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China Advanced Construction Materials Group, Inc. (NASDAQ:CADC)

Q1 2014 Earnings Call

November 14, 2013 8:00 AM ET

Executives

Jemming Shang - Board Secretary

Xianfu Han - Founder, Chairman and CEO

Analysts

John Tini - Private Investor

Operator

Greetings, and welcome to the China Advanced Construction Materials Group Inc. Fiscal Year 2014 First Quarter Results Conference Call. 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 Ms. Jemming Shang. Thank you Ms. Shang, you may begin.

Jemming Shang

Thank you, Rebecca. And welcome all to our China ACM fiscal year 2014 first quarter conference call. I am Jemming Shang, the Board Secretary of China ACM.

Before we start, I would like to remind you that management’s prepared remarks contains forward-looking statements that are subject to risks 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 Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risk factors but not limited to change from anticipated levels of sales, future international or regional economic and competitive and regulatory conditions change in relationships with customers, access to capital, difficulties in developing in 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 the 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 projection as to the Company's future performance represents management’s estimates as of today, November 14, 2013. We undertake no obligation to correct or update any forward-looking statements provided as a result of new information, future events or even change in our expectations except as required by law.

Joining us on today's call is Mr. Xianfu Han, Chairman and our CEO; Mr. Weili He, Vice Chair and COO, Interim CFO; and Mr. Xinyong Gao, the Financial Controller of the Company. Now I have prepared remarks from Mr. Han and that have been translated into English and I will now read on Mr. Han’s behalf.

Xianfu Han

Good morning and thank you for joining our call today. Although, we experienced a year-over-year decrease in revenue growth for the first quarter of fiscal year 2014, we are glad that we did better than what we expected in this quarter at the end of fiscal year 2013. We will continue our efforts to improve the collection of accounts receivables, expand our plant network and increase our client basis for the coming quarter to curtail future losses.

For the three months ended September 30, 2013, we generated total revenue of approximately $10.2 million compared to approximately $30.8 million during the three months ended September 30, 2012, a decrease of approximately $20.6 million or 67.0%. Such decrease is due to a reduction in sales generated from the concrete division for the three months ended September 30, 2013.

Our concrete sales revenue was approximately $9.7 million for the three months ended September 30, 2013, a decrease of approximately $19.2 million or 66.3% compared to the three months ended September 30, 2012. The decrease in revenues attributable to concrete sales was principally due to the decreased sales in the areas in which we operate.

Operations at one of our concrete producing plants were suspended due to the China International Garden Expo and a temporary suspension order imposed by the Beijing government for industrial activities in the area.

In addition, China's central government continues to impose restrictions on the purchase of residential apartments in order to regulate housing prices in China. And China's economic growth has been decelerating since 2012, which has caused an adverse impact on the construction industry in China.

During the three months ended September 30, 2013, we continued to supply concrete products to three railway projects throughout the China through our portable plants, specially our projects located in Anhui Province. These three projects contributed approximately $0.4 million to our total revenue for the three months ended September 30, 2013, a decrease of approximately $1.5 million or 77.1%, compared to the three months ended September 30, 2012. The decrease in revenues attributable to our manufacturing services segment was principally due to the suspension of operations of a number of our portable plants during the three months ended September 30, 2013.

For the three months ended September 30, 2013, we a generated total cost of revenue of approximately $9.0 million compared to approximately $23.5 million for the three months ended September 30, 2012, a decrease of approximately $14.5 million or 62%. The decrease in cost of revenue was principally due to the overall decrease in production from our fixed concrete plants in the Beijing area and a decreased production on manufacturing services compared to the three months ended September 30, 2012.

The cost of revenue on concrete decreased by approximately $13.2 million or 61% for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. Such decrease was due to a decrease in our concrete production volume. Cost of revenue with respect to our manufacturing services was primarily due to our manufacturing services, which decreased by approximately $1.2 million or 75% during the three months ended September 30, 2013 as compared to the same period last year.

For gross profit; Total gross profit was approximately $1.1 million for the three months ended September 30, 2013 as compared to approximately $7.3 million for the three months ended September 30, 2012. Our gross profit for sale of concrete was approximately $1.1 million or 11.4% of revenue for the three months ended September 30, 2013 compared to approximately $7.0 million or 24.3% of revenue for the three months ended September 30, 2012, a decrease of approximately $5.9 million. The lower gross profit from concrete sales for the three months ended September 30, 2013 compared with the three months ended September 30, 2012 reflects lower production volume while we were subject to similar level of fixed costs.

Our gross profit with respect to our manufacturing services was approximately $0.03 million or 7.0% for the three months ended September 30, 2013, a decrease of $0.29 million from $0.32 million during the three months ended September 30, 2012, while the gross profit margin decreased from 16.4% for the three months ended September 30, 2012 to 7.0% for the three months ended September 30, 2013. Such decrease was principally due to the decrease in revenue for manufacturing services for three months ended September 30, 2013 as a result of the decrease in the number of portable plants and a lower production rates at our plants.

Provision for doubtful accounts; we incurred provision for doubtful accounts of $3.0 million for the three months ended September 30, 2013, a decrease of $6.3 million as compared to $9.3 million for the three months ended September 30, 2012.

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 the allowance for doubtful accounts is adequate. The provision is 15% for accounts receivable past due more than 180 days but less than one year, 60% for accounts receivable past due out one to two years and 75% for accounts receivable past due beyond two years.

The allowance for doubtful accounts increased to approximately $39.5 million at September 30, 2013 as compared to approximately $36.5 million at June 30, 2013, as a result of tightening monetary policy by the Chinese government causing a shortage in cash and declining business of certain of our customers.

We incurred selling, general and administrative expenses of approximately $2.9 million for the three months ended September 30, 2013, a decrease of approximately $0.3 million or 8.7% as compared to approximately $3.2 million for the three months ended September 30, 2012. The decrease was principally due to a $0.1 million decrease in meals and entertainment expenses, $0.1 million decrease in office expenses and a $0.1 million decrease in rental expenses.

Research and development expenses for the three months ended September 30, 2013 was $0.2 million, a decrease of approximately $0.1 million or 29.4% as compared to approximately $0.3 million for the three months ended September 30, 2012. The Company's research and development expenditure was maintained at a certain percentage of revenue. The $0.1 million decrease was mainly due to lower research and development expenditures resulting from decreased revenue.

For the three months ended September 30, 2013, we incurred a $1.4 million loss realized from the disposal of property, plant and equipment. During the three months ended September 30, 2012, we incurred a $0.4 million loss realized from the disposal of property, plant and equipment. The increase of $1.0 million was due to disposal of certain vehicles.

We recognized a net loss of approximately $5.8 million for the three months ended September 30, 2013 as compared to a net loss of approximately $5.4 million for the three months ended September 30, 2012, an increase of $0.4 million. Such increase in net loss was primarily due to the decrease in gross profits of our concrete sales and manufacturing services. And the increase in loss realized from the disposal of property, plant and equipment, which was offset by the decrease in the provision for doubtful accounts and the provision for income taxes.

The Balance sheet overview; China ACM had a working capital of $33.2 million at September 30, 2013 including $6.9 million in cash and equivalents, $13.0 million in restricted cash, $11.1 million in short-term investments, $52.6 million in accounts receivable, $33.0 million in prepayments, $16.3 million in other receivables and $107.8 million in total liabilities. Shareholders' equity was $51.3 million compared with $56.7 million at June 30, 2013. The total number of shares outstanding as of November 8, 2013 was 1.5 million.

For our second quarter fiscal year 2014 and the fiscal year 2014 guidance; for the second quarter ending December 31, 2013, management expects to earn revenue of between $9 million and $11 million and incur between a net income of between $1 million and a net loss of $1 million, resulting in EPS of between $0.67 and minus $0.67 based on weighted average shares of about 1.5 million as of November 12, 2013.

For the fiscal year ended June 30, 2014, management reaffirms our projected guidance that is to earn revenue of between $56 million and $58 million, net income of between $2 million and $3 million and EPS of between $1.35 and $2.02 based on weighted average shares of about 1.5 million as of November 12, 2013.

Now I would like to open the call up for questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. (Operator Instructions) Our first question comes from the line of John Tini, a Private Investor. Please proceed with your question.

John Tini - Private Investor

First, I’d like to ask about the accounts receivable, you have gross balance of about $92 million in receivables and an allowance of $40 million. Do you have any expectations for how much of that you might be able to recovery over this year?

Xianfu Han

Actually now it is quite difficult to provide an accurate estimation about the percentage which can be recovered. And what we can do now is try our best to do the necessary preparations and try to recover as much as possible.

John Tini - Private Investor

Then I would like to ask there has already been some news about the heavy air pollution in Northern China in the cold season. Does this create any risk that you might be subject to controls that would limit your ability to do business over the remainder of this year?

Xianfu Han

Actually with regard to this year maybe the influence will not be so serious and will not be so significant to our Company. But from a long-term perspective it is very likely that some traditional plants and traditional equipments of the production will be subject to the new policy which may come out at different levels, the central level or local level in order to control the air pollution and environmental pollution. So yes from the long perspective it is possible.

John Tini - Private Investor

In a long term perspective -- long term perspective?

Xianfu Han

Yes, in the long-term perspective some traditional equipment and the traditional facilities like pumps they will be subject to the controlling properties coming out at different levels.

John Tini - Private Investor

Then can I ask do you supply any concrete for city rail projects like subways or only for long distance?

Xianfu Han

Now actually in our business the part for long distance railways is only occupies a very small part. We also provide concrete product to city rail projects as like you mentioned and also we provide for many commercial housing projects in the city.

John Tini - Private Investor

Then could I ask you to share some description of the opportunity, the long-term opportunity for environmentally friendly business like concrete recycling or special materials that can reduce pollution from the air?

Jemming Shang

You mean from our Company’s perspective any…?

John Tini - Private Investor

Yes, from your Company’s perspective, how much opportunity does the Company see in those areas?

Jemming Shang

Mr. Han also firmly believes that the environmentally friendly technology, clean technology will be the major trend in this concrete industry. And our Company actually has been working on some recent relevant R&D projects for a long time. And we are committed to contributing more efforts in this area, but so far we haven’t had any specific and tactical, final results coming out from our [R&D] (ph) -- research. But we believe this is something we should do and we will work harder on this.

John Tini - Private Investor

Okay, thank you. Thank you very much for answering my questions and I look forward to positive results over the rest of the year. Thank you.

Jemming Shang

Thank you.

Operator

Thank you. There are no other questions in queue at this time. I will turn the floor back to management for any concluding comments.

Jemming Shang

Okay, thank you. So now 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, Mr. Xinyang Gao, the Financial Controller and the rest of China ACM’s management team, thank you for attending our call. Please feel free to contact us with any follow-up questions. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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