China Green Agriculture, Inc.
Q2 2017 Earnings Call Transcript

Published: 14 Feb 2017

[Operator:]

Good morning and welcome to the China Green Agriculture 2017 Q2 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Frank Wang. Please go ahead, sir.

[Frank Wang:]

Thank you, operator. Thank you and welcome everyone to China Green Agriculture second quarter of fiscal year 2017 earnings conference call. The earning release went to the wire pre-market today. Our call today is hosted by Mr. Tao Li, the Company’s President and Mr. Ken Ren, the Company’s Chief Financial Officer. I would like to remind our listeners that the management’s prepared remarks contain forward-looking statements that are subject to risks and uncertainties, and the management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of year of 1995. Actual results may differ from those discussed today due to such risks as but not limited to fluctuations in customer demand, management of rapid growth, intensity of competition from other providers of China Green Agriculture products and the services. General economic conditions, geopolitical events and regulatory changes and other information detailed from time to time in the Company’s filings and the future filings with the United States Securities and Exchange Commission. Accordingly, although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectation will prove to be correct. In addition, any projections as to the Company’s future performance represent management’s estimates as of today, February 14, year of 2017. China Green Agriculture assumes no obligation to update this projection in the future as market conditions change. Now, I’m pleased to report results for the second quarter of fiscal year 2017. For the fiscal second quarter end of December 31, year of 2016, revenues were 59 million as compared to 57 million for the fiscal second quarter ended December 31, year of 2015. Net income for the second quarter was 5.5 million or $0.15 per share as compared to 4.3 million or $0.12 per share. We are very pleased with our consistent performance in the second quarter fiscal year 2017 where we continue to build shareholder value and with a long-term durability of our business model. Softened net profit as we exit recently concluded fiscal quarter with our successful business combination, the VIE company contributed approximately 8.4 million into net revenue during this quarter. However, during the last quarter, the currency value of the Chinese RMB against the U.S. dollar has decreased by about 5% thus depression was more repeat than our expectation from the beginning of the fiscal year, while the revenue reported in U.S. dollar is lowered by depreciation in the current exchange. The revenue earned in RMB is in line with our expectations. I will now discuss the financial results in great details. Our total net sales for the three months ended December 31, year of 2016, were 59 million, an increase of 2 million of 3.1% from 57 million for the three months ended December 31, year of 2015. This increase was largely due to the inclusion of variable interest entities, net sales during the last three months which contributed approximately 8.4 million of 14.3% of the total net sales. The total net sales results including VIEs for the three months ended December 31, year of 2016, was 50 million, a decrease of 6.6 million or 11.6% from the same period a year ago. For the three months ended December 31, year of 2016, Jinong's net sales decreased by 4.5 million of 14.3% to 26.8 million from 31 million for the three months ended December 31, year of 2015. This decrease was mainly attributable to the decrease in Jinong's sales, which was result of Jinong's implementation of its new sales strategy that further focuses on producing high-margin liquid fertilizer during the last three months. For the three months ended December 31, year of 2016, Gufeng's net sales was 21 million, a decrease of 2.5 million or 10.7% from 23.6 million for the three months ended December 31, year of 2015. This decrease was mainly attributable to Gufeng's lower selling prices to answer to market demand during the three months ended December 31, year of 2016. For the three months ended December 31, year of 2016, Yuxing's net sales were 2.4 million, an increase of 0.4 million of 17.8% from 2 million during the three months ended December 31, year of 2015. The increase was mainly attributable to the increase in market demand and the higher priced Yuxing's top-grade flowers. Total cost of goods sold for the three months ended December 31, year of 2016, was 39 million. There is an increase of 12 million or 15.2% from 34 million for the three months ended December 31, year of 2015. The increase was mainly due to the production and the sales of VIEs product, which accounted for 7 million or 18.1% of total cost of goods sold. The total cost of goods sold without including VIE was 32 million, a decrease of 2 million or 5.6% from the same period year ago. Cost of goods sold by Jinong for the three months ended December 31, year of 2016, was 12 million, a decrease of 1 million or 8.2% from 13 million for the three months ended December 31, year of 2015. The decrease in cost of goods sold of Jinong was primarily attributable to the decrease in net sales during the last three months. Cost of goods sold by Gufeng for the three months ended December 31, year of 2016, was 18 million, a decrease of 2 million or 8% from 20 million for the three months ended December 31, year of 2015. This decrease was primarily attributable to the last products sold during the last three months. For the three months ended December 31, year of 2016, cost of goods sold by Yuxing was 2 million, an increase of 1 million from 1 million for the three months ended December 31, for the year of 2015. This increase was mainly due to the increase that Yuxing’s net sales and the labor costs. Total gross profit for the three months ended December 31, year of 2016, decreased by 3 million to 19 million as compared to 22 million for the three ended December 31, year of 2015. Gross profit margin was 32.6% and 39.7% for the three months ended December 31, year of 2016 and 2015. The decrease in gross profit margin was mainly due to the Jinong, Gufeng and Yuxing's decreased gross margin for the three months ended December 31, 2016. Gross profit by Jinong decreased by 3 million or 18.9% to 14 million for the three months ended December 31, 2016, from 17 million for the three months ended December 31, 2015. Gross profit margin from Jinong sales was approximately 54% and 57.1% for the three months ended December 31, 2016 and 2015 respectively. The decrease in gross profit margin was mainly due to the higher raw material costs and the packing cost. For the three months ended December 31, 2016, gross profit by Gufeng was 3 million, a decrease of 1 million from 4 million for the three months ended December 31, 2015. Gross profit margin from Gufeng’s was approximately 13.9% and 16.4% for the three months ended December 31, 2016 and 2015, respectively. The decrease in gross profit percentage was mainly due to the increased weight for the lower-margin products sales in Gufeng’s total sales, the reason is to answer the marketing demand. For the three months ended December 31, 2016, gross profit by Yuxing was 0.5 million, a decrease of 0.4 million or 42.2% from 0.9 million for the three months ended December 31, 2015. The gross profit margin was approximately 21.2% and 43.2% for the three months ended December 31, 2016 and 2015, respectively. The decrease in gross profit margin was mainly due to the higher labor cost during the three months ended December 31, 2016. The gross profit by VIEs was 1 million with a gross profit margin of approximately 14.7% for the three months ended December 31, 2016. Our selling expenses consisted primarily of salaries of sales personnel, promotion expenses, freight-out costs and the related compensation. Selling expenses was 4 million or 6.8% of net sales for the three months ended December 31, 2016, as compared to 5 million or 9.3% of net sales for the three months ended December 31, 2015, a decrease of 1 million or 25%. The general and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses including expenses incurred and accrued for certain litigation. General and administrative expenses was 5 million or 7.9% of net sales for the three months ended December 31, 2016, as compared to 3 million or 5.1% of net sales for the three months ended December 31, 2015, an increase of 2 million or 59.5%. The increase in general and administrative expenses was mainly due to the VIEs, which had 0.2 million general and administrative expenses during the last three months. The net income for the three months ended December 31, 2016 was 5 million, an increase of 1 million or 29%, compared to 4 million for the three months ended December 31, year of 2015. Net income as a percentage of total net sales was approximately 9.4% and 7.5% for the three months ended December 31, 2016 and 2015 respectively. For the six months ended December 31, 2016, total net sales for the six months ended December 31, 2016 was 120 million, an increase of 9 million from 111 million for the six months ended December 31, 2015. This increase was largely due to the inclusion of VIEs' net sales during the six months ended December 31, 2016, which contributed approximately 21.7 million of the total net sales. The total net sales results VIEs' net sales was 99 million, a decrease of 12 million from the same period a year ago. For the six months ended December 31, 2016, Jinong's net sales decreased 8 million or 11.8% to 58 million from 66 million for the six months ended December 31, 2015. This decrease was mainly due to the decrease in Jinong's sales. This was a result of Jinong's implementation of its new sales strategy that for the forecast of producing high margin deep duty fertilizer during the last six months. For the six months ended December 31, 2016 Gufeng's net sales was 37 million a decrease of 5 million from 42 million for six months ended December 31, year of 2015, this decrease was mainly attributable to Gufeng's lower selling price to answer the market demand during the last six months. For the six months ended December 31, 2016 Yuxing's net sales was 3.8 million, an increase of 0.5 million from 3.3 million during the last six months ended December 31, year of 2015. The increase was mainly due to the increase in market demand and higher price on Yuxing's top-grade flowers. Total cost of goods sold for the six months ended December 31, 2016 was 78 million, an increase of 14 million or 21.3% from 64 million for the six months ended December 31, 2015. This increase was mainly due to the production and sales of VIEs' product which accounted for 18 million or 23% of total cost of goods sold. The total cost of goods sold without VIE was 60 million, a decrease of 4 million from the same period a year ago. Cost of goods sold by Jinong for the six months ended December 31, 2016 was 26 million, a decrease of 2 million from 28 million for the six months ended December 31, 2015. The decrease was primarily attributable to its lower net sales. Cost of goods sold by Gufeng for the six months ended December 31, 2016 was 31 million, a decrease of 3 million or 8.5% from 34 million for the six months ended December 31, 2015 This decrease was mainly due to the less products sold during the last six months. For the six months ended December 31, 2016 cost of goods sold by Yuxing was 3 million, an increase of 1 million or 57.4% from 2 million for the six months ended December 31, 2015. This increase was mainly due to the increase that Yuxing’s net sales and the higher labor costs. Our net income for the six months ended December 31, 2016 was 13 million, an increase of 1million or 11.7% as compared to 12 million for the six months ended December 31, 2015. The net income as a percentage of our total net sales was approximately 10.7% and 10.4% for the six months ended December 31, 2016 and 2015 respectively. Let's move to our financial condition. As of December 31, 2016, cash and cash equivalents were 117 million, an increase of 14 million or 13.3% from 103 million as of June 30, 2016. Net cash provided by the operating activities was 18 million for the six months ended December 31, 2016, an increase of 2 million, compared to 16 million for the six months ended December 31, 2015. Net cash used in investing activities for the six month ended December 31, 2016, was 74,000, an increase of 58,000 or 374.6% from $16 for the six month ended December 31, year of 2015. The net cash provided by the financing activities for the six month ended December 31, 2016 was 0.3 million compared to the cash used in financing activities of 3 million for the six months ended December 31, year of 2015. Our third quarter fiscal year 2017 and confirmed fiscal year 2017 guidance. For the ongoing third quarter ending March 31, 2017, amid the marketing efforts both online and offline, our management has expectation of net sales of 72 million to 82 million, net income of 4 million to 7 million and EPS of $0.1 to $0.18 based on our 38.5 million fully diluted shares. For the fiscal year ended June 30, 2017, management has expectation of net sales of 277 million to 300 million, our net income of 20 million and 27 million, and an EPS of $0.52 and $0.7 based 38.5 million fully diluted shares. Now, this concludes my remarks. Operator, we are now ready for the Q&A section.

[Operator:]

Yes, thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And the first question comes from Jared Cohen with JM Cohen & Co. Please go ahead, Mr. Cohen. Your line is live.

[Jared Cohen:]

I have two questions. One, just an accounting question. Can you tell us what your accounts receivable were the end of the quarter, because I think they always get inflated at this time, because you’ve financed your distributors? And then this is the peak of your season or its start the peak of your season or it’s in the third quarter? I was just confused.

[Tao Li:]

The second quarter for our fiscal year normally is a slow season.

[Jared Cohen:]

Right.

[Tao Li:]

All our business cycle, all our peak quarters normally are the third quarter and the fourth quarter which is from January to June, the second half of our fiscal year.

[Jared Cohen:]

Okay.

[Tao Li:]

From your questions on your receivables, we just want to clarify and….

[Jared Cohen:]

Okay.

[Tao Li:]

So, for example, for instance for this year, for this fiscal year our revenue, our sales is around 6 million-ish for the quarter; and at the next quarter, we expect it will go about 70 million or 75 million-ish.

[Jared Cohen:]

Okay.

[Tao Li:]

Go back to your technical questions on the receivables. As of the quarter end the December 31, 2016, the net of allowance is at 120-ish or 125-ish around that nearly. It from the beginning of this reporting period, which was last year’s ending balance was 117 million, it’s at the same level, almost the same level.

[Jared Cohen:]

Okay. And so what the collection days are about still around what 180 days you give your distributors to pay you or something like that?

[Tao Li:]

There is no policy -- collection policy change or the booking policy change in our allowance or collection policy. And we are comfortable with what we have done and alternatively to better optimize the risk of profile in these collection activities. We integrated this into overall conformational growth strategy. Specifically, we initiate this transformation last year by developing by growing a new segment in addition to our old production segment of fertilizers. You’ve already learned and witnessed what we have done so far the strong last June, we acquired or controlled a first of batches of six companies. They are wholesale and retail, wholesale companies from different regions, and we’ve further penetrates this strategy with the second step on January 1st, we acquired a two additional companies and so far, right now we already have eight new wholesale companies and they start -- they already started to form this new sales strategy and they contributed to our revenue portfolio by adding 8, over 8 million for the -- excuse me for the quarter. And that does not include the newly acquired two companies from January the 1st, I mean you will see their value in a contribution from third quarters from third quarters report and we paid 4 million in cash and 6 million convertible notes with conversion price at a premium, $5 per share due in three years for the first batch of six companies last year and for this January on January the 1st we bought these two new companies we paid each of them 4 million cash and 6 million convertible notes I am sorry RMB. So, the total consideration average for each of them is roughly 2 million, $2 million. And now we have eight entities, eight new companies, they have their original network and we're integrating them together from different provinces and we'll add them, we'll continue to execute this strategy you'll see more and more companies in the wholesale segment will grow very rapidly very quickly and they will catch up with the production and from then on you will see a balance business portfolio with one hand on production, the other hand on wholesale and we're also in addition to the merger and acquisition business combination approach. We're bringing our credit facilities particularly those agricultural farms or countryside based lenders, innovative new internet based lenders and they will provide more credit facilities that will help us to mitigate or reduce the inherent risk in collection and in addition to just the pure numbers in the receivable balances. We believe the best approach, the effective remedy or the method is how you can collect them back while reducing the default risk and in the meantime grow the business and integrate or bond your clients or your customers. I hope this helps.

[Jared Cohen:]

Yes, just more of a macro question. Can you give us an idea of the overall growth in terms of the agriculture business in China, in terms of particularly in terms of the number of provinces you're supplying now, because I think you've always had a limited number? Are you sort of supply more provinces now than you have before?

[Tao Li:]

Let me answer your question this way. This is a macro economy question and the best answer to this question is actually available, is publically available from the central government publications this year. And every spring, the central government of China published, the central government report; and the number one report this year is centering, is focusing on the agriculture industry in China. The government proposed and analyzed the stuck hole of our industry and proposed that. The solution to our industry to optimize the supply and demand of agricultural product and agricultural materials is to optimize the compliment, the structure, the percentage of agriculture products that farmers who raise, that consumers eat and consume. So by solving the starving, starvation crises already for several decade from the past and the government is aiming to raise, to improve the nutrition balance, the nutrition quality of the food available for citizens, for people. And that require manufactures like us, including us who have --overall in a co-industry who have excess of capacities to further recycle some abundant and excessive capacities that can only be used to produce low quality agriculture material, we require them. The manufactures would require them, but in the mean time upgrade the technologies and our capabilities to produce better quality agriculture materials for our farmers to grow. For our farmers to raise better vegetables, better harvest, better grains, non-genetically modified and with better nutrients and with more proteins. So that’s the government's goal and that would lead naturally induce manufacturers and distributors, whole sellers to adjust that there business strategy to anticipate to get more used to the new policies, the new regulations. So that they can better help our, we can better help our farmers, help our customers well avoid a risk, avoid losses. So for example if a manufactures has been sonly producing low quality and low margin, pure chemical fertilizers would have cost historical damages to soil or pollutions et cetera, et cetera. This may not be a good environment to put such low technology companies to continue and to expand and to grow, rather to come as little pushing, the manufactures and also publishers and require in the in quarters. And the overseas companies to what was done to follow their regulations, provide good -- we need good stuff produce and so good stuff well protecting the environment. And if that’s how we interpret look at our industry and we wouldn’t be surprise that the full safety regulations from the tenants FDA will be more rigorous and decided from our fertilizer business. And as a hope group from our affiliates, shareholders and we're also establishing the online, offline the organic and high quality food platform. And overall, we've been in this industry for long time, and we're continuing win this and grow with this and help better, help our customer.

[Operator:]

Thank you. [Operator Instructions] All right, there are no more questions at the present time. So, I'd like to return the call to management for any closing comments.

[Frank Wang:]

Thank you everyone for attending this earnings conference. And thank you very much for your time and we hope to see you in the future.

[Tao Li:]

Thank you.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.