China Green Agriculture, Inc.
Q3 2015 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Hello, and welcome to the CGA Third Quarter Fiscal Year 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I will now turn the call over to Ms. Ran Liu, Secretary of the Board. Ma’am, please go ahead.

[Ran Liu:]

Thank you, operator. Thank you and welcome everyone to China Green Agriculture third 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 President and CEO; Mr. Ken Ren, the company’s CFO, and then 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 represents management’s estimates as of today May 11, 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 and net income meeting the guidance and EPS meeting the guidance. And we are glad that we made first step on the building of the new business model, a comprehensive framework of offline, online and O2O business strategies, to better transit our business model in the new competition of agriculture industry, to combine it with Internet and large-scale agriculture production. We have had made progress on our proprietary online sales platform of agriculture specific material. We aim to build the platform to make online sales convenient for agriculture material distribution. Distributors of the company will be able to set up stores on the platform to sell the company’s products and other types of products such as pesticides and seeds they distribute for [indiscernible] manufacturers. We invite and are helping clients and customers to utilize this infrastructure. We will incentivize the distributors for their online sales performance of the company’s products accordingly. Besides, during the third quarter of fiscal year 2015 we had progress on cooperation with Sino-agri Group. Sino-agri has purchased a total of $22 million fertilizer products during the last three months ending the March 31, 2015, which accounted for 28% of the total sales of fertilizer product from company. We believe our partnership with Sino-agri will be extraordinary. The cooperation win-win showcases within us and then the large base owned enterprise in China. Looking ahead to the fourth quarter of fiscal year 2015, we are confident that we will bring more benefit to our shareholders as we always do so. Now, I am pleased to report results for the third quarter of fiscal year 2015. For the fiscal third quarter ended March 31, 2015 revenues were $79.5 million as compared to $70.3 million for same period of 2014. Net income for the third quarter was $9.9 million or $0.29 per share as compared to $7.3 million or $0.23 per share for same period of 2014. We are very pleased with our consistent performance in the third quarter fiscal year 2015, where we contribute - 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 we aim to 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 third three months of fiscal year 2015 result of operations. Net sales, total net sales for the three months ended March 31, 2015 were $79.5 million, an increase of $9.1 million or 13.1% from $17.3 million for the three months ended March 31, 2014. This increase was due to an increase in Gufeng’s and Jinong’s net sales. For the three months ended March 31, 2015, Jinong’s net sales increased $3.1 million, or 10.2%, to $33.3 million from $30.2 million for the three months ended March 31, 2014. This increase was mainly attributable to the greater sales of humic acid fertilizer products including the liquid and powder fertilizers with a higher unit price during this period as a result of the company’s aggressive marketing strategy and the increased number of its distributors. For the three months ended March 31, 2015, net sales at Gufeng were $45 million, an increase of $5.9 million or 15.2% from $39 million for the three months ended March 31, 2014. The increase was mainly attributable to Gufeng’s expanded marketing promotion strategy, especially one large amount sale to Sino-agri Group during the last three months. For the three months ended March 31, 2015, Yuxing’s net sales were $1.2 million, an increase of $0.2 million or 16.9%, from $1 million during the three months ended March 31, 2014. The increase was mainly attributable to the increase in market demand on Yuxing’s top grade flowers during the last three months. Cost of goods sold, total cost of goods sold for the three months ended March 31, 2015 was $51.3 million, an increase of $7.2 million, or 16.2%, from $44 million for the three months ended March 31, 2014, increase was mainly due to the 13.1% increase in net sales. Cost of goods sold by Jinong for the three months ended March 31, 2015 was $13.6 million, an increase of $1.4 million, or 11.9%, from $12 million for the three months March 31, 2014. 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 March 31, 2015 was $36.8 million, an increase of $5.6 million, or 17.9%, from $31.3 million for the three months ended March 31, 2014. 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 March 31, 2015, cost of goods sold by Yuxing was $0.9 million, an increase of $0.2 million or 22.3% from $0.7 million for the three months March 31, 2014. This increase was mainly due to the increase in Yuxing’s net sales and raw materials costs. Gross Profit, total gross profit for the three months ended March 31, 2015 increased by $2 million to $28 million, as compared to $26 million for the three months ended March 31, 2014. Gross profit margin was 35.5% and 37.2% for the three months ended March 31, 2015 and 2014, respectively. Gross profit generated by Jinong increased by $1.6 million, or 9%, to $19.7 million for the three months ended March 31, 2015 from $18 million for the three months ended March 31, 2014. Gross profit margin from Jinong’s net sales was approximately 59.1% and 59.7% for the three months ended March 31, 2015 and 2014, respectively. The slight decrease in gross profit margin was mainly due to a small increase in product costs. For the three months ended March 31, 2015, gross profit generated by Gufeng was $8.2 million, an increase of $0.4 million, or 4.9%, from $7.8 million for the three months ended March 31, 2014. Gross profit margin from Gufeng’s sales was approximately 18.2% and 20% for the three months ended March 31, 2015 and 2014, respectively. The decrease in gross profit percentage margin 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 March 31, 2015, gross profit generated by Yuxing was $0.3 million, an increase of $13,000, or 4.4% from $0.3 million for the three months ended March 31, 2014. The gross profit margin was approximately 27% and 30.2% for the three months ended March 31, 2015 and 2014, respectively. This decrease in gross profit margin was mainly due to an increase in the cost of raw materials for the three months ended March 31, 2015, compared to the same period in 2014. Selling expenses, 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 2.6%, of net sales for the three months ended March 31, 2015, as compared to $0.9 million, or 1.3% of net sales for the three months ended March 31, 2014, an increase of $1 million, or 120%. The selling expenses of Yuxing were $11,000, or 1% of Yuxing’s net sales for the three months ended March 31, 2015, as compared to $12,000, or 1.3% of Yuxing’s net sales for the three months ended March 31, 2014. The selling expenses of Gufeng were $0.4 million, or 1% of Gufeng’s net sales for the three months ended March 31, 2015, as compared to $0.5 million, or 1.3% of Gufeng’s net sales for the three months ended March 31, 2014. The selling expenses of Jinong for the three months ended March 31, 2015 were $1.6 million, or 4.8% of Jinong’s net sales, as compared to selling expenses of $0.4 million, or 1.3% of Jinong’s net sales for the three months ended March 31, 2014. The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts and the increase in shipping costs. Selling expenses, amortization of deferred assets, the selling expenses, amortization of the company’s deferred assets were $10.6 million, or 13.3% of net sales for the three months ended March 31, 2015, as compared to $10.1 million, or 14.5% of net sales for the three months ended March 31, 2014, an increase of $0.4 million, or 4.1%. This increase was due to the increased amortization of the deferred tax assets for the three months ended March 31, 2015 related to the company’s business strategy implemented since December 2013 that assists distributors in certain marketing efforts and develops standard stores to expand the company’s competitive advantages and market shares. General and administrative expenses, general and administrative expenses consisted primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by the company’s general and administrative departments and legal and professional expenses, including expenses incurred and accrued for certain litigations. General and administrative expenses were $2.6 million, or 3.3% of net sales for the three months ended March 31, 2015, as compared to $3.5 million, or 4.9%, of net sales for the three months ended March 31, 2014, a decrease of $0.9 million, or 24.7%. 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 $1 million for the three months ended March 31, 2015, as compared to $1.8 million for the three months ended March 31, 2014. Net income, net income for the three months ended March 31, 2015, was $9.9 million, an increase of $2.7 million, or 37.6%, compared to $7.2 million for the three months ended March 31, 2014. The increase was attributable to the increase in sales offset by lower general and administrative expenses and no impairment of assets in the quarter ended March 31, 2015. Net income as a percentage of total net sales was approximately 12.5% and 10.3% for the three months ended March 31, 2015 and 2014, respectively. Now the first nine months of fiscal year 2015 results of operations. Total net sales for the nine months ended March 31, 2015 were $184 million, an increase of $24 million, or 14.6%, from $161 million for the nine months ended March 31, 2014. This increase was largely due to the increase in Jinong’s and Gufeng’s net sales. For the nine months ended March 31, 2015, Jinong’s net sales increased $10.6 million, or 12.1%, to $98 million from $88 million for the nine months ended March 31, 2014. This increase was mainly attributable to the greater sales of humic acid fertilizer products including the liquid and powder fertilizers during this period as a result of the increased number of the distributors and the company’s marketing efforts. For the nine months ended March 31, 2015, net sales at Gufeng were $82.8 million, an increase of $12 million, or 17.7%, from $70 million for the nine months ended March 31, 2014. The increase was mainly attributable to Gufeng’s expanded marketing promotion strategy, especially one large amount sale to Sino-agri Group during the last nine months. For the nine months ended March 31, 2015, Yuxing’s net sales were $3 million, an increase of $0.4 million, or 17%, from $2.7 million during the nine months ended March 31, 2014. The increase was mainly due to the increase in sales demand on Yuxing’s top-grade flowers during the last nine months. Cost of goods sold

[Operator:]

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Richard Jones [ph] a private investor.

[Unidentified Analyst:]

Yes. Thank you. You gave this percentage of the large sale to Sino-agri Group in the third quarter, the percentage of sales that accounted for. Will you please repeat that percentage?

[Ken Ren:]

Can you repeat your question? There are a lots of background noise from your end. Thank you.

[Unidentified Analyst:]

Okay. With regard to the larger sale to Sino-agri Group in the third quarter, you gave us the percentage of sales that accounted for, could you repeat that please?

[Ken Ren:]

Hold on for a second. For the three months ended March 31, 2015, our sales at Gufeng were $45 million, an increase of $6 million, or 15% from $39 million present here a year ago. And this increase was mainly attributable to Gufeng’s expanded marketing promotion strategy…

[Unidentified Analyst:]

Yes. Thank you. But my question is regards the large sale to Sino-agri Group, you gave the percentage of sales that was accounted for by that large sale. Would you repeat that percentage please?

[Ken Ren:]

Oh, I see what you’re saying?

[Unidentified Analyst:]

Yes.

[Ken Ren:]

We entered into certain strategic agreement for collaborations with Sino-agri. And such agreement will prepare from an early period in 2014. And I believe this closed earlier in this fiscal year and the company had prepared to work with these strategic partners like Sino-agri. And for the current quarter the Sino-agri sales at Gufeng unit has ramped up to about 40%.

[Unidentified Analyst:]

All right. And you said, I believe that the Sino-agri large sale accounted for something like 27% of your total third quarter sales?

[Ken Ren:]

We have a number of Sino-agri units we worked with. And they conducted the business during different markets and territories such as provinces and regions in China.

[Unidentified Analyst:]

Yes.

[Ken Ren:]

And we also [ph] started a trend with Sino-agri will become very critical for the company’s growth and expansion. Ballpark wise from a unified statistical standpoint, we expected to penetrate and work with Sino-agri on a larger scale and a larger area.

[Unidentified Analyst:]

Yes. And I believe in your prepared remarks, I believe you said that the large Sino-agri sale accounted for approximately 27% of your total sales in the third quarter. And my question is, do you expect Sino-agri in future quarters, the June quarter and the September quarter, for example, do you expect Sino-agri to account for as large a percentage of sales, that is as large as 27% that they accounted for in the third quarter?

[Ken Ren:]

The percentage - the regional number you mentioned is a measurement of Sino-agri sales with respect to the company’s entire sales?

[Unidentified Analyst:]

Yes.

[Ken Ren:]

The percentage from the sales to Sino-agri was mainly attributable to the company’s - granular fertilizer - excuse me, granular fertilizer. And we all know that this granular fertilizer is your flagship product of Gufeng. So I just want to clarify that. Gufeng for the third quarter and Gufeng’s sales as a large portion from - working with Sino-agri and that is more than this 20%, like I said you know. 27% is for the whole company and not only that ratio is above that, it’s above 40% already. And we, like I prepared earlier that we expected the work and these collaboration with Sino-agri will continue to develop. And please also be reminded that we do have seasonalities in the Gufeng’s business. Gufeng is a unit that is mainly dedicated to the granular fertilizer. And granular fertilizer still has higher net loans [ph] over the four seasons in the year. And, for example, in the first quarter of this fiscal [indiscernible] the Gufeng’s sales, as I can remember, was less than $20 million. And the Gufeng’s for the second quarter of this fiscal, which is the quarter of December is above $20 million, but not too much, I think is $22 million. And for the current quarter, because spring comes and this is a big season to apply this granular fertilizer in the field, and the sales from Gufeng for this quarter is $45 million already. And this $45 million is including a $6 million incremental sales compared to over a year ago. Similarly, a year ago was like a less than $40 million. So going forward, we expect production to rise, yes, and the working with Sino-agri, we are glad and optimistic with - our relationship with Sino-agri. And - when we compare the gross from quarter-to-quarter, we need to keep in mind that a big function of the company’s business experienced various seasonality.

[Unidentified Analyst:]

Yes. All right. Thank you. And your accounts receivable at March 31, were down significantly from a total on June 30, 2014, mainly attributable to Gufeng. Could you explain that decline a little further please?

[Ken Ren:]

Actually, if you take a look at the trend of accounts receivable for the first nine months during this current fiscal quarter, and you’re right that at the beginning of this fiscal year on June 30, 2014 our net accounts receivable is nearly $90 million. And during the past three quarters, we observed an increasing trend of accounts receivable balance for $88 million to $76 million or so for the first quarter end and second quarter end we’re at $71 million, and for this quarter end, it’s also - it remains flat, $71 million. So this reflect the collection during the first quarter and such accounts receivable like you said is attributable to collections from the company’s extensive credit facilities and availabilities to our distributors at your merchandise inventory. And with the help from Sino-agri and we believe that Sino-agri will further elaborate or further liberate ourselves from liquidity and working capital. And we will be back to buy this state-owned company with better liquidity and credit capability. And also during this weekend, the Central Bank in China announced a further reduction of lending rates by 25 basis points. And such reduction has become effective today and that affected the domestic equity market and welcome - the market welcomes such message. And we optimistically forecasted and expected that our interest cost will also be improved by - for the remaining after fiscal year and going forward, because on a balance sheet, as of this quarter end, we have short-term loan amounted at little above $20 million. And these short-term loans were from different seven to eight lenders and these loans had been used to support our productions and expenses, particularly for Gufeng historically and now. And we saw that these short-term loans amount has been steadily at the $20 million - $25 million level from the beginning of this fiscal year. Now it went down a little bit. And these reflect our good relationship with the local bankers, the commercial bankers, and we have been very critical and very helpful for our business in the past.

[Unidentified Analyst:]

All right. Thank you. I may have one more question. With regard to your financial condition, you mentioned that net cash used in investing activities for the nine months was $7.7 million, down from $66.1 million for the nine months ended March of 2014. Could you refresh my memory on why that dropped so much, was it unusually high in the year earlier period and approximately, what levels of investing do you expect going forward?

[Ken Ren:]

Good question. The cash in the investment activity was much lower for this fiscal quarter compared to last quarter. And for the first nine months, the three quarters aggregated and we incurred more than $7 million but less than $8 million cash investment activities compared to over $60 million for the same period in fiscal 2014. These investment activities for fiscal 2014 is - was related to the company’s campaign in deploring deferred assets in this improvement for our distributors in their mortar and brick stores, as well as to improve their infrastructure. And such campaigns had concluded, so that in fiscal 2015, this current fiscal year if we look at the same account again, we incurred much less investment, capital expenditure. The deferred asset investment for the fiscal quarter - I’m sorry, for current fiscal year has largely concluded, and we don’t have any more that for this current quarter and that’s the reason why there was some big reduce. And going forward, we’ve already seen that our cash balance has increased as a reflection of our strong operating profitability, and our improved collections of accounts receivables, and we’re working to expand our initiatives to work with Sino-agri as our e-commerce segment.

[Unidentified Analyst:]

Yes. Thank you very much.

[Ken Ren:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Here we have a question from Max Strien [ph] a private investor.

[Unidentified Analyst:]

Yes, hello. My name is Max from Germany. One question about dividends, will we see more dividends in the near future?

[Ken Ren:]

Hold on for a second. [Foreign Language]

[Tao Li:]

[Interpreted] You asked very good question. This is an excellent question for today’s conference call. And we’ll be working very hard to maximize our shareholder value to reward our shareholders. And while our approach is that we have interacted to reward our shareholders to issue dividends to them, for their loyalty, for their commitment, and for their confidence. And I want to emphasize and thank you and thank our shareholders - thanks for shareholders at this moment. And I will promise you that in future, we will issue dividend. We will propose. We will ask the Board to approve the issuance of dividend. With regard to the timing, I can’t answer your question at this moment for dividend issuance, but we will work very hard to reward our shareholders. I like to add a few sentences at this opportunity. I like to report for shareholders that we made significant progress in our efforts to establish our e-commerce platform and infrastructure. Last year we planned and initiated our project to develop the company’s e-commerce business. We issued a press release last fall and we told that we will develop an online sales platform for people, for merchandise to sell their products electronically. We did it this year and I’m very happy to announce and disclose to let you know that on March 16, in the middle of March, we started with the trail; we launched our online sales platform. And in this online sales platform the customers and merchandise apply and utilize this platform to make their e-commerce feasible and convenient. We already managed to invite and helped over 200 merchandises to set up their infrastructure in our online sales platform. And with this small and fairly short trail period, we already tested and accumulated some sales and these trial sales have exceeded RMB 290,000 for the first few weeks. Remember, we haven’t officially started to promote or to launch these platforms to public yet. And I am very confident and optimistic that with our positive efforts we will be able to attract more merchandise and agriculture material sales force to establish their channels on our online sales platform. In this online sales platform they will not only be able to sell fertilizers, they will also be able to sell pesticides, they will also be able to sell [indiscernible], they will also be able to sell different brands different kinds of fertilizers, and other largely needed materials for their local farmers, because we believe that the continuously developing Internet infrastructure and the logistic supply chain network made the materialization of online sales platform feasible, sustainable, and accomplishable. We will invest more. We will work more and very hard to improve and make our online sales platform operational and you will be more interested to hear news and updates with regard to this online sales platform. And I hope that this online sales platform will interest you and I will work very hard, personally and jointly with my team to reward you from our work on this online sales platform. I just checked with my smartphone, and I’d like to provide accurate and precise information of our online sales platform. At 16

[Unidentified Analyst:]

Can I ask another question?

[Ken Ren:]

Please.

[Unidentified Analyst:]

A few months or few quarters ago, Mr. Tao Li mentioned that it is possible to expand Nestlé China deal to a worldwide agreement, are there any news about that?

[Ken Ren:]

Can you repeat your question?

[Unidentified Analyst:]

Chief Executive Officer mentioned a few quarters ago that it is possible to expand Nestlé China agreement coffee bean business to a worldwide business for China bean agriculture. It is because of my German. It is you call it, I think, Nestlé or Nestlé, how do you spell it?

[Ken Ren:]

I think I got you correct. You are talking about our program with Nestlé coffee bean, correct.

[Unidentified Analyst:]

Nestlé, yes.

[Ken Ren:]

Correct?

[Unidentified Analyst:]

Yes, yes.

[Ken Ren:]

Hold on for a second.

[Tao Li:]

[Interpreted] Your following question is very good, it’s exceptional. And this is, say, definitely I’d like to share with the audience with my investors. We started to work with Nestlé China last year. Based on what we’ve achieved last year, we continued our collaboration with Nestlé at larger scale. In addition to the fertilizer supply, we’re working with Nestlé on various aspects from different approaches. We start to work with Nestlé on technical support. We started with Nestlé on supply and other supports. We want a work group for the Nestlé program. And under this work group we have dedicated teams, such as technical support team to work with Nestlé’s colleagues on certain projects. We conducted field tests, lab tests of products, of solutions. And all these environmental and operational work enabled both parties to make the joint program replicable and successful. In addition to the past in work for coffee growers - for coffee growing in Yunnan province, we also did substantial work for coffee growing in Colombia, in South America. We will continue investing our field work and other works for rest of 2015 and going forward in 2015 and I forecast, I expect that our collaboration with Nestlé, we will expand further work significantly by 2017. As I projected last year, we aim to push our work, over collaboration with Nestlé, and also with others globally, and we still aim that, we will do that. And we will become expanding one more from next year to 2017. And I believe we’re making efforts firmly step-by-step as of now towards that goal. I hope this helps to answer your question.

[Unidentified Analyst:]

Yes, thank you very much. Thank you.

[Operator:]

Thank you. And there are no more questions at the present time, so I would like to turn the call back over to management for any closing comments.

[Ran Liu:]

Okay. Thank you, operator. Ken, please.

[Ken Ren:]

Thank you, everyone, for participating in today’s conference call. And we’ll see you next quarter. Have good day.

[Operator:]

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