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Executives

Johnny Lai - MZ-HCI

Pengfei Liu - Chairman and Chief Executive Officer

Marco Ku - Chief Financial Officer

Analyst

Les Bryant - UBS Financial

China Marine Food Group Limited (OTCPK:CMFO) Q1 2013 Earnings Call May 15, 2013 8:00 AM ET

Operator

Welcome to the China Marine Food's first quarter 2013 earnings call. (Operator Instructions) I would now like to turn the conference over to, Johnny Lai from MZ Group. Please go ahead.

Johnny Lai

Good morning, everyone. Joining us today for China Marine's first quarter 2013 earnings conference call are the company's Chairman and CEO, Mr. Pengfei Liu; and the company's Chief Financial Officer, Mr. Marco Ku. Mr. Liu and Mr. Ku will review and comment on the financial and operating results for the first quarter, and they will be available to answer questions after the presentation.

I'd 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 and 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 involved 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 of you who are unable to listen to the entire call, we'll have an audio replay that will be available and the call is being webcast, so you can log on via the internet and all the information provided on this conference call announcement and the earnings releases today.

This time, I'd like to turn the call over to Mr. Liu, the Chairman of the company. And he'll provide opening remarks that will be translated by Marco. Chairman Liu, the floor is yours.

Pengfei Liu

Thank you, Johnny. Good morning and thank you for joining us for China Marine's first quarter 2013 earnings conference call. We were pleased with the growth in our two core businesses, brand seafood snacks and Hi-Power beverage during the first quarter of 2013. Local demand for our products remained strong and our investment in the advertising and promotions continue to pace our sales consistent with the growing snacks and beverage industries overall.

Equally important, our markets continue to trend up towards level we sustained, prior to the downturn in prior years. This is a function of improved operating efficiency, positive operating leverage and cost of good stating as a result of our dedicated cold storage facility.

We've failed stabilizing and growing in Fujian province, our most important market. We are focused on Zhejiang, which is quite next to our home province with strong and similar consumption pattern. As such, we will selectively work together with local distributors to expand our distribution network over the next several quarters to drive sustainable growth in these areas.

We are pleased with the results achieved at the beginning of 2013. Our core consumer business is rolling on the track, while our marine catch business has benefited from the expanded capacity and the new cold storage facility. We expect to carry this positive momentum into the rest of this year. In summary, I am optimistic about our growth opportunities for our seafood snacks and Hi-Power beverages business.

Our CFO, Marco, will now discuss our financial results for the first quarter of 2013. I'll be available to answer your questions after he finishes his presentation. Thank you.

Marco Ku

Thank you, Mr. Liu, and thank you everyone. This is Marco Ku, the CFO of China Marine. I will begin by reviewing our results for the first quarter ended March 31, 2013. Please be aware that all the growth figures that I will reference reflect year-over-year growth compared to the first quarter of 2012.

Total consolidated revenues increased by 42.2% to $21.5 million from $15.1 million in the first quarter of 2012. Gross profit improved to $7.2 million from $4.6 million, an increase of really 57.5%.

Cost of revenue consists of raw materials, packaging materials, direct labor and manufacturing overhead. We produced seafood Psenopsis 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 first quarter of 2013, our Seafood Snack Food segment, sales of our Mingxiang-branded seafood snacks generated $11.7 million in revenue, up 17.8% compared to the same period last year, and accounted for 54.3% of total revenues in the first quarter of 2013. In particular, sales were up 19.5% and 16.1% in Zhejiang and Fujian province respectively, as our sales and marketing efforts have generated positive results.

Hi-Power beverages generated first quarter revenues of $9.6 million, up 84.7% with strong sales in both markets of Fujian and Zhejiang provinces. We sell Hi-Power beverages through major international retailers such as Wal-Mart, China-based supermarkets like Trust-Mart, convenience stores, bars, restaurants, school canteens and local corner stores, which feature Hi-Power beverages as a functional drink side-by-side with those local and well-known international brands.

Our advertising and promotions over the past few quarters are continuing to drive trials from new customers and repeat orders from existing retailers. Sales of Hi-Power beverages were negatively impacted by consumer concerns regarding plasticides used by other beverage manufacturers in the first quarter of 2012.

Our last business segment, Marine Catch generated sales of $0.3 million in the first quarter of 2013, with additional storage space from our new cold storage facility, we will be able to capitalize on favorable market opportunities to purchase and sell marine catch to local market going forward. This also strengths, while we accumulate a significant amount of marine catch inventory as of the first quarter end of 2013.

Consolidated gross profit margin increased 320 basis points year-over-year and 920 basis points quarter-over-quarter to 33.7% in the first quarter of 2013. The primary reasons for the year-over-year increase in gross margin were higher sales contribution from higher margin seafood snacks and Hi-Power beverages and also from the positive operating leverage from strong sales growth.

First quarter gross profit margins for our Seafood Snack, Hi-Power and Marine Catch were 30.4%, 36.9% and negative minus-8.5% respectively. We spent approximately $1.8 million in advertising campaigns and $2.6 million in promotional costs, including subsidized products for promotional purposes, free gifts and other direct marketing events.

We continues to invest in target advertisements, such as outdoor and TV commercials in Fujian and Zhejiang provinces, and promotions tied to sporting events, so as to strengthen brand perfection and improved market awareness. Our sales and marketing team are becoming more efficient as a result of additional sales streaming.

Total operating expenses for the three months ended March 31, 2013, was $6.1 million compared to $6.5 million in the same quarter a year ago. Sales and marketing expenses were up 4.4% to $4.8 million and G&A expenses were $0.7 million. Excluding non-cash acquisition-related amortization and stock-based compensation expenses, non-GAAP operating income was $1.7 million in the first quarter of 2013 compared to an operating loss of $0.8 million in the comparative period a year ago.

Reported net income attributable to China Marine common shareholders was $0.6 million or $0.02 per share. Non-GAAP adjusted net income was $1.1 million or $0.04 per share. Please refer to the non-GAAP reconciliations details in our earnings press release and also from our 10-Q for more information regarding non-GAAP adjustments.

We end the first quarter of 2013 with approximately $3.8 million in cash compared to $0.9 million as of December 31, 2012. We had approximately $19 million of debt outstanding as of March 31, 2013, due to short-term loans from local banks.

Cash outflows from operations were at $7.8 million during the first quarter of 2013 compared to $17 million of cash inflows in the first quarter of 2012. This is primarily due to the decrease in collections of account receivable, partially offset by the increase in net income and a lower increase in inventories, which were largely composed of trading materials.

Accounts receivable were $25.6 million as of March 31, 2013, compared to $54 million as of December 31, 2012. The accounts receivable continues taking about three months to collect on average. Working capital increased from $72.2 million at the end of 2012 to $73.8 million at March 31, 2013. Shareholders equity was $128 million as of March 31, 2013.

This concludes our prepared comments. Thank you for your interest in China Marine 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

(Operator Instructions) Our first question will come from (inaudible).

Unidentified Analyst

Sounds like business is returning to normal, which is very nice. And I wanted to know seasonality? Is Q1 the smallest sale season of the year?

Marco Ku

Yes, you can say that comparing to three quarters that correct, because we have the traditional lunar Chinese New Year holidays within the Q1, and that's why all the production will cease during the holidays. And also the activities right after the Chinese New Year holidays are relatively slow. And that's why when you compare quarter-over-quarter, Q1 sales would be much lower when comparing to Q4.

Unidentified Analyst

And is Q4 the most profitable quarter for you with the highest sales volume?

Marco Ku

I think that most profitable segment will be the drink business.

Unidentified Analyst

So the summer season should be the most profitable?

Marco Ku

The summer season and also the Q4.

Unidentified Analyst

The increase in inventory, how much of that relates to the Marine Catch?

Marco Ku

Over 90%.

Unidentified Analyst

And when will those be sold?

Marco Ku

Well, it depends. That probably we would like to sell in the rest of this year. Put it in this way.

Unidentified Analyst

So is it fair to assume that you will be profitable in all future quarters for this year?

Marco Ku

I hope so, because it largely depend on the spending over the sales marketing.

Operator

Our next question is from (Brian Steele), a Private Investor.

Unidentified Analyst

Now that you have Q1 behind you and you're now midway through Q2, can you give some kind of guidance for 2013?

Marco Ku

I think right now we are still very optimistic about the growth opportunities for 2013. We are still working on the projections for 2013 or to either provide guidance. But right now we don't have the figure, but I believe that Q1 saw a very good start for 2013, and we'll track the momentum to continue for the rest of this year.

Unidentified Analyst

And then, I guess, the next question is around the cold storage facility. You had stated back when you announced that you were making the investment in the cold storage facility, roughly $30 million. You had repeatedly said that you expected $8 million revenue and $4 million of net income from that investment, but it doesn't appear like we're seeing anything close to that yet. Can you just talk about what's driving that, the fact that that has not occurred. Were your assumptions wrong as far as what you thought was going to be there in terms of demand for customers for the freezing and the ice making, and those things that you had talked about before?

Marco Ku

At very beginning, when we tried to let our shareholders understand the project of the cold storage, we have to make out a model to generally explain to what's going on, what the facility can generate, what kind of revenues and how much are they. This show you that the cold storage is a kind of very good investment at a standalone basis.

But after we build the facility, and we really did see a lot of demand from customers that they would like to rent our facility, rent the space for long time. But at the moment, we also see our strong demand for the Marine Catch Trading business. And that's why our management want to first visualize this space by our sales first.

And then after a while, if we bring there new extra unused capacity, then probably we can sell it out to the outsiders. And that's why there is kind of shift from at the very beginning, when we did the model projection for cold storage, it seems like we will sell all those space, and provide all those services to outsiders. But right now we are the major user of the cold storage. And if we have extra capacity going forward, we can do it and offer those services to third-party as well.

Unidentified Analyst

And then, I guess regarding the marine catch and the roughly $65 million that you have invested there in inventory right now. One other thing you talked about was that that was going to help you on your gross margin rate for the processed seafood business. But if I look at your gross margins now, they are actually a little bit lower than what they were back before the downturn for the processed seafood business. So have you had to reduce pricings for your processed seafood and is that why the gross margins are down despite the fact that you have ability to store marine catch now for the processed seafood business?

Marco Ku

In fact, the cold storage did open some balances towards to improve the gross margins for the processed seafood products. But at the same time, we also experienced a negative impact from the reviews and incidents happened couple of years ago. The reason is because after that incident, there is a strong demand in China for those breeding fishes or breeding farming fishes.

And that's why they are still looking for those, the same material that we used for our Seafood Snack Food business, and that's we have at times competition over the raw materials process. And that's why we did see a kind of increase in the raw material process in the last couple of years' time. But with the help of cold storage actually the gross margin is improving even though with that negative impact.

Operator

And our next question will come from Les Bryant of UBS Financial.

Les Bryant - UBS Financial

Are the aquaculture or the growing of fishes, are they customer of yours for your fresh seafood catch?

Marco Ku

Sorry, can you repeat the question?

Les Bryant - UBS Financial

I know in the past you were selling squid as fresh seafood catch, a lot of it. But now are you selling to these fish growers within China, the small fishes, the excess small fishes that you say the prices are getting more expensive. Are you going to profit selling to those people?

Marco Ku

Not really. Because within our Marine Catch Trading segment, those fishes that we trade is actually more expensive items. And that's why actually what we are talking about in the marine catch fishes that we trade is not the same type of fishes that we do in the processed seafood product segments, they are different.

Les Bryant - UBS Financial

So you don't have excess of these small fishes to sell to the aquaculture farms?

Marco Ku

Correct.

Operator

At this time, we're not showing any further questions. So I would like to turn the call back for any closing remarks.

Marco Ku

So as mentioned by Chairman, Liu, we are pretty optimistic about the growth opportunities for both of our core business. With the new cold storage facility, we're able to capture more trading opportunities going forward, given these fish cold storage capacity. We look forward to seeing you again at our new facility in Shishi, and further discuss with you about our business plans in the near future. So thank you so much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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