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

F2Q 2014 Earnings Conference Call

February 13, 2013 8:00 AM ET

Executives

Jemming Shang – Board Secretary

Xianfu Han – Founder, Chairman and CEO

Ken Ren – Independent Director

Analysts

John Tini – Private Investor

Operator

Greetings, and welcome to the China Advanced Construction Materials Group Inc. Fiscal Year 2014 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Jemming Shang. Thank you, you may now begin.

Jemming Shang

Thank you. And welcome to our China ACM fiscal year 2014 second 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 filings 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, February 13, 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 CEO; Mr. Ken Ren, Independent Director of the Board. Mr. Xinyong Gao, the Financial Controller of the Company. Now I have prepared remarks from Mr. Han that has been translated into English and I will now read on Mr. Han’s behalf.

Xianfu Han

(Interpreted)

Good morning and thank you for joining our call today. We experienced a year-over-year decrease in revenue for the second quarter of fiscal year 2014. In addition, to the impact from the Chinese macro-economic situation, such decrease was principally due to the slowing down of the housing market and infrastructure development.

In order to curtail future losses we will continue our efforts to improve the collection of accounts receivables, and enhance our client base for the rest of the year.

For the second quarter fiscal year 2014 financial highlights, our revenue decreased 45% year-over-year to $11.8 million. Gross margin at 12.7%, net loss available to common shareholders of $5.7 million a loss per share of $3.83 $29.4 million in working capital at December 31, 2013.

Second quarter fiscal year 2014 results. For revenues, for the first three months ended December 31, 2013, we generated total revenue of approximately $11.8 million compared to approximately $21.6 million during the three months ended December 31, 2012, a decrease of approximately $9.7 million or 43%.

Such decrease is due to a reduction in sales generated from the concrete division for the three months ended December 31, 2013. Our concrete sales revenue was approximately $11.4 million for the three months ended December 31, 2013, a decrease of approximately $7.7 million or 40% compared to the three months ended December 31, 2012.

The decrease in revenues attributable to concrete sales was principally due to the decrease of sales in the areas in which we operate. Operations at one of our concrete producing plants was suspended until late 2013 due to the China International Garden Expo and a temporary suspension order imposed by the Beijing government for industrial activity 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 the 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 December 31, 2013, we continued to supply concrete products to three railway projects in 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 December 31, 2013, a decrease of approximately $2.1 million or 82%, compared to the three months ended December 31, 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 December 31, 2013.

For cost of revenue, for the three months ended December 31, 2013 we generated total cost of revenues of approximately $10.3 million, compared to approximately $18.4 million the three months ended December 31, 2012 a decrease of approximately $8.1 million or 44%.

The decrease in cost of revenue was primarily due to the overall decrease in production from our fixed concrete plants in the Beijing area and the decreased production from manufacturing services compared to the three months ended December 31, 2012.

The cost of revenue on concrete decreased by approximately $6.8 million or 41% for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. Such decrease was due to a decrease in our concrete production volumes.

Cost of revenue with respect to our manufacturing services was primarily due to our manufacturing services, which decreased by approximately $1.3 million or 77% during the three months ended December 31, 2013 as compared to the same period last year.

For gross profit, total gross profit was approximately $1.5 million for the three months ended December 31, 2013 as compared to approximately $3.2 million for the three months ended December 31, 2012.

Our gross profit for sale of concrete was approximately $1.4 million or 13% of revenues for the three months ended December 31, 2013 compared to approximately $2.3 million or 12% of revenue for the three months ended December 31, 2012, a decrease of approximately $0.9 million.

The decrease in gross profit for concrete sales for the three months ended December 31, 2013 compared with the three months ended December 31, 2012 reflects lower production volume.

Our gross profit with respect to our Manufacturing Services was approximately $0.08 million or 17% for the three months ended December 31, 2013, a decrease of $0.8 million from $0.9 million during the three months ended December 31, 2012, while the gross profit margin decreased from 34% for the three months ended December 31, 2012 to 17% for the three months ended December 31, 2013.

Such decrease was principally due to the decrease in revenue from Manufacturing Services for three months ended December 31, 2013 as a result of the decrease in a number of portable plants and a lower production rates at our plants.

Provision for doubtful accounts; we incurred provision for doubtful accounts of $5.1 million for the three months ended December 31, 2013, an increase of approximately $4.6 million as compared to $0.5 million for the three months ended December 31, 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 receivables 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 $40.5 million at December 31, 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.

For selling, general and administrative expenses we incurred selling, general and administrative expenses of approximately $2.7 million for the three months ended December 31, 2013, an increase of approximately $0.2 million or 11% as compared to approximately $2.5 million for the three months ended December 31, 2012. The increase was principally due to a $0.1 million increase in meals and entertainment expenses, and a $0.1 million increase in office expenses.

For Research and development expenses; research and development expenses for the three months ended December 31, 2013 was $0.2 million, a decrease of approximately $0.1 million or 13% as compared to approximately $0.3 million for the three months ended December 31, 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 loss realized from disposal of property; plant and equipment, for the three months ended December 31, 2013, we incurred an approximately $4000 loss realized from the disposal of property, plant and equipment. During the three months ended December 31, 2012, we incurred a $0.2 million loss realized from the disposal of property, plant and equipment.

Net loss available to common shareholders. We recognized a net loss of approximately $5.7 million for the three months ended December 31, 2013 as compared to a net loss of approximately $3.5 million for the three months ended December 31, 2012, an increase of $2.2 million.

Such increase in net loss was primarily due to the decrease in gross profits of our concrete sales and the Manufacturing Services. And the increase in provision of doubtful accounts offset by the decrease in loss from termination of lease.

Our balance sheet overview; China ACM had a working capital of $29.4 million at December 31, 2013 including $2.4 million in cash and equivalents, $11.9 million in restricted cash, $24.9 million in short-term investments, $47.8 million in accounts and notes receivable, $29.5 million in prepayments and advances, $5.7 million in other receivables and $100.2 million in current liabilities.

Shareholders' equity was $45.9 million, compared with $56.7 million at June 30, 2013. The total number of shares outstanding as of February 6, 2013 was approximately 1.5 million.

For the third quarter fiscal year 2014 and updated fiscal year 2014 guidance; for the third quarter ending March 31, 2014, management expects net sales of $7.5 million to $8.5 million, net loss of $2 million to $3 million and loss per share of $1.35 to $2.02 based on 1,486,871 weighted average shares.

For the fiscal year ended June 30, 2014, due to the uncertainties in some projects and the collection of accounts receivables, management expects net sales of $49 million to $51 million, net loss of $9 million to $15 million and loss per share of $6.05 to $10.09 based on 1,486,871 weighted average shares.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. (Operator Instructions) Thank you it appears we have no questions at this time. I would like to turn the floor back over to management for any concluding comments. We have a question coming from the line of John Tini a Private Investor. Please proceed with your question.

John Tini – Private Investor

Hello everybody. Thank you for hosting the call. I would like to ask about the guidance that you provided for this year. It’s a little bit difficult to understand the strength of the current business; because you have the net income guidance includes the provision for old doubtful accounts.

So could you breakout the expected income from current year operations without the allowance for doubtful accounts to help us better understand for the current business?

[Foreign Language – Chinese]

Jemming Shang

[Interpreted]

So, to answer your question, actually in this Q, you can find that we have an allowance for doubtful accounts reaching almost $45 million. So if we do not consider the impact and the influence from this allowance for doubtful accounts, it is possible that for the fiscal year of 2014, we may have a net income of between $1 million to $2 million.

John Tini – Private Investor

Okay, thank you. That’s very helpful. Then…

Ken Ren

I would like to further comment on these questions, because I want to caution the conference participants including John, you, yourself that the guidance information the management disclosed is a comprehensive approach to consider both the future revenues we are going to earn in the next two quarters along with the assessment of the collection effecting this and the creditworthiness of our outstanding accounts receivable.

As Jemming pointed out that the current accounts receivables totaled at $88 million and up to the time as of December 31, 2013, we have already booked a cumulative current allowance for these doubtful accounts at $40 million.

So, such that the total net accounts receivables outstanding at $47 million and we understand that this income guidance range is somewhat widened compared to the last time we updated such information because currently this can be re-provided at a range of $9 million to $15 million.

And I believe this range although apparently appear to be difficult, it actually reflects the company’s conservativeness and the management assessment to include difficulties in its future collections of these accounts receivables. I just – impelled to emphasize the importance of accounts receivables impact our net income guidance forecast.

John Tini – Private Investor

Okay, thank you very much. That’s all very helpful. Then I would also like to ask about the employee stock purchase plan. This has been adopted that you plan to use this plan?

Jemming Shang

Okay so what’s your question? You want to ask about the SPP right?

John Tini – Private Investor

Right, so, I see you filed the legal documents to set up the plan. So are the employees going to be using this plan?

Ken Ren

Yes, I want to point out that this year SPP plan is an employee stock purchase plan instead of an employee stock compensation granting plan. It’s two different plans. So, the latter which is called employee stock granting plan or stock incentive plan is part of the compensation for the company to compensate this management and employees.

And these new plans, employee stock purchase plan in short, the acronym of the full name is to provide an opportunity for the company’s employees and management to invest into the company they work for. Which is, the company employee need to contribute their personal wealth or wages back to the company in exchange for the company’s stock.

John Tini – Private Investor

Right, that’s right. I think it’s interesting and it would be a good signal to the independent shareholders if that plan is used, so that’s what I wanted to ask about it and understand whether the employees are going to be using that plan.

Ken Ren

Yes, we can’t comment on whether the employees are going to utilize such a plan or not as that we like to leave this decision to the employees themselves to decide and however from the company standpoint particularly from the Board stand, we like to provide such opportunities for our employees and management to be able to invest more into the company if they willing to.

John Tini – Private Investor

Okay, thank you very much for that explanation. Then, I would like to ask about the company’s financial condition. On a cash basis, the company has done pretty well in the past six months. Now the company has a free cash balance of about $2 million and short-term investments of $29 million. So, that’s quite a strong position and could you explain how the company will be using these funds?

[Foreign Language – Chinese]

Jemming Shang

[Interpreted]

Since now the market condition in China is not so good, so, we are trying our efforts to looking for potential business opportunities. So, when there is a good opportunity coming out, we probably will use our cash to enhance our investment in the business.

John Tini – Private Investor

What do mean when you say opportunities?

Ken Ren

You are largely correct to that, the company maintains a cash balance at approximately $2 million to $3 million and I want to point out at the beginning of the period which is the beginning of this fiscal year in last July, we had a cash balance of nearly $4 million.

And as of the end of the reporting period which is December and we have a cash balance of $2.4 million and out of this difference, you are correct and I would like to refer to our cash flow statements that we generated net positive cash provided from our operating activities about a little bit south of $10 million.

And please be cautious that out of this $10 million net cash provided by operating activities, 80% was contributed from the provision of doubtful accounts which still reflects the collection matter in this management of accounts receivables and the Chairman’s comments just that is emphasizing why we invest heavily in the short-term investments.

As we pointed out in our – in the second segment in our cash flow statement, we invested, we paid nearly $20 million in acquisition of short-term investments. So we utilize these short-term investment vehicles such as the money market fund to preserve this very valuable cash balances.

And Mr. Han, the Chairman just commented that we are waiting for the best opportunities to launch these investments, the proceeds from the sale of investments if the opportunity becomes available to expand our business into the traditional concrete market business.

And in the meantime as the macro economy in China is going towards an intersection whether it is going to slowdown or the real estate market, property market will continue to remain hard to ramp up.

And we believe that maintaining a strong cash balance with – while reserving enough in the short-term investments to enjoy or to use some returns from these short-term investments will preserve the safety and credit of this investment is our best position at this moment.

And in the meantime, you can thought that, the last segment in the cash flow statements we renewed our revolving credit line by paying some short-term loans and a bank guarantees, bank guarantees, but renew them with equivalent amounted to obtain a proceeds of $38 million in this short-term loan renewals.

So these cash management patterns and the financing activities actually has been somewhat consistent in the past two to three years and if you take a look at our historical financial statements along with our notes, you will not be surprised to find that this is actually the company’s cash management pattern.

John Tini – Private Investor

Okay, thank you very much. Yes, that’s very helpful. Thanks for answering all of my questions.

Ken Ren

Thank you.

Jemming Shang

Thank you.

Operator

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

Jemming Shang

Okay, so on behalf of our Chairman and CEO, Mr. Xianfu Han, Mr. Ken Ren, the 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.

Ken Ren

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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