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Executives

John Mattio - Senior Vice President, MZ Group

Pengfei Liu - Chairman and Chief Executive Officer

Marco Hon Wai Ku – Chief Financial Officer

Analysts

China Marine Food Group Limited (OTCPK:CMFO) Q3 2012 Earnings Conference Call November 15, 2012 8:00 AM ET

Operator

Good morning and welcome to the China Marine Third Quarter 2012 financial results conference call. All participants will be in listen-only mode. (Operator Instructions) I would now like to turn the conference over to Mr. John Mattio, Senior Vice President of MZ Group. Mr. Mattio, please go ahead.

John Mattio

Thank you and good morning everyone. Joining us today for China Marine’s third quarter 2012 earnings conference call are the company’s Chairman and CEO, Mr. Pengfei Liu; and the company’s Chief Financial Officer, Mr. Marco Ku. Mr. Liu and Mr. Ku will review and comment on the financial and operational results for the third quarter, and then, they will be available to answer questions after the presentation.

I would like to remind our listeners that on this call, prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and that management may make additional statements in response to your questions. Therefore, the company claims the protection from the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements related to the business of China Marine Food Group and its subsidiaries can be identified by common used forward-looking terminology and those statements involve known and unknown risks and uncertainties, including all business-related risks that are more detailed in the company's filings on Form 10-K, 10-Q, 8-K or with the SEC.

For those who are unable to listen to the entire call, we will have an audio replay that will be available and the call is also being webcast, so that you could log in via the Internet, all information that was provided on the conference call announcement and in the earnings release yesterday.

At this time, I would like to turn the call over to Mr. Liu, the Chairman of the company, and he will provide opening remarks that will be translated by Marco. Chairman Liu, the floor is yours.

Pengfei Liu

Thank you John. Good morning and thanks for joining us for China Marine’s third quarter 2012 earnings conference call. Our third quarter results reflect further improvement in our two core businesses, Mingxiang brand seafood snacks and Hi-Power beverages. With demand for our products growing once again, we are optimistic that China Marine is poised to generate efficient growth in the coming years.

We have worked diligently over the past year to overcome the short-term challenges caused by outside factors, such as the Japan nuclear disaster and the evaporation contamination incident happened in Taiwan last year. Accordingly, we have maintained a high level of adverting and marketing and these efforts have helped us maintain a strong branded reputation among consumers and distributors. We are now seeing the benefits of our investments.

Sales of our seafood snacks and Hi-Power beverages grew by 3.7% and 63.2% respectively in the third quarter of 2012. More importantly, our seafood snack group’s gross margins kept improving during the first nine months of this year. We are focused on boosting our margins further across each of our businesses.

We have weathered a huge disaster that had the most fear and long impact on our industry than most had expected. Nevertheless, we have emerged as a strong company at the results of the advancements we have made during the downturn. We are well focused on more growing market share and cash growth, which we believe will ultimately result in an improvement in shareholder’s value. It’s Marco Ku, the CFO of the company.

So, thank you for your interest in China Marine. We are yet to be satisfied with the financial results over the past few quarters. However, we believe our strategy expands and that work is behind us. Our CFO, Marco Ku will now discuss our financial results for the third quarter of 2012. I won’t be available to answer your questions after we finish this presentation. Thank you.

Marco Hon Wai Ku

So, thank you, Mr. Liu and good morning everyone. So, right now, I will begin by reviewing our results for the third quarter ended September 30th of 2012. Please be aware that all the growth figures that I will reference reflect year-over-year growth compared to the third quarter of 2011.

Total consolidated revenues were $30.8 million, down slightly from $30.9 million the same period a year ago. Total revenue totaled $20.8 million in the quarter, or 67.7% of net revenues compared to $23.2 million or 75.1% of sales in the third quarter of 2011. Cost of revenue consists of raw materials, packaging materials, direct labor and manufacturing overhead. We produced Seafood Snack Foods at our dedicated production facility in Shishi, where our Hi-Power production is outsourced to the third-party, branding and bottling facilities in Fujian province.

Consolidated gross profit and gross margin were $9.9 million and 32.3% in the third quarter compared to $7.7 million and 24.8% in the same period a year ago, respectively. The primary reason for the year-over-year increase in gross profit and gross margin was the greater contribution from our seafood snacks and Hi-Power beverage businesses, which contribute substantially higher margins than our marine catch business.

Looking at our business segment performance, for the third quarter of 2012, our Seafood Snack Food segment, sales of our Mingxiang branded Seafood Snack Food generated $13 million in revenue, up 3.7% compared to the same period last year and accounted for 48.7% of total revenues in the third quarter of 2012. In particular, sales were up by 41% in Fujian province. Better sales and marketing efforts have generated positive results.

Gross profit margin for our Seafood Snack Food segment improved 290 basis points to 30.3%, compared to 27.4% in the same period a year ago, as a result of headcount and a change in product mix to products with lower packaging costs.

Hi-Power beverages generated third quarter revenues of $13.8 million, up 63.2% with strong sales in both markets of Fujian and Zhejiang provinces. Our advertising and promotions over the past few quarters are beginning to drive trials from new customers and repeat orders from existing retailers.

We sell Hi-Power beverages through major international retailers such as Wal-Mart, China-based supermarkets like Trust-Mart, convenience stores, bars, restaurants, school canteens and local corner stores, which feature Hi-Power beverages as a functional drink side-by-side with those local and well-known international brands.

Gross margin for beverages was 38.6% in the third quarter compared to 29% in the same period last year, due to higher raw materials, packaging costs, and manufacturing overhead. We spent approximately $8.4 million on advertising and promotions in the third quarter of 2012, up by $3.8 million from the third quarter of 2011. We continued to invest in target, advertisements such as outdoor and TV ads in Fujian and Zhejiang provinces, and for license promotions tied to sporting events and (inaudible) a national holiday in China. Additionally, we continue to build our competent sales and marketing team on an opportunistic basis, ending the quarter with 93 employees.

Our last business segment, Marine Catch generated sales of $2 million compared to $8 million in the same period a year ago. With additional storage space from our cold storage capacity, we will be able to capitalize on favorable market opportunities to purchase and sell Marine Catch to the local market going forward.

I will summarize the other line items for our consolidated third quarter results. Operating expenses were $12.4 million compared to $6.7 million in the prior year’s period. Sales and marketing increased by 80.2% to $8.4 million in the third quarter of 2012 as a result of $2.5 million in advertising campaigns and $5.4 million in promotional costs to strengthen the brand position and improve market awareness.

As a result of significant selling and marketing expenses, for the nine months ended September 30th of 2012 that resulted in a significant operating loss for our drink business. We are performing an updated evaluation of the beverage segments using updated forecast results. Though the corresponding preliminary estimated results do not indicate a probable impairment loss to the intangible assets as of September 30, 2012, we recorded a goodwill impairment loss of $2.6 million during the third quarter of 2012.

We had an operating loss of $2.4 million in the third quarter of 2012 compared to $1 million of operating income in the same quarter last year. Excluding the $0.6 million of non-cash amortization expense related to the Hi-Power acquisition, and a $2.6 million of non-cash goodwill impairment, adjusted operating income was $0.8 million in the third quarter of 2012.

GAAP net loss for the quarter ended September 30, 2012 was $2.5 million compared to $0.8 million net income in the prior year’s corresponding period. Adjusted non-GAAP net income, excluding the non-cash expenses were, were $0.7 million, representing $0.02 earnings per share.

As of September 30th, 2012, we had $1 million in cash compared to $0.6 million as of December 31st, 2011. Cash outflows from operations for the first nine months of 2012 were $4.1 million, mainly due to high inventories of training materials.

Working capital was $67.3 million, down from $70.2 million as of December 31st, 2011. The current ratio was 4.8 to 1 on September 30th, 2012 compared to 9 to 1 on December 31st, 2011. Accounts receivable were $25.6 million compared to $68.6 million as of December 31st, 2011. Shareholder equity was $124.6 million as of September 30th, 2012.

I will summarize the highlights for the first nine months of 2012. Net revenues increased 34.5% to $107.1 million. Gross profits were $23.5 million, representing a gross margin of 22%. Reported net income and earnings per share were a loss of $6.2 million and $0.21 per share loss, whereas non-GAAP net income and EPS were a loss of $1.1 million and $0.04 per share loss. Please kindly refer to our earnings press release or our 10-Q for additional details regarding our year-to-date results.

On behalf of the entire China Marine management team, we would like to thank you for your interest and participation in this call. Please kindly visit our website at www.china-marine.cn for more information regarding our company. We will now take your questions. Thank you so much.

Question-and-Answer Session

Operator

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Marco Ku for any closing remarks.

Marco Hon Wai Ku

Thank you. As mentioned by Chairman Liu, we believe that the worst situation is behind us and we will continue to invest a series of sales and marketing campaigns to further strengthen our brand position and market awareness. With the new cold storage facility, we will be able to bargain for better prices at bulk purchases with local fishermen and thus improve our profit margins. In addition, we can capture more creating opportunities given this extra storage capacity.

We will be more than happy to see you all around our new facility in Shishi port and further discuss with you about our business plans in the near-future. So, thank you again. We are happy for joining us today.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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