Hanfeng Evergreen Inc.

Hanfeng Evergreen Inc.

March 02, 2009 16:30 ET

Hanfeng Announces Record Fourth Quarter and Year End Financial Results

- Q4 Sales grow by 48% to $81.3 million; year-end grows by 93% to $273 million - - Reports Q4 EPS of $0.20 per share and $0.57 for 2008 -

TORONTO, ONTARIO--(Marketwire - March 2, 2009) - Hanfeng Evergreen Inc. (Hanfeng or the Company) (TSX:HF) today reported its financial results for the fourth quarter and year ended December 31, 2008. All amounts are in Canadian dollars unless otherwise noted.

For the 3 month For the 12 month
period ended period ended
December 31 December 31
In thousands except ----------------------------------------------
per share data 2008 2007 Change 2008 2007 Change

Sales 81,307 54,620 48% 272,978 141,308 93%
Gross profit 12,922 10,545 23% 44,423 26,852 65%
EBITDA(1) 13,796 7,496 84% 40,963 21,808 88%
Net Income 12,058 6,793 78% 35,139 19,435 81%
Earnings per share
Basic 0.20 0.11 0.09 0.57 0.34 0.23
Fully diluted 0.20 0.11 0.09 0.57 0.34 0.23
Weighted average number
of shares (000,000)
Basic 61.4 61.2 - 61.4 57.4 7%
Fully diluted 61.8 61.8 - 61.8 57.9 7%

(1) EBITDA is a non-GAAP financial measure. 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, and (5) income tax
expense reported on the income statements. This might not be the same
definition used by other companies.

The significant increase in top and bottom line performance was driven by several factors including increases in annual production and average selling price, as well as the impact of foreign exchange. Demand for Hanfeng's products paced production as approximately 148,000 metric tons (MT) of fertilizer were sold in the fourth quarter and 543,000 MT were sold in the twelve months of 2008, compared to 148,000 metric tons and 397,000 metric tons in the same periods respectively in 2007. International sales were a small portion of overall sales totaling 4.3 percent in 2008 and 5.3 percent in 2007. There were no international sales made in 2008 after April due to the adoption of a special export duty by the China government, ranging from 150 percent to 185 percent.

In 2008, Hanfeng's average selling price increased to approximately RMB 3,310 per MT, compared to RMB 2,500 per MT in 2007, an increase of more than 32 percent. The increase was due to significant increases in raw material costs, particularly urea, phosphate, and potash, which collectively account for approximately 90 percent of Hanfeng's cost of goods sold. Throughout the year, Hanfeng was successful in passing on the higher cost of raw materials on a dollar for dollar basis. As the raw material prices decreased in the fourth quarter of 2008, Hanfeng's fourth quarter average selling price also decreased, however it was still 24 percent higher compared to the same period of the prior year.

At the end of 2008, there were approximately 4,400 MT of finished goods on hand. Hanfeng's annual design production capacity increased from 650,000 metric tons per annum (MTPA) as at December 31, 2007 to 725,000 MTPA as at December 31, 2008. Historically, new plants require approximately three to four quarters to ramp up to their practical capacity level.

During the fourth quarter and throughout 2008, the Chinese Renminbi (RMB) appreciated approximately 7.6 percent to the Canadian dollar. Although Hanfeng earns almost all of its revenue and pays all of its suppliers in RMB, it reports its financial results in Canadian dollars and the appreciation of the RMB has a positive impact on reported revenues.

As at December 31, 2008, Hanfeng reported cash and cash equivalent of $26.4 million and net working capital of $131 million versus $28.7 million and $91 million respectively in 2007. The increase in working capital is primarily due to an increase in prepaid inventory as the Company continues to take advantage of its purchasing power in order to manage its inventory costs. As at December 31, 2008, Hanfeng had no long-term debt and bank debt of $25.1 million.

Balance Sheet Highlights
(In CAD$ thousands except for ratios) December 31, 2008 December 31, 2007
Cash & cash equivalents 26,439 28,690
Working capital 131,077 91,089
Total assets 295,713 207,641
Total debt 25,130 26,383
Total equity 266,194 174,848
Debt / Equity 9% 15%

Business Highlights:

Hanfeng executed on numerous strategic initiatives in 2008 including:

- In January 2008, the results of extensive field trials using Hanfeng's sulfur coated urea (SCU) were announced. The field trials were carried out in 20 provinces over a two-year period and demonstrated that SCU generated higher crop yields while using less nitrogen, eliminated the need for multiple fertilizations, reduced the incidence of disease, and enhanced the quality of the crop.

- In February 2008, Hanfeng completed commissioning of the second phase of its 100,000 MTPA expansion of the Heilongjiang facility in China. The 50,000 MTPA polymer-sulfur coated compound fertilizer (PSCF) plant was completed on budget and ahead of schedule. The PSCF technology, developed by Hanfeng's own R&D team, provides more precise control of the release periods for nutrients at an affordable cost for farmers in China.

- Hanfeng's first 50/50 joint venture project started commercial operations in July 2008. The SCU facility is located in Shanxi province and was constructed next to Shanxi Fengxi Fertilizer Industry (Group) Ltd.'s (Fengxi) operations. Fengxi is Hanfeng's joint venture partner in the project.

- The Company secured a three-year potash supply with JCS Silvinit, one of the two largest Russian potash producers, through a licensed China-based distributor. The contract initiated in July 2008 with 100,000 metric tons in the first year, and allows for 50,000 metric ton annual increases each year through July 2011.

- Hanfeng began construction of the 100,000 MTPA Polymer Coated Urea (PCU) 50/50 joint venture plant on the site of Shandong Mingshui Great Chemical Group in the third quarter of 2008. The fertilizer plant is expected to be operational in the third quarter of 2009.

- The detailed feasibility study for Hanfeng's 200,000 MTPA joint venture NPK fertilizer production plant in Surabaya, Indonesia, announced in August 2009, was initiated.

- In November 2008, Hanfeng signed a two-year agreement to jointly conduct soil test-based fertilization trials using Hanfeng's SCU and sulfur coated compound fertilizer as part of the 2008-2010 Sulfur Application Field Trial Plan with the National Agro-Tech Extension and Service Center (NATESC), a division of the Ministry of Agriculture.

- The Company completed construction on its dedicated railway spur connecting Hanfeng's Heilongjiang facility (currently 450,000 MTPA designed capacity) directly with the national railway.

- In December 2008, Hanfeng announced that its SCU has been included in China's 2009 Torch Program, which recognizes the best in technology achievements as well as focusing on the development, promotion, and advancement of new technologies in multiple business sectors. Hanfeng's SCU was singled out as the most prominent agriculture related technology in the program for its unique slow release capabilities. Inclusion in the Torch Program is recognized in China as one of the highest technology awards granted by the Ministry of Science and Technology.

Subsequent to Year End

- Hanfeng announced that through the renewal of existing, and the establishment of new debt facilities, the Company has access to RMB 230 million (C$42 million) in working capital through loan facilities with China-based banks.

- The Company was recognized by the Heilongjiang Agricultural Industrialization Committee (HAIC) as a Leading Enterprise in the province. The designation is awarded to the top agricultural companies as determined by the HAIC. The designation is reviewed annually and provides recipients with preferential banking status. Specifically, government owned banks will lend to the recipient of the award at bank prime without a collateral security requirement. As Hanfeng continues to expand its operations in China, it will explore new debt arrangements that can take advantage of the designation.

Summary Financial Results

In thousands in
Canadian dollars 12 Months
except per share Q4 Q4 Change ------------------- Change
data 2008 2007 2008 2007
Design capacity
in MT 181,250 162,500 12% 725,000 650,000 12%
capacity in MT
(85% of design
capacity) 154,063 138,125 12% 595,000 456,875 30%
Volume produced
in MT 143,146 128,570 11% 543,430 388,892 40%
Volume sold in
MT 147,619 147,797 0 542,878 397,210 37%
Operating Returns
Sales $ 81,307 $ 54,620 48% $ 272,978 $ 141,308 93%
Average selling
price per MT $ 551 $ 370 49% $ 503 $ 356 41%
Average selling
price per MT
in RMB 3,282 2,718 21% 3,319 2,527 31%
Gross profit $ 12,922 $ 10,545 23% $ 44,423 $ 26,852 65%
Average gross
profit per MT $ 87 $ 71 23% $ 82 $ 68 21%
Average gross
profit per MT
in RMB 519 524 (0.1%) 540 480 13%
general and
expenses $ 1,686 $ 3,475 (51%) $ 7,822 $ 6,365 23%
Depreciation $ 327 $ 214 53% $ 1,234 $ 1,042 18%
Research and
expense $ 74 $ 50 48% $ 451 $ 393 15%
(Gain) loss on
exchange $ (1,631) $ 7 $ (910) $ 254
Stock based
expense $ 45 $ 19 137% $ 160 $ 104 54%
(income) $ 358 ($164) $ 960 ($826)
EBITDA (2) $ 13,796 $ 7,496 84% $ 40,963 $ 21,808 88%
Net income $ 12,058 $ 6,793 78% $ 35,139 $ 19,435 81%
Income per share
Basic EPS $ 0.20 $ 0.11 $ 0.09 $ 0.57 $ 0.34 $ 0.23
Diluted EPS $ 0.20 $ 0.11 $ 0.09 $ 0.57 $ 0.34 $ 0.23
Weighted average number of shares (in millions of shares)
Basic 61.4 61.2 - 61.4 57.4 7%
Diluted 61.8 61.8 - 61.8 57.9 7%

Sales increased 48 percent to $81.3 million for the quarter ended December 31, 2008 compared to $54.6 million in the same quarter of 2007. Earnings before interest, taxes, depreciation and amortization (EBITDA) in the fourth quarter of 2008 were $13.8 million, an 84 percent increase over the $7.5 million in the same period in 2007. Net income increased by 78 percent to $12.1 million for the quarter versus $6.8 million in 2007. Earnings per share (EPS) were $0.20 for the fourth quarter of 2008 compared to $0.11 in the same period in 2007.

For the twelve months ended December 31, 2008, sales grew 93 percent to $273.0 million compared to $141.3 million in 2007. EBITDA in 2008 was $41.0 million, an 88 percent increase compared to the $21.8 million reported in 2007. Net income grew to $35.1 million in 2008 compared with $19.4 million in previous year, an 81 percent increase. EPS was $0.57 for the current year compared to $0.34 in the same period last year.

Gross profit in the fourth quarter of 2008 increased to $12.9 million, a 23 percent increase from the same period of the prior year. For the twelve-month period, gross profit increased to $44.4 million in 2008, a 65 percent increase. Gross profit as a percentage of sales decreased by 3.4 percent to 15.9 percent in the fourth quarter of 2008 compared with the same quarter of 2007, and by 2.7 percent on a year-over-year basis. As previously noted, Hanfeng has been successful in increasing its selling price to track the dollar value increases in raw material costs. Consequently, gross profit as a percentage of sales has decreased while gross profit in dollars has increased.

Operating expenses increased from $8.3 million in 2007 to $8.8 million in 2008 due to the additional production capacity added during the year, offset primarily by the foreign exchange gain and reduced shipping costs related to international sales.

Sales, General and Administrative (SG&A) expenses increased overall in 2008 due to several factors including higher sales volumes and higher administrative costs associated with business growth. SG&A as a percentage of sales decreased year-over-year from 4.5 percent to 2.9 percent due to the aforementioned factors. SG&A percentage decreased from 6.4 percent in the fourth quarter of 2007 to 2.1 percent in 2008, as no international sales were recorded for the period.

R&D expenses increased from $0.4 million in 2007 to $0.5 million in 2008. Hanfeng's annual expenditure on R&D has historically been low due to the significant cost savings the Company enjoys as all its R&D facilities and personnel are located in China.

Gain on foreign exchange was $0.9 million in 2008, compared to a loss of $0.3 million in 2007. Hanfeng benefited from a one-time exchange gain on USD $9.3 million on hand in 2008.

Interest expense in 2008 was $1.0 million, compared with net interest income of $0.8 million in 2007, primarily due to interest generated from $80.6 million in proceeds from share subscriptions by Agrium ($74.4 million) and PetroChina ($6.2 million) in April 2007. Excess cash was placed in short-term money market investments in Canada.

The income tax rate for Hanfeng was nil for 2008. In addition, the Fengxi joint venture that started operation in the third quarter of 2008 was fully exempted from income tax in 2008. Based on its current status in China and on the future production capacity allocation, including consideration of its Indonesia joint venture, Hanfeng's income tax rates are estimated as follows: 1.0 percent for 2009; 14.1 percent for each of 2010, 2011 and 2012; and 16.2 percent thereafter. The Company has been granted certain tax exemptions and rate reductions for a period of time after its initial investments in China. Due to the tax reform in China, there is no guarantee that these incentives will continue or not be revoked.

Conference Call and Webcast

Hanfeng will hold a conference call and webcast on Tuesday, March 3, 2009, to discuss its fiscal 2008 financial results. The results conference call and webcast will be accompanied by a presentation, which will be available for viewing through the webcast link provided below. Mr. Tony Busseri, Executive Vice President of Hanfeng, will host the call. Management invites analysts and investors to participate on the conference call.

Date: Tuesday, March 3, 2009
Time: 9:00 am, Eastern Standard Time
Dial in
Number: 416-695-9719 or 1-866-852-2121
Taped Replay: 416-695-5800 or 1-800-408-3053 (available for 7 days)
Taped Replay
Pass Code: 3283484
Link: http://events.onlinebroadcasting.com/hanfeng/030509/index.php

Hanfeng's fiscal year 2008 audited annual financial statements and MD&A have been filed and will be available at www.sedar.com.

About Hanfeng Evergreen Inc.

Hanfeng is a leading provider of slow and controlled release fertilizers to blenders, the agriculture market and the urban greening market. Hanfeng was the first to introduce the concept of slow and controlled release fertilizers into China's agriculture market with its establishment of the first commercial scale slow-release fertilizer 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. For more information, please visit: www.hanfengevergreen.com.

This press release contains forward-looking information based on current expectations. This forward-looking information entails various risks and uncertainties that could cause actual results to differ materially from those reflected in forward-looking statements. Such statements relate to, among other things, sales growth, expansion and growth of Hanfeng's business, future capital expenditures and Hanfeng's business strategy. Risks and uncertainties about Hanfeng's business are more fully discussed in Hanfeng's disclosure materials, including the Business Risks section in Hanfeng's MD&A, its annual information form and other disclosure filed with the securities regulatory authorities in Canada.

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