Gulf Resources, Inc. (GURE) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Karnythia and I will be your conference operator today. At this time, I'd like to welcome everyone to the Gulf Resources 2018 Fourth Quarter and Annual 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.

Okay. Thank you, operator. Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China and we'd like to welcome all of you to Gulf Resources' annual and fourth 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 commentary and for the company's operating results during the Q&A section. I would like to remind to all of our listeners that in this call, certain management's statements during the call will contain forward-looking statements about Gulf Resources Incorporation and its subsidiaries business and products within the meaning of Rule 175 under 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, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from existing and new competition from the bromine and other oilfields and chemical products, change in technology, the ability to make future bromine assets, and various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risks factors detailed in 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 expectations reflected in those forward-looking statements are reasonable and 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 18th of March, 2019. For those of you who are 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 now, I will review the financial and Mr. Liu, our CEO will provide his commentary. To make the call more efficient, we have received posted questions from many of our investors, which will be answer during that section of the call. So let's look at financial results first. In the fiscal year 2018, we had net revenues of approximately $2.59 million, a decline of 98%. We had a write-off of property, plant and equipment of $1.4 million. Our loss on demolition of a factory was $18.64 million. Our write-off of prepaid land leases was $4.0 million. We incurred direct labor and factory overhead costs of approximately $21.08 million as a result of our plant shutdown. Goodwill impairment loss is approximately $27.97 million. Our loss from operations was approximately $83.55 million. Our net loss was $69.96 million or reached an equivalent to $1.49 per share. Including our foreign exchange tax adjustments of $18.64 million, our compressive loss was $88.6 million. We generated $17.34 million from operations. This includes collecting all of our accounts receivables of approximately $30.24 million. We purchased property, plant and equipment of $35.27 million. As of December 31, 2018, we had $179 million in cash or reached a $3.82 per share. Our shareholders’ equity was $293.85 million (sic) or reached a $6.27 per share. During the year 2018, our major costs included approximately $15.8 million for enhancement works in our protection shells to crude salt fields, approximately $17.8 million to build new extraction wells, a write-off of $18.6 million in the loss on demolition of the three closed factories, impairment loss on the related mineral rights of these factories of $1.3 million, direct labor and factory overhead costs, including depreciation of plant and machinery, of a total amount of $21.1 million, write-off and impairment loss on property, plant and equipment of $1.4 million, write-off and impairment on prepaid land leases for chemical factories of $4.0 million, repair and maintenance expenses of $2.6 million for the damage by flood from a typhoon, $0.4 million for the write-off of some of prepaid land leases for the closed factories and raw material loss as a result of damage from the flooding. Goodwill impairment loss is $28 million. In the past two years, the company spent $34.82 million in rectification of its bromine and crude salt facilities. It expects to incur capital expenditure of approximately $28 million on construction of extraction wells for its existing bromine and crude salt business. It also expects to spend approximately $60 million in total on its new chemical factory. Now, I would like to turn the call over to our CEO, Mr. Xiobin Liu, for his commentary, and I’ll translate.

Hey, everyone. Thanks for attending Gulf Resources’ 2018 fourth quarter and annual earnings conference call. Fiscal year 2018 has been the most difficult year for Gulf Resources. All of our bromine mines and crude salt ponds were forced to close by the government for environmental reasons. Our two chemical factories were also closed for the environmental reasons. Our natural gas well required new equipment before it could begin test production. We worked very hard to get all our facilities rectified. Subsequently, the provincial government decided it required even stricter environmental controls to protect the population. During the summer of 2018, our mines and factories in Shandong Province were hit by one of the most powerful typhoons, as a result of which we spent more than $8 million on cleaning up the facilities, many of which had been recently rectified. Finally, in September 2018, the government informed us that we would have to close our bromine factories Number 3, Number4, and Number 11. During this period, it would have been easy for us to give up. Our revenues came only from selling inventory. We had a loss from operations of approximately $83.55 million. We could have discontinued our bromine, salt, crude salt, chemicals, and natural gas business, which is represented by over $3.82 per share and switched to other businesses by taking advantage of our strong cash balance position. However, it is not our intention to pursue any of those. Instead, the company spent $15.8 million on the protection shells of our crude salt fields at costs and $17.8 million on building new extraction wells. We spent more than $8 million on cleaning up our facilities after the typhoon. We purchased new equipment for our natural gas well in Sichuan Province, and we kept our work force intact. We held quarterly conference calls, issued press releases whenever we had something to report to the public, and worked diligently to keep our shareholders informed. Now as we enter into year 2019, we are increasingly optimistic about the future of our business. While none of our bromine facilities have yet been approved for reopening, we are increasingly confident that all of the remaining seven facilities may expect to be approved. That is one reason that why we are budgeting around $28 million of capital expenditure for improvement of our wells during year 2019. With the government forced closure of so many bromine facilities nationally, bromine prices have remained extremely high. The weakness of the Chinese RMB versus the US dollar has made imports more expensive. We believe that our facilities are among one of the best in the province. We also believe that many of our competitors may not have the capital to complete their rectification process. We expect that as bromine prices should remain still extremely high, we should be able to make reasonably high profits when our bromine facilities, reopen and our bromine production resumes. We also believe that we may be able to make acquisitions at comparable attractive rates. The plans for our new chemical factory are moving ahead well, although they are somewhat delayed. We expect to focus more on higher profit margin businesses, such as pharmaceutical chemicals. With the new modern equipment and lower levels of competition caused by the closing of competitive factories, our new chemical factory should be able to have more competitive advantages than our previous two factories. Our natural gas well in Sichuan is now still under trial production. We are pleased with the initial results. Although it’s too soon to talk about full production or new wells, we expect to have natural gas to be an important contributor to our sales and income in coming years. Despite all of the factors, our management team has been very engaged and motivated. Our senior management team is still intact. Our employees are ready to get back to the production of our products. We believe that competition has been and may remain reduced. We believe our core businesses are expected to have higher margins than they had in the past. We expect to have acquisition opportunities. We expect our company may emerge from difficult period, stronger and more profitable than before.” We appreciate the support from our shareholders. By taking advantage of our strong cash position, we expect to spend sufficient funds on building a new chemical factory, drilling new bromine wells on all of properties, drilling our natural gas well and future wells, and expect to remain in a stronger financial position than our smaller competitors. We understand that it has been frustrating for all investors and it has been more frustrating for us as a company, however, we would not be spending the money if we are not convinced of the future success of our business. This has been a long and painful journey but we see many exciting seas ahead of us. We believe we’ll start to have very good news in the coming quarters.

Okay. So now I would like to forward the questions, particularly one we received from our investors. Firstly, let’s look at bromine factories. The first question is, in your press release of October and December 2018, you indicated that rectification and repair process would be done before the end of 2019 first quarter. We are now end of first quarter. Has all the work been completed? If not, what remains to be done and how long will it take, is there any unresolved issues? The answer is that, the work has been -- basically been completed. However, it is always possible that government might ask for some other works to be done before we get permission to be open the facility. 2nd question. You also indicated that you would receive project approval, planning approval and land use rights approval shortly. Have you received such approval? And if not, which ones are you still waiting for and when do you expect to get them? We have not got these project approval, planning approval and land use rights approval. We expect to seek them soon. Once we receive them, we’ll be able to open those facilities. Question 3. Are all seven factories at a same stage of reopening or are some factories close to be reopened soon? The seven remained factories are all at about the same stage of reopening. However, we would not be surprised if the approval for reopening come in several tranches. In other words, we would not be surprised to see approvals maybe for three or four factories in the first tranche and three or four in the second tranche. Question 4. What is your expectation regarding ramping up production at these facilities during the second quarter? What do you expect your production capacity to be end of March and the end of June? At the present time, we expect to -- the approval to come at the end of March or early April. We will have no product in the first quarter but should be able to ramp up quickly. As far as capacity is concerned, we expect capacity for each factory to be the same as it was before closing. Our total capacity should decline as a result of the closing of the three factories. We plan to spend approximately $28 million in 2019 to build some new extraction wells. These new wells will take place of old wells, some of which were damaged in the typhoon, and others of which were becoming less productive. This is a possibility; some of the facilities might have reduced capacity in order for the government to mediating then with Gulf, at this point in time, we have no information about this possibility. While our hold in these factories is clearly anarchy, the price of bromine remains extremely high at around RMB35,000 as a frame of reference. In the year 2010, when the price of bromine was approximately RMB19,000, we earned approximately RMB60 million in bromine and crude salt. We believe we can generate strong earnings from our remaining factories. Question 5. You said that the company estimated the costs of repairing and rebuilding to the flood damages to be around 10 million. What have you spent to-date? Is your estimate still the same? Yes. The number there still remains the similar, because we explained in the 10-K, the company has particularly repair and maintenance expense in the amount of approximately $2.6 million for the damage by flood from a typhoon during the fiscal year 2018 in the fourth quarter of 2018. The company also built new extraction wells for bromine facilities at a cost of approximately $5.8 million due to damage by flood from typhoon during the third quarter of 2018. Question 6. Have facilities near to Gulf Resources being approved to reopen? Other factories near Gulf have now that been approved for reopening later. Question 7. In the event that authorities rejected approval of these seven factories, what would you -- would be your backup plan? We strongly believe that our remaining factories will be approved for reopening. We could also consider making acquisitions. However, our current focus is getting approval to reopen all factories as quickly as possible. Question 8. Are you considering building bromine production facilities in Dayng County? Given the high level of bromine competition there to make our products too effective, you will have to close. The answer, we believe that there are large quantities of bromine in Dayng County. For the long-term strategy, we will certainly consider opening bromine production in Dayng. However, at the present time, we are focused on bromine in Shouguang first. Question 9. Are you still considering potential acquisitions? The answer, our goal is to get our current factories opened. Also we see which competitor factories are being closed and which producers do not have capital to make complete rectification, we’ll consider making acquisition. We believe we will be able to acquisition at attractive prices, however, we are not going to focus on acquisition unless until our existing factories are reopened, and of course, we have to consider the risk as well if the target acquisition factories cannot have government approval to reopen. Question 10: What is the status of the negotiation associated with land for the closed factories Number 3, Number 4 and Number 11? We have been negotiating with local villages hardly for compensation for lead payments and the lead agreements. To-date looks like there are a few chance, we can expect for the money and company has already did impairment. Now, let’s look at chemical plant reopening issues and question. Question 11: What is the status of the new chemical production facility? Answer; we have purchased the land. We have provided the government with detailed plan. The company has completed designing of the factory, just waiting for the final approval regarding environmental protection assessment, as soon as we get the final approval, so we’ll move ahead as quickly as possible to start the factory construction. Question 12: What’s your latest estimate of when production will begin? Responses: Because of all the environmental issues with which the government has to deal, we believe the construction of the chemical plant will be delayed. We believe the construction maybe completed by June of year 2020 and production will begin shortly thereafter if everything goes fine. Question 13: What will be the capacity of the factory? Response: The capacity of the new factory will be somewhat lower than the two original factories. However, because of the mode of implement and the lower level of competition, we will be able to produce more efficiently the growth profit margin maybe higher than before. Question 14: What will the new factory produce? Answer: To meet the environmental standards, the government may restrict production of some products, such as paper making chemicals, oil and gas industry, used chemicals. The new factory may focus on higher margin products such as materials that are used for human and animal antibiotics. Question [16] (sic): Are the scheduled costs now still changed? As noted above, the schedule will be slightly delayed because of the government’s focus on environmental constraints related to bromine and other mining activities. Question 17: How much have you spent so far on the project? The answer: In December 2018, we paid around $9.7 million to secure a 15 year lease for a land in Bohai Marine Fine Chemical Industrial Park. There was an impairment loss on property, plant and equipment related to the relocation of our chemical plant to Bohai Park in the amount of approximately $16.6 million, since March of the payment that was used at chemical factory toward relating to old. The total costs of getting the new factories have been estimated to be approximately $16 million. The company incurred relocation costs in the amount of approximately $10.9 million and $9.7 million as of December 31, 2018 and 2017 respectively. Question 18: Related to natural gas trial production study a month and half ago, could you update us where you stand with this trial production? Answer, we’re slowly moving ahead on the trial production, this is because some minor modifications in our estimates. At the present time we’re producing 3,000 cubic meters per day. We expect this number to increase on a constant basis. Question 19: What level of production have you achieved to-date and what level do you expect obtain by the end of fourth quarter 2019? It is still pretty hard to project how ratably production will increase. We want to move carefully to ensure that we have solved all of the issues. However, we are increasingly confident in our program. Question 20: In your December 17th press release, you said that you plan to being in commercial production in 2019. Do you now have a date for the start of this commercial production? The answer: As we noted, we are moving ahead our trial production. We are gearing up to increase production. Question 21: What's plans and schedule do you currently have for drilling a second well? How many wells do you plan to drill in the coming nine to 12 months? The answer: Based on the ramp up of our first well, we will decide drilling of the second well, we will see the commercial production results first. Question 22: In your December 31st press release, you mentioned about our agreement with a customer. What is the type of this agreement? Now answer: Because of production is ramping up, our agreement is quite simple. Our customer is protecting whatever we produce. Question 23: You also stated in the past that you expected each well to produce $2.3 million of after-tax profits, did you touch expected kind of numbers? Answer: It is a theoretical estimation. This number is still subject to company trial production results. Question 24: Are you considering some partnership to develop the natural gas field in the commercial production of your start? At the present time, we are focusing our current well, getting our bromine operations reopened and building our new chemical factory. And we will think about it in the future. So now let’s look at the last question. Question 25. Several days ago, I have received a email from one of our largest and most important shareholders. He asked, if the Board has considered representing all of our assets and building a cash which is worth far more than the stock to go into another business? Like we before mentioned that the Board had considered every alternative, quite frankly during this period when all of our bromine stock and 10 of our facilities have been closed and our natural gas business has been going through trial production. There have been times when we had wished it had operating business, however our management and Board believes that the actions by the government will ultimately leave our company in the strongest position in its history and that nothing will bring us higher returns than to reinvest in our current business. Question 26. As a Chairman, do you consider buying shares or has he changed his mind? The chairman has not changed his mind. The issue is that as we have stated before, China has played really very striking shot on exporting currency. The Chairman continues to work on strategies for getting money offshore so that he can purchase the shares to [educate committees]. Question 27. How many people of the work force have been laid off during this extended period of plant closure? At the end of 2016, we had 750 employees, at the end of year 2018 and -- 2017 and 2018 we had 699 employees. There are three major reasons why the number of employees is not declining. First, we needed most of our employees to assist in the cleaning up after the flood caused by the typhoon. Second, we did not want to lose skilled worker because we continue to anticipate the reopening of our mines and factories. Third, we felt keeping our employees would give us added edge dealing with the government. So now we can turn the conference call for the question-and-answer section. Operator, can you get us through the Q&A section.

Hi, operator. If there’s no one asking the question, can we close our call for today?

Yes. You may.

Okay. Thank you.

This concludes today's conference. You may now disconnect.