Yongye International's Management Discusses Q4 2013 Results - Earnings Call Transcript

Mar.17.14 | About: Yongye International (YONG)

Yongye International, Inc. (NASDAQ:YONG)

Q4 2013 Earnings Conference Call

March 17, 2014 8:30 AM ET

Executives

John Capodanno – IR

Sam Yu – CFO

Richard Wang – Senior Finance Manager

Analysts

Sachin Shah – Albert Fried

Heath Winters – ArbitrOption

Jared Cohen – J.M. Cohen & Company

Peter Siris - Hua Mei

Operator

Good day, ladies and gentlemen. Welcome to the Yongye International Fourth Quarter and Full Year 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 fourth quarter and full year 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 Mr. Richard Wang, Yongye’s Senior Finance Manager.

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 as 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’ll also mention adjusted financial measures during the discussion of performance. Reconciliations of those measures to comparable GAAP information can be found in the fourth quarter and full year 2013 earnings release that was distributed earlier today. Any projections as to the company’s future performance represent management’s estimates as of today, March 17, 2014. Yongye assumes no obligation to update these projections in the future as market conditions change.

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

Sam Yu

Thank you, John. Thank you everyone for joining us on the call today. As usual, we would like to spend some time today talking about our performance for the last quarter. Before that, I will begin with some comments on the recent developments with the Go-Private proposal.

As you would be aware, at the special meeting of shareholders held on March 5, 2014, the proposal to approve the merger agreement did not receive approval from shareholders over at least a majority of the issues and outstanding shares of the company other than the excluding shares.

The Merger Agreement was therefore not approved by the company’s stockholders. The Merger Agreement -- been terminated so we would like to thank everyone for their patience during this process.

Moving on, I would like to provide an overview of our performance even in the fourth quarter and the full year 2014. We are pleased with our overall performance in 2013. Our business growth was in line with expectations and we also achieved the positive cash flow from operations for the full year.

The highlight for the year is that we continue expansion of our brand of retailers and as of December 31, 2013 the number of independently owned branded retailers was 36,100 in China, which exceeded our previously issued target of 36,000 branded retailers by the end of 2013.

I’d like to provide some of the key highlights of our financial performance for the full year 2013. Revenue for the full year 2013 increased 49.4% to $661.9 million from $443 million in 2012 while shipments increased 22.1% to $662 million.

Gross profit increased 54.3% year-over-year to $404.9 million. The income from operations increased 83.7% to $214.8 million. Net income attributable to Yongye increased 82.3% to $170.8 million or $2.93 per diluted share compared to $93.7 million or $1.62 per diluted share in the same period of 2012.

Adjusted net income attributable to Yongye was $173.8 million or $2.99 per diluted share compared to $111.4 million or $1.94 per diluted share in the same period of 2012. Operating cash flow was $21 million in 2013 compared to operating cash outflow was $51.4 million in 2012.

Looking at the fourth quarter, this is a traditionally a slow one for us (inaudible) managing to our business with 70% to 80% of full year sales occurring during the second and the third quarters.

Revenue in the fourth quarter increased 29% to $92 million from $71.3 million in the same period of 2012. Product shipments actually increased 30.2% over the same period last year.

Gross profit increased 37.2% year-over-year to $52.7 million from $38.4 million in the fourth quarter of 2012.

Operating income was $16.3 million compared to $18.7 million in the fourth quarter of 2012. Net income attributable to Yongye was $14.6 million or $0.24 per diluted share compared to $19.4 million or $0.32 per diluted share in the same period of 2012.

Adjusted net income attributable to Yongye was $15.3 million or $0.25 per diluted share compared to $20.4 million or $0.34 per diluted share in the same period of 2012.

As end of 2013, total accounts receivable outstanding was $343.5 million of which $124.1 million was passed to the company’s six-month (inaudible).

As of March 12, 2014, approximately $260.2 million has been collected from the company’s distributors including $236.2 million of accounts receivable outstanding at December 31, 2013. $111.9 million of the past due accounts receivable at December 31, 2013 was subsequently collective.

Looking through the year ahead, the underlying fundamentals of our business remains strong. And we’re confident about Yongye’s prospect for long-term growth. The board and the management team will work closely together to explore all appropriate opportunities to maximize the value for all of our shareholders.

In particular we are focused on executing several specific initiatives as a part of our plan to further grow our business. First of all, we plan to diversify our product offering by launching a new water soluble humic acid fertilizers mainly during irrigation.

We expect to offer this new product in our existing distribution network, leveraging the strength of our channel and brand. This new product have lower margin compared to our existing products that will help us maintain the loyalty of our distributors and strengthen our market presence.

Second, we will take strategic initiative to streamline our multilayer distributor networks in several key markets. We sell our products in China through a distribution network mainly comprised of our venture distributors who purchased our products and sell them through a channel of local distributors with a trend in our sales point through either a retail store or large firm.

Currently our distributor network consists of 25 provincial-level distributors, 810 country-level distributors and 36,100 unit level branded retailers. During the past several years, our [provincial] distributors have grossed a good -- size and the bargaining power.

The prompt collections of accounts receivable has been increasingly challenging for us. Related to this, one of our strategic objectives for 2014 is to streamline distribution structure in several of our key markets so that we can better manage our distribution channel.

Third, we will also fully expand our manufacturing capacity for our products in order to meet the growing demand. Thus we will invest in the new facility to increase productivity and capacity for our products.

Our existing manufacturing capacity would be running short soon, adding new capacities is important for our long-term growth. This is also in line with the Chinese government (inaudible) industry. According to the 12th five-year national economic and associate path from 2011 to 2015 of China, increasing agriculture production capacity and developing a high yield, high quality and high efficiency agriculture at the focus of the Chinese government.

With all this said, we believe these [varied] initiatives will enable us to continue to diversify the business and drive growth in 2014 and beyond.

Now, I would like to turn over the call to Richard Wang, our Senior Finance Manager, to give you an overview of our financial results for the fourth quarter and the full year 2013.

Richard Wang

Thank you, Sam. And good morning everyone. Thanks for joining us today to discuss our fourth quarter and full year 2013 results. I will first discuss the numbers for the quarter and then discuss the full year results for 2013.

As I take you through the numbers, please note that (inaudible) in new U.S. dollar terms if and that is specifically mentioned.

Revenue increased by $20.7 million or 29% to $92 million in the fourth quarter of 2013 from $71.3 million from the same period over 2012. During the fourth quarter of 2013, the number of branded retailers increased from 35,506 to 36,100.

Gross profit was $52.7 million in fourth quarter of 2013 compared to $38.4 million in the fourth quarter of 2012, spending of 37.2%. Gross margin was 57.3% in the fourth quarter of 2013 compared to 53.9% from the same period over 2012.

The increase in gross margin was mainly due to less products with lower margin reserve during the fourth quarter of 2013. The company recorded non-cash expenses of $0.7 million related to the amortization of the acquired (inaudible) customer list as part of its cost of sales for the fourth quarter of 2013. Excluding the expenses related to the amortization we acquired (inaudible) customer list. Fourth quarter 2013 adjusted gross profit was $53.4 million, or 58.2% of sales.

Selling expenses increased by $11.9 million, or 83.2%, to $26.2 million in fourth quarter of 2013, from $14.3 million for the same period of 2012. The increase in selling expenses was primarily due to increased promotion expenses of about $21.8 million incurred during the fourth quarter of 2013.

G&A expenses increased by $3.1 million, or 106.9%, to $6 million in the fourth quarter of 2013, from $2.9 million for the same period of 2012. The increase in G&A expenses was mainly due to increased professional fee of about $1.9 million incurred during the fourth quarter of 2013.

R&D expenses were $4.3 million in the fourth quarter of 2013 compared to $2.5 million over the same period of 2012. The R&D expenses mainly consisted of field test expenses for new and existing products on various crops in different geographic markets.

Operating income was $16.3 million in the fourth quarter of 2013, compared to $18.7 million in the same period of 2012. Excluding non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired (inaudible) customer list, and goodwill impairment charge, fourth quarter 2013 adjusted operating income was $17 million, or 18.5% of sales.

Net income attributable to Yongye was $14.6 million or $0.24 per diluted share in the fourth quarter of 2013, compared to $19.4 million, or $0.32 per diluted share, in the same period of 2012. Excluding the impact of non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, a change in the fair value of derivative liabilities, and goodwill impairment charge.

Adjusted net income attributable to Yongye for the fourth quarter of 2013 was $15.3 million, or $0.25 per diluted share, compared to $20.4 million, or $0.34 per diluted share in the same period of 2012.

Full year 2013 financial results, revenue for the year, increased by $218.9 million or 49.4% to $661.9 million from $443 million in 2012. For the full year, $652.4 million, or 98.6% of sales, from liquid crop nutrient and $9.5 million or 1.4% of total sales, from the powder animal nutrient.

For the liquid crop nutrient, the regular crop nutrient contributed $559.9 million, or 85.8% of total liquid crop nutrient, while the two new products for crop seeds and roots contributed $92.5 million or 14.2% of total liquid crop nutrient sales. During 2013, the number of branded new retailers reached 36,100, compared to 35,058 as of December 31, 2012, an increase of 3%.

Gross profit for the full year was $404.9 million compared to $262.4 million in 2012, an increase of 54.3%. Gross margin was 61.2% in 2013, compared to 59.2% in 2012. The increase in gross margin was mainly due to the scale effect of increased sales and the Company’s cost reduction initiatives.

The company recorded non-cash expenses of $3 million related to amortization of the acquired Hebei customer list as part of its cost of sales for the full year 2013. Excluding the non-cash expenses related to the amortization of acquired Hebei customer list, full-year 2013 adjusted gross profit was $407.9 million or 61.6% of sales.

Selling expenses for the whole year increased by $44.9 million to $149 million. As a percentage of sales for the year-ended December 31, 2013, selling expenses remained the same level as that in 2012. The increase in selling expenses was primarily due to an increase in advertising and promotion expenses and distributors’ seminar expenditure of $45.6 million relating to marketing and promotional activities for existing and newly launched products in our market.

G&A expenses for the full year increased by $5 million or 35.5% to $19.1 million from $14.1 million in 2012. The increase of G&A expenses was mainly due to the equity based compensation expenses of $3.7 million that was recorded during 2012, while there was no award issued in 2013.

R&D expenses were $22.1 million for the full year compared to $16.6 million in 2012. The R&D expenses mainly consisted of field testing expenses for new and existing products on various crops and in different geographic markets.

Operating income was $214.8 million or 32.5% of sales for the full year compared to $116.9 million or 26.4% of sales in 2012. Full-year 2013 adjusted operating income was $217.7 million or 32.9% of sales.

Net income attributable to Yongye was $170.8 million or $2.93 per diluted share for the full year compared to a net income of $93.7 million or $1.62 per diluted share in 2012. Adjusted net income attributable to Yongye for the full year 2013 was $173.8 million or $2.99 per diluted share compared to $111.4 million or $1.94 per diluted share in the same period of 2012.

Turning to our balance sheet now. As of December 31, 2013, we had $123.8 million in cash and restricted cash, compared to $44.6 million as of December 31, 2012. Working capital was $594.6 million compared to $383.3 million at the end of 2012.

The company had a $115.6 million short-term bank loan and $9.4 million in long-term debt as of December 31, 2013. Stockholders’ equity totaled $632.9 million as of December 31, 2013, compared to $436.3 million at the end of 2012.

Cash flow provided by operating activities was [$21] (ph) million for the year-ended December 31, 2013, compared to cash flow used in operating activities of $51.4 million in the year-ended December 31, 2012. The year-over-year increase in cash flow from operating activities was mainly due to the increase of $81 million in net income.

Accounts receivable increased by $40.5 million from the end of 2012, which was mainly due to the company’s continued business growth and was consistent with sales occurred in the second and third quarter of 2013 due to the seasonality of the company’s business.

As you may be aware, 70% to 80% of full-year sales occurring during second and third quarters annually, we see growth from provincial level distributors increase significantly, the longest sales during peak season. It also provides our key distributors up to six months credit term.

At the end of 2013, the amount of accounts receivable outstanding was $343.5 million, of which $124.1 million was past the company’s six month’s credit period representing 36.2% of total gross accounts receivable balance as of December 31, 2013. As of March 12, 2014, about $260.2 million had been collected from the distributors, including $236.2 million of accounts receivable outstanding at December 31, 2013. $111.9 million of the past year accounts receivable at December 31, 2013, was subsequently collected.

The company continues to take measures to increase collection efforts and closely monitor of distributors’ financial status.

Turning to our business outlook. According to the company’s revenue recognition policy, certain distributors’ revenue is being recognized on a cash basis rather than a shipment basis. As a result, the company is not in a position to predict specifically what its revenue will be until cash collection is completed. As such, to provide further clarity for investors, Yongye will continue to provide expectations on shipments, a metric that is not impacted by the revenue recognition issue mentioned above.

We expect total shipments in 2014 to be in the range of $800 million to $850 million, representing a growth of 20.8% to 28.4% over 2013. We also expect that our branded retailer network will be expanded to 36,500 by the end of 2014, which represents a 1.1% increase over the 2013 year-end number of 36,100.

With that, I would like to turn the call back to Sam for final remarks.

Sam Yu

Thank you, Richard. Before concluding, I would like to reiterate a few points before I open it up to questions. As I mentioned earlier, Yongye’s business fundamentals remain strong, and we continue to demonstrate meaningful growth in both our branded retailer network and shipment of our products.

We also achieved positive cash flow from operations for the full year. We continue to see strong demand for Shengmingsu and two of our new products, and we remain focused on our efforts to collect outstanding accounts receivable.

As of March 12, 2014, we had collected a vast majority of the overdue accounts receivable at December 31, 2013. We are confident about Yongye’s prospects for long-term growth and the way we will focus on executing several specific initiatives as a part of our plan to further grow our business in 2014.

We plan to diversify our product offering to strengthen our leadership and the market presence, we will also further expand our manufacturing capacity for our products, and restructure our distribution networks.

We believe these initiatives will enable us to continue to diversify the business, drive growth, and maximize the value for our shareholders in 2014 and beyond.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Sir, your first question comes from Sachin Shah of Albert Fried. Please go ahead.

Sachin Shah – Albert Fried

Hi, good morning. So, in the release it says the deal has not been completed or terminated, can you maybe just clarify that point because the assumption was after the shareholder vote didn’t get approved a few weeks ago that the deal was terminated. So, can you just clarify that point and then in addition to that can you just maybe clarify some of the comments that were made in kind of a short-seller report about a week ago?

Sam Yu

Good morning and thank you for your questions. As you know, our special meeting of shareholders was held on March 5, 2014. The proposal to approve the Merger Agreement did not receive approval from holders of least majority of the issued outstanding shares of the company other than the excluding shares.

The Merger Agreement was therefore not approved by the company’s stockholders. At this moment, the Agreement has not yet been terminated. At this point, I do remind everybody that this shareholder meeting was (inaudible). I believe the special committee and its legal advisors are working to complete the process. At this point, we’re not in a position to further update regarding the transaction.

What I can say is that the Board and the Management team remain committed to maximizing value for our shareholders, and we thank everyone for their patience through this process.

Regarding your next question, you talked about a [short-seller] (ph), we haven’t received any copy of that report. So, unfortunately I’m not able to comment on that point.

Sachin Shah – Albert Fried

Okay, that’s fine. Just a follow-up on this, so, would you say it’s not yet been terminated, is the deal going -- expected to be terminated or it is still in a process of reviewing ways to maybe not terminate the deal?

Sam Yu

The deal did not receive enough votes in the shareholder meeting. At this point, we’re not able to provide further updates. Any questions regarding this transaction, please send an e-mail or call us, so we will forward to the special committee, and they are in a [position] (ph) to answer this question.

Sachin Shah – Albert Fried

Okay, thank you.

Sam Yu

Thank you.

Operator

Your next question comes from Xavier Robinson from [Public] (ph) Capital. Please go ahead.

Unidentified Analyst

Yes, good morning everyone. I don’t know if you look at the turnover or the capital of the company between the vote date and between the record date and the second book date where approximately 41.3 million shares exchange hands representing 81.5% of the capital, and 110% of the free float, so between those two dates, i.e. meaning that the [inaudible] have not been able to vote. So, as a result, there has been an outstanding and dramatic degree of absentees, approximately 50% of the free float have not been able to vote as a result.

Those shareholders were constituted approximately by 70% of Merger Arbitrage funds who were all willing to vote in favor of the deal, having said that – I was very sure that who were unable to vote, 68% were in favor of the deal. So it’s not like shareholders have spoken or voted the deal down and they were not in favor of the deal. It’s just the legal structure implemented by the majority or minority.

And a very 55 days between the vote date and the record date that was far too long because there has been a massive churn of shares exchanging hands between those two dates that made the deal and the votes – not only the deal but the vote failing. But my question is how come the special committee didn’t realize this and did not amend a record date or at least the vote structure, and is it something that which is currently being discussed?

Sam Yu

Thank you for the analysis. And as we said earlier, unfortunately we’re not in a position to provide any comments on the transaction in this conference call. You’re very welcome to send your question to the special committee. If you also send a request to our IR e-mail, we’ll make sure to forward it to the special committee.

Unidentified Analyst

All right. Any sense on –comments on the special committee, and I’m expecting an answer because this is – I guess, this is one of the very rare climbing of history where 50% of the shareholders in favor of the deal have not been involved to express their vote in favor of this transaction. And my second question, so I would like the special committee at least to come back to me with some answers, because I’ve addressed it to them, I would like to understand why is it been advised to amend a record date of the vote structure because everybody is in favor of the deal as in current terms.

And if the (inaudible) is not willing to come back for any particular reasons, what are the available options to you, I mean do you envisage a (inaudible) tender or special dividend?

Sam Yu

Unfortunately, we’re not in a position to comment on that direction right now. But I will definitely pass your comment and the suggestions to the special committee. And I’m sure they will get back to you. Thank you for your understanding.

Unidentified Analyst

Okay. Thank you very much.

Sam Yu

Thank you.

Richard Wang

Thank you.

Operator

(Operator Instructions). The next question comes from John Rolls, private investor. Please go ahead, sir.

Unidentified Participant

Hi, everything in this morning’s report regarding past results and future outlook is excellent, management should be complemented. The continuing concern of shareholders is that these fundamentals are not reflected in the price of the stock. The steps mentioned this morning aimed at maximizing shareholder value are all positives, but there are other ways to more directly impact share price, especially in a favorable situation Yongye finds itself in with respect to expectation and increasingly favorable cash position?

Yongye steps or stock buybacks, dividends, more aggressive marketing of the company to the investment committee and other steps. So, anything of this along these lines being considered or planned?

Sam Yu

Thank you for your question. As I said, the Board and management team remain committed to maximizing the value of our shareholders. And we think the first step is to focus on our operation, to deliver solid optimum results, for our shareholders. We shared some of our key objectives for 2014. And you mentioned several other things that we can do, we – regarding the cash position, you understand that we are in a very seasonal business – cash position at the end of the year were in - end of Q1 would normally be consumed by significant working capital needs in our peak season which falls in the second and third quarters.

And traditionally we’re not being able to give - issue dividends; we don’t think we’ll be able to issue dividends in the near future either, given the seasonal nature of our business, not to mention, we continue to see significant opportunities for its growth in China, in our industry. Regarding your [inaudible] just listed, we will do whatever is possible to improve our valuation and increase the value of shareholders.

Unidentified Participant

Thank you.

Richard Wang

Thank you.

Operator

The next question comes from Heath Winters from ArbitrOption. Please go ahead.

Heath Winters – ArbitrOption

Good morning, Sam, and Richard and congratulations on good execution in the operating plan and improving operating income as a percent of sales dramatically. I have two questions. The first is, how is Yongye insulated from accounts receivable never collateralized by copper or iron-ore, we’ve seen a lot of media coverage recently about the impact of declining prices of copper and iron-ore on companies that are domiciled in China?

My second question is on the subject of your participation in the capital markets. What steps is Yongye taking to mitigate the negative impact of the bulletin that was issued by the SEC in June 2011 on the risks of investing in companies that were initially listed in the U.S. through reverse mergers? Thank you.

Sam Yu

Thank you for the question. On the first question, we don’t think our business is too much related to commodity business like copper and other related areas. Agriculture industry in China is actually a virtually stable industry, also during the government policy directives, every year for the past 10 years, they always list agriculture as the top priority. So, we don’t think our performances were impacted by the short term volatility in commodity market.

And on the second question, we listed - we become listed in the United States through a reverse merger, and we upgraded to NASDAQ in 2009. And after the short [inaudible] in 2011 - 2012, we have tried many different things, for example, we have been working with big four auditor for five years, KP&G have been holding our books since 2009. We have a [[inaudible] investor as our key shareholders in 2011, and as you know Morgan Stanley [came] [ph] back to Asia a very reputable primary [exit] [ph] investor in Asia and invested $50 million in our company in 2011.

Also our Chairman, Mr. Wu Zishen, he bought back he bought $3 million worth of stock with his own money [inaudible] as well. And you have also seen the going private proposal from the buyer parties yesterday. So, we have been trying different initiatives to improve our valuation. But unfortunately that’s not at this moment is in our control, and overall [inaudible] is I think we are improving but there is no prediction how quickly our balance sheet can be improved.

Heath Winters – ArbitrOption

Thank you.

Operator

Next question comes from Jared Cohen from JM Cohen & Company. Please go ahead.

Jared Cohen – J.M. Cohen & Company

All my questions have been answered, thank you.

Operator

The next question comes from [Lance Elkins] [ph] from [BH Capital] [ph]. Please go ahead.

Unidentified Analyst

I have a couple of questions. One is, can you give the specific results of the elections or of this shareholder vote, we didn’t get those? Also given that you had – you’re claiming success that you’ve been able to collect a lot of the outstanding accounts receivable, what is the most recent cash level, not the quarter end cash level, but more recent cash level than that?

And also it appears from reading your cash flow statement that you had $26 million tax payable that you weren’t paying which is actually is the difference between being negative and positive. Can you explain, are you going to be paying that tax in the future, is - that deferred tax well into the future?

Sam Yu

On the first part of your question, I would [inaudible] see a few days ago on the detailed results for ‘14. And for your information, in the bulk there were 12,844,043 for votes, and 5,123,670 against votes and 770,236 abstained votes. At the same time, the other gentlemen just mentioned earlier, there was a significant amount of shares that were [in fact] [ph] voted in this shareholder meeting. So, according to the [renewal] [ph], the [back] [ph] parties needs to receive more than half of the – at least the majority of the issued outstanding shares of the company other than excluded shares.

So, in other words those shares not voted would be counted as no vote during, according to the rule, so, the DoG received a no vote from shareholders accordingly. And I’m sorry, what’s your second question?

Unidentified Analyst

What is the most recent cash balance?

Richard Wang

We don’t have the number right now. Normally we report on a quarterly basis and we – [and last we collected] [ph] above 1.6 billion in R&D up till March 12, 2014. But of course we would be using [out of] [ph] cash in this quarter to pay for raw material marketing expense, even product launches. And that’s why we don’t have the detailed result yet, but we will be sharing the number in our first quarter results.

Unidentified Analyst

Okay. And then the last question was, you had a sizable tax payable come up and which basically meant you would have been cash flow negative for the quarter, had you not had $26 million income tax payable. What’s the story behind that?

Sam Yu

We have [inaudible] income tax, we are supposed to pay the government but we [haven’t] [ph] paid yet. Those will be handled in the first quarter.

Unidentified Analyst

So without that you would have been cash flow negative?

Sam Yu

Well, if you put it that way, [inaudible] [$24] [ph] million.

Unidentified Analyst

Okay. My questions have been answered.

Operator

The next question comes from [Glen Cleveland] [ph] from GHC Capital, please go ahead.

Unidentified Analyst

Yes, good morning Sam. I was wondering if you could give us some more details in terms of how much you plan to add capacity in the current year and what your total capital spending is, and maybe any update on the issue around the mineral deposit that you have been trying to get control of?

Sam Yu

So, I didn’t catch the last part of your question, control of what.

Unidentified Analyst

The mine that you’ve been trying to get rights to just maybe an update there?

Sam Yu

Got it, yes. For the lignite coal mine status, we – as you know in the fourth quarter, in the first quarter inner Mongolia is still very cold and it is not possible to conduct any exploration work. So, we’ll continue that when weather gets a little warmer in the second quarter. If we cannot receive approval by the government about exploration date we would file with the government for a renewal at that time.

Unidentified Analyst

And when is the expiration?

Sam Yu

It’s August 2014.

Unidentified Analyst

Okay. And in terms of planned capital spending this year and planned capacity increase?

Sam Yu

Last year we sold over 60,000 tons of product; our current capacity is around 70,000 tons, as you know a growth rate– expect a growth rate for 2014 and beyond. And in addition to the new product we have been offering, there is an urgent need to build additional capacity. At this moment we don’t have too much details yet but we have a budget of approximately $100 million for a new factory. But this is still early stage number.

Unidentified Analyst

Could you say the number again, I couldn’t hear it?

Sam Yu

$100 million.

Unidentified Analyst

$100 million U.S. capital spending for this coming fiscal year?

Sam Yu

Either this year or early next year.

Unidentified Analyst

Okay. So you don’t have a estimate for total capital spending for the new fiscal year?

Sam Yu

It’s – we’re still trying to [define] [ph] at the time but we’re [past] [ph] $100 million for now.

Unidentified Analyst

Okay. And just to confirm, how did the company do versus its make good Morgan Stanley make good for the year that just ended?

Sam Yu

There are two make good targets with Morgan Stanley private investment, one is a lower threshold, we need to grow 20% every year so that Morgan Stanley is [inaudible] to pulling [inaudible] at 20% IRR. We beat that threshold this year and also last year, beat [inaudible] as well. There is another adjustment [carried] [ph] for their conversion price, which is [inaudible] at $8.8.

For that price point, we haven’t confirmed with Morgan Stanley yet since there are some adjustments for the net [interest] [ph] used in the formula. But based on our rough calculation, rough understanding if [inaudible] 2013 results and add 2012 and 2011 results, since [inaudible] basis, we’re looking at somewhere a little bit below the $8.8 but not too far from that.

Unidentified Analyst

Great, thank you Sam.

Sam Yu

Thank you.

Operator

The next question comes from Peter Siris, Hua Mei. Please go ahead.

Peter Siris - Hua Mei

Hi, Sam, how are you?

Sam Yu

Hi.

Peter Siris - Hua Mei

First question I have, I have a couple of questions. The first question I have is, I see that the inventories are much, much higher than they were last year. And I’m wondering if you would come on the high level on inventories is that because you expect the very strong opening season or some other reason you built inventories?

Sam Yu

Okay. Our inventory level is quite significant at the end of 2013 for several reasons. First, as you know that we are a very seasonal businesses and we have new capacity. So, every year end we have to [accumulate] [ph] the inventories so that that we can have the best product to sell peak seasons, in Q2 and Q3.

And another factor for 2013 that we are planning to launch a new product used during irrigation in 2014. The peak season of the new product is falls in the first quarter. Se we have been accumulating a lot of inventory for this new product.

The third reason is, given our current [inaudible] policy, [inaudible] which is recognized revenue upon cash collection, after we ship product to them, we still record those products in our [interest rate] [ph] since we haven’t recognized sales for this with our distributors. Those three factors are the major reasons we have for the [inaudible] inventory balance at year-end 2013.

Peter Siris - Hua Mei

Got it, thanks. I want to go back to a question that Glen was asking about coal mines. So, you’re still trying to get approval from the government for those, for them to be able to operate the mines, that’s correct?

Sam Yu

Correct.

Peter Siris - Hua Mei

And what is the slowdown in getting the approval and what’s the likelihood that you will eventually get approval?

Sam Yu

There are various issues involved in this coal mine project and as I explained earlier, first of all the working time available to us is quite limited in inner Mongolia, given the weather condition in Q2 and Q1. Second, there are different the – [inaudible] also different government organizations to get - we had to collect all the [inaudible] and stuff and sometimes can be quite time consuming.

At this moment we cannot predict the time or timing or the probability as of now, but we are committed to complete this project.

Peter Siris - Hua Mei

But if the project does, if you do get approval that would be a significant benefit to gross margin or reduction in cost of goods sold, is that correct?

Sam Yu

The major objective with the project is to ensure we have enough supply – we don’t have [inaudible] most key raw material for the finisher. And we’ll continue - we’re committed to executing the strategy.

Peter Siris - Hua Mei

But I think you’ll remember the time you brought the mine, you brought - that you felt that it could save you something like 7.5% on cost of goods sold, is that still a reasonable number?

Sam Yu

We actually never gave any projection on cost saving of the coal mine project. I’m pretty sure we didn’t give you that projection. But we remain committed to complete this project. And based on the [inaudible] reports from third-parties at that time and this coal mine had about 40 million cubic meters of lignite coal, it was a very attractive investment at that time.

Peter Siris - Hua Mei

Right, thanks.

Sam Yu

Thank you.

Operator

There are no further questions. I’d like to hand the call back over to Mr. Sam Yu. Please go ahead.

Sam Yu

Thank you for participating in this call. As we have said many times during this call, the Board and the management team will remain committed to maximizing the value of the shareholders. And we will do everything possible to make that happen. Thank you very much.

Operator

This does conclude our conference for today. Thank you for your participation. You may all now disconnect.

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Yongye International (YONG): Q4 EPS of $0.25. Revenue of $92M (+29% Y/Y).