Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

China New Borun Corporation (NYSE:BORN)

Q1 2014 Results Earnings Conference Call

May 23, 2014 8:00 AM ET

Executives

Terence Chen - Chief Financial Officer

Ann Yu - Chief Strategy Officer

Analysts

Sarah Dice - Hillhouse Capital

Hover Chen - Caledonia Investments

Albert Chan - Prime Capital Group

Operator

Good day, everyone, and welcome to the First Quarter 2014 Earnings Conference Call for China New Borun Corporation. Today's conference is being recorded.

Before we get started, I'm going to review the Safe Harbor statement regarding today's conference call. Please note that discussion today will contain certain forward-looking statements made under the Safe Harbor Provisions of the US 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 materially differ from those in the forward-looking statements, please refer to our annual report on Form 20-F filed with the Securities and Exchange Commission on April 25, 2014. The Company does not assume any obligation 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.

Terence Chen

Thank you, everyone, for joining us for China New Borun's first quarter 2014 earnings conference call. Joining me today from management is Ann Yu, the Company's Chief Strategy Officer. Our Chairman, Mr. Jinmiao Wang, is currently on a business trip. And so, for today's call, I will represent Mr. Wang in providing you with a quick review of our business in the first quarter of 2014.

Following that, Ann will offer more details on our operational developments and updates. After Ann, I will then provide you with our first quarter 2014 financial details. I would like to note that on this call today, all of our financial results will be referred to in Chinese RMB unless otherwise noted.

Hello, everyone, and welcome to China New Borun's first quarter 2014 earnings conference call. In this first quarter of 2014, I am delighted that we solidly executed on our plans and delivered very strong results throughout. During the quarter, we saw a third consecutive quarter of uptick in the average selling price of edible alcohol, fueled by strong demand from our core customers, the baijiu customers. Accordingly, we turned up production, and despite Spring Festival Holidays, we were able to reach an average of 92% capacity utilization for edible alcohol during the quarter.

Driven by greater sales volume and a firm average selling price of edible alcohol, we grew revenue by 39% on year-over-year basis and expanded gross margin by more than 400 basis points to a 12-month high of 14.5%.

In light of the improving industry fundamentals, we forged ahead with our operational plans. During the first quarter, we continued with our pre-sourcing strategy and secured a total of 500,000 tons of corn in the past harvest season, enabling us to keep our corn cost relatively stable. I am proud to say that our ability to pre-purchase corn at lower prices remains top notch in the industry, providing us a significant cost advantage in a rising-price environment.

This may potentially squeeze profit margins by smaller edible alcohol producers that buy at spot prices in the non-harvest season. However, with our pre-sourcing capability, we were able to lock up sufficient corn during the lower-priced harvest season, and as such, we anticipate our gross margin will sustain at a relatively healthier level. So as long as the demand and the ASP for edible alcohol remains firm, we are optimistic that we will grow the full-year 2014 profit.

In addition to the robust trends in our core edible alcohol business, we continue to make further progress in our new CPE and foam insulation business. During the first quarter, we expanded production and gained wider market acceptance, as revenue from foam insulation more than doubled, and revenue from CPE nearly tripled from the prior quarter, when we initially launched the products.

We will continue to expand capacity utilization for CPE, while committing more development efforts to broaden the foam insulation product offering to match the large variety of pipe types and sizes. We believe with a solid foundation in place, the new business will steadily grow.

In short, the first quarter of 2014 was very solid throughout. We successfully executed on our strategic plans and are encouraged by the improved industry fundamentals. We will continue to build on this momentum and are confident that we are well-positioned to grow profits for the full-year 2014.

At this point, I will now turn the call over to Ann Yu for more details on our operational developments and updates.

Ann Yu

Thank you very much, Terence, and many thanks to everyone for participating on our call today. I am delighted that we once again exceeded our revenue outlook and accomplished year-over-year growth for the second consecutively quarter. Our core edible alcohol business have grown solidly, and at the same time, I am so pleased that we further controlled operating expenses and made visible progress with our new business.

In recent quarters, we noticed a positive change for our core baijiu customers as the baijiu industry's focus shifts from the premium segment to the mid-to-low segment. In the past, baijiu producers and dealers focused their marketing efforts on wooing the smaller premium segment, where despite a lower sales volume they were able to generate attractive profit margins.

However, now with the rapidly declining sales of premium brands due to the sharply-lower demand from corporate and government, competition has shifted in favor of the mass-market segment, targeting the general public with greater emphasis on sales volume but at lower price level. As a result, the mid-to-low segment of baijiu producers are gaining market share at the expense of the premium baijiu segment.

According to the latest statistics from China Alcoholic Drinks Association, sales of mid-to-low end edible baijiu brands grew by nearly 16% year-over-year, while sales of high-end baijiu brands declined by more than 60% year-over-year in 2013. And this trend appears to continue in the first quarter of 2014. In this type of settings, we believe Borun is at the sweet spot of the new industry dynamics as our core customers have already been the established mid-to-low segment baijiu producers.

Furthermore, with our industry-leading production scale and proficiency, we offer consistently high quality edible alcohol with timely delivery and fulfillment and at a competitive price level. Driven by the robust demand from the baijiu industry, our total production volume of edible alcohol reached approximately 87,000 tons, as our production facilities of edible alcohol were running at approximately 92% of total capacity, despite a one-week pause of production during the Spring Festival Holidays. The robust demand also helped fuel a slight increase in the ASP for edible alcohol to RMB5,267 per ton during the first quarter. The better-than-expected pricing environment for our edible alcohol and other byproducts and higher production volume drove revenue to expand by 38.8% year-over-year to RMB625.7 million. We are well pleased with the modest upward trend in the average selling price of edible alcohol for the past three consecutive quarters.

With the recovery of the industry, we anticipate the ASP for edible alcohol will remain stable in the remainder of 2014. Meanwhile, our average cost of corn during the first quarter of 2014 decreased by 3.8% sequentially to RMB1,954 per ton. This compares favorably to a slight increase of 0.7% in the spot price of corn during the same period, according to the data from the reference "Spot Price of Corn Ex-Warehouse from Dalian". This significant cost advantage clearly demonstrates the effectiveness of our sourcing strategy.

As you may recall, we have further enhanced our corn-sourcing capability by purchasing not only through granaries but also directly from local farmers, and storing the corns in our own storage. In this harvest season, we accumulated a total of 500,000 tons of corn, of which, about 200,000 tons of corn were directly purchased from farmers, and the remainder 300,000 tons bought through local granaries. Accordingly, our total inventories increased to RMB937 million mainly due to the higher corn storage during this harvest season. And with these 500,000 tons of corn on hand, we estimate that we have secured sufficient cost-effective corn for our production needs during the non-harvest season.

More importantly, despite a tight credit environment, we were able to secure an additional RMB252 million in short-term borrowing from Agricultural Development Bank of China during this quarter, demonstrating bank's recognition for our leading position in the edible alcohol industry and confidence in our financial position and profitability. These additional funds help us to further strengthen our sourcing capability and thereby cost advantages over smaller peers. So all in all, we feel good about our sourcing capabilities, our competitive position, and the much improved industry fundamentals.

And we are also making good progress in our new CPE and foam insulation business. During the first quarter, we focused on ramping up production, and were able to double production volume of foam insulation to 931 cubic meters and triple production volume of CPE to 1,681 tons.

Customers' feedback on our trial products was so positive that we were able to sell out all finished goods for the new products. Overall, total revenue from the new products totaled RMB15.9 million, which improved by 193% over the prior quarter, when we initially launched them.

We are encouraged by the market's positive acceptance thus far, and as our new business continues to gain momentum, we anticipate that the capacity utilization for CPE will reach 80% in the second half of 2014, as the product category has less variation in product types and sizes. However, for the foam insulation product category, there is a large variety of pipe types and sizes that we will need to match our production to market consumption. As such, we will commit to broaden our offering, and we will likely take longer to ramp capacity utilization as compared to the CPE product.

We estimate the gross margins for CPE and foam insulation business are currently about 15% and 30% respectively. These estimates excluding depreciation and amortization expenses as we are still ramping up and not yet in mass production mode for these new products. We remain confident that when fully ramped, the new business will be able to earn a blended gross margin of more than 15%, which is higher than the current gross margin level for our edible alcohol business.

Looking forward, we will continue to leverage our efficient production process, management capabilities, and local market knowledge and relationships, and put forward our best effort to diversify our foam insulation product portfolio to meet the end-market demand. In summary, we are very glad to kick off 2014 with a very positive first quarter, and we feel confident about our position for the remainder of the year. Strategically, we remain comfortable with the core business and optimistic with the new.

And this wraps up my part. Now let me turn the call over to Terence Chen, our CFO, for a review of the financial performance in the first quarter of 2014.

Terence Chen

Thanks, Ann. I'm also excited about the achievements we have achieved during the first quarter of 2014. And I'm confident that 2014 will prove to be an even greater transformative year for Borun.

From the financial management's perspective, our top priority for the first quarter was to expand funding resources and maximize utilization of available working capital in order to support our corn-sourcing arrangements through direct purchase.

As such, I was very pleased with our ability to gain additional short-term borrowings during the quarter and our success in securing sufficient corn during this harvest season. These efforts combined with the improved industry fundamentals and greater sales volume contributed to a strong rebound in gross margin. At the same time, we gained greater operating leverage by further controlling operating expenses, and as a result, were able to deliver a net margin expansion of 350 basis points year-over-year. Given the strong first quarter results and a much improved market environment for edible alcohol, I feel positive about the remainder of 2014.

Let me now review our financial performance. For the first quarter of 2014, our total net revenue increased by 38.8% year-over-year to RMB625.7 million, which was mainly driven by a higher production and sales volumes for all of our products.

During this quarter, revenue from edible alcohol increased by 27.4% to RMB399.4 million, with the sales volume increased by 27.5% year-over-year to approximately 75,800 tons driven by solid demand from the baijiu industry, and average selling price of RMB5,267 per ton, unchanged from the same period of last year.

Revenue from DDGS Feed increased by 58.4% to RMB153.4 million, with sales volume increased by 42.3% year-over-year to approximately 69,100 tons, and average selling price increased by 11.3% year-over-year to RMB2,221 per ton.

Revenue from liquid carbon dioxide increased by 42.9% to RMB11.6 million, with sales volume increased by 69.4% to approximately 31,300 tons and ASP decreased by 15.7% year-over-year to RMB372 per ton.

Revenue from crude corn oil increased by 40.6% to RMB45.4 million with sales volume increased by 43.2% year-over-year to approximately 6,030 tons, and ASP decreased by 1.8% year-over-year to RMB7,517 per ton.

Total revenue from CPE and foam insulation totaled RMB15.9 million. Revenue from CPE was RMB14.9 million, with sales volume of approximately 1,700 tons at a price per ton of RMB8,749. Revenue from foam insulation was RMB1.0 million, with sales volume of approximately 940 cubic meters at a price of RMB1,099 per cubic meter.

Our gross profit increased by 92.1% to RMB90.5 million from RMB47.1 million in the prior year period. Gross margin largely improved to 14.5% compared to 10.4% in the first quarter of 2013 and 11.9% in the prior quarter, which was primarily attributable to the recovered market demand as well as the Company's continued efforts in optimizing its sourcing capability to stabilize its corn cost.

Driven by higher gross margin, income from operations increased by 117.4% to RMB78.8 million in the first quarter of 2014, from RMB36.2 million in the same period of 2013. Benefiting from higher operational leverage, General and Administrative expenses as a percentage of total revenue decreased to 1.7% in the first quarter of 2014, compared with 2.2% a year ago. Selling expenses as a percentage of total revenue decreased to 0.19% in the first quarter of 2014 compared to 0.23% a year ago.

Interest expense increased by RMB6.1 million to RMB26.0 million in the first quarter of 2014 from RMB19.9 million in the same period of 2013, mainly due to the interest expenses arisen from the second tranche of Borun Bond, which issued at the April of 2013.

Income tax expenses in the first quarter of 2014 were RMB13.1 million, representing an effective tax rate of 25%.

Our net income increased by 208.3% year-over-year to RMB39.3 million from RMB12.8 million a year ago. Diluted earnings per share and per ADS were RMB1.53 in the first quarter of 2014. The Company had 25,700,000 weighted average basic and diluted shares outstanding during the quarter ended March 31, 2014.

On the balance sheet side, we have cash and bank deposits of RMB424.4 million, as compared to RMB521.3 million at the end of 2013. Our net trade accounts receivable balance as of March 31, 2014, was RMB350.9 million, decreased from RMB358.5 million at the end of 2013.

Our inventory and advance to suppliers balance as of March 31, 2014, totaling RMB937.8 million, increased from RMB629.5 million at the end of last year, reflecting the continued pre-purchase of corn during the quarter as we just discussed. Accordingly, cash flows used in operating activities for the first quarter of 2014 were approximately RMB332.0 million, which was mainly used to pile-up inventories of corn.

That wraps up the financial review, and let me now mention our business outlook. Currently, we estimate revenue for the second quarter of 2014 will be in the range of RMB640 million to RMB670 million, an increase of approximately 1.8% to 6.6% over the same quarter of 2013. The estimated revenue for the second quarter reflects the continued recovering market demand and stabilized ASP of our products. This forecast reflects our current and preliminary estimates of markets and operating conditions and customer demand, which are all subject to change.

So this concludes our prepared remarks. Operator, we will now open the call up for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) We have the first question from the line of Sarah Dai from Hillhouse Capital. Please ask your question.

Sarah Dai - Hillhouse Capital

Hi, thank you for taking my questions and congratulations for such a great quarter. I have some questions regarding your new business. Sorry if I have missed it. What's the current utilization of the CPE and foam insulation product lines in Q1?

Ann Yu

Thank you for your question, Sarah. As we just mentioned, we started generating revenue from CPE and foam insulation plants in the fourth quarter of 2013, and both of our plants intend to gradually ramp up. However, we are very excited to find that the feedback on our CPE products are very, very positive, that the demand of CPE is very solid.

In the first quarter of 2014, our CPE plant went at about 50% of capacity, and we are very confident to reach 80% in the second half of 2014. And for the foam insulation product, there is a lot of variety of pipe choice and size that we will need more time to meet our production to market assumption so that utilization rate in the first quarter is about 10%, but we are very confident that we can gradually ramp up. Thank you.

Sarah Dai - Hillhouse Capital

Okay. So you just mentioned the variety of the pipe foam insulation has many types or sizes and you want to spend more time in developing these new products. So in this case, if I'm assuming that more models also means less leverage, will the actual gross margin from this foam insulation product to be lower than you expectations?

Ann Yu

For the foam insulation product, our target is to provide best quality product to meet the demand from the high end market. And the feedback of our trial product of foam insulation has proved our strategy is a very successful one, as the estimated gross margin in the first quarter is 30%, although the production is not being a mass mode.

But one thing I would like to remind you here is that the estimated gross margin is not the actual one, as we only take -- it does not kind of depreciation and amortization expenses because it's not in a mass mode and they only take those variable costs into account such as some material, utilities and staff costs. And with more research and development investment, we are very confident that we can further improve our capability to provide our customer with high quality and more customized products in the future. And this will have better price and higher profitability. We believe that.

Sarah Dai - Hillhouse Capital

Okay. So with all these plans in position, what is your expectation for this new line, I mean both CPE and foam products in terms of revenue, profit and cash flow contribution in the rest of 2014?

Ann Yu

Thank you. Due to the positive feedback from our customers on the new products, we are very confident that we can generate another about RMB60 million revenue from the CPE and foam insulation products in the remainder of 2014. And although, we are also optimistic that the new plant tends start to generate profit in the second half of 2014. Thank you.

Sarah Dai - Hillhouse Capital

Okay. Thanks, Ann. It's very helpful. And please take care. That's all my questions.

Operator

Thank you. We have the next question from the line of Hover Chen from Caledonia Investments. Please ask your question.

Hover Chen - Caledonia Investments

Hi, thanks for taking my questions. I have three questions. First, what is the average price for the 500,000 tons of corn which you purchased in the past harvest season? And how does the corn price trend in the rest of 2014? And the third question is regarding the CPE and the foam business, excluding the impact of CPE and the foam business, which is the blended gross margin of EA and the by-products during the first quarter? Thank you.

Terence Chen

Thanks for the question, Hover, and I will answer your first question. Yes, we have already secured 500,000 tons of corn in the past harvest season. And average corn cost for the secured corns will be definitely lower than that of the spot market price. And during this quarter, our corn cost is approximately RMB1,950 per ton.

And now, I will answer your second question about the corn price trend in the rest of 2014. As you know that, from May to October, it is the non-harvest season for 2014 and that the corn price will definitely increase during the non-harvest season every year to compare with the current spot market price. That is to say, the corn price in the next several months will be higher than our pre-secured corn cost.

And your third question is about -- sorry, what is your third question?

Hover Chen - Caledonia Investments

It's about the blended gross margin of EA and by-products during the first quarter, excluding the impact of CPE and foam?

Terence Chen

Okay. Excluding the impact of CPE and foam insulation, it will raise our blended gross margin for edible alcohol and its by-products by approximately 20 to 30 basis points during the first quarter.

Hover Chen - Caledonia Investments

Okay. Thank you.

Terence Chen

Thank you, Hover.

Operator

Thank you, sir. We have the next question from the line of Albert Chan from Prime Capital Group. Please ask your question.

Albert Chan - Prime Capital Group

Yes, hi, thank you for taking my questions and congratulations on an excellent quarter. Just wanted to get a better feel for your earnings potential given such a strong quarter. So first of all, in your second quarter outlook, what is the assumption in terms of ASP for edible alcohol? And how does that compare to the second quarter of last year?

Terence Chen

Thanks for your question, Albert. I'll answer your question. For next quarter, I believe that ASP for our main product edible alcohol will remain stable with this quarter. And it will definitely improve to compare with the same quarter last year.

Albert Chan - Prime Capital Group

Okay. And in terms of your capacity utilization in the second quarter, how do you see that in your assumption?

Terence Chen

As we have discussed, during -- as we have discussed, due to the recovering baijiu markets and robust demand for edible alcohol, I suppose that the capacity utilization in next quarter will also be improved to compare with this quarter. And we have already reached 92% of capacity utilization during this quarter.

Albert Chan - Prime Capital Group

Okay. And I would assume you expect the second quarter gross margin to be stable or even exceeding that of the first quarter?

Terence Chen

Yes. You know that ASP for our main product, edible alcohol, will just as I have discussed in the Q&A part that the ASP for our main product, edible alcohol, will remain stable in the next quarter. And with the help of our strong consulting capability, I think we will try our best to control the corn cost in the non-harvest season. Therefore, we will try our best to remain the gross margin stable in the second quarter of 2014.

Albert Chan - Prime Capital Group

Okay. So basically what you're saying is you're seeing pretty firm ASP. You're seeing -- you're expecting capacity utilization to reach even higher than 92%, and your gross margin is going to be stable from the very strong first quarter gross margin. So it looks like you're earning power is going to be pretty strong for the remainder of the year. So my question is, I know you don't provide full year net income guidance, but it seems based on the first quarter results, your net income is already nearly half of your entire net income for full year 2013. So what should we be expecting in terms of your net income in 2014? Could it potentially double from last year and reach closer to the 2,000 level? Or how do you see that trending going forward?

Terence Chen

Yes, I agree with you that the result for first quarter of 2014 is really a strong quarter since we significantly improved both the revenue and the net income compared with the last year. And the management will also continue to solidly execute on our strategic plans in order to earn more profit in 2014. But I think it is too early to say that whether we can double our net income in 2014.

Albert Chan - Prime Capital Group

Right, right. But what I'm getting at is it seems fairly safe to assume that your net income will be at least equal or better than 2013 net income, which was roughly RMB0.50 per share. So, I'm just trying to figure out your base on that, that your valuation was quite low.

Terence Chen

Yes. I think so.

Albert Chan - Prime Capital Group

That's great. That's great. Well, thank you very much and congratulations again.

Terence Chen

Thanks for the question, Albert.

Operator

Thank you, sir. As there are no further questions on the telephone line, I'd like to hand the call back to your speakers for their closing remarks.

Terence Chen

Once again, on behalf of the entire China New Borun management team, I want to thank you for your interest and participation in this conference call. Thank you for joining us today and this concludes our first quarter 2014 earnings conference call. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

2

1

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: China New Borun (BORN) Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts