China Green Agriculture, Inc.
Q4 2017 Earnings Call Transcript

Published: 21 Oct 2017

[Operator:]

Good day and welcome to the China Green Agriculture Fiscal Year 2017 Financial Results 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 Zhuoyu Li. Please go ahead.

[Zhuoyu Li:]

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the China Green Agriculture fourth quarter of fiscal year 2017 earnings conference call. This conference call is being recorded today October 20, 2017. Thank you and welcome everyone to China Green Agriculture’s fourth quarter of fiscal year 2017 earnings conference call. This earnings release went through the wire pre-market today. Our call today is hosted by me, myself, Zhuoyu Li, this Company’s President. 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 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 1995. Actual results may differ from those discussed today due to such risks, but not limited to, fluctuations in customer demand, management of rapid growth, intensity of competition from the other providers of China Green Agriculture product and services, general economic conditions, geopolitical events and regulatory changes, and other information detailed from time-to-time in the company’s filings and 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 expectations will prove to be correct. In addition, any projections as to the Company’s future performance represent management’s estimates as of today, October 20, 2017. China Green Agriculture assumes no obligation to update these projections in the future as market condition change. We are very pleased with our consistent performance in the fourth quarter fiscal year 2017, where we continue to build shareholder value and the long-term durability of our business model, sustained net profit and balance sheet discipline. And I will now turn to Ken Ren to present you with the report results for fiscal year 2017, please.

[Ken Ren:]

Thank you, Mr. President. I’m now pleased to report the results for our past fiscal year 2017. I’d like to remind the conference participants that the earnings release has been out through globewire and corresponding current report is also filed with Securities Exchange Commission, it has the earnings in the exhibit and the yesterday night we filed the full year report annual 10-K for fiscal year 2017. So you’re welcome and you’re encouraged to them – take a look at them and we welcome if you have any questions. So let’s take a look at the fourth fiscal quarter 2017’s results of operation. For that quarter ending June 30, 2017, our net sales was [indiscernible] it reflect the increase of $4 million from $79 million compared to fiscal year 2016 first quarter that’s a 5% increase. In that sales number Gufeng contributed $36 million roughly 44% of total net sales as compared to 60% for the same period in fiscal 2016 and Jinong contributed 27% – $22 million of total net sales compared to $36 million of total net sales in the fourth quarter of fiscal 2016. And please keep in mind that we got a new wholesale segment and this pass the 2017 as the first full year that this new wholesale segment has been in operation. We glad to report that. They contributed $23 million total sales revenues that’s about 27% of total net sales. In terms of the cost of goods sold for the particular quarter it increased by 10% from $57 million to $63 million that’s a $6 million increase and gross profit reminded roughly flat from $21 million to $20 million in the same period. Gross profit margin reflects a new blend of this old segment and at a new wholesale segment was appropriately 24% compared to 27% from a year ago. Beside, if you take a look at general and administrative expenses it was 9% of the net sales, $7 million as compared to $4 million in the same period from fiscal year 2016. Total operating expense as a percentage of sales was 16% compared to 18% in the same period of last year. Operating income was $6 million compared to $7 million in the same period for the last year and operating margin was 7% compared to 9% in the same quarter for fiscal year 2016. Finally net income for the fourth quarter was $4.1 million compared to $5 million in the same fourth quarter period from fiscal year 2016. Now let’s take a look at the full year results of operations. I will summarize these operating metrics and the results and we will give more time for Q&A session. So let’s first take a look at this whole fiscal year’s net sales. Our total net sales for the entire fiscal year was $285 million – of $16 million 6% from $268 million for fiscal year 2016. This increase was mainly due to the production and the question addition of sales from this new wholesale segment. For the fiscal year the Jinong sales was – Jinong sales wholesale was $106 million from $125 million reflect a decrease of $19 million and the fiscal year 2017 Gufeng’s net sales was $104 million a decrease from $134 million from a year ago. So this year it is characterized of our transitional strategy year and we balanced our resources and efforts into this manufacturing segment allowing us to wholesale segment so that the business risk, the market risk has been hedged or maybe get into balance between this upstream segments. The brand new segment contributed $65.5 million in wholesale revenues. For Yuxing’s net sales was $8 million and it’s roughly flat with 2016 and is reflected in the somewhat stable market demand. But if you look at the cost of good sold number, the total cost of goods sold was $201 million increased by 14% from $175 million and this cost increased number was largely due to this new we added business segment. Cost of goods sold by Jinong was $48 million from $53 million a year ago and the cost of goods sold from Gufeng was $89 million a decrease of $26 million from $160 million a year ago. Cost of goods sold by Yuxing was nearly $7 million an increase of $1 million from $5.8 million in 2016. Cost of goods sold by the sales segments by the wholesalers was $56.5 million. Let’s take a look at gross profit. Total gross profit was $83 million as compared to $93 million, the profit margin now is 29% versus 34% a year ago, so this reflect the land of wholesales segments. Gross profit generated by Jinong was $58 million compared to $72 million and gross profit margin was 55% compared 57% as euro this is mainly due to Jinong’s high margin product sales. For the fiscal – whole fiscal year gross profit by Gufeng was $14.5 million from $18 million a year ago and Gufeng’s gross profit margin was 14% compared to 13% a year ago. This reflects the blunt of organic compound fertilizer offer by Gufeng to get out with its inorganic compounds fertilizer products, which has lower gross profit margin than the organic one. Let’s take a look at Yuxing’s gross profit was $1.6 million and this reflect the gross profit margin of 20% compared to 15% – 13% a year ago. This is due to the product of cost and the changes in the choose prices. Selling expense, selling expense for the whole year was $18 million, 60% of the net sales compared to – I’m sorry 6% compared to a 5% which is $13.5 million in year 2016. So the selling expense for Yuxing was 0.5% of net sales and compared to 2% of the net sales in 2016. Gufeng’s selling expense was less then 1%, the similar percentage from 2016. Selling expense for VIE – I’m sorry for the wholesalers was 2%. In selling expenses if we take a look at the deferred assets and the amortization of the deferred assets was $14 million and as 5% of the total net sales compared to 13% a year ago. So let’s take a look at general and administrative expenses, general administrative expenses for the whole fiscal year was $20 million or 7% after net sales compared to $12 million or 5% of the net sales in year 2016. Net income. So net income for the whole fiscal year was $25 million – $25.1 million an increase of 2% compared to $24.7 million in 2016 we raised our net income guidance at the end of the third quarter for the whole fiscal year and for the entire fiscal year our revenue numbers at our raised guidance of $5 million from – we realized the $285 million. Our net income also meet – I’m sorry met our previously raised full year guidance, our full year guidance was $25 million so far we met it. Net income was a percentage of the total net sales was nearly 9% in fiscal 2017 and 9.2% for fiscal 2016. Well maintaining the health growth of the business overall and we continue to produce a steady net income earnings. Financial condition wise as of the fiscal year end the cash and cash equivalents was over $120 million it reflects an increase of 20% from over $100 million as of June 30, 2016 a year ago. The company has $8 million in short term loss as of the year end as an increase of $3 million compared to nearly $5 million as of June 30, 2016 a year ago. We have accounts receivables of $140 million as of this year end as compared to nearly $120 million as of last – as of 2016 fiscal year end. This is 100% increase by $23 million. So, now let’s take a look at our guidance. As we match the fiscal year 2017 full year guidance in net sales, net income and earnings per share for the first quarter ended September 30, 2017. The management expects net sales of $55 million to $60 million and net income of $5 million to $7 million and in terms of earnings per share numbers that has $0.13 to $0.17 per share based on $38.5 million number of fully diluted shares. For the entire fiscal year 2018 management expect net sales of $262 million to $301 million a net income of range from $21 million to $30 million and an expected earnings share between $0.54 per share to $0.77 per share based on again $38.5 million numbers a fully diluted share. We will continuously monitor the business gross and may update these guidance numbers every quarter. This pretty much some of our full year’s results to get to earnings guidance for the ongoing new fiscal year 2018. We love to hear from you and like to take questions at this moment now. So Kerry, operator, so we open the Q&A roster. Thank you.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from James Hopes [ph] Private Investor. Please go ahead.

[Unidentified Analyst:]

Yes. I would like to know, do you have any pure the plans for doing more acquisitions.

[Unidentified Company Representative:]

James?

[Unidentified Analyst:]

Yes.

[Unidentified Company Representative:]

Hold on. Just for second.

[Zhuoyu Li:]

Good morning, James, this is Zhuoyu Li. And…

[Unidentified Analyst:]

Yes, good morning.

[Zhuoyu Li:]

Good morning. To answer your question that I’ll first look back to what we have done during the last two years with regarding to acquisitions. So we have completed eight acquisitions of our former distributors and the addition of these distributors has diversified our business models, as you know that we use to be a – we use to focus more on manufacturing the products and then we provide them to the market. And now building our all sales channels are quite essential to our next step towards building a more cohesive and functional business model in general. And in the future, we are actually in negotiation with a couple of more distributors from areas that we haven’t fully develop the business model [indiscernible] for example. We have acquired two distributors in Shaanxi and – in Shaanxi, which is where we are. And so now we’re looking to develop more distributors in the Xinjiang region. So that we can further – so we can have the bigger impact on the market there. And going forward, we’ll carry on with our strategy of acquiring more distributors and we don’t deny the possibility that there will be different types of distributors joining our team. So – and I think can have more to add regarding this.

[Unidentified Company Representative:]

Thank you, Mr. President. Hi, James.

[Unidentified Analyst:]

Hello, hi.

[Unidentified Company Representative:]

James, first of all, I want to thank you and we really appreciate you take the time participating this conference call, it’s a huge effort. Especially for you, because you’re basically in California and right now it’s 4

[Unidentified Analyst:]

I’d like to just comment on that I mean see on that you reach this late last year as well. And so you know this is something you plan a year in advance and also as it relates to the other reports I mean, I think that having them on time is something it’s important and you have a long time they had to plan to make sure that that occurs in order to the year, each quarter and year away for the next 10-K. And also the website you’ve been talking for a long time about upgrading or just making their website up to date, the last date on your company history is 2010. So when investors look at that they see something that looks like a company that’s out of business. And so I think this is part and parcel of the reason that there is such the stock is such a low level you’re selling it twice earnings. And I think that you that if you do the stockholders would really very much appreciate it is that if you would take some action to update your website to being more to also send out let’s say in the middle of the quarter at least the press release to say what’s going on and what’s new instead of us waiting you know for a quarter and the next – the next meeting is actually because your reports are going to be for the quarter it’s going to be probably in November. And so we waited a long time between the third quarter report and end of the fiscal year report, but it occurs naturally this time will be a shorter wait till the next conference call. But if you could you know I think it’s important for shareholders that you keep them informed better that you put things that you bring the website up to date. And so that’s the statement. I think what I would be interested in hearing from you more is, what it is that you are planning to do to increase shareholder value, I mean a lot of us purchased the stock a well back its way down from where it was the value – there’s lot – you have a lot of cash on hand and yet there’s nothing that you do to rage to you know in the way of a dividend a stock buyback it’s a bargain for the company to buy it back. So I’d like to know what it is that you are planning on doing in the way of stock buyback, dividends or listing on another exchange.

[Tao Li:]

Please hold down for freeze moment James, we’ll get back to you.

[Unidentified Analyst:]

Okay thank you.

[Tao Li:]

President Li, will address this shareholder restore reservation concerns of your questions, before he could address you would you mind if I could give you an update on our website project.

[Unidentified Analyst:]

Sure, that would be great.

[Tao Li:]

We are currently overhauling this website project, because we heard from you and together with other pure investors, shareholders and we deep felt that – we deep feel it’s very important, it’s very imminent to upgrade it and you should be able to see a brand new project – I’m sorry new website in this year, it will be HTML5 based and as far, as I now lately because we have been fully over occupied with this annual report project and once this live is tested well and we’re going to transparent upload all these Investor Relations’ report of information including the press releases and XBRL files and reports over there and you have it sooner rather than later, so that’s my commitment to this website project.

[Unidentified Analyst:]

You’ve done that three months, six months, nine months?

[Ken Ren:]

Within a year.

[Unidentified Analyst:]

Within a year?

[Ken Ren:]

Yes. And President, Li will give you comments on the shareholder value restoration.

[Zhuoyu Li:]

Thanks, Ken. And hi James, so thank you very much for pointing out that we need to communicate with our shareholder more often, so that now what we are doing. And I’m really appreciate your inputs and your e-mails and all the correspondence that you had with – and all the correspondence that you had with us with regarding to restoring on the shareholder values. And for me that’s our primary – that’s our priority to – one of the priorities that we have at the moment and like you have management we are actually exploring all different kinds of possibilities including, but not limited to list hanging other exchanges and like you have mentioned we have paid dividends back in 2013 once before, and we are also trying to figure out as the regulations all foreign currency tightens in China how are we going to pay these dividends back to our overseas investors in a more efficient way. And last but not least the – we like – Ken had mentioned website is just one of beyond the projects that they were doing at the moment to try to give a new image to the company and let the public know what we’re doing and we’re actually developing a basket of strategies at this moment and within the right time, we’ll disclose everything to our shareholders and we hope our strategies and our ideas well win back our shareholders confidence, so that we can all the – all restore the shareholder values together.

[Tao Li:]

I also like to give some of my reflections on what we have done, and what we could have to – could do in this shareholder value preservation or restoration. From our prospective I’d like to point out, let’s view the example, let’s take a look at this acquisition. We using some of our cash on hands together with debt instruments was derivative components to acquire valuable assets this wholesalers assets resource to build this new segments. So in a new structure analyzing and possessing this recommendations and proposals from financial revises, investment bankers we were one of the first few insurers will utilize this unique because convertible bonds, convertible notes on no one has to pay [indiscernible] comments to purchase this wholesaler companies, for example, in total we spend like roughly $20 million consideration for them and nearly half of it – half of them $9 million or so was in a form of convertible note and this convertible notes has such a structure that is not only enable itself to be converted to the common shares, the share prices go above $5, but in case that the shareholder – I’m sorry the share price go higher than $5, such for example like $10. And then it will be converted not as $5, but up to $7.50 which has 75% after then share price if such share price is higher than $5. So we want to make sure that the maximum number of shares that these instruments could be converted into is constraint as of limit. And on the other hand this public companies is this wholesalers don’t perform very well, don’t perform well as we expected then are penalty embedded in that and then the principle amount may shrink maybe dragged on. So the total consideration will not be as much as promised in case they default in case they don’t perform well. So that’s another layer of current shareholders protections. So if you take a look at the Gufeng acquisition we utilized stocks as the payment method this time we don’t, we didn’t, because we used that instruments was limited, conversion, possibility and we also incorporate it, we considered, the difficulties in foreign currency exchange tightening regulation. So we used Jinong to issue the such convertible notes, the Chinese currency in R&D insisted of used U.S. dollars, so that we could utilize over cash resources in R&D in Chinese currency is better and this is actually a better way an advantage of holding this Chinese currencies.

[Unidentified Analyst:]

I had a quick question on that.

[Zhuoyu Li:]

Yes, I’m sorry. Go ahead.

[Unidentified Analyst:]

Quick question on that. You say if the profits of the target with certain levels of sales by the parties, i.e. the growth rate Jinong may at this discretion covert the notes. What do you mean by if the profit sits certain levels of sales you mean if the – is it possible – I mean if the sales of the targets – sales to meet certain levels or you mean – what is that mean the profits at certain levels of sales, I don’t understand the profits could be the level of sales. It is help of the sales…

[Tao Li:]

Thanks of asking the question and you gave me opportunity to explain it to you.

[Unidentified Analyst:]

Okay.

[Tao Li:]

In cost the structure the opposite ways. Assuming the acquisition go well. Okay, similarly acquisition go well and then the company which is Jinong, because the Jinong is the insurer of this convertible notes. After this question to pay it off either in cash or cash and shares explanation, not breaks [ph] it to the conversion mechanism or the shares or to convert it to shares also per the conversion maximum at the promised notion of principle amount, plus the accrued interest expenses unpaid during the period. That’s the positive rights business interaction. If everything go well, let’s assume if everything go well, if that mature Jinong will pay this notion of amount either in cash or at cash with the content from the note holders, which were the shareholders of this company. That’s the brighter side and ultimately if the acquisition – acquired a company did not performed well or even worth scenario. It failed for its default. Let’s say, it breach or violated this terms in this structural and so strategic acquisition agreements we have protected terms to protect the Jinong. So for instance, the shareholders violated those in trusted agreements, then Jinong have the right to forfeit the entire portion or partial portion of the convertible note, which means we are going to – Jinong has power to right off – to right down the principal amount – a notional principal amount of this convertible notes so that the Jinong’s liability we will be reduce. Due to the data consequence cost by the counterparty, which is to shareholder of – the previous shareholder of this acquired a company. It took very favorable term for Jinong and it’s very protective for us. So it set the maximum loss for Jinong if that acquisition didn’t go well along the past in the next couple of years. Hope, I explain it, if I don’t – let me know, I can try again.

[Unidentified Analyst:]

Okay, that’s fine. Make this some other people have a question. I don’t know if there any conference?

[Operator:]

[Operator Instructions] The next question will come from Max Kuney [ph] a Private Investor. Please go ahead.

[Unidentified Analyst:]

Hello, this is Max from Germany. I’m in Wisconsin, I think 2011 now, and I remember very well, really often this is caution about share price of the company. And I understood, regarding the convertible notes, it’s really important for the company to have higher share price. And I think, the other investors can agree that for us the most important points to buy more share is a dividend. And I know we had a lot of information about from the CEO and the filings about [indiscernible] for you, while impossibilities for you to pay us a dividend, because of this reflection from the government. But I know that several other Chinese companies are paying dividends. And I know that this reflection is only for companies who want to transfer more as $5 million outside to us – investors. So I think $5 million will not be reach, if you pay us $0.10 or $0.15 for dividend. So will you cannot allow them where the problem is.

[Ken Ren:]

Max, please hold on for a brief moment. We’ll get back to you. Thank you.

[Zhuoyu Li:]

Hi, Max. This is Zhuoyu Li. Sorry if I have made any misunderstanding that I didn’t mean that there was any difficulties or problems with regarding to paying the dividends. What I said was that, we’re trying to figure out what’s the most efficient way to pay dividend to our shareholders, so that we can both restore the shareholders confidence in our company. While minimizing the – wanted to better deal with the all the regulations of the Chinese polices with regarding to the foreign exchanges. And I think Ken has more to add regarding that.

[Ken Ren:]

Max?

[Unidentified Analyst:]

Yes.

[Ken Ren:]

You are basically in Germany right?

[Unidentified Analyst:]

Yes.

[Ken Ren:]

Thank you for coming to this call. And we heard about you, we know that you are very supportive for the company and you have provided helpful and helpful devices, informations and suggestions all this has been taken care they were recorded. And management’s theoretical review is required its comment and we remember your name. And we first want to thank you for your efforts and your support to us. So let’s come to your questions and as President pointed out that – first of all in my mind I work for the company and I have the obligation, I have the responsibility to help to contribute to add the company’s value, the shareholders value. And I believe and I agree that paying dividend is a great action, it is a great methodology to rewarding the shareholder eventually. It’s a unbiased – it’s is a non-disputable way of returning investments with reward, and we did that. We did issue the dividend in 2014 effectively without single dollar and we fulfilled the dividend payment as we promised in 2015. At that time we also started the foreign regulation, foreign exchange regulation then and we managed to fulfill the beauty. First of all, this kind of – this type of decisions, this type of actions needed of course support for it’s analysis, for it’s resolution consent and then we go to different offices, local authorities and national authorities for approval and it take time. And you mentioned some companies did paid the dividend in China or from China and we started to follow this process and we did that before and then we currently following this program in the regulation updates, qualifications all the time. And there are also some big Chinese companies withdraw their over fees expansion, withdraw their capital allocation, capital investment plan due to this change of the environment the macroeconomic and particularly the foreign currency. And management always keep the shareholders request demand, their search, their expectation on top of everything. That’s what we did. And we analysis this time to time and we make the recommendations to the board, we now have new board members and our seasoned entrepreneurs, seasoned technology founders, and we listen to them, and I’m sure I will guarantee you that your voice today and your communications only here will be hurt by them will be in their heart.

[Unidentified Analyst:]

You stated that several times, several times before. So many times you cannot count for, so we are – what we need is action in a few – it’s not a time, so it is not helpful for us to hope for 2020 or so, nearly everything goes well for the company and you have reached $1 billion of revenue also you have to feel that you take the company private that you have an advantage because of this no share point. So what we want to see is, fast action to cannot wait for another three years, many of us are invested since five, six, seven years and invest so much money that you got your salaries, you got your bonus, shares, but we got nothing, we got $0.10 as a dividend two or three years ago, that’s nothing. The company has full of cash and we really see it as your top goal to pay us some dividends back.

[Zhuoyu Li:]

Can you hold down for a second? We’ll get back to you.

[Unidentified Analyst:]

Thank you.

[Zhuoyu Li:]

Hi, Max, this is Zhuoyu Li again. Hello?

[Unidentified Analyst:]

Yes, I’m listening.

[Zhuoyu Li:]

Oh, cool. So we have offered your requests, and we will disclose the strategy that we are still developing within the next two months, so that you can see that we’re actually taking actions.

[Unidentified Analyst:]

Okay, two months?

[Zhuoyu Li:]

Within next two months.

[Unidentified Analyst:]

That’s great.

[Tao Li:]

I guess what the President indicated here, informed that here that your voice has been taken. And we will bring the feedback from this conference call, the messages you announced in this conference call, and also together with James, you’re pure shareholders of comments, and we would summarize them in minutes in reports and circulate around the board and you’re your recommendations available to them and then they will analyze everything, they won’t miss this opportunity. They will hear from you. They will take your message. And then we’re going to have this quarterly report to you and that’s – that will be next month and we’ll have similar a conferences like this next time and again we’ll maximize the available time for Q&A and you can ask questions and if we will give you an update if any and we’ll give you the feedback from the board on their thoughts.

[Unidentified Analyst:]

Okay, that’s great. I think it’s really good that the President says two months. Two months is really good. So within next several month. Thank you very much. This concludes our question-and-answer session. I’d now like to turn the conference back over Zhuoyu Li for any closing remark.

[Zhuoyu Li:]

Well. Thank you everyone for participating in this earnings conference call. And thanks James and Max for your questions. Thank you again for participating in the earning conference and we hope to you see you next time. Thank you.

[Operator:]

The conference is now concluded. Thank you for turning today’s presentation. You may now disconnect your lines. Have a great day.