Sino Agro Food's (SIAF) CEO Solomon Lee on Q2 2016 Results - Earnings Call Transcript

| About: Sino Agro (SIAF)

Sino Agro Food, Inc. (OTCQX:SIAF) Q2 2016 Earnings Conference Call September 2, 2016 10:00 AM ET

Executives

Solomon Lee - President, Chairman and Chief Executive Officer

Daniel Ritchey - Acting Chief Financial Officer

Peter Tan - Executive Director and our Chief Marketing Officer

George Yap - Independent Director

Anthony Ostrowski - Chief Scientific Officer

Analysts

John Harold - Harold & Associates

Operator

Welcome to Sino Agro Food’s 2016 Second Quarter Financial Results Conference Call. During this call, the CEO, Solomon Lee, and Acting CFO, Dan Ritchey will provide an overview of results from operations and highlights for the quarter ended June 30, 2016. We will then open the lines for question-and-answer session.

All forward-looking disclaimers included in the company’s 2015 annual financial and operating results press release, dated May 16, 2016, which is available on the company website at www.sinoagrofood.com, are in effect and incorporated throughout the duration of this call as an extension of the material discussed and provided in the press release, and in the 2015 10-K filing available via the U.S. Securities and Exchange Commission’s EDGAR system.

In addition to Mr. Solomon Lee and Mr. Daniel Ritchey, on the call are Dr. Anthony Ostrowski, the Chief Scientific Officer; Mr. Erik Ahl, Financing European IR; and members of the Board of Directors, Mr. George Yap, Mr. Anthony Soh, and Mr. Nils-Erik Sandberg.

Questions will come from the phone lines and from those submitted from the web facility. We will have an hour for the call, so in the interest of fairness, please only ask one or two questions at any time selected from the queue.

I would now like to introduce Mr. Solomon Lee. Solomon, please go ahead.

Solomon Lee

Thank you, Jerry, and thank to everyone for attending today’s conference call. On today’s call, our Acting CFO, Mr. Daniel Ritchey will make introductory comments on the quarter before handing it back to me and then to questions. Dan, please go ahead.

Daniel Ritchey

Thank you, Solomon, and thanks, everyone, for joining us today for our second quarter 2016 conference call. Let me first by recapping the quarter’s financial results, which are well represented in the accompanying slide. If you do have the website, I’d advise you go to it in order to be able to help follow along, it would make it so much easier for you.

Highlighting some points of interest and then I’ll make a couple of closing remarks before handing it back to Solomon.

Slide 4 please. The second quarter 2016 revenue totaled $124.3 million with a gross profit of $30 million and revenue from the sale of goods totaling $105 million, which is a record high. Revenue and gross profit, both represented a 37% increase when compared to year-over-year.

Gross profit margins have stabilized around 24% compared to Q2 of 2015, which stands within a 2.3% range on either side of any quarter since 2014. Fully diluted earnings per share were US$0.82, representing a 61% increase compared to last year at this time.

Slide 5 please. Q2 results showed a mark turnaround from the previous quarter’s results, which stem from precipitous drops in domestic beef prices and a few other weak areas. Compared to last quarter, revenue, gross profit, and earnings per share increased 73%, 59%, and 110%, respectively. These results not only indicate the quarter-to-quarter variation in underlying pricing supply availability, other external conditions, and differing production cycles across quarters, but also the company’s ability to turnaround the dampened conditions experienced throughout the first quarter of this year.

Slide 6 please. During the second quarter, the company achieved record volumes across its main product lines, namely aquaculture, value-added beef processing and beef imports, and reestablishing growth in its core businesses.

Slide 7 please. I’ll first start off by recapping aquaculture. Revenue from the sale of goods increased by 51% year-over-year to $28.9 million. Quarter two seafood harvest volume grew 293% year-over-year to 4,723 metric tons from 1,202 metric tons. The steep increase is explained by the harvest of 3,426 metric ton of mixed finfish, mainly highly demanded perch species and other high – higher quality carp species. These are purchased when close to harvest size for final grow-out in RAS tanks, resulting in a high annual turnover of fish biomass.

Mixed finfish generated revenue of $14.3 million, almost 50% of the total aquaculture sale of goods. Quarterly gross profit in the Aquaculture segment increased 35% year-over-year to $6.1 million. The average sale price of mixed finfish amounted to U.S. dollars $3.80 per kilo, and delivered 22% gross margins – gross margin equal to eels and and slightly higher than sleepy cod and prawns in the quarter. The company expects to maintain or increase production volume for these species throughout the year.

Only the gross profit from sale of goods from Fish Farm 1 is calculated in the manner typically provided consolidated operations; that is, revenue less cost of goods sold. Gross profit derived from all other fish and prawn farm operations is based on a standard mark up of between RMB 10 and RMB 25 per kilogram. Once the acquisitions of these farms are completed, both the standard mark-up of Capital Award and the typical farm mark-up will be included in our pro forma.

Slide 8 please. Next, we’ll go on to beef operations. The company continued to emphasize its value-added imported beef segment, while transitioning its herd of live cattle to premium lines. Q2 value added processing increased to 2,943 metric tons versus 2,177 in Q1 2016, and 1,822 in Q2 of 2015.

Quarter-over-quarter revenue from the value added processing increased 55% to $25.9 million, accounting for 67% of the total SJAP revenue. Driven by regional farmers recognizing its quality and effectiveness, revenue from our fertilizer and feedstock increased year-over-year to $6.8 million, or 58%, accounting for 18% of the SJAP revenue. These areas supported an overall segment revenue gain of $2.2 million year-over-year often to overcome decreases from the sale of live cattle.

Revenue from live cattle totaled $6 million, a 16% of the total SJAP revenue. While a decrease of $9.3 million from year earlier sales, revenue increased $3.3 million from the previous quarter moving closer to higher-margin sales of Wagyu and our 550-day grain fed Angus cattle. Sales prices were lower than the year earlier period, but have since recovered to RMB 28 per kilo off their lows since the first quarter.

Quarterly gross profit in the integrated cattle segment increased by $1.5 million, or 17% to $10.5 million year-over-year. Value added processing contributed 63% of gross profit and livestock being 27%. The price or lightweight domestic cattle averaged RMB of 28 per kilogram in the second quarter of this year, down from RMB 31 per kilo in Q2 of 2015, but up from the Q4 2015 average of RMB 25 per kilo and a low of RMB 15 per kilo during Q1 of this year.

With some easing of pricing pressures having been caused by the recent spate of heavy imports, we anticipate better results in this segment and expect to add local beef to value added processing later throughout this year.

Slide 9 please. The import-export and trading sector, revenue increased by 153% year-over-year to $19.7 million, with import volume growing to 1,518 metric tons from 490 metric tons. Sales of imported beef increased 233% year-over-year to $14.4 million as a result of the revolving trade credit facility for the Shanghai Distribution Center being utilized with more products moving through the system.

Higher value crayfish and seafood were imported as new supply channels began to come online, accounting for 20% of the total trading revenue. Imported seafood sales are expected to exhibit a similar growth curve to beef. Quarterly gross profit in the Trading segment increased by $1.4 million, or a 156% to $2.3 million year-over-year.

These imports primarily high-grade Wagyu and grain fed Angus from prominent Australian suppliers accounted for 70% of the gross profit, while imported seafood accounted for 30%, gross margins were around 11.5%. Each of these three business segments that is aquaculture beef operations and import-export trading benefited from separate factors of business emphasis.

In the case of aquaculture, the main improvement in Q1 optimizing the sales mix, given prevailing prices and availability. In beef, while domestic prices began to recover, the main benefit arose from the ongoing focus on value added processing, while transition to a premium herd comes closer to recognizing revenue. And trading benefited from distribution efficiency, or use of the trading credit line and use of new sources of imported seafood. All these factors are expected to continue to reestablish our year-over-year growth in these core businesses.

Slide 10 please. General and administrative expenses decreased by 33% in Q2 of 2016 to US$3.6 million, or 2.9% of revenue versus US$5.4 million, or 5.9% of revenue in Q2 of 2015. The cost improvement was primarily due to a decrease in office and corporate expenses, primarily for overseas professional services.

Slide 11 please. Looking at the balance sheet, working capital of $332 million increased 23% year-over-year and 3.3% quarter-over-quarter. Year-over-year current liabilities reflect a return to lower levels the company experienced in previous years. These levels are expected throughout the remainder of this year. Stockholders’ equity increased by 20% year-over-year to $515 million, or $21.81 per share, based on the weighted average number of fully diluted outstanding shares in quarter two.

Slide 12 please. The company continues to anticipate major, including building a canning factory and potential add-on M&A with a target company located in Qinghai, both to further expand value added processing capabilities at SJAP. Construction of Prawn Farms 2 and 3 continues building added production capacity.

The company plans to stock cattle at HSA beginning in the late third quarter or early fourth quarter. A side attribute to a growing herd is the cost benefit provided to manufacturing fertilizer, because more raw materials would be produced in-house with less having to be purchased from outside sources. We continue making progress to restructure several sets of joint venture assets, each with sufficient critical business standing and size as standalone companies with every expectation with each as a quarter to a multiple to their individual net assets.

The company has been working closely with one of the largest financial institutions in Southeast Asia towards securing debt financing and initiating an IPO exercise for the Tri-way carve-out for the purposes of acquiring farm assets and rights to Fish Farm 1 and Prawn Farms 1 through 4 or 1 through 3 in addition to the development and acquisition of assets and rights to Prawn Farm 4 and subsequent related future farm developments.

The additional time needed to complete this exercise serves both the lending institutions as well as the company’s better interests since a combination of debt financing and pre-IPO funding is anticipated to secure the majority of funding needed to complete the acquisition, providing adequate securities for both parties, while accelerating development and improved revenue streams through both project development services and subsequent product sales.

Thus improving Tri-way’s capital market values sustain through earnings will be one of its main results. The company anticipates closing on the loan sometime within later Q3 or early Q4 of this year. On the beef and cattle side with SJAP, the company has been working closely with well regarded Securities Firms, a CPA firm and a Chinese Law firm to carve-out and list SJAP through the National Equities and Exchange and Quotations Board, abbreviated NEEQ, which operates the National Third Board exchange in China.

There are number of milestone categories that it – that take place. The company anticipates completing these four submission to NEEQ within Q1 of 2017. We look forward to reporting milestone achievements in these endeavors as they occur and/or are warranted.

I’ll now turn the mike over to Solomon, who will update you with his thoughts on Sino Agro’s progress. Solomon?

Operator

Solomon, you may have your line muted. Please go ahead.

Solomon Lee

Oh, I’m sorry. Okay, thanks, Dan. Please turn to Slide 15. This quarter shows significant quarter-over-quarter and year-over-year gains in revenue and gross profits almost across the Board, this was mainly from implementing our previous month’s action plan, thereby realizing solid sales performance in the following areas, value added processing of imported beef, concentrated livestock feed, aquaculture of finfish, new vegetable products, and trading of imported beef.

Recognizing that market conditions fluctuated for the protein food industry, this quarter’s result present a solid baseline performance going forward, given the current mix of strong sales, stabilizing gross margins, and corporate level cost control.

On last quarter’s call, I set the following. We expected with challenging external factor to improve over the remainder of 2016, and our confidence are positive improvement across many business segments.

The outlook for the remainder of 2016 benefits not only from possible improved product mixes and pricing. But also because a newly constructive facilities becoming productive, new sourcing avenue becoming available, and some recent positive development already put into actions.

Some of these changes came into evidence faster than we had anticipated. Foreign import pressure on domestic beef prices appear to have abated to a degree. Just this week, we saw domestic cattle prices rising close to 2015 past average of RMB 31 per kilo and the rapid rise of import beef prices. For example, Australian grass-fed quarter cut beef reached an average of RMB 36 per kilo, based on total cost insurance impact due to the opening of the U.S. market for the Brazilian beef, causing decreased import of beef from Brazil to China.

Changing the mix of seafood price saw significant benefit in the quarter. Beef and seafood sales within the trading segment reached a significant higher sustainable level through progressive development being materialize, including the new sourcing for high-quality seafood. As reception continues to broaden, this business show sustainable growth characteristics for reliable and steady 10% to 14% margin business. With additional economic scale, both in volume and productivity, the potential to increase this margin is possible.

We are working closely with another well-established e-commerce operator with a goal of developing a main brand and label for our pre-packed frozen seafood to distribute directly to thousands of restaurants starting in 2017. The current customer lease of thousands of restaurants will assure sustainable profitability for increase in production at Prawn Farm 3 and Prawn Farm 4.

In the longer-term, our project development pipeline of business is robust, with anticipated booking up to US$310 million worth of project development form now to year-end of 2018. All our businesses demonstrate solid performance throughout the quarter. Though each was presented with different challenges, each was profitable, each arriving at compatible margins. We believe these margins are sustainable, given our continued operational flexibility and given moderately consistent external conditions, let alone a continuation of some of the positive signs we are beginning to see.

Individually, our businesses are poised for organic growth. Collectively, they provide a solid core backdrop to add facilities, seek acquisitions and enhance scale. The expected jobs provides a healthy environment for carve-outs, which are working toward fruition while also working towards each evidently exhibiting a second generation for growth.

The erosion of trading business is instructive. The fruit of our efforts including obtaining financing necessary to ultimately accelerate meeting product goals are now being realized. Those efforts were unlike current efforts to accelerate production in Prawn Farm 3 and Prawn Farm 4, but also ultimately design to speed and enhance the value of aquaculture carve-out. We remain highly confident about closing a debt facility for the Zhongshan Prawn project.

In developing our business, normally we will build facility to a signed capacity then fund working capital using the cash flow of further development businesses then ramp up sales to production capacity. If we can borrow fund on favorable terms, this can expected to posses quite a bit.

Based on the successful completion of recent source of debt financing and on a subsequent IPO, our current forecast for the Tri-way carve-out project, the company well on its way to achieving US$1 billion in market capital value. This assumes an earnings multiple of 10 times of Tri-way by mid-2018, which is about 8 times SIAF’s present capital market value.

As Dan said, we’re making progress toward carving-out and then spinning out our aquaculture assets. In this case, we’re now discussing both the debt financing and our late equity financing in the form of pre-IPO investment while these negotiations being more considerations and perspectives into the picture, the combination were optimally towards expecting a variation tied to and evidently logical component than would otherwise be the case.

We remain confident about closing the loan by the end of the third quarter or in the early part of fourth quarter. Any pre-IPO investment would be priced with consideration of both embedded asset value of the aquaculture facilities within SIAF and the projected market value based on financial metrics and market conditions. And, of course, we would expect a further inclusion of capital to add value to any subsequent IPO pricing not only because of balance sheet improvement, but also because hardening potential in the mid – intermediate terms.

We’re also making progress on SJAP spinout. Like the aquaculture carve-out, we are dealing to freshen the business attractively. If domestic beef prices continue to rise, our former property of network will become healthier at the same time the transition to higher quality cattle will either supplement or add to our market position providing an extra layer of support to this segment of our business.

Both often bode well for the fertilizer and livestock feed businesses and included in our anticipated acquisition in the newly carve-out entity, we will promote significant goal in our already growing value-added processing business. In this respect, after discussing SJAP’s carve-out prospect with financial market consultants, our understanding is that the average market value of four tier industry on the third board [ph] lies between 27 and 37 times earning values, which is more than encouraging to continue moving the process forward.

Now, moderator, let’s open the call for question now.

Question-and-Answer Session

Operator

Thank you. In addition to Mr. Lee and Mr. Richie, Dr. Anthony Ostrowski, Mr. George Yap and Mr. Nils-Erik Sandberg are on the call. We will take questions from phone callers and from the web. Callers your lines are now open. [Operator Instructions] And our first question comes from the line of Ingemar Skaret. Please go ahead. Your line is now open.

Unidentified Analyst

Thank you. Thank you for taking my call. I have some more questions regarding the aqua carve-out to Solomon. Could you please elaborate a bit on the structure of the deal? As I understand from previous conference calls, you have said that now 100% of the farms will be owned by Tri-way and instead the Chinese owners will ultimately own 25% of Tri-way, is that still correct?

Solomon Lee

No, we are working out the final figures at this stage because the variation appraisal we are working on now will determine the exact percentage. But in our historical understanding, on a ballpark figure, the asset will be injected quite evenly, the value of 51% owned by Sino, 51% owned by the Chinese owners at the moment. So the exact figure will come out most probably by end of September or early sometime in October when the appraisal value of that gets the value on to the right figures.

Unidentified Analyst

Okay. But Sino Agro Food had the option to acquire up to 75%. Is that still in place, so we have a chance to increase our holdings from 50% to 75%?

Solomon Lee

No, they’re subject to some of these available debt finance incoming, but debt is directed to Tri-way. So it’s not 100% at the moment those figures, but it will come out in some time. It still depends on the appraisal. When they work on the appraisal because in the appraisal, there will be certain additions that might be provided by Sino or provided by some of the Chinese partners in past you see. So if we can just wait for another month or two, when the appraisal being done, then we know exactly how to calculate. But on the ballpark it’s – hoping it’s what we predict like before, you see. But whether we got enough sufficient money to take up others, we will see and how we negotiate, we will also see within the period of time.

Unidentified Analyst

Okay, and maybe…

Solomon Lee

Yes, we have option available.

Unidentified Analyst

Okay, that’s good. Is this structuring of the deal one reason for the delay of the loan, while it’s taking some time before the loan, is in place is it because the structure isn’t 100% finalized?

Solomon Lee

No, not that because we can’t afford to pay for everything just not, you see. We just want to use your money [ph] to do the job – to do a better job, that’s all.

Unidentified Analyst

Okay. Okay, thank you. I will wait in line for my next question.

Operator

Thank you. Our next question comes from the line of Robert Gustavus. Please go ahead. Your line is now open.

Unidentified Analyst

Thank you. There is a lot of – always a lot of promises, a lot of things going on and a lot of things to look forward to. And when we look at how the share is trading at the different stock exchanges, we can see a few thousand shares is trading everyday, which is not very much. Do you feel any urgency when it comes to making the stock actually investable, it’s pretty obvious to the market, in the market crisis that people don’t think the stock is investable, it’s probably because the corporate governance is not in place and it’s probably the people don’t really trust what’s going to happen, because if people really thought that things were to happen as you said it were happen to the stock would be invested in by many more people.

Do you see any urgency in this because there is nothing happens with the share price and the share price and investability of the stock is very important to the shareholders. You’re talking about revenue growth. But do you understand that the profit growth per share is what really, really counts in the end and if that stock is investable for shareholders for institutions and other investors. Otherwise it’s all about hope and trust and faith. And it’s been so for many years, and nothing really happens, there is less and less trading in the stock. Do you – is this a concern for the company and what is the reason for the delays with the financing that you’ve been promising for a long time now, since the last call?

Solomon Lee

Dan, I think, I pass this call to you, because we have analyzed the situation many times within the Board and the management. I think Dan will be the best guy to give a bit of a story on this one. Dan, please.

Daniel Ritchey

Yes, I mean, Solomon just alluded to, we’ve had these discussions on numerous occasions. And again, I will reiterate for, I don’t know which – how much time – which tine this will be. But the company, its management, its board, we are focused on shareholder value.

As to the ability to be able to go in and to the market, let’s just use as an example in terms of looking at a share buyback plan. The company does not have the wherewithal or the means nor would it be prudent at this stage of the game with everything going on between the discussions we are having with pre-IPO investors and financial institutions to think in terms of using the monies to buy shares back – Sino Agro shares back out of the market.

Unidentified Analyst

I didn’t say that, I didn’t ask for share buy back [Multiple Speakers]

Daniel Ritchey

No, I’m not implying, let me finish my point and then you can come back and ask me a follow-up after that. What I want to say is this, is that, the company, the ability to be able to get Sino Agro Food off of dead center, in my opinion, it’s going to take a period of time. I mean, we – first of all, we’re on the OTC markets, which is not going to attract your institutional investors to come in and take a position.

Also, the same thing can be said for the Merkur Market as well. In that respect, we are going to be and I’m already starting to work on lining things up to be looking to move on to the senior exchange. In addition to that, we also know that we have to be beef up our investor relations efforts as well, and that’s something, which we’re also working on.

And we have several different irons in the fire going on at one time. Now, I’m not going to say, these are going to – any one of these themselves are going to be a solution, they will not be. But in combination over a period of time, if I would have to suspect that, we’re going to probably and this is just my gut on this one. We’re probably going to see an appreciation in price and value for the likes of SJAP and for the likes of Tri-way, probably what we’re going to see for the likes of SIAF.

But SIAF, as the mother company, as the owner in each one of these entities, will eventually be able to see some of that appreciation coming into its play as well. That’s my view as to the timeline that we’re looking at. It’s not to say that Sino Agro Food will not appreciate in price and value through – or in price throughout this period of time. But I do think most of it is going to come down to three things, four things, being able to find ourselves on a – on an exchange, which is going to be attractive to institutions to be able to make an investment.

Number two, to be able to have our – to be able to beef up our investor relations efforts. Number three being able to have things moving forward and being able to show that, as an example, the debt financing, et cetera, is coming through for Tri-way and SJAP.

And the fourth item is that, eventually, we will hopefully be able to have enough funding to initiate a share buyback. And with that, I think, we’ll start then seeing Sino Agro coming back into where it should be today. But obviously, for the forces that beef has not been able to be made to happen.

Unidentified Analyst

Yes. You say eventually and we heard eventually in the future and so on. So you think – so you actually think, it’s – the problem is the Merkur Market or the OTC and not the lack of corporate customers and the fact that the company is a one man show run with one person holding over 80% of their votes. You don’t see that as an issue with no independent board members that can have any actual would say so.

Daniel Ritchey

If we had an individual [Multiple Speakers]

Unidentified Analyst

I’m just looking at the last compensation plan that you had, which is sort of normally used for compensating good results and that is – good results has been shareholders make money. And the shareholders in this company hasn’t been making money for like five years.

So it’s like eventually, eventually, eventually, there must be some insight to that there is some problem. There has been a lot of trading on the Merkur Market when that one started in the beginning and where a lot of new investors coming in, institutions coming in, et cetera, et cetera. And the company has been promising corporate governance and because that is the key to making a company invest in both, and nothing has actually happened, because it’s like, it’s – since Solomon is too afraid to lose control.

We all appreciate what he can do operationally. But obviously, you haven’t been able to to fund the company in an efficient way with low interest rate normal loans or anything. And when you kept came into the company, everybody was really happy, because now all of these things were to be addressed and nothing really happening in the practical, at least, as we can see now, you talk about things are going to happen, but they actually don’t capitalize, or do you have a different view on the…?

Daniel Ritchey

I’ve already seen improvements going on from quarter-over-quarter. What really is amazing to me is that…

Unidentified Analyst

What is corporate governance implementation?

Daniel Ritchey

Operations are not given, they are fair due. And in terms of….

Unidentified Analyst

What is the corporate governance implementation? On the corporate governance…

[Multiple Speakers]

Solomon Lee

Excuse me, gentlemen, if I may just interpret, I’m an Independent Director, and I can tell you that I have led this change in the direction of boarding from an intuitional bank. So the independent directors have been that job, okay. The only way you get information from that is independent directors have done nothing on this company.

Unidentified Analyst

No, but you’ve been looking for many years, you haven’t landed on one yet, at least…

Solomon Lee

We have a good deal with a bank, so just be patient and then as you know…

Unidentified Analyst

I’m not really being patient after five years. I want results.

Solomon Lee

It’s not plan for you to speculate and necessarily some reason at all, for what – rather you’re making these allegations.

Unidentified Analyst

You have been promising things that have no deliberates on debt, there has been no deliberates on…

Solomon Lee

What makes you think that bank loan is not going to cheap [Multiple Speakers]

Peter Tan

This is Peter. Let me interject for a minute. This call is not for private conversation. Robert, maybe we can set up a…

Unidentified Analyst

This is not private conversation, I want to know what’s been done on the corporate governance?

Solomon Lee

This is not a public conversation here. Because this particular person has made an allegation, directors have no influence in this company, which is not true at all. There is [Multiple Speakers]

Unidentified Analyst

Well, it seem to be very clean, so if somebody got so late to present. What has been done corporate governance wise that you call Mr. [indiscernible] for that and make this company investable. What has been done?

Solomon Lee

We’re getting a very good bank loan, that’s it, okay.

Unidentified Analyst

You’re getting. But what have been done? What has been actually company’s corporate governance wise?

Solomon Lee

It’s been done, it will be done, that’s it. You just got to be patient. If you know the work with the bank, you have to be patient. You have to deliver good information to the bank and the bank will make the necessary decision.

Unidentified Analyst

But I’m talking about the corporate governance. I’m talking about corporate governance.

Solomon Lee

That’s part of corporate governance. The independent directors have done a good job bringing in a bank, okay. So let’s be patient and I’m sure everybody – we’re very happy that we’ve got a bank loan…

Unidentified Analyst

You don’t have a bank loan.

Solomon Lee

…which is very favorable and on good terms, okay.

Unidentified Analyst

You don’t have a bank loan. You don’t have a bank loan yet.

Solomon Lee

We will have a bank loan. That’s what we said.

Unidentified Analyst

You have to be respectful to the owners and talk about patients after five years of promising different things and not following through.

Solomon Lee

Well, I’ll take my piece and from an independent director’s point of view – I don’t agree with your point of view.

Unidentified Analyst

You’ve got three times the share count now than the 2010 presentation of what you though you would have. So please don’t talk about patience.

Operator

Hello, sorry. So thank you very much. Now we’ll go to our next question from the line of John Harold of Harold & Associates. Please go ahead. Your line is now open.

John Harold

Yeah, you guys just talked about uplisting to a senior exchange. Yet, you’ve been rejected by NASDAQ, not only that, you didn’t even give us a reason as to why you were rejected by NASDAQ. How do you plan on uplisting when they’ve already told you guys to take a hike?

Daniel Ritchey

Well, there was never a formal rejection by NASDAQ. We withdrew the application at that time, because at that time after having discussions with NASDAQ, we both agreed that in order to be able to attract market interest in the company, we needed to be able to move toward a larger auditing firm, either preferably a top 10 or a top 20. In the interim, we brought in ECOVIS. ECOVIS in right now worldwide at 17, 18 in the world. And so we now are positioned to be able to venture either to NASDAQ or to New York Stock Exchange.

Unidentified Analyst

So you’re saying you withdrew your application, because you wanted to wait to get a top 10 or 20 auditing firm. Why don’t you think of that before you applied?

Daniel Ritchey

Well, at that time the opportunity of getting a top four firm, if you recall, had been almost impossible. Big firms in China were under scrutiny by the SEC, we couldn’t even get one to even take a call let alone, work out a negotiated agreement with one. But after that, after the issue with the SEC has settled with the big four and the other auditing firms working in China, now the doors have opened up. How else should we’ve been able to get ECOVIS in the meantime, if that hadn’t happened.

Unidentified Analyst

You don’t need a top 10 or a top 20 auditing firm to do uplist the NASDAQ. It’s not that hard of a process.

Daniel Ritchey

Trust me. We were meeting with NASDAQ in D.C., so you can’t tell me that what they told me across the table isn’t – didn’t happen, it didn’t exist. Yes, I know what I’m talking about and I know what they’re talking about.

Unidentified Analyst

Also back in the first part of June, you said this launch should be announced within the next couple of weeks, okay? Getting a bank loan doesn’t take months and months and months. You go into the front doors of the bank, you lay in material in front of the banker, you show what you’ve got either says, yes or he says no. This isn’t rocket science.

Daniel Ritchey

Well, it would be – it wouldn’t be rocket science except for the fact that the bank also has been looking to help the company underwrite an IPO. And as a result of that, we now have to be dealing with two fronts, both the debt side and the equity side.

So we have now two groups of the bank that are working with us coordinating this effort. That cannot be done overnight. no matter how much we think it can be or dream that it can be. It’s just impossible. The bank would not be able to do it even if they wanted to do it that quickly.

Unidentified Analyst

So the stock is so cheap as you guys say right here, why am I not seeing any Form 4s being filed insider buys or to directors, officers, Solomon?

Daniel Ritchey

Well, I speack – I can’t speak for others, but for myself, I think, I hold quite a few. So I’m not looking to buy more at this point in time. And I haven’t sold either, which is also an option that I have as well, because obviously, I see that – I see the benefit going forward.

Unidentified Analyst

How come George Yap has never bought a share?

Daniel Ritchey

I think, I can speak, but I believe George has filed a Form 4, if I’m not mistaken.

George Yap

I’m so involved in some of these transactions. I can’t make a buy or sell at the moment, okay? Well, I normally would buy. I don’t buy now, because I mean, one of them is bank, okay. So while I’m doing this thing, I cannot see the benefit when the share price rises.

Unidentified Analyst

So you’d be patient?

George Yap

We know how banks work when you have an investment bank or commercial bank working to get us. Then you know how these things are done, okay?

Unidentified Analyst

I think, you guys ought to just go back to the way it used to be just dilute the – still living daylights out of shareholders and just sell as much stock as pausing [Multiple Speakers]

Daniel Ritchey

No dilution with the bank loan. So please understand there is no dilution with bank loan, okay? [Multiple Speakers] okay, really different. It’s very, very attractive to us, because they don’t improve our market valuation. That’s what we’re trying to do as a Board. Whoever has got this construction that there’s not corporate governance, it is not true, that’s what I’m telling you. Independent directors they work very hard. Every one of them work very hard. There is team work in this company, believe it or not. I’m trying to give opinion, but I disagree with you completely, okay.

Operator

Thank you very much for your question

Daniel Ritchey

Can we move on just more of questions.

Operator

Yes, please go ahead.

Unidentified Analyst

Okay. First question, you’ve mentioned some new building projects, such as abattoir in Madagascar, the Cannery in SJAP, and a small distribution center in Northeast China. Can you tell us what the progress on these are and when they might expect to generate revenue?

Solomon Lee

Well, the Madagascar project is moving along at the moment we’re just doing the cropping, and agricultural department – division over there. In fact, by end of this September, there will be another engine going down there we’ll start to do the construction work on there, for sure. But right now we want to ensure the stocks are being the goat and the sheep stocks are being broad our expectation. So that’s from Madagascar.

But for the northern side, we’re actually doing quite well. As I mentioned to my directors and our group of management, this month we started to have some processed prawns and scallops being picked to our brands and label, which we will – we intend to start launching it with – under the e-commerce brand here by next month sometime to start to see that how the reception that would be. In fact, over these new channels, I’m moving quite to expectation. Hello?

Operator

Hello, thank you. Are you ready to take further telephone questions?

Daniel Ritchey

One more from the web. And what are your highest priorities for capital expenditures going forward?

Solomon Lee

Well, actually the highest CapEx going forward is fishery department, that that consumes most of our CapEx at the moment. But I think that’s the most urgent one for the company to look at that, because of the IPO of the fishery, we must consolidate all the revenue, all the farms into Tri-way. In order, we have – we will perform better for better market federation eventually. I think that is the priority on the CapEx at the moment.

Daniel Ritchey

Okay, Jerry, you want to go back to the phone calls.

Operator

Thank you very much. Before we go to the next telephone question, if I could remind participants to please limit themselves to one or two questions in the interest of fairness. Thank you very much. Our next question comes from the line of Andrew [indiscernible]. Please go ahead. Your line is now open.

Unidentified Analyst

Hi, I have a question regarding the convertible loans and from what I understand, Fredrick –as Fredrik Daniel [ph] says you cashed out some of the loans, could you please comment on that, and what is your situation on that?

Solomon Lee

Dan, can you please address to that question?

Daniel Ritchey

Yes, not a problem. Let me again reiterate the fact that ECAB works continuously with the company in terms of not only the financing that has been provided, but also in terms of continuing to help the company with some other financing ideas as we move things forward.

That being said, there was a conversion of some of the shares when the share price was at a more attractive level. And since that time, the ECAB and the company have been negotiating of other financing pre-IPO financing deals. And there’s no reason as to say that that the – that, in addition to what has already been provided to the company will not continue with additional funding in the future. Although, as I said, these are still in discussions, this is still being negotiated, but that’s where things stand at this point in time.

Unidentified Analyst

Excuse me, you are saying they’re converting some money to shares or they just catching out?.

Daniel Ritchey

No, they have the option to convert or take cash. It’s their choice in respect to the interest and the principal. And that – but it doesn’t mean that when they do a conversion that they have to convert the entire principal or the entire interest. They can indicate as to how they would like to handle any conversion at anytime, and that’s what has happened at this point.

Unidentified Analyst

So you’re saying they did convert?

Daniel Ritchey

There was a partial conversion, that’s correct.

Unidentified Analyst

At what price?

Daniel Ritchey

I would have to go back and pull that for you to find out, for sure, but it was when the price was well above their conversion rate of 9.90 a share.

Unidentified Analyst

Okay, thank you. That’s all my questions. Thank you.

Operator

Thank you. Our next question comes from the line of Ingemar Skaret. Please go ahead. Your line is open.

Unidentified Analyst

Thank you. I have a question for Tony Ostrowski, if he’s on the line.

Anthony Ostrowski

Yes, I’m.

Unidentified Analyst

If you could give us an update on the status of Prawn Farm 3, how it looks and what happened to the first talkings have they been harvested and so on?

Anthony Ostrowski

Okay. Okay, good. Let me answer that question by first giving you a sort of a sense of what we are doing with our operations in farms, as we sort of prepare for this consolidation under our Try-way. Now, all our farms are currently being reconfigured and or reassigned and we try to work as one contiguous unit rather than independently as separate farms. This is part of the plan of currently to maximize profit margin and one of the reasons why we’re so flexible with our operations.

So because operationally, we always target to maximize our profit margin with our choices species and residency farms and our systems in the tanks, as you all know. So it’s better to speak of the progress of the mega farm and Prawn Farm 3 and going forward as sort of a collective of all farms under Try-way. So like we use, Prawn Farm 2 is our hatchery for prawns and shrimps. Fish Farm 1 and Prawn Farm 1 are now focusing on stage 1 and stage 2, primarily as a nursery for our finfish species as are the ponds at these sites and the ponds that are operated by contract farmers.

So for finfish species, Prawn Farm 3 and Prawn Farm 4 eventually will operate more as a final stage 3 and stage 4 grow-out. And in the case of Prawn Farm 4 as of fattening and declaration facility or purging facility, don’t have the carcass composition for flavor and taste, okay.

So at prawn farm, we currently, we continue to stock prawns. We stock prawns since May as well and shrimp, as before utilizing the nursery stage 1 to the stage 4 grow-out, as I’ve shown previously. But we’re also including final fattening stages as of species Jade Perch and declaration or purging of carps.

Now, we saw in the Q2 reporting on the slide that we presented today, we got margins very high margins of 22% from mixed species and this is primarily a mixture of the lower value carps. We purchased these animals at a larger size from the contract farmers who are raising the animals in ponds, which raising animals in pond sometimes resulted in off-flavor of the animals.

So the off-flavor comes from, these new tablets are produced primarily by blue-green algaes that grow naturally in the ponds and give sort of the flesh of muddy/musty or kind of when you taste. And then that taste affect the price negatively. However, as I mentioned, we can depurate or perch these off-flavors, it’s been an exposure time and water that does not have in the satellite like our RAS system. And it goes away faster. We don’t see the fish, and the fish don’t have a high content.

So we get these fish at a larger size, put it in our RAS tanks, and this is what’s happening at Prawn Farm 3 for a month and either stage 4 – 3 or stage 4 grow-out to remove the off-flavor. And we also don’t see the fish much over this period. So, therefore, there’s also very low cost for caring of the fish.

So as a result, we get an improved price and the prices that we’re getting are improved price from about ¥25 to ¥43 or RMB per gene, or that’s about a half kilos. So it effectively turn this lower moderate value species into a very high margin species consistent with our operational objectives. So that’s kind of what we’re doing at the farm right now and as we’re consolidating things.

So simply purging the fish for a month or less allows us to get a very high turnover of the product as well. So any differences in the total price of these animals compared to like eels or something that’s a higher price is offset by the greater volumes and the greater – than the higher turnover and the larger size of the fish that we put through the system.

The same is true for fattening of Jade Perch, and we get a better price for these animals if they fattest. So we see them very, very rich diet, looks like a cattle farm that you go through fattening. This improves the fat content. So the rapid turnover using this approach and I’m getting to the point now finally of what you want to know leads us to project that we have about 8,000 metric tons total for 2016, it’s about 50% higher than our output that we had last year.

And using the same model and same approach that we’re doing now because of the flexibility of the system, we’re predicting somewhere in 2017, somewhere around 21,000 metric tons collectively from our farms, and 2018 of about 54,000 metric tons. Of course, all of this is contingent from the most important variables completion of the debt financing exercises. So the quicker we get financing and larger the financing that we are targeting the quicker we can finish Prawn Farm 3 and Prawn Farm 4 and get to those quite a bit. Does that help?

Unidentified Analyst

Yes. And that number you mentioned, Tony, 80,000 tons, is that for all farms, or is it for Farms 3 you’re talking about?

Anthony Ostrowski

No, all farms, all farms collectively, because again, we’re starting to look at them more as a collective now rather than an individual farm. So as we’re – so it’s a national that’s including the farm.

Unidentified Analyst

But actually that’s not very impressive, because right now for the first-half we were 6,600 tons total. So 8,000 for for the full-year, it’s not very impressive at all.

Daniel Ritchey

Again, it goes back to the debt financing. The quickly we get that that financing, the quickly that we can finish things on Prawn Farms 3, and so moving forward on Prawn Farm 4 and get higher. Actually, the 8,000 is our lower end, it’s between 8,000, 9,000 is our prediction, but I’m shooting low on this operationally.

Unidentified Analyst

Yes, because last quarter was 4,700 tons. And as it said in the report that finfish could continue in good volumes also for the remainder of 2016, I would expect more than 10,000 tons for the whole year?

Anthony Ostrowski

No, if we do that, then you’ll be very impressed when – with the 8,000 ton metrics, the 8,000 metric tons.

Solomon Lee

So anyway, Tony, I can help to put in items there, of course.

Anthony Ostrowski

Yes.

Solomon Lee

Because what happened here, we are facing the other farm to support Prawn Farm 3 and Prawn Farm 4. So some of these Farms will be going some of the stage – early stage fish. So we have some of these bigger fish to go out faster in the Prawn Farm 3 and Prawn Farm 4. Unfortunately, at the moment, we don’t have enough tanks to ambitiously to increase that capacity so quickly in the last quarter. But moving in 2017 and 2018, very impressive because of this early preliminary reorganization of the farm for that to happen, Tony.

Unidentified Analyst

Okay. And you mentioned before that one cause for the delay of and grow-outs in the Prawn Farm 3 was the settling prawns, has they been built now or otherwise still waiting for some financing to be done?

Solomon Lee

Well, that one is now underway, but that one is not just on the money. That one also subject to some of the weather, because reason we still have a bit of rain that’s wasting a lot of our time, because all those open dams are still open at the moment. Every time as it rain, we have to pump the water back out of it for a number of days to continue. That is the delay at the moment, but we intent to complete a low and stop the two buildings on Prawn Farm 3 in full operation by 1st October, that’s our direction at the moment. And hopefully, whether we would be – they will be kind to us and we can achieve what we trying to do.

Unidentified Analyst

Okay. Thank you very much.

Operator

Thank you. We will now take another question. And our next question comes from the line of Mark Tade [ph]. Please go ahead. Your line is now open.

Unidentified Analyst

Yes, good afternoon or good morning. It’s Mark Tabak [ph]. Hello, I have a question regards to the spins, giving the concerns about corporate governance, the directors taking compensation while the stock prices going down and the lack of performance to the stock, I think we all have concerns in this area. So my concerns and I think some people on the phone that have significant holdings in the company is that, we want to be treated fairly going forward with these spins in new company. So my question is and I guess, I’ll address to you Dan. Well, every shareholder be treated equally upon these spins, where everybody get the same benefits upon these spins in the new companies?

Daniel Ritchey

Yes. I’ll make answers to sink and that answer will hold through throughout the entire process. But keeping in mind, we do have throughout the IPO discussions, we have three IPO investors who will be coming in, and they’re obviously going to be having a stake in this as well. But with all of the new money that comes in, comes new production, higher production, quicker production.

So instead of putting this thing out to 2019/2020, we may start seeing some of those higher levels in – by 2018, which means quicker returns to shareholders of record. So, yes, and answer to your question, yes, all will be equal or the same actually. In this instance too, those that are coming in later to the party are not going to be getting the share of benefit as much as those would have come in early, including us here at Sino Agro Food.

Unidentified Analyst

Okay. Well, that’s encouraging. The second question I had was, we understood that when the new aquaculture spin, what’s going to happen that we would start hearing about new management, new CEO for the company, et cetera, how is that process going?

Daniel Ritchey

Good and we are working in concert with the bank and these pre-IPO investment, investing firms as well to get their input on who they feel are and that’s for both the Board and for the operations management. So we are keeping a very open dialogue going on. We want to be able to bring in the best every company says that right, but we really do.

We are looking at strong attributes that will last into the future and will provide the solid footing from the very beginning. And keeping in mind with the dollars that we’re trying to raise, the bank and the investors are thinking just exactly the same. So we are working with them. We are – we will have a list of those individuals, hopefully, not in the too distant future. But again, I’d rather take our time in getting us who we need rather than trying to rush it just to simply get it done.

Unidentified Analyst

And are these internal or external candidates or combinations of the both?

Daniel Ritchey

Well, we obviously have to have representation from Sino Agro Food, since we’ll be one of the major shareholders in these companies, but, yes, external as well absolutely.

Unidentified Analyst

Okay. And I’ve always not really, excuse me, has never been clear in my mind what kind of voting rights that Solomon has on this new spin aquaculture spin? I understand that he is forsaking his super voting shares. But what kind of ownership or rights does Solomon have on this new spin to this spin company?

Daniel Ritchey

Well, there’s two things here, and I’ll let Solomon to answer the second part. The first part is that the bank – the banks and the institutions are looking for continuity. And part of that continuity is to make sure that we have the operator who is in essence this is Solomon’s game plan, if you will, at least being able to provide solid footing throughout the next year, year-and-a-half, as to what Solomon decides to do, after that, that’s up to everyone on the Board at that time and Solomon. Solomon, do you have any inclination at this point, where which traction. I don’t want to push you out, but I’m just thinking have you had any discussions with the banks or the institutions at this stage? Solomon?

Solomon Lee

I think it sounds me good.

Daniel Ritchey

Maybe so…

Solomon Lee

Can you hear me?

Daniel Ritchey

Yes, yes, sure, you’re fine.

Solomon Lee

Yes, okay, because according to the stock exchange corporate governance, we would – that we would not allow anybody. But the slight advance there will be continuity, so they would like to see my presence in the Board, but they don’t have specific direction how much shares would I own.

And I can make sure you’re kind of afford to have controlling interest at that time anyway. But the bank would see the continuity for as part of my holding, coordinate with some of times holding the original owner of the farms, Chinese farms collectively to have some continuity in the majority of controlling stake. So that would be part of that reason. But and I think Erik is very good, has been working in our team.

He can more the less also later on when the opportunity arrive, he can give you some figures on some of this – the Director’s shares, given at whatever time and whatever for figures that is in favorable for the company. But anyway, but to answer your question before, I’m sure I would be part of the controlling shareholder in the new Tri-way spin-off. But I will not have to take the controlling stake of voting rights like what we have now.

Unidentified Analyst

And that will allow the institutions to come into the new or that that will appease, I would say, or make the institutional investors, which we’ve been waiting to come into the stock happy or allow them to come into the stock right?

Solomon Lee

Yes, that’s right. Because that’s – actually whatever corporate government is allowed by that certain exchange or the ruling, we must be abide by it, that’s all.

Unidentified Analyst

Okay. And then one final question and then I’ll get back in the queue. You’re targeting the spin for the aquaculture in Q4 this year as I recall and when we start seeing new management being hired at this point, it’s now Q3, shouldn’t we see it in the upcoming weeks?

Solomon Lee

No, I think your first statement is a bit wrong because one cannot do the IPO that quickly.

Unidentified Analyst

Okay.

Solomon Lee

Because the bank recommended to us 2016 is not the right time. So we’re also looking for application sometime later part in 2017 purely because the valuation by that time would be a lot, lot higher than what it is now as it is now Tri-way has only one farm. And there’s a ruling in the stock exchange there to say we have certain cash flow from operation no less than certain figures the previous three years and the forward figures on the test for operation. So we are aiming to improve that by some time, may be Q3 in 2017 such that we can leverage on some of the project at 2018 figures to get a much higher valuation. Now that’s the position with Try-way at the moment.

Unidentified Analyst

Is it have more or less…?

Daniel Ritchey

But let’s not confuse the two. There’s two different things we’re talking spinoff and we’re talking IPO, okay. The spinoff will be happening before the IPO. The IPO will not be taking effect until such time as the market conditions are providing a premium to what we anticipate we should be able to get off of the value of the company. So the consolidation and so forth will be happening much sooner than that than the timeframe that we’re talking about for the IPO.

Solomon Lee

Yes, the restructuring then we’re aiming to be finalized before end of this year.

Daniel Ritchey

Yes. So I want to make sure there is a distinction between those two and not to confuse the two, yes.

Unidentified Analyst

Okay, okay. Now I understand. Okay, I’ll get back in the queue. Thank you for your time.

Operator

Thank you very much. We have time for one more question from the line of [Jonathan Callison of TGK South Carolina [ph]. Please go ahead. Your line is now open.

Unidentified Analyst

Yes, I want to give my thanks to Solomon, and Dan, Tony Ostrowski, I think some of the earlier calls were in my humble opinion as a very long time investor not only in stock and equities in general, but specifically in Sino Agro is that dead flies seem to be attracted from time to time and do just that love to ridicule, love to bring negativity, and don’t bring a thing to the table. So I appreciate again the ability of Solomon and Dan, Tony Ostrowski and others to bring this company to what I think it’s going to ultimately do and that is my point. Thank you.

Daniel Ritchey

Well, thank you so much. And again it is a constant struggle, it’s been much more of a struggle in the past than it is today. This is – let me just say in terms of having a major financial institution coming in and literally taking the lead in regards to coordinating this effort. Speaking from my own personal experiences having gone after several loans for my own companies here in the states when you have a bank or banks that are becoming involved and wanting to make it work on behalf of the customer, now you know you have something that is going to become the – is going to become the attraction that you knew it had the potential to become all this time.

But now that we are at this point, we obviously have gone to the point now where the financial institutions are seeing Sino Agro Food, Try-way, SJAP or the value that they have and also the value that will they will have coming in the future. But thank you for your comments. It’s obvious there has been frustration throughout the years. Trust me, I’ve been an investor since 2008. I have had my share of frustrations as well. But at the same time, we see things moving forward and at each time that these things are happening progressing, that gives me more faith in terms of where things are headed.

Anthony Ostrowski

I’ve had my frustrations as well. Certainly the things that I’ve mentioned, the list being on a seniors exchange, the IR problem, the – even A shares up. But I know other companies that have got an exact same governance set up like that. Facebook comes to mind, although, I’m not trying to compare Facebook to Sino Agro. But this is some of these consternation that constantly get thrown out are just incredible for me. And again, I give you my kudos and that’s it. Thanks

Unidentified Analyst

Thank you.

Solomon Lee

Thank you for that encouragement. But I’d like to cap some of my moral of the story that I’ve been talking with our Directors. To see the moral of the story of the development assignment, especially in the field of aquaculture and aquaculture industry is that, the CapEx and working capital always go hand-in-hand, that’s why.

And as a first generation farmer, Sino Agro Food usually a very poor in cash, but very rich in assets. And when we achieved that, although, the asset always looks good in the company, but it doesn’t affect in the capital market. Hopefully, like – if you’re a first generation farmer, usually you’re second and third generation people, your family will benefit.

So I would say that, SIAF is first generation, and hopefully, our shareholder will benefit, but it’s not that far away. But I’m fairly confident that spin-off will definitely pulls the value of the assets – of the company, and so every shareholder will benefit from it as well. Thank you.

Unidentified Analyst

Thanks.

Operator

As there are no further questions, Solomon, would you like to make any closing remarks?

Solomon Lee

I thank you for everybody’s coming tonight and our website and Peter Grossman is always open for further questions, and our Directors are always really to putting the answer to everybody. Thank you for coming tonight.

Operator

Thank you to our shareholders. We look forward to the next quarterly conference call. Thank you very much. This does now conclude today’s call. Thank you for attending. Participants you may disconnect your lines.

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