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Aoxin Tianli Group, Inc. (NASDAQ:OINK)

Q2 2014 Earnings Conference Call

August 14, 2014 8:00 AM ET

Executives

Tina Xiao - Weitian IR

Ping Wang - Chairman and CEO

Jun Wang - CFO

Yang Chen - SVP

Analysts

Mark Griffin - Triangle Capital

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome everyone to Aoxin Tianli Group’s 2014 Second Quarter Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday August 14, 2014. At this time, I’d like to turn the conference over to Ms. Tina Xiao of Weitian Investor Relations. Please go ahead, Mr. Xiao.

Tina Xiao

Thank you, operator and good morning everyone. Joining us today from Aoxin Tianli Group are the Company’s Chairman and CEO, Mr. Ping Wang; the Company’s Chief Financial Officer, Mr. Jun Wang; and the Company’s Senior Vice President, Mr. Yang Chen. I will provide translation to Mr. Ping Wang’s opening remarks and on behalf of the management team review and comment on the reporting period for Aoxin Tianli Group. Then management will respond to your questions during the Q&A session after management’s prepared remarks.

I would like to remind our listeners who are 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 Securities Litigation Reform Act of 1995. Aoxin 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 Mr. Ping Wang, Chairman and CEO of Aoxin Tianli Group. I will provide English translation for Mr. Wang.

[Foreign Language]

Ping Wang

Thank you, Tina and thank you everyone for joining Aoxin Tianli’s second quarter 2014 earnings conference call today. Despite continued weakness in market demand for our regular breeder and regular market hogs, strong sales of black hogs and black hog specialty pork products continued to drive double-digit top-line growth for us, with revenue growth 18% year-over-year in the second quarter. Our gross margin also improved to 7.7% for the second quarter, from negative 4% in the prior year, benefitting from lower feed costs as well as a more favorable product mix.

2014 is a transformational year for Aoxin Tianli as the recent changes to our corporate name and ticker symbol highlights our newly adopted strategy to transform the Company from the single revenue stream, hog farming to a well-diversified company through targeted investments and acquisitions in selected high-growth industries such as equipment manufacturing, optoelectronics, new materials and new energy products, electromechanics and healthcare devices.

Last month, we successfully acquired an 88% equity interest in Hubei Hang-ao Servo-valve Manufacturing Technology Company Limited, allowing us to tap into the underdeveloped domestic Servo-valve market which is poised to benefit from favorable national industry policies and increasing domestic brand market penetration.

Looking forward, with our much improved cash position following our recent private placements, we are excited about the prospects of our business and will actively pursue investment and acquisition targets to further diversify into high growth and profitable segments. We want to thank our shareholders, many of whom have been with us since our IPO in 2010 for their continuing support. We are confident that our new strategy and execution capabilities will allow us to deliver significant long-term returns for our shareholders.

Thank you again for all your support and attention. Next Tina will summarize our second quarter financial results on behalf of management team.

Tina Xiao

Thank you Mr. Wang and good morning everyone. On behalf of the management team, I will summarize some key financial results for the second quarter of 2014 and first half year 2014 respectively. For the second quarter that ended June 30, 2014 revenue grew 18% to $8.07 million from $6.84 million for the same period of last year. This increase was primarily due to sales of black hogs raised by farmers participating in our black hog program as well as revenue contributed from our retail sales of special black hog products and was partially offset by the decreased sales of our regular breeder and market hogs due to the shutdown of our 8th farm.

We sold a total of 40,306 regular breeder hogs, regular market hogs and black hogs during the second quarter compared to 36,249 hogs sold for the same period of last year. Average selling price for our hogs sold increased to $196 per hog for the second quarter of 2014 from $187 per hog for the same period of last year.

Breeder hog revenue decreased 11% to $1.74 million with the number of regular breeder hogs sold decreasing 10% to 6,938 hogs from 7,718 hogs for the second quarter of last year and average selling price down 1% to $251 per hog from $253 per hog for the same period of last year. Regular market hog revenues decreased 8% to $3.4 million for the second quarter of 2014 as the number of regular market hogs sold decreased 10% to 20,213 hogs and the average selling price of regular market hogs increased 2% to $168 per hog.

For the second quarter of 2014, we generated $2.93 million in revenue through the sale of black hogs and black hog specialty pork products, compared to $1.20 million for the same period of last year. We sold 13,155 black hogs with the average selling price of $209 per hog generating $2.75 million in revenue during the second quarter of 2014. We also sold 39,568 kilograms of our specialty black hog pork products through retail that generated $0.18 million in revenue during the second quarter of 2014. Our black hog specialty products includes fresh pork meat sold to supermarkets and meat shops, various vacuumed pork meats sold in gift boxes or portable thermo coolers.

Gross profit for the second quarter of 2014 was $0.62 million, compared to gross loss of $0.28 million for the same period of last year. Gross margin for the second quarter of 2014 was 7.7%, compared to gross loss margin of 4% for the same period of 2013. This increase in gross profit and gross margin reflect the impact of lower feed costs. The gross margin for regular breeder hogs, regular market hogs, black hogs, and retail sales were 34%, negative 3%, 5% and 3% respectively, for the second quarter of 2014.

As a comparison, gross margins for regular breeder hogs, regular market hogs, black hogs, and retail sales were 24%, negative 18%, negative 5%, and negative 1%, respectively, for the same period of last year.

SG&A expenses were $0.95 million for the second quarter of 2014, increasing $0.24 million for the same period of last year. This increase primarily reflects the additional amortization cost of $0.05 million for the acquired distribution network as a result of the repurchase of a 40% non-controlling interest of Tianzhili, $0.10 million in higher payroll expenses for the retail segment, as well as higher depreciation cost for our black hog facilities.

Net Income for the second quarter of 2014 was $0.56 million, compared to a net loss of $1.14 million for the same period of 2013. After allocating net income attributable to non-controlling interest, net income attributable to common shareholders for the second quarter of 2014 was $0.56 million, or $0.03 per diluted share. This compared to net loss attributable to common shareholders of $1 million, or net loss of $0.09 per diluted share, for the same period of last year.

Now shift gear to year-to-date financial results.

Revenue for the six months ended June 30, 2014 grew 25% to $17.76 million from $14.23 million for the same period last year. This increase was primarily due to sales of black hogs raised by farmers participating in our black hog program as well as revenue contributed from our retail sales of specialty black hog products. We sold a total of 81,658 regular breeder hogs, regular market hogs and black hogs with a blended average selling price of $210 per hog during the six months ended June 30, 2014, compared to 68,762 hogs for the same period of last year. Average selling price for our hogs sold increased to $210 per hog for the six months ended June 30, 2014 form $206 per hog for the same period of last year. Revenue for the six months ended June 30, 2014 from regular breeder hog sales decreased by 9% to $3.73 million with total number of regular breeder hogs sold decreasing 9% to 14,007 hogs from 15,408 hogs for the same period of last year. And average selling price increasing slightly to $266 per hog.

Revenue for the six months ended June 30, 2014 from regular market hog sales decreased 3% to $7.98 million and as the number of regular market hogs sold decreased 3% to 42,796 hogs and the average selling price of regular market hogs was unchanged at $186 per hog. The decline in regular breeder hogs sold and market hogs sold is due to the shutdown of our 8th farm.

For the six months ended June 30, 2014, we generated $6.05 million in revenue through the sale of black hogs and black hog specialty pork products, compared to $1.91 million for the same period of last year. We sold 24,855 black hogs with average selling price of $218 per hog, generating $5.42 million for the same -- six months ended June 30, 2014. We also sold 129,052 kilograms of our special black hog products through retail that generated $0.63 million in revenue during the six months ended June 30, 2014.

Gross profit for the six months ended June 30, 2014 was $2.05 million, compared to $0.53 million for the same period of last year. Gross margin for the six months ended June 30, 2014 was 11.7%, compared to 3.7% for the same period last year. This increase in gross profit and gross margin reflect the impact of lower feed costs. The gross margins for regular breeder hogs, regular market hogs, black hogs, and retail sales were 35%, 2%, 7% and 33% respectively, for the six months ended June 30, 2014.

As a comparison, gross margins for regular market hogs, regular market breeder hogs, black hogs, and retail sales were 27%, negative 6%, negative 3%, and negative 1%, respectively, for the same period of last year.

SG&A expenses were $2.01 million for the six months ended June 30, 2014, increasing to $0.26 million for the same period of last year. The increase primarily reflects the additional amortization cost of $0.05 million for the acquired distribution network as a result of the repurchase of a 40% non-controlling interest in Tianzhili, $0.31 million in higher payroll expenses associated with the retail segment and our black hog program.

Net Income for the six months ended June 30, 2014 was $0.83 million, which reflected $0.99 million relocation compensation received from local government for the shutdown of Farm 8. This compares to a net loss of $1.32 million for the same period of 2013. After allocating net income attributable to non-controlling interest, net income attributable to common shareholders for the six months ended June 30, 2014 was $0.96 million, or $0.06 per diluted share. This compared to net loss attributable to common shareholders of $1.11 million, or a net loss of $0.10 per diluted share for the same period of last year.

Now a quick summary of our balance sheet and cash flow. As of June 30, 2014, the Company had cash and cash equivalents of $31.12 million, compared to $10.09 million at the end of 2013. Working capital as of June 30, 2014 was $32.11 million as compared to $14.95 million at December 31, 2013. Net cash provided by operating activities was $5.79 million for the six months ended June 30, 2014, compared to net cash used in operating activities of $0.21 million for the six months ended June 30, 2013.

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

Question-and-Answer Session

Operator

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Mark Griffin with Triangle Capital.

Mark Griffin - Triangle Capital

You announced on July 17 a new strategic development plan. Can you elaborate on that and go into more specific details on the new direction of the Company? Thank you.

According to the answers from the CEO Mr. Ping Wang I would like to talk about the company’s new strategic development plan based on the current agriculture business the company intends to transform Aoxin Tianli from the single revenue stream hog farming business to a well diversified company to selected higher growth industries such as equipment manufacturing, optoelectronics, new materials & new energy products, and healthcare devices in order to avoid the risk from single hog farming business.

Meanwhile building on Aoxin Tianli status as the NASDAQ listed public company. The company will drive the acquired enterprise to keep growth in new business and expansion into the market and we’ll also support its enterprise which are qualified to go public via split on March and we’ll have them to enter into the capital markets both in domestic and overseas in three to five years.

The business development of the company, will continue say enhance the inner control and outer expenses to create several industry models and continually duplicate the above development strategy to achieve our long-term goals. Secondly, I want to talk about the staff’s full transformation based on strategic transformation the company will be mainly focused on adjustments of the organization structure and the financial structure. And there will be independently for the internal outer control to manage the operation well for the public company. Thank you.

Operator

Okay. (Operator Instructions) Okay, we have a question from William Long a private investor.

Unidentified Analyst

Hi, thank you for the information. Ms. Li, I have two questions. The first one is, during the second quarter I found the sales of breeder hog the negative hog that appears decrease a lot, was it related to shut down of the 8 Farm or negative market demand or both? Thank you so much.

Ping Wang

According to the answers from the management team, we understand that decrease of our regular breeder hogs and market hog sales was primarily attributable to the shutdown of our Farm 8 by the local government. So there were no hogs sold of the 8th farm in this quarter. As a comparison there 3,347 hogs sold from Farm 8 during the same period of last year. Meanwhile the lack of market demand also slightly affected the sales. However the decrease of our regular hog sales was totally offset by the strong sale of our black hogs and black hog specialty pork products.

Unidentified Analyst

I have two. The second question is the company will provide a guidance for the number of black hog sales in 2014, can you expect that range will be change a lot compared with the last year?

Ping Wang

According to the answers from the management team, we understand the company anticipates that the number of black hog sales will achieve 13,000 to 17,000 in 2014 for black hog sales. As for the average selling price in the second half of each year, we always understood the selling price will increase due to the upcoming Chinese traditional festivals such as Mid-Autumn Day, National Day in the coming third quarter. So it is hard for us to say it will recover the price in the level of 2013, but it will increase ASP price in the third quarter.

Operator

Thank you. And the next question comes from Paul Busick, a Private Investor.

Unidentified Analyst

Hello. I think part of my question was answered with the previous answer but I am wondering what the general plans are for black hog farming in the coming year or two general trust how much percentage you want to increase every year in the next year or two? And then I have a second question.

Yang Chen

According to the answers from the Senior Vice President Yang Chen we understand the company intends to concentrate on the black hog farming and sales where we’re paying more attention to their qualities and we anticipate to achieve the numbers to maintain sales in black hog or more in the next one or two years and our focus would be on the branded expansion of the our specialty black hog branded and the premier quality for the black hog sales that’s what the premier quality would be our company’s concentration for the black hog sales. Thank you.

Unidentified Analyst

Okay, thank you and for the second question. Is there any plans or timeframe for any additional acquisitions in the next year or so at this time?

Yang Chen

As the company has the plan for the acquisition and that engaging optoelectronics business and with regard to the future acquisition target the company has considerations on specific size of industry. As for the industry selection just as we disclose to the public, there were press release. We will mainly focus on the equipment manufacturing optoelectronics new energy, new materials and current devices. Thank you.

Unidentified Analyst

Okay, thank you for the answer.

Operator

Thank you and we have a follow-up question from Mark Griffin from Triangle Capital.

Mark Griffin - Triangle Capital

Hi, I wanted to discuss the recent acquisition where you acquired 88% of Hubei Hang and if you could give us some more information financial on the company and on the electro-hydraulic servo-valves market that will be very helpful. Thank you.

Yang Chen

As the Senior Vice President Mr. Chen Yang just shared some information about the Chinese Servo-valve market. I will translate to all of you. As for the market status of our several products in China, it shows the total number for domestic servo-valve of servo system demand in 2013 is approximately 216,000 sets. 90% of them depend on the import from foreign countries and the domestic supply only accounts for 10% according to the market penetration and the market survey results. Meanwhile calculated by the annual average growth rate is 7.2% after year 2020. National economic target the relevant annual average growth rate of servo products will stay about 10%.

Market demand is optimistic. The market sale in China, in 2013 is around $860 million. It is anticipated that the sales in 2014 and 2015 will go up to $940 million and $1,123 million respectively in 2014 and 2015. The main competitor overseas includes the branded of Moog of USA, ATOS of Italy and Rexroth of Germany. The main domestic competitors include Number 609 Institute of China National Aviation Corporation, Number 604 Institute of China State Ship Building Corporation and et cetera. And above institute and its products, are being for the aerospace industry and military products but their supply amount is less than 28,000 sets annually. Hang-ao plays a leading position among the industry in private company excluding the state-owned enterprise of institute.

Secondly, I want to share some information about the products of Hang-ao. Hang-ao is currently operates well and follows the procedure to the regular production selling and also actively participating researching and developing of the servo system and servo-cylinder or other servo products. We estimated that company will procedure once all the necessary patterns of the servo-valve and servo-system and realize the sales of approximately $5 million. The company will make great efforts to enter into the market of military products and the company is already to all the management combination to meeting needs of the requirements for the listed company. So far I would think those are very well with Hang-ao and we expect to share more information in the next quarter’s earnings call. Thank you.

Operator

Thank you. And this concludes today’s question-and-answer session. So, I would like to turn the call back to management for any closing comments.

Ping Wang

We want to thank you our shareholders and thank you for your continued support and intention. We are confident that our new strategy and execution capabilities will allow us to deliver significant long-term returns for our shareholders. Thank you again to attend this conference call today and we’ll see in the next earnings call. Thank you for all your support. Thank you, operator.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a nice day.

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