Zhongpin Reports Higher Revenues and Lower Net Income for the Year 2012

BEIJING and CHANGGE, China, March 14, 2013 /PRNewswire/ -- 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 year ended December 31, 2012 compared with the year 2011.

Year 2012 highlights:                   

• Sales revenues increased 13% to $1,639.6 million in 2012 from $1,456.2 million in 2011 primarily due to higher sales volume for pork products sold at lower average selling prices.
• Net income decreased 31% to $44.1 million in 2012 from $64.2 million in 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 due to the ongoing industry consolidation.
• Basic earnings per share (based on net income attributable to Zhongpin shareholders) decreased 29% to $1.18 in 2012 from $1.66 in 2011. Weighted average basic shares outstanding decreased 3% to 37,273,652 shares in 2012 from 38,505,027 shares in 2011.
• Diluted earnings per share (based on net income attributable to Zhongpin shareholders) decreased 29% to $1.18 in 2012 from $1.66 in 2011. Weighted average diluted shares outstanding decreased 3% to 37,328,792 shares in 2012 from 38,539,880 shares in 2011.
• As of December 31, 2012, Zhongpin had 40,376,182 shares of common stock issued, of which 37,209,344 were outstanding and 3,166,838 were held as treasury stock.

Mr. Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin, said, "In 2012, our sales revenues increased 13 percent on higher tonnage at lower average prices, compared with 2011, primarily due to the intense competitive market pressure generated mainly by the continuing pork industry consolidation in China.

"Our costs continued to increase, mainly in support of our current operations and planned expansions. As a result, our gross profit margin declined to 9.4% in 2012 from 10.7% in 2011 and our net profit margin declined to 2.7% in 2012 from 4.4% in 2011.

"We are sustaining our prudent expansions in geographic markets and operations to gain market share for our long-term success in the face of the ongoing industry consolidation. We are managing our costs to maintain as much gross and net profit margin as possible and are aggressively working to further increase our asset utilization, effectiveness, and efficiency.

"In 2013, we expect that the demand for pork in China should remain strong and that Zhongpin's revenues from pork and pork products are likely to increase modestly based on higher tonnage sold at lower average prices, while live hog prices will remain at current levels, compared with 2012. We anticipate that our net profit margin in 2013 will decrease due to increased competition in the industry, the expected increase in labor cost and overheads, and the expected increase in quality assurance and control costs in response to increased importance on food safety placed by the government and consumers."

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 second quarter of 2011 and was completed in the second quarter of 2012. Trial production started in July 2012, and the plant has been in regular production since the end of the third quarter of 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 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, we leased the facility to a third party for annual rental in the amount of RMB 5.0 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, 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 2013.

Zhongpin is investing 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 invested about $35.0 million on the first phase that was put into operation in February 2013.

Zhongpin put a new by-products production facility in Changge, Henan province, into operation in November 2012, eight months after the construction began in March 2012. The new plant has an annual production capacity for 100 million meters of sausage casings and 300 billion units of raw material to make heparin sodium. Cost was approximately $10.5 million.

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.

In November 2012, Zhongpin decided to stop production in its Deyang Zhongpin facility in Sichuan province because its western location was inconsistent with Zhongpin's strategy to focus on Central China, North China, East China, and Northeast China markets. As a result, Zhongpin's annual capacity for chilled and frozen pork was reduced by 45,000 metric tons in 2012.

As of March 1, 2013, Zhongpin had an annual capacity of 683,760 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 909,760 metric tons. In addition, its annual capacity for sausage casings was 100 million meters and for the raw material to make heparin sodium was 300 billion units.

Detailed guidance discontinued

In light of the pending going-private transaction, Zhongpin has discontinued its detailed guidance for the year 2013.

Sales revenues in 2012

Total sales revenues increased $183.4 million or 13% to $1,639.6 million in 2012 from $1,456.2 million in 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 food service distributors in China, which were partially offset by the lower average pork price resulting from market fluctuations and industry competition. The following table shows tonnage, sales revenues, and average price per metric ton by product division for 2012 and 2011.

Chilled pork revenues increased on higher tonnage at lower average prices per metric ton. Chilled pork revenues increased 14% in 2012 from 2011. Chilled pork tonnage increased 27% and the average price per metric ton decreased 10% in 2012 from 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 prices 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 4% in 2012 from 2011. Frozen pork tonnage increased 2% and the average price per metric ton decreased 7% in 2012 from 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 35% in 2012 from 2011. Prepared pork tonnage increased 22% and the average price per metric ton increased 11% in 2012 from 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 99.1% of total sales revenues in 2012 and 98.9% in 2011.

Geographic coverage and distribution channels

The sales of pork and vegetable products are closely related to the particular regional markets in which our distribution channels are located. Therefore, the increase in metric tons sold in 2012 was partly attributable to our efforts to expand our geographic coverage and broaden our distribution channels since 2011.

The following table shows sales revenues by distribution channel. In 2012, sales to wholesalers and distributors accounted for 41% of sales revenues, restaurants and food services were 28%, retail channels were 29%, and import and export were 2%.

The increase in sales revenues from different distribution channels was mainly due to the following factors: (a) our production capacity has increased because we completed the expansion of our chilled and frozen pork processing facilities in Taizhou, Jiangsu province and in Changchun, Jilin province in December 2011, and the expansion of our prepared meat processing facilities in Changge, Henan province in July 2012. To increase the utilization of our new facilities, we focused our sales efforts on the wholesalers and distributors, as it is easier to achieve higher volume sales within this channel. As a result, we had significantly higher sales in the wholesalers and distributors channel than in other distribution channels, with the overall capacity utilization rate that was lower in 2012 from 2011 due to the capacity added by the new production facilities that were put into operation at the end of 2011 and middle of 2012; (b) we have built our brand image and brand recognition through general advertising, display promotions, and sales campaigns; (c) we have increased the number of stores and other channels through which we sell our products; and (d) we believe consumers are placing more importance on food safety and are willing to pay higher prices for safe food products.

As of December 31, 2012, Zhongpin's customers included 156 international and domestic fast food companies, 162 processing factories, and 1,389 school cafeterias, factory canteens, hotels, army bases, hospitals, and government departments. As of December 31, 2012, Zhongpin also sold directly to consumers in 3,490 retail outlets, including supermarkets, in China.

The following table shows the retail channels and number of stores and counters that generated sales volume in 2012 and 2011.

Geographic expansion and broader channel coverage together have been important factors in our long-term success, including in 2012. The table below shows the number of cities, subdivided by the size, in which we distribute our products through all of our distribution channels at the end of 2012 and 2011.

Cost of Sales

Cost of sales primarily includes the costs of raw materials, labor costs, and overhead. Of the total cost of sales, the cost of raw materials typically accounts for about 96.0% to 96.4%, overhead typically accounts for 2.1% to 2.6%, and labor costs typically account for 1.4% to 1.5%, with slight variations from period to period. All of our meat products are derived from the same raw materials, which are live hogs. Vegetable and fruit products are purchased from farmers located close to Zhongpin's processing facility in Changge in Henan province. As a result, the purchasing costs of live hogs and vegetables and fruits represent substantially all of the costs of raw materials. The increase in the cost of sales was consistent with but considerably higher than the increase in sales revenues.

Gross profit margin (gross profit divided by sales revenues) decreased to 9.4% in 2012 from 10.4% in 2011 primarily due to (a) increased competition in the market, (b) the increase in write-off of VAT recoverable, (c) increased promotional activities to grow our market share, (d) the increase in overhead due to the higher labor costs and utility costs, and (e) higher quality control costs in response to increased importance placed by the government and consumers on food safety. As a result, the gross profit margin was lower than the level Zhongpin would expect to achieve once it fully integrates its new production facilities and expands into new regional markets for its products.

General, administrative, and selling expenses

General and administrative expenses increased $9.6 million or 33% to $38.8 million in 2012 from $29.2 million in 2011. As a percent of revenues, general and administrative expenses increased to 2.4% in 2012 from 2.0% in 2011. The higher general and administrative expenses in 2012 were primarily due to a $2.5 million increase in salary expenses resulted from hiring more employees required to support the expansion of the business, an increase in the average salary we paid to our employees, a $1.1 million increase in legal fees due to the proposed going private transaction, a $1.9 million increase in the bad debt provision due to increases in revenues and accounts receivable, and a $1.8 million increase in other taxes due to land and property placed into service in December 2011 for two new facilities in Taizhou and Changchun on which the Company started paying land and property taxes in the first quarter of 2012.

Selling expenses increased $4.0 million or 12% to $37.6 million in 2012 from $33.6 million in 2011. Selling expenses as a percent of revenues remained at 2.3% in 2012 and 2011. The higher selling expenses were primarily the result of a $1.4 million increase in salary expenses, a $0.9 million increase in supermarket management fees, and a $1.0 million increase in promotion expenses.

Impairment loss

Impairment loss increased $2.4 million or 150% to $4.0 million in 2012 from $1.6 million in 2011 primarily due to a $2.7 million increase in a provision for plant and equipment in our Deyang Zhongpin operation. In November 2012, we decided to stop production in the Deyang facility in Sichuan province in western China because our strategy is to focus on the Central China, North China, East China, and Northeast China markets. We will concentrate our resources on these markets. We evaluated the plant and equipment of Deyang Zhongpin and decided to accrue an impairment loss based on the difference between the book value and the estimated fair value of the plant and equipment.

Interest expense, net

Interest expense, net of interest income, increased $8.9 million or 41% to $30.4 million in 2012 from $21.5 million in 2011. The increase in interest expense was primarily the result of an increase of $113.0 million in short-term bank loans, an increase of $40.7 million in long-term bank loans, an increase of $41.7 million in bank notes payable, and an increase in the interest rates published by the People's Bank of China, which increases were partly offset by an increase in interest income.

Other income and government subsidies

Other income and government subsidies increased $3.3 million or 79% to $7.5 million in 2012 from $4.2 million in 2011 primarily due to an increase in government subsidies of $1.4 million and an increase in other income of $2.0 million as a result of recognizing the exempted output VAT for fruits and vegetables as other income and the recognition of rental income from renting out the sire boar breeding facility in Henan.

Provision for income taxes

The enterprise income tax rate in China on income generated from the sale of prepared products is 25% and there is no income tax on income generated from the sale of raw products, including raw meat products and raw vegetable and fruit products. The provision for income taxes increased $0.9 million in 2012 from 2011 due to higher sales of prepared pork products.

Net income

As a result of the foregoing, net income decreased $20.1 million or 31% to $44.1 million in 2012 from $64.2 million in 2011. The Company's net profit margin (net income divided by sales revenues) declined to 2.7% in 2012 from 4.4% in 2011.

Earnings per share

The earnings per share numbers below are based on net income attributable to Zhongpin Inc. shareholders.

Basic earnings per share decreased 29% to $1.18 in 2012 from $1.66 in 2011. Weighted average basic shares outstanding decreased 3% to 37,273,652 shares in 2012 from 38,505,027 shares in 2011.

Diluted earnings per share decreased 29% to $1.18 in 2012 from $1.66 in 2011. Weighted average diluted shares outstanding decreased 3% to 37,328,792 shares in 2012 from 38,539,880 shares in 2011.

As of December 31, 2012, Zhongpin had 40,376,182 shares of common stock issued, of which 37,209,344 were outstanding and 3,166,838 were held as treasury stock.

For a discussion of Zhongpin's results for 2011 compared with 2010, please see the Form 10-K that Zhongpin will file with the Securities and Exchange Commission on March 18, 2013.

Liquidity and capital resources

During the year 2012, Zhongpin's cash and cash equivalents increased by $40.6 million. Cash and cash equivalents (excluding restricted cash) totaled $176.4 million as of December 31, 2012 compared with $135.8 million as of December 31, 2011. As of December 31, 2012, working capital (current assets minus current liabilities) was a negative $41.7 million, which is primarily because (i) we borrowed more short-term loans in 2012 in light of the proposed going private transaction, which resulted in more short-term loans outstanding at December 31, 2012, and (ii) we had a larger balance of the current portion of long-term loans outstanding at December 31, 2012 as a larger portion of the long-term loans we borrowed in prior years will mature in twelve months from December 31, 2012. We do not believe we have material risks to our financial position or results of operations in connection with our negative working capital. In 2013, we plan to borrow more long-term loans and use more operating cash to pay back short-term loans, in order to achieve a positive working capital balance.

Net cash provided by operating activities in 2012 was $35.4 million, primarily from net income that provided $44.1 million, depreciation and amortization that provided $25.8 million, a provision for allowance for bad debts that provided $2.5 million, an impairment loss that provided $4.0 million, accounts receivable and accounts payable that used a total of $50.9 million, purchase deposits that provided $7.5 million, inventories that provided $4.1 million, VAT tax refund receivable that used $3.5 million, and other items that provided $1.8 million, net.

Net cash used in investing activities in 2012 was $119.4 million, primarily for construction in progress, additions to land use rights, and prepayment and additions to property, plant, and equipment that together used $122.4 million.

Net cash provided by financing activities in 2012 was $124.0 million, primarily from the proceeds from loans and notes, net of repayments, that provided $134.2 million, repayment of a capital lease obligation that used $5.8 million, repurchases of common stock that used $2.8 million, and another item that provided $0.2 million.

As a result, including the effect from foreign currency exchange rate changes on cash, Zhongpin increased its cash and cash equivalents in 2012 by $40.6 million. Cash and cash equivalents on December 31, 2012 totaled $176.4 million compared with $135.8 million as of December 31, 2011.

Zhongpin believes its existing cash and cash equivalents, together with its ability to secure bank borrowings, will be sufficient to finance its investment in new facilities, with budgeted capital expenditures of about $102.0 million over the next 12 months, and to satisfy its working capital needs. It intends to satisfy its short-term debt obligations that mature over the next 12 months through additional short-term bank loans, in most cases by rolling over the maturing loans into new short-term loans with the same lenders as the Company has done in the past.

Conference call and webcast

Zhongpin will host its year 2012 earnings conference call and live webcast at 8:00 a.m. Eastern Daylight Time (New York) on Friday, March 15, 2012, which is also 8:00 p.m. in China and Hong Kong on the same day.

The dial-in details for the live conference call are:

The live webcast and archive of the conference call will be available on the Investor Relations section of Zhongpin's website at http://www.zpfood.com.

A telephone playback of the call will be available after the conclusion of the conference call through 8:00 a.m. Eastern Daylight Time, March 29, 2013.

The dial-in details for the telephone playback are:

About Zhongpin

Zhongpin Inc. is a leading meat and food processing company that specializes in pork and pork products, vegetables, and fruits in China. Its distribution network in China covers 20 provinces plus Beijing, Shanghai, Tianjin, and Chongqing and includes 3,490 retail outlets as of December 31, 2012. Zhongpin's export markets include Europe, Hong Kong, and other countries in Asia.

For more information about Zhongpin, please visit Zhongpin's website at http://www.zpfood.com.

Safe harbor statement

Certain statements in this news release may be forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Zhongpin has based its forward-looking statements largely on its current expectations and projections about future events and trends that it believes may affect its business strategy, results of operations, financial condition, and financing needs.

These projections involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, which may include but are not limited to such factors as downturns in the Chinese economy, unanticipated changes in product demand, interruptions in the supply of live pigs and or raw pork, the effects of weather on hog feed production, poor performance of the retail distribution network, delivery delays, freezer facility malfunctions, Zhongpin's ability to build and commence new production facilities according to intended timelines, the ability to prepare Zhongpin for growth, the ability to predict Zhongpin's future financial performance and financing ability, changes in regulations, the impacts of the proposed going private transaction, and other information detailed in Zhongpin's filings with the United States Securities and Exchange Commission. These filings are available from www.sec.gov or from Zhongpin's website at www.zpfood.com.

You are urged to consider these factors carefully in evaluating Zhongpin's forward-looking statements and are cautioned not to place undue reliance on those forward-looking statements, which are qualified in their entirety by this cautionary statement. All information provided in this news release is as of the date of this release. Zhongpin does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.

For more information, please contact:

Zhongpin Inc.

Mr. Sterling Song (English and Chinese)
Director of Investor Relations
Telephone +86 10 8455 4188 extension 106 in Beijing
[email protected]

Mr. Warren (Feng) Wang (English and Chinese)
Chief Financial Officer
Telephone +86 10 8455 4388 in Beijing
[email protected]

Christensen

Mr. Victor Kuo (English and Chinese)
Telephone +86 10 5826 4939 in Beijing
[email protected]

Mr. Tom Myers (English)
Mobile +86 139 1141 3520 in Beijing
[email protected]
www.zpfood.com

Financial statements follow.

SOURCE Zhongpin Inc.

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