Origin Agritech Limited (SEED) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to Origin Agritech Fiscal Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow 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. 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 believes and expectations of management and are subject to risks and uncertainties which could cause the 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 conference over to Dr. James Chen for prepared remarks.

Thank you. Good morning, everyone. And for those in China, good evening. Before I start, please note the press release for fiscal year 2015 earnings results has been released earlier this morning. This is an exciting moment for Origin as we are moving forward to the new corporative stages announced in June 2015, while we are seeing significant cash flow improvement as well as the turnaround in operating performance. Today I will firstly discuss of corporative strategies and successes in biotech Seed product development. Followed by our operational improvement and how those improvements helped us to reduce our cost structure. Then I will go over our financial results and highlight the significant turnarounds in both operating performance and the cash flows from operating activities. First on the corporative strategies, I would like to quickly review the company's history and major corporative events. The company has stated as the hybrid corn seed company 18 years ago, with the success and strong cash flow from the hybrid corn seed business. Origin has started it's seed biotechnology research in earlier 2000s and established the Origin Live Science Center in 2005. The company has since focused on the seed biotech product development and funded that the biotech R&D with its free cash flows from the traditional hybrid seed business. After more than 10 years of seed biotech development, Origin is now essentially becoming an biotech company focusing on its GMO technologies and has developed biotech corn seed products that are waiting to be commercialized. At the same time, the company has already build up state-of-the-art seed production basis and a solid distribution channels in China and continues to generate cash flow from the hybrid seed business. With the success in biotech product development, especially the successful field trials of the stacked traits of insect resistance, Bt genes and glyphosate tolerance genes. We announced in June 2015 our strategies going forward. Under the announced strategy, we have reorganized into two business units: Biotech & Product Development under State Harvest and Seed Production & Distribution under Beijing Origin. So the State Harvest, Biotech & the Product Development business were planned to enter the seeds and traits market in North America with our GMO corn seed products while waiting for the approval for commercial plant in China. We currently setup operations in United States. At this point, we have already started a detailed business training and have also in the discussions with several potential global partners. Beijing Origin, the current operating entity in China were focused on the seed production and the distribution business in China. As we have discussed through the presentation material filed with SEC, we expect the Beijing Origin to generate EBITDA of over RMB100 million and we are actively looking for strategic investors to become our partners in Beijing Origin's business. On the Biotech Product Development main, the most significant progress will mainly be in the last several years as the new biotech corn seed products were stacked traits of insect resistance genes and glyphosate tolerance genes. 2015 marks the fourth year that double stacked traits were successfully tested in the field against the technologies currently implied in the global markets. Additionally, we have started to introduce tripled stacked and quadruple stacked traits of Bt and herbicide tolerance genes. For the double stacked Bt and glyphosate genes, our repeated field testing in both our Beijing testing site and southern [indiscernible] testing site has shown very positive and a stable insect resistance results. We believe the our Bt gene coded as Cry1Ah, used in our double stacked traits could be highly valuable in the North American corn seed market. The successful development of the doubled stacked traits of Bt and glyphosate tolerance genes provides us the differentiated technologies to enter the U.S. corn seed and trade market. For resistance process in China, we are completed the environmental release test for the doubled stacked trait in 2015, and prior to started the production test in the 2016 season. On the intellectual property protection front, we have filed four additional patent applications in 2015 relating to our double stacked traits of Bt and glyphosate tolerance genes. We believe our patent positions in the genetically modified seed technologies will allow us to maintain our leading position in China and provide us the part to enter the global biotech traits market. Next on the operational improvement front, we continue to achieve significant improvements in operational efficiency and the cost reduction in fiscal year 2015. As we reduce our headcounts by 19% and have reduced the general and administrative expenses by 12% year-over-year. G&A as a percentage of sales is now at 10.8% down from 15.3% four years ago. We believe our efforts in the cost reduction and operational improvements are critical, especially when we face the challenges during the seeding bottom cycle. Now I would like to summarize the financial performance for fiscal year 2015. I would like to first highlight that we had a significant turnaround in both operating income and the cash flows from operation. Operating income for the fiscal year was RMB1.3 million a significant turnaround from the operating loss of RMB24.5 million in fiscal year 2014. Net cash provided by operating activities was RMB52.2 million in fiscal year 2015, also a significant turnaround from the negative operating cash flow of RMB85.6 million in fiscal year 2014. Total revenues for the fiscal year 2015 were RMB376.3 million, a decrease of 9.3% year-over-year mainly due to the lower volumes for corn and rice seeds as the result of market oversupply and increasing competition. Operating expenses for the fiscal year 2015 were at RMB110.9 million, representing a decrease of 19.8% year-over-year mainly as the result of our expense control efforts. As I mentioned earlier, operating income for the fiscal year 2015 was RMB1.3 million, a significant turnaround from the operating loss of RMB24.5 million in fiscal year 2014. The improvement in operating results was mainly due to our expense control efforts. Net loss in fiscal year 2015 was RMB13.8 million compared to the net loss of RMB9.5 million in fiscal year 2014. Net loss for fiscal year 2014 included a reversal of tax liabilities of RMB39 million, excluding the reversal of tax liabilities, net performance improved significantly year-over-year. Net loss per share was RMB0.6 for the fiscal year 2015, compared with net loss per share of RMB0.4 in fiscal year 2014. On the balance sheet, cash and cash equivalent as of September 30, 2015 was RMB66.0 million compared to RMB46.3 million one year ago, and a RMB22.4 million as of June 30, 2015. Net debt as of September 30, 2015 was RMB198.7 million declined from net debt of RMB227.9 million a year ago. As discussed earlier, net cash provided by operating activities was RMB52.2 million in fiscal 2015, compared with net cash used of RMB85.6 million for the fiscal year 2014. Please note that the events from customers on the balance sheet declined RMB60.1 million year-over-year to RMB264 million as of September 30, 2015, as we moved to more direct sales. Excluding the changes in the events from customers, net cash provided by other operating activities was more than RMB110 million, significant portion of the net cash flows from the operation was the result of our inventory management we have discussed before. Looking forward, I should point out that our cash flow from operation will continue to show significant improvements as we manage our inventory and sales efforts. We will also brief the market condition should recall modestly in fiscal year 2016 as the industry of corn seed inventory is expected to decline. With our new production introduction, increasing sales efforts and our operational improvements we expect both revenues and operating income to improve in fiscal year 2016. With that, I have reached the end of today's presentation. I would now open the call for questions. Operator, please begin the Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Peter Butler of Glen Hill Investments. Please go ahead.

Hi.

Hi.

It's nice to see some black numbers.

Thank you.

One of my favorite questions for management is, not looking at the past year but looking at the year coming, a year from now if we're having a conference call a year from now, what do you think are going to be significant changes in your fundamentals? For instance, do you think you could sign the first technology deal in the United States or I'm thinking that if you could sign a significant technology deal and get an upfront payment that you could use that money to do a share repurchase program. So, what do you guys seeing during the next year?

[indiscernible] I'll answer the question, you're talking about a year from now, I assume that 2016 will be very steady for us. Number one, I assume that [indiscernible] we'll have significant improvement in our seed sales in China. Number two is in biotech as we mentioned last year or six months ago we wanted to be some – be globalized our technology, especially in North American market. In last few months we have made a significant discussions and negotiations with some major players in this market and I assume we're extremely happy about our future in this market. We do have some collaborations, if we're moving very quickly hopefully we'll [indiscernible] all the information as soon as we have reached the concrete agreement. I assume within 6 to 12 months you'll get [indiscernible] we'll have some very concrete agreement to be announced. In terms of technology movement, as you know, we do have – in China also [indiscernible] procedures, we're also moving forward and hopefully in this year we will have better – we'll get some of agreed traits get approved.

So, is it possible that you can get a sizable upfront payment on your technology deal in North America and use that money to do a share repurchase program?

No we look differently, we [indiscernible] license agreement recently on shares. We're not really sell the technology to other people, we basically we want to license to other people to pay – to receive license of the unit we sell, that’s what we're looking for.

And you…

Translation of this that will be much more significant and by long-term we'll have better return, just not the best sell the technology for others.

And do you expect to sign one or two, three of these deals in the next – did you say 6 to 12 months?

I think so, yeah.

Yeah?

Yeah.

Okay.

We think – we have some agreements in the final stage, we'll be in the other two or three negotiations waiting.

Okay. How do you see your balance sheet a year from now? Are they going to be significant uses of cash that we don’t know about, how do you see your cash flow this year?

Go ahead.

Go ahead.

Okay. Yeah, I can take the question. Yeah, for the use of the cash we do not have any significant need for new CapEx expenses. For the generating of the cash, we think that going forward with the more free cash flow from operation in fiscal year 2016.

Sounds good, sounds good. Okay, there is a lot of discussion in the global agricultural chemical markets about the consolidation discussions that are underway. We have the Dow DuPont and we have Syngenta etcetera. And just in the last year ChemChina has come into focus here. What would be the impact do you think on Origin if Syngenta in fact sold out to ChemChina, would this consolidation step help or hurt Origin in China?

I assume it was – we were looking on two aspects, one is the ChemChina acquired [indiscernible] that means Chinese – the Chinese government own the company. That means Chinese government is more, wanted to be a service player in the durable markets since bio technology. That will be a point for us in term of the open Chinese market. In other terms, there will be open – more opportunity for us to collaborate with Syngenta or ChemChina in terms of the technology and the seed business.

So, okay. A year or two ago Origin turned down a takeover bid by a Chinese company and as I recall it was – they were offering $2.5 a share which obviously is maybe the double the stock – current stock price. How – since that time do you think the value of your company has gone up, and if so how much and have you been hearing from that same company, have they been talking like maybe they'll come back with a new bid or what do you hearing?

No, we didn’t, the company surface undeveloped because we didn’t [indiscernible] understand better of the company. Since [indiscernible] with our new strategy, you have a look of our strategies only two parts of the company, one is biotech, it's similar biotech company. The trees we have that’s the [indiscernible]. Another one is that seed business are long in China about how much you are worth. So we are – there was really high volume of – maybe we have some consultants who really figure out how the market might vary in terms of the seed company in local market, how many biotech company in the global markets. So, we assume that there will be – there should have been much more value than what the price, stock markets – financial market [indiscernible].

So you…

Yeah – I'm sorry Peter, I just want to add a little bit more, I mean I have different metrics of the value of the company. Obviously in 2014 or later 2014 the seed market was very top market and cash flow was under significant pressure. And as you know like our cash flow from operation from 2014 was our negative of, like I think more than RMB140 million our negative cash flow from operation. But this year 2015 we had a positive over RMB50 million of cash flow, and the next year fiscal year 2016 we think we will have much larger cash flow from the operation. Those cash flow will definitely increase the value of the company significant and I just want to add on that fundamental, on top of what Dr. Han had talked about our value of like biotech business as well as our traditional seeds business. So I think on the value of the stock market is totally influenced by some outside market condition like in Chinese, Asia market conditions, and the stock should be much more valuable than the price that with the awful way we received in 2014. Thank you.

Okay. Did I hear you say that this company that did $2.5 maybe has contacted you to maybe step-up their bid or have you gotten any bankers coming in banging on your door to ask about your availability?

We – as we announced our strategies, our Beijing Origin which is the seed production distribution business in China with the potential EBITDA of RMB100 million, this is the business that we are willing to invite for investors to join. And we obviously, we're talking, we don’t have any specific information to disclose in this conference call.

Okay. Well, thank you for your help today. It's great to see you into the black and what you're saying is the numbers are going to get a lot better this year and I presume if the inventories come down the 2017 could be a really damn good year.

Okay, Peter I would like to add one word, Peter, it's like we as – for Origin we are not only looking for the numbers, the number is only for operation from a seed. Please remember we are using our traditional seed, the conventional seed company generally the profit to support our biotech. If you look at a biotech, mainly biotech company only submitting money, but not [indiscernible] any more there. So we are actually looking to use all the profit that we generate from the seed operation, conventional seed of Origin to support our biotech operation, biotech research. Actually biotech research didn’t know, well when a good global [indiscernible]. Then as James – Dr. Chen mentioned that we will look for the strategic partner for the seed section, the seed sales is increasing in China I think what [indiscernible] is much more valuable than what our total cost at this moment.

Okay, good. Thank you.

Thank you.

Thank you.

[Operator Instructions] I'm showing no further questions at this time.

Thank you.

Thank you.

Dr. Chen, do you have any closing remarks, sir?

No, I think we all set.

All right, wonderful. Well, thank you all for attending today's participation. Today's call has now concluded. Have a wonderful day, and you may disconnect your lines. Thank you for your time, gentlemen.

Thank you, bye-bye.