HQ Sustainable Maritime Industries, Inc. Q4 2008 Earnings Call Transcript

Mar.12.09 | About: HQ Sustainable (HQSM)

HQ Sustainable Maritime Industries, Inc. (HQS) Q4 2008 Earnings Call Transcript March 12, 2009 4:30 PM ET

Executives

Norbert Sporns - Director, Chief Executive Officer and President

Jean-Pierre Dallaire - Financial Controller and Chief Financial Officer

Eugene Hill - Executive Vice President of Finance.

Jeffery Goldberger - KCSA Strategic Communications

Analysts

Tony Brenner - Roth Capital Partners

Colin Guheen - Cowen & Company

Unidentified Analyst

Michael Finkelstein - NorthPointe Capital

Mark Zinski - 21st Century Equity Research

Unidentified Analyst

Operator

Welcome to the HQ Sustainable conference call [distorted] on March 12, 2009 at 4:30 pm Eastern Time. This is a call replay for conference ID 87865445. (Operator's instruction) Please go ahead, sir.

Jeffery Goldberger

Thank you Raquel and good afternoon everyone. Welcome to HQ Sustainable fourth quarter and yearend 2008 conference call in a period ended December 31, 2008. Again, my name is Jeffery Goldberger and I am with KCSA Strategic Communications as Investor Relations Counsel to HQ Sustainable.

With us today are Mr. Norbert Sporns, President and Chief Executive Officer; Mr. Jean-Pierre Dallaire, Chief Financial Officer, and Eugene Hill, Executive Vice President of Finance.

Before, we get started I would like to remind our listeners that management’s prepared remarks in this call contained forward-looking statements that are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the Company claims the protection of Safe Harbor for forward-looking statements that is contained in Private Securities Litigation Reform Act of 1995. Actual results may differ from those disclosed today due to such risks as, but not limited to, fluctuations in customer demand, management's rapid growth, intensity of competition from other providers of aqua culture products, general economic conditions, geopolitical events and regulatory changes and other information detailed from time to time in the Company's filings or future filings with the SEC.

Although, the Company believes that expectations contained in such forward-looking statements that are reasonable, there could be no assurance that these expectations will prove to be correct. Any projections as to the Company’s future performance represents management estimates as of today's date, March 12th, 2009 and HQ Sustainable assumes no obligation to update these projections in the future as market conditions change.

With those formalities by the way, it is now my pleasure to turn the call over to Norbert Sporns, again, President and Chief Executive Officer of HQ Sustainable. Norbert, the floor is yours.

Norbert Sporns

Thank you. Thanks Jeffery, and welcome everyone to HQ Sustainable fourth quarter and yearend 2008 conference call. Before Jean-Pierre takes you through our results, I would like to update you on how our business developed throughout the year and how we plan to build on this success.

Despite a growing worldwide economic downturn, HQ Sustainable continued to successfully execute its roadmap plan in 2008. During the year, we successfully targeted buyers who in turn sell directly to consumers. This change is an extremely important point of differentiation for HQ allowing us to showcase our superior feeds methodology highlight third-party certifications and demonstrate the progress of our vertical integration.

In addition, we were successful in expanding our range of health products using fish by-products which are sold in China. Currently, we have a total of 18 government-accepted products. Most of which were developed through our internal research and development department. We have made progress in executing our roadmap in 2008. In the past year, we expanded our production capabilities by adding 10,000 metrics tons live weight flow turned capacity. We also worked to improve production through superior self produced enriched feeds after utilizing nutrition to the ultimate consumer.

We confirmed the importance of pond ownership through the testing of improved technologies which brings additional sophistication to the farm-based rollout. This improves profitability and caters to more demanding clients for tailored fish products. We are exploring increased ownership options. We improved quality monitoring and customer satisfaction through the adoption of third-party certification embracing food safety, environmental and social respect accompanied by full traceability from sea to [fry], to rollout, to processing plant, to consumer.

In 2008, we consolidated our sales to buyers dealing directly with consumers who increasingly have no choice but to embrace those who have embraced vertical integration and traceability especially as demand for whitefish increases. We solidified and improved our management team to more effectively navigate the consolidation process and added an additional air of management in China to take full advantage of expansion and production and the harmonization of our multiple operations. With the addition of Eugene Hill, our Executive VP of finance, we can more [ably] respond to the changing financial landscape and keep investors more in tuned with our growth.

Finally, we improved our management systems including advances in production possible through original research, computer-assisted security systems, and the latest accounting software combined with additional on-the-job training. During 2008, we made strides in the branding of our toxin-free tilapia expanding our branded products through the rollout of the line of frozen, ready-to-eat meals that positions tilapia as the main protein component. These meals branded Lillian’s Healthy Gourmet are being introduced in club stores in US and Canada. This very important rollout is being managed by Bryan Gent, Vice President of Product Development with us and will be comprised of three lines focusing on organic, all natural and regular frozen meal.

This new line of branded products will help us expand our reach and reputation as a leader in toxin-free tilapia production and help drive additional growth opportunities. The meal format enables consumers with diminishing purchasing power to serve healthy meals at a reasonable price, not only is this an important message during the economic situation but we expect this to be attractive to consumers in good times as well. Our balanced healthy meals provide a vehicle for us to promote our operations and third-party certification.

As our feed meal begins production, this message will expand to include box top starburst highlighting the enriched omega 3 and vitamin E content of our meals. This will enhance consumers understanding of our other products and consolidate HQS's leadership in the sector. HQS falls into a very select category of publicly traded companies that benefit from being focused on staples for life with in addition the financial wherewithal to withstand an economic downturn. We operate in one of the fastest growing segments of the food sector.

Demand for foreign fish is growing faster than any other part of the sector. Aqua culture is meeting this demand. HQS is in the lead in this sector. Our performance reflects our success for fourth quarter and yearend 2008 sales increase 22% and 23% respectively. This level of performance is the result of many factors including aforementioned the addition of 10,000 metric tons live weight flow through capacity at our aqua culture processing facility in August of last year.

During the fourth quarter and yearend 2008, we achieved revenues of $21.5 million and $67.7 million respectively. Our fourth quarter earnings per share on a fully diluted basis was $0.51 and earnings per share for the year ending December 31, 2008 on a fully diluted basis was $0.785. Similarly, we experienced strong sales for our aquatic products for 2008 revenue increased 25% to $45.4 million compared to $36.2 million in 2007.

In spite of the slowing of the economy in China which resulted in price reductions for our health and bio products, this segment also performed well in 2008. For the year ended December 31, 2008, revenue has increased 19% to $22.3 million, up from $18.7 million in 2007. While the volume and pricing in China were lower, we expect our market strategy and product expansion efforts pay dividends as the Chinese economic slowdown subsides.

During the year, we significantly expanded the number and range of health products produced from fish by-products. We currently have 18 government-approved products; all this was accomplished by drawing on the rich technical expertise of our in-house China-base researching development team.

While we feel that we are well-positioned in a global market place, there is no escaping the harsh reality of the global economic slowdown. To combat this, our management team has taken the necessary steps using the levels at our disposal to control cost and ensure that we are operating as efficiently as possible. As an update, another previously announced growth drivers, we are completing the construction of our new feed mill with an opening ceremony planned for this April.

I would now like to turn things over to Jean-Pierre who will present more detailed financial results for the fourth quarter and full yearend 2008.

Jean-Pierre Dallaire

Thank you, Norbert. I would like to begin by stating that in addition to providing our GAAP results, we will include EBITDA which is a non-GAAP financial measurement. The press release issued earlier today contains reconciliations of EBITDA to net income.

Overall, I am very pleased with our results from the fourth quarter and year as we have shown significant growth in our revenues, gross profit and EBITDA. For the full year 2008, total sales reached $67.7 million, up 23% from $54.9 million of the corresponding period of 2007. Approximately 71% of the $12.7 million increase in sales gained from increased sales in the aqua culture product segment.

Gross profit reached $28.2 million for the full year 2008 compared to $25.5 million for the comparable period of 2007. The gross profit ratio was 42% in 2008 compared to 46% to the corresponding period of 2007. The gross profit ratio decreased in the aqua culture product segment from 27% in 2007 to 25% in 2008. Gross profit ratio also decreased in the health and bio product segment from 84% in 2007 to 75% in 2008 mainly due to market penetration cost incurred in second half of 2008 on new products marketed and different mix of product sold.

Operating income increased to $15 million in 2008 from $12.8 million in 2007 mostly due to the higher sales and related gross profits $2.7 million in both of our segments in 2008 added to increase of recovery of bad debt of $1.2 million in 2008 originating from our aqua culture product segment.

Net income increased to more than $10 million in 2008 from $4.5 million in 2007, a 124% growth as a result of increased operating income in 2008 at the definitive of income tax free operations in the aqua culture segments since January 2008 and to a significant reduction in finance cost of $3.2 million also in 2008. We are of course subject to all other taxes in China including sales tax and employee benefits program.

Diluted earnings per share increased from $0.54 in 2007 to $0.79 in 2008 after getting effect to a 47% increase in the number of diluted shares in 2008. EBITDA increased to $17.1 million for the full year of 2008 compared to $14.1 million in 2007 which is 1% improvement.

For the balance sheet now as of December 31, 2008, we had cash and cash equivalents of $54.9 million, an increase of $7.9 million or 17% compared to $46.9 million at December 31, 2007. Our current assets were $84.1 million in December 31, 2008, up $73.4 million at the end of 2007. Total liabilities at the end of December 2008 were $11.9 million of which 4.6 corresponded the current portion of the convertible promissory notes due in November 2009.

Shareholders' equity was $88.3 million at the end of 2008 showing an increase 28% from $68.8 million in the end of December 2007. As of December 31, 2008, working capital stood at $72.2 million compared to $61.5 million at December 31, 2007. The funds generated by the operating activities of $12.6 million during 2008 were used mainly to support the increase in our receivables and inventory levels and decrease in our payables and an increase in our investment in new feed plant under construction and other fixed assets.

Back to you Norbert.

Jeffery Goldberger

Thank you, Jean-Pierre. The opportunity that lies ahead of us is within our grasp and we will try to inform our industry and the way top buyers purchase farmed tilapia products. HQ Sustainable is an industry leader that has the ability to benefit from the current economy for the benefit of consumers. This 'yes, we can' affirmation is reflected in our new website but more importantly in the roadmap plan rate out by our management team and embraced by buyers an consumers alike.

On behalf of our Board and our employees, I would like to thank you all for your continued support. We would now like to open the call for questions. I, Jean-Pierre and Eugene will be happy to answer you questions.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Tony Brenner - Roth Capital Partners.

Tony Brenner - Roth Capital Partners

A couple of things; first of all, your fourth quarter number is provided in your release so I got a couple of questions regarding that. Number one, it appears that depreciation expense particularly is slightly lower in the fourth quarter than any previous quarter. What is the reason for that?

Jean-Pierre Dallaire

Ah, $199 we had reduced to $555, actually I cannot answer that, I do not have that information with me. I will have to get back to you on this one.

Tony Brenner - Roth Capital Partners

Okay, and do you have an average fully diluted share up in the fourth quarter?

Jean-Pierre Dallaire

Fully diluted share for the fourth?

Tony Brenner - Roth Capital Partners

Yes.

Norbert Sporns

It is 13.2.

Jean-Pierre Dallaire

It should be $13.2 million.

Tony Brenner - Roth Capital Partners

Okay, Norbert, you have talked about possibly buying a processing facility rather than constructing a new one which will significantly change the timing of one such a facility might be brought on stream. Can you update us a little like on your feel on what is going on with that?

Norbert Sporns

It was still our plan. We mentioned before that we expect opportunities to firm up during the second quarter which is still a couple of weeks away. We are here for the Boston Seafood currently under meeting and then back to China at the end of March when we expect to freshen our perspective on those opportunities. We also as a result of the show meetings that occurred during that show, we will be confirming the level of appetite moving forward which with spearhead the expansions that we are talking about. So, all of the background will be available to us in the next six to eight weeks.

Tony Brenner - Roth Capital Partners

I see. If you decide not to purchase or the opportunity that presents itself, you can purchase of these facilities and you lined up all the ongoing sales plant with get a re-planning, if you may, will that still be available through the first quarter of 2010?

Norbert Sporns

No, I think it is about 12 months so it will be spilling in to the second quarter then of 2010.

Tony Brenner - Roth Capital Partners

And last question, is there anything further to report on expanding into product management?

Norbert Sporns

Well we managed ponds as it is. The ponds are owned by our cooperative farmers. We are not involved with the day-to-day management but we supervise what they do. We have completed our analysis of owning our own ponds and that analysis has been very positive. We are looking at opportunities for ownership and we should have something to announce in April.

Tony Brenner - Roth Capital Partners

Does this involved purchase of existing ponds or are you going to have to..?

Norbert Sporns

No, it will be construction of a new ponds and this would be something that we would be prepared to speak more about in April.

Operator

Your next question comes from the line of Colin Guheen - Cowen & Company.

Colin Guheen - Cowen & Company

I guess the first one is if we can then get back to the fourth quarter results that we have [inaudible] in our model?

Norbert Sporns

Sure, again we will send those sure.

Colin Guheen - Cowen & Company

And secondly, the CapEx outlook excluding ponds and acquisitions and first quarter of fiscal year, do you have those numbers with you?

Jean-Pierre Dallaire

Yes, so that is about $3 million for the considering of the plant in Q1.

Colin Guheen - Cowen & Company

…first quarter?

Jean-Pierre Dallaire

Yes, that will be in the first and second quarter.

Colin Guheen - Cowen & Company

Okay and any project to maybe reporting the actual tonnage produced I mean looking at profitability per ton those metrics mid later in the year?

Norbert Sporns

Well, we are deploying a new accounting system in China but you have to understand the variety of orders that we have especially with the kind of clientele we have, the variety of orders, the products actually that we are producing are different from client to client and that difference is more now than it has ever been before. When you are dealing with very large buyers, they have very specific specifications as to how that orders are to be produced and the cost vary as a result of that.

So, in some way it is misleading if we just give the tonnage of fillet or block or round produced because the specifications vary so much. We have some clients that want a lot of trim on the fillet and some that want none at all, some that want a shallow skin product which is about a 36% recovery of the fish as opposed to other clients that want a super deep skin product which can be a recovery as well with 22%.

So, you have such variety and the cost that flow with that that simple tonnage figure per period could be very misleading. We certainly have them available, we have the information available on what we are selling and to whom we are selling it but the information is so specific to that client that it is very difficult to release.

Colin Guheen - Cowen & Company

And can you lastly comment on market pricing and anything that might affect commodity pricing and profit in the next nine months?

Norbert Sporns

We have been very good at keeping, maintaining profitability despite of the economic conditions. Most of the fluctuations that we see are a flow through of changing commodity prices and what we found very encouraging during the last year was that the market was following in spite of very high fuel and commodity prices during the earlier part of the year. There is a real market acceptance of tilapia species and consumers are very much in tuned with insisting on tilapia not just any whitefish. The prices I have in our varied reports for three to five ounce fillet which is a general snapshot and it shows that prices spike on a three to five ounce standard. US fillet, they went as high as $2.55 and currently for March, we are seeing prices closer to $2 but through all of that, the market has been very strong and we have seen our profits as being very stable.

Operator

Your next question comes from the line of [Steven _ 25.02].

Unidentified Analyst

I apologize if you covered this in your prepared remarks. I was late coming to the call. Can you comment on what caused the gross margin decline in the fourth quarter? That is my first question.

Norbert Sporns

Well, we have two principal components to our business. One is the health products, the other the secret products as you know. On the health product side, we saw a decline as a result of the economic situation even though it is not officially a recession in China. It is a slowdown. It had affected margins.

On the aqua culture side, it has been fairly stable. We have had minor adjustments which worked out over time as we see commodity prices come down. There maybe a shipment where we either benefit or penalized by pricing but that flows through quite quickly so we have seen a lot of change on the aqua culture side in terms of profitability.

Unidentified Analyst

Okay, on the bio side, according to the press release, that business did grow 20% in the fourth quarter which is ultimately equal to the aqua culture side. So, can you talk about the effect the foreign economy has had that are you saying that you were forced to [distorted]…

Norbert Sporns

Yes, the sales have been strong because we have been successful with our marketing. We have expanded marketing as indicated in previous press releases and conference calls. We have also added a range of products for up to over 18 products that have been approved by the government. We still have a pipeline of other products.

So, this is very well perceived by distributors. Increasingly, distributors like to deal with manufacturers that have a vision. Ours is being drawing from pure, all-natural ingredients that our stores from fish by-products has a huge acceptance in China of that kind of philosophy and we had very good success with the expanded range of products.

We have also began marketing with Duty Free shops in airports in China and that has been very successful so a lot of Korean, Taiwanese and Hong Kong travelers that are exiting the country having RMB in their pocket are looking to buy our products and when they come back, they look for the products because they have had a good experience with them. So, we have success with our publicity but we have had to adapt to the new economic reality and reduce somewhat the profitability. The margin on the product of course is still very healthy margin and very profitable business.

Unidentified Analyst

Okay and second, the debt retirement, did that take place at the end of 2008?

Jean-Pierre Dallaire

No, actually the retirement of that debt will appear in November 2009.

Unidentified Analyst

No, I am referring to the other debt instrument, the other note.

Jean-Pierre Dallaire

The other note, the last payment of those notes actually it was repayable on a monthly basis since the beginning 2006, yes and will be matured, the last payment being up at the end of January 2008.

Unidentified Analyst

January 2008, okay.

Operator

Your next question comes from the line of Michael Finkelstein - NorthPointe Capital.

Michael Finkelstein - NorthPointe Capital

Question as I look across the expense line items, you talked about going to direct sales but it seems like the expense is really been kept under control. Is there something going on there? Is there something that maybe was not recorded, any one time items that we benefited? I am trying to just get a feel for what the expense structure looks like going forward.

Jean-Pierre Dallaire

I think, Michael, this is Jean. It is more related for example where over at the yearend for the Chinese New Year, we would do at least for one buy three, get one free. So, it is sort about in the cost of good sold versus expense line.

Michael Finkelstein - NorthPointe Capital

Okay, but the gross margin is still at least in my perspective held in fairly well.

Jean-Pierre Dallaire

Yes, but it is starting to drop down. Last year it was like 84%, this year it is 74%. So you will see that kind of coming down as we have done that publicity to continue, formulation to continue to sell effort.

Michael Finkelstein - NorthPointe Capital

So maybe there are some below, there are some operating expenses that might be in the comps you are saying?

Jean-Pierre Dallaire

Yes, well exactly the cost of the product we included in the promotion of you buy three, you get one free, that is included in the cost.

Michael Finkelstein - NorthPointe Capital

Okay, otherwise that ends up in where, marketing?

Jean-Pierre Dallaire

Yes.

Michael Finkelstein - NorthPointe Capital

Okay, but moving to the direct sales, are you seeing, it felt like you got, it incurred some additional expenses that you were not having before and then there is going be some up steps to that, I guess we are having trouble finding where that extra expense is being spent.

Jean-Pierre Dallaire

Are you speaking on the bio or on the aquatic?

Michael Finkelstein - NorthPointe Capital

I am just looking, you guys had gave us the full year financial so I am just trying to backend with the fourth quarter off spike and that that breakdown each of your line items selling, your distribution, marketing, advertising, general, administrative, etc. They all seemed fairly right, not light but lower than I would anticipate.

Jean-Pierre Dallaire

So, for the marketing in the fourth quarter, we are looking at about $1.2 million versus $1.3 million in Q4 of 2007 but because of again I believe the free, what we have had is we have been able to eliminate that third party [brokers meal] to eliminate some of that cost and pull that in so that through the direct sell, we have eliminated some of the cost. It might otherwise show up in marketing or in the selling and distribution expense.

Michael Finkelstein - NorthPointe Capital

So, there has been really now upfront cost in establishing this new sell…

Jean-Pierre Dallaire

Correct.

Michael Finkelstein - NorthPointe Capital

Or up selling, okay. What about, you picked up some down for [31.59] recovers in the fourth quarter?

Jean-Pierre Dallaire

Yes, actually what we do change a year that we provide on the statistical basis, the amount of that provision that we did at the end of the year, what happened in the last quarter was that by using the same formula basically, the older account stayed in the last quarter so what we do is the provision that we took over the year. That is what we recovered at the end of the year.

Michael Finkelstein - NorthPointe Capital

Okay. So, you are really hoping reserve throughout the year?

Jean-Pierre Dallaire

What we will say, basically with this is that we used statistically about 1% a year so we spread it out on a quarterly basis as percent of our sales but at the end of the year, it is adjusted and we have not recovered in the work provision actually as far as for the quarters.

Michael Finkelstein - NorthPointe Capital

Okay, so that is more of a true up there and actual account recovery.

Jean-Pierre Dallaire

This is, well, yes basically it is a reversal of reserves that we did in prior quarters.

Michael Finkelstein - NorthPointe Capital

Okay, was that below the operating income line? It looks like there was a nice tick up on other income. What does that represents?

Jean-Pierre Dallaire

That was basically nonrecurring profit on disposition of fixed asset that happened during the last quarter, so about $500,000.

Michael Finkelstein - NorthPointe Capital

Right.

Jean-Pierre Dallaire

Yes, that is it.

Michael Finkelstein - NorthPointe Capital

Okay and on the feed mill, is that on track? It seems that might have a slipped a little bit.

Norbert Sporns

No, we visited just few days ago, I think before coming back from China. The dealer people are in there connecting all the equipment. The building is complete. The massive structured. It is actually 12-storey structure in terms of height but there are six levels above ground and three below ground and the equipment is being, I spoke with the head of the dealer chain that is in there making the installation and officially, the opening ceremony will be in April. We will wait deliveries go in China, most deliveries start in May in the contracts with the farmers and it goes for an annual basis from there.

So, they are not really open to buying from us until May and we will have enough time in April to complete the testing and de bugging and all of our operating staff has been trained by dealer. They have a state-of-the-art training and monitoring control systems in the plant and they have passed all of the exams and so everyone is very excited about getting fully operational at the end of April.

Michael Finkelstein - NorthPointe Capital

And will that be able to, the fact that we will be able to get that together to participate in new contracts of that that happened earlier than April?

Norbert Sporns

No, what we mentioned after the Chinese New Year, we completed the testing. We have shared the results of the testing with the farmers that we work with. They are very excited about it as well because it means economies for them. In some cases depending on the sophistication of the farmer, they can account and increase efficiency of almost 20% so that is huge for the farmer where most of their cost, currently their cost represented by the veer anywhere between 65% and 70% of their total cost. So we can reduce that by as much as 20% for them. It is a huge benefit for them.

We have an excluded fee which is very efficient. The efficiency is measured by how much the excluded fee actually flows and we get as close to 100% as you can get. So, it is going, it is on track. It is very much on track and all of our farmers and our operators in the installation company are very positive about the way things had been going.

Michael Finkelstein - NorthPointe Capital

So, you will be able to realize those and your farmers will be able to realize those benefits once the plant is up and running. You are not going to miss any sort of on track negotiation period?

Norbert Sporns

No. We are not going to miss that and we actually are able to use some of the finishing feed is really state-of-the-art stuff that I mentioned in my prepared remarks. When you start including algae rich in omega 3 and certain types of vitamin E that only benefit the fish but also embedded the flesh and are actualize, what we call actualize the consumers which means when you eat the fish, you benefit from more omega 3 or vitamin E.

That type of technology will be available to the finishing feed to farmers in the last stages of their grow-out even thought in the early stages, they did not use our feed. So, we will see benefits very quickly of the feed mill and the publicity surrounding the very unique approach that we have.

Operator

(Operator's instruction) Your next question comes from the line of Mark Zinski - 21st Century Equity Research.

Mark Zinski - 21st Century Equity Research

I was just wondering if you could potentially comment on the perception receptive customers have of food product coming out of China and if you notice any kind of just any difference or presenting or meaning sort of a stigma attached to food quality issues?

Norbert Sporns

It is a great question, thanks very much. Nice to hear your voice. I just back up and say that generally speaking, China has some of the highest standards in food inspection in the world, something, a perception that most consumers may be do not appreciate. The CIQ, which is the Chinese equivalent of the FDA, does a great job in inspecting food and this is not to say that there are not cases of abuse or exceptions but if you look at the quantities which are exported by China, full 50% of the frozen fillet, tilapia fillet coming in the United States comes from China and this is not only because of products but also because of the quality that is there.

We just received inspectors, the US Department of Commerce who came, they are out there in our plant today doing the annual audit of our [Inaudible], a voluntary audit that we choose to embrace. The quality standard that we have at our plant and our ponds are subject to repay an audit by various third-party auditors, something that we have embraced to fairly link to us.

But even those plants that do not choose to invite third-party foreign auditors, the government has a very detailed program for pond, farmers, as well as plant, processing plants that are producing for export and this is a very rigorous program. In the previous publicity that is centered around food problems in China, nothing has mentioned tilapia. There was an FDA instruction regarding shrimp and eel and one other specie but not tilapia. There was no recall, a simply a warning to check, to make sure that the product is tested for banned substances.

The case with HQ Sustainable, we have never had a shipment refuse, repeated successful deliveries in the United States is called in the industry you are green card exporter which means you have gone through all of the previous tests and successfully and to the point where the government focuses, the FDA focuses on new exporters or exporters that they have not tested before.

This does not stop us from testing before we harvest. We also test before we ship at the CIQ and we do tests of feed when it is not our own feed. We do repeated tests in our processing plant at every level to make sure that there are no risks on the bio security side. As the third-party certifications become more accepted, we just renewed our ATC certification for the processing plant and we are embracing the ponds certification that will be happening in the coming weeks.

We expect that gradually consumers will not look to so much country of origin but the third-party certification and in fact, to anyone who is interested in hearing it, I am prepared to challenge them to discussion on food safety quality in China versus in the other country. There is a very high standard in China that we bring to even higher level as the result of the additional third-party certifications that we embrace.

Mark Zinski - 21st Century Equity Research

Okay, great and then just secondly, do you have any hard data or statistical evidence that looks at the current economic situation and hits in consumer spending between like chicken and tilapia versus I guess higher grade fish? I mean coming tangible options that people are purchasing more tilapia because of the relative pricing of chicken and the higher grade fish.

Norbert Sporns

Well, there is a, we are seeing in the big cities through the success of Carrefour and Wal-Mart, the large scale, low cost retailers that are selling amongst the standard dried fish but also frozen food products and that in the big cities, there is an acceptance of frozen food products as the Chinese consumer gets more used to cooking, using microwave and more western style fast cooking technique and getting away from the wet market purchase of live fish or fresh fish and getting into frozen products.

To give you statistics on that, there are current, I do not have those other than the, we could perhaps get it from Asian about the expansion of these stores and the profile or the types of products that they are selling. If you are going to a Carrefour store or Wal-Mart store in Beijing, it is probably the best profile for big city spending to see how that is changing. We see anecdotal evidence of downswing in the number of people going to restaurants, more interest in buying prepared foods but have not seen statistics on that that is current.

Generally speaking, statistics tend to be a bit slow in coming out. Okay, that is with the Chinese market, yes.

Mark Zinski - 21st Century Equity Research

And just final question, what are you seeing in terms of any increase competitive threats of Southeast Asia for instance like Vietnam's aqua culture industry very slim. Is there something significant going on there or are those countries still pretty much in the early stages?

Norbert Sporns

They are in the early stages. Vietnam for example has large aqua culture operations. They are focused principally on the European market and production of the fish that is related to the catfish which is basa or pangasius. These fish are grown under different conditions and tilapia is newer to the American market, somewhat more familiar to European buyers. But we view tilapia as being a very different fish, a different tasting and not that catfish flavor. It is a clean tasting. Tilapia is a clean tasting fish. It has a different market and the pond culture of tilapia in Vietnam is not widespread because of more massive infrastructure development that is required that tilapia aqua culture is quite different from pangasius aqua culture. The density is much lower for tilapia and the requirement for good water and more sophistication in the farming techniques as well as the multiple types of feed during the grow-out. You need to have at least three different types of feed to meet the demands of growing tilapia.

And all of this is somewhat far away for people who are newer to aqua culture to just the Vietnamese.

Operator

You have a follow up question from the line of [Steven - Mosaic]

Unidentified Analyst

Yes, regarding the cash in your balance sheet, $54 million, could you give a rough breakdown as to whether that is denominated in RMB or dollars and where it resides, whether in China or the US?

Jean-Pierre Dallaire

Actually, I would say most of them is in China. There is about I would say between 10% and 15% in the US, the rest is in China in RMB.

Unidentified Analyst

Okay and is there any issue repaying your notes which I presume are denominated in US dollars?

Jean-Pierre Dallaire

Actually, the notes are convertible and that is, if you are referring to 2006 note, the first year is in our repaying in US dollars in the last couple of years and the next one will be repaid in November at the convertible notes so they will probably be converted in this year in November. So, we are paying in JUne.

Unidentified Analyst

But if you have to pay in cash, the [accounting issue does that].

Jean-Pierre Dallaire

If we ever have to pay it in cash, we would not have any issue with that.

Unidentified Analyst

Because you have sufficient US dollars?

Jean-Pierre Dallaire

Right.

Operator

Your last question comes from the line of [Michael - Capital _ 47.36].

Unidentified Analyst

I think you answered this already, the question on the few plants, wondering if you have a forecast of what is contribution to revenue might be the share as well its profit margins and also when it would be expected to be fully ramped by and what does numbers would look like at that point?

Jean-Pierre Dallaire

We do not give guidance. If you look at the, I showed the reports on the [certified] analyst, we will give you some guidance and direction after the call.

Operator

At this point, there are no further questions at this time, I would now turn the call back over to you for closing remarks.

Norbert Sporns

Thank you. Well, I would like to thank everyone who participated in the conference call. We look forward to receiving your questions during another route of the quite period prior to the earnings. We are very happy to give any more colors that we can without tipping up, giving you projections for the future and we hope to continue to enjoy your support in the future. Thank you very much.

Jean-Pierre Dallaire

Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participant and ask you to please disconnect the line.

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