Yongye International's Management Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Yongye International Inc (YONG)
by: SA Transcripts

Yongye International, Inc. (NASDAQ:YONG)

Q3 2013 Earnings Call

November 12, 2013 8:30 am ET

Executives

John Capodanno - IR Advisor, FTI Consulting

Sam Yu - CFO

Kelly Wang - Finance Director

Analysts

Sachin Shah - Albert Fried

Operator

Good day, ladies and gentlemen, and welcome to the Yongye International's Third 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 would 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 third 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 in this call contains 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 plant 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 performance. Reconciliation of those measures to comparable GAAP information can be found in the third quarter 2013 earnings release that was distributed today. Any projections as to the company's future performance represent management's estimates as of today, November 12, 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 third quarter of 2013. Sam?

Sam Yu

Thank you, John. Thank you everyone for joining us today on our third quarter 2013 results conference call. On today's call, I will provide a top line review of our third quarter results, discuss the key business highlights of the quarter, and also provide some color around some of the recent developments with our company, including the definitive merger agreement that Yongye entered in September. After this, I will turn the call over to Kelly to provide a detailed review of the quarterly results.

We are pleased with our financial performance in the third quarter of 2013. Our revenue and gross profit both increased over 70% year-over-year. The significant year-over-year increase in revenue was primarily due to the collection of a past sales we made to certain distributors from whom we recognize revenue on cash collection instead of shipment.

Recall that since the fourth quarter of 2011 for those provincial-level distributors with a prolonged payment record, the company had recognized revenue upon the receipt of cash instead upon shipments. Yongye continues to provide these provincial-level distributors with six-month credit terms.

During the quarter, we also continued the expansion of our branded retailer network as the number of branded retailers increased from 35,409 to 35,506. As a result, we are reiterating our outlook for expansion of our branded retailer network to 36,000 by the end of 2013, which represents a 3% increase over the 2012 number of 35,058.

In 2013, China's macro-economic trend remains more challenging compared to prior years. While our product shipments were only up 3.5% for the quarter on a year-over-year basis, year-to-date shipments were up approximately 20% over last year. As a result, we believe that we can achieve our fully year guidance for shipments in the range of $650 million to $680 million, representing a growth of 20% to 25% over 2012.

We understand that the many shareholders may have grudges surrounding the go-private proposal. Please note that on September 23, 2013, the company entered into a definitive merger agreement with the buyer parties. Based on the unanimous recommendation of the special committee, Yongye's Board of Directors approved and adopted the merger agreement and have recommended that the company's shareholders vote to approve the transaction.

The company will schedule a special meeting of its shareholders for the purpose of a voting of the approval and adoption of the merger agreement. In connection with the special meeting the company we will mail a proxy statement to its shareholders and the proxy has been filed with SEC.

Beyond this update, we are not in position today to discuss details of the go-private transaction or to discuss the information in the proxy filed with the SEC. We will let all shareholders know as soon as the special meeting to consider a vote on the go-private proposal has been scheduled.

Now, I would like to provide an overview of our performance during the third quarter 2013. Revenue increased 72.1% to $223.2 million from $129.7 million in the third quarter of 2012. Among the revenue recognized in the quarter, $89 million was due to cash collection from certain distributors for sales made in prior quarters in 2012 and 2013. The company recognizes revenue for those distributors on a cash collection basis, rather than a shipment basis. In the third quarter of 2013, products shipments actually increased 3.5% over the same period last year.

Gross profit increased 76.1% year-over-year to $141.8 million. The increase was primarily due to the collection for past sales we made to certain distributors from whom we recognize revenue on a cash basis instead of a shipment basis.

Income from operations was $88.2 million compared to $22.8 million in the third quarter of 2012. The increase was primarily due to collection for past sales and a one-time impairment loss of goodwill of $10.7 million the company recorded in the third quarter of 2012. Net income attributable to Yongye increased 318.9% to $70.5 million from $16.8 million for the same period of 2012.

Diluted earnings per share for the quarter was $1.22 compared to $0.28 for the same period of 2012. The increase was primarily due to the collection for past sales and the one-time impairment loss of goodwill of $10.7 million the company recorded in the third quarter of 2012.

Adjusted net income attributable to Yongye, which excludes non-cash expenses related to the amortization of the acquired Hebei customer list, share-based compensation for management and independent directors, a change in the fair value of derivative liabilities, and goodwill impairment charge was $71.2 million or $1.23 per diluted share, compared to $29.7 million, or $0.51 per diluted share for the same period of last year. The increase was primarily due to collection for past sales we made to certain distributors from whom we recognize revenue on a cash basis instead of a shipment basis.

Operating cash inflow was $28.3 million for the nine months ended September 30, 2013, compared to an operating cash outflow of $52.3 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 third quarter of 2013. Kelly?

Kelly Wang

Thank you, Sam, and good morning everyone. Thanks for joining us today to discuss our third 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 $93.5 million, or 72.1%, to $223.2 million in the third quarter of 2013 from $129.7 million for the same period of 2012. The significant increase in revenue was primarily due to collection of past sales we made to certain distributors from whom we recognize revenue upon cash collection instead of shipment.

In the third quarter of 2013, $221.1 million, or 99.1% of total sales, was attributable to sales of liquid crop nutrient, and $2.1 million, or 0.9% of total sales, was attributable to sales of powdered animal nutrient. During the third quarter of 2013, the number of branded retailers increased from 35,409 to 35,506.

Gross profit was $141.8 million in the third quarter of 2013, compared to $80.5 million in the same period of 2012, representing an increase of 76.1%. Gross margin was 53.5% in the third quarter of 2013 compared to 52.1% for the same period of 2012. The increase in gross margin was mainly due to the scale effect of increased sales as compared to the same period of 2012.

Selling expenses increased by $5.4 million, or 14.5%, to $42.4 million in the third quarter of 2013 from $37 million for the same period of 2012. The increase in selling expenses was primarily due to an increase in advertising and promotion expenses and expenditure on seminars for distributors of $4.6 million.

General and administrative expenses increased slightly by $0.9 million, or 19.4%, to $5.7 million in the third quarter of 2013 from $4.8 million for the same period of 2012.

Research and development expenses were $5.4 million in the third quarter of 2013, compared to $5.2 million for the same period of 2012. The R&D expenses mainly consisted of field test expenses for existing and new products on different crops and in various geographic markets.

Operating income was $88.2 million in the third quarter of 2013, compared to $22.8 million in the same period of 2012. Excluding non-cash expenses related to the amortization of the acquired Hebei customer list, share-based compensation for management and independent directors, third quarter of 2013 adjusted income from operation was $88.9 million, or 39.8% of sales. The increase in income from operation was mainly due to collection for past sales and a one-time impairment loss of goodwill of $10.7 million, the company recorded in the third quarter of 2012.

Net income attributable to Yongye was $70.5 million or $1.22 per diluted share in the third quarter of 2013, compared to net income of $15.8 million, or $0.28 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, a change in the fair value of derivative liabilities, and goodwill impairment charge, adjusted net income attributable to Yongye for the third quarter of 2013 was $71.2 million, or $1.23 per diluted share, compared to adjusted net income of $29.7 million, or $0.51 per diluted share in the same period of 2012. The increase in adjusted net income was primarily due to collection for past sales we made to certain distributors from whom we recognize revenue upon cash collection instead of shipment.

Revenues for the nine months ended September 30, 2013 increased 53.3% to $569.8 million[ph] from $371.7 million for the comparable period in 2012, while gross profit was $352.2 million, compared to $224 million in the first nine months of 2012. Gross margin was 51.8% for the nine months ended September 30, 2013, as compared to 50.3% for the same period of 2012.

Operating income in the first nine months of 2013 was $198.5 million, compared to $98.2 million in the same period of 2012. Net income attributable to Yongye for the first nine months of 2013 was $156.3 million, compared to $74.3 million in the prior year period.

In the first nine months of 2013, net income per diluted share was $2.70, as compared to $1.31 diluted earnings per share for the same period of 2012.

The top line and the bottom line increase in the first nine months was mainly due to collection of past sales and a one-time impairment loss of goodwill of $10.7 million the company recorded in the third quarter of 2012.

The company's product shipments increased 19.8% during the same time period.

Turning to our balance sheet, as of September 30, 2013, the company had $101.1 million in cash and restricted cash, compared to $44.6 million as of December 31, 2012. Working capital was $567 million, compared to $383.3 million at the end of 2012.

The company had $83 million in short-term bank loans and $18 million in current and non-current long-term loans and payables, and $2.8 million in current and non-current capital lease obligations as of September 30, 2013.

Stockholders' equity totaled $612.2 million as of September 30, 2013, compared to $436.3 million at the end of 2012.

Cash provided by operating activities was $28.3 million for the nine months ended September 30, 2013, compared to cash used in operating activities of $52.3 million for the nine months ended September 30, 2012. The change was primarily driven by collection of accounts receivable, as well as the reduction of inventory. Other factors include an increase of $86.7 million in earnings.

Accounts receivable increased by $96.7 million or 33% as of September 30, 2013, compared to $293.6 million as of December 31, 2012. The increase in accounts receivable was consistent with our sales occurred in the second and third quarter due to the seasonality of our business.

As of September 30, 2013, the amount of gross accounts receivable outstanding was $399.6 million. Of the $399.6 million gross accounts receivable as of September 30, 2013, $9.8 million or 2.4% of our total gross account receivable were past our six month credit term. This provided allowance for doubtful accounts in the amount of $9.2 million, taking into account current market condition, the customers' financial condition, the accounts receivable ageing, and the customers' repayment patterns.

We anticipate seeing an increase in the amount of overdue receivables in the fourth quarter as we have seen in the past several years. We provide six month credit term and that the second quarter is our largest quarter for sales as it is the height of the peak farming season in China. As a result we may have significant amount of accounts receivable to collect in the fourth quarter. Yongye continues to take measures to increase collection efforts and closely monitor our distributors' financial status.

Turning on to our business outlook, as Sam mentioned earlier, Chinese economy is facing a more challenging environment compared to prior year. Well, our product shipments were up only 3.5% for the quarter on a year-over-year basis. Year-to-date shipments were up approximately 20% over the last year. As a result, the company continues to expect the total shipments 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. As a result, we have difficulty knowing what our revenue will be with specificity until cash collection is completed. This is why we continue to provide expectations on shipments as opposed to a revenue figure based on U.S. GAAP. This could be impacted by the revenue recognition issue mentioned before.

With that, I'd 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 it up to questions. We have just completed the peak season for our business. And as a result of the year-over-year shipment performance, we have seen through the end of October, we are reiterating our full year outlook of total shipments to be in the range of $650 million to $680 million.

Additionally, we are also reiterating our expectation that our branded retailer network will be expanded to 36,000 by the end of 2013.

Again to reiterate the optics I've provided around the go-private merger agreement, the company will schedule a special meeting of its shareholders for the purpose of a voting on the approval and adoption of the merger agreement. In connection with the special meeting the company will mail a proxy statement to its shareholders and the proxy has been filed with SEC.

Beyond this update, we are not in a position today to discuss details of the go-private transaction or to discuss the information in the proxy filed with the SEC. Any questions regarding this matter can be sent to us via email and we will forward to the special committee. We will let all shareholders know as soon I have the special meeting to consider the vote of go-private proposal has been scheduled.

Additionally, as we disclosed in the press release amended merger agreement, we continue to expect the transaction to close before the end of the first fiscal quarter of 2014.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take your first question from Sachin Shah with Albert Fried. Please go ahead.

Sachin Shah - Albert Fried

Just had a question on an update, just to confirm no regulatory approvals are needed for the deal and is there any kind of estimation for the actual shareholder role and ultimate close?

Sam Yu

The company has filed a preliminary proxy statement with the SEC. We believe SEC is reviewing the statement. We expect that the transaction will be closed by the end of the first quarter of 2014, as we just discussed.

Sachin Shah - Albert Fried

Okay. So the amendment was filed November 6, so we're still waiting for the shareholder vote. There is nothing else. Just as a clarification, aside from the effectiveness of the proxy and the shareholder vote that is required for the transaction, you don't need any regulatory approvals?

Sam Yu

I cannot answer a detailed question regarding the process on behalf of special committee. And -- but you can send an email to us and we will forward to special committee who can answer this question with more details after consulting with their legal counsel. Thank you.

Operator

(Operator Instructions) We will take your next question from John Rolfe [ph].

Unidentified Analyst

Thank you for taking my call. Congratulations on notifying quarter. The results clarify that the underlying growth has been steady, in fact it was largely discussed until last quarter because of accounting changes. My question has to do with the financial information presented (inaudible); it excluded $94 from the balance sheet for what was termed imminent construction of a new manufacturing facility. Although this has a major effect on valuation this project has not been presented in any detail to shareholders. The $94 million figure seems surprisingly large being about four times the original cost of all the company's total property, plant and equipment on the books. Please provide additional information about this project and in the light of the characterization of this as imminent state how much was expended in the third quarter and how much will be expended in the fourth quarter?

Sam Yu

Thank you, Mr. Rolfe for your question. As we just discussed, for this conference call we are not in a position to discuss details of go-private transaction or to state anything more than what is in the proxy filed with SEC. In terms of any questions regarding the content with proxy we welcome you to send us your question to the special committee or to us, which we will forward to the committee.

Unidentified Analyst

My question really has to do with cash utilization. It stated that $94 million of your cash is about to be expended on a manufacturing facility, can you comment on that?

Sam Yu

We -- you will see more details of our financials, cash position in the 10-Q we'll be filing very shortly after this call.

Operator

(Operator Instructions) Mr. Yu, there are no other questions at this time. I'll turn it back to you for closing remarks.

Sam Yu

Thank you everyone for joining this call. We appreciate the support of shareholders and thanks again for joining with us this morning. Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.

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