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Zhongpin: 3Q Higher revenues and lower net income

Zhongpin Inc. reported higher sales revenues and lower net income for the three months ended September 30, 2012 compared with the third quarter 2012.

Third quarter 2012 highlights:
•    Sales revenues increased 4% to $415.7 million for the three months ended September 30, 2012 from $398.1 million in the third quarter 2011 primarily due to higher sales volume for pork products sold at lower average selling prices.

•  Net income decreased 40% to $11.0 million in the third quarter 2012 from $18.3 million in the third quarter 2011 primarily due to a lower gross profit margin, the cost of more employees to support expansion, higher salaries, higher promotional activities, rising labor and utility costs, and higher interest expenses. The higher expenses were mainly due to the higher volume of business and intense competitive pressure in the pork market.

•  Basic earnings per common share (based on net income attributable to Zhongpin shareholders) decreased 35% to $0.30 in the third quarter 2012 from $0.46 in the third quarter 2011. Weighted average basic shares outstanding decreased 7% to 37,198,909 shares in the third quarter 2012 from 39,918,816 shares in the third quarter 2011.

•  Diluted earnings per common share (based on net income attributable to Zhongpin shareholders) decreased 35% to $0.30 in the third quarter 2012 from $0.46 in the third quarter 2011. Weighted average diluted shares outstanding decreased 7% to 37,240,843 shares in the third quarter 2012 from 39,918,816 shares in the third quarter 2011.

•  40,376,182 common shares were issued as of September 30, 2012, of which 37,209,344 were outstanding and 3,166,838 were held by Zhongpin as treasury shares.

•  The company maintains its previous guidance for 2012. Zhongpin expects that sales revenues should be within a range of US$1.55 billion to $1.72 billion for 2012. Gross profit margin is expected to be within the range of 8.6% to 10.2%. Net profit margin is expected to be within the range of 3.3% to 4.2%. The resulting diluted earnings per share for the fiscal year ending December 31, 2012 is expected to be within the range of $1.36 to $1.92 per share, assuming average diluted common shares outstanding of about 37.5 million shares in 2012. Assumptions and judgments supporting the guidance are shown below.

Mr. Xianfu Zhu, chairman and chief executive officer for Zhongpin, said, "We achieved 4 percent sales revenue growth in the third quarter on higher tonnage at lower average prices, compared with last year's third quarter, in the face of intense competitive pressure. The competitive pressure in the market remains very high due, in part, to industry consolidation in the pork industry in China. Our costs continued to increase, mainly to support our current operations and planned expansions. While pork prices were generally lower, mainly due to intense competitive market pressure, hog prices also declined, but not as rapidly as pork prices. That is the primary factor for our lower gross profit margin in the third quarter compared with last year's third quarter.|

Capacity and market expansions in 2012
Zhongpin is investing approximately $58.5 million to build a new production, research and development, and training complex in Changge, Henan province, excluding the cost of land use rights that it has already obtained. When completed, this new facility is expected to have an annual production capacity of about 100,000 metric tons for prepared pork products. Adjacent to this new production facility, Zhongpin plans to develop a center for research and development, training, and quality assurance and control. Construction for the first phase with a production capacity of approximately 50,000 metric tons for prepared pork products started in the third quarter of 2011 and was completed in the second quarter of 2012. Trial production was started in July 2012, and the plant has been in regular production since the end of September 2012.

The company established a joint venture company in June 2011, of which the Cit owns 65%, with Henan Xinda Animal Husbandry Company Limited. The joint venture company is financed by capital contributions and bank loans. All capital contributions to the joint venture company have been made. The joint venture company is expected to provide 20,000 sire boars annually. Upon the completion of the building of infrastructures for sire boar breeding in the third quarter of 2012, Zhongpin leased the facility to a third party for annual rental in the amount of RMB5.0 million.

Zhongpin is investing approximately $18.0 million in a cold-chain logistics distribution center in Anyang, Henan province. This distribution center will have a temperature adjustable warehouse with a floor area of approximately 27,000 square meters, processing capacity, distribution center, and a quality control center. The distribution center will be used for third-party cold-chain logistics service. Zhongpin expects to put this distribution center into operation in the fourth quarter of 2012.

It plans to invest approximately $87.5 million in a chilled and frozen food processing and distribution center in Kunshan, Jiangsu province, which is near Shanghai. The center will be built in three phases. The first phase will include a processing center, cold-chain logistics center, and business complex. It  expects to invest about $35.0 million on the first phase that should be put into operation in the fourth quarter of 2012.

The company is investing approximately $10.5 million in a by-product processing plant in Changge, Henan province. This facility will have a production capacity for 100 million meters of sausage casings and 300 billion units of raw material to make heparin sodium. The construction started in March 2012, and the new facility is expected to begin operations in the fourth quarter of 2012.

Zhongpin will be investing approximately $47.6 million to build a cold-chain logistics distribution center in Tangshan, Hebei province. This distribution center will have a 27,000 square meter temperature-adjustable warehouse, processing capacity, distribution center, and quality control center. This distribution center will be used for third-party cold-chain logistics service and is expected to be in operation in the fourth quarter of 2013.

As of September 30, 2012, it had an annual capacity of 728,760 metric tons for chilled and frozen pork, 176,000 tons for prepared pork products, 20,000 tons for pork oil, and 30,000 tons for vegetables and fruits, for a combined total of 954,760 metric tons.

Guidance for the year 2012
Mr. Warren Wang, Zhongpin's chief financial officer, said, "We are maintaining our prior guidance. Our guidance for 2012 is based on several assumptions that include:

• Continuation of China's policies designed to stimulate domestic consumption and economic growth.
• Average hog prices in China are expected to decrease about 15% to 20% in 2012 from 2011, based on the assumed forecasted trend for the supply of live hogs and the increasing cost to raise hogs.
• A higher percentage of sales from our higher-margin chilled pork and prepared pork products in 2012 compared with 2011, while we plan to continue to increase sales volumes of processed pork products to optimize our product structure.
• Average capacity utilization for the year of about 75% for pork products.
• Increasing distribution efficiencies and reduction in the duration of delivery times through the expansion of our cold-chain logistics system, networks, and services.
• Total government subsidies for Zhongpin are expected to be $5 million in 2012.
"In addition, we have assumed that the more aggressive price competition that we saw in the latter part of 2011 and the first quarter of 2012 will continue in 2012, especially aggressive promotion efforts by our major competitors.
"We have assumed that we will increase our expenses in four areas in 2012:
• First, we will continue to build our brand more aggressively;
• second, we will increase our  investments in human resources, especially in training and recruiting;
• third, we will increase research and development for new customized products with different styles and tastes to further satisfy customer needs in different regions, with the objective of capturing more market share for prepared pork products; and
• fourth, we will advance our information technology and information systems more  rapidly to support our cold-chain logistics system, optimize the structure of the supply chain, and to reduce the management cost.

"Lastly, we have assumed that the historical trend of increasing costs for labor, energy, environmental protection, and quality assurance and control will continue into the future, including in 2012.

"Given those comments and assumptions, we are maintaining our prior guidance.

"For the year 2012, we expect that Zhongpin's sales revenues should be within a range of US$1.55 billion to $1.72 billion.Gross profit margin is expected to be within the range of 8.6% to 10.2%. Net profit margin is expected to be within the range of 3.3% to 4.2%. Diluted earnings per share for the year 2012 are expected to be within the range of $1.36 to $1.92 per share, assuming average diluted common shares outstanding of about 37.5 million shares in 2012."

Sales revenues in the third quarter 2012
Total sales revenues increased $17.6 million or 4% to $415.7 million for the three months ended September 30, 2012 from $398.1 million in the third quarter 2011 primarily due to higher sales volume for pork and pork products sold at lower average selling prices.

The higher revenues resulted mainly from continued increases in the number of retail outlets, geographic expansion of its distribution network and processing facilities, and higher sales to chain restaurants, food service providers, and wholesalers and distributors in China, and higher selling prices for prepared pork products, partly offset by lower average selling prices for chilled and frozen pork. The following table shows tonnage, sales revenues, and average price per metric ton by product division for the third quarters of 2012 and 2011.

Chilled pork revenues increased on higher tonnage at lower average prices per ton. Chilled pork revenues increased 2% in the third quarter 2012 from the third quarter 2011. Chilled pork tonnage increased 37% and the average price per metric ton decreased 25% in the third quarter 2012 from the third quarter 2011. The higher revenues from chilled pork were mainly due to higher tonnage sold as a result of higher capacity, increased sales to existing customers, and increased volume of sales from new geographic markets, expanded points of sales, and added new customers, partly offset by the lower average selling price that resulted from fluctuations in market price for chilled pork or chilled pork-related products in a more competitive market.
Frozen pork revenues decreased on higher tonnage at lower average prices. Frozen pork revenues decreased 9% in the third quarter 2012 from the third quarter 2011. Frozen pork tonnage increased 15% and the average price per metric ton decreased 21% in the third quarter 2012 from the third quarter 2011. The lower average selling price of frozen pork products was the result of fluctuations in market prices for frozen pork or frozen pork-related products in a more competitive market, which was partly offset by higher tonnage sold.

Prepared pork revenues increased on higher tonnage at higher average prices. Revenues from prepared pork products increased 38% in the third quarter 2012 from the third quarter 2011. Prepared pork tonnage increased 33% and the average price per metric ton increased 4% in the third quarter 2012 from the third quarter 2011. Prepared pork products are becoming more important to our business since customers are increasingly demanding them for their flavor and convenience and are willing to pay higher average prices for these products. We plan to gradually increase sales from prepared pork products by increasing our brand recognition and expanding our capacity for these products.

Pork products totaled 98.8% of total sales revenues in the third quarter 2012 and 98.7% in the third quarter 2011.

** Zhongpin is a leading meat and food processing company China.


For more information: Zhongpin

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