Zhongpin Inc. ("Zhongpin" or the "Company," Nasdaq: HOGS), a leading meat and food processing company in the People's Republic of China, today reported higher sales revenues and lower net income for the three months ended June 30, 2012 compared with the second quarter 2011.
Second quarter 2012 highlights:
Total sales revenues increased 11.4% to $408.2 million for the three months ended June 30, 2012 from $366.5 million in the second quarter 2011 primarily due to higher sales volume for pork products sold at lower average selling prices.
Net income decreased 43.0% to $11.0 million in the second quarter 2012 from $19.3 million in the second quarter 2011 primarily due to a lower gross profit margin, the cost of more employees to support expansion, higher salaries, rising labor and utility costs, and higher interest expenses and income taxes.
The higher expenses were mainly due to expansion of our business and intense competitive pressure in the pork market as the industry continues to consolidate and companies are required to vie aggressively to win additional market share in a variety of ways.
Basic earnings per common share (based on net income attributable to Zhongpin shareholders) decreased 39.6% to $0.29 in the second quarter 2012 from $0.48 in the second quarter 2011. Average basic shares outstanding decreased 7.8% to 37,189,322 shares in the second quarter 2012 from 40,355,502 shares in the second quarter 2011.
Diluted earnings per common share (based on net income attributable to Zhongpin shareholders) decreased 39.6% to $0.29 in the second quarter 2012 from $0.48 in the second quarter 2011. Average diluted shares outstanding decreased 7.8% to 37,209,695 shares in the second quarter 2012 from 40,365,654 shares in the second quarter 2011.
Common shares issued were 40,356,182 shares as of June 30, 2012, of which 37,189,344 were outstanding and 3,166,838 were held in Zhongpin's treasury.
Guidance for 2012 is maintained: 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 year 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 good sales growth in the second quarter on higher tonnage at lower average prices, compared with last year's second quarter.
"The continuing intense competitive pressure due to the ongoing pork industry consolidation in China, and higher costs generally in China, have reduced our gross profit margin and increased our operating costs for this quarter and this year.
"We continued to expand our operations in the second quarter, but at a slower rate, to help secure our long-term growth and achieve a much stronger market position in the years ahead. Recently, we finished the construction for additional annual production capacity of 50,000 metric tons for prepared pork products and started trial production in July. With that addition, our total annual production capacity was 954,760 metric tons for all of our products at the end of July 2012.
"Pork prices were lower than expected, mainly due to intense competitive pressure as the industry continues to consolidate. Hog prices also declined, but not as rapidly as pork prices. Those were the main factors for our lower gross profit margin in the second quarter compared with last year's quarter.
"Our product growth strategy is to develop, produce, and sell more prepared pork products -- first, because customers like them, and second, because the products can be sold at higher profit margins.
So the shift you see in our product mix -- with lower tonnage, lower prices, and lower sales revenues from frozen pork and higher numbers from our prepared pork products this quarter - reflects our strategy to use more of our resources to develop and produce our prepared pork products, because those are considerably more profitable and have a very attractive future.
Chinese consumers today are embracing more easy-to-complete-and-serve meals, often based on the outstanding quality, safety, and taste of Zhongpin's prepared pork products. In some markets, we even sell comp lete kits for those meals.
"As of June 30, we offer more than 440 types of different categories of products.
"I believe the long-term outlook for China's pork industry and for Zhongpin is quite good, but given the pork industry's massive consolidation that is expected to continue with increasing intensity in the next several years, we believe that delivering a sustained pattern of higher net income and higher net cash flows in those coming years will be a difficult challenge."
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 should 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 w ith a production capacity of approximately 50,000 metric tons for prepared pork products started in the second quarter of 2011 and trial production started in July 2012.
Zhongpin established a joint venture company in June 2011, of which the Company 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 will provide 20,000 sire boars annually. Construction of the facility for sire boar breeding is continuing and the operations are expected to begin in the third quarter 2012.
Zhongpin is investing approximately $18.0 million in a cold-chain logistics distribution center in Anyang, Henan province. This distribution center will have processing capacity, a temperature adjustable warehouse with a floor area of approximately 27,000 square meters, a 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 third quarter of 2012.
Zhongpin 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. Zhongpin expects to invest about $35.0 million on the first phase that should be put into operation in the fourth quarter of 2012.
Zhongpin will be 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 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 $49.0 million to build a slaughtering and processing plant, low temperature prepared pork plant, and logistics center in Tangshan, Hebei province.
This facility will have an annual production capacity of about 60,000 metric tons for chilled pork, 20,000 metric tons for frozen pork, and 22,000 metric tons for prepared pork products. Construction is scheduled to start in the third quarter of 2012, and the new facility for chilled and frozen pork is expected to begin operations in the second quarter of 2013.
As of June 30, 2012, Zhongpin had an annual capacity of 728,760 metric tons for chilled and frozen pork, 126,000 tons for prepared pork products, 20,000 tons for pork oil, and 30,000 tons for vegetables and fruits, for a combined total of 904,760 metric tons. With the additional annual capacity of 50,000 metric tons for prepared pork products that started trial production in July, Zhongpin's total annual capacity for all products was 954,760 tons as of July 31, 2012.
Outlook for pork demand and pricing in China
Zhongpin's outlook for hog prices and pork prices has decreased somewhat since the end of the first quarter 2012.
Although China's economy appears to be healthy and pork continues to be the preferred protein for most Chinese consumers, and the fundamental demand for pork should continue to be quite good, the vigorous competition for market share in the pork industry, as the industry consolidates, has helped to reduce pork prices in the second quarter 2012 more than the cost of hogs has decreased.
Zhongpin believes that hog prices may have reached the bottom of the current price decline, despite the current abundant supply of hogs.
As the costs for breeding and feed are rising, the Chinese government has recently started to increase the nati
on's pork reserve, which in the past has generally had the effect of stabilizing hog prices somewhat above the cost to raise hogs.
Hog prices have declined about 15% from the end of January 2012 to early August 2012. Given the expected bottom, we still estimate hog prices to decline on average by 15% to 20% in the year 2012 compared with 2011. The hog price declines in the second quarter 2012 are consistent with that estimation for the year 2012.
Pork prices tend to follow hog prices, since most pork producers, including Zhongpin, try to maintain a good spread between the price of hogs and the price of pork.
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, which 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 and second quarters 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 and do that more aggressively in 2012 than in 2011;
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.
"Zhongpin believes that China's meat and food industry will continue to consolidate in 2012 at a more rapid pace than in 2011, which may result in higher market shares for the leading producers. We believe that Zhongpin is equipped to meet the challenge of increasing competition and that our guidance for 2012 can be achieved."
Sales revenues in the second quarter 2012
Total sales revenues increased $41.7 million or 11.4% to $408.2 million for the three months ended June 30, 2012 from $366.5 million in the second quarter 2011 primarily due to higher sales volume for pork and pork products 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 second quarters of 2012 and 2011...
Source: Argentine Beef Packers S.A.
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