Hanfeng Evergreen Inc.
TSX : HF

Hanfeng Evergreen Inc.

February 08, 2010 21:05 ET

Hanfeng Announces Second Quarter Fiscal 2010 Financial Results

TORONTO, ONTARIO--(Marketwire - Feb. 8, 2010) - Hanfeng Evergreen Inc. ("Hanfeng" or the "Company")(TSX:HF) today reported its financial results for the second quarter and six months of fiscal 2010 ended December 31, 2009. All amounts are in Canadian dollars unless otherwise noted.

Summary Financial Results
In $Cnd. thousands except per share data For the three month period ended Dec 31 For the six month period ended Dec 31
2009 2008(1) 2009 2008(1)
Sales $61,400 $81,307 $116,500 $149,448
Gross profit 10,265 12,922 19,076 22,957
EBITDA(2) 9,587 12,165 17,701 21,776
Net Income 6,307 12,508 12,409 20,247
  Basic EPS 0.10 0.20 0.20 0.33
  Diluted EPS 0.10 0.19 0.20 0.33
           
(1)The Company changed its fiscal year end from December 31 to June 30, effective June 30, 2009. Therefore, the comparative 3 and 6 month periods in 2008 were previously reported as the third and fourth quarter of fiscal 2008.
(2) Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a non-GAAP financial measure, which the Company believes is meaningful information for purposes of performance evaluation and it allows for comparisons of the Company's performance to the industry as it eliminates the impact of financing decisions, capital structure and the cost basis of assets. Hanfeng calculates it by adding (1) net income, (2) interest expense (or deducting interest income), (3) depreciation expense reported as part of cost of goods sold, (4) depreciation expense reported as a line item on the income statements, (5) fixed asset write-down and (6) income tax expense reported on the income statement;, and by deducting foreign exchange gain. This might not be the same definition used by other companies.

Revenue from sales of the Company's value-add fertilizer products were $ 61.4 million in the second quarter ended December 31, 2009, compared to $ 81.3 million in the quarterly period ended December 31, 2008 as a result of a lower average selling price as commodity prices continued to trend lower during the period, and partially offset by an increase in volume sold. Sales volumes in the second quarter of fiscal 2010 increased 5 percent year over year to 154,962 metric tonnes (MT), the highest quarterly sales volume in the Company's history, indicating that demand for Hanfeng's products continues to grow.

EBITDA in the quarter ended December 31, 2009 was $9.6 million compared to $12.2 million in the quarter ended December 31, 2008 primarily due to a lower gross profit, an increase in costs primarily associated with the commercialization of new products (CarbonPower®), and an increase in stock based compensation expense. Net income decreased to $6.3 million for the current quarter versus $12.5 million in same period in 2008 primarily as a result of the aforementioned items, a fixed asset write-down of $1.15 million ($0.02 per share) primarily relating to production equipment at one facility during the quarter and a $1.63 million foreign exchange gain in the quarter ended December 31, 2008. In addition, Hanfeng's tax holidays expired effective this fiscal year and its earnings are now subject to Chinese income tax. Earnings per share (EPS) were $0.10 for the second quarter of 2010 compared to $0.20 in the fourth quarter of 2008. 

Sales, EBITDA, and net income for the first half of fiscal 2010 ended December 31, 2009 were $116.5 million, $17.7 million and $12.4 million respectively, representing decreases of 22 percent, 19 percent, and 39 percent from the six month period ended December 31, 2008. Earnings per share for the six month period ending December 31, 2009 was $0.20 ($0.20 fully diluted), compared to $0.33 ($0.33 fully diluted) for same period in calendar 2008. The decreases were the result of previously mentioned items, as well as first time maintenance shut-downs at the Company's largest wholly owned facility in Heilongjiang during the first quarter of fiscal 2010.

In the second quarter of fiscal 2010, Hanfeng's average selling price decreased to approximately Renminbi (RMB) 2,555 per MT, compared to RMB 3,282 per MT in the quarter ended December 31, 2008. The reduction is a result of continuing decreases in raw material costs. Particularly, in the second quarter ended December 31, 2009, the average price of urea, phosphate, and potash in China decreased 6 percent, 9 percent, and 30 percent respectively, compared to the same period in calendar 2008. Urea, phosphate and potash (conventional fertilizers) collectively account for approximately 90 percent of Hanfeng's cost of goods sold, as well as being the primary competition in the China agriculture market. More recently, Hanfeng's average selling price per MT in RMB decreased 9 percent compared to the first quarter ended September 30, 2009.

The actual production volume in the second quarter of 2010 increased by 6 percent year over year to 152,133 MT, a record amount for the Company. For the six month period, production is down approximately 1 percent, primarily due to the previously mentioned first time maintenance shut down at the Heilongjiang facility in the first quarter of fiscal 2010 and offset by new production from the Shandong joint venture. Finished goods on hand at the end of the quarter were 7,491 metric tonnes.

Since the spring of 2009, many conventional fertilizer producers began liquidating their high cost inventories carried over from 2008, creating significant downward pressure on pricing. Furthermore, many urea producers in China were experiencing financial difficulty during this period and were selling into the market below their costs. In response, Hanfeng elected to reduce the pricing on its slow and control release fertilizers in order to continue to maintain and grow its customer base. The market is expected to return to more historic pricing levels as current market conditions, particularly in Hanfeng's established markets such as Heilongjiang and Jiangsu, have begun to stabilize. 

Gross profit decreased by 21 percent in the quarter ending December 31, 2009 and 17 percent in the first half of fiscal 2010 versus the comparative periods in calendar 2008 respectively as a result of a lower gross profit per metric ton partially offset by an increase in tonnage sold. For the quarter ending December 31, 2009, gross profit in RMB decreased by 14 percent, which is the result of a 18 percent decrease in sales revenue, partially offset by the improved gross margin percentage (16.7 percent for the quarter ending December 31 2009 vs. 15.8 percent for the quarter ending December 31, 2008). Gross profit as a percentage of sales increased 0.7 percent for the quarter ending December 31, 2009 from the quarter ending September 30, 2009. 

Gross profit on a per metric ton basis for the quarter ended December 31 2009 was RMB 427, compared with RMB 519 for the quarter ending December 31, 2008, a 18 percent decrease, due to the aforementioned market conditions. On a consolidated basis, gross profit per metric ton in the second quarter of fiscal 2010 decreased by RMB 20 (or 4 percent) from the first quarter of fiscal 2010. Gross profit per metric ton in Hanfeng's established markets was consistent in the second quarter of fiscal 2010 compared to the first quarter of fiscal 2010, but was offset by a lower gross profit per ton in the newly commissioned Shandong facility. 

The average foreign exchange rate (i.e., CAD dollar to RMB) for the quarter ended December 31, 2009 was 6.45 compared with 5.96 in the quarter ended December 31, 2008, representing an 8 percent appreciation in the Canadian dollar. While Hanfeng earns almost all of its revenue and pays almost all of its suppliers in RMB, it reports its financial results in Canadian dollars. The appreciation of the Canadian dollar over the reporting period had a negative impact on revenue and gross profits reported in Canadian dollars.

As at December 31, 2009, Hanfeng reported cash and cash equivalents of $47.2 million and net working capital of $150.0 million. As at December 31, 2009, Hanfeng had no long-term debt and bank debt of nil. In addition, Hanfeng has undrawn lines of credit in China totaling RMB730 million (CAD $111.9 million).

Liquidity and Capital Resources
In thousands of Canadian dollars except for ratios December 31, 2009 June 30, 2009
Current ratio (1) 25.4:1 4.4 : 1
Cash & cash equivalents 47,201 92,342
Working capital 150,046 148,786
Total assets 266,764 317,266
Total debt (2) Nil 39,146
Total equity 260,614 273,777
Total debt / Total equity NA 14%
Notes:    
     
  1. Current ratio = Current Assets / Current Liabilities
  2. Total debt does not include accounts payable, accrued liabilities, advances from customers and income tax payable.

Business Highlights

  • Hanfeng has amended its distribution agreement for CarbonPower® with FBSciences Inc., enabling the Company to export the product to Southeast Asia on a non-exclusive basis. Hanfeng signed an exclusive distribution agreement with FBSciences Inc. to distribute CarbonPower® in China on November 9, 2009. The term of the agreement remains 2 years with a right of first refusal. Hanfeng field tested CarbonPower®, used in conjunction with its own value add fertilizers, during fiscal 2009 in a number of provinces with encouraging results. Hanfeng applies CarbonPower® to conventional fertilizer thereby improving its effectiveness. The first commercialization of this product occurred in the second quarter of fiscal 2009 (ended June 30, 2009) when 100,000 tonnes of coated urea was sold.

  • Construction on the Company's first joint venture outside China is currently on schedule for commissioning in the first quarter of fiscal 2011. Located in Surabaya, Indonesia, the initial plant will have an annual productive design capacity of 150,000 metric tonnes. Hanfeng has partnered with two established agricultural companies in Indonesia: one a distributor of agricultural products in southeast Asia, and the other, a large-scale palm oil grower, who under the terms of the joint venture, will purchase 80 percent of the production from the facility for its own internal use. 

  • The 100,000 MT per annum (MTPA) Shandong Mingshui joint venture facility began commercial production in the first quarter of fiscal 2009 as scheduled. The Shandong province is a key market for Hanfeng's products and consumes approximately 15 million MTPA of fertilizers annually, the largest of any province in China. To further strengthen our presence in this very important market, an additional 140,000 MTPA is expected to be added to the joint venture during calendar 2010.

  • In August 2009, Hanfeng was selected by the Standardization Administration of the People's Republic of China to establish the National Compulsory Standard for sulphur coated urea ("SCU"), as well as the standards for blended fertilizers where SCU is used. The SCU National Compulsory Standard will control technical specifications including the amount of nitrogen and sulfur contained in SCU, as well as the dissolution criteria for its slow-release characteristics. The application and enforcement of the new standard is expected to improve the quality of the SCU market in China, and further enhance Hanfeng's first mover advantage.

In addition, Hanfeng's former Chief Financial Officer (CFO), Ms. Madeline Yu, has advised the Company that she will not return to her position when her maternity leave expires in May 2010. Ms. Yu served as the Company's CFO from 2004 – 2009 and was a significant part of the Company's transition and early success as a value-add fertilizer producer. The board and management of Hanfeng acknowledge and appreciate her many contributions and wish Ms. Yu the very best in her future endeavors.

Mr. Paul Begin, CFO of Hanfeng, will host a conference call to review the Company's financial and operational performance. Management invites analysts and investors to participate on the conference call.

Date: February 9, 2010

Time: 10:00 am, Eastern Time

Dial in Number: 416-340-8018 or 1-866-223-7781

Taped Replay: 416-695-5800 or 1-800-408-3053

Taped Replay Pass Code: 8508185 

Webcast Presentation Link: http://events.digitalmedia.telus.com/hanfeng/020910/index.php

Hanfeng's Second quarter 2010 financial statements and MD&A have been filed and will be available at www.sedar.com.

About Hanfeng Evergreen Inc.

Hanfeng is the largest producer of slow and controlled release fertilizers in China. It was the first company to introduce the concept of slow and controlled release fertilizers into China's agriculture market with its establishment of the first commercial scale production in China. All production facilities are located in prime agricultural regions of China. The Company is headquartered in Toronto, Ontario and its shares trade on the Toronto Stock Exchange. www.hanfengevergreen.com

This press release contains forward-looking statements based on current expectations. These forward-looking statements entail various risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Risks and uncertainties about Hanfeng's business are more fully discussed in the Company's disclosure materials, including its annual information form and MD&A, filed with the securities regulatory authorities in Canada. All amounts are stated in Canadian dollars except for noted otherwise.

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