China Green Agriculture, Inc.
Q3 2014 Earnings Call Transcript

Published: 12 May 2014

[Operator:]

Greetings, and welcome to the China Green Agriculture Third Quarter Fiscal Year 2014 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator instructions). As a reminder, this conference is being recorded. I would now like to turn the conference to your host Ms. Ran Liu, Secretary of the Board for China Green Agriculture. Thank you. You may begin.

[Ran Liu:]

Thank you, Operator. Thank you, and welcome everyone, to China Green Agriculture's third quarter fiscal year 2014 earnings conference call. The earnings release went to the wire pre-market today. Our call today is hosted by Mr. Tao Li, the company’s President and CEO; Mr. Ken Ren, the company's CFO, and me. I would like to remind our listeners that management’s prepared remarks contain forward-looking statements that are subject to risks and uncertainties. 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 but not limited to, fluctuations in customer demand, management of rapid growth, intensity of competition from other providers of China Green Agriculture products and services, general economic conditions, geopolitical events and the regulatory change, 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 the May 12, 2014. China Green Agriculture assumes no obligation to update these projections in the future as market conditions change. Now, I am pleased to report results for the third quarter of fiscal year 2014. For the fiscal third quarter ended March 31, 2014, revenues were $70.3 million as compared to $65.9 million for same period of 2013. Net income for the third quarter was $7.2 million or $0.23 per share as compared to $13.4 million or $0.48 per share. As we exit our recently concluded fiscal quarter, we look forward to a year with those instruction (ph) and expense from the recently withhold (ph) shareholder registration and start our new quarter with a particular focus on building our domestic Jinong and Gufeng fertilizer franchise as well as consolidate our Beijing operation to position our agriculture product revenue for future growth. Finally, as we enter the new quarter, China Green Agriculture is well on its way to achieving the early benchmarks of our 10 year plan. I will now discuss the financial results in greater detail. So, the first three months of fiscal year 2014 results of operations. Total net sales of the three months ended March 31, 2014, were $70.3 million, an increase of $4.4 million or 6.7% from $65.9 million for the three months ended March 31, 2013. This increase was due to an increase of Gufeng and the Jinong's net sales. For the three months ended March 31, 2014, Jinong's net sales increased $3.2 million or 11.7% to $30.2 million from $27.1 million for the three months ended March 31, 2013. This increase was mainly attributable to the greater sales of humic acid fertilizer products including our liquid and powder fertilizers with higher unit price during this period as a result of our increased distributors and aggressive marketing strategy. For the three months ended March 31, 2014, net sales at Gufeng were $39.1 million, an increase of $1.4 million or 3.7% from $37.7 million for the three months ended March 31, 2013, the increase was mainly attributable to Gufeng’s expanded marketing promotion strategy during the last three months. For the three months ended March 31, 2014, Yuxing’s net sales were $1 million a decrease of $0.1 million or 11% from $1.1 million during the three months ended March 31, 2013. The decrease was mainly attributable to reduced procurement demands from the government during the last three months. Total cost of goods sold for the three months ended March 31, 2014 was $44.1 million, an increase of $8000 from $44.1 million for the three months ended March 31, 2013. The increase was not significant. Cost of goods sold by Jinong for the three months ended March 31, 2014 was $12.1 million, a decrease of $0.3 million or 2.6% from $12.5 million for the three months ended March 31, 2013. The decrease was primarily attributable to slightly lower product cost. Cost of goods sold by Gufeng for the three months ended March 31, 2014 was $31.3 million, an increase of $0.4 million or 1.3% from $30.8 million for the three months ending March 31, 2013. The increase was proportionally to Hosong sales increased for the three months ending March 31, 2014. For three months ending March 31, 2014 cost of goods sold by Yuxing was $0.7 million, a decrease of 70,000 or 10% from $0.08 million for the three months ended March 31, 2013. The decrease was proportional to Yuxing’s decreased sales for the three months ended March 31, 2014. Total gross profit for the three months ended March 31, 2014, increased by $4.4 million to $26.1 million as compared to $21.7 million for the three months ended March 31, 2013. Gross profit margin was approximately 37.2% and 33% for the three months ended March 31, 2014 and 2013 respectively. Gross profit generated by Jinong increased by $3.5 million or 24% to $18 million over three months ended March 31, 2014 from $14.5 million for the three months ended March 31, 2013. Gross profit margin from Jinong still was approximately 59.7% and 53.8% for the three months ended March 31, 2014 and 2013 respectively. The increase in gross profit margin was [Indiscernible] due to the increased rates for higher margin products sale in Jinong total sales. For the three months ended March 31, 2014, gross profit generated by Gufeng was $7.8 million, an increase of $1 million or 14.2 % from $6.8 million for the three months ended March 31, 2013. Gross profit margin from Gufeng’s sales was approximately 20% and 18.2% for the three months ended March 31, 2014 and 2013 respectively. The increase in gross profit margin was small due to the decrease in raw material and increase in rates for higher margin product sales in Gufeng’s total sales. For the three months ended March 31, 2014, gross profit generated by Yuxing was $0.3 million, a decrease of 46,000 or 13.3% from $0.4 for the three months ended March 31, 2013. So, gross profit margin was approximately 30.2% and 31% for the three months ended March 31, 2014 and 2013 respectively. The decrease in gross profit percentage was not significant. Our selling expenses consisted primarily of salaries of amortization of our deferred assets, sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $11.1 million or 15.8%, of net sales for the three months ended March 31, 2014, as compared to $3.9 million or 5.9% of net sales for the three months ended March 31, 2013, an increase of $7.2 million or 187.2%. The selling expenses of Gufeng were $0.52 million or 1.3% of Gufeng's net sales for the three months ended March 31, 2014, as compared to $0.5 million or 1.3% of Gufeng's net sales for the three months ended March 31, 2013. The selling expenses of Jinong for the three months ended March 31, 2014 were $10.6 million or 35.1% of Jinong's net sales, as compared to selling expenses of $3.4 million or 12.4% of Jinong's net sales for the three months ended March 31, 2013. Most of this increase in Jinong's selling expenses was due to the amortization of $1.7 million of the deferred assets related to assisting the distributors in certain marketing efforts and developing standard stores to expand our competitive advantage and market shares. 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 litigations. General and administrative expenses were $3.5 million or 4.9% of net sales for the three months ended March 31, 2014, as compared to $1.3 million or 2%, of net sales for the three months ended March 31, 2013, an increase of $2.1 million or 156.8%. The increase in general and administrative expenses was mainly due to the related expense in the stock compensation awarded to the employees for fiscal year 2013. Net income for the three months ended March 31, 2014 was $7.1 million, a decrease of $6.2 million or 46.2% compared to $13.4 million for the three months ended March 31, 2013. The decrease was attributable to the increase in selling expenses and the impairment charge related to the write-down of assets held for sale. Net income as a percentage of total net sales was approximately 10.3% and 20.4 % for the three months ended March 31, 2014 and 2013, respectively. Now, the first nine months of fiscal year 2014 results of operations. Total net sales for the nine months ended March 31, 2014 were $161.2 million, an increase of $14.1 million or 9.6% from $147.1 million for the nine months ended March 31, 2013. This increase was largely due to the increase in Jinong and Gufeng’s net sales. For the nine months ended March 31, 2014, Jinong’s net sales increased $10.4 million or 13.4% to $88.3 million from $77.9 million for the nine months ended March 31, 2013. This increase was mainly attributable to the greater sales of humic acid fertilizer products including our liquid and powder fertilizers during this period as a result of our increased distributors and certain marketing efforts. For the nine months ended March 31, 2014, net sales at Gufeng were $70.3 million, an increase of $3.7 million or 5.6% from $66.6 million for the nine months ended March 31, 2013. The increase was mainly attributable to Gufeng's expanded marketing promotion strategy. For the nine months ended March 31, 2014, Yuxing's net sales were $2.7 million, an increase of $8,000 or 0.3% from $2.6 million during the nine months ended March 31, 2013. The increase was not significant. Total cost of goods sold for the nine months ended March 31, 2014 was $93.8 million, an increase of $1.5 million or 1.6% from $92.2 million for the nine months ended March 31, 2013. This increase was not significant. Cost of goods sold by Jinong for the nine months ended March 31, 2014 was $37 million, an increase of $1 million or 2.8% from $36 million for the nine months ended March 31, 2013. The increase was primarily attributable to the increase in sales offset by lower product cost. Cost of goods sold by Gufeng for the nine months ended March 31, 2014 was $54.8 million, an increase of $0.4 million or 0.77% from $54.3 million for the nine months ended March 31, 2013. The increase was primarily due to the increase in Gufeng's fertilizer sales offset by slightly lower raw material cost and manufacturing cost. For nine months ended March 31, 2014, cost of goods sold by Yuxing was $2 million, an increase of $69,000 or 3.6%, from $1.9 million for the nine months ended March 31, 2013. The increase was mainly due to the increased raw material cost and labor cost during the nine months ended March 31, 2014. Net income for the nine months ended March 31, 2014 was $21.3 million, a decrease of $9.2 million or 30.3% compared to $30.5 million for the nine months ended March 31, 2013. The decrease was attributable to the increase in selling expenses and the impairment charge related to the write down of Jintai's assets held for sale. Net income as a percentage of total net sales was approximately 13.2% and 20.7 % for the nine months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, cash and cash equivalents were $23.9 million, a decrease of $51.1 million or 68.2% from $75 million as of June 30, 2013. The decrease in cash and cash equivalents was due to the incurrence of a deferred asset of $59.3 million as of March 31, 2014. Company had $28.9 million in short-term loans as of March 31, 2014, an increase of $12.8 million, as compared to $16.1 million in short-term loans as of June 30, 2013. Net accounts receivable stood at $87.4 million as of March 31, 2014, an increase of $2.1 million, as compared to $85.3 million as of June 30, 2013. I will now discuss our fourth quarter of fiscal year 2014 and updated fiscal year 2014 guidance. For the fourth quarter ending June 30, 2014, management expects net sales of $60 million to $70million, net income of $6 million to $7 million, and EPS of $0.19 to $0.22 based on 31.8 million fully diluted shares. For the fiscal year ended June 30, 2014, management expects net sales of $220 million to $230 million, net income of $27 million to $28 million, and an EPS of $0.85 to $0.88 based on 31.8 million fully diluted shares. Operator we are now prepared for questions from our audience. Thank you.

[Operator:]

Thank you. We will now be conducting question-and-answer session (Operator Instructions). Our first question comes from the line of Bill Whitfield with Morgan Stanley. Please proceed with your question.

[Bill Whitfield:]

Good morning everyone and thank you for taking my call. Can you hear me okay?

[Tao Li:]

We hear you sounding clear. Go ahead, Bill.

[Bill Whitfield:]

Wonderful, thank you. So my question is this, how is business trending sequentially into this new quarter which is the June quarter at Jinong and Gufeng?

[Tao Li:]

This is a good question.

[Bill Whitfield:]

Thank you.

[Tao Li:]

Before I elaborate to address the business trending of all subsidiaries and I like to reiterate or remind the audience that there exist certain degrees of seasonality across our business line. And each subsidiary or each segment seasonality vary due to its uniqueness and business characters and the degree of seasonality may get impacted by the market condition particularly the weather or/and the supply of raw materials’ price. And for the particular quarter ended March 31, 2004, which is the third quarter of our fiscal this quarter, is its strong sales quarter for our fertilizer segment, perhaps one of the most important sales quarter for Gufeng. And Jinong which specialized in production and the sales of specialty fertilizer extracts less degree of seasonality than Gufeng’s fertilizers mainly because Gufeng fertilizers are compound fertilizer and this is application to their large field across such as wheat, corns as well as rice, you can name it -- name there. And the specialty fertilizer is typically applicable to the nurseries, to the fruits and flowers, and et cetera. So, this track fairly will never be understandable uniqueness of seasonality and our relatively small segment the...*** the testing development or further development of fertilizer product as well as the production and growth of agriculture products. As Yuxing’s subsidiary is still ramping up and most of its power products are raised in a nursery in a greenhouse, so they expressed probably the least seasonality across all these important subsidiaries. So, go back to your original question for the current fiscal year’s third quarter, we are cautiously optimistic as we expressed in last quarter than the sales is in line with our expectation. However, due to the softened coal market and the weakened markets of urea fertilizers and hardened nitrogen and phosphorus fertilizers which we use as some raw material in our Gufeng production, the sales for division is trending year-over-year kind of slows down or not aggressively as expanding as we have experienced in a past several years. As you may see from our press release and a numbers we disclosed that the year-over-year growth in terms of revenue, the speed somewhat slow down that’s mainly because of the entire macro-economy is concerned and the softening pricing in our raw material and that slowed down the growth speed of our fertilizer segment. I hope this helped for you to answer, to address your questions.

[Bill Whitfield:]

It does. It’s very generous answer and if I can just have one more question little more specific.

[Tao Li:]

Go ahead.

[Bill Whitfield:]

Thank you. Now do you produce 100% of the fertilizers you sale or do you outsource or subcontract any of your production?

[Tao Li:]

Hold down a second.

[Bill Whitfield:]

Okay.

[Tao Li:]

Except the number of fertilizer products, we almost surely produce our fertilizer products ourselves. Roughly 1 %.

[Bill Whitfield:]

So, roughly 1% okay. And so what percent of your sales are your own products that you can produce and if you tell that number?

[Tao Li:]

Most of the products which is produced by ourselves.

[Bill Whitfield:]

Okay. Is there anyway to get a percentage on that to quantify that?

[Tao Li:]

Like we said approximately 1% as I say from the outsourcing parties and the rest will be produced by companies owned.

[Operator:]

Thank you. Our next question comes from the line of Alex Barely with GI Financials. Please proceed with your question. GI Financials, Alex your line is live. I am sorry; our next question comes from the line of Philip Rose with Native American Holdings Group. Please proceed with your question. I am sorry, our next question, I am sorry one moment please. (Operator Instructions). Our next question is from the line of Peter Siris, he is Private Investor. Please proceed with your question.

[Peter Siris:]

Good morning. I see that the sales expenses are way, way up; can you talk about what you are spending money on and when you expect it to start benefiting the company in terms of sales or earnings?

[Ken Ren:]

Yes, like we addressed the raw material market has been somewhat softened and is then drag down the, some expected sales of our finished product and some of these raw materials were procured prior to the slow down or softening of our raw materials. So, we would vision these cost of goods that contributed a lot to the sales expense to be of seasonality, to be of a market nature and in low run when the raw material price rebound and specifically such as urea, one of the most important of raw materials rebound when the coal price rebound and it will push up our compound fertilizers price.

[Peter Siris:]

Excuse me, Ken, that wasn’t the question I asked but let me, I want to go back to question I guess but I want to deal with the answer you just gave me, the question I did miss. If raw material prices are down that should be good for gross margins and earnings, why do lower raw material prices lead to softer sales, could you explain that to me first then I will get back to my question I asked before?

[Ken Ren:]

Okay. There is a time difference between the products get sold and the raw material when the raw material got purchased by the company.

[Peter Siris:]

Say in other words when raw material prices come down, fertilizer prices come down you have so the expense of raw material from before and now raw material prices are lower you are replacing that with lower raw materials, is that correct? The raw material price and the fertilizer price have something in common. If raw material prices come down, fertilizer prices come down, is that correct?

[Ken Ren:]

Correct, yes, that’s correct. And…

[Peter Siris:]

Okay. I understand, now I understand, so what happened is fertilizer prices have come down a little bit which impacts sales number but you haven’t gotten the full impact of lower raw material prices but you had raw material in the beginning.

[Ken Ren:]

Correct, yes. We purchased these raw materials when the raw materials price wasn’t this low.

[Peter Siris:]

Got it. And so now, if raw material prices stabilize and go up, fertilizer prices go up, you get better margins going forward, is that correct?

[Ken Ren:]

Correct, yes. And because of this raw materials price is low, if the raw material price will go up in future it will be a good time for any fertilizer companies to purchase the raw material at this moment. And in future when the raw material such as the coal and urea’s price go up and your finished fertilizers, compound fertilizers price will almost surely go up as well because there is a positive strong co-relationship between the coal, urea and the compound fertilizer in the spot market.

[Peter Siris:]

Okay. Now let me now go back to question I asked which was it sense here. Selling expenses were $11.1 million or 15.8% of sales as compared to $3.8 million or 5.9% of sales in the same quarter last year, an increase of 187.2%, okay. Now, obviously and it says the selling expenses for the Jinong for the three months were $10.6 million compared to $3.3 million, 35.1% of sales compared to 12.4% of sales. You dramatically increased selling expenses for Jinong, okay and this is obviously impacted earnings. So, when we talk about what you are spending the money on and when you expect, what returns you expect to see in the future from these expenditures?

[Ken Ren:]

These expenditures is related to the company’s sales expansion efforts or its marketing program, so that will require, we launched our resources and assets to expand our sales and endless consumption, endless sales, endless expansion and endless striving we believe is the key to our corporate success. And we believe that as we iterated before, in these firm markets while a lot of other players were hesitating to expand and we believe it is a good opportunity for us to catch, to grasp what we don’t own and we believe there are number of targeting market that is very attractive to our future growth.

[Peter Siris:]

Excuse me. I understand all the words, what are you spending the money, can you tell me specifically how you’re spending the money.

[Ken Ren:]

Such as our franchisee program and we expanded our sales network by allowing our distributors to expand their retail access to Main Street. They have their own little stores and we help them to expand, we provide them resources and assets to expand these, just network.

[Peter Siris:]

And you’re paying; you’re paying money in terms of advertising, marketing, things like that for them to expand their sales network.

[Ken Ren:]

As well as well as helping them to build the infrastructure network.

[Peter Siris:]

Okay and when do you expect that we will see the sales impact from these activities?

[Ken Ren:]

We want to say, the sales impact from these effort (ph) program, although it depends on a lot of factors such as the land, and in the future we believe we will show its strength from the next fiscal and in the long run we will say this is a three to five year program.

[Peter Siris:]

Okay so you, so going forward, I’m not asking you for projections, but like in the next fiscal year you will expect faster sales growth than this year?

[Ken Ren:]

Hold on a sec?

[Peter Siris:]

And can you give you us a range of what you might expect.

[Peter Siris:]

Can you pull up with that?

[Ken Ren:]

Sure.

[Tao Li:]

Well it’s still early for us to project the precise or fine tune vision, outlook for next fiscal revenue growth or business expansion but we will say 20%ish increase or so is our target, is our expectation.

[Peter Siris:]

Okay, so the expenditures for this year which lower the earnings, that could come back next year in terms of better sales and hopefully earnings next year right?

[Ken Ren:]

That’s why we launched these assets. We use them to expand our sales and…

[Operator:]

Thank you, we have no further questions at this time, I’d like to turn the floor back over to Mr. Ken Ren for closing comments.

[Ken Ren:]

Thank you everyone for participating today’s conference call, this concludes today’s conference, thank you, have a good day.

[Operator:]

Thank you. This concludes today’s teleconference; you may disconnect your lines at this time. Thank you for your participation.