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Tianli Agritech, Inc. (NASDAQ:OINK)

Q4 2013 Results Earnings Conference Call

March 14, 2014 08:00 AM ET

Executives

Tina Xiao - Investor Relations

Hanying Li - Chairwoman and CEO

Jun Wang - Chief Financial Officer

Analysts

Art Havener - Stampede Capital

Operator

Welcome everyone to the Tianli Agritech’s 2013 Fourth Quarter and Full Year 2013 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Tina Xiao. Please go ahead.

Tina Xiao

Thank you, Amy and good morning everyone. Joining us today from Tianli Agritech are the Company’s Chairwoman and CEO, Ms. Hanying Li; and the Company’s Chief Financial Officer, Mr. Jun Wang. I will provide translation to Ms. Li's opening remarks and on behalf of management team review and comment on the reporting period for Tianli Agritech. Then management will respond to your questions during the Q&A session after management’s prepared remarks.

I would like to remind our listeners while on this call, management's 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 as contained in the Private Security and Litigation Reform Act of 1995. Tianli is under no obligation to update or alter its forward-looking statements, whether as a result of new information, [further] events or otherwise.

At this time, I would like to introduce Ms. Hanying Li, Chairwoman and CEO of Tianli Agritech. I will provide English translation for Ms. Li. [Foreign Language].

Hanying Li

[Foreign Language].

Thank you Tina and thank you everyone for joining Tianli’s fourth quarter and full year 2013 earnings conference call today. The hog industry remain challenged in 2013 as pork demand in China was negatively affected of the outbreak of H7N9 avian flu and the government’s crackdown on corruptions and extravagant government spending. On the other hand domestic pork supply continues to expand as a result of preferential government policies such as tax breaks and subsidies. [Hogs in] continue weakness in pork price through most of year in 2013.

[Foreign Language].

Despite a challenging industry environment we saw a solid growth in our business in 2013 with revenues growing 25.7% to $33.35 million and a total number of hogs sold increasing 28.9% to 149,181 hogs. As we started to see our years of investment in the black hog program in Enshi Prefecture started paying dividend for us.

Our efforts to build our retail distribution network were also making significant progress with now 12 super markets and 10 chain restaurants and hotels distributing our branded premier quality pork product.

[Foreign Language].

With black hog sales contributing our third of total revenue in the fourth quarter and our retail network continue to expand, we believe better days lie ahead of us and excited about the prospects of our business.

Thank you all for your support and attention. Next, Tina will summarize our fourth quarter and full year 2013 financial results on behalf of management team. Thank you.

Tina Xiao

Thank you, Ms. Li and good morning everyone. Next on behalf of the management team, I will summarize some key financial results for the fourth quarter of 2013 and for the 12 months ended December 31, 2013 respectively. For the fourth quarter that ended December 31, 2013 revenue grew 15.6% to $10.39 million from $6.86 million for the same period last year. This increase was primarily due to the black hog sale as well as sales of processed black hog pork products to retail that were resume in April 2013 and offset by decline in revenues from our regular market hog sales. We sold a total of 42,588 hogs during the fourth quarter compared to 30,865 hogs sold for the same period last year.

Average selling price for our hogs sold increased by 9.9% to $244 per hog from $222 per hog for the fourth quarter 2012. Breeder hog revenue increased 16.1% to $2.14 million with total numbers of breeder hogs sold increasing 14.9% to 7,626 hogs from 6,636 hogs for the same fourth quarter of last year. And average selling price up 1.1% to $281 per hog from $278 per hog for the same period last year.

Regular market hog revenues decreased 15.7% to $4.22 million for the fourth quarter of 2013 as the number of regular market hogs sold decreased by 29.7 to 17,031 hogs and average selling price of regular market hogs increased 19.8% to $248 per hog. We sold 16,867 black hogs with average selling price of $221 per hog, generating $3.72 million in revenues during the fourth quarter 2013. We also sold 1,064 market hogs for processed pork through our retail channel during the fourth quarter of 2013, with an average selling price of $285 per hog, generating $0.3 million in revenues. At the end of 2013, our processed black hog pork products were distributing through 12 supermarkets and 10 chain restaurant and hotels.

Gross profit for the fourth quarter of 2013 was $1.59 million compared to $0.73 million for the same period last year. Gross margin for the fourth quarter of 2013 was 15.3%, significantly higher than the 10.6% for the fourth quarter of 2012, as well as 10.4% for this prior quarter.

The gross margin for breeder hogs, regular market hogs, black hogs and retail sales were 29%, 15%, 7% and 26% respectively for the fourth quarter of 2013. As comparison, gross margin for breeder hogs and regular market hogs were 32% and 5% respectively for the same period of last year.

SG&A expenses were $1.48 million for the fourth quarter of 2013, increasing $0.74 million for the same period of last year. The increase primarily reflected general and administrative expenses associated with our retail efforts.

Net loss from continuing operations for the fourth quarter of 2013 was $1.54 million compared to $0.11 million for the same period last year. Net loss from the fourth quarter of 2013 included impairment charges of $1.9 million for the government mandated shutdown of Farm 8 and $0.04 million from construction in progress.

Excluding net income attributable to non-controlling interest, net loss attributable to common shareholders for the fourth quarter 2013 was $1.22 million or a loss of $0.09 per diluted share.

On a normalized basis, after excluding a non-recurring $1.49 million impairment charge from the shutdown of Farm 8, net income attributable to common shareholders was $0.31 million or $0.02 per diluted share. For the fourth quarter of 2013, this compared to net loss attributable to common shareholders of $0.11 million or a loss of $0.01 per diluted share for the same period of last year.

Now shift gear to year-to-date financial results. Revenues for the 12 months ended December 31, 2013 grew 25.7% to $33.35 million from the same period last year. This increase was due to the results of selling black hogs raised by farmers participating in our cooperative programs, the initiation of retail sales of processed black hog products offset by the decrease in revenue from our regular market hog sales.

The company sold a total of 149,181 hogs with blended average selling price of $224 per hog during the 12 month period ended December 31, 2013 compared to 115,696 hogs sold at blended average selling price of $229 per hog for the year of 2012.

Revenues for the 12 months ended December 31, 2013 from breeder hog sales increased 7.1% to $8.37 million with the number of breeder hogs sold increasing 14.8% to 30,639 hogs and the average selling price of breeder hogs decreasing 6.8% to $273 per hog.

Revenues for the 12 months ended December 31, 2013 from regular market hog sales decreased 2.6% to $18.23 million as the number of regular market hogs sold decreased by 0.5% to 88,523 hogs and average selling price of regular market hogs decreased 1.9% to $206 per hog.

The decline in average selling price of the both breeder and regular market hogs was mainly due to; first, a decline in domestic pork demand due to the outbreak of H7N9 avian flu. Second, an increase in domestic hog supply as a result of preferential government policies, for example government subsidies. And third, the Central government's new policies that promote frugality, thrift and forbidden extravagance from government spending which further reduced pork consumption.

We sold 28,003 black hogs as breeder and market hogs at average selling price of $222 per hog, generating $6.21 million in revenues during the 12 months ended December 31, 2013. We also sold 2,016 market hogs for processed pork through our retail channel during the year of 2013 with an average selling price of $270 per hog, generating $0.54 million in revenue.

Gross profit for the 12 months ended December 31, 2013 was $3.02 million compared to $3.46 million for the same period of last year.

Gross margin was 9.1% and 13% for the 12 months ended December 31, 2013 and 2012 respectively. The impact of increased feed costs and animal medicines, as well as reduced hog price caused a significant decrease in gross margin. The gross margin for breeder hogs, regular market hogs, black hogs our retail sales were 28%, 1%, 5% and 24% respectively for the 12 months ended of 2013. As a comparison, gross margin for breeder hogs and regular market hogs were 31% and 5%, respectively for the year of 2012.

SG&A expenses for the 12 months ended December 31, 2013 was $3.8 million, up $0.38 million from $3.42 million for the same period last year. The increase was primarily a result of $1 million of general and administrative expenses from our retail segment, partially offset by the $0.6 million reduction in overall selling expenses.

Net loss from continuing operations for the 12 months ended December 31, 2013 was $2.68 million compared to $0.25 million for the same period of last year. Net loss for the 12 months ended December 31, 2013 reflect impairment charge of $1.49 million related to the government mandated shutdown of Farm 8 in the fourth quarter of 2013.

After allocating net loss attributable to non-controlling interests, net loss attributable to common shareholders for the 12 months ended December 31, 2013 was $2.04 million or a loss of $0.18 per diluted share. On a normalized basis, after excluding the non-recurring impairment charges incurred in fourth quarter of 2013. Net loss attributable to common shareholders was $0.51 million, a loss of $0.04 per diluted shares for the 12 months ended December 31, 2013. This compares to net loss attributable to common shareholders of $0.22 million, a loss of $0.02 per diluted share for the same period of last year.

Now for quick summary of our balance sheet and cash flow, as of December 31, 2013 we had approximately $10.09 million cash and cash equivalent compared to $7.48 million at December 31, 2012. Working capital at December 31, 2013 was $14.95 million as compared to $8.98 million at December 31, 2012. Cash flow from operations was negative $0.11 million and $5.61 million for the 12 months ended December 31, 2013 and 2012 respectively.

Now I would like to turn the discussion over to operator for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from [Paul Busick], private investor.

Unidentified Analyst

Yes. My question is -- I have two questions. One is market hogs and black hogs. What is the weight, the market weight of a mark -- of a regular hog compared to a black hog? And the second question is, in the processed hogs; are they black hogs or are they market hogs? Thank you.

Hanying Li

[Foreign Language].

Tina Xiao

Hi Paul, this is Tina. Can you please repeat your first question? Your question is the market hogs and black hogs, market weight, right?

Unidentified Analyst

Yes. How many kilograms, is there a difference in the weight when you market them, at the time you sell them, are they -- difference in average weight of the regular hogs and the black hogs.

Tina Xiao

Okay. Thank you. [Foreign Language].

Hanying Li

[Foreign Language].

Tina Xiao

Sorry for interrupting. Amy, the operator, something wrong with the CEO, the voice doesn’t sound good. So, she would like to…

Operator

No, she should not back in, the line is fine. She needs to turn the webcast off at the location, since the webcast playing in the background and that’s where the noise is coming from. So, she should turn that computer off or turn the volume off.

Unidentified Analyst

Okay. I just did it.

Tina Xiao

Okay.

Unidentified Analyst

Is it better now?

Tina Xiao

Yes. That’s better.

Unidentified Analyst

Okay. I’m sorry. I’ll repeat the question. Should I repeat the question?

Tina Xiao

Yes, Paul. You can repeat it again. Thank you.

Unidentified Analyst

Okay. I’m very sorry for that. The first question is, the average weight of market hogs or regular hogs and the average weight of a black hog, is it different? And the second question was the processed hogs; are they black hogs or are they regular hogs? That’s it, two questions.

Tina Xiao

Thank you. [Foreign Language].

Hanying Li

[Foreign Language].

Thank you, Paul. And according to Ms. Li’s answer, the average weight for market hog and black hog 100 kilogram; and all the processed products are black hog, not regular hog. Thank you.

Unidentified Analyst

Okay. Thank you very much. So, the weight for the market hogs and black hogs are the same, approximately?

Tina Xiao

Yes.

Unidentified Analyst

Okay. Thank you.

Tina Xiao

Thank you.

Operator

Our next question comes from Mark Griffin at [Triangle] Capital.

Unidentified Analyst

Hello everyone. My question is about gross margin, things are looking good this year. You’ve done a very good job. And in the fourth quarter your gross margin went above 15%. And that’s the highest we’ve seen over the last two years, can you explain I know there has been turnaround and we are changing and things are growing can you explain why the gross margin has improved and where we should expect the gross margin going forward?

Tina Xiao

Thank you, Mark. [Foreign Language].

Jun Wang

[Foreign Language].

Tina Xiao

Hi. According to the answer from the CFO, Mr. Jun Wang I can’t give you the answer. Our gross margin reached the highest level since the first quarter for 2012, which was largely driven by improvement in the selling price of hogs and also the relatively high gross margin from the retail segment [Technical Difficulty] overall gross margin to some extent. For 2014 it is hard for us to make a projection with the hog price because the hog price’s uncertainties. Thank you.

Operator

Are you ready for the next question? Art Havener at Stampede Capital.

Art Havener - Stampede Capital

All right, thank you. In terms of 2014, can you give me an idea of the breakdown, of the number of hogs you expect to sell and the range of average pricing?

Tina Xiao

Sorry, can you please repeat your question again? I didn’t hear it clearly, I am sorry.

Art Havener - Stampede Capital

I am interested in 2014, the company’s projection for the number of hogs sold by regular hogs, black hogs and breeder hogs. And I am interested in just a range and the average pricing range that they expect to see at the end of the year?

Hanying Li

Sure. [Foreign Language].

In terms of the market regulations, the overall hog industry will be very weak after the traditional Chinese New Year. And also because of the hog price went down in the fourth quarter of last year, we should increase according to the situation in the past few years.

We anticipate the pork price will recover in the second half of 2014 after such a long period recession. Thank you.

Art Havener - Stampede Capital

Well, okay hold on. You sold a 149,000 hogs in 2013; can you give me a number that you expect to sell in 2014?

Tina Xiao

Black hog?

Art Havener - Stampede Capital

Total number of hogs, I like them by segment, I’ll take total hogs if you have that, if that’s all you will give me?

Hanying Li

[Foreign Language].

Okay. Currently we cannot give you the numbers for each segment, but according to the numbers from the full year 2013, we sold 30,019 black hogs. And we anticipate that, we believe we can sell 50,000 to 80,000 black hogs in 2014.Thank you.

Art Havener - Stampede Capital

Okay. So the big growth area will be in the black hogs is what you're suggesting, is that correct?

Tina Xiao

Yes.

Art Havener - Stampede Capital

Okay. Can you also give us an idea of where the future growth focus on the company is; is it in the supermarkets or is it in the restaurants, hotels or what areas is the future growth for the company?

Hanying Li

[Foreign Language].

To serve through the supermarket, hotel and restaurants still it is the strategy for our company’s retail channel and we will expand the channel to Wuhan and expand to other areas. And at the same time we will increase the style of the products. We will develop more styles for the products of black hogs.

Art Havener - Stampede Capital

Okay. I have one more question. You have about $6.4 million debt outstanding, what’s the intention of refinancing? Do you expect to raise more equity or keep going with the renewal of short-term debt?

Hanying Li

[Foreign Language].

For the financing question, it depends on the approval and recognized from the capital market from China and both China and U.S., so we do not have any plan now.

Art Havener - Stampede Capital

Okay. I had more questions, but I will get back in the queue. Thank you.

Operator

(Operator Instructions). Our next question comes from [Diana Chen], private investor.

Unidentified Analyst

Good morning. I have one question. Has the company had already shutdown its farming? And if not, when do you expect it to happen and what kind of impact do you expect for your financials going forward? Thank you.

Jun Wang

[Foreign Language].

Tina Xiao

After the response from CFO, we can get the answer. As the farm, 8 Farm, we have obtained 3 months grace period to evaluate our portable assets and personnel from the local government. It is expected that we would finish all the evaluation work at the end of the first quarter of 2014. Besides, we have booked $1.49 million impairment loss from Farm 8 in the 10-K and we anticipate the loss will be offset by the compensation from the local government in 2014.

Operator

Assuming that finishes Ms. Chen’s question, this concludes today’s question-and-answer session. Conference is now concluded. Thank you for attending today’s presentation.

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