China New Borun's (BORN) Q1 2016 Results - Earnings Call Transcript

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China New Borun Corporation (NYSE:BORN) Q1 2016 Earnings Conference Call May 27, 2016 8:00 AM ET


Terence Chen - Chief Financial Officer

Ann Yu - Chief Strategy Officer


Sarah Dai - Hillhouse Capital


Good day, everyone and welcome to the First Quarter 2016 Conference Call for China New Borun Corporation. Today’s conference is being recorded.

Before we get started, I am going to review the Safe Harbor statement regarding today’s conference call. Please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause the actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our annual reports on Form 20-F filed with the Securities and Exchange Commission on April 28, 2016. The company does not assume any obligation to update any forward-looking statements, except as required under applicable laws.

At this time, I would like to turn the call over to Mr. Terence Chen, Chief Financial Officer of China New Borun Corporation for opening remarks and introductions. Please go ahead, sir.

Terence Chen

Thank you, operator. Thank you everyone for joining us for China New Borun’s first quarter 2016 earnings conference call. Joining me today from management is Ann Yu, the company’s Chief Strategy Officer. For today’s call, I will represent Mr. Wang in providing you with a quick review of our business in the first quarter of 2016. Following that, Ann will offer more details on our operational developments and updates. After Ann, I will discuss our first quarter 2016 financial details. I would like to note that on this call today, all of the financial results will be referred to in Chinese RMB, unless otherwise noted.

We are very pleased with our significant extensive profits during the first quarter of 2016, despite lower revenue due to the shorter than planned production ramp benefiting from a steeper decline in corn price than that of edible alcohol. Our first quarter gross margin expanded by 180 basis points to 12.2%. We also cut interest expenses by nearly 50% and as a result, grew year-over-year net profits by 60%, expanded net margin to 5.2% versus 2.8% in the same period of last year.

As discussed in our previous call with you, this February, the Shouguang government conducted a mandatory safety check at all chemical manufacturing facilities in the region requiring our Shouguang facility to halt operations during inspection. Given our strong safety record, we had initially expected a very brief inspection at our facility and therefore a shorter shutdown. However, the mandatory inspection period was applied equally to all manufacturers. And as such, although our facility successfully passed the safety check, the actual shutdown took a total of 39 consecutive working days from February to April. The total impact was more than one-third of our quarterly production and we estimate that this erased more than 20% of the first quarter total production schedule and approximately 60% of the second quarter’s production schedule. As such, our total revenue for the first quarter decreased 14.8% year-over-year to RMB486.6 million.

Looking at the bigger picture, the baijiu industry continued with its recovering trend for third consecutive quarter. According to financial data from China’s Asia listed baijiu companies, the industry reported healthy growth in both the top and bottom lines. The average first quarter of 2016 top line growth was 16% year-over-year, the first double-digit growth rate since 2012. Meanwhile, factory average selling price of baijiu also slightly increased reversing the previously negative trend and reflecting greater confidence by distributors. In general, with the baijiu industry previously having to endure a tough four years of rapid changes and restructuring, the surviving companies are now more rational and the industry more healthy than before. We believe the baijiu industry currently places greater emphasis on providing higher quality products for mass consumption and the operations are more efficient, innovative and sustainable.

Although the healthy dynamic mix of the baijiu industry provides a solid foundation for demand for edible alcohol, we believe that development in edible alcohol industry has lacked that of baijiu industry. In previous years, when corn prices were rising, we witnessed the main edible alcohol producers reduced the production volume or even shutdown operations. This helped to drive higher ASP for edible alcohol and its by-products. However, in recent quarters as corn prices have been trending steeply downwards, we are witnessing a return to old habit to quickly expanding production by providing producers. To make matter worse, we are surprised to also see smaller and call it new engines scaling up production. Consequently, that quickly expanded market supply of edible alcohol is exerting downward pressure on ASP for edible alcohol and byproducts.

As we discussed in our previous calls, corn producers are facing a steep downward trend since last September when government lowered its corn purchase price to a level that was 10% to 12% below the price level in the previous harvest season. This resulted in corn prices to drop further in the first quarter of 2015 as well as in the first quarter 2016. By the end of March 2016, the spot price of corn has declined more than 20% from the pre-harvest season spot price in August 2015. This significant decrease in corn prices have to enhance profitability for edible alcohol manufacturers, which prompted many producers to quickly expand production volume in order to capture more near-term market share and profit. This April and May, we are seeing a sharp increase in edible alcohol supply, causing fierce competition and bringing down ASP for the edible alcohol. We believe this expansion will put heavy pressure on near-term ASP for edible alcohol and therefore near-term margins. As such, for second quarter of 2016, though we continued to see lower corn prices in the spot markets, we are cautious that ASP for edible alcohol and its byproducts are also dropping, which may cause negative effects to our profitability in the second quarter.

Encouragingly, the government completed annual national corn reserve program on April 30, where it purchased a new record of over 155 million tons of corn, an increase of 33% from the purchase level of last year. Subsequently, corn prices have stabilized, and we believe that government plans to manage its release of corn reserve in the second half of 2016, which should help to smooth the market prices.

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

Ann Yu

Thank you, Terence. Good day everyone and appreciate you taking the time to join us on today’s call. We are happy to report strong profit for the first quarter of 2016, driven by higher gross margin and lower capital costs. During the first quarter, our sales volume of edible alcohol decreased by 4% year-over-year to approximately 73,750 tons on lower capacity utilization of only 74%. The primary cause of the lower capacity utilization was the mandatory halt of operations at our Shouguang facility that Terence just elaborated. This comprehensive safety check was triggered by several series production houses at the other chemical plants in the region.

As you may recall, back in mid-March, we anticipated the total inspection will last only two weeks. However, the actual shutdown was nearly three weeks, which erased more than 20% of the first quarter total production schedule. Additionally, our Shouguang facility was mandated to shutdown for another two weeks in April for final inspection, which we expect would shorten our production schedule for the second quarter by approximately 16%. The good news is that the mandatory safety check has been fully completed and now Shouguang facility has successfully passed the inspection and reopened to full operations.

During the first quarter of 2016, our branded cost of corn was around RMB1,600 per ton, a decrease of nearly 14% quarter-over-quarter. We used up the pre-purchased corn from the last year’s harvest season that carried a high cost base in the first quarter. And therefore, we believe our corn cost base for the second quarter will be slightly lower than the first quarter.

During the first quarter of 2016, our average selling price for edible alcohol declined by 8.9% year-over-year, which was noticeably less than the decline in our corn cost fueling the gross margin expansion of 180 basis points. As such, although our top line declined by 14.8% year-over-year, we were able to generate a slight increase in gross profit to RMB59.5 million. In the first quarter, we completed our annual corn pre-purchased program and sourced a total of 340,000 tons of corn from this harvest season. We estimate that this should be sufficient for our production needs in the non-harvest season in 2016. We believe that the government will manage its release of corn reserves in the second half of 2016, which should stabilize prices. And there is also a potential for corn prices to go up later this year due to lower market supply levels. And so, we are confident that our corn pre-purchasing capabilities will ease our planning and managing of working capital as well as maintaining our cost advantage.

Now, let me provide you with a quick review of our CPE business. During the first quarter of 2016, total revenue for CPE increased by 112.6% to RMB21.3 million as sales volume increased by 113.6% year-over-year to approximately 2,500 tons. CPE had a relatively stable average price of approximately RMB8,510 per ton.

Lastly, I would like to quickly update you our financial position and capital structures. As you remember on our last call, we have been proactively managing our financial resources and working capital in order to properly retire the long-term bonds at their maturity date in early 2016. During the first half of 2016, we retired a portion of the corporate bond with principals totaling RMB180 million. And by the end of January 2016, we repaid the corporate bonds with principals totaling RMB310 million with the remainder balance of RMB10 million repaid in April on its due date. As China has lowered interest rates multiple times since our insurance of the corporate bonds in early 2013, we are in active discussion and seek for cheaper financial facilities in 2016. We currently expect to complete these financing trends by the end of the second quarter and we expect our finance expenses will decrease in 2016 as compared to 2015.

That wraps up my part. Now let me turn the call over to Terence Chen, our Chief Financial Officer for a review of the financial performance in the first quarter of 2016. Terence?

Terence Chen

Thanks Ann. Now I would like to share with you additional details about our financial performance. For the first quarter 2016, revenue decreased by 14.8% year-over-year to RMB486.6 million from RMB570.9 million in the same period of last year. The decrease in revenue was mainly due to the longer temporary shutdown and a lower ASP in edible alcohol and its byproducts.

Now let us look at revenue breakdown during this quarter. Revenue from edible alcohol decreased by 12.5% to RMB344.8 million with the sales volume decreased by 4% to approximately 73,750 tons, while the average selling price decreased by 8.9% to approximately RMB4,680 per ton compared with the same period of last year. Revenue from DDGS Feed decreased by 28.7% to RMB88.4 million with sales volume decreased by 18.5% year-over-year to approximately 56,360 tons, while average selling price decreased by 14.6% year-over-year to approximately RMB1,570 per ton.

Revenue from liquid carbon dioxide decreased by 20.7% to RMB3.4 million with sales volume decreased by 11.4% year-over-year to approximately 23,050 tons, while average selling price decreased by 10.5% year-over-year to approximately RMB150 per ton. Revenue from crude corn oil decreased by 25.1% to RMB28.7 million with sales volume decreased by 23.5% year-over-year to approximately 4,430 tons, while average selling price decreased by 2% year-over-year to approximately RMB6,480 per ton. Total revenue from CPE increased by 112.6% to RMB21.3 million with sales volume increased by 113.6% year-over-year to approximately 2,500 tons at an average price per ton of approximately RMB8,510.

Our gross profit increased slightly by 0.5% to RMB59.5 million from RMB59.2 million in the prior year period. Gross margin expanded by 180 basis points to 12.2% compared to 10.4% in the first quarter of 2015. The higher gross margin was primarily attributable to steeper drop in the cost of corn than average selling price of edible alcohol. G&A increased slightly to RMB12 million in the first quarter of 2016 from RMB11.8 million in the same period last year, while selling expenses decreased by 9.8% to 1.2 – sorry to RMB1.1 million in the first quarter of 2016 from RMB1.2 million in the same period of last year. Reflecting the higher gross profit, operating income for the first quarter of 2016 was RMB46.4 million, an increase of 0.4% from RMB46.2 million in the first quarter of 2015.

Looking at other income and expenses during the first quarter of 2016, we repaid a majority of our remaining corporate bonds in January, which correspondingly reduced our net interest expenses to RMB14.3 million from RMB26.4 million in the same period of last year. As such, total other expense during the first quarter of 2016 was cut by half to RMB12.7 million from RMB25.2 million in the same period of last year. Income tax expenses in the first quarter 2016 were approximately RMB8.4 million, representing an effective tax rate of 25%. All-in-all, our net income increased by 60% year-over-year to RMB25.3 million from RMB15.8 million a year ago. Diluted earnings per share and per ADS were RMB0.98 in the first quarter of 2016. The company has 25,700,000 weighted average basic and diluted shares outstanding during the quarter ended March 31, 2016.

On balance sheet side, our cash and bank deposits balance increased to RMB503.2 million as of March 31, 2016 compared with RMB495.6 million by December 2015. The increase of cash and bank deposits was mainly due to improved receivables collections and less cash used to pre-purchase corn partially offset by repayment of corporate bonds during the first quarter 2016. Cash flows provided by operating activities for the first quarter of 2016 was approximately RMB143 million compared with RMB14.1 million during the same period of last year. As of March 31, 2016, our inventory balance increased to RMB733.7 million and net trade accounts receivables balance decreased to RMB324.1 million.

That wraps up the financial review and let me mention our business outlook. The safety check by the Shouguang government continued to have a carryover impact to our manufacturing for the second quarter and we have a temporary shutdown for about two weeks in April, which is equivalent of nearly 16% of quarterly production schedule. We are now back to full operations. And as Ann indicated, we anticipate our utilization will ramp up 85% for second quarter versus 96% in the second quarter of 2015. With less utilization for the second quarter and downward trend in ASP, edible alcohol and its byproducts, we believe our top line will be [indiscernible] corresponding.

Accordingly, we currently estimate revenue for the second quarter of 2016 will be in the range of RMB460 million to RMB500 million, a decrease of approximately 30.6% to 36.2% over the same quarter of 2015. This forecast reflects our current and preliminary estimate of market and operating conditions and customer demand, which are all subject to change.

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

Question-and-Answer Session


Thank you. [Operator Instructions] Your first question comes from the line of Ms. Sarah Dai from Hillhouse Capital. Thank you. Please ask your question.

Sarah Dai

Hey, thank you for taking my question. You mentioned edible alcohol price has dropped very significantly recently, so can you brief me how significant it is and what is the current price trend for edible alcohol now?

Terence Chen

Thanks for your questions, Sarah. We estimate that the average selling price for edible alcohol will be approximately 80% lower than that of the first quarter. And so far, we do not see any improvement in ASP for edible alcohol and its byproducts.

Sarah Dai

So far the second quarter average is 8% lower?

Terence Chen

Yes, 8% lower for average selling price for edible alcohol to compare with the first quarter.

Sarah Dai

Okay. And how do you view the competition landscape for edible alcohol now?

Terence Chen

I think this is the main reason, I mean the fierce competition in the industry caused a significant drop in ASP for edible alcohol. Just as I have mentioned this with many edible alcohol manufacturers suddenly expanded their production volumes seeing the corn price dropped a lot in 2016, which caused excess supply in the market in near-term and which will put a lot of pressure on ASP for edible alcohol in the near-term.

Sarah Dai

Okay. So what’s the current price level of corn and how do we see the trend?

Terence Chen

Our processing costs will be a little bit lower than that of the first quarter. And we estimate in the second half of 2016, the corn price will be more smooth and that will be helpful.

Sarah Dai

What is the current market price?

Terence Chen


Sarah Dai

What’s the market price of corn now?

Terence Chen

The market price for corn, I know it’s hard to say the market price because in many regions of China from South to North, the market prices differ a lot. And we have facilities in Daqing in Heilongjiang Province and also in Shouguang in Shandong Province. The market price in Daqing and the market price in Shouguang also differs a lot. So, I can only tell you our processing corn in the second quarter, we estimate that it will be a little bit lower than the first quarter.

Sarah Dai

Alright, got it. Thank you. That’s all my questions.

Terence Chen

Thank you.


There are no further questions at this time. I would now like to hand the conference back to today’s presenters. Please continue.

Terence Chen

Once again, on behalf of the entire China New Borun management team, we want to thank you for your interest and participation in this call. Thank you for joining us today and concludes our first quarter 2016 earnings conference call. Thank you.


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

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