Origin Agritech Limited (SEED) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to Origin Agritech’s Second Quarter of Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow with the following presentation. [Operator Instructions] Please note this event is being recorded. Joining me today on the call are Dr. Gengchen Han, the company’s Chairman and CEO; and Dr. Zheng Chen, the company’s CFO. Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-Looking statements are statements that are not exactly historical facts such as based upon the beliefs and expectations of management and are subject to risk and uncertainties which could cause actual results to differ from the forward-looking statements. Risks on these holdings Origin's filings with the Securities and Exchange Commission, information set forth herein should be read in light of such risks. Origin assumes no obligation to update information content in this conference call. Now, I would like to turn the call over to Dr. James Chen for prepared remarks.

Thank you, Laura. Good morning, and for those in China, good evening. Before I start, please note that the press release for the second quarter of fiscal 2015 results has been issued earlier this morning. In today’s prepared remarks, I would first like to discuss the recent actions from the Chinese government toward the GMO technology development and our biotechnology progresses. Then I will go over to financial results for the second quarter of fiscal year 2015. First of all, we are excited to note that the Chinese central government is now taking much more effort to post the research and commercialization of GMO corn seed. Back in February, in the No. 1 Central Document of 2015, the Chinese government stated clearly that more effort will be putting to GMO research. And more importantly for the first time the Chinese central government stated that it will start to educate the general public about GMO technologies. We think this is a clear statement that the Chinese government is preparing for the public acceptance of GMO technologies in China. With the central government’s No.1 document, we’ve noticed some visible actions from the Chinese government including positive messages toward the GMO technologies in the government controlled public media. Last week, the Ministry of Agriculture posted on its website a revised Bio-Safety approval process for public comments. We think this is clearly a positive spec for GMO commercialization. At the GMO Bio-Safety approval is the major spec toward the GMO commercialization. And after several years of no major action, the government is now working on the key document governing the GMO commercialization process. The government’s confirmed attitude and actions have further strengthened in the research and commercialization of GMO corn seeds. Our glyphosate tolerance GMO trade is now under the review process for Bio-Safety approval and our pest trait of resistance resistant BTG and glyphosate tolerance gene is currently under the environmental release stage of Bio-safety approval. The field result of pest trait was very well and we believe this pest trait could be revolutionized the corn farming industry in China. This new technology could help farmers in both insect control and waste control, improving yield while reducing the use of chemicals. Now let me review our financial results for the second quarter of fiscal year 2015. I should first remind everyone that as our accounting policy will don’t recognize majority of our revenues until the third and the fourth fiscal quarters. So this quarter’s earnings performance is related mainly to the operating costs. We are very happy to report that the net loss per share this quarter was RMB1.14 representing a significant improvement from the net loss of RMB1.95 per share a year ago. The significant year-over-year improvement this quarter was mainly the result of operating expense control. Total operating expenses were RMB19.8 million in the second quarter of fiscal year 2015, a decline of 46% year-over-year, which was mainly due to decreased margin expenses and other expense controls. During the second quarter of fiscal year 2015, the company generated revenues of RMB3.8 million, or US$0.6 million, compared with RMB4.7 million for the second quarter in fiscal 2014. Revenues generated this quarter were mainly from scrap sales. Deferred revenues are RMB423.1 million, or US$68.9 million, as of march 31, 2015, compared with RMB426.8 million on March 31, 2014. Despite the industry oversupply and increasing competitions, our core corn demands remain strong as the demand for our key product has been increasing and the some of new products were sold out. Let me briefly comment on the market oversupply issue. The corn seed supply reached a historically high level after the beginning of 2014 season. Since then, the industry entered destocking phase. According to the organization on the Ministry of Agriculture, the corn seed inventory at the end of 2015 seeding season could be 20% lower than the inventory at the end of 2014 seeding season. The seed production planting areas in both 2014 and 2015 are significantly below the average planting area in the previous five years, setting a stage for a more balanced supply demand for the 2016 seeding season. Now regarding the operating expenses, as I mentioned earlier, total operating expenses for the second quarter were at RMB19.8 million, or US$3.2 million, down 46% from RMB36.8 million for the same period in fiscal 2014. The decrease was mainly due to decreased marketing spending and the cost controls over other operating activities. Specifically, selling and marketing expenses were RMB6.2 million or US$1.0 million for the second quarter of fiscal 2015, a decrease of 64% from RMB17.1 million for the same period in last year due mainly to decreased marketing spending and continued expense control measures. General and administrative expenses were RMB9.2 million, or US$1.5 million, for the second quarter ending March 31, 2015, down 15% from RMB10.8 million one year ago as our cost control efforts continued. Research and development expenses were at RMB8.9 million, or US$1.4 million, in the second quarter of fiscal 2015, which was consistent with the R&D expenses for the same period last year. Operating loss for this quarter were RMB21.5 million, or US$3.5 million, compared with an operating loss of RMB39.1 million for the same period in fiscal 2014. The lower operating loss was mainly due to operating cost control efforts. Net loss attributable to the company for the second quarter of fiscal 2015 was RMB25.9 million, or US$4.2 million, or net loss per share for basic and diluted share of RMB1.14 or US$0.19, compared to a net loss of RMB44.3 million, or net loss per share of RMB1.95 in the same period one year ago. On the balance sheet, we have cash and cash equivalent of RMB37.3 million, or US$6.1 million, short-term borrowing of RMB225 million, or US$36.6 million, and long-term borrowing of RMB72.7 million, or US$11.8 million as of March 31, 2015. Although the short-term debt was reduced from a year ago, we would still like to further reduce our debt level. We already have plans in place to reduce the debt through inventory management and cost reduction. We expect our inventory adjustment would free up working capital by at least RMB100 million to RMB300 million in the next several quarters. We’re confident that those actions especially inventory adjustment should help us to reduce the debt level significantly going forward. With that I have reached the end of today’s presentation. I would now open the call for questions. Laura, please begin the Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Peter Butler of Glen Hill Investments.

Good morning, good morning or…

Good morning, Peter.

I guess good evening to you everybody. Okay, I have a couple of questions please. Whether your expectations for volume and price this year, do you sound more optimistic and do you expect the trends in volume and price to accelerate next year and I think it’s very important for you to start showing some good volume gains here. What do you see?

Yes, Peter thank you for the question. As I mentioned earlier, the market conditioning in this year so far was very competitive, but our volume for our key product has really increased year-over-year. And more importantly, we have a couple of new products and we think is very promising product as even sold out. So, we do feel that with the supply demand getting much more balanced going through the – going into the 2016 selling season which we definitely should see more volume increase going forward.

Well, could you sort of quantify it please, what would be a good best case, worse case for your volume and price next year?

Yes – to quantify these numbers like as you know that we don’t usually give guidance ahead of time. But we don’t feel comfortable that volume growth should go into the next year. And more importantly, the corn business which is you know either was very competitive last year and in this year. We have been doing fairly well. Last year, we have seen some volume growth. This year has not been closed yet. We still expect there the possibility of nice – some volume growth, but definitely to next season we will see – we’re expecting to see a meaningful volume growth going forward.

Okay. You mentioned your debt before, thus looking at your internal projections on free cash flow in the next three years, does the total of your free cash flow come close to your total debt so that we could look forward to eliminating debt may be in the next three years?

Yeah, definitely, we think we’ll be – with free cash flow comes in especially with the inventory adjustment that we will see – probably even less than three years where we’ll have cash flow comes in more than the current debt situation. And this happens in the company’s history because this business – cash flow is still very strong. And the last year we’re basically because of the inventory build up and then market conditions. So going forward for the next several quarters, as I stated earlier, we do think we should see at least RMB100 million to RMB300 million of cash coming from the working capital adjustment.

And finally, do you guys have some internal guesses on when the government might start the final approval process, which you’d say it’s something like maybe one out of ten chance this year, four out of ten chance next year and eight out of ten in 2017. What do you guys…

Yes, Peter, thank you for the question. I know this is very good question. And straight forward answer is it’s so difficult for us to give what government’s decision, but we do see some positive trends as more and more positive information we can see. And as I point out at this time that we have both No.1 Document talking about it and also the Ministry of Agriculture has also did something last week that I’ll see very promising going forward. So how faster they will – like your question, like if I can get – the – how much chance they can approve it and in which year. Sorry and honestly, I don’t have those answers, but we do see positive trends.

Okay. You know several – more than a couple of years ago, I met Dr. Han in New York City and I’ve been following your company subsequently. I’m wondering if Dr. Han is going to – maybe revisit Wall Street in the next year with maybe you could even talk about how the Chinese government in fact has started to approve GMOs. Are we going to have Dr. Han’s spotting in New York this year?

Let me ask Dr. Han to answer this question.

Yes, Peter, hello, good morning. I’d to see actually in summer time, I have spent quiet a few times in the [indiscernible] this time June and July.

June, July.

Yes.

Okay.

So we’ll be…

And I assume that you’re going to come with a pretty bullish picture?

We – well, let me share something that you know what do we have during the last few years and we also share assumption with you know [indiscernible] for the future. You know in last few years, we have – in terms of restructure, get technology ready and then we’ve got some business move forward. And then in coming [indiscernible] more options to work on it, more opportunity to work on it.

Well, you put in a way the work on the restructuring and repositioning and I hope it’s time to start harvesting all the work that you put into it.

I think so, I think so, yes. You can see in last two years, our market condition is very tough as Zheng has mentioned that and the completions are very strong and the most of the major seed company in China, we have a very good balance, but we still clearly – our growth [indiscernible] summing-up. Late – some kind of growth in terms of product – our core business is like corn seeds. As Zheng mentioned this year, since the whole market is delayed and the farmers had at [indiscernible] later, but it looks well we’re still on the target. And we’re still accurate, at this moment I was still hitting the seeds out to the farmers. And usually, we – we’ll finish that much on later as well. So for this year – for the next year we’re looking for meaningful significant of growth.

Well when you come to New York, I hope we can upgrade from just drinking a couple beers together to maybe getting into the Dom Perignon champagne.

Yes, I look forward to that.

Okay, thanks for your help today.

Thank you, Peter.

Thank you. There are no further questions at this time. This concludes today’s teleconference. You may now disconnect your lines. We thank you for your participation and we wish everyone a great day.