China New Borun's CEO Discusses Q2 2012 Results - Earnings Call Transcript

China New Borun Corporation (BORN)

Q2 2012 Earnings Call

August 7, 2012 8:00 am ET

Executives

Jinmaio Wang – Chairman, President, Chief Executive Officer

Terence Chen – Chief Financial Officer

Ann Yu – Chief Strategy Officer

Analysts

Chenyi Lu – Cowen & Co.

Anson Chan – Piper Jaffray

Presentation

Operator

Good day everyone and welcome to the Second Quarter 2012 Earnings conference call for China New Borun Corporation. Today’s conference is being recorded.

Before we get started, I am going to review the Safe Harbor statement regarding today’s conference call. Please note that this discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to differ materially from those in forward-looking statements, please refer to our annual report on Form 20-F filed with the Securities and Exchange Commission on April 6, 2012. The Company does not assume any obligation to update any forward-looking statements except as required by applicable law.

At this time, I would like to turn the call over to Mr. Terence Chen, Chief Financial Officer of China New Borun Corporation for opening remarks and introductions. Please go ahead, sir.

Terence Chen

Thank you everyone for joining us for China New Borun’s second quarter 2012 earnings call. Joining me today from management are Jinmaio Wang, Borun’s Chairman and Chief Executive Officer, and Ann Yu, the Company’s Chief Strategy Officer. On the call today, Mr. Wang will provide a quick review of the quarterly highlights and our business environment. Following Mr. Wang, Ann will offer more details on our operations and our business development and expansion plans. After Ann, I will provide you with more financial details.

I would like to note that on this call today, all of our financial results will be referred to in Chinese RMB unless otherwise noted.

At this point, I would like to introduce Mr. Wang, Chairman and Chief Executive Officer of China New Borun. Mr. Wang will speak in Mandarin and I will translate. Mr. Wang?

Jinmaio Wang

(Mandarin)

Terence Chen

Hello everyone and welcome to China New Borun’s second quarter 2012 earnings conference call.

Jinmaio Wang

(Mandarin)

Terence Chen

We believe Borun continues to perform well on many aspects of our business strategy despite the increasing margin from corn prices and the overall macro environment that is currently crippling many of our smaller and less efficient competitors. We are very proud of our reported quarterly revenue of RMB 803.7 million that exceeded our previous stated revenue forecast which was driven by a combination of strong sales volume and higher average selling price. Notably, the strong demand growth came from all key product lines, which provides clear evidence of the continued robust demand for our industry-leading edible alcohol and byproducts in China, and driven by our strong pre-sale success we continue to immediately sell out our entire production and ensure sales for the remainder of 2012, gaining greater operating efficiency.

Jinmaio Wang

(Mandarin)

Terence Chen

However, these volume and revenue gains were not matched by profitability gains as the price of corn, our main input cost, rose faster than our ability to raise prices. Corn continued its price increase trend during this non-harvest season in the second quarter, and we believe this increase in corn price has posed industry-side margin pressure to edible alcohol producers. We still view this as a temporary factor beyond our control and therefore we have taken several initiatives to drive margin expansion, including improving operational efficiencies and optimizing cost structure through efficient sourcing of raw materials, improving our product mix and expanding our customer base. Especially thanks to our preproduction sourcing strategy at the beginning of the year, we are able to source corn at a cost lower than the market spot price and that benefits us with a cost advantage compared with smaller competitors. We believe these initiatives that we took in the quarter will position Borun well in the second half of the year, which Ann will provide you with more details in her discussion.

Jinmaio Wang

(Mandarin)

Terence Chen

Looking ahead to the second half of the year, we are optimistic regarding the overall climate of the edible alcohol market in China. Third quarter is normally our peak consumption season for edible alcohol in China as more public holidays, including the October national holidays and moon festivals typically drive higher demand from (inaudible) producers. Considering the industry market environment and presales indicated from our customers, we are cautiously optimistic that prices for our edible alcohol will also pick up during the period. We believe the increase in average selling price should mitigate further margin contraction.

In summary, I’m pleased that we continue to execute our strategy efficiently in the second quarter, and I’m cautiously optimistic of our operating results in the remainder of the year.

Jinmaio Wang

(Mandarin)

Terence Chen

At this point, I will now turn the call over to Ann Yu for a discussion of our strategic and business development initiatives.

Ann Yu

Thank you very much Mr. Wang and Terence, and my thanks to everyone for participating in China New Borun’s second quarter 2012 earnings conference call. Continuing on (inaudible) top line growth momentum, we are happy to report that we once again posted strong revenue during the second quarter of 2012 and our quarterly revenue reached a new record of RMB 803.7 million with solid growth coming from all of our key product lines. We continue to operate efficiently at all of our existing facilities and increasing the production of our byproducts DDGS Feed, crude corn oil, and liquid carbon dioxide.

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