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Skystar Bio-Pharmaceutical Company (NASDAQ:SKBI)

Q1 2014 Earnings Conference Call

May 16, 2014 7:45 am ET

Executives

Christopher Chu - Director, IR

Weibing Lu - Chairman & CEO

Bing Mei - CFO

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

Analysts

Operator

Greetings and welcome to the Skystar Bio-Pharmaceutical First Quarter Fiscal 2014 Results for the period ended March 31, 2014 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Christopher Chu, Investor Relations. Thank you. You may now begin.

Christopher Chu

Thank you, operator. Good morning and welcome to Skystar's first results conference call for fiscal 2014. Joining us on the call today is Skystar's Chairman and CEO, Mr. Weibing Lu; Skystar's CFO, Bing Mei; and Company Director, Corporate Development and U.S. Representative, Scott Cramer. Scott and Bing will provide an overview of Skystar's results. And we'll then open up the call to your questions for Mr. Lu.

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 believe, expect, may, 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 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 our 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 and 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 earnings call. All forward-looking statements are qualified in the entirety by this cautionary statement. 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 the call over to Scott Cramer. Scott?

Scott Cramer

Hi, Chris. And thank you so much. Good morning everyone and welcome to Skystar's first earnings call for fiscal 2014. I will be delivering prepared comments on behalf of the company. And as a reminder, Mr. Lu, Skystar's Chairman and CEO will be available for question-and-answer after the prepared remarks.

The company's unaudited 10-Q was released yesterday, and filed with the SEC. Additionally, the financial results press release was released yesterday also. If you do not have a copy of the release, please contact Chris Chu, our External Investor Relations Representative and he will assist you in getting any of the two documents.

On behalf of Mr. Lu and the rest of the Skystar team, we are pleased to announce our first quarter results with the market.

Skystar is pleased with the unaudited first quarter results as seeing an increase in both year-over-year top and bottom line profitability.

Skystar's revenue growth was driven by veterinary medicine growing over 46% year-over-year with solid contributions coming from Skystar's other segments as well. The increased utilization rates for Skystar's veterinary medication production facility were realized following the receipt of more product permits from the Ministry of Agriculture. Skystar's year-over-year gross margin compression from 47% to 41% for the current reporting year was due to the increased production coming from our lower margin veterinary medications line for which the Company recently received some additional product permits.

In addition, we experienced increased manufacturing overhead as we book these costs associated with our successfully completed Huxian vaccine plant construction. We expect as we ramp up production on our vaccine line we will move towards recapturing our margins.

We expect manufacturing to continue to scale up throughout the year in preparation for the majority of Skystar's sales coming after the first quarter, which is coinciding with China's celebration of the Chinese Lunar New Year holiday. Skystar expects to experience an extended period of steady growth once all of its manufacturing plants can be completed and brought to full utilization rates.

With that, I would like to turn the call over to Bing so he may discuss the financials. Bing?

Bing Mei

Thank you, Scott. For the first quarter 2014, we had revenue of $6.8 million as compared to revenue of $5.5million in the year ago period, a increase of $1.3 million or 23.5%. Overall revenue increase was due to the increase in manufacturing at our company's Huxian facility in combination with receiving additional product permits from the Ministry of Agriculture to manufacture all of veterinary medication product.

Here is a breakdown of the quarter, the revenue by production line. Revenue from sales of veterinary medications increased by $1.4 million or 40.6%, from $3.4 million for the first quarter of 2013 to $4.8 million for the first quarter of 2014.

Revenue from micro-organisms products decreased by $146,000 or 8.8% from $1.7 million for the first quarter of 2013 to $1.5 million for the first quarter of 2014. The decrease was due to weak market demand for micro-organisms product due to a decline in meat price in the first quarter, which discouraged the farmer from increasing their livestock farming.

Revenue from feed additives increased by $44,000 or 15.5% from $286,000 for the first quarter of 2013 to $330,000 for the first quarter of 2014.

Vaccine revenues increased by $5,000 or 4.1% from $131,000 for the first quarter of 2013 to $136,000 for the first quarter of 2014. Vaccine production is expected to commence the production at our new Huxian facility during the second half of this year.

Gross profit for the quarter was up $223,000 or 8.6% from $2.6 million for the first quarter of 2013 to $2.8 million for the first quarter of 2014. Gross margin was 41.3%, down from 47% in the same year ago period. The decreased gross margin was mainly because the majority of our revenues during the first quarter came from less profitable veterinary medications and thus increased the manufacturing overhead as we successfully completed the GMP of our Huxian vaccine plant.

Operating expense for the quarter increased 8% to $1.6 million or 24% of the total revenue, compared with $1.5 million or 23% (ph) of revenues for the same year ago period.

R&D costs were insignificant for both the first quarter of 2014 and 2013 as there was no significant R&D efforts being undertaken during the first quarter because of the Chinese New Year. R&D costs are expected to increase as new projects begin throughout the remainder of the fiscal year 2014.

Selling expense totaled $370,000 for the first quarter of 2014 as compared to $318,000 for the first quarter of 2013, an increase of $52,000 or 16.5%.

G&A expense totaled $1.3 million for the first quarter of 2014 as compared to $1.2 million for the first quarter of 2013, an increase of $65,000 or 5.4%.

Operating income for the first quarter of 2014 was $1.2 million up $100,000 or 9.5% from the two-thirds of the prior year. Operating margin was 17% versus 19% in the year ago period.

Net income for the quarter was $975,000 or $0.13 per fully diluted share. This compares to net income of $713,000 or $0.09 per fully diluted share for the year ago period.

As of March 31, 2014, Skystar has approximately $6.8 million of cash, current assets $88.4 million, and current liability of $23.7 million, which result in a net working capital of $64.7 million.

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

Scott Cramer

Yes, hi, Bing. And thank you so much. Our revenue picture has always been seasonal with Q1 being our weakest quarter. With Skystar's strong start to the fiscal 2014 reporting cycle, it is encouraging of what the road ahead for Skystar will look like. As the only U.S. listed China animal pharmaceutical peer play, the company believes that it's built a strong framework in both manufacturing and distribution.

We recently completed a newly GMP certified manufacturing facility in Huxian increased the Skystar's ability in animal health medicine. Also, we will be able to start production of our new agriculture line. This is fish farming. These two lines represent a $30 million revenue opportunity. It should also be noted that these two lines we will be producing at a 70-plus-percent gross margin.

We have also been able to expand our distribution footprint across all 29 farm producing provinces in the China. Equally as important, the company has been able to launch and expand its manufacturing infrastructure while China's new regulatory requirements for GMP production facilities has become markedly more stringent. While these more stringent rules and manufacturing standards are designed to ensure the safety of China's food supply and agricultural and animal husbandry industry standards in China as they move towards more modernization and industrialization, it is also serving as a barrier to entry to the space and is giving Skystar a distinct competitive advantage. As a result, Skystar believes that it's uniquely positioned to take advantage and reap the rewards of the rapidly growing and consolidating animal husbandry industry in China.

Skystar currently maintains its business outlook and anticipates in delivering an 8% to 18% year-over-year top-line revenue increase for fiscal 2014 as compared to the prior year. This expected revenue range is $46 million to $50 million with a gross margin of roughly 50% for fiscal 2014.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

It appears we have no questions at this time. I would like to turn the floor back over to management for any additional concluding remarks.

Scott Cramer

Okay. On behalf of our Chairman and CEO, Mr. Weibing Lu, and our Chief Financial Officer, Bing Mei, we would certainly like to thank you for joining our call this morning. Skystar does appreciate your participation and support. This has been a critical time for Skystar and very pivotal. We are just now brining on additional capacity of 1000% of vaccine lines and we are also brining on significant capacity to start our new operating (inaudible). We expect that Skystar has a $30 million opportunity available here in the years to come in capacity and we'll also be brining on more manufacturing and infrastructure in the near future.

The road for Skystar looks very good. We appreciate your support. We look forward to having you join us on the next call for Q2. Thank you so much.

Operator

Thank you, ladies and gentlemen. This does concludes today's teleconference. Thank you for your participation. And you may disconnect your lines at this time.

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