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China Green Agriculture, Inc. (NYSE:CGA)

F2Q10 (Qtr End 12/31/09) Earnings Call Transcript

February 8, 2009 9:00 am ET

Executives

Ted Haberfield – IR, HC International

Tao Li – Chairman, President and CEO

Ying Yang – CFO

Analysts

Joe Giamike – Rodman & Renshaw

Tim Tiberio – Chardan Capital Markets

Howard Zhou – Roth Capital Partners

Antonio Garate [ph]

Operator

Greetings and welcome to the China Green Agriculture Incorporated second quarter fiscal year 2010 earnings call. (Operator instructions) It is now my pleasure to introduce your host, Mr. Ted Haberfield of HC International. Please go ahead.

Ted Haberfield

Thank you, and welcome everyone to China Green Agriculture's quarterly conference call, which will cover the second quarter of fiscal year 2010 financial and operating results. The earnings press release accompanying this conference call went to the wire earlier this morning before the market opened.

On our call today is Mr. Tao Li, Chairman, President and Chief Executive Officer; Ms. Ying Yang, the company’s Chief Financial Officer; and Mr. Johnny Yang, Secretary to the Board.

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 the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will be correct. In addition, any projections as to the company’s future performance represent management’s estimates as of today, February 8, 2010. China Green Agriculture assumes no obligation to update these projections in the future as market conditions change.

At this time, I would like to turn the call over to Ms. Ying Yang, the company’s chief financial officer, who will be providing the financial results from the most recent quarter, in addition to an update on the company’s business and outlook. Ms. Yang, the floor is now yours.

Ying Yang

Thanks Ted, and thank you everyone for joining us today. We are very pleased that our financial results have exceeded both our revenue and net income guidance for the second quarter of fiscal year 2010. We are also pleased to report an increase in our earnings per share of 43% year-over-year despite an increase in our weighted shares outstanding of 27%.

We continue to have market leading margins, which increased due to the value-added tax exemption the company received during the first quarter of fiscal 2010, along with the increasing sales of our new high-end fertilizer products. Rising demand for our green fertilizer products, coupled with our growing nationwide distribution network, should allow us to experience robust revenue and earnings growth for the reminder of the year, as we view down [ph] being one of the leading organic compound fertilizer producers in China.

Net sales for the second quarter of fiscal year 2010 totaled $11.2 million, up 60% from $7 million in the same quarter of fiscal year 2009. Jinong, which is the division that sells humic acid based compound fertilizers accounted for 81.5% of our total net sales. The top three selling products accounted for 21% of the fertilizer sales.

For the second quarter of fiscal year 2010, Jinong’s net sales increased $4.2 million, or 84%, to $9.1 million from $4.9 million for the same quarter a year ago. This increase was primarily due to the increase in production capacity and the sales from more high-end products, including our new highly concentrated powder fertilizer products. Sales volume increased 771 tons or 25% to 3,836 tons in the second quarter versus 3,065 tons a year ago.

Sales from our Jintai division, namely top-grade fruits, vegetables, flowers and colored seedlings decreased 0.3% from a year ago, and accounted for $2.1 million, or 18.5% of our total net sales.

Gross profit for the second quarter totaled $6.8 million, an increase of 65% from $4.1 million in the same quarter of fiscal year 2009. Gross margin was 61% for the second quarter up from 59% a year ago.

Operating income for the second quarter was $5.4 million, up 73% from $3.1 million in the second quarter of fiscal year 2009. Operating margin was 49%, compared to 45% in the same quarter a year ago.

Net income for the second quarter was $4.7 million, or $0.20 per basic and fully diluted share, up 78% compared with net income of $2.7 million or $0.14 per basic and fully diluted share during the same period in fiscal year 2009. In the second quarter of fiscal year 2010, the weighted average shares outstanding were 23.3 million shares, which include shares issued in our public offerings in November and December 2009 versus 18.4 million shares in the same quarter of fiscal year 2009.

For the six months ending December 31, 2009, net sales increased 41% to $22.4 million, up from $15.9 million for the six months ended December 31, 2008. For the first six months in fiscal year 2010, Jinong net sales, which accounted for 86% of total net sales, increased $6.7 million, or 53%, from $12.6 million a year ago. This increase was primarily due to production capacity increases, and the sales of more high-end products, including recently introduced powder fertilizer products. Sales volume increased 9.6% to 8,151 tons from 7,435 tons a year ago. This increase was attributable to production capacity upgrades, the introduction of 7 new products and the new addition of 10 new distributors.

Jintai's net sales decreased 150,000 or 4.5% to $3.2 million for the six months ended December 31, 2009, from $3.3 million for the same period in 2008.

Gross profit increased 52% to $13.7 million in the first six months of fiscal year 2010, versus $9 million in the same period a year ago. Gross margin was 61% and 57% for the six months ended December 31, 2009 and 2008, respectively.

Operating income for first six months of fiscal year 2010 rose 56% to $11.6 million compared to $7.4 million for the first six months of fiscal year 2009. Net income was $10 million, or $0.44 per basic and fully diluted share, based on 22.5 million weighted average shares. Net income in the second quarter of fiscal year 2009 was $6.2 million, or $0.33 per basic and fully diluted share, based on 18.4 million weighted average shares.

Moving on to the balance sheet, as of December 31, 2009, the company had $61.2 million in cash and cash equivalents, an increase of 43.4 million from June 30, 2009, primarily due to the net proceeds from the public offering. The company maintained short-term loans of $2.2 million and had no long-term debt as of December 31, 2009.

Net accounts receivable stood at $11 million as of December 31st ‘09, with trailing 12 months days sales outstanding of 67, compared to DSO of 86 three months ago.

For the first six months ended December 31st ‘09, the company had $6 million in cash flows from operating activities, while capital expenditures amounted to approximately $13.1 million, primarily due to the purchase of land use rights for the expansion of the new greenhouse facilities compared to $1.9 million a year ago.

During the first six months of fiscal year 2010, we released 7 new fertilizer products, which included four highly concentrated powder fertilizer products. These seven new products accounted for approximately 14.7% of fertilizer revenues in the first six months of fiscal year 2010. We added 10 new distributors in the first six months, which increases our regional distributor base to 540 individual distributors, and further strengthens our distribution footprint. We plan to release an additional 13 to 17 new products, and have approximately 580 distributors by the end of this fiscal year.

Supported by our 55,000 metric ton production capacity, we expect to increase sales volumes by at least 40% per year over the next three years due to anticipated strong sales of our organic compound fertilizer products. We will continue to focus our marketing efforts on promoting the quality image of Jinong brand through both distributors and retail stores, offering the Jinong organic compound fertilizer product directly to farmers, which is expected to drive revenue growth as well as margin expansion in the upcoming years.

We will continue to introduce new products to the market quickly, which includes both liquid and powder fertilizer products. We remain on schedule in meeting our construction goals, while our additional 12 new greenhouses, which will further increase the company's ability to develop higher margin fertilizer products, as well as humic acid based derivatives, such as humic acid based pesticides and herbicides.

Once again, the government's number one policy document for 2010 released on January 31st was on agriculture, which further promotes green food and organic agricultural products in the belief that increasing incentives from Chinese central government over environmental concerns will offer a catalyst for organic fertilizer demand growth in 2010 and beyond, especially when farmers recognize an increase in crop margins.

For the third fiscal quarter, the management expects revenues of 12.4 million to 13.4 million, net income of 5.1 million to 5.4 million and EPS of $0.21 to $0.22. The management now increased guidance for fiscal year 2010, and expects revenues between 48.9 million and 50.1 million, net income of 20.3 million to 20.9 million, and EPS of $0.87 to $0.89 based on 23.4 million weighted average shares. This guidance reflects the anticipated strong sales resulting from our increased production capacity, as well as extended margins on our high-end fertilizer products.

In addition, we would like to reiterate our continued efforts to increase shareholders value and our commitment to timely and transparent communication with the investor communities. We will be traveling to Denver next week to present at Wells Fargo Equity Forum on the 18th, and will be presenting in New York City at the Brean Murray Global Resources & Infrastructure Conference on March 5th. Then after Beijing at (inaudible) in early March, along with the ROTH Conference in Newport Beach in mid march.

I look forward to meeting with new and current investors at those events to discuss the company’s current business and future plans. With our annualized production facility utilization rate at 30%, we feel our recent initiatives will provide sustainable growth, while expanding both growth and operating margins and give us the capability to reach full utilization of our 55,000 metric ton capacity over the next few years.

We believe that the company will continue to benefit by offering high yielding organic compound fertilizers, which are vital to the China's agricultural production capability in the face of shrinking arable land, ongoing consumer food safety concerns and a growing population. By leveraging our new production facilities with the support from our existing and new greenhouse facilities, we feel China Green Agriculture is well positioned to gain further market share.

This concludes our prepared remarks for the second quarter of fiscal year 2010. I would now like to invite listeners to ask Mr. Li or myself any questions you may have regarding our operations and financial results.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Joe Giamike with Rodman & Renshaw. Please state your question.

Joe Giamike – Rodman & Renshaw

Good morning, and congratulations on the quarter.

Ying Yang

Good morning Joe. How are you?

Joe Giamike – Rodman & Renshaw

I am well. Thank you. So, you guys – you are very much in line with what you are [ph] looking for, so I don't have too many questions. The only thing I will ask is that sort of walk through how your utilization rates go from the 30% level that we are currently at, since the significant facility expansion, and how you get to your target rates over that three-year period of time. It is just sort of a matter of adding distributors and what the biggest impediment is on them, and just a better sense of how the time frames roll out.

Ying Yang

Yes, actually the current utilization is based on an annualized production volume. So, we expect by the March quarter and June quarter, which is our third and fourth fiscal quarters, we're going to ramp up more utilization rates, and by the end of this fiscal year, our utilization rate would be roughly between 38% to 40%. And then in the next following years, we continue to expect a further ramp up on the utilization rate.

So through the strategy, as we emphasized previously by adding new lease distributors, by introducing new products and promoting our own direct retail stores, the management are very confident that we can continue to deliver our promise and realize the full utilization rate by the end of the three years period.

Joe Giamike – Rodman & Renshaw

And the new distributors that you are adding, is it just expanding the geographic footprint?

Ying Yang

Yes.

Joe Giamike – Rodman & Renshaw

Okay. Well, congratulations again and thank you very much.

Ying Yang

Thank you Joe.

Operator

Our next question comes from Tim Tiberio with Chardan Capital Markets. Please state your question.

Tim Tiberio – Chardan Capital Markets

Good morning. I guess my question is, looks like during the past three quarters you have exceeded our targeted gross margin target of 55% or 60%. Is there increased confidence that that 55% to 60%, however, might prove conservative? Going forward how should we think of your gross margin target through fiscal 2010?

Ying Yang

Yes, this is something to be pretty consistent margin we're trying to maintain. Of course, as we mentioned, we have gained some positive impact from the value added tax exemption, and we also have change in our product structure by introducing some high-end products. However, on the other hand we also introduced some low-end products, for example the granular fertilizer products and the purpose of introducing those is trying to expand more markets. So, the mix impact of those is going to be offsetting each other, and we're quite confident that the gross margin will be maintained at this level.

Tim Tiberio – Chardan Capital Markets

So, we should still look at the 55% to 60% range as a more sustainable long-term target? Okay.

Ying Yang

Yes.

Tim Tiberio – Chardan Capital Markets

One other question I had was, I noticed that your DSOs have been reduced to 67 days. Is there any long-term target that you feel that you can reduce the DSOs down to or, I guess how should we look at that going forward?

Ying Yang

The DSO varies quarter by quarter. So, for example, last quarter we had about, almost 86 days. So, it is very seasonal. As we are growing our sales, we try not to lose up our credit terms and maintain a consistent DSO level.

Tim Tiberio – Chardan Capital Markets

Okay. And then just one last question, is there any further progress update on, I guess, your greenhouse capacity expansion?

Ying Yang

Yes. We have plenty of [ph] land use rights, and recently we started the ground construction. The area has been raised out, and we also have engaged an engineering company to design the whole construction site. So everything is moving according to our plans.

Tim Tiberio – Chardan Capital Markets

Okay, great. Well, congratulations on the quarter. Thank you.

Ying Yang

Thanks Tim.

Operator

Our next question comes from Howard Zhou with Roth Capital Partners. Please state your question.

Howard Zhou – Roth Capital Partners

Hi, good evening everyone. Congratulations on a great quarter.

Ying Yang

Thanks Howard.

Howard Zhou – Roth Capital Partners

My first housekeeping question is, Yang, could you please break down revenue, sales volume and the gross margin for your liquid fertilizer, as well as powder and the granular products?

Ying Yang

Certainly. So, as of the December quarter, we have introduced a total of 142 products now, 137 are still liquid-based fertilizer, which is the majority. We have four powder fertilizer products now, and one granular. The liquid-based fertilizer accounted for almost 80% of our revenues, and then powder fertilizer accounted for roughly about 17%, the granular is about 3%.

Howard Zhou – Roth Capital Partners

What about sales volume and gross margin for these three?

Ying Yang

In terms of the sales volume, 70% comes from liquid-based, 12% comes from powder-based, and 17% comes from granular.

Howard Zhou – Roth Capital Partners

What about gross margin?

Ying Yang

The gross margin is pretty consistent, as I mentioned last quarter, is we roughly have about 55% for the liquid-based. We tried to maintain the powder fertilizer at 60% to 65% and for the granular it is roughly about 30% to 35%.

Howard Zhou – Roth Capital Partners

I'm sorry. What is the gross margin on the liquid fertilizer?

Ying Yang

50% to 55%.

Howard Zhou – Roth Capital Partners

50 to 55. Okay. This seems a level lower compared to the last quarter. Last quarter I saw the liquid fertilizer you have –

Ying Yang

55% to 60%.

Howard Zhou – Roth Capital Partners

Last quarter I think you had 62% for the liquid fertilizer.

Ying Yang

I think you're talking about overall, right.

Howard Zhou – Roth Capital Partners

Okay, anyway.

Ying Yang

It would include the mix of powder fertilizer as well.

Howard Zhou – Roth Capital Partners

Okay, and then just quickly on the gross margin, the gross margin was 61% for the quarter, and we actually expect a bit of a higher gross margin because of the IT [ph] exemption the company received. So could you explain why that margin still remains flat on a quarter-to-quarter basis?

Ying Yang

Yes, because we have introduced the granular fertilizer, which have, you know, a downward impact. The – also keep in mind the new production facility has just you know, doesn't have the full utilization rate. So we have incurred a lot of successes allocated the overhead in our cost – total cost structure. So that has some impact in our gross margin as well.

Howard Zhou – Roth Capital Partners

Okay, and then I noticed the company granted some restricted stock options in the 2009 equity incentive plan. So what will be the estimated impact on G&A. Basically, I assume that there will be additional stock-based compensation expenses, right, for the remainder of the year.

Ying Yang

Yes, that's a very good question. Thanks for bringing that up, and give us an opportunity to explain that. The 2009 equity plan was approved on our annual shareholder meeting, and then we have actually had the compensation committee approve the actual equity allocations early January. We actually only allocate roughly 500,000 shares for this year, which includes some restricted shares as well as options for the directors, officers as well as other key management employees in the company. So the financial impact – and because it is amortized roughly between 2 to 3 years time horizon the total financial impact on an annual basis is roughly about 1.8 million.

Howard Zhou – Roth Capital Partners

I'm sorry.

Ying Yang

1.8 million.

Howard Zhou – Roth Capital Partners

Okay.

Ying Yang

Yes.

Howard Zhou – Roth Capital Partners

On an annual basis, right?

Ying Yang

On an annual basis.

Howard Zhou – Roth Capital Partners

Okay, great, and then just could you, may be, Mr. Li could provide some color on your cash flow rate you did in last November. What is the plan for the company to use the proceeds going forward?

Ying Yang

Okay.

Tao Li

(Foreign language).

Ying Yang

Okay, so as Mr. Li mentioned, everyone knows about our R&D expansion which would take about two years roughly. The Capex budget is around $38 million. So the maturity of the proceeds is going to be used on that R&D expansion. We also plan to use some of the proceeds as a working capital and on top of that because we currently have also positive cash flow from operations, some of the proceeds we are planning to use for potential acquisitions. The company has been actively looking for the right acquisition target.

Howard Zhou – Roth Capital Partners

Okay, great. Just my last question is in terms of your greenhouse expansion, when do you think the greenhouse will start some partial production. Just any update on the timing of that?

Ying Yang

Yes, as – probably the first stage of the greenhouse can be completed and start generating production revenue by the end of next year, which is our second fiscal quarter of 2011.

Howard Zhou – Roth Capital Partners

Okay, second quarter of 2011 fiscal year?

Ying Yang

Yes.

Howard Zhou – Roth Capital Partners

Okay, great. That's all my questions. Thank you very much.

Ying Yang

Thanks Howard.

Operator

Thank you. (Operator instructions) Your next question comes from Antonio Garate [ph]. Please state your question.

Antonio Garate

Yes, good morning.

Ying Yang

Good morning Antonio.

Antonio Garate

Good morning. I'm a very small private investor, and I'm curious about are there any plans in the foreseeable future for you too to start establish possibly a footprint here in the United States?

Ying Yang

I appreciate your question. Actually, we've been answering many times to other occasions, the company currently has tremendous demand and huge market in domestic in China. So, we have very small portion export to some neighboring Asian countries, but in terms of going to the US from the government perspective, we don't have any incentives, and also you know, the cost and benefits doesn't – the cost doesn’t justify for the potential benefits. So in the foreseeable future we don't have such a plan.

Antonio Garate

Okay, thank you.

Ying Yang

Sure.

Operator

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing remarks. Thank you.

Ying Yang

Thanks Leo. On behalf of the entire China Green Agriculture's management team, I would like to thank you for your interest and participation on this call. This now concludes China Green Agriculture's second quarter fiscal year 2010 conference call.

Operator

Thank you. You may disconnect your lines at this time. Thank you all for your participation.

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