Richard Galterio – VP, Public and Investor Relations
Andrew Wang – EVP and CFO
Mitch Paleo [ph]
China Direct Industries, Inc. (CDII) F3Q10 (Qtr End 06/30/10) Earnings Call Transcript August 12, 2010 5:00 PM ET
Welcome to the fiscal 2010 third quarter earnings conference call for China Direct Industries. For those of you who may be new to the company, China Direct Industries trades on the NASDAQ global market, under the symbol CDII. China Direct Industries is a U.S.-based company, with operations in China in two core business segments, magnesium production and distribution of basic materials. The company also provides advisory services to China-based companies to assist them in competing in the global economy.
Headquartered in Deerfield Beach, Florida, China Direct Industries operates nine subsidiaries throughout China. China Direct Industries provides a direct link between Western investors and companies in the People's Republic of China. For more information on the company, please visit its website, at www.cdii.net.
Our call today is hosted by Mr. Andrew Wang, CFO; and Richard Galterio, Vice President. Additionally, Dr. James Wang, CEO and Chairman, will also be available during the Q&A session that will follow management's discussion of the third quarter ended June 30, 2010.
At this time, I would like to refer to the Safe Harbor Statement under the Private Securities Litigations Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the company's products or markets, or otherwise make statements about the future, which statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.
These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission, including its most recent Form 10-K filed on December 31, 2009.
At this time, I would like to introduce Mr. Richard Galterio, Vice President of Investor and Public Relations of China Direct Industries. Thank you. Mr. Galterio, you may begin.
Thank you, operator; and all of you who are joining us for our fiscal 2010 third quarter conference call.
China Direct Industries recorded revenue of $31.9 million for the third quarter of fiscal 2010, ended June 30, 2010. This was up 64% from the $19.5 million recorded in the comparable period in fiscal 2009. Our net loss in the quarter, now up to $1.1 million, or a loss of $0.04 per share, compared with a loss of $2.9 million or $0.12 per share in the third quarter of fiscal 2009.
Revenue was $77.3 million for the nine months of fiscal 2010, compared to $79.1 million for the comparable period in fiscal 2009. The net loss for the nine months ended June 30 now rose to $412,000, inclusive of $1.1 million in stock-based compensation, compared with net loss of $14.5 million in the same period of 2009. Our net performance in the first nine months have significantly improved, resulting in a loss per basic share and diluted share of $0.02, compared to a loss of $0.61 in the comparable 2009 period.
I am also pleased to report that we continue to see a market pickup in activity in all of our segments, particularly in magnesium and consulting.
In our magnesium segment, I would like to highlight several important trends. First, the volume output at our current magnesium operation was approximately 6,000 metric tons. This is up 49% from the same period in 2009. Second, volumes increased by 42% sequentially from last quarter.
In our consulting segment, we had particularly strong performance, with revenue up 123% from the same period in 2009. And I would also like to highlight some accomplishments in this area. First, we added two additional clients, bringing the total number of clients we service to seven. We are confident that these additions will lead to substantial increases in transaction revenue for assistance in areas like mergers, capital formation, and business development.
In our basic materials segment, we continue to see a market improvement in chemical operations, where revenue was up 59% from the same period in 2009. Additionally, as we have categorized our trading operations in this segment, the startup costs associated with trading are now reflected in this segment.
As we move forward into the remainder of the year, and soon into fiscal 2011, it is important to emphasize a number of key overall factors, which we believe will contribute to our success. First, our balance sheet remains strong, with $14.4 million in cash, a $1.5 million increase from our September 2009 year end, and still with negligible long-term debt. Second, we have over $37 million in working capital to support our operations as the business environment improves and we forge new trading opportunities in South America and Mexico. Third, the metrics in our magnesium segment continue to improve, with our working capital investments now starting to deliver top line growth, as more production is coming online. Additionally, our Ruiming acquisition will enable us to service our customers with a wider variety of products to further entrench our IMG brand. Fourth, we have parlayed our consensus with a number of consulting clients in the first half of the year into the addition of two new clients, as I have mentioned before, with additional prospects for the coming quarters. It is important to note that transactional business in consulting can yield very high margin revenue, as was the case in 2007 and in 2008, where consulting was the largest driver of earnings.
Our company remains in a strong position to re-accelerate growth, as the business environment in our business segments improve. We will continue to execute on our strategy of being a global leader in the magnesium industry, and look to opportunistically grow in a prudent and cost-effective manner.
I would now like to turn the call over to our chief financial officer to discuss this quarter in more detail. Andrew?
Thank you, Richard; and welcome, everyone. For the fiscal 2010 third quarter, China Direct Industries recorded consolidated revenues of approximately $31.9 million, up 63% from $19.5 million recorded in the comparable period of 2009. Gross profit in the period was $2 million. The total operating expenses were approximately $3.3 million in the quarter. Our net loss for the third quarter was $1.1 million, which includes $412,000 of stock-based expenses, as compared to a loss of $2.9 million in the June 2009 quarter. The net loss applicable to stockholders was approximately $1.1 million, resulting in a basic and diluted loss per share for the third quarter of $0.04. On a weighted average basis, there were 20.8 million basic and diluted shares outstanding.
Looking at our core magnesium segment for the second quarter, revenues from our magnesium subsidiaries was $14.3 million. This represents a 56% increase from the revenue of $9.2 million recorded in the June quarter of 2009. Overall shipments reached 5,967 metric tons, up 49% from 4,007 metric tons in the same quarter in 2009, which included 437 metric tons from discontinued operations. This is also up 42% sequentially from 4,250 metric tons shipped last quarter. The average sale price was $2400 per metric ton in this quarter, up fairly from the second quarter but down from $2520 in the June 2009 quarter. Stock prices are currently about $2400 per metric ton. The overall increase in revenues was a result of an increase in demand, resulting in increase of volume in a stable pricing environment.
Revenue from our consulting segment increased to $700,000 in the fiscal 2010 third quarter, up 142% from $307,000 in the June 2009 quarter. Our net loss for this segment in the third quarter was $400,946, which included all corporate overheads and expenses, a substantial improvement from the loss of $1.8 million in the fiscal 2009. Revenues in our consulting segment varied depending upon the level of service, especially in addition of new clients. As previously stated, we have added two new clients.
Our basic materials segment revenue totaled approximately $16.9 million in the fiscal 2010 third quarter, an increase of 69% compared to the $10 million recorded in the June 2009 quarter. Our basic materials segment generated a gross profit of $802,000 compared to $527,000 in the June 2009 quarter. Our basic materials segment generated a net loss of $487,000, which includes the costs associated with our accreting operations launch project in South America and Mexico.
In the third quarter, we saw an overall improvement in business activities in all of our segments, and we believe our business will improve substantially in the fourth quarter and into fiscal 2011. We continue to put substantial efforts in improving our internal control, taking a conservative approach to our balance sheet, and positioning our operations to be more streamlined and focused. We believe the significant sequential improvement in top line performance and improving trends are evidence that we are going in the right direction. We continue to believe our current staffing levels are appropriate, and our subsidiaries in China and increases in staff at our facilities when they are reinitiated in the coming months. Any other additions or receptions of that will reflect in the market.
We will continue to look to reduce costs when necessary, and maintain inventory levels appropriate for our level of businesses, which is why we can build inventories in our magnesium segment, and look to expand our product offerings. Our balance sheet remains strong, and we believe we are well positioned for the future. We continue to act with our specific initiatives for the future, as we look to grow our businesses, including the further consolidation of our magnesium operations, as previously discussed. The remaining acquisition is a first significant fast work in that consolidation process, as we view our IMG brand for the future.
At this time, I will return the call back over to Richard for some closing comments. Richard?
Thanks, Andrew. Our results for the fiscal 2010 third quarter reflect an improving overall environment in our various business segments, coupled with the steps we have taken to revamp our cost structure (inaudible) downturn of our business.
We have reaccelerated top line growth and remain steadfast in the belief that bottom-line results will improve dramatically as we head into our historically stronger quarters ahead. Gross margins continue to improve in magnesium, where we have made our most substantial investments for our future. As we have previously stated, the global environment in our business is improving, and we are steadily making progress with our IMG pricing strategy to create more long-term stability and order flow, and pricing, enabling us to secure large end customer orders in our magnesium segment.
Our magnesium customers in various industries, including automobile manufacturing, aluminum alloying, and steel production are strengthening, and our volumes are increasing, and prices slowly trending upward. We are restarting additional facilities and expect more significant volume increases in the current quarters. Our successes in consulting over the last six months have increased our awareness and led to additional clients, with a number of opportunities in front of us in the near term. We believe there are a number of transactional opportunities capable of being closed in the fourth quarter, and are working diligently to bring them to fruition.
I would also like to highlight that we have entered into several sale purchase agreements to provide various types of ore into China from South America and Mexico, and we continue to anticipate that trading will begin meaningful contribution to revenue in fiscal 2010 and beyond.
While we are pleased with our efforts, we have only seen a slight improvement in magnesium prices over the course of fiscal 2010. The rate of increase has been somewhat slower than forecast by industry experts. We expect our outlook in magnesium to continue to increase, and that will be coupled with stronger performance, which we anticipate will come from our consulting and basic materials.
We now see our overall revenue ranging between $120 million and $130 million for the full fiscal year of 2010, with net income ranging between $6 million and $8 million. This guidance is predicated on our ability to close certain opportunities in the fourth quarter, as well as to complete delivery of contracts in magnesium and basic materials. We continue to believe that there will be an improvement in prices, as demand builds for our magnesium and other business segments grow. We intend to provide updates to our guidance on a quarterly basis as necessary.
In closing, I would like to emphasize that we are confident that with our strong balance sheet, and over $14 million of cash, with $51 million in shareholder equity, our shareholders have a strong foundation for the future.
Additionally, the investments we have made in magnesium, and building our trading operations, coupled with the client wins in our consulting operations, put us in a solid position to deliver markedly improved bottom-line performance in the remainder of 2010, and into fiscal 2011. We are excited about the improvement in our operations, as well as the opportunities mentioned earlier, and we see improvements in all of our segments. We are steadfast in our belief that we will emerge as a major force in our business segments, and our entire team is working diligently to reach that goal.
Allow me now to thank you again for joining us, and we can begin the formal Q&A.
(Operator Instructions) Our first question comes from the line of Mitch Paleo [ph], who is a private investor. Please proceed with your question.
Hi, guys. Obviously with half the fourth quarter being completed, I see that you are suggesting that you are going to be doing a minimum of $42 million in sales, and $6.4 million in net income. Pretty substantial, and being halfway through the quarter, you must have a really good idea that you are going to probably hit that. Can you expand on that a little bit, and can you talk about how you are going to complete that both lofty goals?
Sure. If you take a look at, you know, first of all, the growth trajectory that you have seen in magnesium, as well as in our other business segments, we, on a sequential basis, increased revenue from the second quarter into the third quarter by about 40%. Should that trend continue, coupled with our consulting operations, as we have said in the past, being transactionally based, in prior years, if you go back and you look at 2007 and 2008, when transactions take place with consulting clients, especially the new consulting clients, they are in a substantial pump-up in revenues and we wouldn't be talking about, you know, $300,000 or $400,000 or $700,000 in revenue.
We could be talking about a great deal more than that, but we believe that if we continue along the trajectory with our magnesium and our basic materials operations, and as we said before, some of our trading operations, which other than from now, really haven't produced any tangible amount of revenue, that we have a lot to start aligning into the fourth quarter that should contribute to revenue in addition to the growth that we would be seeing intrinsically in the segments that we have already. So there is a number of different contributors that haven't been contributing as greatly so far in the year that should kick into the fourth quarter to help us reach that goal.
Okay. I guess I just realized that there is only a month and a half left to the fourth quarter. So you guys must have a really strong feeling to reiterate this guidance and confirm it here are in this call.
You know, there are some timing issues, you know, one transaction is full and when certain deliveries have been made, but, you know, at this point in time, we do feel that we are capable of reaching that goal.
(Operator Instructions) There are no further questions in the queue at this time. I would like to hand the call back over to management.
Once again, we would like to thank you for attending this conference call, and as always, we will provide information as it becomes available to us, and we look forward to seeing you several months from now at our year-end call coming up probably sometime in December. Thank you and that will conclude our call.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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