Origin Agritech Limited (SEED) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to Origin Agritech’s Third 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 the 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. James Chen, the company’s CFO. Before we get started, we 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 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 are detailed in 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 contained in this conference call. Now, I would like to turn the call over to Dr. James Chen for prepared remarks.

Thank you, Annie. Good morning, everyone. And for those in China, good evening. Before I start, please note the press release for the third quarter of fiscal 2015 earnings results has been published earlier this morning. In today’s prepared remarks, I would first like to briefly discuss company’s new strategies disclosed this quarter, changing our board member and the recent GMO field testing and demonstration results. Then I will go over the financial results for the third quarter of fiscal year 2015. During the fiscal third quarter, the company’s Board of Directors has approved the company’s new strategies which was later announced through an investor meeting on June 16, 2015 and a related press release. On the successful development of biotech Seed technologies, the company is now reorganizing into two business lines - agri-biotech and product development under State Harvest and seed production and distribution under Beijing Origin. Under the new strategic directions, State Harvest were introduced in agri-biotech product line to the global seed market while waiting for the approval for commercial planting in China. The separation of Beijing Origin’s seed production and distribution business from our biotech development could unlock the financial value of our seed production and distribution business which could have the potential of generating over RMB100 million EBITDA and could attribute [ph] to new investment to increase the financial flexibility of the company. We announced on Monday that Mr. Geoffery Merszei will join our Board of Directors. He will replace Dr. Yingqi Xia as an Independent Director and Chairman of the Compensation Committee effective October 1, 2015. We think Geoffery’s exceptional global leadership experience in chemicals and agriculture industries, including biotech seed business across multiple geographies will add tremendous value to our board, especially when we are moving forward to the new strategy of becoming a global biotech seed company. We think a globally-focused board is a significant first step to successfully executing our new global strategies and we believe Origin is poised to benefit from the ever-growing global biotech agribusiness. We would also like to share with you our recent activities in biotech seed technology development. We organized a field demonstration with our partner, Chinese Academy of Agricultural Sciences, last week and invited a representative from Chinese Ministry of Agriculture, Ministry of Science and Technology and a scientist from the Chinese Academy of Engineering to observe the field testing results in our Tongzhou facility in Beijing. As some of you might have seen the reports in Chinese media, the demonstration event was very successful. For biotech corn seed products with the pest traits of glyphosate tolerance and insect resistance have shown great results. And I consider that a breakthrough by the attendance in the genetically modified technologies in China. To summarize, we are now moving forward to our new strategies with more a globally-focused Board of Directors of exceptional experiences. Our new technology of pest traits of glyphosate tolerance and insect resistance will allow us to become a global biotech seed company. Now let me review our financial results for the third quarter of fiscal 2015. I shall first remind everyone that as our accounting policy, we don’t recognize our revenues until the final sales price and sales incentives are fixed and are determined. The majority of our revenues will not be recognized until the fiscal fourth quarter. So for the fiscal third quarter performance, we will focus our operating performance in both recognized revenue and a deferred revenue. And we will also summarize the operating cost year-to-date in order for you to understand the cost structure and the year-over-year comparison. The revenues recognized in the third quarter of fiscal 2015 were RMB73.7 million or $12.0 million compared with RMB92.9 million a year ago. Deferred revenues as of June 30, 2015 were RMB373.4 million or $61.1 million compared with RMB342.1 million on June 30, 2014. Again, it is expected that the majority of the deferred revenues will be recorded in the income statement during the fiscal fourth quarter of 2015. The sum of recognized revenues for the first nine months ended June 30, 2015 and the deferred revenues as of June 30, 2015 was RMB466.5 million or $76.1 million, compared with RMB460.1 million for the same period one year ago. Total operating expenses for the three months ended June 30, 2015 were RMB18.7 million or $3.1 million compared with RMB27.5 million during the same quarter in fiscal 2014. The decrease was mainly due to lower transportation expenses, higher other operating income and continuous cost controls. Total operating expenses for the first nine months in fiscal 2015 were RMB68.8 million compared with the total operating expenses of RMB98.7 million a year ago. Excluding other operating income, the total operating expenses for the first nine months ended June 30, 2015 were RMB84.4 million, a decline of 18.5% year-over-year. Loss from operation for the third quarter of fiscal 2015 were at RMB8.4 million or $1.4 million, compared with RMB6.3 million for the same quarter in fiscal 2014. Net loss attributable to Origin Agritech for the third quarter of fiscal 2015 was RMB11.9 million or $1.9 million, or net loss per basic and diluted share of RMB0.52 or $0.09 compared to the net loss of RMB14.7 million or net loss per basic and diluted share of RMB0.65 in the same period one year ago. On the balance sheet, we have cash and cash equivalents of RMB22.4 million or $3.7 million, short-term borrowing of RMB210 million or $34.4 million, and the long-term borrowings of RMB64.4 million or $10.5 million. While we were able to adjust our inventory to free up working capital, the advanced payments from the customers declines year-over-year due to tight credit environment in China and of our sales and marketing strategies of more direct sales to farmers. We will continue to adjust our inventory level. And we expect our inventory adjustment could further free up working capital by at least RMB100 million to RMB300 million in the next several quarters. We are confident that inventory adjustment as a way of cost control should help us to reduce the debt level significantly going forward. To conclude this conference call, I would like to point that we believe 2015 is a transition year for the Chinese seed industry and especially for Origin Agritech. When the industry supply-demand expected to improve further next year and the low cost structure going forward, we believe our operating Origin seed production and the distribution business will see a significant improvement going forward. More importantly, with our success in biotech seed product development, 2015 will become a transition year for Origin Agritech as we launch our near strategies as we discussed earlier, and after more than 10 years of preparation. With that, I have reached the end of this presentation. I will now open the call for questions. Operator, please begin the Q&A.

[Operator Instructions] And our first question is from Peter Butler at Glen Hill Investments

Good morning.

Good morning, Peter.

I was wondering, the 2015 seed market is about completed and at this point, how do you see industry inventories of corn seed shaping up and what is the early look on Origin’s sales volume pricing earnings expectations next year? And why shouldn’t Origin guide to a much better 2016?

Okay. First of all, for your industry question, one of the divisions on the Ministry of Agriculture, they do have a statistics regarding how many seed production in average in 2015, 2014 or even for the history [ph] result. And as we’ve discussed previously that the 2014 seed production average was on the historical low. 2015 was also very low. So in both years in the cyclical bottom years for the seed industry in China, the production of corn seed both are seen at the low end during in the history. And we do expect the seed inventory will continue to decline further. And we will see the 2016 will be much better year. We do not typically make a guidance at this point. And as you know that we haven’t been doing much variance over the last couple of years. But we do think that like we’ve discussed earlier this year, that 2015 will see a significant earnings operating earnings improvement and we do expect this improvement at this point for this whole year. And we’ll continue to expect the revenue and operating earnings improvement in 2016 as the industry supply-demand will ease going forward.

Okay. Good. Sounds good. How do you guys envision the consolidation trend in China ag in the ag industry in China to play out? It looks like there’s a trend going maybe inspired by government pressure to have big companies buy the small ones and produce a much stronger industry in China overall? How do you guys see it now? Have there been any recent changes?

Yes, the government as I understand that the Ministry of Agriculture, they continue to push and make the industry much healthy. There’s several ways you have already noticed and we discussed it before that government increased - given this license to be a national seed industry. So the smaller seed companies, they’re under pressure to aggregate to the seed market. So we do see more consolidation going on. And it’s somewhat seen as consolidation effort is going on in different levels. I mean you probably even see that as the market consolidates that will fair in terms of supply-demand going forward. But actually currently, it’s somewhat inactive because some small companies are continually liquidating the seed inventory.

On a different subject. You mentioned the possibility of Chinese government policy changing regarding GMOs. Are you guys still confident that you’re in a leadership position when the government starts approving these products, I presume one by one? Do you guys believe you’re still the leader and we wait long enough, we’re going to get a bonanza here?

Yes, we still think that we are the leader in this GMO development. We have a very broad product line. And also, the demonstration we organized last week after a short [indiscernible] and most of the attendant believe that we are ahead in this development especially for the pest [ph] technology of glyphosate tolerance and the insect resistance. So we still think when the China open up the biotech planting in China, we do think we can take advantage of our leadership in the Chinese market. But I would like to point out again that as our new - since we already have the product, we think are already proved in the field testing for a couple of years, we are ready to launch our global penetration or global business for biotech products. So while we’re waiting for the Chinese government’s final approval, we are now really just waiting. We are moving ahead. And we are pushed back quickly try to commercialize the technology we already prepared for over 10 years.

How advanced are your discussions with potential partners and customers outside of China? Do you envision a mix of joint ventures and direct sales? Or what sort of model are you anticipating?

Yes. We have been discussing with potential partners. And we’ll continue to discuss this. We explore different possibilities in terms of cooperation or direct to marketing. But I would like you to notice that as we announced on Monday, we have Mr. Geoffery Merszei who has great experience in the seed industry over many years and also in other industry like chemical and agriculture industries. He has joined our board. And I would like you to notice that this is a significant event because we start from the board level, to change you managing board and the management structure so that we are getting ready to when we move ahead in the global biotech seed industry.

Yes. I guess maybe the last thing. I’m wondering about if what you’re plans are, management’s internal plans for cash flow generation in the next couple of years. It sounds like you’re planning on a pretty good increase in your sales volume and market share and earnings. But how much do you subtract out? How much of CapEx is going to be required in your new growth ventures? And what is the bottom line? Does your free cash generation become large enough to substantially shrink the debt? Or how do you see it?

Yes. On the cash - on the balance sheet [ph] side, we pretty much is the same movie according to what we planned in 2014 when we did the planning for inventory adjustment. We’ll continue to adjust our inventory. As you know, the seed industry are taking at least a year or two to adjust the inventory. So we are moving right around. And we adjusted the inventory very successfully in 2014. And we continue to adjust it, I’m sorry, very successfully in 2015 season and we’ll continue to adjust it going forward. So we do see the cash generating from the inventory adjustment of at least RMB100 million to RMB300 million going forward. And we do not expect any major CapEx investment. And so our current capacity can support our growth of revenue in the corn seed business by more than twice, two to three times. And I like to point out here, take this opportunity to point out that our high debt level, you should realize, this is a demonstration or this is a proof that we are highly favored by the bankers or the Chinese bankers because we are in the industry the Chinese government support. So this is important for us to continue to be able to outreach in the business even though there’s high debt level. And I would like investors to realize how strong our business is and how strong support from the bankers or from the government policies toward the seed industry.

Yes. Everything looks going for the future, why doesn’t Dr. Han put some money into share repurchases even if he has to borrow money - if you’re buying low, you should be able to make a lot of money if things turn out the way you look in the market?

Yes. Our board will continue to evaluate the different options.

Well, okay. Well, thanks for your help today.

Thank you. Thank you for your questions.

[Operator Instructions] There are no further questions at this time. Would you like to make any closing remarks?

No. Thank you.

That concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation. I wish everybody to have a nice day.