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Skystar Bio - Pharmaceutical Company (NASDAQ:SKBI)

Q2 2014 Earnings Conference Call

August 15, 2014 07:45 AM ET

Executives

Christopher Chu - Director of IR

Scott Cramer - CFO

Analyst

John Gregory - SJ Strategic Investments

Operator

Greetings and welcome to the Skystar Bio-Pharmaceutical Second Quarter Fiscal 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Director of Investor Relations. Thank you sir. You may now begin.

Christopher Chu

Thank you operator. Good morning everyone and welcome to Skystar's second quarter results conference call for fiscal 2014. Joining us on the call today is Skystar's Chairman and CEO, Mr. Weibing Lu; Skystar's CFO, Mr. Bing Mei; and Company Director, Corporate Development and U.S. Representative, Mr. Scott Cramer. Scott and Bing will provide an overview of Skystar's results. And then we'll 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, will, should, project, intend, 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 PRC, 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 Securities Exchange Commission.

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 obligations to publicly update or revise any forward-looking statement, 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

Yes, thank you Chris. Good morning everyone and welcome to Skystar’s second quarter call for fiscal year 2014. I will be delivering prepared remarks on behalf of the Company. As a reminder Mr. Lu, Skystar’s Chairman and CEO will be available for Q&A after the prepared remarks. The Company’s unaudited 10-Q was released yesterday and filed with the SEC. Additionally our financial results announcement was released to the market first thing this morning. If you do not have a copy of the release, please contact Chris Chu, our External Investor Relations Representative and he will gladly assist you in getting hold of any of the documentation.

On behalf of Mr. Lu, Chairman and CEO of Skystar, we would like to note how pleased we are to report strong financial results and our operational highlights for this second quarter. Revenues were driven by our veterinary medications line, up 37% year-over-year. This average selling price increased 60% due to increase in sales in our premium priced products.

Additionally Skystar added 48 production permits to its medication line since the period a year ago. Demand for Skystar’s veterinary medications product line remains promising and strong and continues to grow as we ramp our production line to full capacity now that Skystar has received GMP approval for our Huxian plant and production permits in application are being received and approved on an ongoing basis.

Currently we have production permits for 97 products including our strongest seller praziquantel in our veterinary medication lines and 50 permits in the application process. We also have production permits for five vaccines. Production permits that we have in the application process for our vaccine line are expected to be ongoing and received on a regular basis as well.

Skystar stopped manufacturing its veterinary vaccine line manually in our small lab and we transitioned production to our modern GMP certified plant in Huxian. We are capable of very large scale and large batch production. For this reason our revenues from our vaccine line decreased; however, Skystar was able to offset this drop in revenues through sales across this other product lines. The transition of our vaccine line to a modernized facility is a critical and crucial step in executing our core mission to grow Skystar's organic business profitably.

The need to modernize and standardize our manufacturing products in accordance with the Ministry of Agriculture's strict GMP standards, ensures that Skystar remains competitively positioned to assist in China's campaign for improving the safety, health and the quality standards of its food supply.

The ability to adapt to the Ministry of Agriculture's regulatory changes and thrive and producer profitably, positions Skystar as a leader in the animal husbandry space in China and this allows for predictable growth rates for the future.

In moving forward with the Company's growth initiatives, we continue to build infrastructure and make improvements to our other production lines including our probiotic and feed additive line which ultimately will provide a total and complete suite of animal healthcare products that can be sold and marketed through our proprietary franchise based sales channel, our direct sales channel and our indirect sales channel that spans across all 29 farm producing provinces in China.

Our operational highlights for the period include; the vaccine facility in Xi'an, that is the manufacturing facility that is expected to be operational by third quarter 2014. At normalized capacity this facility represents a revenue opportunity of $12 million to $15 million in our vaccine revenues.

Following revisions to the Jingzhou plant, this is our veterinary medicine production facility and in order to be compliant with the GMP requirements, we expect the upgrades for this facility to be completed by the end of this fiscal year.

The Kunshan probiotic facility continues to move forward with its build out, currently the construction and installation of these facilities are almost now complete. The Company expects the equipment installation to be completed by the end of 2014 and manufacturing to begin in Q4. The Kunshan facility does not require GMP certification by the Ministry of Agriculture and therefore we expect production at this facility to begin in Q4.

In September 2013, a third party accounting consulting firm completed the initial field work at our main administrative offices in China, they are helping to draft a new accounting policy, procedures and a new manual in accordance with U.S. GAAP accounting. Skystar intends to complete this project by no later at the end of 2014 and we will continue to conduct quarterly assessments of the state of the Company's financial reporting measures and systems, as a whole.

We continue our awareness campaign for our sales and marketing efforts by using direct mailings to major customers, sending sales teams and presenters to various rural seminars, symposiums and other promotional events.

With this I’d like to turn the call over to Bing, so he can discuss the financial results for Q2.

Bing Mei

Thank you Scott. For the second quarter of 2014 we had a revenue of roughly 14.2 million as compared to revenues of $11.3 million for the second quarter of 2013, an increase of 2.9 million or 25.6%. Overall increase in revenue was mainly due to an increase in sales in our premium products.

Here is the breakdown of this quarter’s revenue by production line. Revenue from sales of our veterinary medications increased by 2.3 million or 36.7%, from 6.3 million for the second quarter of 2013 to 8.6 million for the second quarter of 2014.

Revenue from microorganism product line increased by roughly 824,000 or 20.4% from 4 million for the second quarter of 2013 to 4.9 million for the second quarter of 2014. The increase was due to improved efficacy of our products resulting in increased market demand for our products from our customers.

Revenue from feed additives increased by roughly 262,000 or 50.9% from 514,000 for the second quarter of 2013 to 776,000 for the second quarter of 2014. Vaccine revenues decreased by 492,000 or 99% from 497,000 for the second quarter of 2013 to 5,000 for the second quarter of 2014. It is primarily due to the result of our transition from small scale lab production to large scale factory manufacturing. Our new state-of-the-art vaccine facility has been completed and certified by the Chinese GMP standard, and we expect to have received the vaccine production permit from the government in the third quarter, commencing production shortly thereafter.

Gross profit for the quarter was up 0.4 million or 6.7% from 6.0 million for the three months ended June 30, 2013 to 6.4 million for the three months ended June 30, 2014. Gross margin was 44.7%, down from 52.6% in the same quarter a year ago. The decreased gross margin was primarily due to the fact that revenue growth for the quarter mainly came from the less profitable veterinary medications product line.

In addition the change in the production formula aims to improve the product efficacy with some of our products increased our unit raw material costs result in the increase the cost to produce this product.

Operating expenses for the quarter increased 112% to 3 million or 21% of the total revenue, compared with 1.4 million for the same quarter a year ago. R&D cost for the quarter increased significantly as there was no significant R&D effort undertaken during the second quarter of 2013, thus R&D costs increased by 759.8% to 0.8 million for this period.

Selling expenses totaled 0.8 million for the second quarter of 2014 up by 0.2 million, as compared to 0.6 million for the second quarter of 2013, an increase of 32.6%. G&A expense totaled 1.4 million for the three months ended June 30, 2014 as compared to 0.7 million for the three months ended June 30, 2013, an increase of 97.1%.

Operating income for the period was 3.4 million, down 1.2 million or 25.9% year-over-year. Operating margin was 23.7% versus 40.1% in the corresponding period one year ago. Net income for the quarter was 2.8 million or $0.37 per fully diluted share. This compares to net income of $3.8 million or $0.49 per fully diluted share for the year ago period.

As of June 30, 2014, Skystar has approximately 16.4 million in cash, current assets 107 million and total current liabilities 42 million which resulted in a net working capital of 65 million.

With that I will turn the call back over to Scott.

Scott Cramer

Yes, thank you Bing. We’d like to reiterate our excitement in having such a strong production launch of this quarter and Skystar’s veterinary medication lines for the fiscal year to date. With the sales and marketing efforts and our premium veterinary medication lines on the way, we feel that the ROI for Skystar’s facility expansion is well justified. We also believe that our veterinary vaccine line which is due to begin sales and distribution of products beginning in the second half of the fiscal year will have a similar positive impact in reception.

At full capacity we expect Skystar’s new veterinary medications and vaccine facilities to generate a revenue opportunity of over 45 million. In addition to that these lines are going to have higher margins that should translate to higher net income to Skystar’s bottom line.

Last, Skystar’s recent private placement to a strategic healthcare investor in this space believes strength -- Skystar believes we strengthen our balance sheet and the additional capital allows the Company to seek out avenues of growth including the purchases of new products, new intellectual property and the build out and expansion of our Kunshan facility our probiotics plant. All of this firmly positions Skystar to be a leader in our space. In moving forward with Skystar's business model, having past the regulatory tailwinds of the past two years we are now on track to maintaining a stable pathway to growing revenues through our near-term, medium-term and long-term plans.

Skystar currently maintains business outlook and anticipates delivering an 8% to 18% year-over-year increase in topline revenue for fiscal 2014 as compared to the prior year. The expected revenue range is still in the $46 million to $50 million neighborhood with gross margin of around 50% for fiscal 2014.

With this I’d like to turn the call over to the operator and open up the call for questions-and-answers.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question comes from the line of John Gregory with SJ Strategic Investments. Please proceed with your question.

John Gregory - SJ Strategic Investments

I have a couple of questions. First of all I noticed on the balance sheet that you have a prepay for acquisitions of 3.25 million. Does that mean that you in essence already did a contract to buy a product or what is that?

Scott Cramer

Bing would you like to address that?

Bing Mei

Yes. The prepayment for acquisition is a contract of third party to help us to identify some strategic acquisition in the path. So this is a prepayment we made then.

John Gregory - SJ Strategic Investments

Then the other question I’ve got is based on, Scott what you’re saying is the potential for revenue growth as these things become fully utilized over the next three to five years. Am I right in assuming and basically what that’s saying is that Skystar has the potential to get up close to 100 million in revenue over the next three to five years?

Scott Cramer

That’s exactly what we’re saying. So just so we’re clear Dr. Gregory is the revenue opportunity that we referenced in our script, that we referenced in our previous presentations is revenue in addition to the revenue that we are currently generating.

John Gregory - SJ Strategic Investments

Right well and if it’s high gross margin and that means, I know you guys aren’t giving projections out three to five years but as an investor I might be able to assume that might even be $3, $4 earnings per share with that type of increase.

Scott Cramer

Yes, I don’t want to speak to any calculations on the EPS. However the main premise of what you’re saying is accurate. As we change our product mix, and the revenues from the probiotics, the opco cultures and vaccine lines become more prevalent at a bigger percentage of our total revenues, we should see an increase in margins which should increase to -- flow to the bottom line of net income which should flow to EPS.

Operator

(Operator Instructions). It appears we have no further questions at this time. I would now like to turn the floor back over to management for additional or closing comments.

Scott Cramer

Great. Operator, thank you so much. We want to thank everybody for joining in the call here with Skystar. We are very excited to finally be on track of building out our facilities starting production of our new vaccine medication lines, launching our line for our agriculture line and getting the build out of our Kunshan Manufacturing facility. This is a very exciting time for Skystar. As referenced earlier we see a definitive path to increased revenue, higher margins and increased income. We’re very excited about executing this plan over the next many years and we look forward to having you guys on our next call. Again thank you for your support of Skystar. Chris Chu will always make himself available for any questions you may have in the interim and we look forward to seeing you guys on our very next call for Q3. Thank you.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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