SIAF CC TRANSCRIPT
Welcome to the Sino Agro Food shareholder conference call. The purpose of this conference call is to re-cap the first half performance of 2010 and provide guidance for the remainder of 2010. The Chief Executive Officer, Mr. Solomon Lee will also touch on guidance for 2011.
After the CEO has provided his assessment, the floor will be open for shareholders to ask questions. Immediately following the CEO’s discussion questions that were sent in via email will be presented first, followed by questions by phone participants if time permits.
Today’s conference call is scheduled for approximately 1 hour.
I would now like to introduce the CEO of Sino Agro Food, Mr. Solomon Lee.
Welcome to the Sino Agro Food conference call for August 31, 2010.
During this call I will be reviewing the first half of 2010 results, providing guidance for the remainder of the calendar year, and briefly touching on what we are anticipating in 2011.
First, I would like to welcome all of our investors participating in today’s session. You remain a top priority to the company and we constantly strive to improve our performance to exceed your expectations. So again, a warm welcome to all of you.
The first half of 2010 had performed as expected; keeping in line with overall results when compared to the 1st half of 2009. Under the current umbrella, Sino Agro’s income is predominately seasonal, reaping the benefits of its harvest and the majority of its revenue during the 2nd half of the year.
Revenue derived from seasonal operations will not be as domineering in upcoming years due to advanced farming methods employed at Sino Agro; essentially eliminating much of its seasonal driven production. Controlled environments such as the fish farms; constant beef cattle feed supplies; heartier breeds of dairy cattle that produce milk supplies in level quantities throughout the year will all contribute to a steadier stream of income without climatic vagaries controlling the outcome.
First half 2010 operation results are well defined and available in our 2nd quarter report that can be downloaded from the web at WWW.OTCMARKETS.COM. Again, you can obtain a copy of 2nd quarter results as well as all previous Sino Agro reports at WWW.OTCMARKETS.COM.
I would like to highlight a few of the results and some of the more important advances in operations from the report, if I may.
1) Our total assets were $85,451,737 as of June 30, 2010, as compared to $78,148,919 at the end of the same period in 2009. The $7,302,818 increase in assets between these periods was primarily the result of the growth in net earnings and an injection of additional capital.
2) Our total liabilities were $6,834,441 as of June 30, 2010, compared to $13,585,409 for the same period ending in 2009. This decrease in liabilities primarily was due to the improvement of the Company’s cash flow during the year.
3) Our stockholders’ equity was $78,617,296 as of June 30, 2010, compared to $64,544,922 on June 30, 2009. This increase in equity was primarily due to increases in net earnings, additional capital injected, monetary exchange gains and minority interest. There was no increase in common stock issued and outstanding. Again, if I may. In concert with our commitment toward strengthening shareholder value, common stock issued and outstanding during this period remained the same, and shall remain so for the foreseeable future.
4) For the three months ended June 30, 2010, we had a gross profit of $5,100,002, as compared to a gross profit of $2,053,130 for the three months ending June 30, 2009; a two and a-half fold increase year-over-year. This increase was due to 1) improved productivity; 2) higher sales margins/profits derived from a reduction in direct production costs of milk primarily due to more crops being cultivated in-house; and 3) mature cows resulting in better yields with only a marginal increase in husbandry costs. Also, Capital Award Inc. had obtained a service contract to build its first aquaculture fish farm in China. In addition, an adjustment to our 2009 audited financials resulted in a one-time realized gain and is reflected in the current quarterly report as requested by our auditor.
5) Our net income from operations was $1,765,449 and $949,088 net of minority interest for the three months ended June 30, 2010 and 2009, respectively. This improvement was due to an increased profit margin during the three months ended June 30, 2010, as compared to the three months ended June 30, 2009.
So, to recap the items just mentioned when comparing 2nd quarter 2009 to 2nd quarter 2010:
1) Total Assets increased $7,302,818, representing a 9.5% gain.
2) Total Liabilities decreased by $6,750,968, that is, a 50% drop in liabilities.
3) Stockholder Equity increased $14,072,374, representing an increase of 22%.
4) Gross Profit increased by $3,046,872, representing a two-and-a-half fold gain, AND
5) Net Income rose to $1,765,449, reflecting an increase of 86% year-over-year.
Overall, the company is very pleased with the demand and growth of its product line. Our management team strives to accelerate our production development to meet demand while continuing to attract new customers to its ever growing base.
As you can tell, we have been operating on all cylinders to get where we are in the last five years. Now it’s time to shift our business into higher gear; applying everything we’ve gained into our future growth and business development.
I’ll now delve into guidance for the remainder of this calendar year and briefly touch on some of our expectations for 2011.
We anticipate fully diluted Earnings per Share for 2010 to come in line with what was originally forecasted at the beginning of the year. That is, 29 cents remains our projected earnings per share on a fully diluted basis.
Basic EPS, that is EPS based on the current Outstanding Share balance of 52.9 million shares, is projected to come in at the top end of our previous forecast of 32 cents per share for this calendar year.
I would like to briefly touch on the issue of fully diluted shares, since I’m aware questions surrounding its structure have been brought up by several interested parties.
10 million "Series B" shares were created in July 2010, out of which Seven (7) million were issued and exchanged for 7 million common shares that were retired as common stock.
Even though these shares can be converted on a one-to-one basis, they will remain non-voting and non-eligible for dividend distribution while under preferred status.
Management has been assured that these preferred will not be converted into common shares until such time when there will be sufficient and additional extra-ordinary income to compensate for the conversion without affecting the EPS derived from the Group's business operations. Let me repeat, these preferred shares will not be converted until such time that extra-ordinary income is available to counter any dilutive effect they might have on EPS, if and when they are ever exercised.
As stated earlier, in concert with our commitment toward strengthening shareholder value, common stock issued and outstanding shall remain the same for the foreseeable future.
I’ll now breakdown total earnings by segregating and highlighting each of our current profit centers; namely, Dairy; HU flowers; Beef Cattle; and Fishery operations which incorporates each of their respective income sources, as well.
Milk and other dairy products are becoming a part of Chinese daily diet and Chinese consumers have become more aware of the nutritional value of liquid milk. The quest for quality and safe food that prompted the organic revolution in the U.S also has made Chinese consumers wanting the same. Consumers are becoming more aware of the different types of milk and seek to differentiate quality among various products in addition to brand recognition. The perception of Brand is more important than ever before.
The dairy segment of our business derives its income from four categories. Raw milk; Dairy Products (retail); Livestock Feed and Fertilizer. Raw milk currently comprises 83% of sales; Dairy Products 5% and Livestock Feed and Fertilizer the remaining 12%.
Total dairy revenue projected to be realized in 2010 is just north of $28 million. Gross Profit is projected to be approximately $16 million, representing a 56% gross margin on projected revenue.
These figures are projected to increase in excess of $39 million on the revenue side and close to $19 million generated in gross profit in 2011.
The HU Flower plantation will always remain the one weather dependent cash crop that we will have limited control over its performance. With the plant’s maturation requiring only 3-years we are able to supplement our current crop with additional acreage to help offset lost crops with shear volume. In due time, we should have enough acreage planted so that when weather conditions are favorable the bumper crop will far exceed our projections, and whenever inclement weather prevails there will be sufficient harvest to offset any shortfall.
The HU Plant segment of our business derives its income from three categories. Dried HU Flowers; Fresh HU Flowers and Value Added HU Flower products. Dried HU Flowers currently comprises 90% of sales; Fresh HU Flowers 5% and the Value Added products the remaining 5%.
Total HU Plant revenue projected to be realized in 2010 is $12 million. Gross Profit is projected to be approximately $7.9 million, representing a 66% gross margin on projected revenue.
These figures are projected to remain about the same at $12 million on the revenue side and close to $8.4 million generated in gross profit in 2011. Ringing in a slightly better profit margin of 70% in 2011 when compared to current year projections.
The livestock industry in China has undergone massive changes since the liberalization of markets started in 1985. The beef sector is no exception to this transition with production and consumption increasing faster than all other meats in the last two decades. Between 1980 and 2005 the number of cattle had nearly doubled to around 145 million and since then beef production has increased at a much faster rate than cattle inventory.
The Beef Operation in the Huang Yuan District currently derives its income from three categories, although beginning in 2011 the retailing of Enzymes will also contribute to this profit center. Livestock Feed; Bio-Organic Fertilizer and Wholesale Beef are the three components currently generating revenue. Wholesale Beef currently comprises 10% of sales, but this figure will increase to 47% of sales next year; Bio-Organic Fertilizer currently represents 59% of sales and Livestock Feed the other 31%.
Total Beef Operation’s revenue projected to be realized in 2010 is slightly over $4 million. Gross Profit is projected to be approximately $600,000.
These figures are projected to increase in excess of $17 million in sales revenue and close to $2.5 million in gross profit in 2011.
Regarding our fish farming operations, I would like to quote a recent statement made by the CEO of a reputable Canadian seafood company who put in clear perspective the future of China’s aquaculture industry when he stated, “There are other countries that are ripe, but I think they would pale in comparison to the size of the opportunity for mainland China.”
"China has a growing middle class with a great deal of money to spend and Asians are huge seafood eaters and we have already seen strong growth in that market. We're going to be able to continue to see it develop."
The Fishery Operation will derive its sole source of revenue for 2010 from the sale of its A Power Modular Fish Farm technology. The projected revenue for this year is $3.5 million and its Gross Profit is expected to come in at $2.275 million.
In 2011 sales from this technology are expected to increase significantly to $14 million and its Gross Profit in excess of $9 million.
Revenue from Fish Sales also will begin to be realized in 2011 with Sales Revenue projections of $6.25 million and Gross Profits of $3.75 million being anticipated.
When combining all four segments we find that:
1) Projected Gross Revenue for Sino Agro Food in 2010 should be slightly better than $48 million
2) Gross Profits are projected to come in at $28 million
3) Net Profit should come in comfortably at $17 million
4) Basic Earnings per Share should come in around 32 cents per share.
5) Fully Diluted Earnings per Share should come in around 29 cents per share.
2011 projections are still in line with previous forecasts of 50 cents per share with a positive bias toward the upside in consideration of all projects being brought online in good order.
With respect to the 2008 and 2009 audits, they are in their last phase of review by the auditor, Madsen and Associates and should be finalized in very short order.
Shortly after the audits are completed, we will file for registration on the OTCBB by completing the Form 10 and submitting it for review by the SEC.
Hopefully, this presentation has been able to answer many of your questions throughout the call. I am open to discussing any further inquiry you might have and to clarify any item that might have been mentioned.
Together we can work toward building one of the most modern technologically advanced agriculture centers here in China. One in which as an investor you’ll certainly be proud to call your own.
I’ll be happy to take your questions at this time.
Thanks Mr. Lee for your comments..
First we will be presenting Mr. Solomon Lee with questions sent in via email. There were many questions sent in and for the sake of time we will not be able to get to all of them during this particular call however the investor relations team will follow up with questions that were not answered.
The first set of questions comes in from Mr. Grossman.
What is the Fishery business model? Can you quantify revenues from franchise fees, modules purchased, consulting etc.. ?
A Fishery business model consists of the followings:
A). Early year during development and construction of an A Power Modular fish farm (APMFF) We shall contract to give services in engineering, supply of P&E, installation and supervision, training and management of the APMFF, in term, we earn service fee and technology license fee.
Normally, a standard APMFF will have the capacity to produce up to 250 MT of fish / year,
And cost about US$3.5 million to be established and built, as such, we are targeting to get gross profit up to 65% on each APMFF’s service contract. AN APMFF can be built and established within 4 months from start to operation in China.
B). at later years (usually within 7 to 9 months from day of the APMFF operation begins),
Fish sales will begin, so in the interim we shall take up equity interest in the APMFF, and in term earn income from its fish sales. (In this respect, it will be subjecting to our internal financial capacity at the time of how much % equity interest that we shall acquire, however it is our aim to secure up to 75% by year 3 from the APMFF’s operation starting day.)
C.) Further down the road when there will be sufficient APMFFs built with volume of production will come up sufficiently for us to start up a marketing net-work to sell and distribute all production under one roof, as such, we shall earn from the marketing and sales of all production.
Principally that is the model.
How many fisheries do you target for 2011, 2012 and beyond?
Yes I am targeting 4 APMFF and 8 APMFF for 2011 and 2012 respectively.
For the flower business, how many acres have been planted in 2010, and are planned for 2011?
We shall plant new HU plants covering 10 acres in Oct. 2010, and aiming to plant 35 acres and 70 acres more in 2012 and 2013 respectively.
Next are questions abbreviated from Mr. Scheffer
Can you explain the differences and discrepancies in the financial reports posted to OTC markets.com?
Thank you for your question, and I apologize if there were any inconsistence with the financial statements as they were prepared in a hurry before all figures came in from adjustment made by the auditors and further adjustments made to various other items in Chinese titles that needed to be translated, I did not really have the time then to counter check and did not have time to put them to our external accounting firm to check them either before posting to meet the dead line of Pinksheets.
However, we shall make amend within next week on any mistakes with the statements.
In regards to wages and salaries, yes for 2009, there were much adjustments would be inserted on this sector due to various allowances and compensation benefits changes by the Government ruling, so for purpose of this Q2 report my accounting department just taking the last 3 Q3 and divided evenly, but it will be finalized and adjusted accordingly in our audited reports. However the total for the year was $1,024,294 (collective sum of $511,224 for 1st half and $513,070 for 2nd half).
Also, Q1 2009 posted earlier did not adjust for their final depreciation & amortization and financial cost which were adjusted in current Q2 posting, that's why there was a difference of some US$200k in net earnings between the two statements.
Also due to other adjustments made within the current auditing processes, that's we also submitted in this Quarter statements covering 2008 and 2009 hopefully to avoid further misunderstanding on the subject. (Any way, whatever they are/were presented, they will still be subjected to final audits).
Next Question from Mr. Huber
What is the structure of the Series B Shares? What consideration do the holders of the Series B get?
In the past I just retired my own holdings of common shares to compensate for whatever new issuance of shares, until my current lawyer advised me to do it differently by creating Series B shares which is not a common share and has no voting right nor right to dividend, but can be converted back to common shares whenever I decide to do so, in this respect I exchanged 7 million Series B shares with my 7 million common shares which was retired as common stock on July 28 2010. However I have no intension to convert them until such time, there will be sufficient extra-ordinary profit generated to compensate for the future conversion and without affecting the basic EPS derived the operational activities’ earnings of the company.
Next abbreviated questions come from Mr. York
Can you update us on the plans to import milking cows from Uruguay?
So far we had delay due to the young cows did not pass the Agriculture Department’s inspection last season, hope they will do so this coming year.
How about guidance for raw milk production and price forecasts?
Current average is US$643 / MT and in our forecast we used the same figure.
Next question comes from Mr. Berger.
What is the length of time from beginning to the market place for the fish business?
Construction and establishment of a standard fish farm normally takes 4 months, as such, in general, it will take between 7 to 9 months thereafter to start the sales of fish based on between 500g to 600g per fish.
The next group of questions comes in from various undisclosed groups or individuals.
In Qinqhai, when will the first cows arrive to the buildings under construction?
We had purchase first 50 heads of very good “Simentals” due to arrive as soon as our first cattle house will be fully installed targeting sometimes in September this year after we have stocked up some of livestock feed for internal use.
How is the plan for the dairy products “Green and natural” for 2010 and 2011?
Mainly to increase the number of and to improve the productivity of our dairy cows and to concentrate firstly to establish a good export based markets for our dairy products before we are going to attack the local domestic markets in scale. And we aim to achieve the above with the time frame that you mentioned.
How are you planning to sell the Sleeping Cod? To Restaurants? Fish markets?
For 2011 and 2012, local demands are extremely high, so we intend to sell them all to the fish wholesale market in Guangzhou City, and in the interim, we shall build more farms and get enough quantity to establish our own marketing networks and distribution centers by 2012.
We will now begin taking a few questions from our phone participants. To ask a question please press *(star) 1 (one) on your keypad. We have time to take a few more questions before we conclude.