China Green Agriculture, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Feb 2015

[Operator:]

Welcome to the China Green Agriculture Inc. Second Quarter Fiscal Year 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, Board Secretary. Ms. Liu, please go ahead.

[Ran Liu:]

Thanks, operator. Thank you, and welcome everyone to China Green Agriculture’s second quarter fiscal year 2015 earnings conference call. The earnings release went to the 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 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 February 09, 2015. China Green Agriculture assumes no obligation to update these projections in the future as market conditions change. Now, I’m pleased to make a review of the past quarter. During the quarter we are glad that we had revenue beating the guidance and net income meeting the guidance and we’re honored that we firmly stepped on the building of the new business model at comprehensive framework of offline, online and offline to online business strategies. To better transit our business model in new competition of agriculture industry, to combine it with Internet and large scale agriculture production. During the second quarter of fiscal year 2015, we have entered cooperation with giants in different industries like China National Agricultural Means of Production Group Corporation and Tea & Food Marketing Company Limited, a subsidiary of China National Cereals or Oils and Foodstuffs Corporation, China's largest food manufacturer with close cooperation with powerful business partners, the Company will grow into already widening agriculture industry. The Company's affiliate 900LH.com Food Company Limited has entered into an agreement to jointly build an agricultural comprehensive development based project with the Shiquan County Government in China. According to a cooperation agreement between the Company and 900LH.com, the Company's fertilizers will be exclusively supplied to all plants and agricultural products in the project and 900LH.com will promote the Company's fertilizers to all its affiliated farms. Besides, the Company held a three day international distributor conference, more than 80 distributor representatives of Jinong and Gufeng came to attend the conference. During the conference the Company updated the development progress of the Company's proprietary online sales platform of agricultural plastic material. Distributors of the Company will be able to set up stores on the platform to sell the Company's products as well as all kind of products such as pesticide and seeds distribute for all manufacturers. The Company will compensate the distributors for their online sales performance of the Company's products accordingly, so online sales platform got its distributors intense entries into Yuxing. Furthermore, 47 companies’ employees have submitted their enrollment forms for the subscription of a total of 465,000 shares of common stock from the Company. These employees made a total cash contribution to the company at an aggregated amount of $1 million, together with previous investments made by Mr. Tao Li, Chairman and CEO of the Company and other employees, the Company's employees had invested an aggregated amount of $4.9 million personnel wealth to the Company. That implies the employees’ confidence to the Company. The Company made their first payments of dividend during the quarter. The dividend is of $0.10 per share to the Company's stockholders of common stock of stack out as of the close of business day of October 31, 2014. This dividend was a first kind of the Company's history. It demonstrates the Company's commitment to grow momentum and strong financial position. The Company reiterates its policy and the returning value to shareholders. We also recognize the benefits of returning capital to shareholders as a means of maximizing return impact equity. The payment of the dividend is the Company's latest effort in doing so. Looking ahead to the third quarter of fiscal year 2015 we’re confident that we'll bring more benefit to our shareholders as we always do so. Now, I'm pleased to report results for the second quarter of fiscal year 2015. For the fiscal second quarter ended December 31, 2014 revenues were $54.1 million as compared to $40.6 million for same period of 2013. Net income for the second quarter was $5.2 million or $0.16 per share as compared to the $3.7 million or $0.12 per share for same period of 2013. We are very pleased with our consistent performance in the second quarter fiscal year 2015, where 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 exit our recently concluded fiscal quarter with the close cooperation of business partners and government support. I believe the Company will grow into a leading one in the agriculture industry. We look forward to start our new quarter that way into fulfill our strategy of developing the new business model. 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. The first three months of fiscal year 2015 results of operations. Total net sales for the three months ended December 31, 2014 were $54.1 million, an increase of $13 million or 33% from $14 million for the three months ended December 31, 2013. This increase was principally due to an increase in Jinong’s and Gufeng’s net sales. For the three months ended December 31, 2014, Jinong’s net sales increased $4 million, or 18.7% to $31 million from $26 million for the three months ended December 31, 2013. This increase was mainly attributable to Jinong’s implementation of sales strategy that’s focused on promoting the sales of high-margin liquid fertilizer, despite the decrease in a sales volume during the last three months. For the three months ended December 31, 2014, Gufeng’s net sales were $22 million, an increase of $8 million, or 61.5% from $13 million for the three months ended December 31, 2013. The increase was mainly attributable to the fact that Gufeng has developed more large clients from Northeast area in Mainland China and completed a large amount sale to Sino-agri Group during the last three months compared with the same period last year. Total three months ended December 31, 2014 Yuxing’s net sales were $1 million, an increase of $0.2 million or 25% from $0.9 million during the three months ended December 31, 2013. The increase was mainly attributable to the increase in sales demand on Yuxing’s top-grade flowers. Total cost of goods sold for the three months ended December 31, 2014 was $31 million, an increase of $9 million, or 43%, from $22 million for the three months ended December 31, 2013. This increase was mainly due to the 33% increase in net sales. Cost of goods sold by Jinong for the three months ended December 31, 2014 was $12 million, an increase of $1 million or 13.3% from $11 million for the three months ended December 31, 2013. Although Jinong lowered the product cost for the mix of products being sold, the increase in cost of goods was primarily attributable to Jinong's higher net sales. Cost of goods sold by Gufeng for the three months ended December 31, 2014 was $18 million, an increase of $8 million or 75.2% from $10 million for the three months ended December 31, 2013. This increase was primarily attributable to an increase in the cost of raw materials and an increase in the sales of fertilizer products. For the three months ended December 31, 2014, cost of goods sold by Yuxing was $0.8 million, an increase of $0.2 million or 27.2%, from $0.6 million for the three months ended December 31, 2013. This increase was mainly due to the 25% increase in Yuxing's net sales. Total gross profit for the three months ended December 31, 2014 increased by $4 million to $22 million as compared to $19 million for the three months ended December 31, 2013. Gross profit margin was 42.4% and 46.4% for the three months ended December 31, 2014 and 2013, respectively. Gross profit generated by Jinong increased by $3 million or 22.4%, to $19 million for the three months ended December 31, 2014 from $16 million for the three months ended December 31, 2013. Gross profit margin from Jinong's sales was approximately 60.5% and 58.7% for the three months ended December 31, 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 December 31, 2014, gross profit generated by Gufeng was $4 million an increase of $0.6 million or 17.3%, from $3 million for the three months ended December 31, 2013. Gross profit margin from Gufeng's net sales was approximately 17.2% and 23.7% for the three months ended December 31, 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 December 31, 2014, gross profit generated by Yuxing was $0.3 million an increase of $46,000 or 19.2% from $0.2 million for the three months ended December 31, 2013. The gross profit margin was approximately 26.6% and 27.9% for the three months ended December 31, 2014 and 2013, respectively. This decrease in gross profit margin was mainly due to an increase in the cost of raw materials for the three months ended December 31, 2014, compared to the same period in last year. Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensation. Selling expenses were $2 million, or 3.7%, of net sales for the three months ended December 31, 2014, as compared to $0.8 million, or 1.9% of net sales for the three months ended December 31, 2013, an increase of $1 million, or 163.2%. The selling expenses of Yuxing were 14,000, or 1.3% of Yuxing’s net sales for the three months ended December 31, 2014, as compared to 13,000, or 1.5% of Yuxing’s net sales for the three months ended December 31, 2013. The selling expenses of Gufeng were $0.2 million or 1% of Gufeng’s net sales for the three months ended December 31, 2014 as compared to $0.3 million, or 2.3% of Gufeng’s net sales for the three months ended December 31, 2013. The selling expenses of Jinong for the three months ended December 31, 2014 were $2 million, or 5.6% of Jinong’s net sales, as compared to selling expenses of $0.4 million, or 1.6% of Jinong’s net sales for the three months ended December 31, 2013. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts and the increase in shipping costs. Our selling expenses amortization of our deferred assets were $11 million or 19.7%, of net sales for the three months ended December 31, 2014, as compared to $8 million or 19.8% of net sales for the three months ended December 31, 2013, an increase of $3 million or 32.2%. This increase was due to the increased amortization of the deferred tax assets for the three months ended December 31, 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 advantages and marketing 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 million or 5.9% of net sales for the three months ended December 31, 2014, as compared to $5 million or 11.2%, of net sales for the three months ended December 31, 2013, a decrease of $1 million, or 30%. The decrease in general and administrative expenses was mainly due to the related expenses in the stock compensation awarded to the employees which amounted to $2 million for the three months ended December 31, 2014 as compared to $3 million for the three months ended December 31, 2013. Net income for the three months ended December 31, 2014 was $5 million, an increase of $2 million or 41.9%, compared to $3.6 million for the three months ended December 31, 2013. The increase was attributable to the significant increase in sales offset by an increase in selling expenses. Net income as a percentage of total net sales was approximately 9.6% and 9% for the three months ended December 31, 2014 and 2013, respectively. The first six months of fiscal year 2015 results of operations. Total net sales for the six months ended December 31, 2014 were $105 million, an increase of $14 million or 15.9%, from $91 million for the six months ended December 31, 2013. This increase was principally due to an increase in Jinong's and Gufeng's net sales. For the six months ended December 31, 2014, Jinong's net sales increased $8 million or 13.1%, to $66 million from $58 million for the six months ended December 31, 2013. This increase was mainly attributable to Jinong's implementation of the sales strategy that focuses on promoting the sales of high-margin liquid fertilizer despite the decrease in its sales volume during the last six months. For the six months ended December 31, 2014, Gufeng's net sales were $38 million an increase of $7 million or 20.9% from $31 million for the six months ended December 31, 2013. The increase was mainly attributable to Gufeng had more large clients from northeast area in mainland China and one large amount sale to Sino-agri Group during the six months ended December 31, 2014 compared with the same period a year before. For the six months ended December 31, 2014, Yuxing's net sales were $2 million, an increase of $0.3 million or 17.1%, from $1.6 million during the six months ended December 31, 2013. The increase was mainly attributable to the increase in sales demand on Yuxing's top-grade flowers. Total cost of goods sold for the six months ended December 31, 2014 was $58 million, an increase of $8 million or 16.4% from $50 million for the six months ended December 31, 2013. This increase was mainly due to the 15.9% increase in net sales. Cost of goods sold by Jinong for the six months ended December 31, 2014 was $26 million, an increase of $0.9 million or 3.4%, from $25 million for the six months ended December 31, 2013. Although Jinong lowered the product costs for the mix of products being sold, the increase was primarily attributable to its higher net sales. Cost of goods sold by Gufeng for the six months ended December 31, 2014 was $31 million, an increase of $7 million, or 30.4%, from $24 million for the six months ended December 31, 2013. This increase was primarily attributable to an increase in the cost of raw materials and an increase in the sales of fertilizer products. For the six months ended December 31, 2014, cost of goods sold by Yuxing was $1 million, an increase of $0.2 million, or 12.8%, from $1 million for the six months ended December 31, 2013. This increase was mainly due to the 17.1% increase in Yuxing’s net sales. Net income for the six months ended December 31, 2014 was $13 million, a decrease of $0.7 million, or 5.3%, compared to $14 million for the six months ended December 31, 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 12.6% and 15.5% for the six months ended December 31, 2014 and 2013, respectively. As of December 31, 2014, cash and cash equivalents were $59 million, an increase of $32 million, or 120.8%, from $26 million as of June 30, 2014. Net cash provided in operating activities was $39 million for the six months ended December 31, 2014, an increase of $38 million compared to $0.4 million for the six months ended December 31, 2013. The increase was mainly attributable to the decrease in accounts receivable and advances to suppliers, increase in customer deposits and tax payable and an increase in depreciation and amortization, offset by an increase in inventories during the six months ended December 31, 2014 as compared to the same period in 2013. We had accounts receivable of $71 million as of December 31, 2014, as compared to $89 million as of June 30, 2014, a decrease of $18 million or 20%. I will now discuss our third quarter of fiscal year 2015, and updated fiscal year 2015 guidance for the third quarter ending March 31, 2015. Management expects net sales of $75 million to $80 million, net income of $8 million to $10 million, and an EPS of $0.23 to $0.28 based on 35.2 million fully diluted shares. For the fiscal year ended June 30, 2015 management expects net sales of $255 million to $269 million, net income of $26 million to $35 million and EPS of $0.74 to $0.99 based on 35.2 million fully diluted shares. This concludes my remarks. Operator we're now prepared for questions from our audience. Question-and-Answer Session Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from David Weinberg a private investor. Please go ahead.

[Unidentified Analyst:]

I had seen on Friday that there was a press release regarding this plan with the local government with the agricultural development plan. And I noticed that the total investment on the project is expected to be approximately RMB 3 billion that's around $480 million. What division is that going to be coming from the government and how much is expected to be paid by the Company?

[Ken Ren:]

This is the Company's finance officer Ken. Please bear me for a second I am going to translate your questions to our Chairman and the CEO Mr. Tao Li. And he will address your questions in Chinese. And I will subsequently translate Mr. Li's comments and remarks back to English to answer your questions. So bear us for a second. Last Friday we issued a press release to announce the engagement news from a Company's affiliate and the Chinese government. I like to emphasize that like we iterated in the press release, this agreement is between the Chinese government and the Company's affiliate 900LH.com. With regard to 900LH.com's nature, we have disclosed and described the Company in our previous filings and we will also elaborate our current filings, which will become soon available today and also we explained that 900LH is an affiliate of the Company of China Green Agriculture. The matter that it was owned and controlled by TechTeam Investment holding company and TechTeam Investment is the affiliate of China Green Agriculture. With regard to the ownership structure of 900LH, the affiliate of the Company and the controlling and the majority shareholder controls and owns indirectly or directly of 900LH and there are a consortium of other investors holding equity interest of 900LH with me. The number available in the press release to revealing RMB approximately US$480 million as you mentioned is the total investment consideration in this development project and the development phase will take five years or even longer and it won't be fully invested within the incoming one year period of time, it is consist of two phases for investment and development. This project involves the participation of Chinese government, in addition to the private investment government of China will provide your support strategically and financially to collaborate with the private company for the mandate of building a modern agriculture infrastructure and platform. The portion of the government support and investment is not disclosed yet. Concurrently with the engagement agreement between the 900LH.com and China government, the Company entered into a separate agreement with 900LH.com. This collaboration agreement between the Company and 900LH.com centered at the use of China Green Agriculture’s fertilizers in this project from now and going forward, such that the collaboration between 900LH.com and the Company on a fertilizers aspect can be established, modeled, showcased and replicated in future. There are two covers for issuing this press release as I am the major shareholder of both 900LH.com and China Green Agriculture therefore I am obliged to report to the public of the significant development of this Company with 900LH.com, this is purpose number one. The second purpose of this press release is to disclose that the Company’s fertilizers products will be exclusively supplied to bring this operations in this forthcoming projects and I expect that the development plan of this project will be very influential for China Green Agriculture’s fertilizer business outlook because 900LH is engaged in a business model to grow, distribute, supply Green Agriculture products and food mission wise to that we will source contracts, farms all over the country and overseas. From time-to-time we intend to replicate the collaboration model between 900LH.com and the Company in terms of fertilizer use to other contracted farms and 900LH supplier or at 900LH’s for territory owned farm. I’d also like to comment that since the foundation of 900LH.com we have successfully established or owned base farms totaled approximately 200 globally to supply 900LH various food and agriculture products. My vision is to let everyone of our 900LH contracted or proprietary owned farm to use, China Green agricultures, fertilizers as exclusively as possible. We're not just only using China Green agriculture's fertilizer products but we will be using China Green agriculture's products systematically. According to the methodology we proposed, we promoted over years. And I believe the showcase impact of using China Green agriculture's fertilizers in 900LH farms will promote, will help, will boost to illustrate the effectiveness of China Green agriculture's product feature so that more and more farmers and clients will be interested in using our company's fertilizer products in their farming operations. The 900LH farm include both the farms in China as well as the farm that 900LH contracted overseas. For example, the all farms -- we have farms in New Zealand. In our New Zealand farms we're growing grapes, we're growing avocado, we're also growing olives and we're developing a plan to grow to coffee beans in New Zealand. Sorry, correction the coffee farm will be in Columbia, South America not New Zealand. This concludes my answers to your questions about the press release we issued on Friday for the project engagement between 900LH and China government. Next question please.

[Operator:]

[Operator Instructions] Your next question is from Peter Siris of Honey. Please go ahead.

[Unidentified Analyst:]

I have a comment and two questions. So comment is very simple, I wish that on the next call you wouldn’t spend 40 minutes reading through the press release so we could get the questions fast. Okay, I have two questions. My first question is how you deal with investors? Over the last three months I have placed probably 30 phone calls and sent maybe 50 e-mails to Ken to Liu Ran and to everybody else and it never receives or responds and I'm curious as to why you won't talk to investors? And incidentally on the phone number that you list on the press release there is never an answer. So that's my first question.

[Ken Ren:]

For all your questions before we answer them one-by-one exclusively and necessarily. And here we noticed that the e-mails between the management and you were forwarded and appeared on the bloggers post I assume that was bloggers post. We felt that our trust has been abused and we talked to you so we answered all your questions before but we didn't expect that the personal communication were leaked were forwarded to the short sellers and it was posted on a blogger for the purpose to attack the Company to short sell the Company’s stock therefore we suspect that you're involved with the short sellers, with the blogger in this systematic activities to short sell the Company's stock. That's the main reason you didn't get any answers from the Company rather than the all available public information.

[Unidentified Analyst:]

Well, you couldn't be more wrong and I just I want to ask my next question, I just want to make a personal comment which is that first, I was very -- now this is to you Ken, I was very concerned about your health and I left many phone messages just enquiring about -- not asking any questions about the Company and I was an old friend of the Company I have visited the Company many times. I have nothing to do with the short sellers. I don’t know how any email got to the short sellers but I think that, if you don’t want to talk to me that’s fine with me, it’s very sad but it's fine with me, that’s the way you treat old friends. Okay, I won’t bother you again, unless you guys want to call and apologize to me.

[Operator:]

This concludes our question-and-answer session. I’d like to turn the conference back over to Ran Liu for any closing remarks.

[Ran Liu:]

Thank you, Operator. Thank you all for attending China Agriculture’s second quarter of fiscal year 2015 earnings conference call today. This may conclude the meeting. Thank you.

[Operator:]

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