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Agria Corporation (NYSE:GRO)

F2Q 2014 Results Earnings Conference Call

March 06, 2014 08:00 AM ET

Executives

Kean Seng U - Head of Corporate and Legal Affairs

Patrick Tsang - Chief Financial Officer

Analysts

Chris White - Greenstone Value Opportunity Fund

Operator

Good day everyone and welcome to the Agria Corp First Half of Fiscal 2014 Results Conference Call. Today’s call is being recorded. At this time, I will turn the conference over to Mr. Kean Seng U, Head of Corporate and Legal Affairs. Please begin.

Kean Seng U

Thank you. Good day everyone. We are pleased that you are joining for Agria Corporation’s first half 2014 earnings conference call. With me on the call today is our Chief Financial Officer, Patrick Tsang. For those listening on the webcast, the accompanying slides will appear automatically, but you will need to manually advance them as we prompt to you. For those dialing in, you can download the accompanying presentation from the Investor Relations sections of our website www.agriacorp.com.

Before our presentation, I would like to refer to the Safe Harbor statement which is shown on slide 3. The call will contain certain statements that address operating results, performance, events or developments that we expect or anticipate will occur in the future. Those forward-looking statements include among other things, statements relating to our business, strategies and plan of operations, our capital expenditure and funding plans, operations and business prospects and the regulatory environment.

The forward-looking statements are based on our current expectations and involve a number of risks, uncertainties and contingencies, many of which are beyond our control which may cause actual results, performance or achievements to differ materially from those we have anticipated. Should one or more of those risks or uncertainties materialized or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.

Another factors that could cause actual results to materially differ include, our plans and objectives for future operations and expansion or consolidation, interest rate and exchange rate changes, the effectiveness of our cost control measures, our liquidity and financial conditions, environmental laws and changes in political, economic, legal and social conditions in jurisdiction that we [offer]. These and other sectors affecting our operations are set forth in the company’s Form 20-F for the fiscal year ended June 30, 2013, Form 6-K for the six months ended December 31st and in our future filings with the SEC. These documents are referenced were filed with the SEC on October 18, 2013 and March 6, 2014 respectively.

Unless required by law, the company undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new informations, future events or otherwise. Following our prepared remarks, you will have the opportunity to ask questions.

I would like to turn the call over to Mr. Patrick Tsang, Chief Financial Officer of Agria Corporation. Patrick?

Patrick Tsang

Thank you Kean Seng. And thank you everyone for dialing in today's call. I will first explain our new segment reporting structure and then we will review the financial performance and operating highlights for the first half.

Turning to slide four, the new segment reporting structure with [such the fact that] Agria is evolving into an integrated global agricultural company. The new reporting structure better reflects how we think about all lines of business. It will also assist your understanding of future acquisitions or new business initiatives.

We believe this is the most shareholders friendly like to report our results and welcome your feedback. The new reporting format breaks out results by our major credit lines; first, seed and grain; second, crop protection, nutrients and merchandise; third, rural services.

The seed and grain segment develops, produces and markets seeds for numerous categories including forage, turf, maize, corn, cereal and vegetable seeds. The crop protection, nutrients and merchandise segments operates a chain of retail stores, supply farm input materials including chemicals, fertilizers and more. The rural services segment offers a variety of services critical to the agriculture economy. More detail on each segment is presented in the press release.

So let’s turn to our performance beginning on slide five. Please, keep in mind that all the comparisons I make after the year earlier period meaning the first half of fiscal year 2013, unless I mention otherwise. All figures are in renminbi unless otherwise noted. Overall, our first half performance was strong. Revenue grew 6%. But more importantly all three business segments showed strong improvements in profitability. Revenue was RMB3.2 billion while operating income was RMB94 million and net income attributable to shareholders was RMB11 million. In a year earlier period we had an operating loss and net loss attributable to shareholders of RMB319 million and RMB375 million respectively. Due to the non-cash impairment charges on land use rights and on current prepayments we’ve recorded at that time.

Slide six, reviews our seed and grain business segment which contributed significantly to growth. This unit generated revenue of RMB1.1 billion which was 33% of our consolidated revenue and operating income of RMB44 million. Revenue was up 5% and operating income up 24%. Grain sales was a highlight within this segment, advancing 21% due to a higher wheat and maize volume. Similar to the results in crop protection nutrients and merchandise segment, the favorable dairy industry situation grows sales, since the industry uses seeds products to feed dairy cows. Seed sales were up by 7% that were helped by continued strong volume in proprietary seeds and better pricing on our near high value Cleancrop Brassica wheat.

We turn next two our crop protection, nutrients and merchandise segment on slide 7 which also drove growth in the first half. This segment generated revenue of RMB1.5 billion, which is 47% of our consolidated revenue. And operating income of RMB115 million, revenue was up 10% and operating income up 16%.

The strong performance was a result of better trading conditions. Last [update] sales were particularly strong due to the dry condition last autumn, meaning less natural pasture feeding and higher dairy payouts. Beyond and joined good portion of trading conditions we also are taking concurrent actions to improve our market share.

Our store remodelling program is nearing completion and customers are reacting favorably to the changes. We are also accelerating the technical training of field staff, so they better understand and promote the products [carried in stores]. For instance, [where those] sales people are propelling notable sales gain in chemicals and seed. On the other hand, (inaudible) was also provided to our farmer customers to give them a better understanding of our products.

Finally, rural services on slide 8. This segment generated revenue of RMB643 million, which was 20% of our consolidated revenue and operating income of RMB33 million. Though the revenue was down slightly, the Group operated more profitably. That operating represented 106% growth. The biggest challenge for sales was livestock revenue which was down 43% as anticipated.

We mentioned previously that a large export contract was completed and we have yet to replace it. Nonetheless, the trading we did in livestock was profitable and recorded RMB 7 million of operating income. Other business units in rural services segment with strong revenue and operating income growth included irrigation and pumping as well as real estate. Irrigation and pumping unit made up acquisition during the period, namely Water Dynamics and Aquaspec.

Furthermore, the unit performed an unprecedented amount of repair work after the Canterbury, New Zealand windstorm in September last year. In general, the demand for new irrigation installations was strong. Real estate also stood out having recovered to an operating income of RMB9.6 million from breakeven last year.

Wool revenue was up 22% but operating income was down by nearly half. While export demand remains firm, we have to procure at high cost as a result of shortage after the destocking by Sheep farmers during the drought.

Now turning to slide 9, let’s look at rest of the income statement on a consolidated basis. Gross profit of RMB757 million which is 4% up compared to the same period last year. Our operating expenses declined modestly while operating income increased to RMB94 million as noted earlier. When we compare the operating loss of RMB319 million of prior period, keep in mind that it includes a one-off impairment loss on land use rights and non-current prepayments. Operating income of prior period excluding this impairment loss was RMB38 million.

Now please turn to the balance sheet review on slide 10. We strengthened our balance sheet significantly during the period. We ended the first half with RMB187 million in cash and cash equivalents and reduced our total debt by 19%.

Finally, let me quickly offer a U.S. dollar translation of our key figures. We do this for the convenience of our investors to better understand the [stuff] of our operations. So, keep in mind that our present reporting currency is renminbi and our overall operations also have exposures in New Zealand dollars, Australian dollars and South American currencies.

In the first half, we generated US$531 million in revenue and US$125 million in gross profit. We recorded an operating income of US$16 million and our net income for the first half was US$2 million. Our strengthened financial position reflects cash and cash equivalents of US$31 million as of December 31, 2013 and total bank debts reduced to US$140 million. This is the end of the presentation.

Kean Seng U

We’re ready to begin with the questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will hear first from Chris White, Greenstone Value Opportunity Fund.

Chris White - Greenstone Value Opportunity Fund

Hey guys, congratulations. I just want to -- so what percentage of revenues, I haven’t gone and looked at it, coming from New Zealand. Could you just give me a quick approximate on that please?

Patrick Tsang

Well, approximately 80% from the New Zealand.

Chris White - Greenstone Value Opportunity Fund

Okay, cool. And PGW just announced a dividend, I think it was 2 cents for the half, is that expected to be 4 cents annualized over the next year? And obviously PGW, they have a very long history until recently of providing a dividend, they’ve got 20 years, 30 years of providing dividend. Do you think this is sustainable going forward?

Patrick Tsang

Yes. We just announced, PGW has about 2 cents per share for the first half. Actually PGW dividend policy issued previously. And we will look at the earnings and as well as the cash flow before we make that final decision on the dividend after the annual results.

Chris White - Greenstone Value Opportunity Fund

Okay. Can you give me an idea of what do you think interest expense will look like over the course of the next year?

Kean Seng U

Can you repeat that question again please?

Chris White - Greenstone Value Opportunity Fund

Interest expense for the next 12 months; is it approximately RMB10 million to RMB12 million, is that what I should model?

Patrick Tsang

Yes, yes. Given the existing [year-end gap] I think more or less you can say that’s around that RMB12 million to RMB13 million.

Chris White - Greenstone Value Opportunity Fund

Okay. So you will continue to pay down debt at the existing rate than what you’ve done in the last year or two or debt repayments were slow?

Patrick Tsang

Yes. Depending the growth opportunities going forward -- well, in addition to our normal CapEx at operation, we’re also looking for potential M&A targets from time-to-time. No doubt to grow our acquisition is part of our expansion strategy, so it will depend at how things are going forward.

Chris White - Greenstone Value Opportunity Fund

Yes. I mean I would encourage you to continue in the same [way] turning the operating results around, generate free cash flow and pay up dividends. And I think the businesses that you’re in today are very good businesses and that will grow organically. Obviously you’ve got a lot of expertise there in Asia and that can complement the New Zealand business overtime, but I think if you continue in the same way as what you’ve done in the last year, I think investors will be very happy.

Patrick Tsang

Yes. Thanks for comment, Chris.

Chris White - Greenstone Value Opportunity Fund

Thank you.

Kean Seng U

Yes. Thanks for your advice. Thank you.

Operator

(Operator Instructions). And we will hear again from Chris White. Go ahead please.

Chris White - Greenstone Value Opportunity Fund

Well, I’m not going to keep asking questions if there is no one else on the call.

Kean Seng U

You’re welcome.

Chris White - Greenstone Value Opportunity Fund

I figured that. I mean it’s early here in the U.S. perhaps maybe people in Central Time, Mountain Time and Pacific Time are still won’t be -- might be starting to think of them in the future. I just think for the second half outlook, Patrick I think I saw in there it was close to RMB100 million in operating income, how much of that is seasonality? Is that for the next half is where all the seasonality comes in, is that right or should I model it going forward or how much seasonality is there?

Patrick Tsang

Yes, you are right. There is seasonality around there. So it’s on the seeds and grains it’s most [viewed] as second half of the fiscal year. So we are just about to enter into sales season. Normally we have -- in terms of EBITDA [proper] unit for the seed and grain business about 30% in the first half and about 70% in the second half.

Chris White - Greenstone Value Opportunity Fund

Also I’d just -- you talked about the Canterbury and the irrigation, I noticed that they are spending another RMB350 million to RMB400 million down there in the irrigation scheme at Central Plains project. Is that something that you think is a contributor when those hectares come online for irrigation? Are you a big part of the irrigation business down there or is it just -- is it going to grow exponentially or how do you view that business?

Patrick Tsang

Yes. It’s a big thing for our irrigation and pumping business in probably medium-term. The [uplift] plan to build unit, the dams and all the irrigation systems are I think substantially in the Canterbury region. So in terms of area further now 150,000 hectares. And yes, I think that that will benefit a lot for the conversion of our [corporate bonds] and also that we will have many more farms that are being irrigated in probably in three years to five years. And given our market leading position, especially in the (inaudible), I think we will benefit from that.

Kean Sang U

I think it doesn’t give us opportunities of irrigation that we talked about. I think it puts everything in the context, currently I think we are holding about 70% of that market’s total. I think we’ll continue to produce that…

Chris White - Greenstone Value Opportunity Fund

Okay. That’s encouraging and obviously the seed and cropping is really encouraging. What about D&A next year, what do you expect depreciation and amortization to be for the next 12 months?

Patrick Tsang

I think it should be more or less the same as last year.

Chris White - Greenstone Value Opportunity Fund

All right. Okay. I’ve got no more and I appreciate it. Thank you, guys.

Kean Seng U

You’re welcome, Chris.

Operator

(Operator Instructions). And now with no additional questions, I will turn the call back over to your host for additional or closing remarks.

Kean Seng U

Thank you. This concludes our call. Thank you for your interest in Agria. We look forward to our next conference call perhaps with a better timing to view the latest next year when we will report the full year 2014 results. Good bye.

Operator

And with that ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation.

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