Pingtan Marine Enterprise Ltd.
Q4 2014 Earnings Call Transcript

Published: 11 Mar 2015

[Operator:]

Good morning and welcome to the Pingtan Marine Fourth Quarter and Year-End 2014 Financial Results conference call. At this time, all participants are in a 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Katherine Yao of The Equity Group. Thank you, ma’am. You may begin.

[Katherine Yao:]

Thanks Operator and good morning everyone. Thank you for joining us. Copies of the press release announcing the 2014 fourth quarter and year-end results are available on Pingtan Marine’s website at www.pingtanmarine.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 on 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 prospects and results of operations. Such risks are fully detailed in Pingtan Marine’s filings with the Securities and Exchange Commission. The company filed its annual report on Form 10-K yesterday. I would now like to take a moment to outline the format for today’s call. As we’ve just been informed the company’s Chairman and CEO, Mr. Xinrong Zhuo, is traveling and will not participate in today’s call, therefore I will read Mr. Xinrong Zhuo’s prepared opening statement in English. I will then turn the conference call over 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. With that, I will now start to read Pingtan Marine’s Chairman and CEO, Mr. Xinrong Zhuo’s prepared opening statement. Thank you. Good morning everyone, and for those from China and Asia region, good evening. Thanks for joining our 2014 fourth quarter and year-end conference call. We are pleased that in 2014, Pingtan reported balanced operating results. During fiscal 2014, our revenue increased to $223 million, representing an increase of 90%, and our net income increased 32% to $86 million. The robust growth driven by our continuous efforts in further development, enhance our fleet to increase our fishing capacity, and expand our sales network to penetrate new markets. Also in 2014, we have sold 76 million kilograms of our 30 different species of fish and marine products to more than five provinces covering 237 million people in mainland China, including Fujian, Shandong, Zhejiang, Liaoning and other areas. 2014 was a breakthrough year for Pingtan as we continued to realize our goal of becoming a vertically integrated seafood product provider. Greater expansion took place due to our utilization of both operation and financial leverage strengths. Recently, we proudly announced the RMB 400 million strategic investment made by China Agriculture Industry Development Fund, which is a strong long-term strategic partner. We expect to work with them to seek win-win ideas through additional capital, resource sharing and transparency. Our CFO, Mr. Roy Yu will discuss strategic investments made by China Agriculture in detail later in this call. Also in 2014, we were pleased to announce that Pingtan has begun paying quarterly dividends of U.S. $0.01 per share, and we have declared two consecutive quarterly dividend payments on record dates of October 6, 2014 and January 15, 2015, and taking cash on November 14, 2014 and February 18, 2015. We think the quarterly dividend payment reflects our strong balance sheet as well as our commitment to deliver significant growth [indiscernible] to our investors. In 2014, we were aware of continuous growing demand for deep ocean seafood in China, and we are confident with our marketing strategy and long-term growth. Pingtan is committed to developing our business to become a properly rated seafood company. We plan to enlarge our fishing fleet in the next three years to increase our fishing capability and [indiscernible]. We are actively seeking opportunities to expand to other fishing grounds worldwide, including North America, South America and Haiti, which will further diversify our harbor fish types to stay competitive. Also, we are planning to expand our fish processing business as part of our initiative with the joint venture, Pingtan [indiscernible] with China Co-Op. We expect to market processed food products throughout China and worldwide once the fish processing plant is completed. At the same time, we will strengthen our brand recognition in the market, which will allow us to achieve forward integration of the industrial channel and hence improve its profitability. On behalf of our company, I look forward to meeting any of you in person, and as always welcome each of you to visit our facilities in Fuzhou and [indiscernible]. Thank you. I would now like to turn the call over to Mr. Roy Yu, Chief Financial Officer of Pingtan Marine Enterprise.

[Roy Yu:]

Thanks Katherine. Good morning and welcome everyone. Today I will discuss Pingtan Marine’s 2014 fourth quarter and year-end operational and financial results. Before I get started, I would like to address a few significant events during the fourth quarter and recent announcements. On October 27, 2014, we announced the delivery of three newly built fishing vessels which were initially ordered by the company in October 2012. Each of these vessels has about 2,000 tons annual fishing capacity. Currently, the company’s total fleet has increased to 129 vessels. On January 13, 2015, the company announced that it has declared a cash dividend of $0.01 per share of common stock outstanding. The dividend was payable in cash on or about February 18, 2015 to shareholders of record on January 15, 2015. This makes the second consecutive quarterly dividend paid by the company, which it intends to continue paying on a quarterly basis. On February 10, 2015, the company announced a RMB 400 million investment agreement with China Agriculture Industry Development Fund. The investment goes to Pingtan’s wholly owned subsidiary, Fujian Province Pingtan County Ocean Fishing Group Company Limited, with an 8% equity interest of Pingtan Fishing in return. The investment raises Pingtan Fishing valuation up to approximately RMB 5 billion or U.S. $800 million at current exchange rates. Due to the execution of this strategic investment agreement, Pingtan terminated its existing variable interest entity agreements as permitted by the law of People’s Republic of China. This provides the shareholder of Pingtan Marine Enterprise with direct ownership of its subsidiary rather than contractual ownership through the VIE structure. We currently catch nearly 30 different species of fish, including ribbon fish, Indian white shrimp, croaker fish, pomfret, Spanish mackerel, conger eel, squid and red snapper. All fish products caught by the company are shipped and transported to the cold storage warehouse facilities to nearby onshore fishing bases. We then arrange charter transportation to deliver the frozen fish to its nine cold storage warehouses located in one of China’s largest seafood treating centers, Mawei Seafood Market in Fujian Province. We sell our products directly to customers, including distributors, restaurant owners and exporters, and most of our customers have long-term and cooperative relationships with us. Our existing customers also introduce new customers to us from time to time. As of December 31, 2014, we sold our fish to over 200 distributors and retailers by acting as a wholesaler, and no customer accounted for more than 10% of our sales. Our operating results are subject to seasonal variations. Harvest volume is the highest in the fourth quarter of the year and harvest volumes in the second and third quarter are relatively low due to the spawning season of 13 fish species. Based on past experience, demand for seafood product is the highest from December to January during Chinese New Year. We recognize revenue when customers receive purchased goods at our cold storage warehouse after payment is received or credit sale is approved for recurring customers with excellent payment histories. We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to customers. We do not accept returns from customers. Deposits or advance payments from customers prior to delivery of goods are recorded as advance from customers. Now I’d like to move to financials. We reported strong growth in revenue, operating income and net income from our fishing business for the three months and year ended December 31, 2014. This was a result of increases in sales volume from the additional 66 new fishing vessels in June and September 2013, most of which began operating at full capacity in the year ended December 31, 2014. The addition of 20 new fishing vessels acquired from December 2013 were also put in operation in year ended December 31, 2014. Sales volumes in the year ended December 31, 2014 increased 77% to 76 million kilos from 47 million kilos in the year ended December 31, 2013. Average unit sales prices increased 11% in the year ended December 31, 2014 compared to the year ended December 31, 2013, which was driven by the higher demand of natural seafood in China. The company reported revenues from our fishing business for the 2014 fourth quarter of $57 million compared to $61 million for the same period in 2013. The decrease was primarily due to delay in spring festival, which is our peak season. For 2013, spring festival was in January 2013, while for 2014 it was in February 2015. For the year ended December 31, 2014, the company increased revenues from our fishing business by 90% to $233 million from $123 million compared to the prior year. The increase was mainly due to increase in sales volume as a result of the addition of 66 fishing vessels into our operation in June and September 2013, most of which were operating at full capacity in the year ended December 31, 2014, and the addition of 20 new fishing vessels acquired from Hong Long in December 2013, which were put in our operation in the year ended December 31, 2014. For the fourth quarter ended December 31, 2014, gross profit from our fishing business was $19 million compared to $25 million in the prior year period. The gross margin was 34% compared to 42%. The decrease was primarily due to an increase in fuel cost, labor cost and fishing license and agency from additional nine vessels. Six of these vessels replaced vessels from the company’s fleet replacement plan announced on May 28, 2014 and were delivered to the company in 2014 fourth quarter, and the remaining three vessels were newly built fishing vessels which we ordered in October 2012 and were also delivered in October. All of these nine vessels have an expected remaining period of three to six months in which each are placed into the sea for testing prior to full operation. In addition, the average unit sales price decreased in December 2014 compared to December 2013 due to delay of the spring festival. For the year ended December 31, 2014, gross profit from fishing business was $78 million from $48 million in 2013. Gross margin in full-year 2014 was 33%, decreased from 39% in full-year 2013. The decrease was primarily due to an increase in fuel costs, labor cost, and fishing license and agency from additional vessels. Pingtan reported net income from fishing business for fourth quarter of 2014 of $33 million or $0.42 per basic and diluted share compared to net income of $30 million or $0.38 per basic and diluted share in the prior year period. The company reported net income from fishing business for the year ended December 31, 2014 of $86 million or $1.08 per basic and diluted share, increased 82% from $47 million or $0.60 per basic and diluted share in full year 2013. Moving quickly to the balance sheet, at December 31, 2014 Pingtan’s cash and cash equivalents were $13 million, total assets of $249 million, total long-term debt of $39 million, and shareholders equity was $149 million compared to $8 million, $170 million, $55 million and $65 million respectively at December 31, 2013. Regarding the company’s 2015 earnings guidance, which I believe many of you will ask in the later Q&A session, as many of you are aware of recent anti-illegal fishing matters from the Indonesian government, our efforts in cooperation with the Indonesian Navy have affected the majority of our fishing vessels harvesting within the Arafura Sea in Indonesia in the short term. As a result, the company has taken a conservative approach and decided not to provide specific earnings guidance at this time, given the recent political conditions, and we look forward to announcing the 2015 earnings guidance once all of our fishing vessels in Indonesia are in full operation. We believe these recent developments in Indonesia are a positive indicator and long-term growth driver for fully licensed fishing companies like Pingtan. We expect the regulations which the Indonesian government will enact in April will further secure our company to operate in a safer and protected environment. To conclude, we continue to grow organically through opening new retail sales channels, cooperation with large distributors to extend our sales network into new provinces and areas. Finally, we went to great lengths to include detailed information on our business in our Form 10-K. We would like to welcome each of you to review it closely. With that, Operator, let’s open it up for any questions. Thank you.

[Operator:]

[Operator instructions] Thank you. Our first question is coming from the line of Damon Sultan [ph], a private investor. Please proceed with your question.

[Damon Sultan:]

Yes, thank you. My question is with the amount of strong growth since this time last year, what efforts are being made by Pingtan to increase shareholder value? And I ask this question because it appears that the price per share this time last year was slightly higher than it currently stands, and that was before Pingtan’s positive information regarding the declaration of a dividend and also the elimination of the VIE structure. So are any efforts being taken to increase shareholder value? Thank you.

[Roy Yu:]

The return to shareholders is the most important work of our management. As you can see, we grow our company for the acquisition of the new 66 fishing vessels, so the revenue, the net income has been doubled compared to last year. The company, also the management team keeps very transparent to our shareholders and investors. We’re disclosing all the information and we keep paying a quarterly basis dividend back to our shareholders. As the CFO, I believe going forward U.S. investors will understand the operations of Pingtan and will know the true value of the company.

[Damon Sultan:]

Just one other question. With the China Agriculture deal, I understand that the valuation was approximately $800 million, and that came out to be approximately $9 per share. Not exactly certain how that valuation came about. I understand there was involvement with Ernst & Young, the firm. How were they involved?

[Roy Yu:]

Sure, yes, the definitely know that because Pingtan is a public trading company in the U.S., so I believe that’s how they knew about us at the beginning. [Indiscernible] we are a public company, so they definitely know that. So this is about--the valuation is about a comparison with the similar fishing companies trading in the China market, the fishing companies listed on A share, and we believe that is a fair price to our company. So before they signed this strategic investment agreement with Pingtan, they spent a lot of time, nearly six months time doing background checks on the company, including go through all the documentation and doing research on the fishing license and all paperwork with the Indonesian government. Also, they sent their lawyers with the managers of the firm, go to Indonesia, talk to local people about our company, also to talk to the Indonesian government about Pingtan. So from financial part, [indiscernible] Ernst & Young did a full financial due diligence of our company for year 2013 and 2014, and finally they made the decision to invest RMB 400 million to Pingtan at U.S. $800 million valuation.

[Damon Sultan:]

All right, well keep up the good work.

[Roy Yu:]

Thank you.

[Operator:]

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star, one at this time. Our next question is coming from the line of John Harrell [ph] of Harrell & Associates. Please proceed with your question.

[John Harrell:]

Yes, good morning. It just seemed like with the $0.01 share dividend each quarter, that’s still right around 1% annually, and if you wanted to make your company seem legitimate and treated like it should be, it seems like you’d offer a dividend based upon what you think the fair value of the stock is and not where it’s trading at. At this point, you provide no incentive whatsoever to buy the stock here, and obviously with this--the business is definitely being affected by the Indonesia government since the company is refusing to provide any guidance going forward, so it seems to me like numbers are going to be coming down rather than going up going forward. What do you think?

[Roy Yu:]

First of all, $0.01 quarterly dividend, this was--the decision was made by the board of directors of the company, so after they seriously considered about investment opportunity of the company and the return back to our shareholders. They do have a projection based on the earnings, so currently the $0.01 we paid out is based on earnings of 2013. So with that calculation, I believe full-year 2015 with the dividend will be paid out based on the net income earnings from 2014, that will be increased going forward. To answer your second question about the guidance, it’s not about the company not providing the guidance going forward. It’s about this new regulation coming out from the Indonesian government which we definitely believe is a very, very positive factor to our company and the anti-illegal fishing, so that will drive up the [indiscernible] price as the last demand provided to China. So the Indonesia government, based on our current negotiations with them, so they will provide new regulations and [indiscernible] know the details about this new regulation, so we could be back in full capacity. At that time, we will be providing the guidance for 2015 to investors and our shareholders. So in the short term, yes, that will affect our operations a little bit, but in the long term I think this will be a very positive factor to our operation. Thank you.

[John Harrell:]

So how long do you expect the negative impact to last? Just another quarter?

[Roy Yu:]

It wouldn’t be--that depends on the new regulation. It could be another quarter, it could be [indiscernible] an impact, we could be back to [indiscernible] April or May. So you know, this all depends on the new regulation.

[John Harrell:]

So what’s the current impact of the fishing regulations? Are you fishing at all right now, or are operations completely shut down?

[Roy Yu:]

No, the current is not shutting down. Because there are so many illegal fishing in Indonesian waters, so the government has [indiscernible] to stop all the fishing vessels and doing a full inspection to every vessel. That’s how they verify which is legal, which is illegal, so after they’ve done that, they are currently working on a new regulation to protect the companies, the legal fishing companies like Pingtan to be safer and better fishing environment on the sea.

[John Harrell:]

So right now, you’re not doing any fishing as of right now?

[Roy Yu:]

We still have operations in 12 fishing vessels, and we still have some operations but not in full operation in Indonesian waters.

[John Harrell:]

Okay, well thank you very much.

[Roy Yu:]

Thank you.

[Operator:]

Thank you. As a final reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star, one on your telephone keypad. As a reminder, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for additional questions. Thank you. It appears we have no further questions at this time. I would like to turn the floor back over to management for any additional or concluding comments.

[Roy Yu:]

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

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.