Transcript of
Deyu Agriculture Corp. (DEYU.OB)
Second
Quarter 2011 Financial Results Conference Call
August 19, 2011
Jianming
Hao, Chairman and Chief Executive Officer
Charlie
Lin, Chief Financial Officer
Kevin Fickle,
Investor Relations, NUWA Group, LLC
Operator
Greetings and welcome
to the Deyu Agriculture Second Quarter 2011 Financial Results Conference Call. At
this time, all participants are on a listen-only mode. A brief question and answer
session will follow the formal presentation. If anyone should require operator
assistance during the conference, please press *0 on your telephone keypad. As
a reminder, this conference is being recorded.
It is now my pleasure
to introduce your host, Kevin Fickle, Investor Relations of Deyu Agriculture. Thank
you, Mr. Fickle, you may begin.
Kevin Fickle – NUWA Group, LLC – Investor
Relations
Thank you, everyone,
for joining us today for Deyu Agriculture’s Second Quarter 2011 Earnings
Conference Call. On the call today from Deyu Agriculture is Mr. Charlie Lin,
Chief Financial Officer; and Jianming Hao, Chairman and CEO.
Deyu Agriculture
issued its second quarter 2011 earnings release which can be found on the
company’s website at www.deyuagri.com.
Subsequently, the company also filed a 10-Q which can also be found on the
company’s website as well as the SEC website at www.sec.gov.
The call today will
feature a short presentation from Mr. Lin covering business and operation
developments and will take you through a discussion of the company’s financial
performance. After the prepared remarks, the presenters will open the floor to
questions from the audience.
To comply with regulation
FC, we ask that all questions be asked in English. If necessary, the questions
will be translated to management in Mandarin and then translated back into
English. We thank you for your understanding of this matter.
Before beginning,
Deyu Agriculture’s management team would like to remind the audience that this
presentation contains statements constituting forward-looking statements within
the meaning of Section 21E of the Securities and Exchange Act of 1934 as
mandated and as defined in the US Private Securities Litigation Reform Act of
1995. These forward-looking statements can be identified by terminologies such
as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,”
“targets,” and similar statements. Such statements are based upon management’s
current expectations and current market and operating conditions and relates to
events that involve known or unknown risks, uncertainties, and other factors,
all of which are difficult to predict and many of which are beyond Deyu
Agriculture control, which may cause Deyu Agriculture’s actual results,
performance, or achievements to differ materially from those in the
forward-looking statements. Further information regarding these and other
risks, uncertainties, or factors is included in China Deyu Agriculture’s
filings with the US Securities and Exchange Commission.
Deyu Agriculture does
not undertake any obligation to update any forward-looking statements as a
result of new information, future events, or otherwise except as required under
applicable law.
I would now like to
turn the call over to Charlie Lin, CFO.
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
Thank you, Kevin.
Welcome, all, to the earnings call for Deyu Agriculture.
Before I discuss our record
results for the second quarter ended June 30, 2011, I would like to take this
time to give a brief introduction of the company.
We are a vertically
integrated producer, processor, marketer, and distributor of organic and other
agricultural products made from corn and grains operating in Shanxi Province of
the People’s Republic of China. We have access to over 109,000 acres of
farmland in the Shanxi Province for breeding, cultivating, processing,
warehousing, and distributing grain and corn products. In the last few years,
we have grown considerably. We were able to accomplish this growth by focusing
on the needs of our customers. We strive to provide our customers with quality
products primarily simple processed, deep processed, unpacked, and wholesale
grain products at competitive prices. Our products can currently be found in
over 10,000 retail stores throughout China. We believe that the breadth of our
product offerings, which range from grain-based beverages to grain-based foods,
our well-established sales network, and nutritious qualities of many of our
products are contributing to the growth of our customer base.
Operationally, we consider
our strength to be as follows. As an established agricultural company, the
high barrier of entry in China’s agriculture sector serves as one of our chief
competitive advantages. At this time, China’s government has stopped granting
licenses to new corn processing companies. Furthermore, only after years of vigorous
development we are now able to supply approximately 10,000 supermarkets and
convenience stores in China.
Our exclusive access
to over 100,000 acres of excellent farm lands, 19,000 acres of which we hold
the ownership to; our contract with more than 200 farmers; our modern logistic
ventures and agreements with three major Chinese railway lines, all facilitate
our distribution efforts.
In addition, we
completed the construction of a new storage center in early May 2011 that we
believe will reduce the risks associated with the raw material seasonality as
well as enable us to better meet the growing demand for our products
particularly our corn products. With the addition of our new storage center,
the warehouse of which is capable of storing 70,000 pounds of grains with an
annual turnover rate of more than 350,000 pounds, our total storage capacity
now stands at over 120,000 pounds with an annual turnover rate of more than
600,000 pounds. This new facility features advanced corn drying equipments
that we believe will enable us to process 500,000 pounds of corn products
annually. We project that our new storage center will support annual corn
sales of 120 million. Even though our new storage center is geared more
towards corn production, we aim to be a well-rounded provider of grain
products.
Another strength of our
business model is our use of the shopping shop approach where we buy spaces,
primarily counter areas, in supermarkets to display our products. Even though
we do not have many signed agreements with these supermarkets, we still are the
exclusive seller in many of them, meaning we have no true competition in these
shopping shop areas. As a result, in many of these supermarkets, our products have
primarily been set apart from competitors. We intend to build upon this trending
advantage by launching more shopping shops in additional supermarkets in the
future.
Now, we’ll take a
look at our results for the second quarter ended June 30, 2011.
We reported revenue
of $52 million in the three months ended June 30, 2011, which is 182% increase
over the $18.5 million in revenue we earned during the same period in 2010.
When we further compare these two periods, we see that the foundation of our
business, our corn division, more than doubled its sales from $15 million in
the second quarter of 2010 to $34.7 million in the second quarter of 2011. Moreover,
our simple processed grains division improved its revenues more than 500% from
$2.5 million to $15.6 million.
Net sales from our
unpacked grain business, which was added during the first quarter of 2011 as
part of our simple processed grains division, generated revenues of $7.7
million during the three months ended June 30, 2011. We also continued to see
progress in other recently added business segment, bulk sale of rice and flour,
in this first quarter. Over time, we expect our revenue to improve as we
continue to cultivate our product lines and we plan to continue to use our
operating cash flow and financing proceeds to enter our products into more
supermarkets in China.
Our gross margin for
the three months ended June 30, 2011 was 17.1%, which was a decrease of 8.6%
from our gross margin of 25.7% during the same period in 2010. This decrease
was primarily due to the decreasing margin of our corn division of 15.8% and a
lower margin of 8.8% in our bulk purchase and wholesale of rice and flour
division this past quarter.
Gross margin for our
corn division was 16.8% during the three months ended June 30, 2011 compared to
21.6% during the same period in 2010. This lower margin was attributable to
price competitiveness in the beginning of the harvest season of corn along with
corn purchase limited to two wholesalers by bank notes. We believe that this
margin will improve in the following periods due to our strength of inventory
quality, warehousing capacity, strong procurement, and security of supply.
Gross margin for our
simple processed grains division was 17.7% during the three months ended June
30, 2011 as compared to 52.6% during the same period in 2010. This decrease is
a reflection of the lower margin of 8.8% in our newly added business of bulk
purchase and wholesale of rice and flour and a margin of 27.9% in our unpacked
grain business sold in supermarkets being included in this division. Since
consumer agricultural products cannot reflect price increases of purchase cost
in time, we discounted some of those products this past quarter which is in
line with our strategy of increasing our market share in the (inaudible)
market.
Our unpacked grain
business, a recent addition to our simple processed grain division, generated a
gross margin of approximately 27.9% during the three months ended June 30, 2011,
which was lower than the margin of three months ended March 31, 2011. This is
a result of an increase in the quantity of goods sold including a higher percentage
of common types of grain with lower margins.
Our other recently
added business, the bulk purchase and wholesale of rice and flour, had a gross
margin of approximately 8.8% during the three months ended June 30, 2011. This
margin is consistent with our margin during the three months ended March 31,
2011.
Gross margin for our
deep processed grains division was 18.7% during the three months ended June 30,
2011. We established our deep processed grain division during the second half
of 2010 through acquisition and research and development and this segment is
still in the mode of market development. We are still testing new product
lines and manufacturing plants. Accordingly, most of our deep processed grain
products were produced through outsourcing this past quarter. All of these
factors contributed to weakness in cost control. We believe that our deep processed
grains division margins will improve once both of the company’s new lines and
manufacturing plants are up and running and more fully developed.
Our continuous growth
relies on our ability to meet the rising demand for our current products and
expanded product lines and, as we head into 2012, we believe we have sound
strategy in place to help us sustain our progress.
All of us at Deyu extend
our deepest thanks to our shareholders. We will not be in this great position
we are in today as an emerging agricultural company without your support.
On that note, we will
now like to open up the call for questions. Operator?
Operator
Thank you. We will
now be conducting a question and answer session. If you would like to ask a question,
please press *1 on your telephone keypad. A confirmation tone will indicate
your line is in the question queue. You may press *2 if you would like to
remove your question from the queue. For participants using speaker equipment,
it may be necessary to pick up your handset before pressing the * keys. One
moment please while we pool for questions.
Thank you. Our first
question is from the line of Echo He of Maxim Group. Please state your
questions.
John Hamm – Maxim
Group
Hi, everyone. This
is John Hamm for Echo. My first question is could you talk a little bit about
the revenue of each of your segments going forward in this year?
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
Basically, looking at
the whole year of 2011, definitely it’s a huge growth compared to last year,
not just by year but quarter by quarter for the same period in the last… compared
to last year. For the both corn… for among all of our three main divisions,
corn, single, and deep, and we can… we expect to see growth in the third
quarter again compared to the same quarter in last year. Not only that, we
can… we expect to see the increased revenue from second quarter to the third
quarter for across all three divisions including corn, simple, and deep. And
for the corn division, because our bank loan… the short-term bank loans and
bank notes we received in the middle of the second quarter, you will see the
full effect in the third quarter about the influence of this three-year… all
these loans and notes payable that you will see inventory will increase and more
inventory regenerated from the second and third quarter will populate into more
increasing revenue in third quarter not just for corn division but for the simple
processed grains division, we… because it includes the unpacked grain business
in the supermarket for the open counter section and that business is good and
because our brand Deyu and Deyu provides a quality product is getting well-known
in the supermarkets. And the longer those unpacked counter sitting in the supermarket
and more and more supermarkets, the more we are going to see more revenue get
generated due to the position and existence in those supermarkets. So it’s
getting popular in those supermarkets.
In the third quarter
or future, we will like to add more variety of grains for the common five (ph)
and unique five (ph) and also, eventually, we may consider importing the nuts
and cereals from the US to add more flavor of the unpacked grain counter
section.
And for the bulk
purchase and wholesale of the rice and flour, in July, we set up a new company,
a joint company with another well-known local individual businessman that we
set up a company called YuGu Company. YuGu Company would push our bulk
wholesale rice and flour to another label. It’s going to be a project of a
Chinese… Great China Grain… more like an intersection center to where we
provide a place for people to attract the buyer and seller in the open market.
It’s like a… so after that project is completed, we will see more and more
business revenue generating from bulk sales in grains.
John Hamm – Maxim
Group
Ok. Thank you. My
second question is about the margin. I think I may have missed some data when
you talked about the margin in the last two quarters, could you reiterate like
the deep processed products, what’s the margin in the second quarter; and the
simple processed, what’s the margin?
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
Right. Okay. For
the simple processed division, the margin is about 17.7%. That division
includes two pieces. One segment is unpacked grain business. Unpacked grain
business has a higher margin than the other segment. The unpacked grain
business has 27.9% and the other part of simple processed division is bulk
wholesale and trade which one… which has a lower margin of 8.8% because this is
more like strictly a trading business. So we don’t… for that bulk wholesale
and trading, we don’t… in general, we don’t produce the material or product, we
simply pool buyer and seller together. So that part of business tends to have
a lower margin but all together will come out 7.7% for simple processed grains
division.
John Hamm – Maxim Group
And the deep processed?
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
Deep processed has
18.7%.
John Hamm – Maxim
Group
Okay. And for corn it’s
51.8%, am I right?
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
No. Corn has 16.8%.
John Hamm – Maxim
Group
Oh, 16.8%, sorry.
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
Yeah, 16.8%. 16.8%.
John Hamm – Maxim
Group
Okay. Okay. Those
are my questions so far. Sorry, just one more question. How do you think the
margins are going to change in the rest of the year?
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
Margin… because the
second quarter, we see the corn margin division dropped a little bit but I
believe that corn margin in third quarter would be definitely higher than this
16.8% once we master all the process because the second quarter is almost like
one of very… almost like first time we were able to access this amount of loans
and notes payable so once we gain the experience with those corn wholesalers,
we will probably would be able to get more leeway and more bargaining power,
but since this is the first time this year, so we were limited by those two
wholesalers for notes payable paid to them so… but in the third quarter, because
we have a strong warehouse and logistics center and railway station so we are
able to provide more capacity, more supply and quality to our customers so, in
that regard, you will definitely see a higher margin I believe for simple and
corn both.
John Hamm – Maxim
Group
Okay. Thank you.
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
You’re welcome.
Operator
As a reminder, if you
would like to ask a question, you may press *1 from your telephone keypad.
We’ll pause a moment to pool for questions.
Once again, if you would
like to ask a question, you may press *1.
Thank you. There are
no further questions at this time. I would like to turn the floor back to
management for closing comments.
Charlie Lin – Deyu
Agriculture Corp. – Chief Financial Officer
I thank you, all, for
participating in this earnings call. As we strive to another growth and
another success in the following quarters and coming quarters, we look forward
to seeing you all in the next earnings call and we expect to have another great
earnings call and record results for the third quarter. Thank you, all, for
coming and dialing. Thank you. Have a nice day.
Operator
This concludes
today’s teleconference. You may disconnect your lines at this time. Thank you
for your participation.
