Gulf Resources, Inc.

Good morning, ladies and gentlemen, and welcome to the Gulf Resources 2022 Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Helen Chu. Helen, the floor is yours.

Thank you, Tom. Good morning, ladies and gentlemen, and good evening to all those of you for joining us from China. And we'd like to welcome all of you to GovResources' third quarter 2022 earnings conference call. I'm Helen Xu, the IR director. Our CEO of the company, Mr. Xiaobin Liu, the COO, Mr. Naihui Miao, will also join this call today. I'd like to remind you to all our listeners that in this call, certain management statements during the call will contain forelooking statements about golf resources in corporation and its subsidiaries' business and the products with the meaning of Rule 175 under Security Act of 1933 and Rule 3B-6 under the Security 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 conditions in the PRC, the risks associated with the COVID-19 pandemic outbreak, future product development and production capabilities, shipment to end customers, market acceptance of new and existing products, additional competition from existing and new competition from the bromine and other oil field and power production chemicals, changing technology, the ability to make future bromine assets, and the various other factors beyond its control. All forelooking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed with the company's reports filed with the SEC. Corporate authorities assume no obligation to revise or update any forelooking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes expectation reflecting in those forelooking statements are reasonable and there can be no assurance of such will prove to be correct. In addition, any reference to a company's future performance represents the management's estimates as of today, the 15th of November 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 of the details. So I will review the quarter and nine months and then send a call back to Mr. Miao and Ms. Liu for their commentaries. After which, we will have a QA section. So firstly, let's look at the quarter of the company for the third quarter operating results, which is the outstanding quarter for our company. Because for the three months ended September 30, 2022, revenues increased 29% to approximately $22.8 million. Income from operations increased 68% to approximately $11.9 million. Profits before taxes increased 68% to approximately $12 million. Net income increased 66% to approximately $9 million. Earnings per share increased 65% to 86%. by segments for the quarter. Browning revenues increased 33% to approximately $19.8 million. Tones increased 6%, while the average selling price increased 26%. We had four factories in operation. We have prepared factory number eight for opening. We expect section number eight to produce revenues in the fourth quarter 2022. Gross profits were approximately $12.5 million, an increase of 50.1% from the results of the previous year. Profit margins increased to 63% from 56%. Income from operations increased 53% to approximately $10.6 million. Cruise sort segment revenues from cruise sort increased 3% to $2.9 million. Volume increased 3%. Cost of net revenues declined to $1 million from $1.6 million, largely due to the relocation between Bromine and cruise sort. income from operations increased 234% to approximately $1.9 million from $561,000, largely due to the change in allocation of costs. So on August 30th, 2022, the company provided guidance for the third quarter for our Browning and Crusoe segments. Our projections were for revenues in these two segments of $20 to $21.8 million. Extra revenues were $22.8 million. We projected profit before tax of $9 to $10.3 million. Extra profits before tax were $12.4 million. We are very pleased to have exceeded our guidance. Technical products which had zero revenue and had a loss from operations of approximately $448,000. Natural gas segment had revenue of approximately $82,000 from the rental of some of our equipment. direct labor, and the factory overhead. Investors should note that we incurred costs for our closed factories approximately $1.9 million. As noted, even with these costs, we were able to report earnings per share of $0.86 versus the $0.52 in the previous year. For the nine-month period ending September 30, 2022, the company revenues increased 39% to approximately $47.5 million. Income from operations increased more than 10 times to $17 million. Net income increased more than 60 times to $12.7 million. Earnings per share increased to $1.22 from two cents by segment. Firstly, let's look at the brownie segment. Revenues in this segment increased 41% to approximately $41.9 million. The cost of net revenues were worth $18.1 million. and the $2.2 million approximately of this increase was due to a reallocation of costs with crude salt. The gross profit was approximately $23.7 million compared to $13.8 million. Income from operations more than doubled to approximately $17.2 million. Crude salt segment. The revenues in this segment increased to approximately $5.5 million from $4.4 million. The cost in CUSOT dropped to $2.9 million from $3.3 million, largely due to $2.2 million in lower cost allocation. Gross profit more than doubled to $2.6 million from $1.1 million. Income from operations worth $1.5 million compared to a loss of $1 million. Other businesses, chemical products lost approximately $1.4 million compared to approximately $2 million in the previous year. Natural gas lost approximately $69,000 compared to a loss of approximately $167,000 in the previous year. Corporate costs were $187,000 compared to $3.4 million in the previous year. In year 2021, the company incurred about $3.1 million in the cost related to stock grants. By September 30, 2022, we had no new stock grants. But as noted in the 2022, on October 7, 2022, the company issued 200,000 shares under its equity incentive plan at a cost of approximately $668,000. For the nine-month cash flow, the company generated net cash from operations of approximately $37.1 million. Capital expenditures for the Browning segment were $33.2 million. The effect of the decline of the RMB versus the U.S. dollar impacted our cash and cash equivalents by approximately $6.7 million. Balance sheet. During year 2022, the RMB declined sharply against the U.S. dollar. According to the website, exchange readers at ORG at U.K., On January 1, 2022, $1 worth RMB 6.3557. On September 30, 2022, $1 worth RMB 3.1204 yuan, a decline of approximately 12%. The drop of the RMB against the US dollar caused a resulting impact on the balance sheet items. Despite the impact on our balance sheet, we ended the quarter with cash of $92.6 million, or $8.85 per share, working capital worth $94.1 million, or $8.99 per share, book value worth $268.6 million or $25.65 per share. So now let's look at the update on our business operations. COVID, because COVID continues to significantly impact on our business, it has caused a softening of the bombing prices and a delay in receiving the equipment. needed for our new chemical factory. We have no visibility as to when the impact of the COVID epidemic will abate. However, the company is aware of that COVID is more dangerous in the winter months, so issues may continue. During the third quarter, we prepared Factory 8 for production. are expected to be generated in the fourth quarter of 2022. We have not heard anything from the local government about factories number 2 and 10 yet. We remain optimistic that we may receive permission to open these factories, although some investment may need in the new wells, crude salt pumps, and aqueducts will be required. The chemical segments, or COVID, epidemic and resulting supply chain destruction has impacted the opening of our chemical factory. While some of the equipment has been delivered, we are still lacking a few components. We expect this to be delivered in this quarter or at latest in the first quarter of year 2023. Once all of the equipment is delivered, it will take three to four months to get them installed. After installation, the testing process should take two to three months, after which we will apply for the environmental approval and other approvals from damage. After we have all the necessary approvals, it will take four months to conduct the trial production. Full commercial production may start by the beginning of year 2024. The company regrets for this delay, but we could not have foreseen the continuing issues related to COVID. Natural gas segment. The company is continuing to wait for the government of Sichuan province to complete its plan. The company believes that Sichuan Steel represents a substantial opportunity for both natural gas and bromine. The company remains optimistic that it will eventually receive approval to drill for both products. However, the company is open to considering partnerships with state-owned enterprises. fourth quarter 2022 projections for the browning and the crude salt segments only. The COVID pandemic and the early Chinese New Year are likely to impact on the fourth quarter 2022. The Chinese economy remains soft. Browning prices dropped in the beginning of September and started to rise in the second week of October. On November 8th, We were at RMB 49,800 yen, which is higher than that of September 30th, 2021, but lower the highs achieved in the fourth quarter of the year, 2021. The company expects the government to announce another winter closing in the year 2022. Chinese New Year was on February 1st, In year 2023, it will be on January 22 equal to the earliest date in this century. This means there will be 10 less days of production in year 2022. By contrast, 2023 should have approximately 19 additional days of production because of the later Chinese New Year in year 2004. Given the potential of fewer days of production and a lower price of bromine, the company estimates revenues for bromine at CruzSalt will be in the range of $15.4 and $16.8 million. Profit before tax will be in a range of $3.8 to $4.2 million. In our projections of August 30th, 2022, the company indicated that Bromley & Cushart would have annual revenues between $62 million to $63.7 million. With the results for the nine months and the projections for the fourth quarter, we now project this segment will have revenue of $62.7 to $64.1 million. We had also projected this segment would have profits before taxes of $20 to $21.5 million. Based on the nine months and the projections for the fourth quarter, 2022, the company now projects that this segment will have profits before taxes of $22.4 to $22.8 million. So despite slowdown caused by COVID, We expect that it exceeds our original guidance for bromine and crude salt for both sales and earnings. So now I will turn the call back to Mr. Miao and Ms. Liu for their commentary. Hello, Mr. Miao.

Hello, Ms.

Miao.

Hello, Mr. Miao. Hello, everyone.

I am the CEO of the company, Miao Nehui. Welcome to join the overseas team. So I will do the translation for Mr. Miao. Mr. Miao stated that, hi, everyone. I'm the CEO of the company, Mr.

First of all, welcome all of you to attend the year 2022 third quarter and nine months earnings conference call and the September 30th, 2022. I will join Mr. Liu later on for the Q&A section following up regarding the company's operating questions. Hello, everyone.

I'm the CEO of the company, Xiaobin Liu. First of all, I would like to welcome everyone to participate in the third quarter of the financial operations meeting in 2022. First of all, we are very happy that the company's performance in the third quarter and the previous nine months is so strong, with a profit of $1.22 per share. Okay.

So hi, everyone. I'm company CEO, Mr. Shelby Liu. First of all, welcome all of you to attend Graphic Resources third quarter year 2022, our new conference call. First of all, we are very pleased to have reported such a strong third quarter and the nine-month results with $1.22 of earnings per share, with the lower RMB making imports more expensive and the closing of some domestic facilities. We believe borrowing prices will continue to be strong, while we regret delaying in opening our chemical factories. We are very confident in its long-term potential. We also believe that we will eventually receive approval to geo for natural gas and bromine in Sichuan province.

can find another management level, can use so many years of salary to exchange stocks. Simply put, we put our own career and family's future benefits on the stock price of the company's stocks. If the stock price remains at the current low level, no one will suffer more losses than we do. We know shareholders hope that We are very aware that our shareholders are unhappy with our share price.

assure you that company management is even more unhappy because last year company management repaid more than 11 years of a big portion of their cash compensation and we do do not believe that you can find another case where company executive officers retained so many years of cash salaries for shares simply put we are betting our careers and the welfare of our families on the price of our shares. If the stock remains at its current depressed levels, no one will suffer more than we will. We know that our shareholders would like the company to buy back stock. We wish we could, but unfortunately, we cannot get approval to take money out of China to buy back stock or to pay dividends.

We think there are two things that can help the short-term, medium-term, and long-term prices of stocks. In the short term, companies may consider paying with RMB and repurchasing some of the stocks of the executives. If an executive needs to sell some stocks to pay for living expenses, he can make private transactions with the company to sell his stocks. The company can use RMB to pay for the settlement. We will report to you at any time on the progress of this idea. In the long term and mid-term, we strive to increase financial flexibility. We know that the company's future chemical plants will produce many medical and chemical products that are in demand all over the world. However, there are two things we think we can do to help the short-term

short, intermediate, and long-term prices of the shares. In the short term, the company may consider to pay executive officers in RMB and buy back some of their shares. If an executive officer needs to sell shares to pay for living expenses, then the executive could go to the company and offer his shares in a private transaction with the company. The company could pay the executives in RMB will keep you updated on this progress of this idea. Over the intermediate and the long term, we are committed to gaining increased financial flexibility. We know that many of the pharmaceutical intermediates products we will produce in our chemical factory, which are in demand throughout the world, especially in the emerging countries in Asia. Once we opened our chemical factory, we will consider to develop a plan to generate exports in pharmaceutical intermediate products and its byproducts that could enable us to have increased financial flexibility for buy-on-back stock or pay dividends. So now we are open for QA section. Hi, operator. Tom.

Yes, thank you so much. Ladies and gentlemen, the floor is now open for questions. If you would like to enter the queue to ask a question at this time, you may press star 1 on your telephone keypad to enter the queue. We do ask if listening on speakerphone this morning that you please pick up your handset to ensure optimal sound quality. Once again, ladies and gentlemen, it'll be star one on your telephone keypad at this time. If you would like to enter the queue to ask the question, please hold a moment while we poll for questions. And we have a question this morning coming from Glenn Kreblin. Glenn, your line is live. Please go ahead.

Yeah, good morning and congratulations on a very strong quarter. I have two questions. The first is how many more dollars of capital spending is needed to complete the bromine facilities to bring the three that are not currently online online and how much more capital is needed for the chemical business to get that up and running? That's my first question. I'll let you answer and then I'll ask my second question.

Okay. Hi, Glenn. I have one question because we have two more factories. Number two and number 10 did not have the permission from government yet. So I do not quite understand when you talk about the capital expenditure on bromine segments. Do you need to increase these two factories or just for section number eight?

At the moment, let's do number eight, and then if you have a projection for the other two, that would be helpful.

Okay, okay, thank you. Hello, Mr. Liu. The first question is from Glenn, the president of this company. He has two questions. The first question is that To the present day, if the company looks at our capital investment in terms of revenue, how much will the investment be, how much will the budget be, is to let revenue start here. Then I asked him a question just now. I said, if you mean to say that it only includes 8 factories at present, or does it include 2 factories and 10 factories? Because 2 factories and 10 factories are currently not subject to the government's permission. Then Glenn said, if 8 factories, let's talk about it first. It's best if it's for 2 factories and 10 factories. Also, if you have a concept of a big debt in your heart, you can also count this number. This is the first one. And then there is also how much capital expenditure is needed for the chemical factory. These are the two questions. The data of two capital expenditures.

First of all, this is the repair factory. You just said that our current investment is in some of the I told you you come and go. You can watch. I thought I didn't watch. I thought I didn't watch. I thought I didn't watch. I thought I didn't watch. I thought I didn't watch. The second thing is that the second market and the market are saying that we have not yet received a permit from the government, so it is not clear what the government's requirements are. And that is to say, will there be any other requirements other than investment of funds so that we can achieve it, so this is not really expected.

Okay, then how about the chemical industry? Okay, Mr. Liu, I'm sorry. I didn't hear it clearly. How much do you expect for the eight factories? The money has been spent so far. We have spent more than $300 million so far.

But we may start to invest in production in the near future. So in this area,

Okay. Hi, Glenn. So firstly, for your question on the bromine segment, Ms. Liu would like me to explain first. And firstly, let's look at the bromine factory because as I mentioned before, the factory number eight, which got approval from garments and the company already started the preparation and kept expenditures on this factory until now which have until like a third fourth quarter which have spent approximately three million dollars and there will be few more dollars to be spent on this factory and it may be start production in fourth quarter and contribute revenue in this quarter as well. And regarding factory number two and number 10, because we did not have a government approval yet, so we do not know clearly how the government's real requirements. We are not sure, will they ask we only update on our bromine factories or do you have any other requirements? So the CAPEX expenditure on these two factories, we cannot provide any details yet. So this is for the questions from me first. So chemicals, if you will continue. Do you mind just hold on?

The second is that for the chemical factory, we currently have Just because of some other reasons, such as China's control over the epidemic and other reasons, and the government's more and more strict requirements for the environment in the future. That is to say, we are still moving slowly. But in terms of investment, we do not have any additional budget at present. The original budget has already been told to everyone in the announcement.

Secondly, regarding the chemical section, which due to the comment and the most strict environmental protection requirements by the government. So the process for this chemical section may be delayed, but the capex expenditure are still the same as our budget. We are still under our budget. And this number will have been disclosed in our 10-Q already.

Right. But my question is, how much more capital spending is needed in the chemical facility that has not been spent to date? How much more remains? Just the dollar number. That's all I'm looking for.

Okay.

I can check out for you in the 10Q. But do you mind I email back or you want me to check it?

Sure. You can email me back. But I just want to know how much is remaining to be spent on the chemicals before it's open. My last question is in order to generate foreign currency, do you just need to make sales of products overseas or do you need to buy an overseas asset?

Okay. Wait a moment, I translate first. Liu Zong, 第二个问题就是这个关于公司提到的就是美金的 Is the company planning to sell products overseas or buy assets overseas? We hope that after our factory opens, some products will be sold abroad.

We also hope to get some orders from foreign customers. Okay. So, hi, Glenn. The Mr. Liu stated that we hope after our chemical factory started production, we can sell some of our products or

export them to overseas and at the meantime and we will have some overseas clients and they pay us in dollar and then the company will have more flexible in its financials okay so you do so you will export and you don't need to buy an overseas

business in order to generate foreign currency. Do I understand that correctly?

Do you mean overseas assets or do you mean like if we want to do export, we need to buy a license overseas?

No, I mean, do you need to buy an overseas asset, a distributor, a a selling organization, or can you just export?

No, we cannot now export. We think we need a license for that. But we are not going to buy that. At this moment, we did not talk about buying assets overseas.

Okay. Thank you. I'll let someone else ask questions. Thank you very much.

Okay. You're welcome.

Thank you. Once again, ladies and gentlemen, if you would like to join the queue to ask a question at this time, you may press star one on your telephone keypad to enter the queue. Once again, ladies and gentlemen, that'll be star one on your telephone keypad at this time if you would like to join the queue to ask a question at this time. Please hold a moment again while we poll for questions. And there are no further questions in queue at this time.

Okay. Do you mind ask again, if there's still no question, I think that we can close the call for today.

Absolutely. Ladies and gentlemen, if you would like to join the queue to ask the question at this time, please press star then one on your telephone keypad to join the queue. Once again, ladies and gentlemen, that'll be star one on your keypad at this time. if you would like to join the queue to ask a question. And there are no questions in queue at this time.

Okay, thank you. Hi, operator Tom. I think we can close the call for today if there is no more questions. And thank you all for attending this conference call. Thank you very much. Thank you, Helen.

And 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.