Gulf Resources, Inc. Q2 FY2022 earnings call

Management Statement and Operational Highlights

• The company reported strong Q2 results with revenues up 41% to $15.7M, gross profit up 80% to ~$7.6M, etc.
• Bromine revenue increased due to higher selling price; average selling price in Q2 was $7,740 vs $5,556 in prior year.
• Crude salt revenue increased with 10% production increase and 47% average price increase.
• Chemicals segment faced delays in machinery/equipment due to COVID and supply chain issues; ~$45.6M spent on new factory with total cost estimated at ~$69M.
• Plans to reopen closed bromine facilities, with hope to open one soon and another by H1 2023.
• COO mentioned higher utilization and pricing in bromine segment expected to improve profits in Q3 and beyond.
• CEO discussed long-term plan to produce pharmaceutical chemicals for export to meet demand.

Segment Performance

• Bromine: Second quarter revenue increased 38% to $13.9 million. 6-month revenue increased 48% to approximately $22 million. Income from bromine segment in Q2 increased 98.5% to ~$5.3 million. 6-month income from operations increased 376% to ~$6.7 million.
• Crude Salt: Second quarter revenue increased 62% to ~$1.8 million. 6-month loss from crude salt segment operation improved from $1.6 million to ~$379,000.
• Chemicals: Second quarter revenues were $0, with a net loss of $475,000. 6-month chemicals segment loss was ~$988,000.
• Natural Gas: Second quarter revenue was $0, with a net loss of $61,699. 6-month natural gas segment loss was ~$88,000.

Guidance

• Expect higher utilization and pricing in bromine segment to lead to significant profit improvement in Q3 and beyond.
• Hopes to receive approval to reopen one closed bromine facility soon and another by H1 2023.
• Chemical segment's profitability depends on timely delivery of wastewater and solid waste treatment equipment to complete factory construction.
• Remainder of 2022 expected to be extremely profitable.

Risks

• General economic and business conditions in PRC.
• Risks associated with COVID pandemic outbreak.
• Future product development and production capabilities.
• Shipments to end customers.
• Market acceptance of new and existing products.
• Competition from existing and new players in bromine and other oilfield/power production chemicals.
• Changing technology.
• Ability to make future bromine assets.
• Currency controls restricting ability to get money out of China.

Question and Answer

Q: 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?

A: Expenditures were mainly for current operating facilities; closed facilities had minimal investment, maybe around 2%.

Q: What capital expenditures do you expect for the remainder of this year? What percentage for chemical segment and bromine?

A: For bromine segment, remainder of year expected to have ~$1M investment; for chemical segment, ~$23M left but depends on equipment delivery.

Q: Are you producing natural gas currently? What's the holdup? How many days shut down due to COVID inspections?

A: Petroleum China is coproducing near the site but we're waiting for government approval; COVID inspections in Q2 lasted ~11-12 days.

Q: Have you made inroads with EV car manufacturers for bromine in batteries?

A: Currently, customers are old relations; may explore opportunities in next half year.

Q: Concern about potential delisting due to auditing requirements. Does management think auditing team meets SEC requirements?

A: Management believes auditing files and disclosures satisfy SEC requirements; company is transparent and compliant with current policies.