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Yongye International, Inc. (NASDAQ:YONG)

Q2 2013 Earnings Conference Call

August 9, 2013 8:30 am ET

Executives

John Capodanno - MD, FTI Consulting

Sam Yu - CFO

Kelly Wang - Finance Director

Analysts

Peter Sirrus - Huamei

Operator

Good day, ladies and gentlemen. Welcome to the Yongye International's Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today's call, John Capodanno. Mr. Capodanno, please proceed.

John Capodanno

Thank you, operator. Good morning, ladies and gentlemen, and welcome to Yongye International's second quarter 2013 earnings conference call. I'm John Capodanno of FTI Consulting, Yongye's Investor Relations advisor. With us today are Mr. Sam Yu, Yongye's Chief Financial Officer; and Ms. Kelly Wang, Yongye's Finance Director.

Before we start, I would like to remind our listeners that management's prepared remarks on this call contain forward-looking statements which 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 the 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 plants and animal nutrient 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. Although the company believes that the expectations in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct.

On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in the second quarter 2013 earnings release that was distributed this morning. Any projections as to the company’s future performance represent management’s estimates as of today, August 9, 2013. Yongye assumes no obligation to update these projections in the future as market conditions change.

Having now stated those formalities, I will now turn the call over to Mr. Sam Yu for a review of the company’s developments in the second quarter of 2013.

Sam Yu

Thank you, John. Thank you everyone for joining us on our second quarter 2013 results conference call. Today's call, I would provide a top line review of our second quarter results, discuss the key business highlights of the quarter and also provide some color around some of the recent introduce we have put into place. After this, I will turn the call over to Kelly to provide a detailed review of the quarterly results.

We are extremely pleased with our stellar performance in the second quarter of 2013. In addition to posting, strong year-on-year revenue growth of nearly 70%, our profits more than doubled during the second quarter. The significant year-over-year increase in revenue was primarily due to the more effective channel management, continued retail network development and increase in promotional marketing programs and increased demand for the company’s liquid crop nutrient.

The second quarter is a traditionally our largest quarter for sales, as in the past, during the peak farming season in China. During the quarter, we saw very strong demand of Shengmingsu and our two new products, Zhongbaosheng and Qianggenbao. We are continued to be pleased with the performance of these products, which we successfully launched during the first quarter of 2012. These new products highlight our commitment to product diversification and our strong (inaudible) capabilities, which we believe will further solidify our marketing leading position.

During the quarter, we also continued the expansion of our branded retailer network and the number of the brand new retailers increased from 35,058 to 35,409. As a result of its growth, while we are reiterating our outlooks our branded retailer network will be expanding to 36,000 by the end of 2013, which represents a 3% increase over the 2012 numbers.

Additionally, as we highlighted on our first quarter earnings call, we have originally focused our efforts on the collection of our accounts receivable. We continue these efforts during the second quarter and they have continued to pay off. As you have seen from this morning’s press release that over the first six months of 2013, our accounts receivable balance decreased by 7.5% or $32 million compared to the accounts receivable balance at the end of 2012. The (inaudible) accounts receivable balance has decreased on a six month basis despite our extremely strong growth during the second quarter. It’s a testament to our cash collection efforts over the past few months.

Also as of June 30, 2013, we had collected all over due accounts receivable. Overall, we believe that the underlying fundamentals of our business remain strong, and going forward, we are confident that we can achieve our full year guidance for shipments and our targets for the expansion of our branded retailer network.

Before, I review our top line results for the second quarter, I’d like to briefly comment on the NASDAQ Trading issue that we dealt with over the course of the quarter. As the Company previously announced on June 17, 2013, Yongye's common stock resumed trading on the NASDAQ Stock Market on Monday, June 17, 2013. On behalf of the board and management, I would like to sincerely thank all of our shareholders for the patience and support during the recent month while we work hard to provide what’s needed to satisfy NASDAQ requirement and enable trading to resume.

Our management, pleased to be able to put this issue behind us and refocus on full attention on executing our strategy to further grow the business and to maximize value for our shareholders.

Now, I would like to provide an overview of our performance during the second quarter of 2013. Revenue increased 69.6% to $301.3 million from $177.6 million in the second quarter of 2012. Shipments of the Yongye’s agriculture nutrient products increased 50.8% to $328.8 million in the second quarter of 2013 from $218.1 million in the second quarter of 2012. Gross profit increased 74.6% year-over-year to $188.8 million. Income from operations increased 104.1% to $109.2 million. Net income attributable to Yongye increased 110.3% to $86.4 million from $41.1 million for the same period of 2012.

Diluted earnings per share for the quarter were $1.50 compared to $0.74 for the same period of 2012. Adjusted net income attributable to the Yongye which excludes the amortization of the acquired Hebei customer list, non-cash expenses related to share based compensation from management and independent directors and a change in the fair value dividends to liabilities were $87.2 million or $1.51 per diluted share compared to $43 million or $0.78 per diluted share for the same period of last year. Cash flow from operating activities was $188.8 million for six months ended June 30, 2013 compared to $8.1 million in the same period of 2012.

Now, I would like to turn over the call to Kelly Wang, our Finance Director to give you a more detailed overview of our financial results for the second quarter of 2013.

Kelly Wang

Thank you, Sam, and good morning everyone. Thanks for joining us today to discuss our second quarter 2013 results. I will first discuss the results and then provide guidance for the full year. As I take you through the numbers, please note that I will only speak in U.S. dollar terms unless specifically mentioned.

Sales increased by $123.7 million or 59.6% to $301.3 million in the second quarter of 2013 from $177.6 million for the same period of 2012. The significant increase in revenue was primarily due to more effective channel management, continued the retail network development and the promotional marketing program, the increased revenue showed a strong demand for our liquid crop nutrient in the second quarter.

During the second quarter $298 million or 98.9% of the total sales was liquid crop nutrient and the $330 million or 1.1% of the total sales were from the powder animal nutrient. For the liquid crop nutrient, the original crop nutrient product contributed $243.9 million or 82% of total liquid crop nutrient sales, while the two new products for crop seeds and the roots contributed $54.1 million or 18% of the total liquid crop nutrient sales.

During the second quarter of 2013, the number of branded retailer increased from 35,246 to 35,409. Gross profit was $188.8 million in the second quarter of 2013 compared to $108.1 million in the same period of 2012, an increase of 74.6%. Gross margin was 52.6% in the second quarter of 2013 compared to 50.9% for the same period of 2012. The increase of gross margin was mainly due to the scale effect of increased sales as compared to the same period of 2012.

Selling expenses increased by $26.4 million or 58.5% to $55 million in the second quarter of 2013 from $38.6 million for the same period of 2012. The increase of selling expense was primarily due to an increase in advertising and promotional expenses and distributors spending their expenditure of $27.2 million relating to marketing and promotional activities for our products in the market.

General and administrative expenses decreased by $5.4 million or 52.3% to 3$.3 million in the second quarter of 2013 from $8.27 million for the same period of 2012. The decrease of general and administrative expenses was mainly due to the margin of the equity compensation expense recorded in the second quarter of 2012.

Research and development expenses were $11.4 million in the second quarter of 2013 compared to $7.4 million for the same period of 2012. The R&D expenses mainly consisted of field test expense for existing and new products on different crops and in various geographic markets.

Operating income was $109.2 million in the second quarter of 2013 compared to $53.5 million in the same period of 2012. Excluding non-cash expenses related to the amortization of the acquired Hebei customer list and the share-based compensation for management and independent directors, second quarter 2013 adjusted income for operation was $109.9 million or 36.5% of sales. The decrease in income from operations was mainly due to the increase in sales and gross margin, as well as the significant decrease in G&A expenses.

Net income attributable to Yongye was $86.4 million or $1.50 per diluted share in the second quarter of 2013 compared to net income of $41.1 million or $0.74 per diluted share in the same period of 2012. Excluding the impact of non-cash expenses related to the amortization of the acquired Hebei customer list, share-based compensation for management and independent directors and a change in the fair value of derivative liabilities, adjusted net income attributable to Yongye for the second quarter of 2013 was $87.2 million or $1.51 per diluted share compared to adjusted net income of $43 million or $0.78 per diluted share in the same period of 2012.

Revenues for the six months ended June 30, 2013 increased 43.2% to $346.6 million from $242 million for the comparable period in 2012. Gross profit was $210.4 million compared to $143.5 million in the first of six months of 2012. Gross margin was 60.7% for the six months ended June 30, 2013 as compared to 59.3% for the same period of 2012.

Operating income in the first six months of 2014 was $110.3 million compared to $75.4 million in the first six months of 2012. Net income attributable to Yongye for the first six months of 2013 was $85.8 million compared to $57.5 million in the prior year period in the first six months 2013, net income per diluted share was $1.47 as compared to $1.2 diluted earnings per share for the same period of 2012.

Turning to our balance sheet, as of June 30, 2013, the company had $254.6 million in cash and restricted cash compared to $44.6 million as of December 31, 2012. Working capital was $486.5 million compared to $383.3 million at the end of 2012. The company had $75.2 million in short-term bank loan and $18.8 million in current and non-current long-term loans in the period and $2.8 million in current and non-current capital lease obligations as of June 30, 2013. Stockholders' equity totaled $534.1 million as of June 30, 2013 compared to $436.3 million at the end of 2012.

Cash flow provided by operating activities were $188 million and $8.1 million for the six months ended June 30, 2013 and 2012, respectively. The change was primarily driven by collection of accounts receivable as well as the reduction of inventory. Other factors include an increase of $29.9 million in earnings.

Accounts receivable decreased by $32 million or 7.5% as of June 30, 2013 compared to $296.6 million as of December 31, 2012. The decrease in accounts receivable was mainly due to the collection of accounts receivable during the first half year of 2013. We have taken measure to increase our collection efforts and to closely monitor our distributor’s financial status.

As of June 30, 2013, the amount of gross accounts receivable outstanding was $280.8 million. None of the accounts receivable were past the Company’s six-month credit term. Positive balance was renewed individually by collection. We determine that the (inaudible) of the allowance for doubtful accounts by considering the amount of historical losses adjusted to take into account current market condition and the customer’s financial condition the amount of receivables in this period and the past period. So, accounts receivable edging and the customers' repayment patterns.

Turning to our business outlook, as Sam mentioned earlier, the company continues to expect a total shipment in 2013 to be in the range of $650 million to $680 million, representing a growth of 20% to 25% over 2012. The Company also expects that its branded retailer network will be expanded to 36,000 by the end of 2013, which represents a 3% increase over the 2012 year-end number of 35,058.

As a reminder, according to our revised revenue recognition policy, certain distributors' revenue is still being recognized on a cash basis rather than a shipment basis. In addition, the company's distributors' payment cycle has been longer compared to prior years.

As a result, the company has difficulty knowing what its revenue will be the specificity and yield cash collection is completed. This is why we are now providing expectations on shipments as opposed to an official revenue figure which could be impacted by the revenue recognition issue mentioned before.

This said, I would like to turn the call back over to Sam for final remarks.

Sam Yu

Thank you, Kelly.

Before concluding, I would like to reiterate a few points before I open up to questions. Yongye's business fundamentals remain strong and we continue to demonstrate growth in both our branded retailer network and the shipment of our products. During the second quarter, we remained focused on collection efforts and as of the end of the second quarter, we had collected all over due accounts receivable. We will continue to take measures to increase collections and closely monitor our distributors' financial status.

We (inaudible) business and as a result of a strong year-over-year shipment growth, we have seen through the end of July. We are reiterating our full year outlook of total shipments to be in the range of $650 million to $680 million. Additionally, we reiterate our expectation that our branded retailer networks will be expanded to 36,000 by the end of 2013.

I would also like to address a 'go private' offer that Yongye received in October 2012. We understand that many shareholders may have questions surrounding this proposal. However, at this time, I have no further updates other than the fact that since August started to resume trading on NASDAQ, all buyer parties have reconfirmed with a special committee that they may remain interested in pursuing the proposed 'going private' transaction.

Beyond this update, we’re not in the position to comment at this time but did want to reiterate that special committee has been in discussion with the buyer parties regarding the proposed transaction and such discussions are continuing.

As a reminder, no decisions have been made by the special committee with respect to the company's response to the proposed "going private" transaction. There can be no assurance that any definitive offer will be made and any agreement will be executed for this or any other transaction will be approved or consummated.

With that, I would like to open this call up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of (John Ross) from Private Investor. Please go ahead.

Unidentified Analyst

Yes, actually I have two questions. So I’ll give my first question. First, this really relates to the previously announced intent to establish a co-resource that would provide raw material for the Company? What is the forecast timeline for bringing on stream that operation and what would the expected effect on percentage cost of sales resulting from this resource some full production achieved?

Sam Yu

Thanks for the question. The lignite gold mine project, it is still ongoing. We don't have the detailed exploration report at this moment. So, we don't have enough information to provide a forecast on the potential cost saving and those information will be available after we -- only after we actually using this call in our production. Our permit, exploration permit expires in 2014. At this moment, the work is still ongoing. We will report to our shareholders once there is -- we reach any key milestones.

Unidentified Analyst

Thank you.

Sam Yu

Thank you.

Operator

Your next question comes from the line of (Edward Stamford) from Private Investor. Please go ahead.

Unidentified Analyst

First, let me compliment you and all the leadership team for an excellent job of managing the transition in leadership perspective of our elections here in the United States, sometime this can cause some extra work. I think you’ve done an excellent job. My question is do you foresee an increase in your taxes in the near future due to policy changes or otherwise?

Sam Yu

In China, we are currently enjoying a reduce 15% income tax since we are qualified as a high tagged enterprise in China. We totally believe that status will continue although there will be -- need to be a renewed application approval with the government every three years, at this moment we believe we should be able to renew our similar status in the next renewal process.

Unidentified Analyst

Very good. Thank you.

Sam Yu

Thank you.

Operator

Your next question comes from the line of Peter Sirrus from Huamei. Please go ahead.

Peter Sirrus - Huamei

Hey Sam, how are you doing my friend?

Sam Yu

I’m doing good. Thank you, Peter. How are you?

Peter Sirrus - Huamei

I’m doing fine. I wanted to just make sure I understand the revenue and the earnings. You did $346 million in the first half and you’re just saying for the year, it’d be $650 million to $680 million. So, it’s a 300 plus million in the second half. So, the first part of the question is, of the tag $300 million to $330 million in the second half, what part of those sales would be under the cash revenue recognition and what part of those sales just generally would be under the sales revenue recognition, could of it, because you have a dual system here.

Sam Yu

Actually the guidance we gave is based on shipment. So, those are not related to cash collection issue.

Peter Sirrus - Huamei

Okay. Then I will ask the question in a different way. In the first half, what percentage or just generally, what percentage if your sales are, is the revenue based on cash collection and what percentage is based on shipments because I’m confused about the whole revenue recognition system right now?

Sam Yu

For the first half, our cash connection for the distributor is, if you compare the cash collection versus the shipments actually the cash. Cash collection is the higher --

Peter Sirrus - Huamei

No, no, I understand that. What I’m asking is, for every $100 sold, some of your customers are on cash, some of your revenue recognition is based on cash collection and some of your revenue recognition is based on shipment, is that correct?

Sam Yu

Correct.

Peter Sirrus - Huamei

Okay. What percentage in general rough number, what percentage of your revenue recognition is based on shipments and what percentage on the cash calculations?

Sam Yu

It’s hard to give that, for example, since it really depends on the collection status for those distributors at any specific timeframe. So, we don't have a good pattern at this moment to see to do share what percent it would be basic collection, which is based on distribution. If you look at, if you only look at distribution perspective for the first half a year, if you measure from shipment perspective, our shipment increased roughly 30%.

Peter Sirrus - Huamei

Right, okay. So, in terms of the profitability in the second half of the year, that’s going to be based on both the shipments and when you collect from the customers, so, the second half of the year, it should be very profitable, the third quarter should be profitable, the fourth quarter, it will depend on when you collect and if it’s not in the fourth quarter, then the profits will come in the first quarter. Is that a reasonable way of describing things?

Sam Yu

Yes, fourth quarter will be very important for us since a lot of our sales were made in the second quarter due to be collected by the fourth quarter.

Peter Sirrus - Huamei

Okay. So, got it. Okay. So, the sales in the second quarter, you’re giving a little bit extended sales, so if you collect all of those things in the fourth quarter, fourth quarter would be very big and if you don't then the first quarter, would be big?

Sam Yu

Assuming, we collect it in the first quarter next year, yes.

Peter Sirrus - Huamei

Yes, okay. So, I got it. Now I understand everything. Okay, great quarter. Thanks Sam.

Sam Yu

Thanks Peter.

Operator

There are no further questions at this time. Mr. Sam, you please continue.

Sam Yu

Thank you everyone for joining this call today. Yongye had a great second quarter for 2013 and the management team is very pleased with the result and we will continue to work very hard to make sure that our growth will be continued. Thank you very much.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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