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China Green Agriculture, Inc. (NYSE:CGA)

Q1 2013 Earnings Call

November 20, 2012, 08:00 am ET

Executives

Jane Zuo - Investor Relations Manager

Ken Ren - CFO

Analysts

Operator

Greetings and welcome to the China Green Agriculture Incorporated First Quarter Fiscal Year 2013 Financial Results. At this time, all participants are in a listen-only mode. A brief 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, Jane Zuo, China Green Agriculture. Ms. Zuo, you may now begin.

Jane Zuo

Thanks operator. Thank you and welcome everyone to China Green Agriculture's first quarter fiscal year 2013 earnings conference call. The earnings release went to the wire pre-market today. Our call today is hosted by Mr. Ken Ren, the company's Chief Financial Officer and Mr. Hao Yu, Director of the company.

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 as 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 regulatory changes and other information detailed from time-to-time in the company’s filings and future filings with the United States Securities and Exchange Commission.

Accordingly, although the company believes that 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 20, 2012. China Green Agriculture assumes no obligation to update these projections in the future as market conditions change.

On September 3, 2012, we received a letter from the staff of the US Securities and Exchange Commission notifying us that the staff had completed its investigation with the company and that it do not intend or recommend any enforcement action against the company. It is good news for both CGA and its investors. With the termination of SEC investigation, an aggregate amount of $500,000 stock purchase by the executive, we are committed to grow the company's business and thrive to increase the enterprise value for shareholders.

Now I would like to review the performance of the company for first quarter of fiscal year 2013. For the first quarter of fiscal year 2013, we sold approximately 39,599 metric tons of fertilizer products as compared to 81,720 metric tons for the first quarter of fiscal year 2012. Jinong sold approximately 17,449 metric tons as compared to 16,846 metric tons in prior year. Gufeng sold approximately 22,150 metric tons as compared to 64,784 metric tons in prior year.

Total net sales for the first quarter of fiscal year 2013 were $39.5 million as compared to $53.1 million from first quarter of fiscal year 2012, representing a decrease of $13.6 million or 25.6%, largely due to the decrease in Gufeng’s net sales.

Jinong’s net sales for the first quarter of fiscal year 2013 were $27.9 million as compared to $22.2 million for the first quarter of fiscal year 2012, representing an increase of $5.6 million or 25.2%, mainly attributable to the greater sales of humic acid fertilizer products including our liquid and powder fertilizers driven by our increases to distributors and the aggressive marketing strategy.

Net sales at Gufeng for the first quarter of fiscal year 2013 were $10.9 million as compared to $29.6 million, representing a decrease of $18.7 million or 63.1%. This fiscal quarter ended September 30, 2012, fell in the ‘export window’ in which no special tariff tax applied. However, due to the lower demand from importing countries on Nitrogen-Phosphorous elemented compound fertilizer as a result of the backlog of their imported compound fertilizers in previous quarters, which also led to lower than before profit margin level over the export contracts.

Gufeng had no export contract in the first quarter of fiscal year 2013. Despite of that, Gufeng has been expanding and penetrating the domestic market particularly since the fiscal quarter ended March 31, 2012. During which period no revenue was generated from the fertilizer exportation either due to federal tariff tax levied by China authority or due to weak demand from important countries.

However, net domestic sales of Gufeng for the first quarter of fiscal year 2013 was $10.9 million as compared to $9.2 million for the first quarter of fiscal year 2012 representing an increase of $1.8 million or 19.1%. Jintai's net sales decreased by $0.7 million or 100% to zero for the first quarter of fiscal year 2013 from $1.2 million in prior year. The decrease was attributable to Jintai's relocation, which commenced on March 1, 2012 and is still ongoing. Therefore, Jintai did not generate any sales revenue since March 1, 2012.

Yuxing’s net sales for the first quarter of fiscal year 2013 were $0.7 million, an increase of $0.7 million from $0.05 million for the first quarter of fiscal year 2012. This increase was mainly attributable to the strong sales of Yuxing’s top-grade flowers. Total costs of goods sold for the first quarter of fiscal year 2013 was $22.6 million, a decrease of $11.6 million or 34% from $34.2 million for the first quarter of fiscal year 2012. This decrease was proportional to the decrease in sales, which was mainly due to Gufeng's decreased exported sales.

Cost of goods sold by Jinong for the first quarter of fiscal year 2013 was $12.8 million, an increase of $4.7 million or 58.3% from $8.1 million in the first quarter of fiscal year 2012. The increase was primarily attributable to the first 110% increase in the cost of raw materials and 25.2% increases in sales fertilizer products.

Cost of goods sold by Gufeng from first quarter of fiscal year 2013 was $9.2 million a decrease of $16.1 million or 63.6% from $25.3 million in the first quarter of fiscal year 2012. The decrease was proportional to Gufeng’s sales for the fiscal quarter.

Cost of goods sold by Jintai for the first quarter of fiscal year 2013 was zero as compared to [$748,813] in the first quarter of fiscal year 2012 because Jintai had no operation during the past quarter as a result of the ongoing relocation.

Cost of goods sold by Yuxing for the first quarter of fiscal year 2013 was $0.6 million, an increase of $0.5 million, or 743.3% from $0.07 million from first quarter of fiscal year 2012. The increase was proportional to Yuxing's sales for the fiscal quarter. Total gross profit for the first quarter of fiscal year 2013 decreased by $2 million or 10.4% to $16.9 million as compared to $18.9 million in the first quarter of fiscal year 2012. Gross profit margin was approximately 42.9% and 35.6% for the first quarter of fiscal year 2013 and 2012 respectively.

Gross profit generated by Jinong increased by $0.9 million or 0.2% to $15 million for the first quarter of fiscal year 2013 from $15.1 million for the first quarter of fiscal year 2012. Gross profit margin from Jinong was approximately 33.9% and 53.6% for the first quarter of fiscal year 2012 and 2011 respectively.

Gross profit generated by Gufeng decreased by $2.6 million or 59.8% to $1.7 million for the first quarter of fiscal year 2013 from $4.3 million from the first quarter of fiscal year 2012. Gross profit margin from Gufeng sales was approximately [15%] and 14.7% for the first quarter of fiscal year 2013 and 2012 respectively.

Outstanding expenses consist primarily of salaries of sales personnel, advertising and the promotion expenses freight out costs and related compensation. Selling expenses were $3 million or 7.7% of net sales for the first quarter of fiscal year 2013 as compared to $2.5 million or 4.7% of net sales for the first quarter of fiscal year 2012, representing an increase of $0.5 million or 21.8%. The selling expenses of Gufeng were $0.2 million or 2.1% of Gufeng’s net sales for the first quarter of fiscal year 2013 as compared to $0.8 million or 2.8% of Gufeng’s net sales for the first quarter of fiscal year 2012.

The selling expenses of Jinong for the first quarter of fiscal year 2013 were $2.8 million or 10% of Jinong’s net sales as compared to selling expenses of $1.6 million or 7.4% of Jinong’s net sales for the first quarter of fiscal year 2012. Most of this increase was due to Jinong’s expanded marketing efforts and increase in shipping costs.

General and administrative expenses primarily consisted of related salaries, rental services, business development, depreciation and travel expenses incurred by our general and administrative department and legal and professional expenses including expenses incurred and accrued for certain litigations. General and administrative expenses were $2.9 million or 7.3% of net sales for the first quarter of fiscal year 2013 as compared to $3.1 million or 5.9% of net sales for the first quarter of fiscal year 2012, representing a decrease of $0.3 million or 8.4%. This decrease was primarily the result of the decrease of legal fees, incurred in connection with certain litigations.

Total operating expenses as a percentage of sales for the first quarter of fiscal year 2013 were 15% as compared to 10.6% in first quarter of fiscal year 2012.

Operating income for the first quarter of fiscal year 2013 was $11 million, decreased by 17% from $13.3 million in the first quarter of fiscal year 2012. Operating margin for the first quarter of fiscal year 2013 was 27.9% as compared to 25% for the first quarter of fiscal year 2012.

Net income for the first quarter of fiscal year 2013 was $8.9 million, a decrease of $1.9 million or 17.4% as compared to $10.7 million for the first quarter of fiscal year 2012, due to the decrease in gross profit primarily relating to Gufeng’s.

Net income as a percentage of total net sales was approximately 22.4% and 20.2% for the first quarter of fiscal year 2013 and from ‘12 respectively. Diluted net income per share for the first quarter of fiscal year 2013 was $0.32 as compared to $0.4 in the first quarter of fiscal year 2012 based on diluted weighted average shares outstanding of 27.5 million and 26.9 million respectively.

As of September 30, 2012 cash and cash equivalents were $74.2 million, an increase of $2.2 million or 3.1% from $72 million as of June 30, 2012. The company had $14.5 million in short-term loans as of September 30, 2012. Net accounts receivables were $67.7 million as of September 30, 2012 as compared to $62 million as of June 30, 2012, the 9.2% increase was primarily due to the increase at warehouse selling and credit [terms] for Gufeng’s fertilizer products.

For the first quarter of fiscal year 2013 cash flow provided by operating activities were $6.4 million. For the first quarter of fiscal year 2013 the capital expenditure was approximately $4.6 million.

As of September 30, 2012 we had a total of 446 different fertilizer products of which 179 was developed and produced by Jinong and 317 by Gufeng, the company now has a total of 966 distributors of international [provinces], four autonomous regions and three essential governments in children there is a package in China. Jinong and Gufeng had 779 and 187 distributors respectively. We expect to deliver continued growth sales as a result of our broader product line, high quality brand’s strong and expensive distributor networks and well designed marketing programs.

We are well positioned to introduce high margins products to the market range, so they penetrate our historical and newly credit markets and on our strength as one of the leading leather producers in China. For the second quarter of fiscal year 2013, management in facts net sales of $47.2 million through [$13.8 million].

Net income of $8 million through [$9 million] and EPS of $0.32 to $0.35 this on $27.5 million fully diluted weighted average shares outstanding. For the fiscal year 2013, management expects net sales of $238 million to $235.9 million, net income of $46.2 million to $49.2 million and an EPS of $1.68 to $1.79 based on $27.2 million weighted average shares.

This concludes our prepared remarks for the first quarter of fiscal year 2013. I would now like to turn the call to Mr. Ken Ren, Chief Financial Officer for Q&A session.

Ren Ken

Thank you, Jane. Operator we may begin the Q&A session.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from the line of (inaudible). Please proceed with your question.

Unidentified Analyst

My first question is on the gross margin, and I noticed that the gross margin in this quarter dropped and maybe you can comment on that.

Ren Ken

Okay. For the past quarter we experienced a decrease in gross margin as observed from our filings, and this drop is merely due to decrease of gross margins in different subsidiaries. For instance for Gufeng sales for the past quarter, we've earned a revenue of RMB69 million, and in this respect on average we have gross margin of 16% and for the compound fertilizers containing humic acid elements, we sold for RMB26 million and the total volume is around 8000 metric tons, and for these types of product we earned a gross margin of 17% and for the other compound fertilizers which does not contain any humic acid elements we have earned revenues for RMB43 million and the sales volume is approximately 40,000 metric tons and in that respect we have gross margin at 15.4%. So that's essentially a pretty good driver for slowdown of our gross margin under Jinong [slide].

We have gross margin average for 55% and among these Jinong products for liquid products we have gross margin of 55% with revenue of RMB138 million and then for powder fertilizer products, we have gross margin of 58%, RMB25 million and then for the Jinong compound fertilizer products, the margin is 33%. They all contain humic acid elements and the total revenue for these type of compost fertilizer products is RMB10.5 million. So that in total accounted for the Jinong revenue of RMB173 million and (inaudible) average raw material accounted for nearly 60% and for packaging approximately 36% and the rest contributed to labor cost and the manufacturing cost. Hope this helps?

Unidentified Analyst

Yeah, it helps. And the metrics (inaudible) I am just wondering how should I estimate the domestic sales contribution from Gufeng for this fiscal year?

Ren Ken

For this question I want to point out that when we calibrate our guidance you can notice that the first quarter’s performance is typically within a ballpark of the previous guidance we disclosed. That reflects a few factor; the generous slow down of the fertilizer market, particularly in the (inaudible) competitive compound fertilizers market and the absence of Gufeng’s export (inaudible), because due to the temporary suspension from the government and the prohibitively high taxes, and we believe that for the rest of the fiscal year we are positively optimistic that the export will pick up somewhat for the fourth quarter and for the domestic market.

For Gufeng (inaudible) sales will also peak after the fourth quarter. With regard to your questions, you specifically asked h how you are going to forecast the Gufeng’s performance for the rest of the year. So from our standpoint, we expect that Gufeng (inaudible) for the first [fiscal] quarter will in the ballpark around like RMB90 million to RMB100 million for both export and domestic for the last quarter and the revenue will approximately range from RMB120 to RMB140ish. So that reflects the revenue growth year-over-year of 20% range on the total year basis.

Operator

Thank you. (Operator Instructions) There are no further questions at this time. I would now like to turn the call back to management for closing comments.

Ren Ken

Thank you, everyone for participating in our conference. This concludes today's conference call. See you in next quarter, bye-bye.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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