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Zhongpin Inc. (NASDAQ:HOGS)

Q4 2012 Earnings Call

March 15, 2013 8:00 AM ET


Sterling Song – Director, IR

Warren Wang – CFO

Vivien Sun – Secretary

Baoke Ben – EVP


Echo He – Maxim Group


Welcome to Zhongpin’s conference call covering its results for the year 2012. Fort the first part of this call all participants will be in listen-only mode. The question-and-answer session will follow the prepared remarks. I am pleased to present Mr. Sterling Song. Please begin.

Sterling Song

Thank you, guys. Good morning everyone. Hello from Zhongpin. I am Sterling Song. I am very pleased to be with you today. Our team today includes Mr. Baoke Ben, our EVP and Board member; Mr. Warren Wang, our CFO; Ms. Vivien Sun, Board Secretary; and I am Sterling Song, the company’s Director of Investor Relations.

First, I will remind you about forward-looking information. Our conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct.

Further information about this and other risks are included in our filings with the Securities and Exchange Commission.

The Company doesn't assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Yesterday, on Tuesday evening, we issued our earnings release, so we assume you have read it.

First is Warren Wang, our CFO, who will cover the financial results. Warren, please.

Warren Wang

Thank you, Sterling. As we have mentioned in our earnings release in light of the pending going-private transaction, we have discontinued our detailed guidance. Here are the general outlook comments that we’ve provided in our earnings release last night.

We are sustaining our prudent expansions in geographic markets and operations to gain market share for our long-term success in the face of the ongoing industry consolidation. We are managing our costs to maintain as much gross and net profit margin as possible and are aggressively working to further increase our asset utilization, effectiveness, and efficiency.

In 2013, we expect that the demand for pork in China should remain strong and that Zhongpin's revenues from pork and pork products are likely to increase slightly based on higher tonnage sold at lower average price, while live hog prices will remain at current levels, compared with 2012.

We anticipate that our net profit margin in 2013 will decrease due to increased competition in the industry, the expected increase in labor cost and overheads, and the expected increase in quality assurance and control costs in response to increased importance on food safety placed by the government and consumers.

Next, I will give you a summary of our financial results starting with cash flow. During the year 2012, our net cash flow, increased cash and equivalents by $40.6 million bringing the total cash and equivalents as of December 31 to $176.4 million.

Working capital at December 31 was a negative $41.7 million. Net cash provided in operating activities in 2012 was $35.4 million, primarily from net income that provided $44.1 million, depreciation and amortization that provided $25.8 million, a provision for bad debts provided $2.5 million, an impairment loss that provided $4.0 million, accounts receivable and accounts payable that used a $50.9 million, purchase deposits that provided $7.5 million, inventories that provided $4.1 million and a VAT tax refund receivable that used $3.5 million.

Net cash used in investing activities in the year 2012 was $119.4 million, primarily for construction in progress, additions to land use rights, and prepayment and additions to property, plant, and equipment that together used $122.4 million.

Net cash provided by financing activities in 2012 was $124.0 million, primarily from the proceeds from loans and notes, net of repayments that provided $134.2 million, a repayment of a capital lease obligation that used $5.8 million and repurchases of common stock that used $2.8 million,

As a result, including the effect from foreign currency exchange rate changes on cash, Zhongpin increased its cash and cash equivalents by $40.6 million in 2012. Cash and cash equivalents on December 31 totaled $176.4 million compared with $135.8 million at year end 2011.

We believe our existing cash and cash equivalents, together with our ability to secure bank borrowings, will be sufficient to finance our investments in new facilities, with budgeted capital expenditures of about $102 million over the next 12 months and to satisfy our working capital needs.

We intends to satisfy our short-term debt obligations that mature over the next 12 months through additional short-term bank loans, in most cases, by rolling over the maturing loans into new short-term loans with the same lenders.

Our debt-to-total capital at December 31 was 52.4%. Our net debt-to-total capital was 43.8% subtracting cash and cash equivalents numbers total debt and total capital. Interest coverage for the year 2012 was 2.64 times from net interest expense. We are nearing a limit of average interest coverage. So I only talk in terms of practicability remaining should we need it.

It’s important to understand we intentionally add that to be sure which is then as a confidence extension in the next 12 months when the needs of markets tighten. So our financial flexibility is end of the results.

Summary of the year’s operation income. Sales revenues were up 13% year-over-year, a higher tonnage and lower average price. Prepared pork products had the best performance in the year with tonnage up 22% and the average price per ton up 9% from 2011.

Gross profit margin was 9.4% in 2012 versus 10.7% in 2011. Operating profit margin was 12.4% versus 5.9% in 2011. Net profit margin was 2.7% versus 4.4% in 2011. The average assets turnover in 2012 was 1.48 times.

Stock we have purchased progressed. Next is an update on stock we have purchased progress. There were no repurchases in the second and third quarters because of Board of Directors has terminated the program after receiving Chairman Zhu going private proposal on March 27, 2012.

The repurchase program has been expired since August 2012. In the summary that brings you current Zhongpin’s financial results for a year and year end 2012. Next Vivien Sun will cover the investor consolidation, pricing outlook and our ongoing strategy and trends for 2013.

Vivien Sun

Thank you, Warren. The next as of date and update on the pork industry and its consolidation. First, as you remember, China’s government is requiring the grading by the dramatic immunization of our hog slaughtering capacity in the next five years. The industry consolidation is accelerating more of the smaller slaughtering houses have been forced to close by the local government as part of China’s national policy.

Second, since May 2011, competition in the market has become very aggressive as the major strong producer started to gain higher market share in – and to increase their capacity utilization.

The market share we seek could come from the absence of the closed slaughtering houses and from the peers companies make long-term survival and expansion as their family grows. But I am sure the industry consolidation is finished. The competitive actions had mainly been in aggressive promotions in all the districts in China.

Third, food safety is increasingly important to consumers and the government they think that eating food or Zhongpin these consumers know the Zhongpin brand in high quality is product at the same time, our high quality and safety must continue to improve even more, though cost and investments to achieve even higher food safety along with further improvements in quality assurance and control systems will increase for several years.

And the fourth, there is increased likelihood that imported pork will become normal in the Chinese market. Zhongpin will further develop our advantage in international business. These four points are designed in the context of the new terms consolidation in the meat processing industry that is happening today.

So the massive and aggressive consolidation and I want to say decisive actions to benefit from that consolidation will continue probably for about five years or even longer. I am sure that industry consolidation has been complicated.

The foundation of the industry consolidation starts with the government in 2012, Ministry of Industry and the Information Technology of China announced that the China meat industry development strategy report for 2011 to 2015. In that report, the Industry and the Information Technology Ministry provided the target for the meat industry for the coming five years.

First, over tonnage of pork produced will be 54 million metric tons and the pork would be about 63% of all meat produced by 2015. Second, sales of chilled pork was increased around 30% of the total pork sales in the larger cities, that’s all above the country level in China by 2015.

Third, prepare the meat product would increase to 15 million metric tons by 2015 of about 70% of total meat sales. That would be 25% higher the sales in 2010. We believe that prepared products are likely to be higher than 70% of total meat sales by 2015.

Fourth, to eliminate 50% of manual and semi-mechanical outdated facilities in China and fourth tier and second tier cities eliminate 80% of the outdated facilities, that means, including license from slaughtering houses from about 21,000 of slaughter houses to about 30,000 in China and the fifth, to build new pork product capacity in China in the central, north, northeast, east and the southeast regions of China.

Next our hog and the pork prices in 2012 and the 2013. Due mainly issue and abundant supply of hogs, hog prices has been declining since the peak in September and October of 2011 including during the first three quarters of 2012, then turned up and increased moderately in the fourth quarter of 2012.

We believe that hog prices as commented to remain at the current level in 2013, although there was a sound this morning that suggesting that hog prices may decline a bit during the year due to a lack of supply of hogs then begin to increase in the fourth quarter.

Pork prices year-to-date moved in parallel with hog prices since most of the pork producers try to maintain a reasonable stride between the selling price of pork and their buying price for hogs. That is price what’s pressured in either quarter of 2012 and it is likely that this price did not recover much if at all in 2013 due to expected higher cost and the intense competition in the market that is resulting from the ongoing industry consolidation.

Our strategy has not changed for 2013 here again in summary form. First, we are focusing on greater yields of existing facilities to exploit the potential of our current facilities and optimize our product structure customer base and the supply chain structure. Second, we are developing more byproducts such as sausage, casings and the feeder stock for heparin sodium for more profit higher returns and the higher utilization of our raw material.

Third, we are expanding our cold-chain logistics capacity and fourth we will enter several new geographic markets. We are focusing on Central China, North China, East China, and the Northeast China. So those new expansions will be within our geographic focus.

In early release you read that we have stopped the production at a plant in Western China in the Sichuan Province. That was due to the fierce competition and the high operation cost and that the plant was outside of our target market. Our long-term goal strategic direction and execution are next.

We have two primary goals; in operation it is to be a major consolidator in the next industry chain during the next five years. The finance, it is to increase long-term value for our shareholders, we believe it bodes well simultaneously.

Our strategy and actions to achieve those goals have six major points.

First, we continue to optimize and reconstruct our business model. Second, we continue to expand operations and the business in our target region. Third, we will consolidate resources to create a unified, safe, efficient, collaborative supply chain system.

Fourth, we will increase the sales of prepared and processed products plus we expect to about maintain the growth rate and high sales proportion of our chilled products. Fifth, we look for every logical upstream and downstream extension of our primary business

And increase value-added parts of the industrial value chain by comprehensive processing.

Sixth, we always give priority to the reduction of operating costs both fixed and variable costs. We also have been expanding our cold-chain logistics system into a new commercial service and we are delivering the expected good results. We expect that to continue in the future.

The details of the expansion and our capacity products and the regions and our near term plans are provided in our earnings release and Form 10-K. Here is an update about our new plans.

In the first quarter 2013 in Kunshan near Shanghai, we have put the new first phase into total production. The first phase includes temperature adjustable warehouses plus a regional logistic center. Trial production year-to-date last one to two quarters. With that, we have come to your part of the program and we will be happy to answer your questions.

Sterling Song

We are open to Q&A session. We are welcoming you with any questions you are interested in.



Thank you. (Operator Instructions) The first question is from the line of Echo He. Please go ahead your line is open now.

Echo He – Maxim Group

Hi, thank you for taking my questions. And the first one I wanted to ask about the construction in progress. I saw this large cash on balance sheet for the construction. What are those projects are and when are they if they are needs generated when they are coming to contribute to the revenue?

[Foreign Language –Chinese]

Vivien Sun


Here is the concept what Mr. Ben and Mr. Warren. Our ongoing construction program including first one the 3000 metric tons prepared pork in our Sichuan plant and this plant was started construction in the second half of 2012 and due to the cold weather in the winter in Sichuan and we expect this plant will be going to the total production in the fourth quarter of this year.

And the second project is our processing and distribution center in (inaudible) and the third one is our logistics center in Kunshan the first phase of Kunshan has been put into trial production in the beginning of this year. And so far we do not have schedule for the second and the third phase for this project.

However, because the first phase is only in the trial production, so we feel with the Kunshan project and the construction in progress in our balance sheet. And for the first project and because of the location and the environment issue we are still discussing on the authentication by the local government. Therefore the Changchun project has now been started to construct.

Echo He – Maxim Group

Okay. Thank you so much. The second question I want to ask is that, you said you are going to increase the prepared pork production and also the revenue contribution. I was looking at the income statement that prepared pork actually is the one segment that has declining margins and is that because of the competition is high and would that be prepared pork production?

[Foreign Language – Chinese]

Vivien Sun


Well, here is the comment from Mr. Ben. Regarding the gross margin of the prepared pork compared with the chilled and frozen and prepared pork has a higher margin and we believe to adjust product structure which means to increase the proportion of the sales of the prepared pork. We will have a positive impact to improve our overall margins.

And the reason that the prepared pork’s margin has been going down and we think there are several reasons. The first one is an increment of the overall cost and the second is the fierce competition in the market and the third when we increase the volume of the prepared pork and we have to do the promotion to gain the more market share.

Echo He – Maxim Group

Okay understand. And also, can I just ask about where are you on a going private project and especially on the SEC filings?

[Foreign Language – Chinese]

Warren Wang

So we have announced that the company entered an agreement with – by Mr. Zhu and I believe the lawyers are working on the process which we will be filing with the SEC in the near future. Please wait for the announcement from the company. Thank you.

Echo He – Maxim Group

Okay. Thank you so much. That’s all my questions.


(Operator Instructions)

Sterling Song

If there are no other questions coming up, I think we can come to the closing remarks.


I confirm there is actually one further question. It’s from the line of (Andrea Risley) at (Crawley Pension). Please go ahead. Mr. Risley did you have a question? Seems he is offline. So I will turn the conference to you for closing comments sir.

Sterling Song

Okay, thank you. Now we have come to the end of the Q&A session and we thank you for the time with us today. As always we thank you for investment in Zhongpin like a promise between good friends. We expect to deliver attractive returns to you. Wish you good health, safety and happiness. Thank you again from Zhongpin, goodbye for now. Thank you.

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