China Green Agriculture, Inc.
Q1 2015 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Hello and welcome to the China Green Agriculture Q1 FY 2015 Earnings Conference Call. All participants will be in a 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 Ran Liu. Ms. Liu, please go ahead.

[Ran Liu:]

Thanks, operator. Thank you, and welcome everyone, to China Green Agriculture first quarter fiscal year 2015 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 Chairman and CEO; Mr. Ken Ren, the company's Chief Financial Officer, 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. 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 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 November 10, 2014. China Green Agriculture assumes no obligation to update these projections in the future as market conditions change. Now, I would like to turn the call over to Mr. Tao Li. Mr. Li, Please.

[Tao Li:]

Thank you, everyone. Good morning and good evening everyone. I’m Li Tao. Thank you for joining our conference today. We are pleased to report the results for the first quarter of fiscal year 2015. Mr. Ren will give detailed overview of the results in a little moment. This quarter especially, I clearly remember, I said last quarter that we will start the fiscal year 2015 with a cost on the transition of our traditional fertilizer business model into a new business model, that is adaptive to the development of internet, technologies and our service of a particular policy revamping in agriculture macro-economy. Now, at the first quarter of 2015 we concluded, I’m proud to say we have made firmly the first step of fiscal year 2015. Now, coming to cooperation with strong strategy business partner have substantial development on our transition of business strategies. We made significant progress in ecommerce as we continue to enhance our human resource and update our business model. But in terms of efficiency and coverage, we had the senior specialists with rich experience in the area of online/offline, O2O in distributing channels. At some time we continue to build out our online sales network including the development of company’s proprietary internet platform to the sale of the company’s fertilizer products at subsidiary level. Utilizing existing Internet channels from third parties to enhance the availability of the company’s products to a large customer base like Alibaba, sell quality agriculture products and organic grain to our residence online at the company’s proprietary internet platform, offline and online to offline by working with our peer strategic partner Xi'an Gem Grain Company. Overall, we are very pleased with the results in ecommerce with sales incrementally excel three months ago in ecommerce. Looking forward in the ecommerce, should start to make the notable contribution to our business in the next quarter. Besides, we established comprehensive business framework that consist of various online/offline, online to offline infrastructure channels to enhance the sales strategies of the company’s products. With the development of new business framework the foregoing cooperation with strong business partner would be more productive. Furthermore, we entered into a Tripartite cooperation memorandum with our business strategy partner Tea & Food Marketing Corporation Ltd, a COFCO subsidiary, and Xi'an Gem Grain Company to jointly the develop the company’s new business model, including the sales of fertilizer, as well as green agriculture products. Recently, we entered into another strategic cooperation with an agreement with China National Agricultural Means of Production Group Corporation to promote the sales of Jinong's fertilizer products. And the agreement both parties to establish a long term strategic partner that is mutually beneficial to both. On October short sellers falsely alleged us of representing results of our operation and our sales. We have carefully analyzed that article. We found it was totally misleading and irresponsible. Through the two investor days followed and my shareholder letter to the public, I believe the public may obtain the truth that our company operates with high ethical and quality standards. I believe our supporters are standing with us as they always do. In the new fiscal quarter we will still focus building comprehensive framework offline, online and O2O business strategies to better transform our business model in the new competition of agricultural industry to compete with internet and large-scale agriculture production. For the benefit of our shareholders, our customer, our employee. I will work hard with my employees to develop our new business model to embrace the internet technology. We’re working with strategic partner and peer companies to our compound cold fertilizer in Yuxing for quality agriculture products and sell the quality agricultural products to city residents from online to offline. With our hard work, we believe our business will be better and better in near future. I will lead my team to strive for lucrative change in the market. We aim to deliver better earnings so that will greatly reward our cause. At last, thank you for supporting us. Thank you. We will now pass the call with Liu Ran to discuss the operating results in further details. Ran Liu Thank you, Mr. Li. Now, I am pleased to report results for the first quarter of fiscal year 2015. For the fiscal first quarter ended September 30, 2014 revenues were $51.3 million, as compared to $50.3 million for the fiscal first quarter ended September 30, 2013. Net income for the first quarter was $8.1 million or $0.25 per share, as compared to $10.4 million or $0.35 per share. The revenues match the previously disclosed guidance of between $50.7 million and $54.3 million. Net income to beat the previously disclosed guidance of between $5.9 million and $7.8 million, by $0.3 million and EPS beat the previously disclosed guidance of between $0.18 and $0.24 by $0.01 per share. We are very pleased with our consistent performance in first quarter fiscal year 2015, while we continued to build shareholder value through focusing on prudent revenue growth. Building the long-term durability of our business model, sustained net profits and balance sheet discipline, as we exist our recently concluded fiscal quarter with we look forward to a year without distraction and expense from the recently resolved shareholder litigation and start our new quarter with a particular focus on building our domestic Jinong and Gufeng fertilizer franchise, as well as consolidate our Yuxing operations 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 ten-year plan. I will now discuss those financial results in greater detail. Total net sales for the three months ended September 30, 2014 were $51.3 million, an increase of $1 million or 2% from $50.3 million. for the three months ended September 30, 2013. This increase was due to an increase in Jinong’s net sales offset by a decrease in Gufeng net sales. For the three months ended September 30, 2014, Jinong’s net sales increased $2.7 million, or 8.5% to $34.5 million from $31.8 million for the three months ended September 30, 2013. This increase was mainly attributable to Jinong’s latest implementation of sales strategy that focus on promoting the sales of high-margin liquid fertilizer, despite the decrease in Jinong's sales volume during the last three months. For the three months ended September 30, 2014, net sales at Gufeng were $16 million, a decrease of $1.8, or 10% from $17.8 million for the three months ended September 30, 2013. The decrease was mainly attributable to the delayed fertilization time due to climatic impact compared to the same period in the last year. For the three months ended September 30, 2014, Yuxing's net sales were $0.9, an increase of $0.7 million, or 8.4%, from $0.8 million during the three months ended September 30, 2013. The increase was mainly attributable to the increased in sales demand of Yuxing's top-grade flowers. Total cost of goods sold for the three months ended September 30, 2014 was $26.6 million, a decrease of $1.2 million, or 4.3%, from $27.8 million for the three months ended September 30, 2013. This decrease was mainly due to the 10% decrease in Gufeng's net sales. Cost of goods sold by Jinong for the three months ended September 30, 2014 was $13.4 million, a decrease of $0.6 million, or 4.2%, from $14 million for the three months ended September 30, 2013. The decrease was primarily attributable to lower product costs for the mix of products being sold. Cost of goods sold by Gufeng for the three months ended September 30, 2014 was $12.6 million, a decrease of $0.6 million, or 4.6%, from $13.2 million for the three months ended September 30, 2013 as a result of the reduction in net sales. For three months ended September 30, 2014, cost of goods sold by Yuxing was $0.6, a decrease of $5,000, or 0.9%, from $0.7 million for the three months ended September 30, 2013. The decrease is not significant. Total gross profit for the three months ended September 30, 2014 increased by $2.2 million to $24.7 million, as compared to $22.5 million for the three months ended September 30, 2013. Gross profit margin was 47.1% and 44.7% for the three months ended September 30, 2014 and 2013, respectively. Gross profit generated by Jinong increased by $3.3 million, or 18.5%, to $21.1 million for the three months ended September 30, 2014 from $17.8 million for the three months ended September 30, 2013. Gross profit margin from Jinong's sales was approximately 61.2% and 56% for the three months ended September 30, 2014 and 2013, respectively. The increase in gross profit margin was mainly due to the increased weight for higher-margin products sales in Jinong's total sales due to Jinong's sales strategy. Jinong has adjusted its production process to focus on producing the high-margin liquid fertilizer during the last three months. For the three months ended September 30, 2014, gross profit generated by Gufeng was $3.4 million, a decrease of $1.2 million, or 25.5%, from $4.5 million for the three months ended September 30, 2013. Gross profit margin from Gufeng's sales was approximately 21.2% and 25.6% for the three months ended September 30, 2014 and 2013, respectively. The decrease in gross profit percentage was mainly due to the increased weight for lower-margin products sales in Gufeng's total sales answering to market demand. For the three months ended September 30, 2014, gross profit generated by Yuxing was $0.2 million, an increase of $0.7 million, or 54.9% from $0.1 million for the three months ended September 30, 2013. The gross profit margin was approximately 23.8% and 16.7% for the three months ended September 30, 2014 and 2013, respectively. The increase in gross profit margin was mainly due to the rising price for flowers during the three months ended September 30, 2014, comparing to the same period of 2013. Our selling expenses consisted primarily of amortization of our deferred assets, salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $11 million, or 21.6%, of net sales for the three months ended September 30, 2014, as compared to 5.8 million, or 11.5% of net sales for the three months ended September 30, 2013, an increase of $5.3 million, or 90.9%. The selling expenses of Gufeng were $0.2 million, or 1.2% of Gufeng's net sales for the three months ended September 30, 2014, as compared to $0.2 million, or 0.9% of Gufeng's net sales for the three months ended September 30, 2013. The selling expenses of Jinong for the three months ended September 30, 2014 were $10.9 million, or 31.6% of Jinong's net sales, as compared to selling expenses of $5.6 million, or 17.7% of Jinong's net sales for the three months ended September 30, 2013. Most of this increase in Jinong's selling expenses was due to the amortization of $10.3 million of the deferred tax assets for the three months ended September 30, 2014 related to our business strategy implemented since the first quarter of fiscal year of 2014 that assists distributors in certain marketing efforts and develops 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 $3.1 million or 6.1% of net sales for the three months ended September 30, 2014, as compared to $3.3 million or 6.6% of net sales for the three months ended September 30, 2013, a decrease of $0.2 million or 6.6%. The decrease in general and administrative expenses was mainly due to the related expenses in stock compensation awarded to the employees which amounted to $1.4 million for the three months ended September 30, 2014, as compared to $2 million for the three months ended September 30, 2013. Net income for the three months ended September 30, 2014 was $8 million, a decrease of $2.3 million or 22%, compared to $10.4 million for the three months ended September 30, 2013. The decrease was attributable to the increase in selling expenses offset by an increase in our gross margin. Net income as a percentage of total net sales was approximately 15.8% and 20.6% for the three months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, cash and cash equivalents were $41.1 million, an increase of $14.2 million, or 52.9% from $26.9 million as of June 30, 2014. Net cash used in financing activities for the three months ended September 30, 2014 was $0.7 million, a decrease of $0.9 million or 349.1% from provided by financing activities of $0.3 million for the three months ended September 30, 2013. Company had $ 22.9 million in short-term loans as of September 30, 2014, a decrease of $1.1 million, as compared to $24.0 million in short-term loans as of June 30, 2014. We had accounts receivable of $75 million as of September 30, 2014, as compared to $88.8 million as of June 30, 2014, a decrease of $13.7 million or 15.5%. I will now discuss our second quarter of fiscal year 2015 and confirm our fiscal year 2015 guidance. For the second quarter ending December 31, 2014, management expects net sales of between $49 million and $53 million, net income of between $3 million and $6 million, and EPS of between $0.07 and $0.17 based on $32.5 (sic) million fully diluted shares. For the fiscal year ended June 30, 2015, management confirms net sales of between $255 million and $269 million, net income of between $26 million and $35 million, updated EPS of between $0.74 and $1 based on 35.2 (sic) million fully diluted shares. This concludes my remarks. Operator, we are now prepared for questions from our audience. Thank you. Thank you, operator.

[Operator:]

Thank you. (Operator Instructions) Okay. We have a question from Rick Sherman with Oppenheimer.

[Rick Sherman:]

Yes, good morning. First question I have is one the private placement that you announced on October 2, is the proceeds of the $1.1 million in this quarter’s balance sheet or will that be reflected in the next quarter’s balance sheet?

[Ken Ren:]

That will be reflected in next quarter’s balance sheet.

[Rick Sherman:]

Okay. Thank you.

[Ken Ren:]

Because the transaction occurred after September 30, in our financial statement to answer your question the balance sheet statement is out of September 30, 2014.

[Rick Sherman:]

Thank you. That’s what I thought. Okay, and then the second question I have is, can you speak to the seasonality of your business, which quarters are historically stronger or weaker than others over – and is that changing – what has that been in the past versus do you project that to change now that you’re in the process of changing part of your business model?

[Tao Li:]

Hold on. [Interpreted] Okay. As you may be aware of that our company provides a series of fertilizer products and each product is customized to offer, new trend solutions to specific crops, the crops have their own growing period and a life cycle. As such the corresponding fertilizers to treat these crops during the different phase of their growth may experience fluctuated demand in the market. While we do have some generic fertilizer products, which impacts less seasonality compared to some of our specialty products. Overall, I would zero-in and take a look at different products with different degree of seasonality. For instance, one of our flagship product is targeting to treat wheat and such product sales normally occur only in the first-half of a natural calendar year. That’s because after the conclusion of the first-half the use of such wheat fertilizer may diminish allowing us the harvest of wheat in China. I’d like to give you another example, let’s take a look at of our Gufeng subsidiary. These subsidiary offers compound fertilizer, and it also have its characteristics in terms of seasonality. Gufeng’s product seasonality is heavily related to or co-related to the farming habits of its users as well as the crops these farmers choose to grow season-by-season. Above all, as we are offering multi-products in market and we view our business a multi product strategy, that enable us to be able to offer products at different seasons to help farmers to grow different crops, when such season becomes their peak fertilizing season. And due to diversity location-by-location it give us a diversified market to offer different fertilizer products, while the fertilizer products naturally comes with its seasonality but due to the reasons I elaborately explained above the seasonality is somewhat mitigated because of our multi-products strategy. Compared with other quarters, the current quarter from October to December, the fourth quarter of a natural calendar year is somewhat softer than the other seasons, the other three quarters. However, such weakness is not significant. We anticipate that spring season will be a peak season in our business cycle on year basis. And in our business to prepare the strong sales season the company normally procures the raw materials, prepare the productions, schedule the batches, for the purpose to restock our inventory, so that at the time the fertilizer season comes we are readily available to launch, to offer these products to the customer at the very first moment.

[Rick Sherman:]

No, I understand…

[Tao Li:]

[Interpreted] If we have to pick a weak season or a slow season, a slow quarter in a year, I would say, probably the current season from October to December would be the weak season, or the slow season, however, again like I said earlier, it’s low, but not that slow…

[Rick Sherman:]

If I might ask another question the reason why you brought that up is that, you seem to have if revenue is, let’s say, relatively consistent as, let’s just call it $50 million. But quarter-to-quarter on that same $50 million, you can have $0.25 in earnings like you just had in the first quarter, in the second quarter you are predicting $7 million to $17 million which (inaudible) and to make your target for the year clearly another quarters is going to be higher than that. So what has – what can you speak to in terms of since you are looking for revenue next quarter to be in line more or less with the first quarter, what is making for the changes in earnings per share?

[Tao Li:]

[Interpreted] You are right that the quarterly guidance we provided for the second quarter is close or similar to the revenue we earned for the past first quarter and there are several reasons to support our guidance – our projections for the business performance in the quarter (inaudible). First of all I want to emphasize that as I reviewed it over and over, we are in a transition period to transform a fertilizer company that heavily focus on the traditional business model to a new business model, and it will incur as certain good administration and general expenses. As we disclosed in our press release just last month, we entered into two major cooperation agreements with two companies. The first one we entered into is, COFCO. COFCO is the largest food state-owned in China. Second company we entered into is, Sino-agri, the largest fertilizer company in China. These two agreements are the foundations for our transform work from old business model to new business model. COFCO is the largest food and a crop dealer in China, and Sino-agri is the largest fertilizer dealer in China. And pertaining to the content in our agreement with these joint companies, we – we’ll start to prepare the cooperation or collaboration with them, and that will require us to book to bucket resources, assets, and cashes to support these work. I'm very proud to have the company entered into the cooperation agreement with COFCO, the largest food company – the food dealer – the largest food dealer in China, as well as Sino-agri, the largest fertilizer sales company and production in China. These works with these two companies will support us to grow ourselves from a small fertilizer company based on traditional fertilizer sales model to a new growing fertilizer company supported by new technologies, new business model, and partnership with the biggest companies, state-owned companies in agriculture industry in China. You will see the impact of this agreement, you will see the exploding sales introduced from our collaboration with these partners and the amount of expenses, amount of resources we put into these agreements – this joint work with them from this quarter will reward us next year – next calendar year in the following subsequent quarters.

[Rick Sherman:]

Great.

[Tao Li:]

[Interpreted] Ending November, we will also hold a distributor conference. And the distributor conference will invite our distributors nationwide to the companies headquarter. And we will host the (inaudible) meeting to motivate to cater our distributors to share with them what we are going to do in a framework, judge collaboration framework with our partners. And this will also, needless to say, incur some administration expense as well. All we are doing – all we’re going to do in a quarter is for a sake of future growth. And you are right that our net income guidance for the quarter – for the second quarter is lower compared to the past quarters realized earnings. This is natural, because we are doing our work and doing this work cost money. And we believe what we always doing now is for the sake of its future success with our collaboration of Sino-agri (inaudible) and our distributors.

[Rick Sherman:]

Now, it totally makes sense, I appreciate that. I hope to see the results of those investments you are making. Just as a commentary thought, I hope you continue to try to be more transparent and work on trying to dispel or to put to bed the time consuming issues of whether or not – this short sellers and the people who basically are using you a various types of things. So I'm hoping that you can do a better job of being transparent and I would suggest also you bring down – you try to raise bring more cash to the balance sheet. If you are truly proactive, you would start some, I understand that the Chairman bought some shares, but would also be helpful if the company decides to utilize his cash also to buy back stock. Anyway, thank you for taking my questions. Good luck.

[Ran Liu:]

Okay. Thank you. Okay, operator…

[Operator:]

Yes, yes.

[Ran Liu:]

Hi, operator.

[Operator:]

Yes, yes, ma’am.

[Ran Liu:]

We may reach the end of the call. Time is up, time is out. Thank you. Thank you all.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

[Ran Liu:]

Thank you. Bye.