Origin Agritech LTD Q2 FY2022 Earnings Call

Hello and welcome to the Origin Agritech First Half 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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. Origin's mission of bringing Agritech innovation to China has never been more relevant 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 time with rising interest rates, inflation, and geopolitical conflicts around the world. We like to think that we're a place that maybe wouldn't be said to benefit from all those things, but could be a good hedge in your portfolio. As you can see, we're thriving during these difficult times. Food security is a top priority for the Chinese government, as you can imagine, and they're investing heavily into the agriculture sector, embracing Agritech innovations such as with the recent approval procedures for gene-edited crops. We're very excited to be playing a role in solving this food security problem, as we have the technology to not only dramatically improve corn yields but also increase 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 300% from RMB11.6 million to RMB46.4 million or USD7.3 million. Gross margin grew from RMB4.3 million to RMB12.9 million. Importantly, despite our rapid growth, our 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-leasing 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. We had this corn plant in test fields planted in the main growing region in China. Some of you might have seen on the news that there was a terrible drought followed by horrific flooding. Our corn plant really thrived under those conditions. 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 increases over traditional corn. We could have sold a lot more corn, but we ran out of inventory. 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 because they see just how impactful this product is for them and for their profit margins, and they are demanding immediate supply. As we mentioned in our press release, this nutritionally enhanced corn alleviates the need for additives such as soybean meal that are traditionally needed to make the feedstock sufficient for hogs. This alleviation is why we dramatically improve the profit margins, and why these feedstock companies are coming to us and are 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 has an approximate market value of about RMB500 billion or USD75 billion. We project that our new contracts growing the NEC business model will grow rapidly and NEC will play a significant role in the feedstock industry in the next few years. It doesn't take a very high percentage of capturing this market to have pretty incredible financial results or impact for Origin as even a small gain in this market would translate to huge revenues and EPS for the company. We don't see why our feedstock partners want to do more business with us given the impact of this product. It's important to note that sales recognized in the first half of 2022 had zero contribution from this NEC; they were just from 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 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 September; we're not on the standard calendar year. In terms of 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 anticipate will be soon given all the new laws that are being passed to establish a legal framework for commercialization of GMO crops. Late last year, we successfully completed production trials of drought-tolerant GMO corn in China and subsequently filed for biosafety licenses, which is the last step of the approval process before actual GMO approval. So with the addition of that trait, we now have every trait sold by the big companies like Bayer outside of China. We've got a complete portfolio concerning that side. Corn is projected to be a multibillion-dollar market opportunity, and Origin has plans to be a major player in this space. Outside of GMO, there are fascinating developments with CRISPR gene editing. As I worked for a previous company, we had a licensing deal with Monsanto, and at that time, the scientists mentioned that CRISPR was the most significant development for plant breeding. However, they also said those cell walls are challenging to navigate. Origin has made some innovations with new processes for getting CRISPR past the plant walls in corn. We have been working on this since 2017, which were the early days of CRISPR. We believe we are not only a leader in China in the GMO market and the Chinese Agritech market, but we think we are leading the world in using CRISPR for corn breeding. We have developed over a dozen new traits, and one of them recently announced is particularly interesting; we altered the leaf angle of our corn to enable it to be planted in closer proximity to other corn plants, which would increase yield. We're doing many remarkable things with this technology, and I believe that the pace of innovation is only going to accelerate. When I look at our portfolio of assets, they work in tandem; it is not solely GMO or solely CRISPR; it requires both thriving hybrids and those traits. Many of our competitors may have GMO traits but lack high-performing corn hybrids to incorporate those traits into. Consequently, their eventual outcome reflects that flaw. In summary, we're very excited about the opportunities ahead of us and confident that we're going to generate an attractive rate of return for shareholders. Chairman Gengchen Han will now address some Q&A. Operator, would you please open the call for questions?

We do have a question from Bill Stein with Celadon Financial.

Hi Dr. Han, congratulations on finally starting to achieve some of the success you've been looking for all these years. My question is about the patents you may be filing regarding your gene editing. Are you filing patents for China, the United States, or worldwide? Could you elaborate on that? Thank you.

Yes, best regards. We have filed patents for our gene editing on a worldwide level, not only for China. We have achieved breakthroughs in gene editing, especially for corn, where we are significantly more efficient than others. This technology is new, and procedures related to gene editing are already being established in China, resembling more of the U.S. processes. Since we are internally just altering genes without introducing foreign genes, this gives us a significant advantage, allowing for a faster pooling process.

Okay, can I ask a few more questions? Is DuPont still a licensee of Origin? Do you expect to have more contracts to land with your NEC compared to GMO since it isn't approved yet? Could you also comment on how strong Origin is today versus any previous time in history? Thank you.

Currently, we are looking for all kinds of potential collaborations with multinationals, but we are also more focused since multinationals have operational restrictions in China. Thus, we are relying more on collaborations with local seed companies. As for the comparison of Origin today versus 10 or 20 years ago, we have significantly advanced our technology number one, and number two, we have developed an excellent product portfolio due to our dedicated breeding process. Despite previous adverse weather conditions, our hybrids have performed well. In terms of product competition and GMO product development, we are much stronger now than we have ever been. Recent years have shown our commitment to expanding our nutrition-enhanced corn, which was launched last year and has generated immense excitement among farmers. The corn seed market in China is currently around RMB300 million and could reach RMB600 million to RMB1 billion when considering the GMO segment.

Thank you very much. Will you be available to speak to investors more frequently than in the past?

Yes, I expect so. Due to pandemic-related travel restrictions over the last three years, we have been limited in our interactions. This is my first time conducting a conference call in many years, and I plan to communicate with our investors more regularly to share exciting developments as soon as possible.

Bill, I think thanks for the support and good to hear from you again. As Chairman Han mentioned, this is our first call in a long time, and with a new VP of Business Development, Wei Han, working out of New York, we anticipate an accelerated pace of news and developments.

Thank you very much.

Thank you, Bill.

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 ask a couple of questions. Could you comment on any new developments or contracts expected throughout the rest of this year? Also, do you think we might see some insider buying to show conviction from the company? Additionally, could you provide updates on any future contracts if possible?

I'll make a quick comment and turn it over to Chairman Han. If you can double profit margins for an industry, it would not be the right economic decision for companies to pass on that opportunity. We have many more inquiries and commitment from potential partners. As for insider buying, I'm not an officer, so I don't file reports, but I did buy stock a few months back, and I've encouraged friends and family to do so due to my optimism about the future.

Regarding the contracts, we currently have about 50,000 contracts for our NEC corn. Our challenge remains increasing seed production to meet the growing demand next year. Our strategy is focused on producing corn for seed mills instead of selling seeds directly to farmers to maximize profits. This year serves as a preparatory phase for future demands.

That did answer my question. Since I've been invested for six to eight years, my frustration is seeing the price of corn rising while the stock has not reflected similar growth. Also, could you comment on the potential for investment coverage from some major banks?

We are indeed in conversations with banks to secure coverage, though this process is not immediate, we hope for progress soon. On valuation, I find it puzzling that our current share price does not reflect our growth trajectory. The significant potential from upcoming harvests and partnerships indicates our stock is undervalued.

Thank you for your responses. I'm excited about the future.

It's great to hear from an investor that's been with us for five years. Your support is greatly appreciated, and I believe the next five years will outshine the last.

Thank you. I would like to return the floor to Chairman Han for any closing comments.

Thank you very much for your support and for attending today's conference call. We are in an exciting period, and I'm confident we will deliver favorable results for our investors. Have a good day.

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