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Skystar Bio-Pharmaceutical Company (NASDAQ:SKBI)

Q3 2013 Earnings Conference Call

November 15, 2013 07:45 AM ET

Executives

Chris Chu - Investor Relations

Scott Cramer - Director of Corporate Development and U.S. Representative

Bing Mei - Chief Financial Officer

Analysts

John Helm - Helm & Associates

Richard Greulich - RAG Capital Advisors

Operator

Greetings and welcome to today’s teleconference. Skystar Reports Third Quarter Fiscal 2013 Financial Results. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow our formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Chu, Investor Relations for Skystar. Thank you, sir. You may now begin.

Chris Chu

Thank you operator. Good morning and welcome everyone to Skystar Bio-Pharmaceutical's third quarter fiscal year 2013 financial results conference call. Joining us on the call today is Skystar’s Chairman and CEO, Weibing Lu; Skystar’s CFO, Bing Mei; and US Spokesman, Scott Cramer. Scott and Bing will provide a brief overview of the quarter and then we’ll open the call up to your questions.

Before we begin, I would like to remind you that certain statements made during today’s call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward-looking terminology such as belief, expect, may, will, should, project, or anticipate, or the negative thereof or comparable terminology. Such statements typically involve risks and uncertainties and may include financial projections or information regarding the progress of new product development.

Actual results could differ materially from the expectations reflected in such forward-looking statements as a result of a variety of different factors, including the risks associated with the effect of changing economic conditions in The People's Republic of China, variations in cash flow, reliance on collaborative retail partners and on new product development, variations in new product development, risks associated with rapid technological change and the potential of introduced or undetected flaws and defects in products, other risk factors detailed in reports filed with the SEC.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. All forward-looking statements are qualified in their entirety by these cautionary statements. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I would now like to turn this call over to Scott Cramer. Scott?

Scott Cramer

Hi Chris, thank you. Good morning I hope everybody is doing well just fall into the winter of 2013. We want to wish everybody a warm welcome to Skystar’s third quarter 2013 earnings call. The company’s 10-Q was filed yesterday around the close of market and our third quarter earnings press release was distributed to the Wires this morning. I present prepared remarks for Mr. Lu, Chairman and CEO.

In the period, strong top-line and bottom-line performance highlights Skystar’s operational strategy. Adjustments to operations include redirecting sales and marketing efforts to create awareness and demand for newly available products, as our manufacturing capabilities have come online. Skystar is also making significant progress in completing the complex 2 Stage GMP inspection process that the Ministry of Agriculture, MOA requires for the company to operate its new completed and modern Vaccine facility.

Additionally, since completing the approval process and obtaining production permits for Skystar's veterinary medication lines earlier this year, the MOA has granted roughly 45% of Skystar's submitted permits to manufacture individual veterinary medications. We are still awaiting approval on the remaining submissions.

Keeping this in mind, Skystar's current results reflect a significant ramp up of production and sales of veterinary medications since the approval of its GMP compliant production facilities in Huxian and Jingzhou, respectively.

Sales resources were shifted away from probiotics, feed additives and vaccines in order to ensure a successful relaunch of Skystar’s veterinary medications business. This operational strategy has played an important role in Skystar ramping up off of its veterinary medication product line with revenues increasing a dramatic 452% year-over-year through Skystar’s seasonally strongest quarter. As of current, both veterinary medication manufacturing facilities are operating at or above, at or near 50% capacity.

As explained in the company’s 10-Q, China’s Ministry of Agriculture is currently in the process of completing Stage 2 of its GMP inspection of Skystar’s newly built veterinary vaccine manufacturing facility in Huxian, China.

The company expects that Stage 2 of the GMP inspection will be completed by fourth quarter of this year and that its complete certification process will be completed thereafter and that includes applications for vaccine batch production permits.

Following reduced shipping of the batch’s production permit, Skystar will ramp up production and distribution logistics for the vaccine line. The newly built largely automated vaccine manufacturing facility will allow the company to mass produce vaccines without sacrificing quality control.

We do expect to provide the market with an update once each step is completed. Moving forward into fiscal 2014, the operational changes occurring over the next several quarters are expected to increase Skystar’s ability to generate revenues and profits.

As more manufacturing capabilities come online, the company will initiate the appropriate sales and marketing efforts to support its growing number of product lines and production base. It's always been management's mission to grow revenues without sacrificing the profitability. Since Skystar's listing on NASDAQ, the company has been historically profitable and plans to continue that mission in the quarters ahead.

I’ll now turn the call over to our CFO. Mr. Bing Mei. Bing?

Bing Mei

Thank you, Scott. Good morning and good evening everyone. For the purpose of this conference call, I'll be using rounded figures, please refer to the filed 10-Q on the SEC reporting sign, for detailed financial statements or as a [pattern] of today's press release.

Diving into the financials, for the three months ended September 30, 2013, we had revenues $16 million as compared to revenue of $8.9 million for the three months period in 2012, an increase of roughly $7 million in revenue or 79% as compared to the same period in 2012. Revenues are generated from sales of four product lines; veterinary medications, micro-organism, feed additives and the vaccines. The selling price of our products for the third quarter of 2013 has now materially changed on average from last year. The increasing revenue was primarily due to the increase of sales volume.

Here is the breakdown of the revenue by product lines. Veterinary medication sales increased by $8 million or 450% from $1.8 million in the third quarter of 2012 to $9.8 million in the current period as a result of resumed production in medication production at the Huxian facility. In addition to third quarter, the insights are the traditional high season for veterinary drug business in China, as well as the strict position to shift our sales folks back to our veterinary medication product line and increasing our marketing and sales efforts to gain some customer relationships and recruit new customers.

Micro-organisms’ revenue increased slightly by $24,000 or 0.5% year-over-year and the sale of $4.9 million in the current period. Feed additives sales decreased by $579,000 or 48.7% from $1.2 million in the third quarter of 2012 to $610,000 in the third quarter of 2013. The decrease was primarily the result of our limited sales resource for feed additive product line this year. Vaccine revenues decreased by $433,000 or 41.6% from $1 million in the third quarter of 2012 to $607,000 in the third quarter of 2013. The decrease was also primarily due to our limited sales resource for vaccine products this year.

Gross profit for 2013 third quarter was roughly $8.2 million, up 56% from the third quarter of 2012. Gross margin for the period was lower at 51.4% compared to 58.9% in the year ago period. The decreased gross margin for the third quarter of 2013 was mainly because of the majority of our revenue generated in the quarter came from less profitable veterinary medication product lines and we resumed veterinary medication production at the Huxian facility.

Total operating expense for third quarter 2013 came in at $3.5 million or 26% of total revenue compared with the $1.6 million or 80% of total revenue in the year ago period. R&D cost totaled roughly $324,000 for the third quarter of 2013 as compared to roughly $199,000 in the year ago period, an increase of 63%. The increase was primarily due to the newly launched R&D products undertaken in the third quarter of 2013 in livestock and the poultry.

Selling expense totaled $1.3 million for the third quarter of 2013 as compared to $693,000 in a year ago period, an increase of 83%. This increase was primarily due to the increase in sales commission and the shipping and handling cost as a result of a significant increase of veterinary medication sales in the quarter.

G&A expense totaled $1.9 million for the third quarter of 2013 as compared to $703,000 in the ago period, an increase of 158%. The increase in G&A expense was mainly due to the additional allowance for doubtful accounts of $977,000 accrued during the quarter for our increased accounts receivable balance partially because of our high sales results and the favorable payment terms we have given customers during the quarter.

Operating income increased 30% year-over-year and was $4.7 million for the third quarter of 2013 as compared to $3.6 million in the year ago period. And operating margin was 30% as compared to 41% a year ago period.

Net income for the third quarter of 2013 was $3.7 million or $0.49 per diluted share this year is compared to net income of $2.7 million or $0.36 per diluted share in the year ago period. As of September 30 2013, we had unrestricted cash of $4.5 million, our total current assets were $88.6 million our total currently liabilities were $28.4 million, which result in a net working capital of $68.2 million.

With that I will turn the call back over to Scott. Scott?

Scott Cramer

Thank you, Bing. With a strong sale in this quarter Skystar would like to reiterate its financial guidance to be in the range of between $40 million and $45 million for the full year of 2013. In addition, we have received no indications from the Ministry of Agriculture of any issues for the Skystar’s second stage GMP approval lines for its vaccine, I mean GMP approval for its vaccine lines, as a result management foresees a clear path to executing its operational strategy and moving forward as a leader in China’s end mobile pharmaceutical space. The company has several exciting R&D projects that are being reviewed and expect exciting new products to come from these efforts.

With that I would like to turn the call over to the operator and open the call to Q&A.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now be conduction a question-and-answer session. (Operator Instructions) Thank you. The first question is coming from the line of John Helm with Helm & Associates. Please proceed with your question.

John Helm - Helm & Associates

Yeah. Good morning. And doing $16 million is revenues in Q3 you implied the reiterated guidance suggest you are going to do $9.6 million in Q4 using the midpoint, is that because of the seasonality, the reduction in revenue? And also could you talk about the cash position which seems to really be depleted and the receivables way up?

Scott Cramer

Sure. So yes our business is very seasonal, Q3 is always our strongest, Q4 is always our second strongest quarter. And I think that your implied revenue projections are exactly where it is that have ours. Somewhere between that (inaudible) midpoint would put us somewhere we need to do between $9 million to $10 million this quarter to reach the midpoint.

To talk about the receivables; in this quarter we have relaunched our veterinary medications line because our plant was shutdown. Two things set into that, the first is that in order to reestablish ourselves in that space and because other competitors were doing the exact same thing, we had to give more favorable payment terms to many of our customers. So as a result the collections look slow from the outside looking in we have never, not collected the receivable here at Skystar and we fully expect to collect all of the receivables that are due. However because of the GAAP rules and the aging of our receivables exceeded the norm and that was because we gave the extended payments terms our auditors made us reserve for a doubtful allowance. So those are wide as you are seeing a high receivables and we have the write-off of close to $1 million. So, we do expect to collect that in the future and expect to see that back into the income.

John Helm - Helm & Associates

[Is there any] reasons, you have to raise cash in the next year?

Scott Cramer

Yes. We do not need cash for any operational facilities. If we were to do any sort of capital raise, it's going to be for an acquisition, the building of the new plant or something like that. But to run our business, we do not need any cash.

John Helm - Helm & Associates

Okay. I Appreciate it. Thanks and good luck.

Scott Cramer

Yeah.

Operator

Thank you. (Operator Instructions). Our next question comes from the line Philip Johnson with Johnson Equities. Please proceed with your question.

Unidentified Analyst

Yes. Hi, good morning. Can you talk about where capacity will be exiting 2013 and where do you expect it to be by the second half of 2014?

Scott Cramer

Okay. I'm going to have management answer that question. But I just want to kind of reiterate to make sure we understand that. You want to know where our current capacity is via four product lines on each of our product lines and where that's capacity is going to be in midway in 2014 or through 2014. Is that a fair question?

Unidentified Analyst

Yeah.

Scott Cramer

Okay. Bing can you answer that or translate that to Mr. Lu.

Bing Mei

Do you refer to our new production facility to come online for the vaccine, the new vaccine facility and does Kunshan, the micro-organism facility or occurred in the manufacturing facility.

Scott Cramer

He is asking about each different facility and our capacities?

Bing Mei

Yes. I can give some….

Unidentified Speaker

If you just want to give total capacities of your?

Scott Cramer

Just overall capacity.

Unidentified Analyst

Yeah.

Bing Mei

Sure, sure, yes, I can give you overview to the third quarter, uses of capacity. As you know we have the three facilities, currently manufacturing our products. In Xi’an we have the Huxian facility and the central facility. For the veterinary medication of the facility, during the third quarter we used the capacities, probably just because of the third quarter is our high season. So we used around the 75% of occurred in the capacity for the veterinary medications product line. We used about the 80% of micro-organism, the manufacturing capacity and we used about the 50% of feed additives manufacturing capacity. For the vaccine, we are probably around the 65% of the capacity, because right now we only conduct very small lab the production, while waiting [GM08] approve our new vaccine facility the GMP’s solicitation. So we can have a bit of manufacturing for the vaccine products next year.

As to the Jingzhou facility, we use about 50% of its vaccine and medication manufacturing capacity. So this is the overview of our utilization of the manufacturing capacity in each of the existing manufacturing facility.

Unidentified Analyst

Okay. But that does not answer the question, what is the total dollar volume? Assuming you guys get all the GMP approvals and certifications and operating at near full capacity. What is going to be the total revenue possibility of everything were to go right for 2014 for Skystar? Scott, I don’t know if you want to answer that?

Scott Cramer

Yeah. Part of that’s going to be projections that we may or may not want to make. But I do understand the question. If we had everything operating at full capacity which we will not, to be clear, we expect and we had a lot of product to grow those, we could expect that we could toe-in $100 million operating full capacity, but that's not the way our business works.

We have seasonality that in some seasons we’re going to be operating at full capacities, and some seasons not. So right now we’re not making revenue projections for 2014. But if the impart question is how much capacity do we have left and how much room do we have to grow, we do have a lot.

Unidentified Analyst

Yeah. I’m just trying to sense what next you have to look like? I mean could it be in the high 50s per revenues, I mean can you share with us?

Scott Cramer

Yes. Those, right now we are not making revenue projections for next year. We do expect growth from the $40 million to $45 million that we are currently projecting. I think by for sure on the next call, we will have some guidance and we may [put] out some guidance internally. But do keep in mind our vaccine line is what is coming online. We have about on that line -- on just the vaccine line, we have about $15 million of capacity if it’s up and running at full capacity and then we also have on the agriculture line which we are getting the approval where we can expect about a total capacity of about $8 million. We do not expect to reach capacity next year on those, but I am giving you total revenue figures of capacity.

Unidentified Analyst

Okay, thank you.

Scott Cramer

Okay. I just want to be clear, I hope that doesn’t sound evasive, but we just haven’t given projection that we’re not comfortable doing so.

Operator

(Operator Instructions) We do have a question coming from the Richard Greulich with RAG Capital Advisors. Please proceed with your question.

Richard Greulich - RAG Capital Advisors

Thank you. So the veterinary -- the vaccine line, that’s coming on, so that was the one you are talking about where the revenues in the third quarter were about $600,000?

Scott Cramer

Correct. Would you like me to add some color around that?

Richard Greulich - RAG Capital Advisors

Yeah, I would. And also to what extent, is there seasonality in that particular area?

Scott Cramer

Yeah, so the vaccine line has two issues with it right now. The first is that we are literally making the vaccines in the lab by hand. So we don’t have a so-called production facility. The vaccine line would we get it up and running will be our highest margin line. We expect our margins to be in the 65% to 70% neighborhood. Vaccines like the rest of our business are going to be seasonal by quarter. However, it is a year around demand, but most farmers start ramping up for a lot of introduction for the Chinese New Year.

And that's why you see a lot of animals and farmings and things like that because the demand for food is more for the Chinese New Year. So, that is going to drive our seasonality for the vaccines. However, when farmers grow animals, they want the vaccines and there are certain vaccines that we will have licensed that are required by the government for all animals to have.

Richard Greulich - RAG Capital Advisors

So if you can also then kind of take me through the animal growth cycle. So if the farmer wants a vaccine from animal, let's say and demand for food is higher in the New Year. At what point in time, does the demand for vaccine fall into that?

Scott Cramer

Yes. So the demands for the vaccines are going to rise with the demand of the production of food. So I don't want to think the vaccines are animal specific. (Inaudible) on growing the unfortunately same amount of cows, chickens and things like that. However, the food needs to be available at the end of this year or beginning of next year for the Chinese New Year, which is going to be in January. Maybe just for growing the animal about a quarter to a little bit more than that before. So that's why you see demand for our products in our biggest quarter in Q3.

Richard Greulich - RAG Capital Advisors

Okay.

Scott Cramer

And that's true with across all lines. So, it's going to be vaccines, medications, feed additives, where there is more animals the people are growing so they take them to slaughter at the end of Q4.

Richard Greulich - RAG Capital Advisors

So given that, is it fair to say, when you look at the different quarters, while the third quarter is your strongest in terms of revenue, is that been the weakest in terms of gross margins?

Scott Cramer

That happens to be true for this quarter. And I don't think that's true overall. And the reason it's true for this quarter is because for two reasons. One we had to reinitiate some of our sales efforts and marketing efforts that we won't have those start-up costs [next year] free if you will because we just bought back our vaccine, I mean our veterinary medication line. We just got that back online and started to ramp up productions. We have to shift our sales efforts and we had to pay out more commissions, we had to more marketing. So, I don't think you'll see that kind of seasonality margins like you did this quarter going forward.

Richard Greulich - RAG Capital Advisors

Thank you.

Scott Cramer

And I wanted to say one other things just so we are real clear. The approximately two-thirds of our revenues historically has come in Q3 and Q4 while one-third of our revenues have come in Q1 and Q2.

Richard Greulich - RAG Capital Advisors

Thank you.

Operator

Thank you. It appears we have no further questions at this time. I would like to turn the floor back over to management for any concluding comments.

Scott Cramer

Okay. Look, we want to thank you everybody for joining Mr. Lu, Bing and myself on this call. We really appreciate the continued support of Skystar and we appreciate everybody staying with us. We, operationally things are really coming into focus for us. We expect to be getting our full strides here 2014 as our production facilities come online and this is a very exciting time for Skystar. On behalf of management we hope that you’ll join us for our year-end conference call as we expect to share a whole bunch of exciting times ahead for Skystar. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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