Origin Agritech LTD Q4 FY2024 Earnings Call

Thank you for standing by, and welcome to the Origin Agritech Fiscal Year 2024 Conference Call. Please note that, today's call is being recorded. It is now my pleasure to introduce Matthew Abenante of Strategic Investor Relations.

Thank you, operator, and thanks to all of you for joining us today on the Origin Agritech Fiscal Year 2024 Earnings Conference Call. Joining us on the call today are Mr. Weibin Yan, Chief Executive Officer; and Mr. Patrick Cheng, Chief Financial Officer. The format of our call will consist of a company update provided by Mr. Yan and Mr. Cheng, followed by a question-and-answer session addressing the questions submitted by investors. We thank everyone for submitting these questions. Before we begin, I would like to remind our listeners that any statements on this call that are not historical facts are forward-looking statements. Today's call includes forward-looking statements that address expected future business and financial performance and financial conditions, and contain words like expect, anticipate, intend, plan, believe, seek, will, would, target and similar expressions and variations. Forward-looking statements address matters that are uncertain. Forward-looking statements are not guarantees of future performance and are based on assumptions and expectations which may not be realized. They are based on management's current expectations, assumptions, estimates and projections about the company and the industry in which the company operates, but involve a number of risks and uncertainties, many of which are beyond the company's control. Some of the important factors that could cause the company's actual results to differ materially from those discussed in forward-looking statements are failure to develop and market new products and optimally manage product life cycles, ability to respond to market acceptance, rules, regulations and policies affecting our products, failure to appropriately manage process safety and product stewardship issues, changes in laws and regulations or political conditions; global economic and capital markets conditions such as inflation, interest and currency exchange rates, business or supply disruptions, natural disasters and weather events and patterns, ability to protect and enforce the company's intellectual property rights and separation of underperforming or non-strategic assets or businesses. The company undertakes no duty or obligation to publicly revise or update any forward-looking statements as a result of future developments or new information or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws. Although, the company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that such expectations will turn out to be correct, and actual results may differ materially from the anticipated results. You are urged to consider these factors carefully in evaluating the forward-looking statements contained herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by these cautionary statements. And with that, I would like to turn over the call to our first speaker, Mr. Weibin Yan, Chief Executive Officer of Origin Agritech. Hello, Mr. Yan.

Thank you, Matthew, and thank you all for joining us. As the new CEO of Origin Agritech, I'm excited to share our vision and strategic direction. Let me start by acknowledging where we are today. Origin Agritech has achieved several significant milestones in 2024 with our revenue growing 24.6% to $16.2 million. This growth was primarily driven by the higher volume of corn seed sales as a result of the improving corn market. In May 2024, we received a GMO safety certificate for our BBL2-2 transgenic maize, which contains advanced insect resistance and herbicide-tolerance traits. This technology stack provides robust protection against major pests like the corn borer and lice beetles, which offer four times full-stack tolerance. We have successfully tested this trait. Another major achievement was our publication letter that described our breakthrough in induction line gene editing technology. As you may know, we established the world's first efficient genetic transformation system for maize introduction line Hi3. This isn't just an academic achievement; it has real commercial implications, allowing us to develop improved traits like leaf angle, enhanced drought resistance, and strong lodging resistance in a fraction of the time compared to traditional breeding methods. To accelerate the commercialization of these technologies, we established the Origin Marker Biological Breeding Service Consortium in October 2024. We are already working with thousands of breeding companies across China to improve our corn yield. This consortium approach allows us to maximize the impact of our innovations while creating new revenue streams. Looking ahead, we have a clear three-phase strategy. For fiscal years 2024 to 2026, our immediate focus is on stabilization, achieving cash flow breakeven from operations, improving our industrial systems, and resolving historical challenges while maintaining strong operations. From 2027, we aim to establish ourselves as one of China's six leading corn companies with leading research capabilities and the highest seed quality and operational compliance reputations; compliance is becoming increasingly important today. By 2030 to 2032, which is the third stage, our goal is to become one of China's top five corn seed companies and a leading global biotech seed company, with 20% of our revenue coming from overseas markets. We are strengthening our core infrastructure, expanding our technology platform capabilities, and exploring new opportunities in nutritional food and related areas. With over 4,000 hectares of fixed plantation and advanced processing equipment, our Xinjiang production facility gives us the scale to support our growth. I'm particularly excited about our new product pipeline. We have eight new varieties launching in 2025, targeting different regions, and several more in advanced trials. This diverse portfolio addresses various market needs, from high-density planting to specific regional adaptations. But perhaps most importantly, we have an outstanding leadership team. Dr. Gengchen Han continues to be the Chairman of the Board, and I am personally taking on the CEO role. This brings continuity and deep industrial expertise, while we will add experienced executives across Research & Development, Production, Quality Control, and Corporate Development. Already, Agritech has become a pioneer in China's corn seed industry today; we are transforming into a global agriculture technology leader, combining biotechnology innovation with conventional operating expertise. We are not just developing better seeds, but advancing sustainability, agriculture, and food security. Our vision is to become the most trusted high-tech seed and agriculture company for farmers and society. With our strengthened team, advanced technology platform, and a clear strategic roadmap, I'm confident we can achieve this goal while delivering substantial value to our shareholders. Speaking of our strengthened team, I will pass the call over to our new Chief Financial Officer, Patrick Cheng, to give our financial results. Please, Patrick.

Thank you, Mr. Yan. As the new CFO of Origin Agritech, I'm pleased to present our financial results for fiscal year 2024, which demonstrates both our progress and the investment we are making in our future growth. Let me start with our top line performance for fiscal year 2024. We achieved a revenue of $16.2 million, representing a 24.6% increase from $13 million in fiscal year 2023. This growth was primarily driven by the higher volume of corn seed sales due to improvements in market conditions related to our sales. Our general and administrative expenses increased to $5.1 million from $1.99 million, primarily due to necessary investment in talent, systems, and professional services to support our growth initiatives. We have also increased our R&D investment to $1.5 million, up from $1 million, as we continue to advance our biotechnology platforms and develop new seed varieties. In terms of bottom line performance, our net income from continuing operations was $2.7 million, which is lower than the $8.7 million reported in fiscal year 2023. It's important to note that the prior year figure included a greater contribution from one-time gains from subsidiary disposals. We had a net income attributable to Origin of $3 million compared with $7.7 million in the prior year for the same reasons as I just mentioned. Turning to our liquidity position, we ended the year with cash and cash equivalents of $1.2 million compared to $3.3 million at the same period a year ago. Our cash flow metrics reflect the investment we're making in the business. Operating cash flow usage increased by $2.1 million, primarily due to working capital investments to support our growth. Our financing activities provided $0.6 million in cash flow compared to $3.2 million in the prior year. The company did not issue or sell ordinary shares during the fiscal year ended September 30, 2024. Looking ahead, we have clear financial strategies aligned with our three-phase business plan. In the near term, our focus is on achieving cash flow breakeven while maintaining necessary investments in R&D and operational improvements. We are implementing enhanced cost control and working capital management practices while ensuring we maintain investments in critical growth initiatives. For the medium term, we are focused on driving profitable growth through the commercialization of our biotechnology innovation and expansion of our seed business. We expect to see improving margins as we scale these operations. In the long term, our goal is to build a sustainable, profitable business model that combines stable seed revenues with high-margin biotechnology licensing and service fees. We have also identified several operational efficiency opportunities, particularly in our Xinjiang facilities, which should help improve our margin over time. Additionally, our new varieties launching in 2025 are expected to contribute positively to our revenue growth and profitability. In conclusion, while we're making necessary investments for future growth, we are doing so with financial discipline and a clear path to improve profitability. Our balance sheet has improved, our cost structure has become more efficient, and we have the financial flexibility to execute our financial plans. Thank you for your attention. Matthew, we can start the question-and-answer session, please.

Thank you. Our first question from investors is: Why has the gross margin in the past two years been significantly lower than in the early 2000s, in particular, between 2004 and 2005?

Thank you for the insightful questions about our historical margin trends. The difference in gross margins between this period reflects both industry evolution and our strategic positioning for future growth. You see, in the early 2000s, the Chinese seed industry was in a different phase with fewer competitors and lower market saturation. Today's environment is more competitive, but we are executing a deliberate strategy that we believe will return us to and potentially exceed historical margins through three key initiatives. First, our BBL2-2 GMO corn varieties, which received a safety certificate in May 2024, commenced premium pricing with 35 varieties already incorporating these traits and more in development. We expect to see margin expansion as these products enter the market. Second, our gene-editing breakthrough published in a leading journal enables us to develop improved varieties much faster and at a lower cost than traditional breeding. This technology advantage, combined with our original marker biologic operating service consortium, is creating high-margin revenue streams through licensing and services that were not available in the 2000s. Third, we invested significantly in modernizing our Xinjiang facility, which can process 75,000 tons annually. While this investment impacted margins in the short term, it gives us economies of scale that will improve profitability as the volume increases. Looking ahead, we expect our margins to improve substantially as these initiatives mature. Unlike the 2000s, when margins were purely from seed sales, our future margin profile will benefit from a mix of premium seed products and high-margin biotechnology services and licensing fees. This will diversify our revenue stream, helping us recover historical margin levels and establish a more sustainable and profitable business model for the long term.

Thank you. Our next question is: Is the company on track to meet revenue forecasts that were shared back in June 2024?

Thank you for your question. Under our new management team, we have developed a comprehensive eight-year strategy roadmap that surpasses previous guidance. We believe this strategy provides a clear and more actionable framework for investors to understand our path forward. In Phase 1 covering 2024 to 2026, we are focused on fundamentally strengthening our business, achieving cash flow breakeven, and optimizing our operations. The 24.6% revenue growth we achieved in fiscal year 2024 demonstrates our early progress, but we are more focused on building a sustainable foundation than meeting short-term targets. Looking further ahead, Phases 2 and 3 augment our path to becoming the top six and ultimately the top five corn seed companies in China. These ambitious but achievable goals are supported by concrete assets and capabilities, our newly upgraded Xinjiang facility, our breakthrough gene-editing technology, our BBL2-2 GMO corn varieties, and other varieties in the pipeline. Rather than concentrating on past projections, we invite investors to evaluate us on our execution of the strategic roadmap. We believe this provides a more meaningful framework for measuring our progress and potential. Each quarter, we will update you on our advancement through this phase and the specific milestones we are achieving along the way.

Thank you. Our next question is: Will you please consider changing the fiscal year to a calendar year to better show annual results to investors? The planting and harvesting season and when results are reported do not make much sense currently.

Thank you, Matthew. You raised a valid point about better matching our reporting to the natural agricultural cycles. We agree that this could provide more clarity to investors about our seasonal business patterns. As part of our broader corporate governance improvements under the new management team, we are continually evaluating several reporting optimizations, including this potential change. Our transition requires careful planning to ensure smooth financial reporting and compliance with both U.S. and Chinese regulations. We will update investors if we decide to move forward with this change. Thank you.

Thank you. What plans do you have to scale up NEC to a level where you can meet the demand of purchasers like Muyuan in the past?

Thank you. Our Xinjiang facility actually gives us significant capacity to meet large-scale demand from our customers like Muyuan. Our facility has a seed plantation of 4,000 hectares and an annual processing capacity of over 75,000 tons. However, we are able to take a systematic approach to scaling up our NEC production while keeping our limited resources at the moment under the breakthroughs of GMO and gene editing, which make us more valuable and competitive in the seed industry. I have spoken to the Board to suspend the NEC business of the company in order to focus on biotechnology commercialization and seek sales expansion. I believe this new prioritization of the business will enable the company to gain further traction in the biotechnology and seed competition, which is more value-added than the NEC business and will bring additional value to society and our shareholders. This is the situation.

Thank you. Our next question: Your gene editing breakthrough published in a leading journal seems significant. Can you explain how this translates to commercial value?

Good question. Thank you. Absolutely. Our gene editing system for corn introduction line is a game-changing technology; while others typically need three to four years for trait improvement through traditional methods, we can now achieve precise genetic modifications in just one year. This means we can bring improved varieties to market much faster and at a lower cost. We have already developed more than ten lines with enhanced traits, such as better drought resistance and improved plant architecture. This technology is so valuable that we are now partnering with dozens of operating companies across China to improve our corn varieties. This is more effective.

And what differentiates Origin from other agricultural biotechnology companies in China?

Yes, another good question. We have unique advantages. First, we are the only Chinese seed company with both GMO and gene editing capabilities, demonstrated by our GMO safety certificate BBL2-2 and our recent publication. Second, we have end-to-end capabilities from research through production, with our state-of-the-art Xinjiang facility processing 75,000 tons annually. This will enable us to gain a stronger position than other seed biotechnology companies. Third, we have an extensive Germplasm Bank and breeding programs that have been developed over the past 25 years. This compilation allows us to develop breakthrough technologies and quickly incorporate them into commercial production. Thank you.

The next question: Your eight-year strategy seems quite ambitious. What gives you confidence you can achieve these goals?

Okay. Thank you. We have four key advantages that make our goals achievable. First, regarding GMO, we just received the GMO safety certificate for our BBL2-2 corn, which has already been incorporated into 35 orders. Second, gene editing: Our gene editing platform is providing transformations validated by recent publications. Third, our service platform: We established the Origin marker biological operating service consortium, which is already generating revenue through partnerships. Fourth, seed platform: Origin has a good reputation in the Chinese corn seed market for its high quality and extensive network of distribution and research partners, modern seed processing facilities, and a robust genetic resource pool, making it a full-cycle seed company. Of course, finally, we have a new management team with deep industry expertise. We have added key executives across Research & Development, Production, and Sales. Most importantly, we are already seeing the results: a 25% revenue growth this year, reduced losses, and eight new varieties ready for launch in 2025. Thank you.

And here's our last question: How do you see the Chinese agricultural biotechnology market evolving?

Thank you. China is at an inflection point in the adoption of agricultural biotechnology. The government strongly supports GMO commercialization and innovative breeding technologies to ensure food security. We are perfectly positioned to capitalize on this shift. We have approved GMO traits, advanced gene editing capabilities, and the production facilities to scale quickly. As the first Chinese seed company to achieve many biotechnology milestones, we have a first-mover advantage as the market develops. Thank you, Matthew.

Thank you. And as I said, there are no further questions. So, I'll hand the floor back over to you, Mr. Yan.

Thank you. Thank you, Matthew. And thank you, everyone, for participating in today's call. Before we end our call, I would like to thank you for your continued support of Origin Agritech. We have made remarkable strides in the past year in advancing our groundbreaking agricultural technologies. In closing, I want to reiterate that we are committed to enhancing shareholder value and achieving a fair market valuation that reflects the true potential of our company. Thank you once again for joining us today, and we look forward to sharing more of our journey with you in the coming months. Thank you.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.