Pingtan Marine Enterprise Ltd.
Q4 2018 Earnings Call Transcript

Published: 18 Mar 2019

[Operator:]

Greetings. Welcome to Pingtan Marine Enterprise’s 2018 fourth quarter and year-end financial results. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Katherine Yao of The Equity Group. Ms. Yao, you may begin.

[Katherine Yao:]

Thank you Robert, and good morning everyone. Thank you for joining us. Copies of the press release announcing 2018 fourth quarter and year-end financial results are available on Pingtan Marine’s website at www.ptmarine.com. You are also welcome to contact our office at 212-836-9600 and we’ll be happy to send you a copy. In addition, this broadcast will be made available at Pingtan Marine’s website. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect Pingtan Marine’s business and prospects and results of operation. Such risks are fully detailed in Pingtan Marine’s filings with the Securities and Exchange Commission. I would now like to take a moment to outline the format for today’s call. In order to take care of all conference call participants, this call will be conducted in both English and Chinese. First of all, the company’s Chairman and CEO, Mr. Xinrong Zhuo will read a prepared opening statement in Mandarin, which I will then read in English. I will then turn the conference call to Mr. Roy Yu, Pingtan Marine’s CFO, who will continue with the presentation. When he is finished, we will open the floor for questions. For the question and answer session, please allow us a moment to translate the question and then we will respond to everyone on the call in both English and Chinese. With that, I will turn the call over to Pingtan Marine’s Chairman and CEO, Mr. Xinrong Zhuo. Please go ahead, Mr. Zhuo.

[Xinrong Zhuo:]

Good morning. Thanks for joining our 2018 fourth quarter and year end conference call. We are pleased to [indiscernible] growth in both operational and financial performance in 2018 and we believe that this is the result of [indiscernible] efforts by the company. In April 2018, we announced that all 27 fishing vessels have received approval from the MOA for modification and rebuilding and were expected to [indiscernible] international waters of the Indian Ocean. [Indiscernible] did commence the modification and rebuilding project for the 27 fishing vessels within the same month since November last year. These rebuilt new fishing vessels set sail to their destination waters for production. We are also pleased to report to investors that on last Tuesday, on March 12, the last eight of the company’s first group of 27 modified and rebuilt new fishing vessels have departed from Port of Fuzhou, sailing to international waters and will start production once the vessels reach respective designated fishing areas. So far out of the first group of 27 vessels modified and rebuilt new fishing vessels that have been put into production, we expect operation of these new fishing vessels will help promote our production capacity and harvesting value in 2019. In early March 2019, we announced that Pingtan has received approval from MOA of the second group of 27 fishing vessels for modification and rebuilding. We believe that operation of these new fishing vessels will further expand our fishing areas, increase our production capacity, and enrich product mix. The company’s management will continue to focus on this development. As always, we will keep our investors apprised of all developments and we welcome any constructive suggestions [indiscernible]. Now our CFO, Mr. Roy Yu will discuss operations and the financial results for the fourth quarter and year end 2018. On behalf of our company, I look forward to meeting you in person and as always, welcome to our headquarters in Fuzhou and take a tour. Thank you. I’d now like to turn the call over to Mr. Roy Yu, Chief Financial Officer of Pingtan Marine Enterprise.

[Roy Yu:]

Thank you, Katherine. Good morning and welcome, everyone. Our Chairman has briefly reported the operations results of Pingtan. Regarding the factors affecting Pingtan’s results of operations, we refer to our 2018 fourth quarter and year ended earnings press release and the 10-K we filed last Friday. Today I will discuss Pingtan’s 2018 fourth quarter and fiscal year operations and financial results. For the fourth quarter of 2018, our sales volume was 10.4 million kilograms compared to 5.4 million kilograms in the fourth quarter of 2017. For the year ended December 31, 2018, our sales volume increased by 46.1% to 26.3 million kilograms from 18 million kilograms in the year ended December 31, 2017. Pingtan reported its revenue for the three months ended December 31, 2018 at $25.1 million compared to $16.4 million for the same period in 2017. This increase was mainly attributable to more landings of cash delivered to our warehouse. For the year ended December 31, 2018, the company’s revenues were $64.3 million, increasing by 1.7% from $63.2 million for the year ended December 31, 2017. The increase was mainly due to the reason described above. For the fourth quarter ended December 31, 2018, gross profit was $9.1 million compared to gross profit of $12.2 million in the prior year period. The gross margin for the fourth quarter ended December 31, 2018 was 36.2% compared to 74.5% for the same period in 2017. The decrease was mainly attributable to the increase of $7.3 million in fuel costs due to refueling 19 new fishing vessels sailing to sea for operation. For the year ended December 31, 2018, gross profit was $31 million compared to gross profit of $22.1 million in 2017. Gross margin in full year 2018 was 48.3% compared to 34.9% in full year 2017. The increase was primarily attributable to an increased number of deliveries into warehouse that average down unit production cost of fish. Our selling expenses mainly include storage fees, insurance, shipping and handling fees, custom clearance charges, and advertising expenses. Our sales activities are conducted through direct selling by our internal sales staff and we do not have to aggressively market and distribute our products. As a result, our selling expenses have been relatively small as a percentage of our revenue. For the fourth quarter ended December 31, 2018, selling expenses were about $0.44 million compared to $0.47 million in the prior year period. For the year ended December 31, 2018, selling expenses were $1.62 million, an increase of 31.8% from $1.23 million in the same period. The increase was mainly due to the increase in storage fees and shipping and handling fees as a result of larger warehouses rented and an increased number of deliveries to warehouses, partially offset by the decrease in insurance and advertising expenses. For the three months ended December 31, 2018, our general and administrative expenses were $2 million compared to $6.3 million in the prior year period. The decrease was primarily due to a decrease in professional fees as a result of mainly decreased legal fees, consulting fees and accounting fees, a decrease in compensation and related benefits, and a decrease in depreciation of non-operating fishing vessels. For the fiscal year ended December 31, 2018, total general and administrative expense was $10.3 million compared to $9.6 million in the same period of 2017. This increase was primarily due to an increase in depreciation expenses, compensation and related benefits, professional feels, rent and related administrative service charge, as well as bad debt recovery [indiscernible] review of accounts receivable balance and management evaluation of correctability of receivable balance, offset decrease in travel and entertainment expenses. For the three months ended December 31, 2018, net loss was $3.2 million compared to net income of $5.3 million in the same period of 2017. The decrease was mainly due to [indiscernible] $9.7 million impairment loss from vessels in the fourth quarter of 2018. For the year ended December 31, 2018, net income was $14.8 million compared to $32.5 million in the prior year period, a decrease of 54.5% as described above. This decrease was mainly due to [indiscernible] and impairment loss of $9.7 million on vessels compared to nil for the year ended December 31, 2017. In the fourth quarter of 2018, the company de-registered 24 vessels and applied to MOA for building 24 new fishing vessels. As a result of de-registration, the company assessed the recoverability of the 24 fishing vessels based on the discontinued future cash flow that the fishing vessels are expected to generate as less than the carrying amount and recognized an impairment loss, as per U.S. GAAP. Impairment loss is a non-cash item. Excluding the impairment loss, net income for the year ended December 31, 2018 would be $24.5 million. Pingtan reported a net loss contributed to owners of the company of $3 million for the fourth quarter of 2018, or $0.04 per basic and diluted share compared to net income attributable to owners of the company of $4.8 million or $0.06 per basic and diluted share in the prior year period. The company reported a net income attributable to owners of the company of $13.4 million for the year ended December 31, 2018, or $0.17 per basic and diluted share, compared to net income attributable to owners of the company of $29.7 million or $0.38 per basic and diluted share in full year 2017. On the balance sheet as of December 31, 2018, Pingtan’s cash and cash equivalents were $1.97 million, total assets were $247 million, total long term debt was $22.3 million, and shareholders equity was $151.6 million compared to $2 million, $201.1 million, $17.2 million, and $147.5 million respectively at December 31, 2017. We continue focusing our expansion of fishing grants and fishing fleet as a way to enhance production capacity and enrich production mix. We anticipate entering the seafood processing market and direct with customers both online and offline, meanwhile we will further explore ecommerce seafood retail business to enhance the entire industry chain and develop new distribution channels to penetrate China inland province. Based on the company’s expectation of potential production capacity recovery due to operation of 27 modified and rebuilt new fishing vessels during the first quarter, the demand for fishing products in the Chinese market, and the company’s continued efforts to expand its market share, the company expects that the [indiscernible] volume for the first quarter of 2019 will be around 20 million kilograms.

[Katherine Yao:]

Robert, let’s start the Q&A. For the question and answer session, please allow us a moment to translate the questions and the Chairman will respond to everyone on the call in both English and Chinese.

[Operator:]

[Operator instructions] Thank you. The first question is from the line of Spencer Ross with Superior Capital. Please proceed with your questions.

[Spencer Ross:]

Hi, good morning. I had a few questions. The first one, if somebody could comment on the gross margin in Q4, came in around the mid-30s. It was kind of down from the previous couple of quarters. I know it had something to do with the increase in the fueling of the 19 new ships. I was wondering if you could comment about the gross margin going forward.

[Roy Yu:]

First of all, in our gross margin, the fourth quarter of last year was actually in a relatively reasonable area as what we expected. The gross margin actually decreased comparing to the fourth quarter of last year from 74% to 36%. This is actually caused by a reclassification of a non-cash item, which is the depreciation of the existing vessels [indiscernible]. Based on our discussion with our auditor, both of us believe that according to U.S. GAAP for this depreciation of these vessels should take off from the cost and put them into SG&A, as required by U.S. GAAP, so this is why the gross margin for last year was relatively very much higher than what we had this quarter. Thank you.

[Spencer Ross:]

Okay, good, thanks. Going forward, though, do you see the gross margin going back to that 60, 70% level, or do you see it more like it was in the fourth quarter?

[Roy Yu:]

Of course as the increase of the company’s production capacity, there is going to be more fish we’re going to catch from the sea, so given the fact of the fishing industry, the cost is nearly at the fixed cost of the vessels, such as labor, fuel, the higher volume that we can catch, the higher production volume means it’s going to be a lower cost average to the number of catches we can get, so that from my point of view, I think the reasonable gross margin for this industry, it’s between 30 to 40%. Going forward, I believe our gross margin should be within this range.

[Spencer Ross:]

Okay, great. One question, you sort of indicated the impairment charge affected the gross margin. Is that correct?

[Roy Yu:]

I’m sorry?

[Spencer Ross:]

You indicated that the impairment charge, the $9 million charge affected the gross margin in the quarter. Is that correct?

[Roy Yu:]

Oh yes, so that part is actually a non-cash item, which is when we have rebuilds--I’m sorry, go ahead?

[Spencer Ross:]

Sorry. That was a one time, was a one-shot, one-off? That’s not going to be a recurring charge, is that correct?

[Roy Yu:]

No. That’s correct.

[Spencer Ross:]

Okay. Those 24 new vessels that you recently received MOA approval for, are those the same 24 that the impairment charge was related to?

[Roy Yu:]

I’m sorry, I didn’t hear you very clearly.

[Spencer Ross:]

Yes okay, I’m sorry. The 24 new vessels that you recently received approval for to rebuild, are those the same 24 that you had the $9 million impairment charge to relicense them?

[Roy Yu:]

That has been charged in the fourth quarter of 2018, so it won’t be any more charged in the future.

[Spencer Ross:]

Okay. These 24 new vessels, do you sort of foresee the same type of timeline to get them operational, in the same way that the first 27 came up, which took about, I don’t know, about nine months, or do you see that it’s going to move along any faster, or--?

[Roy Yu:]

Based on the contract we signed with other vessel supplier, the period of time it takes should be 1.5 years. But based on our experience with them and also our expectation, we hope they can be in water and start operation as soon as possible, so our expectation is these 24 vessels should be up and running by the end of this year or the beginning of next year.

[Spencer Ross:]

Okay, got it. Great. In terms of harvest volume from these 24, do you see that being similar to the 27 that just were made operational again?

[Roy Yu:]

Yes, sure. This is--the 24 new vessels, it’s actually the same type of vessels we rebuilt, so it’s going to be the same volume, vessel capacity.

[Spencer Ross:]

Okay. Now, you guided to 20 million kilograms for harvest volume in Q1. Is that--does that have anything to do with seasonality because of the Chinese New Year, or do you see that as something that’s going to be doable in other quarters coming up?

[Roy Yu:]

No, so actually we believe the capacity of these 27 vessels should be much higher than the guidance, the production guidance that we gave out, but the reason we think the first quarter should have 20 million kilograms is because these 27 vessels going out to the production area by different fleets, so the first fleet went out in November last year, so it takes 20 to 30 days for these vessels to get to the area for production, which means the first quarter not 100% of these 27 vessels is in production. So moving forward, we believe it’s going to be higher volume quarter by quarter.

[Spencer Ross:]

Okay, so in April of last year, you indicated that these new vessels would have the potential to bring between 80 and 100 million kilo volume. Is that number still accurate, or you think you’ll be able to--you know, is that a conservative number?

[Roy Yu:]

It is, it is, but this is the design capacity for the vessels, and there is also some other factors may affect the production, like the labor, or some other natural factors. But in our members on the vessel, they are very experienced and have been training for years, so they should have very rich experience on fishing so we believe this should be very possible number for the actual harvest volume for these 27 vessels.

[Spencer Ross:]

Okay, got you. Just wondering if you could comment a bit about the pricing environment in Q4 and upcoming, looking into 2019. Are you there?

[Roy Yu:]

Yes.

[Spencer Ross:]

I can repeat the question. I was wondering if you could comment on the pricing environment that you’re seeing for the various types of fish that you’re seeing, how was it in Q4 and how do you see it coming up this quarter into 2019.

[Roy Yu:]

The fishing prices?

[Spencer Ross:]

Right.

[Roy Yu:]

The fishing price is actually driven by the demand of the market, and also there is seasonality - for example, before the Chinese New Year, the seafood market is [indiscernible], which can drive up higher price. Given our point of view from the market, we believe the seafood market will keep stable [indiscernible] the supply still shorter than demand from the market, so this is--I think this is going to be the main driver for the fishing price in the next maybe five to 10 years.

[Spencer Ross:]

Do you see demand remaining strong, as strong as it’s been in the last year, or do you have any pulse on that?

[Roy Yu:]

The demand is always strong for seafood in China, and it’s [indiscernible].

[Spencer Ross:]

Okay. Is it helpful for Pingtan that the Chinese government has tried to limit the amount of fishing that’s being done? Is that helpful in terms of the pricing environment for you?

[Roy Yu:]

Yes, for sure it’s not only for the volume as well as the number of vessels, so this won’t be any increase the number of fishing vessels on international waters, which means there won’t be new license issued for the Chinese government.

[Spencer Ross:]

Could you just repeat that last point? I didn’t quite hear you.

[Roy Yu:]

I’m sorry. Okay, [indiscernible]. The first part is the elimination of the number of catches on each vessel, so on the other part, the Chinese government won’t issue any more new fishing license for international waters--

[Spencer Ross:]

Uh huh, okay, got it.

[Roy Yu:]

So these two factors will definitely be a driver for the seafood price in the future.

[Spencer Ross:]

Okay, good. I think this might be my last question and then I’ll go out of the line. Any update on the Indonesian government policy, are you getting any clues on that ? Was it just--have you given up on that or--? It looks like you’re doing a lot of the right things even without that, but do you see any cracks in the water?

[Roy Yu:]

We don’t have any update now, but if they do, we’re going to put out a press release for that.

[Spencer Ross:]

Okay, that was good. Thank you for your help, and congratulations going forward.

[Roy Yu:]

Thank you very much.

[Operator:]

Thank you. I will now turn the floor back to management for closing remarks.

[Katherine Yao:]

Robert, hold on one second. We would like to translate all these questions into Chinese. Thank you.

[Operator:]

Thank you. Is there additional translation at this time?

[Katherine Yao:]

Hello Robert, we have finished translating the questions.

[Operator:]

Thank you, Katherine. Would management like to make any closing remarks?

[Xinrong Zhuo:]

Okay, thank you again to all of you for joining us today. We look forward to speaking with you again in May when we report our first quarter 2019 financial results. As always, we welcome any visitors to our office in Fuzhou, China. Thank you.

[Operator:]

Thank you. Today’s conference has concluded. You may disconnect your lines at this time. Thank you for your participation.