Deyu Agriculture Corp., a Shanxi Province, China-based vertically integrated producer, processor, marketer and distributor of organic and other agricultural products made from corn and grains, today announced its financial results for the third quarter ended September 30, 2013.
Third Quarter 2013 Results:
Net revenue was $68.3 million, increased $11.9 million or 21.0%, compared to $56.5 million in Q3 of 2012;
Gross profit was $4.0 million, decreased $6.2 million or 60.9%, compared to $10.2 million in Q3 of 2012;
Gross margin was 5.8%, compared to 18.1% in Q3 of 2012;
Net loss available to common stockholders was $15.2 million, compared to net income of $3.5 million in Q3 of 2012;
Loss per diluted share was $1.43 on 10.6 million shares, compared to income per diluted share of $0.28 on 12.6 million shares in Q3 of 2012.
Mr. Greg Chen, Chief Executive Officer of the Company commented, "2013 has been a very challenging year. Our Q3 2013 financial results showed a large decrease in net income. China's on-going economic slowdown has been imposing challenges on us. In addition, unexpected extreme weather conditions and increased corn imports have added to an already challenging situation."
"Corn is mainly used as raw material for livestock feeds and processed products. The corn market experienced a boom in the past several years. However, since the beginning of 2013, its market demand has been decreasing. In contrast, with rising labor costs and inflation in China, the minimum farmers' selling prices supported by the government due to its farming protection policies, continues to rise."
"Livestock farming has been going through a very difficult time in 2013. The demand for processed corn products has also been very weak. The price of ethanol hit its lowest level in the past three years. Meanwhile with a good corn harvest in 2012, there has been an influx of low cost corns imported into the market in China. With another good corn harvest in sight for 2013, anticipated increases in corn imports in the coming year, and extended current economic conditions in general, we anticipate the market demand will remain low."
"The deteriorating efficiency of existing retail distribution channels curtailed our retail grain package sales amidst the increasing competitiveness in the market. We allocated more grain resources to bulk trading activity, yet the slowdown in consumer market growth has had negative impacts on the grain bulk trading business."
"With the change in market conditions, we assessed the fair value of the land use rights of the farmlands we own in Yuci, Shanxi Province and the construction of the factory facility in our subsidiary Huichun. We realized that the discounted cash flow generated from those assets couldn't recover their net book value and we recorded an impairment loss of $6.6 million in this quarter," added Mr. Chen.
Financial Results for the Third Quarter Ended September 30, 2013
The Company's net revenue for Q3 2013 was $68.3 million compared with $56.5 million for Q3 2012, an increase of $11.9 million, or 21.0%. Net revenue from our Corn Division for Q3 2013 was approximately $47.6 million, an increase of $12.7 million, or approximately 36.5%, as compared to $34.9 million for Q3 2012, which was mainly attributable to the increase in sales volume under the strategy of accelerating the sale of our corn inventory with the management's anticipation of continuous decline of corn's selling price. Net revenue from our Grain Division for Q3 2013 was $9.9 million, a decrease of $7.5 million, or 43.0%, as compared to $17.4 million for Q3 2012, which was mainly due to the decline of retail sales in supermarkets and convenience stores. Net revenue from our Bulk Trading Division for Q3 2013 was $10.8 million, an increase of $6.6 million, or 159.4% as compared to $4.2 million Q3 2012, which was mainly attributable to our strategic shift from grain retail sales to wholesale or bulk trading.
The Company's gross profit decreased by $6.2 million, or 60.9%, from $10.2 million for Q3 2012 to $4.0 million for Q3 2013. Our gross margin decreased from 18.1% for Q3 2012 to 5.8% for Q3 2013. The decrease in gross margin was mainly the combined result of the simultaneous decline of gross margin in each division and the increased sales percentage of the bulk trading business, which had a relatively lower gross margin. Gross margin for our Corn Division was 5.1% for Q3 2013, down by 1023 basis points from 15.4% for Q3 2012, which was mainly attributable to the weakening demand in the corn industry with an oversupply of corn after a good harvest in 2012. Gross margin for the Grain Division was 13.7% for Q3 2013, which decreased by 1270 basis points from 26.4% for Q3 2012, which was primarily due to the increasing cost of raw materials in addition to the strategic shift from grain retail sales to wholesales with lower gross margins but with fewer distribution expenses.
Selling expenses increased by $2.4 million, or 63.5%, to $6.2 million for Q3 2013 as compared to $3.8 million for Q3 2012, which was primarily due to the increase of handling costs caused by the extreme humid weather conditions and the increase of freight cost resulting from an increase in sales volume of corn and an increase in railway delivery prices announced in February 2013. General and administrative expenses for Q3, 2013 was $5.0 million, an increase of 2.7 million, or 115.5% compared to $2.3 million for Q3 2012, which was primarily due to the increase of allowance for bad debts, the increase in taxes related to inter-subsidiary fixed assets transfers and the increase in expenses caused by obsolete inventories. Loss on impairment of assets was $6.6 million Q3 2013, which represented a $5.8 million impairment loss of the land use rights of farmlands and a $0.8 million loss resulted from the termination of the construction of an uncompleted building in our subsidiary Huichun.
The Company had net loss available to common stockholders of $15.2 million for Q3 2013, as compared to net income of $3.5 million for Q3 2012, a decrease of $18.7 million, or 537.1%. Loss per diluted share was $1.43 on 10.6 million shares for Q3 2013, compared to income per diluted share of $0.28 on 12.6 million shares for Q3 2012.
Business Outlook
"Evolving market conditions in China present not only challenges, but opportunities," said Mr. Chen. "We are developing a new operating model supported by digital infrastructures to achieve resource integration, execution efficiency, and the ability to reduce the exposure to market volatility by hedging features, while at the same time forming strategic partnerships with our suppliers and clients via a more brand and service driven approach for trading activities. We believe the introduction of this new operating structure could also have a positive impact on the Company's internal controls."
"We are also streamlining our operational structure, developing new product lines, exploring new venues and utilizing a brand-driven approach to go beyond traditional distribution channels. Our new initiatives still continue to cultivate the whole value chain concept, by offering agricultural services to secure strategic production resources, to offer efficient commercial orders and other value-added services."
"Strengthening the Company's internal and financial controls will remain one of our top priorities. Management will continue its cost-saving and efficiency assessment review of all of our subsidiaries and their divisions, with particular focus on reducing administrative costs, and will allocate resources towards business development activities. We recently reviewed the Company's overall corporate governance, internal control and financial controls and some weaknesses on operations of some subsidiaries were noticed. Measures are being taken to strengthen the Company's, including subsidiaries, resources sharing, strategic planning and management of funds. With the implementation of new business strategies and resource consolidation/sharing, we believe that we can compete effectively in the industry under the new emerging market conditions," continued Mr. Chen.
