China Green Agriculture, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Oct 2016

[Operator:]

Welcome to the CGA Annual 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 conference is being recorded. I would now like to turn the conference over to Fang Wang. Mr. Wang, please go ahead.

[Fang Wang:]

Thank you, operator. Thank you and welcome everyone to our company's fiscal year 2016 earnings conference call. This earning release has already went to the market today. Our call today is hosted by the company's President; Mr. Tao Li, and company's other managers and executives and me. 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 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 private providers of our company's products and services, in our markets, general economic conditions, geopolitical events and regulatory uncertainties and changes as well as and other information detailed from time to time in our 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 expectation will prove to be accurate and correct. In addition, any projections as to the company's future performance represent management's estimates as of today only October 3, 2016. The company and we assume no obligation to update this projection in the future as market change as the condition may vary. Now I'm pleased to report to you the result for the fiscal year 2016 ended on June 30, 2016. Fiscal year ended June 30, 2016, we realize the revenue at $268.8 million, compared to $263.4 million for the previous fiscal year ended on June 30, 2015, net income was $24.7 million and $0.67 per share as compared to $31.4 and $0.93 per share. We were pleased with our consistent performance in a very challenging economy during the past fiscal year 2016. In the past fiscal year, we continued to build our shareholder value. We strive for the increase in our price intrinsic value and the long term durability of our business model percent net profit and balanced discipline and their various approaches ranging from our organic internal growth to a number of external acquisitions we exercised at the end of fiscal year. On June 30, 2016, our oldest subsidiary, the Jinong fertilizer factory entered into six strategic acquisition transactions with six new companies and these six new companies are located throughout the entire China. They're from Shenzhen autonomous regions. They're from [Shenzhen] Province. They're from Hunan Province and Shaanxi Province, the home province where Jinong is located. They're all leader participants and a dominant player in their local, agriculture material markets and are all conducting business mainly in agricultural sales and distribution industry. They conduct the wholesale business and the retail business for agricultural materials such as fertilizers, pesticides, seeds and grain and food. We had successfully closed the dispatch of six acquisitions simultaneously. We're proud and confident that this excess success is a result of the joint effort from both involved parties. Our new team members, those founders and management members from the six newly joined entities assuring the same value and the same mentality envisioned with us and the we'll be teaming up together to built, to grow our business model with innovative approach. We on the same vision, the vision to transform ourselves from a pure manufacturing business and a wholesaler-only businesses to a integrated platform in which the old factory and the new wholesaler will leap forward with unlimited capacity to discover our underdeveloped and potential new value in this grand and limitless rural market in our homeland. Upon the close of our six transactions, six acquisitions, we're penetrating into market areas where we don’t -- we have limited footprint before and we unlocked our capability by teaming up with our new members, further penetrate into the market where they're familiar with, with efforts and to jumpstart those markets was turbo power. We are striving for our goal to build the newest and the promising and the largest platform ventures for the rural market in China and we are confident, we're doing something that nobody had done before ever in this market and we will continue to realize to grow this strategy and this plan and this is a great start, this is a very exciting starting point for us, for the new company members and for future collaborators, for future partners. We look forward to start our quarters that we aim to fulfill this strategy was new business segments in addition to old manufacturing segment. As we exited our concluded fiscal year of 2016, with the close call provision with our old and new business partners and government support, we believe our company will grow into the new space, the new style that never existed in our market in this industry. Now I’d like to discuss the financial results with the participants in this call in greater details. Let’s first look at the last fiscal quarter results of operations, the first quarter of fiscal year 2016 from the end of March to the end of June. With this three month period, the net sales we realized was $79 million, an increase of less than $1 million or less than 1% from $78.5 million for the same three month period ended June 30, 2015 a year ago, among which our compounds fertilizer factory within Beijing Gufeng Chemical contributed $49 million of total net sales which accounted for 62% as compared to $46 million, 49% in the same period from fiscal 2015. On the other hand, the oldest factory Jinong net sales realized at $28 million from $31 million in the same period last year decreased by $3 million due to market conditions and the macro economy in our opinion. Our R&D subsidiary Yuxing net sales increased by $600,000 or 50% to $1.8 million as compared to $1.2 million for the same period in fiscal year 2015. On the second line in cost of goods sold, the whole cost of goods sold increased by 14% with amount of $7 million to $57.5 million for the three months period ended June 30, 2016, compared to $50 million in the same period last year. Gross profit margins decreased by $4 million or 14.5% to $21.5 million as compared to $28 million in the same period of fiscal year 2015. Gross profit margin, our average was approximate 27.2% and 35% of net sale for the three months ended June 30 and June 30, 2105 respectively. Besides let’s look at the general and administrative expenses. The general and administrative expenses were $4 million or 5% of the net sales as compared to $2.4 million or 3.1% of net sales for the same period of last fiscal year. Such increase of $1.6 million or 66% increase is reflected in the total operating expenses as a percentage of sales was 17% compared to 21.7% in the same period from fiscal year 2015. Operating income was $7 million, a decrease of $4 million or 37% from $11 million in the same period last year. Operating margin was 8.9% compared to 14% during the same quarter of fiscal year 2015. Finally the net income for the last quarter was $5 million, which matched the guidance is as compared to $8 million in the same period from fiscal year 2015. Now let’s look at whole fiscal year 2016's results of operations. Net sales; the total net sales for the 12 months of fiscal year 2016 ended June 30, 2016 was $268.8 million, an increase of $5 million or 2% from $263 million for the fiscal year ended June 30, 2015. This increase is a mix of reflection of primarily due to an increasing Gufeng’s net sales and Yuxing sales and the reduction in Jinong sales. For the fiscal year ended June 30, 2016, Jinong's net sales decreased $5 million or 3.5% to $125 million from $113 million year-over-year. This decrease was mainly attributable to Jinong’s decrease in sales volume, which is the result of the market and the demand etcetera from the last fiscal year. For the fiscal year ended June 30, 2016, Gufeng's net sales were $134 million. It's an increase of $6 million or nearly 5% from $129 million over a year ago. This increase is mainly attributable to the momentum of growth in Gufeng sales for the whole fiscal year for its market promotion strategy as well as the sales effort. For the fiscal year of 2016, Yuxing’s net sales were $8 million with an increase of $4 million or 94% from $4 million a year ago in fiscal 2015. This increase was mainly attributable to its growth momentum and of adjusted price of its product and it's realized demand from season customers and our new customers in the fiscal period -- in the fiscal year. Let's look at the whole year's cost of goods sold. The total cost of goods sold for the whole past fiscal year 2015 was $176 million. It's an increase of $16 million or 10% from a $149 million from fiscal year 2015. This increase was mainly due to the sales, the increase in sales in somewhat due to the changes in the raw materials cost and packaging cost with a mixed effect. Cost of goods sold by Jinong, the concentrated fertilizer manufacturer for the fiscal year 2016 was $53 million with an increase of $1.6 million, 3% from $52 million a year ago of fiscal year 2015. This increase in cost was mainly attributable to raw material costs, packaging costs etcetera, those factors affected in its performance. The cost of goods sold by Gufeng for the fiscal year ended June 30, 2016, was $116 million, it's an increase of $12 million or 11% from $104 million for the fiscal year 2015. This increase was primarily attributable to an increase in the cost of raw materials and increased sales volume of our compound fertilizers product at Gufeng. For the year of fiscal 2016, cost of goods sold by Yuxing was nearly $6 million with an increase of $2.7 million or 88% from $3 million ended June 30, 2015. This increase was mainly in line with the increase in Gufeng's net sales. Gross profit; total gross profit for fiscal year 2016 decreased by $11 million to $93 million as compared to over $100 million for the fiscal year 2015, a year ago. Gross profit margin was 35% and 48% for both fiscal years 2016 and 2015 respectively. Gross profit generated by Jinong decreased of $6 million or 8% to $72 million for the fiscal 2016 from $78 million from 2015 fiscal. Gross profit margin from Jinong sales was approximately 57% and 60% for both fiscal years 2016 and 2015 respectively. This decrease in the gross profit margin was mainly due to the increase in its raw materials expenses and cost as we articulated already before. For the fiscal year June 30, 2016, gross profit generated by Gufeng was $18 million with an increase of $6 million, 25% from $24 million for the fiscal year 2015. Gross profit margin from Gufeng sales was approximately 13.5% and 19% for both fiscal years 2016 and 2015 respectively. The decrease in the gross profit percentage was mainly due to the increase in the percentage for the lower margin products sales in Gufeng's total sales as well as the price changes for other categories, other product's categories. For the fiscal year 2016, gross profit margin from Yuxing was $2.6 million with an increase of $1.4 million or 109% from $1.2 million for the fiscal year 2015. The profit margin, gross profit margin was approximately 30% and 28% from the last two fiscal years, 2016 and 2015 respectively. The increase in these gross profit margin of 2% is mainly due to the price adjustment for certain product categories sold by Yuxing during the fiscal year 2016. Selling expenses, our selling expenses primarily consist of the salaries of sales personnel, advertisement, promotion expenses, strategies, freight-out costs and related compensation and classifiable expenses. Selling expenses were $30.5 million or 5% of net sales for fiscal year 2016 compared to $9 million or 4% of net sales for the fiscal year 2015. There is a increase in selling expenses of nearly $5 million or 50% compared to a year ago. The whole year general and administrative expenses, general and administrative expenses consist of primarily of related salaries, rental expenses, business development, research and development, depreciation and travel expenses incurred by our general and administrative departments, legal and professional expenses, include expenses incurred and accrued for certain litigations and legal services. General and administrative expenses were $11.8 million or 4% of net sales for the fiscal year 2016 as compared to $11 million, 4% of net sales for fiscal year ended June 30, 2015, a year ago. It's an increase of $5 million; I am sorry, $0.5 million, $500,000 or 4%. Net income, net income for this whole fiscal year 2016 was $24.7 million, again read the net income guidance we disclosed before. A decrease of -- it decreased by 21% of $6.7 million compared to over $30 million a year ago. The decrease was mainly attributable to the changes in the gross profit margin and the general and administrative expenses and these increasing expenses offset the increase in our net sales and percentage wise, the net income is 9% of our net sales compared to 11% for the net sales a year ago. Financial conditions, as of June 30, 2016, cash and cash equivalents was $102 million, an increase of $10 million or 10% from $93 million compared to over a year ago. We have $5 million in short-term loans as a decrease of $19 million compared to $24 million over a year ago as we paid them off and we had account receivables of $170 million as of June 30, 2016, as compared to nearly $100 million as of June 30, 2015, a year ago, the increase of nearly $50 million or 70.8%. I would now like to discuss our guidance; the quarterly, the first quarterly guidance for fiscal year 2017 and the whole fiscal year 2017. For the first quarter ended September 30, 2016, Management expects net sales of $57 million to $62 million and net income of $5 million to $7 million. For the whole fiscal year Management expects net sales of $289 million to $330 million and net income of $20 million to $27 million. We expect to update our guidance for the whole fiscal year and our quarterly future guidance accordingly as the year passed along. This concludes the prepared remarks. Operator?

[Operator:]

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Jones. Please go ahead.

[Richard Jones:]

Yes, would you please tell me the amount of deferred assets on your balance sheet as of June 30, 2016?

[Fang Wang:]

As of June 30, 2016, the deferred assets net stand at $13 million.

[Richard Jones:]

$30 million?

[Fang Wang:]

Yes $13 million.

[Richard Jones:]

$13 million. Okay. Okay. And the amount of deferred assets has been coming down each quarter by anywhere from $6 million or $7 million to over $10 million. Do you expect that amount will go to $0 in the current fiscal year?

[Fang Wang:]

It will, yes I think so. It is being amortized period by period.

[Richard Jones:]

Yes, okay. And I didn’t see on your website a 10-Q for the quarter ended March 31, 2016?

[Fang Wang:]

I believe it's available on the Securities Exchange Commission's website.

[Richard Jones:]

Yes.

[Fang Wang:]

It is also available on the Edger's website.

[Richard Jones:]

Yes, I can go there. In the past you've always in your Investor Relations Section shown the Securities and Exchange Reports and I would hope that you would start doing that again. And as for the fiscal year ended June 30 of 2016, I haven’t yet seen your release of your results, I look at Yahoo and it's not there and I looked on your website and I didn’t see it either. What's the reason for that?

[Fang Wang:]

That's correct. As a small reporting company, according to the requirement from Securities and Exchange Commissions, we are due to report our Annual Results and audited financials within 90 days after our fiscal year ended. Our fiscal year always ends on June 30. As such mandates from June 30, September 28 was the last day we were supposed to release our full Annual Report, whole year Annual results and as a matter of fact because we conducted six acquisition transactions and we need additional time to compile and to prepare the Annual Report and I'm happy to let you know that to inform you that along with this earning release, which was announced and scheduled as from a few days ago from last month, we are going to report our full year results shortly after this earnings conference call. It will become readily available very soon.

[Richard Jones:]

All right. All right. I hope in the future that you will have your results out before the conference call rather than afterwards.

[Fang Wang:]

We take your comments very gratefully and thank you very much for letting us know and for this fiscal year see -- our reporting season, annual reporting season as we own learnt and noted that because at the end of last fiscal year, we classified that these acquisitions, there are six acquisitions in total and it added tremendous substantial work to the team and our third party, our third party helpers. So along with that, we have been working day and night since we exercise the acquisitions and we're happy to report these results to our shareholders, to our public and your comments. We thank for your comments and from next quarter and future quarters, future reporting, if we have new acquisitions, we will work harder and harder, quicker and quicker to make sure that people and investors and shareholders get these results timely and for the information and we will double check all the technical aspects and make sure that they are readily available and thank you.

[Richard Jones:]

Thank you.

[Operator:]

Our next question comes from Jared Cohen of JM Cohen & Company. Please go ahead.

[Jared Cohen:]

Yeah just a few questions, thank you. You've done a very good job of managing your balance sheet and growing your cash levels over the last three or four years. I was just curious, what do you think you need to do or might be a function of the economy in China of both growing your top line and bottom line over the next three to five years?

[Fang Wang:]

This is an excellent question. Thank you for asking and we're happy to share with you our thoughts and our vision. These past fiscal year concluded and we will soon see our entire annual reports and the entire annual reports you see whole set of financials and thank you for the compliment, nice complement on how we manage our balance sheet etcetera, etcetera. And I would like to point it out that when we take a look at the entire annual report keeping in mind that this would be the last annual report in which only the manufacturing business were included. And in future it was more important, when you take a look at the report and the results keeping in mind this is no longer a pure manufacturing business. It's a platform. It will be become a platform with equally important segments, a pair of well balanced segments. One namely the manufacturing segment, which is our old business, which is the cash cost, the engines, but old which are subject to the uncertainties and market risk in the production, in the manufacturing. The manufacturing has been saturated with -- such with older capacity. There is too much capacity. While we tried very hard, we endeavor ourselves, we dedicated ourselves to promote our products in different regions, in different categories. Remember that we started with the concentrated fertilizer business and we go into the compound fertilizer business. We added the new elements to the assets, to the compound fertilizer business. We have the business and we don’t deny. We don’t deny that the growth momentum in the manufacturing business alone or the manufacturing segments only nevertheless will reach a limit. The growth momentum is inevitable slowing down and bearing it's slowing down sitting on cash, we earn hardly from before is not the best or is not the smartest method to unlock its potential and forgive me, I would like to say honest is a lazy fashion, is a lazy way to do it. Let's recall during historical quarterly conference calls like this in this moment our company's Chairman, Mr. Tao Li reiterated and promised to our shareholders, promised to the participants, promised to our friends, our shareholders, we'll still have confidence, trust in us, will have the hope in us. He said sooner rather than later, you will see a brand new strategy on how we're going to use our cash wisely and how we're going to launch something that nobody ever did before historically in China in this industry, in agriculture industry. He said that, he promised you with that, with a commitment and we did it. We prepared, we were preparing, we are doing all the work well. We were talking to you during those quarters and we did it in the end of last fiscal year. Let's go over what we did for this strategic acquisition. We acquired six different companies from different locations in China and separating with each other 2,000 miles away and look at their industry. They're not manufacturers. They are not factories with substantial fixed assets. They're not factories with capacities, which the founders or the current management don’t know what to do this where the like manufacturing owners, they're scratching their heads and working very hard to utilize their capacities and these companies are in their distribution and the sales business and in future you will see in our sales segment, we are no longer just selling the concentrated fertilizers and compound fertilizers. We've been producing for years in future, you will see that. In our sales segment, our sales force are going to sell products, agriculture materials make by us, make by others, made in China, made in USA, made in Europe, internationally, for instance we're selling products, we're selling -- we’re going to sell the corn seeds from pioneer. We’re going to sell pesticides from Dow Chemicals in China. Nevertheless this industrial, this international conglomerate will be leveraging on this existing choose network to promote their products. We agree that top chemical pioneers, this best chemical for the best seed companies globally, Monsanto with their roundup products, however to sell this products in China, they rely on somebody daily to there, somebody not in their business. You may already learn that some state-owned chemicals, state-owned companies in China, huge state-owned companies such as Sinochem are working on behalf of the Central Government authority to acquire, to expand out of China. They placed the purchase bid, acquisition bid toward Monsanto to award Sunchan, for us, we don’t have that buying power. Instead we realize who we are. We understand our market. We understand where we will be and where we are in this market so that we reach to someone that these big companies don’t care. These big companies wouldn’t bother, wouldn’t of don’t have the enough resources or manpower to it and we are taking this hidden gems. We are picking up this hidden glories, hidden glories that people have forgotten in the market and because these six companies are all private companies, they are all natural born entrepreneurs who fund their companies since they decided to be or to standardize as a private entrepreneur. So that’s why we share same vision similar thoughts about our future. Let’s take a look at our purchase consideration. We use cash but not just the cash, we use cash plus convertible notes, not cash plus book because we know our company’s stock price is undervalued and by paying cash we'll stock or paying more stock in this transactions. We will not be able to utilize or unlock the values in our securities in our shares so we'll repeat, we use a primitive structure of framework of both cash and convertible notes and I’m happy to have this opportunity to share with you how we come to this and why we did this, how these structure got carefully examined or assessed or designed, beautiful exercised. We spend nearly $5 million cash in these transactions and more amounts in convertible notes with three year, maturity term and a 3% a coupon rate and if we take a look at the convertible notes debentures or the terms sheet, I think end of this three year, these convertible notes is subject to optional conversion to the company’s common stock, it doesn’t quite call the convertible note and $5 per share compared to our current share price $1.45 with both professionals and to make sure that everybody aspect is incorporated. And if we take a look at specifically or more closely varying to the term sheets it will be convertible to -- it will be converted to common shares at the higher of A, $5 per share; B, for 0.5% less of where the future price will be. So for instance, if the future price at the maturity of the convertible note is at the $10 per share than the note will be converted to common shares at $7.50 instead of $5 as we believe this is additional layer of protections to the current shareholder to ensure that in a case of future appreciation of our company’s share price. The dilution effect is limited and further if anything happened adverse, anything adverse happened throughout these three years, the company has the right to recall the convertible notes and in other sense the party who is responsible for adverse events such as delays in filings and etcetera, etcetera will be paying us a penalty at 15% is very comparable to the private equity build structure. You can compare, make meaningful or comparable analysis to that. And by doing this, we are trying -- we compared means with difference methods, different structures, approaches in the transactions and we found that selecting this is a culture and responsible use of our cash and our financial instruments, the convertible note financial instruments because the parties that we acquired will have no longer interest in acquiring in accepting the convertible notes if we have not been a public company in the New York Stock Exchange. And because of our status of a public company and because of our history and they have -- they have confidence in that our strategy as seasonable because that's we're going to do. We’re going to use this old manufacturing segments the old engine to produce to generate new cash, additional cash and then together with what we have to gather and then we utilize them and to acquire, to build this new sales network, this new sales distribution infrastructure, this new segment. And then if anything reverse happens, let’s say the manufacturing segment got hit, we got sales distributor here and such risk is hedged by offering the market, by doing business with not just ourselves, it's not just with by doing business, not just with ourselves alone, but by doing business of selling the best, the most welcome products, which are mostly accepted by the farmers whether they're international producers or whether they're state owned manufacturers and we're there. And on top of that, we're going to do this, do this sales not just only in the traditional way, but on the eCommerce platform and we expect that to this eCommerce platform offers our confidence. It's something we started and something we have prepared for in the past few years and it's the part for its book to explode with our readily acquired entities and entities to be acquired. Let's say, we acquired 100 companies hypothetically in future, in the next couple of fiscal years. And then you'll look at us not in over there, you're looking at not a manufacturer company with a disciplined balance sheet, but a agriculture platform of a well built, a well seasoned, well developed manufacturing engine, manufacturing segment, which is still produce a great competitive horsepower and on the other hand you have a sales network, a sales coverage which was never seen before ever in this industry and we're very excited about that. That's what we'll be doing and if we are working fully toward that goal and that's how we can as part of the plan, how we're going to generate more cash, use them cautiously, use them wisely. Now our President, Mr. Li also would like to add his comments in this matter to you.

[Tao Li:]

Sorry that was me coughing in the background and while since Fang has given you a pretty thorough explanation as to how we are going to achieve that, I will just summarize that in short. We are planning to turn our current cash into channels, like he mentioned before, if anything happens to the manufacturing side of the business, we will have the channels to sustain our growth which we can confidently tell our investors that it was the right choice to be -- to trust us and currently we have -- currently we have completed the acquisition of six new businesses and like he just mentioned before, they're locally, they have been founded locally and they know the local markets better than anyone else that could possibly be doing the same businesses. So they will -- in a business we do, we call -- we have the term for if we are buying new fertilizers to a ground that we haven’t tested for, we call them the test field and they will be the test field for our new business model. So we are trying to turn our old distributors into our own channels and if we can make that transaction successful, we are looking to be -- we're looking to expand or we're looking to have more acquisitions completed, so that we could further enrich and enlarge our distribution and sales channels. So hope that answers your questions.

[Jared Cohen:]

Okay. I appreciate it. Thank you for going over your strategy.

[Fang Wang:]

Thank you.

[Operator:]

[Operator Instructions] I'm showing no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Li for any closing remarks.

[Tao Li:]

Thank you very much. And thank you everyone for listening to the earnings conference call for CGA of this fiscal year and to summarize the earnings conference call, we're sorry about delay for both the earnings and its release and we will be releasing that very shortly. So again I apologize for the delay and yeah I guess to summarize our earnings conference call for today and thank you very much everyone.

[Fang Wang:]

Thank you very much. We look forward to taking to you next quarter. Thank you. Have a great day.

[Operator:]

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