A poster on the Yahoo YONG board posted the response he got from IR. I'll paste it here. I think they should make this information available on a PR for everyone to see.Response from Yongye IR 7 minutes ago This is the response I had to my email:Below please find the response to your question from the Company: A Seeking Alpha article claims that our factory could not have manufactured the amount of product that we claim to have sold. Obviously, the author has little understanding of real world manufacturing and capacity issues. The official capacity reported for our factory represents the capacity under normal operations. There is substantial room to exceed that capacity if we operate our factory on weekends, run multi-shifts and save on maintenance time. Also, our manufacturing is a combination of various batch and line processes with different bottlenecks that present both temporary and long term capacity improvement opportunities. During the past several years, our sales consistently exceeded our expectations, as evidenced by our multiple increases in sales guidance. As a result, our factory has consistently been operating at a higher than normal capacity utilization, especially during peak seasons (i.e. second and third quarters). We also shared in our earnings call that our capacity improvement project in 2010 was conducted in early 2010 and we announced it in mid-2010. We also occasionally outsourced certain processes during peak seasons to manage our production needs.
I haven't talked with the company because I wanted to go through this thought experiment myself. After spending several hours going down this rabbit hole, I don't think there are enough details in the filings to definitively conclude that Yongye could not have created as much product as it says it did. Some key questions:1. How is finished inventory being valued? The footnotes in the filings say at the lower of cost or market value, but gives no specific numbers. If the answer is cost, then Yongye was sitting on approximately 1,000 tons of finished goods at the end of 2007 ($4.3mm value/$4,600 cost per unit), which closes much of the alleged 2008 deficit, and another 1,100 tons of work-in-progress ($5mm value/$4,600 cost per unit), which closes even more of it. The wild card is that we don't know what percentage of that inventory was how far along in the process. Maybe it just needed to be bottled; maybe it just needed to be shipped. It's hard to know how much stuff they had ready to go and when, but they appear to have been in reasonable shape.2. Can some of the animal product capacity be used to make plant product?The company notes in its 2009 10k that "We operate one manufacturing facility in Hohhot, Inner Mongolia, China, which can produce 10,000 tons per year of our liquid plant product and 1,000 tons per year of our powder animal product when operated normally." Yet as the SeekingAlpha article shows, sales of animal product drop dramatically during the summer, which is also the high season for plant product. That seems to imply that some of that capacity is being turned over to make plant product -- closing another portion of the alleged deficit. It would make sense that they would bring all capacity to bear rather than let parts of it sit idle.3. What does "operated normally" mean?When it comes to manufacturing, there are a variety of ways to calculate capacity (http://www.allbusiness.com/glossaries/operating-capacity/494...). The company appears to be quoting its capacity at "normal" levels, which means no overtime, regular maintenance, etc. Capacity is more accurately quoted as a range, and ideal capacity (see link above) is higher than normal capacity. The company, during the high season, may have been able to get more capacity out of its lines than advertised. 4. The timing of capacity improvements?The upgrade from 10k to 15k tons seems particularly squishy. They say that had been working on it since the beginning of 2010 and announced it as finished in July 2010. There was likely some ramp up period over that time, though the magnitude is unknown.If I can figure out how to do it, I'll try to put my spreadsheet up in Google Docs so Fools can play around with it.Tim
I should add that the deficits I'm seeing are about 1,000 tons in 2Q10 and 3,000 tons in 3Q10 using the normal operating capacity production estimates (10% to 25% of capacity). Anyone with manufacturing experience know if that's surmountable via temporary increases and, I guess given the response above, some outsourcing.Tim
our factory has consistently been operating at a higher than normal capacityIf something is consistent, one might expect that to be considered normal. I would be more concerned if they seem to be overstating manufacturing capacity than understating.
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