China Green Agriculture (CGA) Q3 2016 Results - Earnings Call Transcript

| About: China Green (CGA)

China Green Agriculture, Inc. (NYSE:CGA)

Q3 2016 Earnings Conference Call

May 13, 2016 7:30 AM ET

Executives

Fang Wang - CFO Assistant

Zhuoyu Li - President

Ken Ren - Chief Financial Officer

Analysts

Jared Cohen - JM Cohen & Co.

Operator

Good day, and welcome to the China Green Agriculture Third Quarter Fiscal Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Frank Wang. Please go ahead.

Fang Wang

Okay, thank you, operator. Thank you, everyone, and welcome, everyone, to join China Green Agriculture third quarter fiscal year 2016 earnings conference call. The earning release went to the wire pre-market today. Our call today is hosted by Mr. Zhuoyu Li, the company’s new President; Mr. Ken Ren, the company’s Chief Financial Officer, and me.

Now, I give my turn to our company’s new President, Zhuoyu Li. Mr. Li, please.

Zhuoyu Li

Thank you, Frank. I would like to remind our listeners that management’s prepared remarks contain forward-looking statements that are subject to risks and uncertainties, and the 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 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 prove to be correct. In addition, any projections as to the company’s future performance represent management’s estimates as of today, November 13, 2015. China Green Agriculture assumes no obligation to update these projections in the future as market conditions change.

And first of all I’m really glad to join the team. And I believe the company and I will grow together as we grow along the way. Now, I’m pleased to report the results for the third quarter of fiscal year 2016.

For the fiscal third quarter ended March 13, 2016, revenues was $78.6 million as compared to $79.5 million for the fiscal first quarter ended March 31, 2015. Net income for the first quarter was $8.3 million or $0.22 per share as compared $9.9 million or $0.29 per share. We are very pleased with our consistent performance in the third quarter fiscal year 2015 where we continue to build shareholder value and the long-term durability of our business model, sustained net profits and balance sheet discipline.

As we exited our recent concluded fiscal quarter with a close cooperation of business partners and government supporters. I believe the company will grow into a leading one in the agriculture industry. We look forward to start our new quarter that we aim to fulfill our strategy of developing the new business model. Finally, as we enter the new quarter, China Green Agriculture is well on its way to achieving the benchmarks of our 10-year plan.

I will now discuss the financial results in greater detail. Total net sales for the three months ended March 31, 2016 were $78.6 million, a decrease from - a decrease of $848,000 or 1.1% from $79.4 million for the three months ended March 31, 2015. This decrease was due to the decrease in Gufeng and Jinong’s net sales.

For the three months ended March 31, 2016 Jinong’s net sales decreased $1.68 million or 5.1% to $31.6 million from $33.28 million for the three months ended March 31, 2015. This decrease was mainly attributable to the decrease in Jinong’s sales volume during the three months ended March 31, 2016.

For the three months ended March 31, 2016 net sales of Gufeng were $43.76 million, a decrease of $1.26 million or 2.8% from $45.02 million for the three months ended March 31, 2015. This decrease was mainly attributable to a Gufeng’s lowering selling prices to answer the market demand during the three months ended March 31, 2016.

For the three months ended March 31, 2016 Yuxing’s net sales were $3.27 million, an increase of $2.09 million or 178.6% from $1.17 million during the three months ended March 31, 2015. The increase was mainly because of the increase in the market demand in using its top-grade flowers during the last three months.

Total cost of goods sold for the three months ended March 31, 2016 was $53.9 million, an increase of $2.6 million or $5.1 million [ph] from the $51.29 million for the first three months ended March 31, 2015. This increase was mainly due to higher raw material costs and packaging costs.

Cost of goods sold by Jinong for the three months ended March 31, 2016 was $13.35 million, a decrease of $270,000 or 2% from $13.62 million for the three months ended March 31, 2015. The decrease in the cost of goods was primarily caused by Jinong’s lower net sales.

Cost of goods sold by Gufeng for the three months ended March 31, 2016 was $36.81 million, an increase of $5.55 million or 17.8% from $36.81 million for the three months ended March 31, 2015. This increase was primarily attributable to an increase in the cost of raw materials.

For the three months ended March 31, 2016 cost of goods sold by Yuxing was $2.44 million, an increase of $1.58 million or 184.6% from $858,000 for the three months ended March 31, 2015. This increase was mainly due to the significant increase in Yuxing’s net sales.

Total gross profit for the three months ended March 31, 2016 decreased by $3.45 million or 12.3% to $2.44 million as compared to $28.19 million for the three months ended March 31, 2015.

Gross profit margin was 31.5% and 35.5% for the three months ended March 31, 2016 and 2015 respectively. Gross profit generated by Jinong decreased by $1.41 million or 7.2% to $18.25 million for the three month ended March 31, 2016 from $19.65 million for the three months ended March 31, 2015.

Gross profit margins from Jinong sales was approximately 57.7% and 59.1% for the three months ended March 31, 2016 and 2015 respectively. The decrease in gross profit margin was mainly due to the increase in product costs. For the three months ended March 31, 2016 gross profit generated by Gufeng was $5.65 million, a decrease of $2.55 million or 31.1% from $8.21 million for the three months ended March 31, 2015.

Gross profit margin from Gufeng sales was approximately 12.9% and 18.2% for the three months ended March 31, 2016 and 2015 respectively. The decrease in gross profit percentage was mainly due to the increased weight of lower margin product sales in Gufeng’s total sales answering to the market’s demand.

For the three months ended March 31, 2016, gross profit generated by Yuxing was 832,000, an increase of 515,000 or 162.6% from 317,000 for the three months ended March 31, 2015. The gross profit margin was approximately 25.4% and 27% for the three months ended March 31, 2016 and 2015 respectively.

The decrease in gross profit margin was mainly due to an increase in the cost of raw materials for the three months ended March 31, 2016, compared to the same period in 2015. Our selling expenses consisted primarily of salaries of sales personnel, advertising and promotion expenses, freight-out costs and related compensations.

Selling expenses were $3.44 million or 4.4% of net sales for the three months ended March 31, 2016. As compared to $2.05 million or 2.6% of the net sales for the three months ended March 31, 2015, an increase of $1.39 million or 69.5%. The selling expenses of Yuxingwa [ph] $47,000 or 1.4% of Yuxing’s net sales for the three months ended March 31, 2016, as compared to $11,000 or 1% of Yuxing’s net sales for the three months ended March 31, 2015.

The selling expenses of Gufeng were $186,000 or 0.4% of Gufeng net sales for the three months ended March 31, 2016, as compared to $435,000 or 1.0% of Gufeng’s net sales for the three months ended March 31, 2015. The selling expenses of Jinong for the three months ended March 31, 2016 was $3.2 million or 10.2% of Jinong’s net sales, as compared to the selling expenses of $1.6 million or 4.8% of Jinong’s net sales for the three months ended March 31, 2015.

The increase in Jinong’s selling expenses was due to Jinong’s expanded marketing efforts and increase in shipping costs. Our selling expenses amortization of our deferred assets was $8.78 million or 11.2% of net sales for the three months ended March 31, 2016, as compared to $10.6 million or 13.3% of the net sales for the three months ended March 31, 2015, a decrease of $1.8 million or 17.2%. This decrease was due to the fact that some of the deferred assets were fully amortized and therefore no amortization was reported on the fully amortized assets during the three months ended March 31, 2016.

General and administrative expenses consisted of, primarily of related salaries, rental expenses, business development, depreciation and travel expenses incurred by our general and administrative departments and legal and professional expenses, including expenses incurred and accrued for certain litigations.

General and administrative expenses were $2.2 million or 2.8% of net sales for the three months ended March 31, 2016, as compared to $2.6 million or 3.3% of the net sales for the three months ended March 31, 2015, a decrease of $401,000 or 15.4%. The decrease in general and administrative expenses was mainly due to the related expenses in the stock compensation awarded to the employees which amounted to $580,000 for the three months ended March 31, 2016, as compared to $1.08 million for the three months ended March 31, 2015.

Net income for the three months ended March 31, 2016 was $88.25 million, a decrease of $1.66 million or 16.8%, compared to $9.9 million for the three months ended March 31, 2015. The decrease was attributable to the increased selling expenses and lower net sales in quarter ended March 31, 2016. Net income as a percentage of total net sales was approximately 10.5% and 12.5% for the three months ended March 31, 2016 and 2015 respectively.

The first nine months of fiscal year 2016 results of operations.

Total net sales for the nine months ended March 31, 2016 were $189.7 million, an increase of $4.9 million or 2.7% from $184.8 million for the nine months ended March 31, 2015. This increase was largely due to the increase in Gufeng’s and Yuxing’s net sales.

For the nine months ended March 31, 2016, Jinong’s net sales decreased by $1.33 million or 1.3% to $97.6 million from $98.9 million for the nine months ended March 31, 2015. This decrease was mainly attributable to the decrease in Jinong’s sales volume during the nine months ended March 31, 2016.

For the nine months ended March 31, 2016 net sales at Gufeng were $85.5 million, an increase of $2.78 million or 3.4% from $82.7 million for the nine months ended March 31, 2015. This increase was mainly due to Gufeng’s expanded marketing promotion strategies, especially one large amount sales to Sino-Agri Group during the last nine months.

For the nine months ended March 31, 2016 Yuxing’s net sales were $6.59 million, an increase of $3.49 million or 112.5% from $3.1 million during the nine months ended March 31, 2015. The increase was mainly due to the increase in sales demand of Yuxing’s top-grade flowers during the last nine months.

Total cost of goods sold for the nine months in March 31, 2016 was $118.2 million, an increase of $9.1 million or 8.4% from $109 million for the nine months ended March 31, 2015. This increase was mainly due to the 2.7% increase in net sales and an increase in the cost of raw materials.

Cost of goods sold by Jinong for the nine months ended March 31, 2016 was $41.3 million, an increase of $2 million or 5.1% from $39.3 million for the nine months ended March 31, 2015. This increase was primarily due to its higher raw material cost. Cost of goods sold by Gufeng for the nine month ended March 31, 2016 was $72.5 million, an increase of $5.1 million or 7.6% from $67.4 million for the nine month ended March 31, 2015.

This increase was primarily due to the increase in the cost of raw materials and an increase in the sales of fertilizer products. For the nine months ended March 31, 2016, cost of goods sold by Yuxing was $4.3 million, an increase of $2 million or 88.6% from $2.29 million for the nine months ended March 31, 2015. This increase was mainly due to the significant increase in Yuxing’s net sales.

Total gross profit for the nine months ended March 31, 2016 decreased by $4.21 million to $71.5 million as compared to $75.7 million for the nine months ended March 31, 2015. Gross profit margin was 37.7% and 41% for the nine months ended March 31, 2016 and 2015 respectively.

Gross profit generated by Jinong decreased by $3.3 million or 5.6% to $56.2 million for the nine months ended March 31, 2016 from $59.6 million for the nine months ended March 31, 2015. Gross profit margin from Jinong sales was approximately 57.7% and 60.3% for the nine months ended March 31, 2016 and 2015 respectively. The decrease in gross profit margin was mainly due to higher raw material cost and packaging cost.

For the nine months ended March 31, 2016 gross profit generated by Gufeng was $13 million, a decrease of $2.3 million or 15.2% from $15.3 million for the nine months ended March 31, 2015. Gross profit margin of Gufeng sales was approximately 15.2% and 18.5% for the nine months ended March 31, 2016 and 2015 respectively.

The decrease in gross profit percentage was mainly due to the decrease - the increased weight of lower margin product sales in Gufeng’s total sales answering market demand. For the nine months ended March 31, 2016 gross profit generated by Yuxing was $2.26 million, an increase of $1.45 million or a 180.5% from $807,000 for the nine months ended March 31, 2015.

The gross profit margin was approximately 34.3% and 26.0% for the nine months ended March 31, 2016 and 2015 respectively. This increase in gross profit percentage was mainly due to the higher price top-grade flowers that Yuxing sold during the nine months period - during the nine months ended March 31, 2016, compared to the same period in 2015.

Net income for the nine months ended March 31, 2016 was $19.7 million, a decrease of $3.4 million or 14.9% compared to $23.2 million for the nine months ended March 31, 2015. The decrease was due to the increase in net sales offset by an increase in selling expenses and higher cost of goods sold.

Net income as a percentage of total net sales was approximately 10.4% and 12.6% for the nine months ended March 31, 2016 and 2015 respectively.

Financial condition. As of March 31, 2016, cash and cash equivalents were $90.4 million, a decrease of $2.5 million or 2.7% from $92.9 million as of June 30, 2015. Net cash used in investing activities for the nine months ended March 31, 2016 was $16,600 a decrease of $7.6 million or 99.8% from $7.6 million for the nine month ended March 31, 2015.

Net cash used in financing activities for the nine months ended March 31, 2016 was $17.49 million, an increase of $14.8 million or 550.4% compared to the cash provided by financing activities of $2.68 million for the nine months ended March 31, 2015.

We had accounts receivables of $74.7 million as of March 31, 2015 as compared to $68.5 million as of June 30, 2015, an increase of $6.2 million or 9%.

I will now discuss our fourth quarter of fiscal year 2016 and fiscal year 2016 guidance. For the fourth quarter ending June 30, 2016 management expects net sales of $74 million to $80 million. Net income of $3 million to $7 million and EPS of $0.08 to $0.19 based on $37 million fully diluted shares.

For the fiscal year ended June 30, 2016 management expects net sales of $264 million to $270 million. Net income of $23 million to $27 million and an EPS of $0.62 to $0.73 based on $37 million fully diluted shares.

This concludes my remarks. Operator, we’re now prepared for the questions from our audience. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question will come from Jared Cohen of JM Cohen & Co. Please go ahead.

Jared Cohen

Yes. Just a few questions, first, financial question, I noticed your cash went down sequentially about $9 million. Can you discuss that, whether that’s because you paid down debt or for some other reason?

Ken Ren

Hey, Jared, how are you?

Jared Cohen

Good. Thank you.

Ken Ren

Nice to have you again in the conference.

Jared Cohen

Thank you.

Ken Ren

For your first question regarding true conditions, you specifically asked the changes in the cash balance. And I like to add a few remarks. And you’re pretty accurate on the fundamental reasons why such change occurred in cash. Specifically for the quarter, you may notice that we paid off our short-term loans and the - on operating activities, we generated regular cash and there is no significant investment activities, that means for the long-term of the cash used for the past period is for the purpose to pay off this short-term loans.

Specifically paid off, yes, and from time to time on the needs and the interest rate market and we maintain good relationship with our commercial lenders. And this short-term loans historically and will be to reflect the better need for working capital.

Jared Cohen

Okay.

Ken Ren

Hope that’s…

Jared Cohen

Good. Second question is just - have you - you always used put on a press release before [announcing your names] [ph] in terms of adding new distributors quarter to quarter. I was wondering if you added any new distributors this past quarter in particular or so forth.

Ken Ren

As a matter of fact we did, we did add new distributors, and for the quarter and we added roughly 10 to 20 distributors [indiscernible].

Jared Cohen

Okay. And the last question, are you getting the benefit of now on the cost side of lower coal prices, because I think that’s one of the raw materials you use in terms of your products?

Ken Ren

The coal price - the coal is one of the raw materials that we use or procure for manufacturing process. And you may notice that the commodity market has been quite volatile for the past quarter. For instance, all these black commodities price went up and down significantly in the spot market as well as in future market in our nation. And we actively or cautiously had our positions.

And in terms of utilizing these market environments or the price advantage, we will rather consider or plan to reduce our hedging cost instead of speculating the pricing trend for future contracts and pricing.

And we foresee that or we anticipate, given the macro-economy situation, the commodity price market will be remaining volatile for the rest of the year. And we are closely monitoring this moment. If it stabilize and if we feel it’s comfortable to book for procure we will make that judgment based on our demands and contracts from our customers.

And by the way also, I’d like to mention that the new President, who recently joined the firm - joined the company has been working or developing international markets, mostly at the company’s affiliate the 900LH.com platform for the past few years. And one of the reason and the advantage that we could have him with us is to explore or better utilize opportunities in right direction. And I think for this conference call, we have a very good opportunity in this time-window to ask questions to him, the new President, who is also Chairman Li and the CEO’s only son in this opportunity.

Jared Cohen

Okay. Thank you very much.

Operator

[Operator Instructions] And at this time there are no additional questions. I would like - we do have a question from [Rey Zerrie] [ph], a private investor. Please go ahead.

Unidentified Analyst

Hi, thank you for taking my call. Could you guys tell me, what your plans are to return some value back to shareholders with the stock price trading in the low ones for a long-time now, and no dividends? Is there any thought of a cash share repurchases or cash dividends? Thank you very much.

Ken Ren

Well, thank you, Rey, for the question. If I remember correctly, three months ago, when we held last quarter’s conference call, similar question were asked and Chairman Li addressed the questions with his comments as, we appreciate these suggestions and your considerations and the board from time to time always put or have these options on the table and may execute such actions or activities timely if conditions permit.

And in history we did issue dividend, and at that time we believe issuing that dividend is appropriate, is accurate, is needed. And we will continue to consider these options to better reward our shareholders to increase their values and that could include the dividend issuance that we accessed [ph] before or share buyback repurchase et cetera, et cetera.

I just want to let you know, that the board has always been considering these actions and these courses.

Unidentified Analyst

Okay. And what are the - can I get what are the factors that would make you guys proceed in such a manner?

Ken Ren

I’d like to give an example, so for instance, we all noticed, if not, I’d like to remind or brief. Lately, many U.S. listed China-based companies had been traded with great volatilities for instance particularly those companies had announced going-private transactions or who have been in a process of conducting going-private transactions. And for instance, some companies, is at the final stage of concluding such transactions, however the information from the market or the update from the regulators caused turmoil and on euro are extraordinary trading activities for their company’s shares.

And one of the particular reason is that for instance these going-private issuers - I’m sorry, this issuers who received going-private offers may have intention or intend a plan to relist in future in Shanghai Stock Market. And such market is under the regulation of the Chinese Securities Regulatory Commission. And such commission indicated that they are studying the passes for the real estate.

And yesterday or day before yesterday Bloomberg reported that, foreign currency conversion bodies or offices are examining the requests from the buyers’ group from the investors. And all these developments had added degrees of uncertainties to the sector. And such updates had been reflected or priced in these companies’ stock price, securities, future or vision.

And what I’m saying is the factors from the regulators could impact the market perception. And we certainly will consider the impact from the changers of the policies, especially from these regulators. And that factor is one of the most important factors we met. And we always consider secondly, macro-economy, particularly in China.

For example, the Chinese macro-economy have been slowing its growth path, growing pace. And the world entered the market adjusting the expectation on the Chinese economy’s growth. And such macro-economies or adjustments and the new norm in China also tend to be indicated or reflected in our company’s performance and financial results, which has been evidenced in our latest or the past reportings.

One of the strategies we executed and are developing is to expand our international market to diversify our business by international - by developing our international market. So that for instance, if we have an international segment of business available and is growing, and the earnings we gain from such segment will be waived [ph] from the Chinese foreign currency converter regulation and we could better utilize such earnings resources to assist, to facilitate some actions we couldn’t have exercised, if such foreign earned or internationally earned earnings have not been or would not available.

And I just want to give you an example to let you know that there are numerous factors that put the board and the management in a position for us to consider to incorporate their impacts, when we are going to plan for some favorable or some actions or some activities or corporate strategies.

You ask or we may plan to, and on the other hand as like Mr. Li commented from the last conference call, Chairman Li commented from last conference call, in the near future, he promised, he assured you that you will hear from us on our activities, our actions. For instance, like in the last quarter earning conference call you didn’t expect that, we’re going to appoint a new president and we did.

And he is available at this conference call and he’s very enthusiastic and full of energy, very young, Mark Zuckerberg from ‘80s had founded Facebook when he was only 20-years-old.

Unidentified Analyst

Okay. Thank you. So - okay, that helps. And so what are the prospects for international growth in the next year or so?

Ken Ren

Why don’t I let our President address you these questions. Hold on.

Unidentified Analyst

Okay. Thank you.

Zhuoyu Li

Hi, Rey?

Unidentified Analyst

Hi.

Zhuoyu Li

Hello, please stay on the line.

Unidentified Analyst

I’m here. Thank you.

Zhuoyu Li

So basically, I just came back from New Zealand where I went to university. And coming to this company of my father’s was really exciting for me, so I’d like to talk to you about our future plan for the international market. So, first of all, we are now negotiating with several different parties with regarding to be exporting of our fertilizers.

First, a couple of years ago we entered in - we have become a global partner with - what was the company - we went to - we became the global partner with Nestle in Yunnan province of China. And after years of cooperation, we have been looking at other parts of the world where they grow coffee beans, that’s one.

And currently, we have been developing and - we have been researching and developing our connections in the New Zealand agriculture industry. Last couple of years we have been approaching the authorities with regarding to being able to export our fertilizers to New Zealand. And now we are handling the - we are actually in the process of getting the products registered and find distributors over there.

And at the same time in South America, we have been negotiating with the government for quite some time regarding - about growing rice over there. So basically they will promote our product, selling to the farmers. And farmers will be subsidized by the government in some way to continue their activity, so basically, that three are major activities or actions that we’re undertaking at this stage about the global market. Thank you.

Unidentified Analyst

And do you have any projection on what you expect as far as additional revenues in the next year or is it too early?

Ken Ren

Hey, Rey, I can address this question for you. Such information from the international market, we may reflect, we may incorporate that for the next of fiscal year. But for this quarter we won’t comment the projection for that particular segment.

Unidentified Analyst

Okay. Okay.

Ken Ren

Thank you.

Unidentified Analyst

Okay. Thank you very much.

Zhuoyu Li

Thank you very much.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Mr. Li for closing remarks.

Zhuoyu Li

Thank you very much, operator. And lastly, I wanted to thank you everyone for attending to this meeting. And thank you very much for your time. See you in the next conference call. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your line.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!