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Executives

John Mattio - MZ Group

Pengfei Liu - Chairman and Chief Executive Officer

Marco Ku - Chief Financial Officer

Analysts

Alberto Bassetto - Jayhawk Capital

Les Bryant - UBS Financial Services

China Marine Food Group Ltd (OTCPK:CMFO) Q4 2012 Earnings Call March 27, 2013 8:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the China Marine's Fourth Quarter 2012 Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). The conference is being recorded today, Wednesday, March 27, 2013.

I would now like to turn the conference to over, John Mattio from MZ Group. Please go ahead.

John Mattio

Thank you and good morning, everyone. Joining us today for China Marine's fourth quarter and full year 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 financials and operational results for the fourth quarter and 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 unknown risks and uncertainties, including all business-related risks that are more detailed in the company's filings on Form 10-K, 10-Q and 8-K 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 that information was provided on the conference call announcement and also the company's earnings release.

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

Pengfei Liu

(Foreign Language).

Marco Ku

Thank you, John. Good morning and thank you for joining us for China Marine's fourth quarter 2012 earnings conference call. Our fourth quarter results reflect further improvements in our two core businesses, brand seafood snacks and Hi-Power beverages for a second consecutive quarter. We believe this is a function of our sustained investments in advertising and branding made over past year having captured our share of improving market. We see significant opportunities ahead to continue growing each of our businesses.

Pengfei Liu

(Foreign Language).

Marco Ku

Consumer demand for our products has gradually returned to levels we experienced prior to the Japan nuclear disaster in March of 2011. While China's overall economy is improving quite as fast as it did a few years ago, we see solid demand for branded snacks and beverages like Mingxiang and Hi-Power.

Pengfei Liu

(Foreign Language).

Marco Ku

For the full year of 2012, our sales increased 9.3% and our gross profit increased 12.9%. Although net income and earnings per share were down, we saw significant [increased] in the second half of fiscal 2012. We expect to carry this positive momentum into 2013.

Pengfei Liu

(Foreign Language).

Marco Ku

We are pleased with the progress we have made over the past year. Our core consumer businesses are growing again while our Marine catch business has from the expanded capacity in new cold storage facility. Going forward, we will remain focused on further increasing our sales, expanding our distribution network and returning our markets to prior levels.

Pengfei Liu

(Foreign Language).

Marco Ku

Thank you for your interest in China Marine. We are yet to be satisfied with the financial results over the few quarters. However, we believe our strategy is [and] that the worst is behind us.

Our CFO, Marco Ku, will now discuss our financial results for the fourth quarter and full year 2012. I'll be available to answer your questions after he finishes his presentation. Thank you.

Marco Ku

Good morning, everyone. This is Marco Ku, the CFO of China Marine. Once again, thank you and good morning, everyone. I will continue by reviewing our results for the fourth quarter end December 31, 2012. Please be aware that all the growth figures that I will reference will reflect year-over-year growth, compared to the fourth quarter of 2011.

Total consolidated revenues were $50.2 million in the fourth quarter of 2012, compared to $64.3 million in the fourth quarter of 2011. Gross profit improved to $12.3 million from $7.3 million a year ago, an increase of 69.4%.

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, while Hi-Power production is outsourced to the third-party, branding and bottling facilities in Fujian province.

Looking at our business segment performance, for the fourth quarter of 2012, our Seafood Snack Food segment, sales of our Mingxiang branded Seafood Snack Food generated $15.9 million in revenue, up 41.6% compared to the same period last year and accounted for 31.7% of total revenues in the fourth quarter of 2012.

In particular, sales were up 69.7% in Fujian province as our sales and. marketing efforts have generated positive results. Hi-Power beverages generated fourth quarter revenues of $15 million, up 154.7% 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 Walmart, 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.

Consolidated gross profit margins increased from 11.3% in the fourth quarter of 2011 to $24.5% in the same quarter this year. The primary reason for the year-over-year increase in gross margin was greater contribution from the higher sales of seafood snacks and Hi-Power beverages, which generated substantially higher margins in our marine catch business.

Fourth quarter's gross profit margin for our seafood snacks, Hi-Power and marine catch were 30.6%, 8.5% and 28.7%, respectively. We spent approximately $4.8 million on advertising and promotions in the fourth quarter of 2012, up by $1.8 million from the same period a year ago.

We continue to invest in target advertisements such as outdoor and TV commercials in Fujian and Zhejiang provinces, and promotions tied to sales and marketing team are now becoming more efficient as a result of additional sales streaming.

Our last business segment, marine catch generated sales of $19.3 million, compared to the $47.2 million in the same period a year ago. With additional storage space from our new cold storage facility, we were able to capitalize on favorable market opportunities to purchase and sell marine catch in the local market going forward. [Marine] accumulate a significant amounts of marine catch inventory as of the end of 2012.

I will summarize the underlying items for our consolidated fourth quarter results. Selling, general and administrative expenses, which exclude depreciation, amortization and impairment were $6.7 million, compared to $5.1 million in the quarter year's period.

G&A expenses, which increased stock-based compensation only slightly increased by $0.1 million to $1.4 million in the fourth quarter of 2012. As a result of significant selling and marketing expenses for the year 2012 that results in a significant operating loss for our drink business, our [value] as expressed has performed and updated valuation of the beverage segment using latest forecast results. Accordingly, we'll report an intangible assets impairment loss of $2.2 million during the fourth quarter of 2012.

GAAP net income attributable to China Marine shareholders for the quarter and for the December 31, 2012, was $1.7 million, compared to $1.1 million in the prior year's corresponding period. Adjusted non-GAAP net income excluding those non-cash expenses was $4.6 million, representing $0.15 earnings per share.

We end 2012 with approximately $0.9 million in cash compared to $0.6 million as of December 31, 2011. Cash outflows from operations for the first nine months of 2012 were $4.1 million, mainly due to high inventories of training materials. Cash outflows from operations for the full year 2012 were $4.2 million as a result of higher inventories of trading materials.

Working capital increased from $70.2 million at the end of 2011 to $72.2 million at December 31, 2012. Shareholders' equity was $126.7 million as of December 31, 2012.

Right now, I will quickly discuss the highlights for the 12 months of 2012. Please refer to our earnings press release or our 10-K for additional details regarding our full year 2012 results.

Net revenues increased to 9.3% to $157.3 million in 2012. Sales of seafood snacks, Hi-Power beverages and marine catch were to [Q1] $46.2 million and $59.7 million representing 32.7%, 29.4% and 37.9% of total sales in 2012, respectively. Gross profit increased 12.9% to $35.8 million in 2012. Gross margin was 22.8%, up 80 basis points from 22% in 2011.

Reported net income and earnings per share were north of $4.5 million and $0.15 loss per share, respectively, excluding those non-cash goodwill and intangible assets impairments, amortization of intangible assets, after-tax, non-cash stock-based compensation expense, we had $3.4 million of non-GAAP adjusted net income equal to $0.12 earnings per share.

On behalf of the entire China Marine management team, we want to thank you for your interest and participation in this call. Please visit our website at www.china-marine.cn for more information regarding our company.

We will now take your questions. Operator, please?

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions). The first question will come from Leonard (Inaudible), a private investor. Please go ahead.

Unidentified Analyst

Yes. I would like to know how the first quarter of 2013 is going and if there is any seasonality in the business to expect or should we again look at the last quarter of 2012, a good, at least as the quarters will be in 2013, or 2013 quarters should now be better than the last quarter of 2012? Thank you very much. It's very nice to see profit again. Congratulations.

Marco Ku

Thank you for your questions. Yes. We did experience a small seasonality in China, especially before and during the Chinese New Year, because during the first quarter of 2013 kind of seasonality due to the Chinese New Year, and that's why everyone going to shutdown their business for a week or two.

Actually every year for the first quarter, it will be comparing to our Q4, will be, it goes down a little bit because of the seasonality reason. For 2013, that will be the same, so when you compare results fourth over the quarter, yes, there will be a little bit downside comparing to Q4, but if we try to compare year-over-year, comparing to Q1 2012, then definitely there will be a significant improvement of that, because we have already over the worst year in 2011 and 2012. 2013, we believe that that will be a much better for us.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Alberto Bassetto of Jayhawk Capital. Please go ahead.

Alberto Bassetto - Jayhawk Capital

Hi, Marco. Good evening, Mr. Liu.

Marco Ku

Good morning, Alberto.

Alberto Bassetto - Jayhawk Capital

Two quick questions. One is account receivables, when are you expecting to collect most of those margin, and second which is following up onto prior question. Can you, Mr. Liu, give us some number or some insight to how we should look at the 2013 in terms of revenue and profit?

Marco Ku

Thank you for the questions. So, go back to the number one question, in terms of AR collection, actually we did collect most of those year-end AR outstanding by end of February, so definitely the AR aging will be somewhat like still in between two to three months in terms of the DSO days. That's normal for us and we will try to increase that a little bit forward. So, you won't see, AR outstanding dates will be more or less in between two to three months.

The second question is the outlook for 2013 as well I said, we give is that 2013 will be a tougher year, so when comparing year-over-year or even comparing to 2011, we believe that we are getting better now, so we are now be expecting that we will do it very soon and give you a more detail in the next press release.

Alberto Bassetto - Jayhawk Capital

Okay. Thank you much.

Operator

Our next question is from Les Bryant of UBS Financial Services. Please go ahead.

Les Bryant - UBS Financial Services

Somewhat regarding your new cold storage unit. Are you getting the desire to expect for your investment in that facility to-date?

Marco Ku

You shouldn't say that, because right now when only when the new facility for about two to three quarters in between, so right now we are still in a so that's normal I would say, because we are very pleased with the capacity that we offer us to further extend our business. So right now, frankly speaking, most of those space and also the blast freezing services are being used by China Marine itself. We are still under monitoring whether we should leave those extra space for the third-party, but we are…

Les Bryant - UBS Financial Services

Okay. That was going to be emerged by the part of your question was revenues and expenses are they been run through the marine catch division or as a separate or as a separate unit?

Marco Ku

You are correct. Right now the operating results are being captured at top of the marine catch business.

Les Bryant - UBS Financial Services

Okay. How much of your $36 million of inventories at year-end represented marine catch rough?

Marco Ku

Over 90%.

Les Bryant - UBS Financial Services

Okay. Very good, if I did that your margins were little better on the marine catch this year than they were last year even though last year, maybe I am mistaken. If you add $47 million in the fourth quarter last year and I believe it was in $19 million this year.

Marco Ku

Yes.

Les Bryant - UBS Financial Services

Your margins were better this year. Am I correct? All good. Okay. Is the ice sales at all meaningful from your new facility?

Marco Ku

Sorry? Once again?

Les Bryant - UBS Financial Services

Is your ice sales through the fish and boats, is that a meaningful?

Marco Ku

No way they are meaningful number.

Les Bryant - UBS Financial Services

A smaller number?

Marco Ku

Yes.

Les Bryant - UBS Financial Services

Yes. Okay. All right. Well, all right. Thank you very much and I am glad that you are giving us more color on what's happening within the company, because we all need somebody to hold our hands. Thank you.

Operator

Our next question comes from [Brian Steele] an individual investor. Please go ahead.

Unidentified Analyst

Yes. With regards to the 2013 guidance, I know you stated that you weren't going to provide specifics right now, but I noticed in your 10-K that you mentioned that related to the drink business that your expectation is for 39% revenue growth in '13, and then 25% revenue growth thereafter, so I was just wondering if you could comment on that.

Marco Ku

Yes. Actually, in 2012, the number is far behind from our expectation. The reason is mainly because of the hesitance which is related to the [being] used to buy somewhat market participants and that's why due to market was down significantly in 2011 and 2012. Right now, we are very pleased to see that the markets we operate from that instance and that's why we expect the market to grow in 2013 and will be pretty significant when comparing 2012. That's one reason and the other reason, because our continuous investment in advertising and promotion and that's why we believe that we will have a much better distribution and awareness in 2013 and we will also enter into another new province this year and that's why you can see that which had a significant growth this year.

Unidentified Analyst

Okay. And then just going back to the pervious questions on the cold storage facility, in your previous discussions when you talked about spending, I think it's roughly $25 million $27 million on the facility. You had talked about you'd be expecting $8 million of revenue and $4 million in net income from that facility, and I was just curious if you could provide some more color around where you are with regards to that previous guidance.

Marco Ku

Yes. Right now, we still separate that cold storage facility lie independently. The reasons because as we are achieving we project we would like to sell the space or lease the space to the third-party 30-days or so, but right now actually [spaces] and services are been captured are being used by China Marine, and that's why we would rather put that operating results within the line of marine catch business, but we heading back to the period projections that we did for cold storage. I think that we are close to that. We have not yet reached that level. This is only half year operating, but we believe that we more [room] having more closed this year 2013.

Unidentified Analyst

Okay. Just one last question, on the marketing and sales for 2012, I think you said in your 10-K, it was roughly $15 million $16 million for commercial cost and $9 million for advertising. How does that roughly split out between the seafood business versus the drink business.

Marco Ku

I think, I would put a foot against drink. I think that will be coming around 40-30.

Unidentified Analyst

Okay. So, 70% drinks 30% seafood?

Marco Ku

Correct.

Unidentified Analyst

Okay. Sorry. Just a last one, how do you plan to increase the stock price for us long-term shareholders it's been pretty painful. What are you going to try to do in '13, especially since it sounds like you finally have the market going in your favor, what you can do to increase the stock price in 2013?

Marco Ku

I think those fundamentals that we continue will be run the business well, to make it, turn it profitable business and let the number tell the story. That's the most fundamental thing that we have to do. And definitely, because as we just have discussed with our [expenditure] we the market was rebounding and coming back this year a little bit, so probably we will have more press releases out to the market let everyone knows what we are doing, what we are planning to do and probably if the markets do bounce back and hopefully we can…

Unidentified Analyst

Very good. Thank you. I appreciate you taking the time. Thanks for my questions.

Operator

(Operator Instructions). There are no further questions. This concludes our question-and-answer session. I'd like to turn the call back over to management for any closing remarks.

Marco Ku

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

We look forward to seeing you all around at our new facility in Shishi port and further discuss with you about our business plans in the near-future. Thank you.

Operator

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

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