Hanfeng Evergreen Inc.

Hanfeng Evergreen Inc.

November 09, 2010 20:46 ET

Hanfeng Announces First Quarter Fiscal 2011 Financial Results

Company Initiates Production in Support of Beidahuang Distribution Joint Venture for Delivery in 2011

Seasonality, Maintenance Shut-Downs Impact Overall Results

TORONTO, ONTARIO--(Marketwire - Nov. 9, 2010) - Hanfeng Evergreen Inc. ("Hanfeng" or the "Company") (TSX:HF) a leading provider of value-add fertilizers in China and South East Asia, today reported its financial results for the first quarter of fiscal 2011 ended September 30, 2010. All amounts are in Canadian dollars unless otherwise noted.                      

Summary Financial Results              For the three month period ended
(in thousands in $Cdn except percentages and per share data) Sep 30, 2010 Sep 30, 2009
Sales $ 42,605 $ 55,100
Gross profit   5,083   8,811
EBITDA(1)   4,503   8,114
Net Income   2,438   6,102
  Basic EPS   0.04   0.10
  Diluted EPS   0.04   0.10
(1) 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 reported on the income statements (or deducting interest income), (3) depreciation expense reported as part of cost of goods sold on the income statements, (4) depreciation expense reported as a line item on the income statements, (5) income tax expense reported on the income statements and (6) and by deducting foreign exchange gain (loss). This might not be the same definition used by other companies.

Sales revenue in the first quarter was $42.6 million, compared to $55.1 million in the comparable period in 2009. The decline was the result of several factors including the impact of seasonality, annual maintenance shut-downs at the Company's production facilities, approximately 30,000 metric tonnes ("MT") of slow and controlled release fertilizers ("SCR") produced for the new joint venture entered into with Beidahuang Agricultural Company Limited ("the Distribution JV") but not shipped during the quarter, and foreign exchange, partially offset by a year-over-year increase in CarbonPower® coated urea ("CPU") sales volumes. EBITDA was $4.5 million versus $8.1 million in the comparable period in 2009. Net income was $2.4 million for the current quarter compared to $6.1 million in the same period in 2009 due to lower realized margins on CPU and the aforementioned factors. Earnings per share ("EPS") was $0.04 for the first quarter of fiscal 2011 compared to $0.10 for the first quarter ended September 30, 2009.


The actual production volume of SCR in the first quarter of 2011 decreased by 26,105 tonnes or 22 percent from the first quarter of fiscal 2010. The decrease in SCR production was primarily due to the requirement to shut down the NPK production line at the Jiangsu facility for the first quarter of fiscal 2011 due to the unusually hot weather. In prior years, the NPK production line at the Jiangsu facility was shut down for only a number of weeks due to the hot weather. In addition, the first quarter of the fiscal year is historically the slowest sales season and consequently, annual maintenance shut downs are performed at all of the locations.

SCR finished goods on hand at the end of the first quarter of fiscal 2011 was 45,931 MT, 29,204 MT higher than the finished goods inventory on hand of 16,733 MT at June 30, 2010. The increase in finished goods inventory is the result of reserving inventory for expected future deliveries to the Distribution JV. In the prior quarters, finished goods were delivered to distributors in advance of the peak selling season. Going forward, the Company expects more seasonality as a result of the Distribution JV. As a result of reserving finished goods for the Distribution JV and lower SCR production due to the aforementioned reasons, sales volume in the first quarter of fiscal 2011 was 63,632 MT versus 122,805 MT sold in the first quarter of fiscal 2010.

In the first quarter of fiscal 2011, Hanfeng's average selling price of SCR decreased to Renminbi ("RMB") 2,592 per MT, down RMB 201 per MT or 7 percent, compared to RMB 2,793 per MT achieved in the first quarter of 2010. Average selling price was relatively unchanged from the fourth quarter of fiscal 2010. The reduction in selling price year over year is mainly due the product mix of SCR sold in the current quarter versus the comparative period. The Company's multi-nutrient products like coated NPK typically have a higher selling price than single nutrient products such as sulfur coated urea (SCU).

Gross profit for SCR on a per MT basis in the first quarter of 2011 was RMB 429, a 4 percent decrease from the comparative period last year. Gross profit for SCR per MT in the first quarter of fiscal 2011 was consistent with the gross profit for SCR per MT in the preceding quarter (Q4 2010).

Combined with the annual production capacity from the recently completed 150,000 MTPA facility in Indonesia and the repurchase of Agrium Inc.'s interest in the Shanxi joint venture (see "Recent Business Highlights"), the Company now has approximately 826,000 MTPA in SCR design capacity.


During the first quarter of fiscal 2011, Hanfeng sold 54,184 tonnes of the new CarbonPower® coated urea product ("CPU"), a 25 percent decrease over the 72,116 tonnes sold in the previous quarter as a result of seasonality. Hanfeng began commercial sales of CPU in the third quarter of fiscal 2010 after securing the exclusive supply and distribution agreement with FBSciences, Inc. in November 2009.

The average selling price on CPU in the first quarter of fiscal 2011 was RMB 2,078 per metric ton, up 3 percent from RMB 2,012 per ton in the fourth quarter of fiscal 2010 due to a marginal increase in urea prices. Gross profit per metric ton for CPU was RMB 107 versus RMB 207 in the fourth quarter of fiscal 2010 due to selling a diluted version of CPU. The Company was producing a product with a lower CarbonPower® content in order to satisfy demand and preserve inventory while awaiting additional shipments which are expected to arrive in the near term. Hanfeng has in the past experienced some importation delays due to the nature of the CarbonPower® product and the sensitivity in China regarding biological products being imported into China. The Company is continuing to identify the most efficient manner in which to import the CarbonPower® product but does expect to continue to experience some delays. The Company is currently in the process of registering the product with the proper authorities in China. Once completed, this is expected to standardize the importation procedures.

The average foreign exchange rate (i.e., RMB to CAD dollar) in the first quarter of fiscal 2011 was 6.51 compared with 6.22 in the first quarter of 2010, representing a 5 percent appreciation in the Canadian dollar. Even though 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 September 30, 2010, Hanfeng reported cash and cash equivalents of $28.5 million and net working capital of $164.9 million. Total inventory and advances to suppliers increased from $94.0 million at June 30, 2010 to $122.5 million at the end of the first quarter of fiscal 2011 primarily as a result of an increase in raw materials in preparation for the busy season and of stockpiling finished goods inventory in anticipation of third quarter deliveries to the Distribution JV. As at September 30, 2010, Hanfeng had long-term debt of $1.3 million and bank debt of nil. In addition, Hanfeng has undrawn lines of credit in China totaling RMB 720 million (CAD $110.8 million).

Recent Business Highlights

Hanfeng became the first chemical fertilizer manufacturer to be awarded the National Environmental Friendly Ecological Fertilizer Certificate for both its slow and controlled release ("SCR") and value-add fertilizers. The award is granted after rigorous product testing and an extensive in-plant monitoring process by the Beijing ZhongHua Combination Certification Agency ("HQC"), a certification body responsible for the oil and chemical industry in China. Hanfeng will also assist HQC in establishing guidelines for other chemical fertilizer manufacturers.
In October 2010, Hanfeng held the grand opening for the 150,000 MTPA slow and controlled release fertilizer joint venture facility in Surabaya, Indonesia (the "JV facility"). The JV facility is the first to be constructed by Hanfeng outside of mainland China and is jointly owned by PT. Matahari Kahuripan Indonesia (the "Makin Group"), the largest producer of palm oil and tobacco in Indonesia, and PT. Sumber Agrindo Sejahtera ("Sejahtera"), Indonesia's largest agricultural distributor. At the grand opening, the Company announced that it will add 100,000 MTPA of bulk blending capacity to the multi-product facility, bringing the total design capacity to 250,000 MTPA. Construction of the bulk blending plant is expected to be completed and operational in 90 to 120 days. The additional blending capacity will enable the joint venture to provide a wider range of products, including CarbonPower® coated urea ("CPU"). The Makin Group and Sejahtera have agreed to purchase 100 percent of the first year production from the plant with first sales to be delivered by December 31, 2010.
In September 2010, the Company entered into the Distribution JV to be operated by Beidahuang and Hanfeng. Under the terms of the agreement, the value-added fertilizer products (SCR, CPU) will be sold to the Distribution JV at market prices for resell in Beidahuang's distribution network. The Distribution JV also plans to distribute additional value added fertilizers by leveraging Hanfeng's core technologies, Beidahuang's distribution network and third party resources. In addition to reselling value-added fertilizers, the Distribution JV will further cooperate in the areas of research and development, promotions and field trials. Hanfeng owns 40 percent of the joint venture.
  The Company has also entered into a letter of intent to build and operate a 150,000 MTPA multi-product production facility (the "Facility") located in the Heilongjiang province. The Facility would be built next to Beidahuang's urea production facility. The Facility would be owned under similar terms as those provided in other Hanfeng joint ventures and the proposed ownership would be 50 percent for the Company and 50 percent for Beidahuang. Construction is expected to begin immediately after reaching a definitive agreement. 
In July 2010, Hanfeng purchased Agrium's ownership in Hanfeng's subsidiary responsible for developing SCU, known as Hanfeng Slow Release Fertilizer (Canada) Co. Ltd. (or "Subco"). Hanfeng purchased Agrium's 50 percent ownership in Subco for $2.3 million in cash and 100,000 common shares valued at the closing price of $6.22 per share for total consideration of $2.9 million. As a result, Agrium's ownership in Hanfeng increased from 19.4 percent to 19.6 percent effective July 16, 2010. Hanfeng's Subco has a 50 percent interest in Fengxi, which includes a 50,000 MTPA SCU facility in Shanxi province, China, and the perpetual license for SCU production in China. The re-purchase is a result of Hanfeng broadening its strategic focus to building facilities that have a range of products including SCU.

Hanfeng will hold a conference call on Wednesday, November 10, 2010, to discuss its financial results for the first quarter ended September 30, 2010. Mr. Paul Begin, CFO of Hanfeng, will host the call. Management invites analysts and investors to participate on the conference call.

Date: Wednesday, November 10, 2010
Time: 10:00 am, Eastern Time
Dial in Number: 416-340-9432 or 1-877-440-9795
Taped Replay: 905-694-9451 or 1-800-408-3053
Taped Replay Pass Code: 8334283
Webcast Presentation Link: http://www.gowebcasting.com/2098

Hanfeng's First quarter 2011 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 and South East Asia. 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 and South East Asia. 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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