Emerald Dairy: Record Q2 Results and Continued Growth in China

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Emerald Dairy Inc.
(OTC BB: EMDY)
Shu Kaneko, CFO

Corporate Profile:
Emerald Dairy conducts operations through its wholly-owned subsidiaries, Heilongjiang Xing An Ling Dairy and Heilongjiang Beian Nongken Changxing Lvbao Dairy. Founded in 1980, Emerald Dairy is one of the leading producers of infant formula, milk powder, soybean and rice powders products in China. The Company is headquartered in Beian City, Heilongjiang, one of China’s largest milk production bases.

With the access to quality resources and the Company’s commitment to quality control, Emerald Dairy provides consumers best quality products at a competitive price. In 2005, “Xing An Ling,” the Company’s principle brand, was named one of the leading brands by the Government of Heilongjiang. In addition to being ISO 90001 certified, the Company‘s products are certified by the national government as organic products.

Today, the Company’s products are distributed under brands “Xing An Ling” and “Yi Bai” throughout 20 provinces in China, servicing second- and third-tier city consumers. Going into 2008 and onward, Emerald Dairy will continue to pursue growth opportunities through capacity expansion, continued commitment to best quality and increasing popularity of its brands.

TRANSCRIPT:

WSR: Good day from Wall Street, this is Juan Costello, Senior Analyst with the Wall Street Reporter, and joining us today is Shu Kaneko, the Chief Financial Officer for Emerald Dairy Incorporated. The company trades on the Bulletin Board. Their ticker symbol is EMDY, and Emerald Dairy produces and distributes infant and children’s formula products. Thanks for joining us today, Shu.

Mr. Shu Kaneko: Thank you for having me here today.

WSR: Anytime. Now, starting off, give us a brief history and overview of the company.

Mr. Shu Kaneko: The company was established in 1986 as a state-owned company, and at that time our CEO joined the company in a very junior position and as a technician in the workshop. Then he raised his rank to manager, senior manager, and general manager over the years. In 2000, because the state-owned entity was losing money, the government decided to privatize the company. So at that time, basically the CEO and the management did a buy-out, a management buy-out, so they bought the company. And in 2006, CEO set up a US company that made the Chinese company a wholly-owned subsidiary of a US parent. In 2007, we got listed on OTC BB through our reverse merger. That’s a very brief history of the company.

WSR: Talk to us a little bit about the company’s record Q2 results, which saw a revenue increase of almost 30% from year-over-year.

Mr. Shu Kaneko: In the second quarter, because we pretty much maxed out the capacity of our current facility, we have a production line A, running at 100% capacity. Year-over-year, we were showing some growth, because we have maxed out on the capacity, and because we basically sell everything we produce. That’s why we cannot really catch-up to the demand we have for our products. That was our second quarter and for the third quarter, because we have this new facility line B completed, and we will make an announcement very soon on the commencement of the production, then we will see real growth on our production and sales.

WSR: Talk to us a little bit about your products, which are under the brand name, Xing An Ling and Yi Bai. What is the market opportunity, and who are your key customers?

Mr. Shu Kaneko: We make infant formula, milk powder products, essentially that’s baby’s food. We provide products for babies from zero months to up to three years plus and in China, at the current birth rate, we have about 16 million newborn babies every year. That’s a huge, huge market for the infant formula milk powder producers. Our focus is more on Tier-2, Tier-3, Tier-4 cities in China, which is the middle-to-low end marketplace. In Tier-1 to Tier-2 cities, we have all the international brands like Mead Johnson, Abbott, Nestle, they are more focused on Tier-1, Tier-2, which we do not directly competing against, we’re more competing against domestic Chinese brands such as Synutra, American Dairy, actually Tier-3, Tier-4 cities, they are our niche and focus.

WSR: What would you say makes your company unique from some of your other competitors in the sector?

Mr. Shu Kaneko: One of the differences for us is, if you have a scale of one to ten in terms of product safety and quality control, we are at the very high end of the group. So, we get this organic label certification. We’re in the process of developing our organic product of infant formula milk powder, which is in the approval process of regulators, and that we have been through all these scandals, like the melamine scandals we were not involved in, and the recent hormone scandals we were not involved in. So, we have been through all the industry’s ups and downs. We have really good product safety and quality control records. That, I think, makes us different than other groups of manufacturers.

WSR: Can you walk us through your background and experience Shu, and talk about some of the management team over at Emerald Dairy for those who are new to your story?

Mr. Shu Kaneko: Myself, my experience has been more on the financial services industry. I went to Georgetown for my MBA, I graduated in 2001, I joined Ernst & Young in New York. I had been with Ernst & Young for about six and half years, before I joined Emerald as the CFO. And before my MBA, I was with a Japanese bank. I worked in Tokyo and Singapore as a portfolio manager for the private bank clients. So, my experience has been mostly focused on the financial services industry. I had been CFO since Emerald got listed in OTC BB on October 7th. That’s myself. My CEO, Mr. Yang Yongshan, probably his whole career life has been in the dairy industry, has more than 20 years of experience in this area. And he has experienced pretty much all the positions from technician, production, marketing, every possible position for the industry and the company. He built the company from a 20-people company, now to 1,200-1,400 people company. Also our COO, Chief Operating Officer, Qin Si Bo, he also has more than 30 years of working experience in the dairy industry, and because of his experience and because he is very, very strict on product safety and quality control, that’s how we can keep a good record of product safety and the quality control record for all these years.

WSR: What are some of the goals, milestones, and objectives that the team is hoping to accomplish here over the course of the next year?

Mr. Shu Kaneko: Our sales were maxed out. While our last year’s sales were $45 million, it was maxed out because we were running at a full capacity, 100% capacity 24×7. Going forward, because we have new production facility done, and we have this new production lines completed, so our goal is to double, actually more than double our revenue in the next nine to twelve months.

WSR: You are going to be presenting tomorrow at the Rodman & Renshaw conference here in New York. So, as you meet with investors and members of the financial community Shu, do you believe that the Emerald Dairy story, your message, and ultimately the upside potential is completely understood and appreciated by the financial community?

Mr. Shu Kaneko: Sure, I believe so.

WSR: Once again, joining us today is Shu Kaneko, the Chief Financial Officer for Emerald Dairy Incorporated, which trades on the Bulletin Board, ticker symbol is EMDY. Currently trading at $1 a share, the market cap is 34 million. And before we conclude, just to recap some of your key points here, why do you believe that investors should consider Emerald Dairy, EMDY, as a good long-term investment opportunity?

Mr. Shu Kaneko: There are three reasons. One is, we have very good product safety and quality control records, we are the leader in organic formula milk powder. Second, we have a vast market, we have 16 million newborn babies in China every year. The market has been very — it’s a big market, and the growth of the market that we have experienced about 23% year-over-year growth, that is industry-wise. For us, we grow, double our sales in about 2-3 years. So, we grow much faster than the segment average. I think, the growth, plus the huge market potential, plus our brand name, product safety record, and quality control measure makes us different than our competitors.

WSR: We certainly look forward to continuing to track your company’s growth as well as report on your upcoming progress, and I’d look to thank you for taking the time to join us today Shu, and update our investors on Emerald Dairy.

Mr. Shu Kaneko: Sure, thank you for having me.

WSR: Thank you.

Mr. Shu Kaneko: Thank you.

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