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SkyPeople Fruit Juice, Inc. (NASDAQ:SPU)

Q4 2012 Earnings Call

April 2, 2013 9:00 am ET

Executives

David Rudnick – Investor Relations

Hongke Xue – Chairman and Chief Executive Officer

Oliver Ma – Chief Financial Officer

Operator

Good morning. My name is Nicole and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Year-end and Fourth Quarter Earnings Call for SkyPeople Fruit Juice, Inc. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. David Rudnick of CCG Investor Relations you may begin your call.

David Rudnick

Thank you, Nichole. Good morning ladies and gentlemen, and good evening to those of you joining us from China. I'm David Rudnick of CCG Investor Relations. I would like to welcome all of you to the SkyPeople Fruit Juice fiscal year-end 2012 earnings conference call. The company has filed its Form 10-K with the SEC on Friday, March 29 and issued its earnings press release on that date as well.

Joining us from the Company today Mr. Hongke Xue, SkyPeople’s Chairman and Mr. Oliver Ma, the Company’s Chief Financial Officer. Mr. Ma will provide translation for Mr. Xue in his opening remarks, as well as during the Q&A session. Before we start, I would like to remind our listeners that on this call, management prepared remarks contain forward-looking statements, which 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 the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, due to various risks including, but not limited to, such factors as unanticipated changes and product demand and market acceptance of the Company’s products, the Company’s ability to meet its financial guidance, competition in the marketing sales of its products, the successful development of projects and its R&D pipeline and other information as detailed from time-to-time in this filings and future filings with the SEC.

Accordingly, although the Company believes that the expectations are reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. In addition, any projections as the Company’s huge performance represent management’s estimates as of today, April 2, 2013. SkyPeople assumes no obligation to update these projections in the future as market conditions change.

With that, it is my pleasure to turn the call over to SkyPeople’s Chairman, Mr. Hongke Xue to provide some opening remarks in Chinese. Mr. Xue?

Hongke Xue

[Foreign Language]

Oliver Ma

We would like to thank all of you for going out today. We are pleased to report strong financial results for the fiscal year 2012. As our diversifying product mix yield solid financial performance for the year the superior performance of our concentrated pear juice and fruit juice beverage segment in particular. We’re able to offset less than desired year-to-year comparison from other of our segments.

Hongke Xue

[Foreign Language]

Oliver Ma

As we have said, the market condition of the fruit juice segment over the past few years, we chose to reduce the selling price of our own branded fruit juice beverages, so as to strengthen our competitive positioning and gain market share, although our fruit juice beverages gross profit margin were slightly reduced.

Our strategy worked as we increased fruit juice beverages sales about 29% in 2012 over 2011. We remain confident about the future of our Fruit Juice Beverages segment given relatively lower domestic consumption of fruit juice beverages and the potential for the consumer adoption and raising income leads to healthier lifestyle.

Hongke Xue

[Foreign language]

Oliver Ma

We continue to see China as a tremendous growing market as the country has been experiencing significant economic development and raising income are causing in transition in consumer tastes towards healthier lifestyles and improved nutrition. Our diversified range of fruit juice product offerings and our own branded fruit juice beverages and a unique delivery systems causes optimism about the long-term future for the company. David?

David Rudnick

Yes.

Oliver Ma

Okay, now I'll begin to review the full-year financial results of 2012. As Mr. Xue indicated, our diversified fruit juice product offerings led to our being able to generate solid financial results for the year 2012. With that as a context, I would now turn to the financial results of fiscal 2012 in further detail.

Revenue for the fiscal year 2012 was $102.4 million, an increase of 22% as compared to $84 million in fiscal 2011. The increase was primarily due to more than doubling in revenue of our concentrated pear juice segment year-to-year, a 29% increase in fruit juice beverages and a 7% increase in our fresh fruit and vegetables segment. This offsets a 41% decline in the revenue of our kiwi product segment and 8% decline in apple product segment.

Gross profit was $33.1 million for the full year 2012, a 20% increase from $27.5 million in 2011. Gross profit margins were 32%, which was very close compared to 33% gross profit margins posted in 2011, mainly due to substantially higher gross margin in our concentrated pear group segments which offset some of the declines in other product segments.

Operating expenses for the year 2012 decreased by 6% to $7.9 million, or 8% of net sales, as compared to $8.4 million, or 10% of the sales in 2011. General and administrative expenses equates to $4.4 million for 2012, mainly due to a decrease in legal fees related to current pending litigations.

Selling expenses increased slightly to $2.9 million, mainly due to an increase in the head count of company’s sales force. Operating income for fiscal 2012 increased 33% to $25.2 million, as compared to $19 million in fiscal 2011. Net income attributable to SkyPeople Fruit Juice shareholders for 2012 were $18.2 million compared to $13.2 million in 2011.

And now for our sales by product segments; sales of our concentrated pear juice rose 116% to $28.9 million in 2012, primarily due to an increase in the amount, driven by an increase in sales volume as well as an increase in our average selling price.

Sales of our own branded fruit juice beverages increased by 29% to $27.1 million from $21 million in the prior year. The increase is attributable to reduced prices, which helped to improve our competitiveness and market share. Sales of our apple-related products decreased 8 % to $22.9 million for the year 2012. Our volumes fell by 15%. We were able to increase our average selling price which largely compensated for this loss of items. Sales of our kiwi products fell by 41% to $9.2 million for 2012 as both our volumes and average selling price fell. Finally, sales from fresh fruits and vegetables increased 7% to $8.4 million in 2012 from $7.9 million in 2011.

Now let’s turn to the Company’s current financial position. As of year-end December 31, 2012, we had $77.6 million in cash and cash equivalents, up from $61.2 million as of year end 2011. Working capital was $102.9 million compared to $87.6 million as of year December 31, 2011. SkyPeople had $11.7 million in short-term bank loans with local and commercial banks in Shaanxi and Liaoning Provinces as of December 31, 2012. Shareholders' equity attributable to SkyPeople Fruit Juice was $156.5 million as of December 31, 2012 compared to $137.9 million reported at year end 2011.

And now turning to our outlook; our growth trends generally consists of two elements. One; improving our existing manufacturing infrastructure to support higher production volumes for our existing products and two; inventing in new products that will help us to further grow by strengthening our product platform. And in terms of our new products, last year, we announced an agreement with Yidu Municipal Government in Hubei Province to construct manufacturing facilities to process and develop a variety of orange products which fully tend our product portfolio and addresses what we believe to be a shortage of such products in the market.

The construction period of the project is expected through 2014 with a total investment of approximately $51 million. We hope we had additional new products to announce in the year ahead that we also strengthen our competitive portfolio and extend our opportunities for growth.

At this point, I’d like to now open up the call to any questions that you may have for the management team. Operator, let’s please begin the Q&A session. Operator let’s please begin the Q&A session, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [Tom Chow]. Your line is open.

Unidentified Analyst

Yes.

[Foreign Language]

Thanks for the call. I think the individual margin for the individual product looks okay. But why the sales of kiwi juice dropped so much.

[Foreign Language]

Oliver Ma

[Foreign Language]

Hongke Xue

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Hongke Xue

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

So, the question is, why did the sales of concentrated kiwi juice in 2012 fall so much as compared to 2011. And our Chairman, Mr. Xue gave us a couple of reasons. And number one was due to shortage of inventory in 2011, which in turn reduced our sales of kiwi juice in 2012.

But Mr. Xue said that, in the last quarter of 2012, when it was a big season of the company due to the higher purchasing price of raw materials, we produced net amount of concentrated pear juice products and that’s the reason why for the entire 2012, the sales of our kiwi juice saw a big decrease as compared to 2011.

Tom, please go ahead if you have anymore questions?

Unidentified Analyst

Yeah, the second question would be for the beverage. I know in order to increase market share, you reduced the price and the margin decreased slightly. So going forward, do you think the margin will be stabilized or will it have a further decrease?

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

Okay, so the question was about the gross profit margin of our fruit juice products. Mr. Xue answered that in his personal opinion, the gross margin of fruit juice beverages may further decline in the future as we are experiencing shortage of production volume and we have already set up 17 sales and marketing centers in various provinces of China and our plan is to build up about 30 sales and marketing centers by end of May.

And we have planned to engage other manufacturing facilities in Northeast China allowing to produce our fruit juice beverages. And in the long run there might be further decline in the gross profit margin of fruit juice beverages.

Tom, please go ahead if you have any more questions?

Unidentified Analyst

I have a follow-up for – when Mr. Xue answered for the kiwi question, so it then implied for the Q1 of this year? The sales were increased from last year because of basically half production amount of sales is more like in the inventory?

[Foreign Language]

Hongke Xue

[Foreign Language]

Unidentified Analyst

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

At the midst of this that given projection of the sales volume of kiwi related products in Q1 and we advice everyone to wait until, to wait by the end of Q1 when the 10-Q comes out to the results. And we don’t want to give any projection.

Hongke Xue

Tom, go ahead if you’ve got any more questions?

Unidentified Analyst

Yeah. I will let other people ask questions.

Oliver Ma

Okay, thank for your presence. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of [Daniel Silva]. Your line is open.

Unidentified Analyst

Good evening gentlemen. I have a couple of quick questions. I’ll try to ask them slowly if there is a need to translate. The first one is a follow-up to the most recent questions and the answers to that, for 1Q results, we’ll have to wait until the Q comes out, 10-Q. Qualitatively, is there anything now that the March quarter is over at the highest level, not at the segment level that you can tell us about how it’s played out relative to historical expectation. So, if historically, 1Q has sequentially declined by 50% or more versus 4Q, is there any reason that this would be different? Also I noted that account receivable was somewhat higher at the end of the year. Presumably, it will decline, I’m curious if you can give us a slight update on that? And lastly about 1Q, can you tell us the CapEx spend during the quarter only and roughly what we should expect for the debt level at the end of the quarter? Thank you.

Oliver Ma

Sorry, can you repeat your last question please, before we begin to answer?

Unidentified Analyst

Sure. the end of quarter CapEx and debt levels?

Oliver Ma

Sorry, didn’t get it.

Unidentified Analyst

Capital expenditures?

Oliver Ma

Okay, capital expenditures?

Unidentified Analyst

Yes.

Oliver Ma

Okay. All right, okay. Let me present your question first.

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

Okay, thank you for the questions. For the first question that you asked and the companies do have operating cycle. Normally, the Q1 is relatively slow and the last quarter of the year is the big season of the Company. And we are planning to adjust our product range by increasing the market share of fruit juice beverages. That will help us to overcome the operating cycle that have been adverse during the past few years.

And interest rate is optimistic that from the year, 2013, we maybe overcome the existing operating cycle by increasing the sales volume in the Q1, but we also guarantee again for me, I would like to again, remind you that we need to wait until the 10-Q comes out. And now I’ll translate the second question to Mr. Xue.

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

Okay, all right. For the second question you asked, about the account receivables, Mr. Xue’s opinion is the account receivables of the Company remains at a healthy level, because during the past few years, we developed a long-term relationship with distributors of our concentrated fruit juices. And we generally assessed the quality of our accounts receivables and as the net debt operation has been remained in a very low level. But the accounts receivable may increase in the future as we expand our market of fruit juice beverages in the future.

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

Okay. for the third question about the capital expenditure, the Board of Directors are continuously evaluating new opportunities to invest in the industry and the capital expenditure for 2013 will be up to the new product. Last year, we announced we entered into an agreement with Yidu Municipal Government to build a manufacturing facility in Yidu city of Hubei Province and makes a sure impact this project will be fully operating in the second quarter of 2013 and we may have very big new investment projects coming up in the second quarter of 2013 as well and by the time, 2013 will be a good year in terms of dealing out new facilities and spending more in investing activities. and we hope we answered half of that.

Unidentified Analyst

Yes absolutely, that’s a very helpful answer, especially to know that starting in 2Q, you actually would be up and running. So I think investors will be very pleased by that. And if I could just ask a quick follow-up, but a more basic question, right now the company has an equity market cap of about $60 million, which in my view deeply undervalues the company in light of the cash balance you have, but the actual cash flow generation that you’re currently putting up and if you look at the two, it would seem that you have the ability to buy back certainly some shares. And while dividends might be more complicated, because for various legal reasons and entity structure, even a small, let’s say $5 million buyback, which would be very feasible, would be very well received by shareholders, because it would be a sign of shareholder friendly capital allocation.

If you could just speak to the disconnects, the under evaluation and the Company’s cash flow generation, I think that would be very reassuring to investors.

Oliver Ma

Okay, thank you for the question. I’m going to translate your question to Mr. Xue.

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

Okay. Thank you for the question. For the last question that you asked about under evaluation of common shares as compared to the Company’s cash balance and the operating cash flows, incomes quarter-by-quarter. And we’ve reviewed that the Board of Directors is continuously evaluating the opportunities or possibilities of a dividend or a buyback. But we don’t have the Board of Directors that don’t make any significant decision as of now. And we certainly will report any significant decision if there is any to our shareholders.

In 2013, as we have indicated, we may begin several benefits, new type of investment projects. And if all those new projects that are currently under evaluation by the Board of Directors, trials would be good and we’ll go ahead with those projects.

There might be a shortage of cash of the Company and we have to borrow funds from the local banks to finance our investment projects. So the Company considering for so many things, this might not be a good time to announce a dividend or a cash buyback. But let’s ask to the Board of Directors and we hope we answered your question there.

Unidentified Analyst

And if I could just ask a really quick follow-up to that, because I hope investors don’t get the wrong idea. I think maybe, you just want to make clear that while there’s certainly a whole bunch of big capital expenditures and investments, it’s not as if the company doesn’t have enough cash or enough cash flow or enough borrowing capacity, so investors should not be afraid that there would be a solvency issue, the Company is certainly well capitalized. I would just ask that hopefully, you clarify that one point, so no one gets the wrong picture.

Oliver Ma

Okay.

[Foreign Language]

Hongke Xue

[Foreign Language]

Oliver Ma

Okay. Probably answer to your [question], Mr. Xue would like to give you an answer more like of the operating perspective. As Mr. Xue has already indicated, there were a couple of very big investment projects that is under evaluation of the Board of Directors. And there is one critical point that the Board of Directors are considering that is the cash that we have that is available to invest in those projects.

We have about over $30 million cash at the moment. But we can use about – only $14 million to $15 million of cash to invest in new projects. We have to reserve some of the cash as to purchase raw materials and use as the working capital. The reason why we didn’t fully start the new investment project is, we are still in negotiation with banks to financing the Company to invest in new projects and the negotiation is still in process. If all the new projects that if any evaluation right now that’s to enhance in 2013, the Company to evolve significant amount of cash from the bank. And that is why the Board of Directors has not yet announced any buyback or dividend; some interest rates that want to follow the accountability of a dividend or a buyback, because that’s a B2B decision of the Board of Directors relevant from Hongke Xue himself and that is still possible for that. Okay, that’s the answer.

David Rudnick

Okay. This is David Rudnick from CCG. I want to thank everyone for all the excellent questions. At this point, we would like to conclude SkyPeople’s earnings call. So on behalf of the entire SkyPeople Fruit Juice’s management team, we would like to thank all of you for your interest and participation on the call. This concludes SkyPeople Fruit Juice’s fiscal year 2012 earnings conference call. Thank you all very much.

Operator

You may now disconnect.

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