chinese companies listed in U.S. have announced to be delisted from U.S. market, like Alibaba and Petro China and China Life Insurance. Of course, they are multibillion dollar market cap companies versus Gulf Resources. It’s about teeny market cap, $46 million market cap. My question is that, in lure of that is happening, has the management thought that the ongoing auditing team for Gulf Resources meet that Security and Exchange Commission auditing requirement?
Do you think that the existing auditing team meet the requirement of the SEC requirement? If the management does not believe, how far or how satisfied the management think the current auditing team meet the requirement of SEC? If not, what the management is going to do to adjust the difference of the auditing requirement so that Gulf Resources will shrink the risk of potentially being delisted? That’s my question. Can you share some ideas on that, please?
Helen Xu
Okay. Thank you. I have got you. I’ll share with Mr. Liu. Okay. This is the response from Mr. Liu’s firstly regarding your first question. Yes, what you mentioned that the company management also realized its problem and this news recently. The — firstly, the SEC required those companies to be delisted from U.S. market. The major reason because their disclosure are not transparent enough and they cannot submit sufficient document and auditing files to SEC. First, we did analysis of our situation. We have different position with them because our company, we are beyond the China — the control, Chinese government information control. We do not have those information which we cannot come — disclose to SEC or U.S. And so we think our auditing file and our all information disclosed satisfied to U.S. SEC.
And of course, this are based on current China policy and the current SEC requirement. We think we do not — we will not have the situation you mentioned for those delisted. But of course, we cannot predict for future any — if the policy of Chinese government, their government policy changed or SEC change. This is the first question this one.
Secondly, your question about our auditing team. We always provide our documents, our information and all the disclosure documents to our auditors on time and with sufficient disclosure. We want to make sure they satisfy and meet all the requirements from U.S. government and SEC. So we do not think we’d have such a problem as well.
Operator
The next question is — we have a follow-up, actually, from James Holtz.
Unidentified Analyst
You have said that you expect the quantity of bromine production in Q3 to exceed that in Q2. And you’ve also said that you expected the sale price in Q3 to exceed that in Q2. How much more money do you expect? How much more profits do you expect to make in Q3 than in Q2?
Helen Xu
Okay. Jim, so like you said, there’s two reasons. Of course, we expect our third quarter revenues will be higher than second quarter. But currently, we cannot provide it yet because, firstly, for a fair disclosure to all our investors. And secondly, we really cannot assess the exact number, but we will provide guidance for this segment maybe by this month.
Unidentified Analyst
Guidance for the bromine segment, you’d provide guidance this month in August?
Helen Xu
Yes.
Unidentified Analyst
Okay.
Helen Xu
Yes, Jim.
Operator
Okay. We have one remaining question coming from [indiscernible].
Unidentified Analyst
I have not finished up my questions. I was going to wrap it. My next question is, what is the name of the current auditor? And then where are they located? That’s my first question.
My second question is that, by looking at your 27 revenue of over $1.7 million. And of course, it’s hard to predict when you would be reaching that level of revenue for government regulations. But how would you project that the company will be back to over $100 million in revenue in the next few years? Is there something you may share some light on that?
Helen Xu
You mean over $100 million revenue per year? One time we…
Unidentified Analyst
That was 27, 27 in revenue. I mean, is there any way that the management could share Mr. Liu can share some light when you would be potentially projected to reach that 27 — 2017 year revenue and then over $2 per share income?
Helen Xu
Okay. So I do not get your question. Like $27 million? Do you mean year 2027?
Unidentified Analyst
My apologies. 2017 year revenue is over $107 million in revenue. My apologies for the mistake.
Helen Xu
2017?
Unidentified Analyst
Yes. 2017 revenue is over $107 million, and the per share income is over $2 per share.
Helen Xu
Regarding your first question, the auditor name is WWC. And they have offices in China and the U.S. as well.
Unidentified Analyst
Sorry. I didn’t hear the name of it.
Helen Xu
WWC.
Unidentified Analyst
WWC, that’s the abbreviation?
Helen Xu
Yes. If you send me e-mail, I can send you their full name.
Operator
This concludes today’s portion of the call for Q&A.
Helen Xu
Thank you very much for attending this call, yes.
Operator
Thank you, Helen.
Helen Xu
You’re welcome. Thank you.
Operator
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.
Helen Xu
You, too. Bye, bye.
Operator
Take care, Helen.
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