China Marine Reports Record Third Quarter Revenues of USD22.7 million and Adjusted EPS of USD0.16
China Marine Food Group Limited, a manufacturer of Mingxiang seafood-based snack foods, "Hi-Power" marine algae-based beverages and a distributor of frozen marine catch, announced its financial results for its third quarter ended September 30, 2010, reports www.megafishnet.com with reference to China Marine Food Group.
Third Quarter 2010 Highlights
• Revenue was USD22.7 million, up 69.2% from Q3 2009.
• The Company expanded its retail footprint for seafood snack food products by 100 sales points to 3,000 and sales grew 31.0% year over year.
• "Hi-Power", the Company's algae-based beverage, was offered at 12,000 retail points at the end of Q3 while quarterly revenues grew to USD6.7 million.
• Gross margins expanded by 472 basis points to 36.7%.
• Net income was USD4.2 million, up 28.9% from Q3 2009; Adjusted net income excluding non-cash charges was USD4.8 million**.
• Earnings per diluted share were USD0.14 based on 29.4 million shares; Adjusted EPS was USD0.16** based on 29.4 million fully diluted shares outstanding.
Third Quarter 2010 Results
Q3 2010 Q3 2009 CHANGE
Net Sales USD22.7 million USD13.4 million + 69.2%
Gross Profit USD8.3 million USD4.3 million + 94.2%
Net Income USD4.2 million USD3.2 million + 28.9%
Diluted EPS* USD0.14 USD 0.14 + 1.1%
Adjusted Net Income** USD4.8 million USD3.2 million + 47.2%
Adjusted Diluted EPS** USD0.16 USD0.14 + 15.5%
* EPS calculated for the period is based on 29.4 million shares on September 30, 2010 versus 23.0 million shares reported on September 30, 2009.
** Adjusted Net Income and Diluted EPS in Q3 2010 are non-GAAP calculations and do not include USD0.6 million of non-cash, amortization of intangible assets related to the Company's acquisition. For more information about the non-GAAP financial measures contained in this press release, please see "About Non-GAAP Financial Measures" below.
"We are pleased to announce record third quarter results, which benefitted from 31.0% organic growth in seafood snack food products line. We added an additional 100 retail points to our network and experienced year over year growth in the majority of the sales territories for our core product line," began Mr. Pengfei Liu, Chairman and CEO of China Marine. "Sales of our beverage line, 'Hi-Power', exceeded our expectations as we experienced continued demand across our home province of Fujian and gained a solid understanding of the caliber of beverage distributors needed to obtain the same level of success in other markets. We also began a robust marketing campaign to foster distributor loyalty, boost brand awareness and drive new sales. Accordingly, we increased the number of 'Hi-Power' sales and marketing staffs from 23 at the beginning of the year to 205 as of September 30, 2010. We expect continued sales growth in the fourth quarter and have increased our revenue guidance for "Hi-Power" to USD23.0-USD25.0 million for the year."
Third Quarter Fiscal Year 2010 Results by Segment
Seafood Snack Food Segment
China Marine's sale of processed and packaged seafood snack foods produced USD15.9 million in revenue, a 31.0% increase versus the third quarter of 2009, and accounted for 70.0% of total revenue in the third quarter of 2010. China Marine added approximately 100 new retail locations which carry Mingxiang-branded snack foods and recorded increases in most of its provincial level sales territories; Shandong, Zhejiang, Fujian, Guangdong and Jiangsu. The Company has also increased sales staff to 46 from 24 in 2009. China Marine has maintained its product line of 29 Mingxiang-branded seafood jerky snacks sold to consumers at 3,000 retail locations in seven provinces in China. Gross profits margins for the seafood snack foods segment were 34.5% and met company guidance and expectation of 30-plus percent.
"Hi-Power" Beverage Segment
In its third quarter of operations under China Marine Food Group, revenues from the "Hi-Power" algae-based beverage line were $6.7 million and accounted for 29.7% of total revenues in the quarter. Sales were primarily driven by orders in the Company's home province, Fujian. Reorder rates from existing customers have been growing and represented most of total Hi-Power sales.
The total number of retail end-points reported by the Company on September 30, 2010 reached 12,000, which includes major international retailers such as Walmart, China-based supermarkets like Trust-Mart, convenience stores, bars, restaurants, school canteens and local corner stores which carry "Hi-Power" beverages, and certain locations where Mingxiang branded seafood products are also sold.
Based on the Company's third quarter and year-to-date performance, China Marine has increased sales guidance for Hi-Power beverages to USD23.0-USD25.0 million for the year. Gross margins for "Hi-Power" trend over 40%.
Marine Catch Trade Segment
China Marine's third revenue segment, frozen marine catch, contributed USD0.1 million in the third quarter of 2010 compared to USD1.3 million in Q3 2009. Typically, in the third or fourth quarter of the year, the Company sells bulk orders of frozen marine catch to select domestic and export distributors. During the third quarter, the Company prepared for the marine catch trading season by accumulating USD23.1 million worth of frozen catch inventory stored in Fujian and Liaoning provinces, where its marine catch customers are based. The Company expects to sell the most of its marine catch inventory in the coming quarters with gross margins of approximately 10%. A majority of this catch represents similar types of squid the Company uses in the production of its seafood snack foods and thus limits the Company's exposure to price fluctuations. The Company estimates the marine catch and trade portion of its revenue streams will account for approximately 20% of total sales in 2010.
Total revenue in all segments including Mingxiang-branded seafood snack foods, "Hi-Power" beverages and marine catch, for the quarter ended September 30, 2010 was $22.7 million, up 69.2% from USD13.4 million in the prior year's period.
Costs of goods sold totaled USD14.3 million for the quarter, or 63.3% of revenues for the period ended September 30, 2010. Costs of goods sold consist of the cost of raw materials, packaging materials, direct labor and manufacturing overhead. In the seafood snack food segment, costs of raw materials account for the greatest percentage of costs and were 75.3% for the quarter, while packaging represented 12.9%. Conversely, in the beverage segment, costs of raw materials were 15.8% of the total costs of goods, with approximately 67.6% spent on packaging which include two-color satin-finished cans and four-color case packaging for retail. As a percentage of total costs of sales, packing costs remained stable quarter over quarter. The balance of costs of goods emanate from each product line's manufacturing overhead. China Marine produces seafood snack foods at its dedicated production facilities in Shi Shi while "Hi-Power" production is outsourced to third party blending and bottling facilities in Fujian province.
Gross profit in the third quarter of fiscal year 2010 was $8.3 million, an increase of 94.2% from USD4.3 million in the prior year's corresponding period. Consolidated gross margins were 36.7% for the quarter, a 472 basis point improvement from 32.0% for the same period of the prior year.
Gross margin for the processed seafood line was 34.5%, compared to 33.5% in the third quarter of 2009. "Hi-Power" algae-based beverages generated gross margin of 42.0%, and the Company anticipates similar margins through the balance of the year.
Selling, general and administrative (SG&A) expenses in the quarter ended September 30, 2010 were USD2.7 million compared to $0.7 million in the prior year period. Increases were mainly attributed to increased sales and advertising costs associated with Hi Power sales and the recruitment and training of new sales personnel in both sales teams. In the third quarter, China Marine also provided distributors with promotional cans of Hi-Power to foster distributor loyalty, introduce more consumers to the beverage, build brand awareness, and to stimulate sales. Costs of the "give-away" and "taste-testing" promotional cans were recorded as SG&A costs for the quarter. In their first full year with new distributors, the sales and marketing departments of China Marine opted against rebate programs in favor of providing distributors promotional Hi- Power product.
"We debated the pros and cons of giveaways as a means to grow sales," stated Chairman Liu.
"Reflecting on past experiences in China and other successful beverage rollouts, we and our distributors agreed that exposing more consumers to Hi-Power through giveaways, taste testing, and promotions would be the most successful methods to increase sell through and build distributor loyalty. Based on the success of the programs currently in place, we will review the cost benefit of promotional versus rebate incentives for the 2011 year," Liu concluded.
SG&A costs as percentage of sales were 11.9% for the quarter versus 5.0% in 2009. Operating income in the third quarter of 2010 was USD5.0 million, with operating margin of 22.0%, compared to USD3.6 million and 26.9%, respectively in the prior year period.
GAAP net income for the quarter ended September 30, 2010 was USD4.2 million, compared to USD3.2 million in the prior year's corresponding period, a 28.9% increase year over year. Adjusted non- GAAP net income for the third quarter of 2010 which excludes the non-cash, quarterly, amortization charges of USD0.6 million was USD4.8 million, a 47.2% increase year over year. Earnings per weighted average diluted shares were USD0.14 based on 29.4 million fully diluted shares, while adjusted earnings were USD0.16 per share. The Company's 15% preferential tax rate is secured through 2012.
Revenue during the nine months ended September 30, 2010 increased by 56.3% to USD69.9 million compared to the corresponding year ago period. Sales of seafood snack foods increased by 37.8% to USD51.7 million. Sales of Hi-Power algae-based beverages were USD17.3 million during the nine months ended September 30, 2010, with no associated sales in the same year ago period. Marine catch sales decreased by USD6.3 million, or 88.5% for the nine months period.
Gross profit was USD25.1 million, an increase of 89.0% from USD13.3 million in the prior year's corresponding period. Consolidated gross margins were 36.0%, a 623 basis point improvement over the year ago period. Gross margins for the processed seafood line, "Hi-Power" beverages and marine catch businesses were 34.5%, 40.9%, and 23.7%, respectively.
SG&A expenses for the nine months period were $5.3 million compared to $1.9 million in the prior year's period. Increases were a result of sales and advertising costs associated with the new beverage business and new staff hires. Operating income in the year-to-date of 2010 was USD17.9 million, with operating margin of 25.7%, a 58.4% year-over-year increase from USD11.3 million in the prior year's period when operating margins were 25.3%.
Year-to-date 2010 GAAP net income was $14.9 million, compared to $10.2 million in the prior year's corresponding period, a 46.1% increase. Earnings per weighted average diluted shares were USD0.51 based on 29.0 million fully diluted shares. Adjusted non-GAAP net income for the nine month period excludes $1.8 million in non-cash amortization charges (approximately USD0.6 million per quarter). Adjusted net income for the period was USD16.7 million, a 63.4% increase year-over-year with earning per share of $0.57 for the nine months period ended September 30, 2010.
Financial Condition
As of September 30, 2010, the Company had USD16.9 million in cash compared to USD7.1 million as of December 31, 2009. Cash flows from operations were a negative USD2.9 million due to higher net income being offset by increased inventories for marine catch. Working capital was USD56.0 million, up from USD48.4 million as of December 31, 2009. The current ratio was 12.1 to 1 on September 30, 2010 compared to 7.0 to 1 on December 31, 2009. Accounts receivable were USD12.0 million, compared to USD18.8 million as of December 31, 2009. The Company maintains days sales outstanding of about 60 days depending on sales volume and any promotions executed throughout the year. Shareholder equity increased 76.2% to USD105.4 million for the period under review.
Construction Update - Cold Storage Facility
The Company commenced construction of its new cold storage facility in the third quarter of 2010 and anticipates completing this facility in the second half of 2011. The project is expected to contribute approximately USD8.0 million in revenues and USD4.0 million in net income yearly once fully operational. Capital expenditures year-to-date were USD13.3 million, while management expects a total expenditure of approximately USD20.0 million to complete the build-out.