Terence Chen - Chief Financial Officer
Jinmaio Wang - Chairman, Chief Executive Officer
Ann Yu - Chief Strategy Officer
China New Borun Corporation (BORN) Q2 2013 Earnings Conference Call August 16, 2013 8:00 AM ET
Good day everyone and welcome to China New Borun Corporation’s Second Quarter 2013 Earnings Conference Call. Today’s conference is being recorded.
Before we get started, I am going to review the Safe Harbor Statements regarding today’s conference call. Please note that the discussions today will contain certain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to differ materially from those in forward-looking statements, please refer to our Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 24, 2013. The company does not assume any obligations to update any forward-looking statements except as required under applicable law.
At this time, I would like to turn the call over to Mr. Terence Chen, Chief Financial Officer of China New Borun Corporation for opening remarks and introductions. Please go ahead, sir.
Thank you, everyone for joining us for China New Borun’s second quarter 2013 earnings call. Joining me today from management are Jinmaio Wang, Borun’s Chairman and Chief Executive Officer and Ann Yu, company’s Chief Strategy Officer.
On call today Mr. Wang provide a quick review of our performance and current business environment, following Ann will offer more details of our operation development and updates. At the end, I will provide you with our second quarter 2013 financial details.
I’d like to note that on this call today all of our financial results will be referred to Chinese RMB unless otherwise noted.
At this point, I would like to introduce Mr. Wang, Chairman and Chief Executive Officer of Chine New Borun. Mr. Wong will speak in Mandarin and I will translate. Mr. Wang?
Hello, everyone and welcome to China New Borun’s second quarter 2013 earnings conference call.
Once again, I’m pleased that for second quarter of 2013, we exceeded our provided guidance for third consecutive quarter validating our continued solid execution. Despite extremely significantly market conditions for (inaudible).
During the quarter, we served more products and achieved meaningful sequential improvements in profitability with increases in gross margin, operating margins as well as net margins.
As discussed with you in our last earnings in May, we have anticipated higher demand for our edible alcohol in the second quarter and accordingly raised our production volume by bringing all of our production line during the quarter. Correspondingly our capacity utilization improved to nearly 90% contributing to profitability, improvement across the board.
Additionally, during the second quarter, we issued a second tranche of RMB150 million for BORN bonds following the first tranche of RMB350 million bond issued at the beginning of this year. We believe this additional cash enhanced our financial flexibility to expand our billing scale and scope and to ultimately drive greater revenue growth than profitability.
With the additional cash, we optimized our sourcing strategies by purchasing approximately 300,000 tons of corn with our own proceeds for later use during the non-harvest season. As you may recall, this last batch of corn were directly purchased from local farmers at seasonally spot price which should improve our cost advantages in the non-harvest season, when corn prices are typically higher than those in the harvest season directly purchasing with our own funds.
We also eliminate the additional charges from local granaries, at the same time, we are also deploying cash to expand the business and we are excited with the completion of our new CPE plant this July and expect completion of foam insulation by the end of third quarter making a new milestone in our corporate history.
We are optimistic about the foam insulation and CPE market opportunity. And with completion of our CPE plant we have already commenced limited trials of CPE production. Our sales team is actively meeting with active customers and showing our pilot samples and we anticipate winning initial sales by this fourth quarter.
And as you can see, we will continue to forge ahead with our strategy and operations and we are confident to maintain our leading position in the edible alcohol market while capturing new market share in the foam insulation and CPE business.
At this point, I would now turn the call over to Ann Yu for detailed discussion of our operational assets.
Thank you very much Mr. Wang and Terence and many thanks to everyone for participating on our call today. I’m delighted that we continue to solidly executing our business in the second quarter and once again it fitted our outlook. In the (second quarter), higher sales and utilization many of our key operating metrics show substantial quarter-over-quarter improvement during the second quarter.
Let me share with you some quarter-over-quarter improvement highlights. In the second quarter of 2013, our total revenue grew by 39.5% to RMB628.5 million beating our high-end guidance of RMB600 million by nearly 5%. Capacity utilization improved to nearly 90% compared with 60% a quarter ago, which contributed to the gross margin improvement of 100 basis points sequentially benefiting from higher level.
Operating expenses decreased to 1.8% of total revenues and our net cost net income doubled to RMB25.5 million, less than RMB13 million a quarter ago.
While we are very encouraged with our improved financial results in the second quarter we believe that the edible alcohol across industry as a whole is still facing weaker demand and declining price. During the second quarter, our ASP for edible alcohol decreased by 7.5% year-over-year and consequently our gross margin decreased to 11.4% from 14.4% a year ago.
As you know, the baijiu and chemical industry had a key end market for our edible alcohol. Unfortunately both markets are placing a tough time over the last 12 month because of China’s decelerating economic and also because of industry special specific tranches.
China’s economic are those in one of the world fastest growing, has decelerated over the past two years. According to the National Bureau of Statistics of China although the government had adopt a number of economic policies to boost China’s economics, the GDP growth rate in the second quarter was only 7.5% below the market estimation of 7.6% and lower than the 7.7% growth rate in the first quarter.
China’s industrial added output growth 9.3% year-over-year in the first half of 2013 down by 20 basis points on the growth rate in the first quarter and 70 basis points on a 10% growth rate in 2012. Furthermore, the baijiu industry plays additional challenges including the central government cost to particularly curb (inaudible) surrounding vintage (inaudible) as well as tougher driving rules that drastically lower the (threshold) of drunk driving. All of these have (inaudible) consumption.
And on the positive side, we are seeing consumers and businesses beginning to purchase more baijiu as many retailers are placing a surge in baijiu in the upcoming mid-autumn festival in September and Chinese national holiday in October where baijiu is the very popular gift and widely consumed at dinner with friends and families.
As the Chinese people say no banquet is complete without liquor and as such we are very optimistic about the long-term prospects of baijiu industry. We believe that the baijiu industry will eventually be nationalized which is to see the industry towards healthier development and a more substantial growth.
Now let me update you on our progress of executing our two-prong strategy of better lowering our future corn costs and diversifying our market concentration risk.
First, lowering our future corn costs, following our direct cost purchased with local farmers and granaries in the harvest season, we have reserved 500,000 metric tons of corn by the first quarter of 2013. As an intension of out traditional solid strategy of acquiring corns through local granaries we started to purchase corns directly from local farmers in the first quarter of 2013. This not only help us to significantly reduce the additional charges for local granaries. But more importantly also provides us with more operating flexibilities which we believe is a very effective method to expand our cost advantage which is fueling this non-harvest season.
As you can see from our inventory balance as of June 30, 2013, total inventories has increased by RMB195 million to RMB333 million compared to the end of last year. In addition, as of June 30, 2013, we have (inaudible) a total of RMB557 million and price additional corns to be delivered into our storage later this year to ensure our production in the non-harvest season. As such we are confident to maintain a significant competitive advantage that more of our competitors that net of repurchase capability.
And second also defining our market concentration risk, we have compared the construction of our new CPE plant including the installation of custom-designed equipment in July. We have also commenced limited CPE trial production in the first quarter and the initial feedback on our sample product has been very good.
CPE is widely (inaudible), as it a raw material of special synthetic rubber. We also expect to complete the construction of foam insulation plant and commence trial production in the next few months. Foam insulation offers excellent opportunities, such as heat insulation, anti-corrosion and oil resistance and is widely used in a broad range of industries including construction, textiles, pharmaceutical medicals, (inaudible) electro-mechanical equipment and fire (inaudible). The (inaudible) of foam insulation and CPE products presents huge market potential providing us with a great opportunity to capture new growth to our top line.
In summary, we are highly encouraged with the improved financial results and I’m very excited about our expansion into the foam insulation and CPE market. We believed, this development demonstrate our ability to forge ahead with our strategy and optimize our operation in this tough market environment.
And that wraps my comment. And now, let me turn the call over Terence Chen, our CFO for a review of second quarter financial performance. Terence?
Thanks Mr. Wang. Thanks Ann. Let me now walk you through in detail for the second quarter financial results.
Total net revenue in the second quarter decreased by 21.8% year-over-year to RMB628.5 million, which was mainly due to lower ASP and sales volume of edible alcohol due to weaker demand from the market.
During this quarter, revenue from edible alcohol decreased by 27.3% to RMB409 million with the sales volume decreased by (28.14%) year-over-year to approximately 78,700 tons and ASP decreased by 7.5% year-over-year to RMB5,198 per ton.
Revenue from DDGS feed decreased by 5.2% to RMB156.5 million with the sales volume decreased by 12.5% year-over-year to approximately 75,000 tons, while the ASP increased by 8.3% year-over-year to RMB2,085 per ton.
Revenue from liquid carbon dioxide decreased by 17.5% to RMB13.7 million with the sales volume decreased by 7.4% year-over-year to approximately 53,600 tons. And ASP decreased by 10.8% year-over-year to RMB407 per ton.
Revenue from cooking oil decreased by 17.6% to RMB49.2 million with the sales volume decreased by 16.4% year-over-year to approximately 6,500 tons. While ASP decreased by 1.4% year-over-year to RMB7,583 per ton.
Our gross profit decreased by 58.2% to RMB71.4 million from RMB115.5 million in the prior year period. Gross margin declined to 11.4% compared to 14.4% in second quarter of 2012, which was primarily due to continued decrease in average selling price.
Operating income (decreased) by a lower year-over-year level of operating expenses decreased by 14.6% to RMB16 million in second quarter of 2013 from RMB101 million in the same period of 2012 primarily due to a lower gross profit driven by a significant saving of RMB3.4 million. General and administration as the percentage of total value decreased to 1.6% in the second quarter of 2013 compared with 1.7% a year ago. The decrease of general and administration expense (inaudible) from our disciplined cost control.
Selling expenses increased by 30.9% to RMB1.5 million in the second quarter of 2013 from RMB1.2 million a year ago. Income tax expenses in second quarter of 2013 were RMB9.1 million representing an attractive tax rate of 26.4%. The higher attractive tax rate is mainly due to the end provisioning prior years.
Our net income decreased by 62.5% year-over-year to RMB25.5 million from RMB58.1 million a year ago. Diluted earnings per share and per ADS were RMB0.99 in the second quarter of 2013. The company had 25,725,000 weighted average diluted shares outstanding during the quarter ended June 30, 2013.
On balance sheet side, cash and bank deposits are RMB419.2 million decreased by RMB191.5 million compared with RMB610.7 million as of December 31, 2012. The restricted cash amounting to RMB229.5 million represents the bank deposits in (local) banks and the guarantee for obtaining short-term loan from those expenses. Inventories increased to RMB353.1 million as of June 30, 2013 compared with RMB138.3 million as of December 31, 2012. And last to the (price) increased to RMB556.6 million as of June 30, 2013 compared with RMB67.8 million as of December 31, 2012, which are mainly due to our corn sourcing strategy.
Cash flow using operating activities for second quarter 2013 were RMB148.1 million mainly due to cash payments in second quarter of corn withdraws for later production use in the non-harvest season.
That wraps up the financial review. So, let me turn to the business outlook.
As discussed before during the third quarter, we historically conduct an annual maintenance at our production facilities, which we typically shutdown the production lines for approximately 2 weeks. In this particular summer, however, China has been experiencing abnormally hot weather that isn’t useful for edible alcohol production. As such, we extended maintenance period to one month during this third quarter.
Reflecting our longer annual maintenance period this summer, we estimate revenue for the third quarter of 2013 would be in the range of RMB400 million to RMB450 million a decrease of approximately 28.5% over the same period in 2012. This forecast reflect our current and preliminary estimates of market and operating conditions and customer demand which are all subject to change.
This concludes our prepared remarks. Operator, we will now open the call up for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of (Albert Chen) from California. Please ask your question.
Hi, thank you for taking my question. I have a few questions regarding your guidance for the third quarter. Would you please explain how the hot weather is unsuitable for edible alcohol production?
Thanks for the question. Well, we took longer maintenance period this third quarter mainly due to the extremely hot weather as I have just mentioned during the script. And the extreme hot weather will significantly affect our production. In fact, we are not aware that production of edible alcohol should in the certain temperature and humidity.
The abnormal heat will affect production of edible alcohol and eventually influence the quality of our products. And beside the abnormal heat is not suitable for storage of edible alcohol. And edible alcohol is flammable and explosive because of this reason and not suitable condition for production. We chose to take a longer maintenance period.
Okay. Would you please also explain how the extra days of maintenance this year can cause sales to decrease roughly 20% to 29% year-over-year?
Of course, the maintenance period being the third quarter in 2012 was approximately two weeks. And we took an extra two weeks in this year, which caused decline in revenue on a year-over-year basis.
Okay. My last question is regarding the corn price because the weather is much hotter than before, so how do you anticipate the corn price for the remainder of the year?
Yes. This summer weather in China is extremely very hot. And mostly through Shouguang or Daqing southern area, the weather is extremely hot and also it is extremely dry in those areas. However, the main plant area for corn in China located in the Northern area such as Changchun and Heilongjiang provinces.
For example, Changchun is also very hottest but there were lots of raining days in July. Therefore, I believe that weather condition will not maturely attack the corn year this year.
And regarding the corn price from some study in material, I propose that the corn pricing in 2013 will remain stable with 2012 both in harvest season and the non-harvest reason.
Thank you. Your next question comes from (Albert Chang) from Prime Capital Group. Please ask your question.
Yes. Good morning. And thank you for taking my question and congratulations on a much improved quarter. On your prepared remarks, you mentioned on the new plant that there were quite a number of industries that the product could be used for. But, what exactly which industry exactly are you targeting at and more specifically have you talked to any potential customers and what’s your sales team telling you about the feedback of those customers?
Thank you, Albert for your questions. As we just mentioned both CPE and foam insulation products are very widely used in many industry including the construction, textile and from typical chemical and the term mechanical equipment and (inaudible) industries.
And actually we have actively started communication with those potential industries and since the beginning of this year and gained quite positive feedback because we have industry expertise on what -- as senior management on our new product who are very knowledgeable and have very good network in the industry.
Now, with the completion of the construction and the successful trial production of CPE we are very confident that we can win those potential clients once our new plant begins mass production. Thank you.
Okay. That’s good to hear. So can follow-up on that, I think you mentioned you expect revenue some times later this year, but could you provide us with a sense of what kind of revenue level do you need to reach breakeven and then of course eventually become profitable. And more importantly, do you have a timeframe as to when you expect the new plants to be accretive to net profit?
Thank you. Let me justify your second question. You are asking when we can reach the – what revenue level can become profitable is that correct?
That is correct.
Based on our current estimation and that is of this new plant investment. We expected the new plant to be profitable after it’s really up to more than 40% of total production capacity. And one more information I would like to provide you as – for your information. The total production capacity of our new foam insulation and CPE plants are 80,000 cubic meters of foam insulation products and 25,000 tons of CPE products.
And now let me answer your first question, you are asking that when we expect the new plant to generate net profit, is that correct?
Yes. That’s correct.
Yes. As we just mentioned, we have just completed the construction of CPE plant by this July and commenced a limited trial production. And we expected to complete the construction of foam insulation plants as they start production in the next few months. Because all of this would take few quarters to run up to full capacity, thus we expected this new plant will begin to generate net profit in 2014.
Okay. That’s very helpful.
Just a couple of housekeeping questions here. On your balance sheet your accounts receivable increased significantly during the quarter, perhaps you can explain that and more importantly did you feel that there is any difficulties to collect those receivables??
Our receivables increased in the quarter in line with the increasing revenue. But, DSO remained stable for this quarter. It is approximately 45 days. And of course, there is no difficulty for us to collect receivables. The management cannot find any indication for bad debt provision.
Okay, okay. That’s very helpful. And along the same line, your inventory balance also increased, can you provide us more color there?
Of course, our inventory balance consist of approximately RMB240 million of corn and RMB60 million is finished goods.
Okay. And then just one last question, if I may. We keep hearing about news that there is a credit crunch in China and that the banks are tightening up credit and its quite difficult in this environment for non-SOE businesses to obtain loans. So, the question is, do you enough funding to support your working capital requirement expansion plan? That’s all I have. Thank you very much.
Yes. From my side I can tell you that it’s not a truth, it’s more and more difficult for the non-SOE companies to get bank loans now-a-days. Most of the times, (inaudible) will be up floated to 20% to 30% compared with the standard rate or even higher. However, we have a good relationship with our local banks, so as to maintain the original level of bank loans.
But, it is also difficult for companies to obtain new bank loans from them through issuing the corporate bond. So, RMB500 million at the beginning of the year – of this year, we have sufficient cash and it could provide us more finance flexibility. So, we have enough funding to support our daily working capital needs and our new projects.
And moreover, I want to mention – say that under the certain circumstances as you have mentioned credit crunch in China now in the success of issuing the corporate bonds, shows the credibility of the company.
Thank you, Mr. Chen. (Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to Terence for closing remarks.
Once again on behalf of entire China New Borun management team, we want to thank you for your interest and participating in this call. Thank you for joining us today. And this concludes our second quarter 2013 earnings conference call. Thank you.
Ladies and gentlemen, this does conclude the conference for today. Thank you for participating. You may all disconnect.