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Executives

Solomon Lee - Chairman and CEO

Analysts

Sino Agro Food, Inc. (OTCQB:SIAF) Q3 2013 Earnings Conference Call November 26, 2013 11:00 AM ET

Operator

Welcome to Sino Agro Foods 2013 Third Quarter Financial Results Conference Call. During this call Mr. Solomon Lee, the Chief Executive Officer and Chairman for Sino Agro Food, will provide shareholders with an overview of results from operations during the quarter ended September 30, 2013.

Following comments by the CEO, the lines will be open for a question-and-answer session. All forward-looking disclaimers included in the company’s third quarter 2013 financial and operating results press release dated November 18, 2013, which is available on the company website, www.sinoagrofood.com are in effect and incorporated throughout the duration of this call as an extension of the material discussed and provided in the press release and in the 2013 10-Q filing available via the U.S. Securities and Exchange Commission’s EDGAR system.

On this call will be Mr. Solomon Lee, the Chairman and CEO of Sino Agro Food Incorporated, as well as two independent members of the Board of Directors, Mr. Nils Erik Sandberg and Mr. George Yap.

I would now like to introduce Mr. Solomon Lee.

Solomon Lee

Thank you, Krista and thank you everyone who is attending today’s conference call. I’m very pleased to report Sino Agro Food’s 2013 third quarter financial results. The company achieved revenue of $70.7 million, giving a quarterly record of over $15 million; net income from operations of $18.75 million, a 31% sequential increase over Q2 and representing a very sustainable 26.5% net profit margin; book value of $2.03 per fully diluted share, representing a $0.08 increase over Q2 book value per fully diluted share; cash and cash equivalents of $9.58 million and working capital of $154.5 million.

As we approach the end of the year I am delighted by the progress the company has made in 2013, positioning the company for the next phase of accelerated growth in 2014 and beyond. We have laid the groundwork for the revenue and earnings multiplier effect envisioned in the five-year plan and are on target for an asset base of over $500 million.

This year we have grown our assets significantly in all product businesses across all vertical levels; pre-wholesale, wholesale, distribution/marketing, and retail. We now have 16 sub-divisional profit centers. This stabilizes the long-term reliability and sustainability of earnings. Nonetheless, net profit margins will vary quarter to quarter, depending on large part on the relative make up of revenue across divisions and levels.

In the third quarter, the company made some strategic operational decisions mainly relating to resource allocation in consulting and services. The company also embarked upon complementary financial initiatives, both were designed to greatly increase flexibility and to expedite operating cash flow increases. The company intends to strengthen its growth path as it completes the final year of its five-year plan in 2014.

This quarter's net profit margin is in-line with the company's long term outlook and is on the low end of a short-term outlook. A theme this year across existing businesses and both operational and financing endeavors has been that it pays to cultivate bigger fish. We see this literally for growing fish from a larger size, allowing more rotations also fattening older cattle from 15 months to 20 or 21 months rather than from 9 to 15. Likewise, we believe we are seeing this theme at play as we seek new business contracts and financing arrangements.

In a sense 2013 is a transition year for the company. Existing businesses now provide demonstration of concept for larger opportunities, and capital investments are poised to demonstrate outsized returns such that the bottom-line will grow in tandem with the top-line in 2014. Qinghai Sanjiang A Power Agriculture, SJAP, is a model for this concept. It is a divisional representative for the company “Farm to Plate” concept and demonstrates the benefit of vertical integration.

I wish to take this public opportunity to thank the employees at SJAP as well as all our loyal stakeholders for their perseverance and success in realizing major milestones. Several that are difficult and rare in China, principally these are, obtaining the business permit for an Abattoir complex on April 17, 2013 and commencing construction on April 21, 2013; completing nearly 80% of the slaughterhouse construction by the first week in November 2013; being granted the coveted “Dragon Head Enterprise” status on October 28, 2013, one of only three in the Qinghai province; trial runs for the Abattoir facilities are scheduled for next month, targeting Phase I operation to commence in the first quarter of next year.

SJAP is transitioning from a wholesaler of live head of cattle to a producer and marketer of packaged beef and value added beef products, as well as a retailer at its Bull Restaurant. Management’s discussion and analysis section in the 10-Q filed November 18, 2013 presents supporting details for the current and incremental economics of SJAP’s business.

In summary, inclusive of pre-wholesale revenue before and after the processing facilities, total revenue per kilogram of beef increased by 170%. On top of this, SJAP targets increasing its year-over-year production of live cattle by 50% for both in-house and through its co-operative farmer network to a total of 12,000 heads of cattle. Capacity at the complex is projected to accommodate an additional 8,000 head of cattle from the region in 2014.

And the incremental year-over-year revenues projected in 2014 will be well over 100 million, expected to exceed the entire 2013 capital development for all Sino Agro Food’s Subsidiary and wholly owned businesses, and sufficient to increase overall company-wide year-over-year revenue by at least 40%.

Prices of beef cattle under a year old are increasing faster than older cattle, providing a leading indicator of mature cattle and beef product prices in the future. The full built-out slaughterhouse and packaging facilities are designed for capacity of 50,000 head of cattle per year and 150,000 head of lamb per year.

Thus growth beyond 2014 portends well for capitalization result. In the third quarter, we saw the beginning of a transition from funding the remaining capital expenses with equity to debt. At the beginning of 2013, the company expected to fund 92 million of its total development budget of 118 million from internal sources leaving 26 million from external. Last quarter, that number was about half and now lower still. The company is active in endeavours to raise these and additional funds from various potential debt instruments. Until a material event occurs, I am restricted in what I can say about progress in this effort by confidentiality and for competitive and regulatory reasons.

Today, I will say that I felt the last month has been good progress. Hunan Shenghua A Power Agriculture, has, a 76% owned subsidiary is operating in the Linli District of Hunan Province. Development of HSA is modeled like SJAP, but it has a much better growing environment. It is situated in a farming-rich province next to the Guangdong Province and benefits from cheaper logistic costs being closer to large markets and has a more favorable climate. However, financial support from the government is more difficult to obtain due to there being more entities sharing the government support provisions.

The company continues to operate or construct five in-door aquaculture farms with aggregate product sales increasing and expected to increase every quarter in foreseeable future.

This quarter the HU plantation saw the first sales from its second crop, a special Chinese herb called XueYingZi, or “Immortal Vegetables.” The company’s distribution and marketing level at the corporate division continues to expand. The trading center is now operating joining the seafood and beef warehouses. Import/export is growing, particularly from Madagascar from the company’s newly built facilities. And the company’s satellite distribution strategy to major and lesser tiered cities in China will expand beyond the Central Cattle Market in Beijing as beef products from SJAP become available.

On October 2, 2013, the company submitted application to NASDAQ seeking listing on the exchange. The application remains pending. Our intention upon approval is to apply to OMX, NASDAQ in Sweden on a fast-track basis.

If you haven’t already, all shareholders and interested parties are encouraged to read the 10-Q filed on November 18 and the company's press release. The company continues to have more and more interoperating and individually growing parts. There are plenty of details in the filing and release. This gives a clear picture of the company’s operations and strategic focus. Also recent developments are posted to the company website and Facebook, and more current pictures will also be posted periodically.

The company is diligently working to strengthen its financial position across all metrics to add a great deal of flexibility in operations and for general corporate purposes. In addition, work is continuing toward exchange listing to improve the company's marketability. We continue to meet benchmark necessitated by the complexities involved in financing, regulatory, and exchange application, bringing fruition closer at hand.

Our two new Directors are again with me on the call today; Mr. Nils Sandberg and Mr. George Yap. But because Mr. George Yap is now in Sydney Australia, and it is almost 5 AM there, so without further delay I would like to open the floor to you our shareholder who may have questions for us to answer. If you would like to direct a question to either Nils or George, please state their name when addressing the question, otherwise I will presume your question is direct to me. Thank you. Krista?

Question-and-Answer Session

Operator

(Operator Instructions). Alright we will go ahead with our first question to (inaudible).

Unidentified Analyst

It’s okay. Am I on the line? Can you hear me?

Operator

Yeah. Please go ahead.

Unidentified Analyst

Okay. Hi Solomon, this is [Dan Nguyen from (inaudible)the] How are you doing?

Solomon Lee

Fine, thanks Dan how are you?

Unidentified Analyst

I am good. First I would like to congratulate you on an excellent quarter and a very nice report. It’s amazing to see what kind of transparency you guys are providing, and also on the many important milestones reached over the first nine years, okay, great job.

Solomon Lee

Thank you.

Unidentified Analyst

Now I would like to ask you a few questions regarding two main issues. The first issue is about SJAP, you have projected the revenue of 200 million next year from about 50 million this year, which is a tremendous growth and all attributable the role of the Abattoir. Now I am wondering about, what [drive] (ph) our JV partner plays in that process? Is it involved in the Abattoir project, has it paid its first year 55% of the 50 million investment, or does it have nothing to do with the revenues that Abattoir is generating?

Solomon Lee

Abattoir will be solely owned SJAP because now being Dragonhead Industry status, they would have to have a minimum of three subsidiaries under their organization, but ant way, the Abattoir and the depending facilities income would go on consolidation into the mother company in the percentage of organization, anyway.

Unidentified Analyst

So that means SIAF would get 45% of the net profit right?

Solomon Lee

Yeah, that is right, yes.

Unidentified Analyst

Okay, so that means (inaudible) would get 55% or whatever is generated at Abattoir?

Solomon Lee

That is right, yes.

Unidentified Analyst

Okay. My question was has it paid, its first-year investment?

Solomon Lee

Yes, because, they have also contributed to part of this investment, we have some kind of a structure later to even out all these particular issues, but that will be announced at a later day in 2014.

Unidentified Analyst

Okay. Now the next question is about the tax status of Abattoir. My understanding because it is a processing, facility, it may not qualify for the tax waiver, so meaning there is a trend, not only we have to give 55% of the profit, but we have to pay 25% tax is that correct?

Solomon Lee

No, this Abattoir we have changed this year from a tiny producer which just tax extended, income tax extended, in fact even most of every at the tax [exercise center] but next year we would have to pay a value added tax, but in China although it will go forward number of processes like a slaughter house and deboning and the value added, so by right you should have to pay three levels of taxes, but no, in China you only pay one level of tax only. Because it’s combined operation and the tax scale on that part is 5.3% on value added tax, but the income tax of the company, it’s subjected that I think renegotiating now above 15%.

Unidentified Analyst

Okay.

Solomon Lee

But that’s because the pending for the successful of renegotiation.

Unidentified Analyst

Okay. So what kind of gross and net profit would you expect from the $200 million that you project from SJAP?

Solomon Lee

Well, it will be included in the company, but then we check out our minority on the percentage ratio.

Unidentified Analyst

Yeah, yeah. What I mean is after the non-controlling interest how much profit can you expect from SJAP next year?

Solomon Lee

Well we're expecting something like between 25% profit margin to come off the full operation as manufacturer as a very additive processor. So that….

Unidentified Analyst

25% before or after-tax?

Solomon Lee

25% before tax, yes.

Unidentified Analyst

Before tax and got two different kinds of tax receipts one is 5% and the other is 15%.

Solomon Lee

So the 5% come off the top, the 5% come off your sales cost, yes, yes come off the top. Then you calculate your income tax thereafter. But I cannot tell you the exact figure because there we have not finalized that, the bottom-line of the tax with the department yet. So 25% and we can take a wild guess between 15% to 20% tax will there hopefully that we can negotiate below that anyway.

Unidentified Analyst

Okay. So after-tax we're looking in the range of 15% to 20% is what you’re saying?

Solomon Lee

Yes.

Unidentified Analyst

Okay. Well that’s very stronger reason I know considering the huge controlling interest that a revolver has. My next question is you said that there would be a partner to operate the Abattoir what kind of partnership will that be, is that like a 49%, 51% partnership or is it [FFJVC] inside another FFJVC?

Solomon Lee

No, with the Abattoir actually you have two functions there. The Abattoir at the moment [2033] we thinking of contract evolve for local operators. That we say we'll pay certain things for the slaughter, but it is only we show operator in our own capacity.

Unidentified Analyst

Okay. So there will be no extra fees paid to the operator other than the what you have indicated in the report, I believe is at page 51 or something like that. What you say slaughtering is RMB 5,000 fee and this and that. So we don't have to pay anything extra to the operator right?

Solomon Lee

No, we don't. Because we stop contractors to order that because you have you see in the slaughter house in China is a lot different to a way. Here we keep all the internal organs, the teeth and skins and everything. We still have to go for some kind of cleaning and processing and then we sell them as a table or mortgage to say. So the in a way actually the slaughter side is minimum, but it's the discovery of all the products, it's the main thing.

Unidentified Analyst

Okay. So it's not a partnership that we have to pay extra percentage of the profit for?

Solomon Lee

No, no, we don't.

Unidentified Analyst

Okay, that's good news. Okay and my next question revolves around the payments, the temporary payments and deposits towards future FFJVC which you reported on page 57 in the report it totals $33.5 million that you deposited for the future acquisitions, you know what I am talking about?

Solomon Lee

Yes. [Chris], we see as our projects are getting closer to completion and they are getting ready to become a Sino joint venture company. It is time for us to secure acquisition intensively. So you will find next year once when we complete the Sino joint venture company the next year of this prepayment and deposit will not be as great. But it goes from depends on the size of the project and the time that they are completing.

Unidentified Analyst

Yeah. Well, my question is or I am wondering why do we need to push so much cash aside like in case of PF1, Prawn Farm 1 you are investing $11.7 million of cash for a project that will be acquired in 2014, a 56% equity ownership. And that project is not going to generate for 2013 you anticipate 300 tons, which means about $5 million or $6 million of revenue and during 2014 next year is 800 tons of prawns for I say I would think $10 million revenue or about $3 million of profit. So that’s not a lot of money for what we are paying right now, why do we have to own 56% that early for a project that is not going to generate a lot of profit right away.

Not only that, but I see also that you are paying $8.6 million for Prawn Farm 2, $6 million for Fish Farm 2, which is not going to reach capacity on 2016 at 23% ownership and Cattle Farm so and so on. So together with depositing over $20 million for farms that are not going to generate a lot of profit, why hurry so much with owning that much percentage, while we are struggling with cash?

Solomon Lee

Yeah. Well, that is improved because Prawn Farm 1 is going to put up another six more (inaudible). Prawn Farm 2 has a big development. It is increasing its production of prawn and the Prawn [Fly] starting at the same time for next coming year. So all that you must take into consideration unless they are -- and don’t have to anything, but we will keep on developing. The U.S. [Care] who comes in to view this farm in the first place are not going to further expand in all these developments.

Unidentified Analyst

I also see on page F-8 that all the five farms that you are paying the deposits to, only PF1 is featured as (inaudible) investing type of equity [owned]. So is that the only [SJAP] that has been approved now of the five projects?

Solomon Lee

Yes, because most of them we are also very much developing although their phases and stages are progressive and completed, but there are new phases coming up in all those area, but Prawn Farm 1 is a little bit limited because their land area is a bit small, but rather too productive [land] base. And the development has been increasing the production particularly double every year.

And the return on the Prawn Farms at the moment looks like it is going to be the best profit of the operation from the last few months’ experiences. The Prawn Farm and the prawn prices and the conversion rate of field and the management of the prawns and so on and the strength we’ve shown a very good gross margin.

Unidentified Analyst

Okay. And my last question would be concerning PF2, it seems like PF2 will have 10 open dams to grow out the prawn, so it looks like it will compete with this F1 for growing the prawn instead of producing prawn (inaudible) and will not be much more productive and space saving to use indoor go out 10 instead of open dams?

Solomon Lee

I think this Prawn Farm, the development trend, at the moment we are constructing an additional hatchery because the existing production on the field and it’s already passing the limit. So the construction is now ongoing and we are also doing a 13 mile indoor farm there as well that will add another additional 1,200 metric tons of grow out prawns in the same farm there. So we see that farm, we feel the next one and one and half year, it’s a very, a pretty good sizable hatching [plus] grow our facilities.

Unidentified Analyst

So it will not only hatch maybe [prawns] that you’re willing also to grow out prawns inside. So you are going to compete with PF1 in terms of going to farm. Am I correct?

Solomon Lee

Yes. Of course there we've got natural water and also got salt water in that to make it possible. But current timeline is that we’ll be restricted because it’s out in an area there is no [salty] water.

Unidentified Analyst

Okay, okay. Well thank you very much Solomon and best of luck with the S1 and the NASDAQ.

Solomon Lee

Okay.

Operator

All right and we’ll go ahead and move on to our next question, caller please go ahead.

Unidentified Analyst

My name is Carl (inaudible) and I have a straightforward question and that is when can we expect the share to be listed on another market under current one? Thanks.

Solomon Lee

We assume moving on target on that particular exercise and I can only give you when and what we’re targeting. We're targeting to be completed in [quarter] listing on next, within January. If the holiday doesn’t hold us up too badly, we're targeting to reach there within that time.

Unidentified Analyst

Can you just say which list that would most likely be?

Solomon Lee

Actually it is for the NASDAQ. We just went into complete application, the S1 registration statement. After that it's not going to be very far away hopefully to get on NASDAQ. And because NASDAQ have a special fast track exercise allowing for a NASDAQ company to move to stock on own rates within much more efficient timing say 3 to 4 weeks.

Unidentified Analyst

Thank you very much.

Operator

Okay. And that was actually our last question for the day. Are there any closing remarks?

Solomon Lee

There is no more questions, that's good. Thanks for everybody's time for the conference call. And we hope to speak to you again in the next quarter. Thank you.

Operator

Thank you. And that will conclude our call for the day.

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