Origin Agritech Limited (SEED) Q2 2022 Earnings Report, Transcript and Summary

Hello and welcome to the Origin Agritech First Half 2022 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 today's event is being recorded. And I would like to turn the conference over to Kirin Smith from PCG Advisory. Mr. Smith, please go ahead.

Thank you, Keith. Welcome to Origin Agritech's first half 2022 earnings conference call. With me today are Dr. Gengchen Han, our Chairman and CEO, and Wei Han, our VP of Business Development. Please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Origin Agritech's to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release, and our filings with the SEC, all of which are available on our website. I would now like to turn the call over to Joe Ramelli Origin's Director of Investor Relations. Joe, please go ahead.

Thanks, Kirin. And thank you to everyone joining us on the call today we really appreciate your support. So Origin's mission of bringing Agritech innovation to China has never been more on point given the geopolitical events affecting the global food supply chain and rising food inflation. And I know for investors, right now, it's a little bit of an uncertain or very uncertain time with rising interest rates, inflation, geopolitical wars in the world. And so, we'd like to think that we're a place that maybe I wouldn't like to say benefits from all those things, but maybe could be a good hedge in your portfolio. As you can see, we're thriving during these difficult times. So food security is a very top priority for the Chinese government, as you can imagine. And as such, they're investing heavily into the agriculture sector and embracing Agritech innovation, such as with the recent published approval procedures for gene-edited crops. And we're very excited to be playing a role in solving this food security problem, as we have the technology to not only dramatically improved corn yields, but also increased the nutritional value of that corn, resulting in the multiplier effect of nutritional yield per area. As you can see from the first half of 2022 results, our business is benefiting from these tailwinds. Sales grew in an impressive 300% from RMB11.6 million to RMB46.4 million or USD7.3 million. Gross margin grew from RMB4.3 million to RMB12.9 million and importantly, despite our rapid growth, we had a lot of leverage to our business model and operating expenses only grew at a muted 14%, which of course dropped down a lot of benefits to the bottom line. The resulting loss from operations decreased from RMB7.8 million to RMB1.3 million or USD200,000. We also generated RMB5.5 million from sub-lending a portion of our corporate headquarters in Beijing, which pushed us into the black for the period with earnings of RMB1.3 million or USD0.03 a share. The main factor driving our rapid growth was the launch of a disease-tolerant corn variety that can adapt to stressful environments. And the background story is really interesting. We had this corn plant in test fields planted in test fields in the main growing region in China. And some of you might have seen on the news, there was terrible drought and then followed by really horrific flooding. And it was really interesting our corn plant really thrived under those conditions. I don't know if thrives right, but did perform very well and versus competing corn products they were decimated and you can see that in some pictures that we have in our investment deck. Our corn is very green and thriving and there's a kind of brown and looks dead. So this created a great deal of goodwill for Origin Agritech's brand and demand for our seeds. In addition, this newly launched hybrid has significant yield increase over traditional corn. We could have actually sold a lot more corn, but we ran out of inventory. So for the coming season, we're ramping up seed production to meet this anticipated demand. Over the last several years, we put significant effort into our breeding program to develop nutritionally enhanced corn to meet the needs of the feedstock industry. In 2021, we tested our nutritionally enhanced corn with our partners in the feed industry at multiple locations. Our partners in the feed industry are very excited, and see just how impactful this product is for them and for their profit margins and they are demanding immediate supply. And as we mentioned in our press release, this nutritionally enhanced corner or NEC alleviates the need for additives such as soybean meal that traditionally or in every other type of corn are needed to make the feedstock sufficient for hogs. And this is not needed with our new corn varieties. So that's why we dramatically improve the profit margins. And why these feedstock companies are coming to us and so excited. It's almost hard to fathom the size of the feedstock market in China. It's over 1.9 million metric tons, which is approximate market value of about RMB500 billion or USD75 billion I think approximately. We project that our new contracts growing NEC business model will grow rapidly and NEC will play a significant role in the feedstock industry in the next few years. And it - doesn't take very high percentage of capturing this market to have pretty incredible financial results or financial impact for Origin as even a few percentage gain in this market would be huge revenues and EPS for the company. And we don't see why our feedstock company partners want to do more business with us as it's such an impactful product. It is important to note that sales recognized in the first half of 2022 had zero contribution from this NEC and was just our traditional seed business. As the new corn variety has yet to be harvested. The sales will hit in the second half of the year. And this of course has given us a high degree of confidence that we will exceed the full year sales guidance of 300% for fiscal 2022. By the way the period ends in the end of September. We're not on the standard calendar year. With regard to technological development, we have integrated our GMO traits into our hybrid corn varieties and are prepared for when the country moves to GMO positive, which we think will be soon given all the new laws that are being passed to establish a - legal framework for commercialization of GMO crops that are really coming into faster and faster pace. Late last year, we successfully completed production trials of drought-tolerant GMO corn in China and subsequently filed for biosafety licenses, which is some of you might know is the last step of the approval process before the actual GMO approval. So with the addition of that trait, we now have every trait that's sold by the big companies like Bayer outside of China. We have all those big traits sold. We've got a complete portfolio on that side. [Indiscernible] corn is projected to be a multibillion dollar market opportunity and Origin has plans to be a major player in the space. And outside of GMO, there's really fascinating developments with CRISPR gene editing as I worked for a prior company. We had a licensing deal - I worked for a biotech company, we had a licensing deal with Monsanto. And the scientists there told me at the time that CRISPR was the biggest development ever for plant breeding. But they also said those damn cell walls because they're so difficult to get past. So it's interesting Origin has made some innovations with new processes for getting CRISPR, past the plant walls in corn, and that we've been working on it since 2017, which were the very early days of CRISPR. And we believe that we're not only the leader in China, we talked about, you know, the China GMO market and the Chinese Agritech market. We think that we're the leader in the world on using CRISPR for corn breeding. And you can see that and - we've come up with over a dozen new traits. And one of them that we announced recently is really interesting. We changed the leaf angle of our corn or corn in order so that it can be planted in closer proximity to other corn plants and denser, and which of course would increase the yield. So, we're doing a lot of amazing things with this technology. And I think that - the pace of innovation is only going to accelerate. And of course, when I look at the whole portfolio of assets that Origin has, they work in tandem, it's not like GMO it's a corn in of itself, you need a really healthy thriving hybrid corn or as we - call it germplasm. That takes on the GMO traits, and also the gene-edited traits. And we think that that's a huge differentiating factor. Some of our competitors have GMO traits, but they don't have the thriving corn hybrids to put it into. And if you have a GMO corn - without, if you have that trait, say for instance for armyworm resistance, but you don't have a thriving corn to put it in, you'll put it into a corn variety that subpar, it will still be a subpar corn, but it will be armyworm resistance, which isn't really a successful endpoint. So anyway, stay tuned as we have many new traits and development on the gene editing side and it's truly amazing what this technology can do. In summary, we're very excited about the opportunity before us and we're really confident that we're going to generate an attractive rate of return for shareholders. And with that Chairman, Gengchen Han is going to answer some Q&A. So operator Keith, would you please open up the call for Q&A?

[Operator Instructions] We do have a question from Bill Stein with Celadon Financial.

Hi Dr. Han, congratulations on starting to finally achieve some of the success you've been looking for all these years. My question has to do with different patents that you're possibly filing about your gene editing. And the question is, are you and if so, would the patents be for China, for the United States for worldwide maybe you could elaborate on that? Thank you.

Yes - best of the regards and we have basically for the gene editing at this moment, what I said - for our patents, you know in worldwide not only for China. Since we think, you know, we have some kind of technology break us through in the gene editing, especially for corn. We're much more efficient than other people doing the same things - as we're confident. But you know this technology is new and [indiscernible] products you know the [indiscernible] is in China now gene editing already created proof of the procedure - he is already this way it seems like, more like U.S. you know, if you are internally just genes, not putting outside the genes well basically trait as a normal corn. So that gave us you know, big advantage and maybe the - a pooling process will be much faster And even for example, sometimes even U.S. customers or even do know this really breeding from gene editing, or from trait operating, but basically no much difference, but gene editing is much, much, much faster, much more efficient, and much it's very - well very exciting about this technology.

Okay, can I just put a few questions for you? One is, is DuPont still a licensee of Origin and also do we expect. Do you expect to have more contracts to land with your, I guess the NEC - the new corn versus GMO since it isn't approved yet. And also maybe you can just comment, I'm sorry, comment on how strong today is Origin versus any other time in history? Thank you.

Okay, that's the - first actually we still look you know, all kinds of possible collaboration with multinational. But I think we also more focused since multinational has some kind of, you know restrictions - limit operation in China. So we more you know in China we have the dependence on more and sell our collaborating with the local seed company. As in another one area as you mentioned what's the difference no, from last Origin 10 years ago. As you know last 10 or 20 years Origin is building the focus on the technology on the seed business that we are really put a lot of effort on GMO corn, which is you know, recent get just most profit and but we didn't touch other things. But at this moment, I think we have much more advanced the technology number one. Number two is, we have a breeding process in the last 20 years when we build out excellent GMO product pool which was as a result as showing bitter like noise. Like largely as Joe mentioned we had - China had very bad weather for the corn growing. But you know it's a good year hybrid growing good. But actually of good hybrid is really showing good it's in better years that's all hybrids - should have. So in terms of product competition in terms of GMO product development in Origin for us at this moment we are much stronger than before product of new technology. I think we are moving we - will help you - that we still have a very strong technology basis that's one. Number two is, you can see through the last few years we said we have one option as you mentioned we are seem like nutrition enhanced corn. This one was launched last year was just tight we saw farmer - with you know see the partners see the amount of people. It has the corn we feel that's very too emphatic since this was not [indiscernible] you know, supply issue this would also save there. You can see that in that 60% of the cost base corn that cost. So with all nutrition enhanced corn, actually you can save a lot of money they have [indiscernible] before that RMB200 million money can be saved from the, our corn. So they are so excited they have actually formed the partner with us tried for the growing contract growing with farmers to supply their seed - their demands. So this was really a new growing area for us as you know, as you mentioned you know corn seed market in China right now is around at RMB300 million and if you cover for the GMO maybe double like RMB600 million to RMB1 billion that's the total world of corn seed. But for the seed corn crop that's the annual very support here RMB500 billion. People like - we talk like just one person [indiscernible] I think very exciting very and our side there is no much competition. We're the only one hedge products. We are the only one decide to growing with the seed. So we have lots of contracts, you know, to request some kind of collaboration with us I think is much - very exciting I think for this area that - we can see next I mean, not only see them in next coming few years, we'll be you know, we just can't meet the demand for the request for these kind of products. As I think it will be very exciting for Origin definitely for investors.

Thank you very much. Are you going to be available for - to speak to investors more in groups more than in the past I guess would be the question for me?

Yes, I think so I would likely you know, due to the pandemic issues in a way in the last three years, basically you can't travel freely sometimes with so much disruption for you know, really daily work. But we'll this is - you can notice, you know, this is the first time I've make the conference call in so many years. Of course I couldn't remember last time was at least five years. So I was likely to communicate with our investors try to get more - any new development and some exciting news to pass throughout the United States as soon as possible.

Bill I think, this is Joe. I think thanks for the support and good to hear from you again. I think that we - as Chairman Han said this is the first call and maybe five years, we've got a really exciting story to tell. And we have a new VP of Business Development that actually works out of the New York area Wei Han. And so, we're going to be on the road more. And I think I would anticipate an accelerated pace of news and developments from the company as there's just a lot of great things going on here.

Thank you very much. Thanks very much.

Thank you, Bill.

[Operator Instructions] All right and we have a question from Howard Yeager with Newbridge Securities.

Hey guys, hey Joe, hey, Dr. Han.

Hello.

So Joe, I wanted to just ask a couple of questions, you sort of alluded to it when you were closing out on the last question before. But can you comment on any new developments or any new contracts throughout the rest of this year. You think that we can maybe see some insider buying and things of that nature to show the conviction from the company itself into the company. But again, I really wanted to know if you could comment on any new developments or any future contracts if you can or where we are for - the rest of this year?

Yes, I'll make a real quick comment and then turn it over to Chairman Han. And I think that obviously if you can double the profit margins for an industry, someone would have to be pretty I don't want to say stupid, but does not really make the right economic decision to pass on that. So as you can imagine, that's a hugely impactful thing to do. And it's a huge, huge - low and low margin business to. So we do have a lot more people coming to us, but and then also - and you mentioned insider buying. I'm not an officer in the company so I don't file, but when you know several months back I was able to buy stock and actually I've had my friends and family buying stock. And so - I'm kind of all in on this if not all in, but you know very excited - about the future here. So I'll turn it over to Chairman Han.

Hello yes - as you raised two questions one is the counter corn something like that its right. Now we have actually this for our field - like nutrition enhanced corn as you know NEC corn. Our strategy is not to sell the seeds to the farmers let them produce corn. What our strategy we're not selling seeds we are trying to produce the corn for the seed mills. So that's why we have set up the JV with the seed - new plant company. So right this year from it has we had of - let see have made 50,000 more contract already, we got also lot orders, but we can't make the supply yet. So but this year for us is the main challenge is how to increase the seed to meet next year's growing need that's a big thing. I think next year, we'll have lot of seed to grow a lot of the corn to grow no we are not. So we are selling the seeds for the corn hybrid seeds. Our GMO seeds are the one note sell seed who the farmers for the NEC corn, because we want to sell nutrition enhanced corn value and different products rather than the seed. The reason is if I sell seed for more details is stake on this GMO probably reach probably one RMB100 million or more this means, you know, for this will produce the NEC corn for the season, but we targeted the product better will be at least a RMB3,000 per mu. So if we can put you know I mean next year, we just brought 100. As you know we can produce 100,000 mu as you can imagine, easier can calculate or we can have much, much bigger revenue numbers and what we can sell for seeds. I'm not sure that - I answered your question.

No, that did. And Dr. Han and Joe I had just two more quick questions. Number one, I guess some of the frustration from my investors and Joe, you know, I've been in this thing for close to six to eight years has been and I'm very happy with the way everything's going. So I guess one of the other frustrations is everyone seeing the price of corn going through the roof every day? And the stock has been performing is, you would think that the stock would be higher based on what the price of corn is. And then one other quick question or after that if you could ask - now that you guys are really starting to ramp up with revenue, hopefully we see more contracts and things like that. Do you expect to see some coverage from some of these major banks or some banks or where do you think we are with that. Those are my last two questions? Thank you.

I can handle those Howard. We are talking to some banks about getting coverage. And so you know, it's a process and I don't think it's imminent, but we are working on that. So I look forward to something developing there. And then on the other side, you know, it's a little bit of a head scratcher I mean, if you look at our share price where it is now. It's - obviously as an insider in the company. You don't want to comment about the valuation of the stock, but we - suffice to say we think it's dramatically undervalued if you just look at not only like. I think investors can do the math on what Chairman Han said ramping up to 100,000 mu, which is the Chinese equivalent of an acre it's smaller than acre, but if you if you look at 100,000 mu that we're going to be able to grow next year. And just reiterating what Chairman Han said earlier that basically, we get a huge multiple of the market opportunity by not just sowing the seeds to the farmers and letting them kind of make all the profit margin. We saw this market as such a hugely impactful market doubling the profit margins for these feedstock companies, that we wanted to take a piece of that actual final corn product market. And policies in China right now are very accommodating to being able to do that in contract growing. And with our JV with BaoDao, feedstock company for instance, the first one we've talked about, they're actually supplying all the capital to grow the corn. So we're able to be a 51% owner in the JV and not have to put up capital at risk, really, what we supply is the corn seed, and the technical expertise to help them out in the process. So you know, if investors can do that math, where they look at 100,000 mu and we're kind of going to be half owners in that product and look at what the revenue potential is. And it's pretty staggering. If you start modeling that out where we could be a year - where we think we will be a year from now. And as Chairman Han said, we have zero competition for that there's nobody else that can do that. So did that Howard did I answer all your questions or did you want to know anything?

Yes you did, thank you. No, no, no you did. Thank you very much. Thank you, Dr. Han - excited about the future.

Great Howard, we really appreciate. It's great to hear somebody that's been with the company for five years and we really appreciate you know, your support and we know the next five years are going to be a lot better than the previous five to understate things.

Thank you. [Operator Instructions] All right as there is nothing else at the present moment, I would like to return to floor to Chairman Han for any closing comments.

Hello, everyone. Yes, thanks very much for your support and attending the conference call. I really appreciate - you're supporting the last few years, and I'm sure you know we are in a very exciting period at this time, I think we'll definitely we'll deliver the results for the company to our investors. Have a good day. Thanks very much.

Thank you. The conference has now concluded. Thank you for attending today's presentation, you may now disconnect your lines.