China Green Agriculture, Inc.
Q4 2014 Earnings Call Transcript

Published: 12 Sep 2014

[Operator:]

Greetings, and welcome to the China Green Agriculture Fiscal Year 2014 Earnings Call. At this time, all the 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. It is now my pleasure to introduce your host Ran Liu. Thank you. You may begin.

[Ran Liu:]

Thank you, Operator. Thank you, and welcome everyone, to China Green Agriculture 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, Ran Liu. I would like to remind our listeners that 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 strategic 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 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 expectations will prove to be correct. In addition, any projections as to the Company’s future performance represent management’s estimates as of today September 12, 2014. China Green Agriculture assumes no obligation to update these projections in the future as market conditions change. I will now pass the call to Mr. Tao Li, our CEO. Please.

[Tao Li:]

Hello everyone I am the Chairman and CEO of CGA. Thank you for joining our conference today. We are pleased with the results for the fiscal year of ’14. Later we’ll give detailed overview of the result in a moment. As we had exited our recently concluded fiscal year where we are already entered a year with less destruction from the recently results transaction. The fiscal year ’15 we are focusing on the transition of our quality fertilizer business model into a new business model. This new model is a positive thought for the development of international technologies and services our tropical forest the agriculture micro-economy. I was born from challenged farmer family in 1960. My family and I suffered poverty and hunger when I was young my vision has been that I will build up a company that can offer quality fertilizer products to 100s of millions of average farmers throughout China. So that farmers will no long suffer from it in the future. 14 years ago I founded our company to start selling fertilizer to farmers, to-date, 14 years has passed. I sold many fertilizers to Chinese farmers. We had grown so significantly, and have become a listed company. Not just in China, we also had sold our product worldwide. The world started to know us, and we are already to embrace change and new challenge in today’s new world. With the first infrastructure of transportation and Internet, this makes our mission easier to sell our customer anywhere. I care for our shareholders, our customers, and our employees, as the Chairman and the CEO my job is straight and forward. Through our productions and sales network I will lead and help to build to grow and supply our customers with affordable eco-friendly fertilizer products in the fields that best serve their crops growth needs. We’re currently entering new business model that nobody was ever made before possible, while working with strategic partners and a peer company platform. To offer our customers quality fertilizers they exchange for quality other powder products and so the quality agriculture product to simply moving from online to offline. I am thrilled to share with you this vision that shook my heart and thrilled up myself and our company. I am proud that we ignite innovation benefit customers and help to build and develop. From our moderate beginning and throughout the past 14 years our company has grown significantly. We are focused understanding our client’s needs, focused on solving their problems, focused on helping them with better products, easier solutions and the best facilities. Few days ago [indiscernible] of [indiscernible] but today it is difficult tomorrow is more difficult, but build of our tomorrow is beautiful. I believe in the same me too we will work hard and need my employees to survive the long journey. We have come a long way and we still have long way to go. I believe our business will be best and better. At last thank you for you’re supporting us thank you again. I will now pass the call with my colleague to discuss the operating results in further details. Thank you.

[Unidentified Company Representative:]

Thank you Mr. Li. We are very pleased with our consistent performance in fiscal year 2014 where we continue to build shareholder values through focusing on prudent revenue growth, building a long-term durability of our business model, concerned net profit and balance sheet discipline. Now I am pleased to report results in detail for the fourth fiscal quarter and fiscal year end of 2014. For the three months ended June 30, 2014 net sales were $72.2 million an increase of $2.4 million or 3.4% from $69.8 million for the three months ended June 30, 2013. Among which, Gufeng contributed $41.7 million or 57.8% of total net sales, as compared to $36.3 million, or 52% of total net sales in the same period last year. Jinong's net sales decreased $3.3 million, or 10%, to $29.5 million from $32.8 million in the same period last year. Yuxing's net sales increased $0.3 million or 37.1%, to $1 million, as compared to $0.7 million for the same period last year. Cost of goods sold increased $3.2 million, or 7%, to $48.5 million for the three months ended June 30, 2014, as compared to $45.3 million in the same period last year. Gross profit decreased by $0.8 million, or 3.2%, to $23.7 million as compared to $24.5 million in the same period last year. Gross profit margin was approximately 32.9% and 35.1% of net sale for the three months ended June 30, 2014 and 2013, respectively; selling expenses were $10.5 million, or 14.5%, as compared to $4.3 million or 6.2% of net sales for the same period last year, an increase of $6.2 million or 142.5%. Finally, net income was $4.3 million, a decrease of $10 million or 75.3% as compared to $14.3 million in the same period last year. For the year ended June 30, 2014, the Company's total net sales were $233 million, an increase of $16.5 million or 7.6%, from $216.9 million in year ended June 30, 2013. Jinong's net sales increased $7.1 million or 6.4% to $117.7 million from $110 million for the year ended June 30, 2013. Net sales at Gufeng were $112 million, an increase of $9 million or 8.8%, from $102.9 million for the year ended June 30, 2013. Yuxing's net sales were $3.7 million, an increase of $23 million or 8.5% from $3.4 million during year ended June 30, 2013. Total cost of goods sold for the year ended June 30, 2014 was $142 million, an increase of $4.7 million or 3.4%, from $137.5 million for the year ended June 30, 2013. Among which, cost of goods sold by Jinong was $48.6 million, a decrease of $3.2 million or 6.3% from $51.9 million for the year ended June 30, 2013. Cost of goods sold by Gufeng was $90.7 million, an increase of $7.7 million or 9.3%, from $83 million for the year ended June 30, 2013. Cost of goods sold by Yuxing was $2.8 million, an increase of $0.2 million or 8.3%, from $2.6 million for the year ended June 30, 2013. Total gross profit for the year ended June 30, 2014 increased by $11.8 million to $91.1 million as compared to $79.3 million for the year ended June 30, 2013. Gross profit margin was 39.1% and 36.6% for the year ended June 30, 2014 and 2013, respectively. Among which, gross profit generated by Jinong increased by $10.4 million or 17.7%, to $69 million from $58.7 million for the year ended June 30, 2013, gross profit margin from Jinong's net sales was approximately 58.7% and 53.1% for the year ended June 30, 2014 and 2013, respectively. Gross profit generated by Gufeng was $21.2 million, an increase of $1.4 million or 6.9%, from $19.9 million for the year ended June 30, 2013. Gross profit margin from Gufeng's sales was approximately 19% and 19.3% for the year ended June 30, 2014 and 2013, respectively. Lastly, gross profit generated by Yuxing was $0.9 million, an increase of $71,000 or 9.1%, from $0.8 million for the year ended June 30, 2013. Finally net the gross profit margin was approximately 23.3% and 23.2% for the year ended June 30, 2014 and 2013, respectively. The increase was not significant. Finally, net income for the year ended June 30, 2014 was $25.5 million, a decrease of $19 million or 43%, compared to $44.7 million for the year ended June 30, 2013. Net income as a percentage of total net sales was approximately 10.9% and 20.6% for the year ended June 30, 2014 and 2013, respectively. I will now discuss our guidance for the 2015 fiscal first quarter and full year. For the first quarter ending September 30, 2014, management expects net sales of 50. For the first quarter ending September 30, 2014, management expects net sales of $50.7 million to $54.3 million. Net income of $5.9 million to $7.8 million, and EPS of $0.18 to $0.24 based on 32.4 million fully diluted shares. For the fiscal year 2015, management expects net sales of $254.7 million to $268.8 million, net income of $26 million to $35.1 million, and an EPS of $0.8 to $1.08 based on 32.4 million fully diluted shares. This concludes my remarks. Operator, we are now prepared for questions from our audience, operator? Question-and-Answer Session

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) We do have a question coming from the line of Jared Cohen with JM Cohen & Co. Please proceed with your question. Jared Cohen - JM Cohen & Company Yes. Just had a curiosity, how many different provinces are you selling your product now in and how many different distributors do you have?

[Tao Li:]

We have nearly a thousand distributors and well sell products all over China. And to be specific with your questions, we sell almost to all the provinces in China and autonomous managed regions. Jared Cohen - JM Cohen & Company Okay. Because you have been spending a good amount of money what for two years to increase your distribution network and I was just wondering, when do you expect to get some type of return on that marketing effort?

[Tao Li:]

In the past few years, the network of our distributors played, and have played a critical role in our efforts to penetrate into regional markets in selling all our products to households, to farmers. And like I said in my opening remarks, a company is in a critical period to transform our traditional fertilizer model into a new business model and we believe that the existing distributer network and its current infrastructure will continue to serve and we’ll be of great importance to play a critical role in our new business model. These distributors had contributed largely to the Company’s sales and their contribution can be evidenced and reflected in the historical financial performance. And in the future five years or so these distributors will continue to contribute and we expected that their contribution is important to our financial performance. In the fiscal year of 2015 in the next couple of fiscal years we expect that the public with shareholders will see the value from distributors in delivering the company’s products particularly in under the framework of the new business model. In another word, in fiscal 2015 you’ll see and we report that these contributions from the distributors will start to make a difference, will start to contribute in a different matter. And in next two to five years their contribution and their channel of contribution will be revolutionized will be different from the old distribution model. Jared Cohen - JM Cohen & Company Very good I understand, you’re helping to finance them, but in the future I’d say year or two out when you start see a decent return cash flow back from those distributors or net income return or some type of, that’s what I’m trying to get that?

[Tao Li:]

It’s like this, like I said in my remarks that we embracing the change, a series of political quality in China’s agriculture industry, the Chinese natural economic and such qualities revamping will significantly impact the nature and the context of Chinese country side. Principally the Chinese country side is undergoing the most fundamental revolution and revamping in the agriculture industry and farming. In the past before the current and couple of years the urban land had been chopped and parceled and distributed into small pieces to the hand of every individual household, each household work on its own small and segregated puzzle of urban land. Concurrently with the rapid development of the Chinese economy in the recent decade particularly with the rapid transform of urbanization in the natural area. Together with a acceleration of the trade and exchange of land use rights in the country side between and amongst the farmers and the country side household. The majority of the arable land in China are now being consolidated rapidly and heavily from segregated small pieces into the large scale parcel of lands. The past individual ownership of small arable land will be history, will become history, will no longer sustain and survive from long future. The number of populations that are engaged in the agriculture production will be reducing significantly. We did our homework and we surveyed the statistical of this consolidation up to the end of last year. Many villages which have over 1,000 villagers population in the past not only hosts farmers no more than 400 in other words, less than 40% of the population of the residence in the village are engaged in farming. We estimate that there has been more than or approximately 60% of the country side population got decreased from where they used to look in a country side due to migrations and change of jobs. The changes that I mentioned above rendering from the policy change to the transfer of land user rights as well as the migration of country side residence have cost the challenge to the companies who are engaged in the production and the sales of agriculture basic materials and such change has pushed agriculture material industries, companies to reassess their market to reevaluate your business and to seek new solutions to transform their old traceable model or old business model to a sustainable new one to embrace or adapt to these changes. Our traditional business model can be characterized as this; our factory -- fertilizer factory produces and pack and they delivers the fertilizer products in pack in bottles to our distributors across the nation and then these distributors further launch these products to their sales uplift to their retail and the eventual end user customers, farmers will buy and obtain these products from the distributors retail uplift and network. As such business model is up to a revamping, up to restructuring. In the next three to five years, my estimates, my vision is that the traditional distributor model will disappear or vanish, if they don’t change at all. There will significantly impact effected by the change cost of technology, cost due to the policy change and the macroeconomics. I am proud to share with you and let you know that we have been considering and preparing or anticipate these impact and changes, a number of years from a numbers ago, we prepared the database and look forward always and we believe, I believe that it’s the time to all my preparation work. We will serve to put that the company will serve to sustain the company over this transition. In the past three years, we were working with our distributors. We plan to work heavily with our distributors to launch or refine to build the end retail network. In the past couple of years what we did is we work with our distributors and we heavily put a lot of efforts to establish initial wide network listing of $440,000. Primitively I am glad to share with you that, our reason our target product market nowadays our average farmers and customers will be able -- have been able to observe or notice our company’s logo, brands, brand awareness, visions, in air and streets on the shops and the impact of this product advertisement has started to illustrate its effect. Along with the increased awareness of our products and brand, we also had successfully cultivated a new breed of clients. These new clients or new breed of clients can be characterized as farmers who owned large-sized, large parcel of available land. There are the consequences of the policy change in exchange or the transfer late used arrived is the countryside. We believe that these new breed of farmers will be the main source of users who will buy and user our products and collaterally the trend of sales to these customers has been reflected in our recent business development. The individual farmers who only owns more parts of land will become likely more and more immature in terms of sales percentage. We go out that the majority of our customers in future who use our products will come from the customers who own large parcel of arable land and more importantly in addition we as we disclosed and we announced to be for that so we also focus or pay attention to what with agricultural companies, food companies from southern China and northern China for instance in this spring we disclosed our cooperation with Nestle China in Inland we provided the fertilizer products the specialty for the lighter products for Nestle to grow coffee in the coffee field Inland the most southwestern province in China adjacent to Vietnam. Over there Nestle used products in their coffee base and inventory in China in northeastern China in Xinjiang province which is adjacent to Russia. We work with large agriculture companies to grow rice in Xinjiang province in their Ailixihu counties. These examples illustrate the trend that we will look with more and more bigger companies with Nestle China and northern agriculture companies. In another word in this ramp of agriculture business model transition we’ll not be only the followers we're leaders and I am proud enough share that we’re leading this trend and there are many players in this game in this industry who also wants to follow and lead the stream of change. I am very proud to show with our dear shareholders that I am fulfilling my commitment to my shareholders and I will work hard to deliver the results. Aside from this I’d like to spend additional time with us as we all know that the Internet companies the technology industry and the ecommerce are leading the transition of Chinese economy. The Internet technology made the number of great companies become available such as Yahoo!, Baidu, JD.com, as well as Tencent QQ including the biggest ecommerce companies that are running also in United States Alibaba. I remember vividly that four years ago when I was running for a road show in Wall Street four years ago I said the following. The people in China invented the gunpowder, a few 100 years ago unfortunately western countries developed countries used the gun powder which was invented by Chinese to produce the bomb and the bullet to attack China to make China to make Chine depressed, to defeat China. Then in 2010 I said well the Internet became available in western countries. I think the people in China we can use the Internet technology which was invented in western countries to help ourselves to equip ourselves to defeat our competitors in western countries and to make ourselves standard. When I said this three years ago in Wall Street a lot of portfolio managers and analysts didn’t take what I said then seriously. And I think now-a-days we talk less about what I said before, four years ago. The Alibaba the Chinese company will become, they say of the largest IPO ever in history this month. My point is following; in China the Internet and ecommerce are changing the agriculture raw material industry, achieving its business model. I want to share with our investors that the company is advancing in the transformation of this traditional business model of product of fertilizer sales from offline to online to the Internet platform. In fiscal 2015 and the following subsequent fiscal years we will transform into the fertilizer sales under the new framework of Internet technologies. A hybrid model a combination of Internet based sales as well as the distributor sales as such the old and series of metrics of profit and earning measurements considering the distributors numbers that distributors contributions show also the updated and restructured to reflect the new characteristics of the company’s sales and the business growth. The earnings and the business contribution will be measured and incorporated hybrid considering both the technology advancement as well as the contributions from distributors. In addition to what I commented above or in my opening remarks we’re not only selling products in China, we are also provide goods and services worldwide. In the past year, we made great leap forward in advancing and exploring our global market, our global business segment. We are currently undergoing collaborations with not only just the Nestle China but also Nestle worldwide. It’s likely that this joint work will go across the border. We made great leap forward in a number of countries in terms of registering our fertilizer products and overturning the license of our fertilizer products in their regime. We organized our division of global development business. We hired key staff, employees worldwide. We hired English speakers, French speakers and foreign speakers to explore opportunities worldwide in South America et cetera. For instance, we accomplished a line of product registrations in Colombia, South America already. By the end of calendar year 2014, our product will be launched in a territory of Colombia, South America. First of all, again we are engaged in a business of agriculture, the business of fertilizer and this is an industry of enormous capacity in a most populated country, China in the world, a lot of opportunities. And secondly, technology particularly the Internet technology and e-commerce make such a change becomes ever happening opportunities for companies like us in a fertilizer business. A combination of both agriculture and Internet make us more unique than anybody in the industry because of the preparation in the past few years with technologies development and the sales of our agriculture products, our fertilizer products, make it possibly or potentially feasible for China Green Agriculture to become a giant industrial conglomerate in the fertilizer business. We are preparing at the best to embrace this great opportunity.

[Operator:]

Thank you. We will move on to the next question which is coming from the line of Nick Jones with Desert Capital. Please proceed with your question. Nick Jones - Desert Capital Venture Okay. Considering the huge capacity you have at Gufeng have you guys ever considered using Gufeng to produce some of Jinong brand fertilizers? Also has Gufeng produced for Jinong in the past, and if so, how much?

[Tao Li:]

In the past fiscal years, the Gufeng have produced certain amount of granular fertilizers and such fertilizers can carry the Jinong brand and such fertilizers is totaled at amount of 66,000 metric tonnes and in terms of delivering revenues of over a RMB160 million -- RMB180 million. And in future we expect this business will continue to work. I also want to compliment on your questions. We have acquired Gufeng for four years and in the past four years, the Gufeng’s distribution channel and network have emerged or incorporated into the Universal China Green Agriculture sales network. As such therefore going forward the different subsidiaries business will be performing or utilizing a universal and integrated sales network by joining sales and marketing forces from different subsidiaries under the universal consistent frameworks incorporated or implanted by the chief operating decision maker, the China Green Agriculture Company. We consider both not only the existing channels but also these newly discussed models from internet base from e-commerce the platforms. They will be unified hybrid and integrated seamlessly under the corporate control. Nick Jones - Desert Capital Venture And following up my last question, do you book those sales under Jinong or Gufeng?

[Tao Li:]

The sales are booked only once and the inter-company’s sales will be eliminated during the consolidation process in reporting. Nick Jones - Desert Capital Venture Thank you.

[Operator:]

Thank you, the next question is coming from the line of Frank Walsh with Green Partners. Please proceed with your question.

[Unidentified Analyst:]

So my first question is for each of Gufeng and Jinong. Can you please tell me how many tonnes of fertilizer was produced and what was the capacity utilization rate in fiscal year 2014?

[Tao Li:]

Could you repeat your question? There is lot of static from your end.

[Unidentified Analyst:]

Okay. So for each of Gufeng and how many tonnes of fertilizer works with you and while there is a capacity utilization rate for fiscal year 2014?

[Tao Li:]

For that question I’ll refer you to look into our fully disclosed annual that will become available later today or weekend.

[Unidentified Analyst:]

So you guys on your financial filing, you guys met your sales in all production and you just mentioned Gufeng producers’14 on so I’m just confused in all our production in each facility?

[Tao Li:]

The Gufeng it is engaged in the production sales of granular fertilizer typically for the current fiscal year 2014 and its sales numbers in terms of volume is roughly like 270 metric tons I don’t recall exact numbers so that’s why I want to refer you to the 10-K that will be available soon and for Jinong, the problem because the Jinong is engaged in the liquid and the compound fertilizers. The liquid and the power fertilizers which is much more concentrated than the granular fertilizer and the sales volume for those two products are roughly the volume, the volume is approximately 30,000 to 40,000ish. So capacity for Gufeng is in terms of the 0.5 millionish and the Jinong’s capacity is just 10s of 1000 degree.

[Unidentified Analyst:]

Okay. So what I’m trying to get is, so in your financial filings, how much you saw is roughly for each factor is approximately on what you guys produce, is that correct, for Gufeng and Jinong?

[Tao Li:]

Say it again.

[Unidentified Analyst:]

So for Gufeng and Jinong on you financial filings, how much each factory you sold is equivalent to how much you guys produce approximately? We can certainly looking at that.

[Tao Li:]

Couldn’t catch your questions exactly, and I would again encourage you to refer to 10-K for the numbers.

[Unidentified Analyst:]

Alright and I actually have a follow-up question, is that okay?

[Tao Li:]

Sure.

[Unidentified Analyst:]

Well, how many times of liquid fertilizer that you now produced in fiscal 2014 and Jinong produced any liquids fertilizer at all?

[Tao Li:]

I think you’re asking the same questions, those questions answers available in the 10-K and like I said the Gufeng’s sales volume in terms of metric tons for the fiscal 2014 is approximately 27,000 metric tons I’m sorry 270,000 metric tons.

[Unidentified Analyst:]

Okay. That is fine thank you.

[Operator:]

Thank you. The next question is coming from the line of Jeff Hanson with Star Advisers. Please proceed with your question.

[Unidentified Analyst:]

Hi, good morning. Everyone hear me okay?

[Tao Li:]

Yes, loud and clear.

[Unidentified Analyst:]

Okay, great, thank you. First of all translator thank you for a wonderful job and of course to the Chairman for his wonderful history on farming and the Internet, I enjoyed very much. I wanted to just follow-up as a gentlemen not the last question right before I couldn’t hear too well I think we asked you book the sales for Jinong or Gufeng you can clarify as they got sketchy on the line. And then I have a follow-up.

[Tao Li:]

We eliminated the inter-company transactions through the consolidation process so we report they filled only once in the financials.

[Unidentified Analyst:]

Okay. And then, so my follow-up was as you right back in fourth earlier I’m confused, so exactly how many tonnes were actually produced at Jinong in 2014?

[Tao Li:]

The Jinong subsidiary produces liquid fertilizers and powder fertilizers like I said that their volumes is much lower than the granular production volume and the granular volume that was sold using the Jinong’s brand and incorporating it’s full capacity is 66,000 metric tonnes.

[Unidentified Analyst:]

I’m just taking notes, I appreciate you’re answering on my questions, 66,000 metric tons, now that’s the -- that is tonnes sold and that as Jinong have tons sold 66,000 that number?

[Tao Li:]

That’s either company sales volume and like I said I refer you to our fully reported filing.

[Unidentified Analyst:]

I know, so with the number that you gave me, how much I know you said sold so how much produced is that Jinong factory? How many tonnes were produced that Jinong factory?

[Tao Li:]

I will refer you to the filings.

[Unidentified Analyst:]

Okay, because the reason why I was asking, I know you’re deferring me it’s because the filings that you said sold and I’m just trying to understand production.

[Tao Li:]

Again, we’re trying to refer you to the final source, in the filings.

[Unidentified Analyst:]

Okay, even an estimation would be great but it’s not I’ll follow-up by phone.

[Tao Li:]

Okay, thank you.

[Unidentified Analyst:]

Thank you, thanks gentlemen.

[Operator:]

The next question is coming from the line of Steven Meltzer with Tri-State Funds. Please proceed with your question.

[Unidentified Analyst:]

Thanks, I don’t have any questions at this time.

[Operator:]

Thank you. It appears we’ve no further questions at this time. I would like to move floor back to management for any additional concluding comments.

[Tao Li:]

Thank you everyone for participating in today’s conference call.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today’s conference. We thank you for your participation and you now disconnect your lines at this time.