Le Gaga Holdings (NASDAQ:GAGA)
F4Q 2013 Earnings Conference Call
September 17, 2013 08:00 am ET
Auke Cnossen - Chief Financial Officer
Henry Chik - IR, PRChina
Good evening, ladies and gentlemen. This is Hugh; I’m the Operator for this Conference Call. Welcome to Le Gaga Holdings’ Ltd. Earnings Conference Call for the announcement of its financial results for F4Q and Fiscal Year Ended June 30th, 2013. (Operator instructions.) As a reminder, this call is being recorded. A live webcast and replay of this conference call will be available on Le Gaga’s website at www.legaga.com.hk.
You can also download the results presentation from the company’s website. I’d like to now transfer the call to the Moderator of today’s teleconference, Mr. Henry Chik of PR China. Henry, please begin.
Henry Chik – PRChina
Thank you, Operator. Good evening, ladies and gentlemen. Thank you for participating in Le Gaga Holdings Ltd.’s earnings call for its F4Q and fiscal year ended June 30th, 2013. With me today is Mr. Auke Cnossen, Le Gaga’s CFO. This conference will be conducted in two sessions. In the first session Auke will give opening remarks and reveal the company’s results for the quarter along with an update on the business strategy and guidance. After that in the second session we will start the Q&A session.
Before we proceed I would like to remind you that the discussion today will contain forward-looking statements. Forward-looking statements include those regarding Le Gaga’s anticipated future operating results. These statements involve a number of inherent risks and uncertainties. As such, actual results may be materially different from the views expressed or anticipated results described today.
A number of potential risks and uncertainties are outlined in the company’s public filings with the US Securities and Exchange Commission. Le Gaga does not undertake any obligation to update any forward-looking statements except as required by applicable law.
On the call today we would also like to mention that non-IFRS financial measures will be used in the discussion of the company’s performance. Reconciliation of those measures to comparable IFRS information can be found in our earnings release. Now I would like to turn the call over to Auke Cnossen. Auke, you may start now.
Thank you, Henry. Good evening, everyone. This is Auke Cnossen. Thank you for joining us today for the earnings announcement for F4Q and fiscal year ended June 30th, 2013.
Our performance in F4Q and F2013 was affected by the overall slowdown of the Chinese economy and lower government spending, which resulted in significantly lower market prices during the winter months as compared to the previous year. The milder weather in south China further contributed to lower market prices. Although production volume and product quality were in line with our expectation the lower market prices resulted in lower revenue than initially expected.
Favorable weather allowed us to make progress on greenhouse construction as we added over 900 more greenhouses during the quarter. During F2013 we spent much of our R&D effort on soilless production systems. Following the completion of the solanaceous season in May we have started the conversion of part of our greenhouse area to soilless production.
The key reasons for shifting to the soilless production system are number one, the increasing difficulty in finding farmlands with unpolluted soil and a safe and reliable water supply in China; two, the increasing disease pressure in recent years due to ever more intensive farming methods around China; thirdly, the increasing difficulty in finding skilled farmworkers in China. The soilless system provides more control over the growing environment as well as the application of production inputs, such as fertilizer, water and pesticide; and helps to mitigate soil-borne disease and pollution issues. Furthermore, this system is less labor intensive compared to production in the soil.
Lastly, the central government has commenced a series of R&D activities on soilless production this year as it is increasingly focusing on the environmental impact of farming as well as food safety issues. Thus, we believe that this is the future development of the agricultural industry in China.
Now let me walk you through our financial results. First of all we should remind you that our presentation will focus on year-on-year comparisons unless otherwise specified. Revenue for F4Q increased by 22.6% to RMB 151.1 million from a year ago, while revenue for the fiscal year increased by 11.0% to RMB 576.3 million from a year ago. The increase in revenue was due to an increase in our land area, greenhouse area, and open field utilization.
Our selling prices in the PRC increased 6.8% year-on-year to RMB 3.76 per kilogram for the quarter. Although market prices were lower for the quarter as well as the fiscal year-ended June 30, 2013 as compared to the same periods last year, we achieved higher average selling prices for solanaceous, leafy, and cruciferous vegetables.
The higher average selling prices were a result of; one, a more favorable product mix; two, better product quality of products harvested during the period; three, more spending on product packaging; four, more transportation costs incurred and passed on to customers as fewer customers came to our farms to pick up the produce. This was partially offset by lower market prices.
Our revenue per MU decreased slightly as the upgraded product mix resulted in lower volume per MU. As of June 30, total arable land was 29,382 MU or 1,959 hectares, the same as March 31 and an increase of 3048 MU from a year ago. Total greenhouse area was 11,963 MU or 798 hectares, a 921 MU increase compared to three months ago.
During the period, we recorded an accounting loss of RMB 13 million. As a net impact of biological assets, fair value adjustment and non-cash share based compensation excluded, adjusted profits for the period would have been RMB 31.0 million. A negative net impact of RMB 43.6 million was recognized arising from biological assets fair value adjustment for the quarter compared to a negative net impact of RMB 39.0 million for the same quarter last year. The large negative net impact was due to the completion of the solanaceous production cycle on most of our farmland and thus a decrease in area planted with high-value solanaceous crops in our greenhouses at the end of June as compared to the end of March.
Adjusted EBITDA for the quarter was RMB 56.2 million representing an adjusted EBITDA margin of 37.2% compared to 45.5% last year. Adjusted EBITDA has excluded the net impact of biological assets fair value adjustment, non-cash share-based compensation, and impairment losses on property, plant, and equipment and prepayments. Basic and diluted loss per ADS was US$0.0481 for the quarter.
Now let’s take a look at our costs. Cost of inventory sold in the quarter increased by 18% to RMB 127.8 million. If the biological assets fair value adjustments were excluded, adjusted cost of inventory sold would have been RMB 65.9 million, up 43.3% from the same period last year. Adjusted cost of inventory sold as a percentage of revenue increased to 43.6% for the quarter, up from 37.3% for the same quarter last year.
Our cost of goods sold increased year-over-year primarily as a result of higher direct material costs, primarily fertilizer; higher labor costs as wage inflation outpaced the increase in selling prices; higher depreciation due to more greenhouse coverage; higher rental expenses as newly-leased land with higher rents came into production during the quarter; and higher overhead expenses.
Packing expenses for the quarter increased by 45% to RMB 12.9 million primarily due to an increase in packing material consumed as a result of the increased production volume, our effort to enhance our brand awareness, and better packaging use to enhance the selling price.
Land preparation costs for the quarter rose 22.7% to RMB 15.8 million, primarily due to an increase in greenhouse coverage, which increased the unit land preparation cost. Selling and distribution expenses for the quarter increased by 91.0% to RMB 12.4 million. This increase was due to; one, higher transportation costs incurred by the company as fewer customers picked up the produce at our farms; two, the increase in production volume; and three, increased fuel costs.
Administrative expenses for the quarter increased by 6.8% to RMB 12.3 million, primarily due to lower option expenses. Our operating cash flow for the quarter more than doubled to RMB 109.5 million primarily as a result of a decrease in trade receivable balances. As of June 30, 2013, we had US$49.8 million in cash on hand.
Looking ahead, due to the conversion of a substantial area of greenhouses to a soil-less production system, we expect our revenue per MU to drop slightly as a result of operational disruption in F2014. We estimate that our revenue for the fiscal year ending June 30, 2014, will be between RMB 585 million and RMB 625 million.
We encourage investors to look at our company on a long-term basis as our operating results in each quarter or each period are impacted by the different mix of products produced in each period. Consequently, in evaluating our overall performance, we pay most attention to metrics such as revenue per MU, adjusted profits, and cash flow.
With that, we conclude today’s briefing and I will now transfer the call back to Henry for the Q&A session.
Henry Chik – PRChina
Auke, before we start the Q&A session there’s a small clarification I wanted to make. When you said administrative expenses for the quarter you said “increased,” it should be “decreased,” right? Decreased by 6.8%?
Henry Chik – PRChina
Okay. That should be a decrease. This concludes the prepared remarks for today. We are happy to take your questions now. Hugh, we are ready for questions.
Thank you very much. (Operator instructions.) Our first question is from the line of [Vincent Zee at Cowell & Lee]. Please go ahead with your question, sir, your line is now open.
Hi, good morning. It’s Vincent from Cowell & Lee. I just want to get some update on the privatization plan which was announced in May.
Yes, good morning. On the privatization, the last announcement we have made is that an independent financial advisor has been selected. The independent financial advisor is currently evaluating the proposal, and we are awaiting their conclusion. Other than that there’s no further update or further announcement that has been made by the company since then.
Unidentified Analyst Okay. But is there any timeline or schedule?
There’s no particular timeline or schedule.
Unidentified Analyst Okay. But is there any [launch] update so that after the deadline that you will be automatically left?
There is not.
Unidentified Analyst Okay. Okay, thank you.
(Operator instructions.) As there seems to be no further questions, may I please pass the call back to yourself, Henry. Do you have any questions?
Henry Chik – PRChina
No. Let’s wait for a few more minutes to let people get in queue.
If there are no more questions I think we can terminate the call, Henry.
Henry Chik – PRChina
Okay. That concludes our call. If you have any additional questions, please feel free to contact Auke Cnossen at 852-3162-8585 or email him at email@example.com. Thank you all again for participation and have a nice day. Thank you, everyone.
This concludes the call. Thank you all very much for attending. You may now disconnect your line.
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