China Advanced Construction Materials Group's CEO Discusses F3Q13 Results - Earnings Call Transcript

| About: China Advanced (CADC)

China Advanced Construction Materials Group (NASDAQ:CADC)

F3Q13 Earnings Call

May 16, 2013 8:00 a.m. ET

Executives

Xianfu Han – Chairman and CEO

Weili He – Vice Chairman and COO, Interim CFO

Operator

Greetings and welcome to the China Advanced Construction Materials Group Inc. earnings call to report third quarter fiscal year 2013 results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host [Jemming Shang]. Thank you miss, you may begin.

Unidentified Company Representative

Thank you. And welcome to China ACM fiscal year 2013 third quarter conference call. I am Jemming Shang, the Board Secretary of China ACM. Before we start, I’d like to remind you that management’s prepared remarks contain forward-looking statements that are subject to risk and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the company claims the protection of the Safe Harbor for forward-looking statement that is contained in the Public Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risk facts but not limited to change from anticipated levels of sales, future international or regional economic and a competitive and regulatory condition change in relationships with customers, access to capital, difficulties in developing and marketing new products, marketing existing products, customer acceptance of existing and new products and other factors that may be included in the risk section of our filing with the SEC. Accordingly although the company believes that such expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

In addition, any cost additions as to the Company's future performance represents managements estimates as of today May 16, 2013. We undertake no obligation to correct or update any forward-looking statements provided as a result of new information, further events or even change in our expectations except as required by law.

Joining us on today's call is Mr. Xianfu Han, Chairman and CEO; and Mr. Weili He, Vice Chairman and COO, interim CFO, Mr. Ken Ren, Independent Director of the Board. Now I have prepared remarks from Mr. Han that has been translated into English and we will now read this on his behalf.

Xianfu Han

Good morning and thank you for joining our call today. Although we experienced year over year decrease in revenue growth for the third quarter of fiscal year 2013, this decrease was principally due to the suspension of some plants. In order to curtail future losses we will continue our efforts to improve the collection of the accounts receivables and trying to increase our client base for the rest of the year.

For revenue; our revenue is primarily generated from sales of our advanced ready-mix concrete products and manufacturing services. For the three months ended March 31, 2013, we generated revenue of $7.2 million compared to $18.9 million during the same period in 2012, a decrease of $11.7 million or 61.7%. The decrease in our revenue is due primarily due to decreased revenue from our manufacturing services and concrete sales for the three months ended March 31, 2013.

Our concrete sales revenue was approximately $7.2 million for the three months ended March 31, 2013, a decrease of $10.8 million or 60% from the three months ended March 31, 2012. The decrease in revenues from concrete sales was principally due to the decreased demand of concrete sales in line with slowing down of the housing market and overall economic growth.

Revenue from our manufacturing services segment was $5,616 for the three months ended March 31, 2013, a decrease of $0.85 million, or 99.3%, as compared to the three months ended March 31, 2012. Such decrease in revenue was attributable principally to the suspension of operations of certain of our portable plants during the three months ended March 31, 2013.

Gross Profit. Gross profit was $0.1 million for the three months ended March 31, 2013, as compared to $2.1 million for the three months ended March 31, 2012. Our gross profit for the sale of concrete was $0.6 million, or 9.0% of revenue, for the three months ended March 31, 2013, as compared to $2.6 million, or 15% of revenue, for the same period last year. The decreased gross profit margin reflects lower demand and lower prices for our concrete products in Beijing as compared to the same period last year.

Our gross loss with respect to our manufacturing services segment was $0.6 million for the three months ended March 31, 2013, flat with $0.6 million gross loss for the same period last year.

Provision for doubtful accounts. We incurred provision for doubtful accounts of $1.3 million for the three months ended March 31, 2013, a decrease of $2.3 million, as compared to $3.6 million for the three months ended March 31, 2012. An estimate of doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against allowance for doubtful accounts when identified. The accrual ratio is 5% for accounts receivable past due less than one year, 50% for accounts receivable past due from one to two years and 100% for accounts receivable past due beyond two years.

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In accordance with our allowance for doubtful accounts policy, at the end of each quarter, we conduct an aging analysis of each customer's arrears to determine whether allowance for doubtful accounts is adequate. In establishing allowance for doubtful accounts, we consider historical experience, economy, trends in the construction industry, the expected collectability of amount receivable that are past due, and the expected collectability of overdue receivables.

Selling, general and administrative expenses consist of sales commissions, advertising and marketing costs, office rent and expenses, costs associated with staff and support personnel who manage our business activities, and professional and legal fees paid to third parties. We incurred selling, general and administrative expenses of $3.8 million for the three months ended March 31, 2013, an increase of $0.7 million, or 22%, as compared to $3.1 million for the three months ended March 31, 2012. The increase was principally due to an increase in salary and employment benefit expense, and advertising expense.

Net loss. We recognized net loss of approximately $8.8 million for the three months ended March 31, 2013, as compared to net loss of approximately $4.2 million for the three months ended March 31, 2012, an increase of $4.6 million. Such increase in net loss was primarily due to the decrease in gross profits of concrete sales and manufacturing service, the increase in selling, general, and administrative expense, and an impairment charge for long-lived assets.

For balance sheet overview. China ACM had working capital of $37.8 million at March 31, 2013, including $2.3 million in cash and equivalents, $4.3 million in restricted cash and $63.2 million in total liabilities. Shareholders' equity was $61.8 million compared with $79 million at June 30, 2012. The total number of shares outstanding as of May 10, 2013 was 17.8 million.

For guidance update. During the third quarter ended June 30, 2013, the management expects the company to earn revenue of between $13 million and $15 million, recognize net loss of between $8 million and $9 million, and EPS of between minus $0.45 and minus $0.50 based on weighted average shares of 17.83 million.

In addition, the company updates its full year guidance for the fiscal year ending June 30, 2013, and currently expects to earn revenue of between $72 million and $75 million, recognize net loss of $25 million to $ 27 million, and EPS of minus $1.40 to minus $1.51 based on weighted average shares of 17.83 million.

Now I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of John Chi, a private investor. The questioner has disconnected. Ladies and gentlemen, it appears there are no further questions at this time. I would like to turn the floor back over to management for any concluding remarks.

(Operator Instructions) Mr. Chi, your line is live. You may proceed with your question.

Unidentified Analyst

Thank you very much. I am sorry, I got disconnected. I am very sorry about that. Thank you for waiting. I wanted to ask about the guidance that you provided for the fourth quarter guidance of about $14 million in revenue and a loss of about $8 million. So if compare to the third quarter the revenue increased about $7 million but the loss is about the same. So I was wondering if you were expecting any exceptional items, any write-downs or anything unusual in the fourth quarter.

Xianfu Han

Thank you, John for raising that question and I can address your comments on the guidance we provided. For the fourth quarter yes we did provide to public a quarterly guidance in the ballpark of $14 million to $15 million and this revenue guidance reflects the management’s expectation that the fourth quarter is typically a better quarter than the third quarter because the third quarter is renewal quarter and end of the spring customer quarter and typically the lowest sales quarter – for every year.

This guidance, if you compare with the last three years, Q4 sales number it reflects a significant slowdown. That is mainly attributable to several major factors such as the slowdown of the housing last year and ultimately is the company’s ongoing plan to relocate and replanning, relaunching its concrete ready mix production stations. As we disclosed in the update since the last quarter because the municipal government is requiring any production inside of urban area to be relocated out of downtown Beijing and the urban area of Beijing city. So not exceptionally but producers, manufacturers of concrete ready mix products we are in a process of re-obtaining the production lease and relocating their production facilities to a further distant location in the whole metropolitan area. So that revenue number reflects our opinion on how much we’re earning revenue for the fourth quarter and revenue wise we believe that (inaudible) we believe operating profit will be improved for the fourth quarter from the third quarter.

We likely will achieve a better concrete operating profits, which means all our operating costs in terms of the material and labor will be less than $14 million to $15 million but the margin will be better – the margin will be better than the past quarter and the second quarter, however it will still be less than traditional 10% gross margin really because we are in the process of relocating and the additional shipping costs and the labor costs also – gross profit basis. Of that, operating wise, we expect to achieve at least the breakeven and on the G&A expense side, we do expect there’re a number of one-time charges such as additional accounts receivable allowance, net debt allowance accounts for certain each accountable receivable, last year we have been in the ballpark of $0.5 million – I am sorry, that will be in a ballpark of approximately 5 million.

And lastly, we expect that we will incur some additional costs in this portable station relocation and corresponding this total of some fixed assets. And in the meantime in addition to these asset relocations, we are also acquiring and procuring new fixed assets or heavy (inaudible). In the third quarter we purchased eight heavy duty trucks, concrete top trucks and we invested. If you take a lot at our cash flow statement we invested roughly 6 to 7 million for this heavy duty part trucks on concrete. So it’s going to be launched for new projects such as the new airport construction project. I hope this helps.

Unidentified Analyst

Could you give me an idea of how much of your capacity you are currently using? Because some of the capacity has suspended the accounts of or are you going to – half of it about today or how much it’s been in years right now

Xianfu Han

It’s caution to accurately or precisely for that, answers to your question I want to caution you that for 13 capacities associated with our high speed railway project, has to be the railway business has been idled for a while. And we expected that highly likely some capacities in that type of business will be eventually relocated or disposed to some extent if those capacities cannot be utilized. In the long term, in a certain region, however on the other hand, whenever this high speed railway project can reignite it and re-ready and chemical to relaunch these capacities, fairly (inaudible).

To address your question, for Beijing, in the Beijing market the capacity use will be – has been – because our total capacity has been shrinking, because to this temporary relocation and redevelopment of this production. Based on our case 30% to 40% will be fair aspect for the fourth quarter.

Unidentified Analyst

And do you have any sense of our second half of the year?

Xianfu Han

Fiscal year or a calendar situation year. In total?

Unidentified Analyst

Calendar year. Right just – it’s just do you see an improvement coming, or are you waiting for government policy or can you just tell me anything about you hear some of your customers about later on the summer and fall ad maybe next winter.

Xianfu Han

To answer your questions I think I will address from S as perception First of all following of each kind of slows it from the acquisition. And the second quarter of the calendar which is the current we are in is a big sales quarter. I will provide in our guidance, the 140 to 150 nearly guidance reflects a couple of markets of our third quarter. So on the other hand we expected that returning to some extent this year, however, the relocation due to the municipal government policies to strengthen the environmental protection slow down company pace to pick up these in our revenues because of our relocation. And overall we are confident and optimistic that the market is constantly improving. And we have been working diligently to relocate our existing production as fast as possible so that this capacity can be regained at good rate as we can, whenever the market get pick up we readily launch these assets.

Unidentified Analyst

I also wanted to ask you have the allowance for doubtful accounts is now very high, $33 million, so those will be receivables as you broke down to zero value. Are you still trying to collect those accounts, what happened to those customers as they have gone out of business or – they don’t have money to pay, do you have any chance to recover that money?

Xianfu Han

We have allowance, net debt allowance can become receivable is very common for concrete read-mix producers and manufacturers in the recent one year or couple of years. This is mainly due to the liquidity capacity and the difficulties for our customers, our distributors will pay us in time. Even as us, one of the largest top 10 ready mix concrete producers and suppliers in the nation’s large – the concrete market, whether the (inaudible) markets. We not exceptionally encountered these difficulties in collecting account receivables. While we have managed this age, the accounts receivables, we lost an integral plant with this relocation. When we relocate these plants, these production patients we’re actively seeking successors to take over not only the fixed assets but also some accounts receivables associated with the plant and these will reflect in our second quarter ’13, accounts receivable was sold together with the plan to fix under it. Not had the par value.

And we expect that eight accounts receivable won’t be right on to zero and actually some of them can be recovered with some residual value by cost ramping them to successor as a condition for the success of the take over the some of the fixed assets we have further growth of flat.

Unidentified Analyst

I would also like to ask if I look at the property development companies, or commercial real estate – they are earning a lot of profit right now. Their business is going well, and if I look at your business supplying the construction companies, it seems very weak. So could you help me understand why the company is selling property or making a lot of money but the other business is weak.

Xianfu Han

That’s a very good question. Because real estate market in China in a property development market, the developers, the companies you mentioned are questioned, typically household pattern is different than ours. They take it of onsets, deposits, heavy deposits from the property – other than the market environment is tense, where the homeowners – we will only finance to through purchase both through the right at the time of closing, or hope to disclosing for the property market in China. There are some markets the housing buyers, the homeowners will require that we pay 30% downpay for the area, 30-40% downpay for the property and basically we will require to pay 70% downpay to the developer the time when they sign this contract, the commitment contract and the time when they can receive the keys of their property is three years forward. So this is a key difference between the property development companies and the construction materials supplier. For construction material supplier, we supply these concrete materials, steel, cements, the developers’ right well in advance. And the will pay us back many months later after we deliver as this is only market around over there.

So I would say the comparable industry to analyze for the purpose of relative value, when you analyze other companies with other companies, I order through cements companies, I order through steel companies, and property development companies. Property development company is the leader in the real estate market. It is first when the market is happening recovery and however a little with the materials supplier in the second tier, and even third tier.

Unidentified Analyst

That’s all my questions. I appreciate your continuing support of the call. It’s easy to stand up and get the attention when the business is good but when the business is difficult, I think I appreciate your’re still able to explain the situation and answer questions. So thanks very much.

Operator

There are no further questions at this time. I would like to turn the floor back to management for any concluding remarks.

Xianfu Han

Thank you. Well, on behalf of myself, our Chairman and CEO, Mr. Xianfu Han; our Vice Chairman and COO, interim CFO, Mr. Weili He, Mr. Ken Ren, Independent Director and the rest of the China ACM management team. Thank you all for attending our call. Please feel free to contact us with any follow up questions. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may now disconnect your lines at this time and thank you for your participation. Have a wonderful day.

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