Richard Galterio – VP, Public and IR
Andrew Wang – EVP and CFO
Carl Dorf – Dorf Asset Management
Abraham Stubenhaus – KAT Exploration
China Direct Industries, Inc. (CDII) F4Q2010 Earnings Call Transcript December 22, 2010 4:30 PM ET
Welcome to the fiscal 2010 year-end 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 other 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 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 discussions of the year ended September 30, 2010.
At this time I would like to refer to the Safe Harbor Statements 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 filings.
At this time, I would like to introduce Mr. Richard Galterio, Vice President of China Direct Industries. Mr. Galterio, you may begin your call.
Thank you, operator, and thank all of you for joining us for our fiscal 2010 year-end conference call. China Direct Industries recorded revenue of $112.7 million for the fiscal year ended September 30, 2010 compared to $68.6 million for our fiscal transition period ended September 30, 2009. Revenue for fiscal 10, 2010, was also up 5% when compared to revenue of $107.6 million recorded in the same 12 month period ended September 30, 2009.
The net loss attributable to common shareholders for fiscal 2010 narrowed to $3.3 million, inclusive of $3.1 million in non-cash related items compared to a net loss of $38.1 million in the 12 month period ended September 30, 2009. This resulted in a loss per basic and diluted share of $0.11 in fiscal 2010 a significant improvement from the loss of $1.56 in the comparable period in 2009. Our improvement in performance was evident across all of our business segments in fiscal 2011 [ph].
First in our magnesium segment, we witnessed a progressive improvement in the pricing and volumes throughout the course of the year. In the fourth quarter of fiscal 2010 we delivered 7718 metric tons of magnesium. This represents a 118% increase from the shipping volume in the first quarter of fiscal 2010, and average sequential increases of approximately 30% for each quarter over the course of the year. The total magnesium shipments in the fourth quarter of fiscal 2010 were the largest in this segment since September of 2008. We anticipate that as our restarted production works its way into our system in fiscal 2011, we will see continued positive trends in overall magnesium sales volume.
In our consulting segment we had a stronger performance when compared to our fiscal transition period, and a 5% improvement from the 12 month ended September 30, 2009. During the year, we hosted our first China CEO Roundtable conference in Florida, and we sponsored the fourth international CEO Roundtable of Chinese and Foreign Multinational Corporations held recently in Beijing. We anticipate adding several additional consulting clients through the contacts made from these conferences, and we intend to host additional conferences in fiscal 2011.
We are confident that the addition of new clients will mean [ph] substantial increases in transactional revenue for assistance in areas like mergers, capital formation and business development.
In our basic materials segment, we continued to see marked improvement in our chemicals operations, where revenue in fiscal 2010 was up 9% from the same period in 2009, and returned to slight profitability from a narrow loss in the same period in 2009. While CDI Beijing had a similar performance then it did to 2009 the subsidiary has greatly improved its prospects for 2011, after having signed a number of distribution agreements to service the construction industry.
We have also made significant inroads in our CDI trading operations in this segment, and we have secured iron ore supply contracts in Mexico and parts of South America, which I will discuss later in this call. Overall, we have navigated through a challenging, yet improving fiscal 2010, and we now begin 2011 with momentum building in all of our segments poised to grow in an improving global economy.
I would like to emphasize several key factors, which will help us to accelerate our growth in fiscal 2011. First we finished the year with a strong balance sheet. Having cash, including short-term restricted cash, totaling approximately $15 million compared to $12.8 million in cash at September 2009 year-end, and we still have negligible long-term debt.
Second, we have significantly increased our magnesium production capabilities with the restart of facilities at Changxin and Bautou Changxin in magnesium, which will continue to increase as demand firms. Additionally, our Ruiming acquisition, which is another step in our plan to acquire and further consolidate our magnesium operation, has added a wider variety of products to further entrench our IMG brands.
Third, we have over $30.3 million in working capital to support our operations, as the business environment improves and we forge new trading opportunities in South America and Mexico. Fourth, as I mentioned previously, our business accomplices have provided us with a number of potential transactions and clients for fiscal 2011 in addition to the current transaction, we expect to close imminently.
It is important to note that transactional business in consulting can yield very high margin revenue as was the case for us in 2007 and 2008, where consulting was the largest driver of earnings. We will continue to execute on our strategy of being a global leader in the magnesium industry as we expand in our basic materials distribution and trading operations.
I would now like to turn the call over to Andrew, our Chief Financial Officer, to discuss the full year in more detail. Andrew.
Thank you, Richard, and welcome everyone. For the fiscal year 2010, China Direct Industries recorded consolidated revenues of approximately $112.7 million compared to $60.6 million for the transition period ended September 30, 2009, and improving by 5% when comparing to revenue of $107.6 million recorded in the same 12 month period ended September 30, 2009.
Gross profit in the period was $7.2 million, a 494% improvement over the $1.2 million in gross profit in the comparable 12-month period in 2009. After including other income and other operating expenses, inclusive approximately of $3.1 million in non-cash items, we recorded a net loss attributable to common stockholders of 3.3 million. This compared to a loss of 30.1 million for the 12 months ended September 30, 2009.
Our net loss applicable to stockholders resulted in a basic and diluted loss per share for the fiscal 2010 year of $0.11. On a weighted average basis, there were 20.6 million basic and diluted shares outstanding. This is a dramatic improvement from the loss of a $1.13 per share recorded in fiscal 2009 transition period, and loss of $1.56 per share in the comparable 12 months ended September 30, 2009, on 24.8 million and 24.5 million basic and diluted shares respectively. While those results demonstrate a significant overall improvement, the underlying trend in our business segments show a building moment.
Looking at our magnesium segment, this becomes more evident, for fiscal 2010, on the surface [ph] of revenue from our magnesium subsidiary was $51.1, about a 3% improvement from the $49.6 million recorded in the comparable 12 month period in 2009. But when you look deeper, first gross margins improved to 3.4% from negative gross margins of 8%. Additionally for the year, we witnessed a cumulative percentage increase in magnesium output of 30% per quarter. Overall shipment by quarter reflects continuous improvement as we shift 3532 metric tons in the first quarter of fiscal 2010, increased to 4569 in the second quarter, in 5167 metric tons in the third quarter, and reaching 7718 in the fourth quarter. This was coupled with a gradual price appreciation in each quarter as well.
These numbers do not reflect a substantial amount of production capacity we’ve started and anticipate a further improvement coupled with greater efficiency as we increase utilization rates throughout 2011. The 2010 fourth-quarter shipment is also up 55% from 4987 metric tons shipped in the fourth quarter a year prior. It is important to note that the shipment in the fourth quarter were the most since September of 2008, and that spot price has gone further [ph] since in our fiscal year 2010 September year-end.
Revenue from our consulting segment increased to $2.8 million in fiscal 2010, up 8% from the $2.6 million recorded in the comparable 12-months ended September 30, 2009. As we record all of our management and corporate overhead in this segment, we recorded a substantially reduced operating loss in fiscal 2010 of 3.5 million as compared to a loss of 4 million, in a large part as a result of 600,000 reduction in general and administrative expenses. Revenues in our consulting segment varied depending upon the level of service, transactional events, and the addition of new clients.
Our basic materials segment revenue totaled approximately $58.8 million in fiscal 2010, an increase of 6% compared to $55.4 million recorded in the June 2009 quarter. Our basic materials segment generated a gross profit of $3.1 million in fiscal 2010. From a net operating perspective the segment was slightly profitable in fiscal 2010 at $174,000 now compared to an operating loss of $111,000 in the comparable 2009 period. Performance at our chemical operations was strongest with the revenue up 9.5% to $40.5 million, and a nice income of $214,000 as compared to a loss of $16,000 in the comparable 2009 period. Our basic materials segment generated a net loss of $140,000, which includes the costs associated with our trading [ph] operations launch project in South America and Mexico totaling approximately $363,000.
In the comparable period of 2009, the segment lost $959,000. As with our magnesium segment, overall business trends are getting progressively more favorable, and we believe we have sufficient capital to grow our distribution operations in China, and our US-based trading business.
From an overall balance sheet perspective, we remain well positioned for future growth. We ended the 2010 fiscal year with $30.3 million in working capital and sufficient cash from our current operations. In summary, we are pleased with improvement in our various business segments given the challenging environment that we faced, and we believe our businesses will improve substantially in the coming fiscal years.
We continue to have substantial efforts in improving our internal controls, taking a conservative approach to our balance sheet, and positioning our operations to be more streamlined and focused. We have reduced overall general and administrative expenses by 600,000 US, and we will keep these expenses in line with our growth. We believe our significant sequential improvement in top line performance that improving trends are evident that we are moving in the right direction.
We continue to believe our current staffing levels are appropriate at our facilities in China, with the exception of our magnesium segment, where we are restaffing [ph] facilities appropriately in the coming months. Any other additions or reduction in the staff will reflect the prevailing environment. We will continue to look to reduce cost where necessary, and maintain inventory levels appropriate to our level of business, which is why we continue to increase our (inaudible) 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 have continued to execute our strategic initiatives for future as we look to grow our businesses, including the further consolidation of our magnesium operations as previously discussed. The restart of magnesium production facilities and our Ruiming acquisition is the significant step in that consolidation process, and we build our IMG brand for the future.
At this time, I will turn the call back over to Richard for some closing comments. Richard.
Thank you, Andrew. Our results for fiscal 2010 reflect an improving performance in all of our business segments, coupled with an improving overall economic trend. Our cash structure is now line with operations placing us in a position where further gains in our business should flow through noticeably to our bottom line performance.
We have reaccelerated our top line growth and enter fiscal 2011 with building moment as opposed to the past periods since the global economic downturns, where business trends were fairly anemic. We returned to positive gross margins in our magnesium segment, with substantial production returning to operation in the coming quarters, and our Ruiming acquisition poised to further our growth in fiscal 2011.
As we have previously stated, the global environment in our business is improving, and we steadily are making progress with our IMG pricing strategy to create more long-term stability in order flow and pricing to enable us to secure large customer orders in our magnesium segment. Our magnesium customers are in various industries including automobile, manufacturing, and aluminum alloying and steel production are strengthening, and our volumes are increasing and prices have been trending higher.
We’re focused on building our consulting operations and anticipate adding additional clients as well as closing a significant transaction in the very near future, and we are working diligently to bring this to fruition. As we look out into fiscal 2011, we see continued improvement in our business and we are confident that the year will bring substantial improvement for our company.
The degree of profitability will be dependent on several factors. First, as we believe magnesium will be the largest driver of revenue in fiscal 2011, our margins will be largely dependent on the strength of the market and our ability to cost effectively ramp up production. Second, we have devoted over a year in the preparation of establishing supply contracts in our trading operations for iron ore to be shipped from Mexico and parts of South America into China. We are expecting to begin shipments were early in the second quarter of fiscal 2011.
Should the initial shipments prove to be delivered successfully, we believe this will have significant revenue and income stream to our U.S.-based operation, and will lay the foundation for shipments to take place on a monthly basis. Third, as we have previously stated we anticipate the near-term closing of the transaction in our consulting segment, as well as the addition of new clients from our stepped up marketing efforts.
We are working diligently to reach closure in these areas, and believe this segment could significantly improve its results in fiscal 2011. And fourth, we have made some strides in recent weeks to reach a conclusion related to our discontinued Pan Asia operations, which we discontinued back in fiscal 2009. And we are hopeful that a resolution will lead to the recapture of some portion of our investment in the Pan Asia facilities, with sales to a third party in fiscal 2011.
As we believe that a number of these factors will become substantially clearer by the time we report our fiscal 2011 first quarter results in February, we will provide detailed financial guidance for this fiscal year at that time. At this time, we believe that we can achieve revenue growth of 30% in fiscal 2011, and that we will return to overall profitability without the addition of revenue from our trading operation, or through the addition of other clients in our consulting operations.
This is predicated on our ability to complete delivery of contracted magnesium and basic materials and believe that there will be gradual improvements in prices as demand builds. In closing, I would like to emphasize that we are confident that our strong balance sheet and our $50 million in shareholders equity gives our shareholders a solid foundation for future growth.
The investments that we have made in magnesium in building our trading operations, coupled with the improved prospects in our consulting operation, place us in a solid position to deliver markedly improved bottom-line performance in fiscal 2011. We are excited about the improvement in our operations, as well as the opportunities we have mentioned in this call. We remain steadfast in our belief that China Direct Industries will emerge as a major force in our business segments, and our entire team continues to work diligently to reach that goal.
Allow me to thank you again for joining us, and now operator you may please begin the Q&A.
(Operator instructions) Our first question is from Carl Dorf with Dorf Asset Management. Please go ahead with your questions.
Carl Dorf - Dorf Asset Management
Hi, good afternoon. I have got enough of questions; let me start with the first one. In the last conference call you communicated that (inaudible) a share, but you don’t make it easy for me. But looking at the last quarter it looks like your loss per quarter has increased, even though the top line is growing, the bottom line is worsening. Can you discuss what really is going on there, and what makes you think it is going to change going into next year?
Well, Carl, I think two things. The guidance that we gave for our revised guidance for our year-end was – we were in line with that guidance. So we actually came in on the high-end of the revenue, and we came pretty much in the middle of where we thought we would be on the income side. I’m not exactly sure. We didn’t break the fourth quarter out, but also in the fourth quarter obviously is where you take all of your charges as far as for the year-end, some of the asset impairment charges are reflected obviously in the year-end that you don’t see until the year-end.
So from that standpoint, I think we came in pretty in line. Additionally, we have been ramping up – we have been ramping up our production, which is always going to be ahead of the curve. So the expenses that you are going to have in opening up those facilities is not immediately going to be transferable into revenue. So there is a point in time where you are going to hit an inflection point, where what we put online now is going to start to also produce. So those costs associated with restarting those facilities as we said in the call also will start to yield some greater efficiencies as well, hopefully leading to better margins on increased revenue, and start to ramp us in a positive direction.
So I think that is where we think we are headed. We have some good orders in our basic materials segment. We are seeing better order flow in our magnesium, a lot more activity in our consulting. So I think across the board in our segments, coupled with our cautious optimism with what our trading can become based upon the contracts that we have on the supply side as things start to align and deliver, we think fiscal 2011 to be a watershed or at least a changing year for us in terms of our trajectory.
Carl Dorf - Dorf Asset Management
But your current magnesium price?
Carl Dorf - Dorf Asset Management
What is the current magnesium price?
Andrew what was the most recent magnesium prices that are out there on the spot?
Right now (inaudible) 2900 US.
And just to give you an idea Carl at 2900 that is trending rate now about if you consider our last quarters in last year, fiscal year, we were around the 2400 and change on the 2500 mark. So it has been a substantial improvement since then. Now, whether that will hold or it may back down at 2700 or something like that and then continue to trend upwards, it certainly is a significant move in an upward direction since the end of our fiscal year.
Carl Dorf - Dorf Asset Management
Well, that is what I was going to say, I’m surprised that with that kind of price increase and (inaudible) at the end of the quarter that you haven’t been able to translate that into bottom-line profitability?
Well, keep in mind Carl that you are talking about from September to December is when that move was made. We finished the September fiscal at an average price of around 24 and change. So that movement that took place since September would not have anything to do with the numbers that we just reported.
Yes, this is Andrew, the CFO. This will give you an idea. The price that we actually quoted in our report is really relating to that work that excluding [ph], and 10% extra tax. The price 2900 was exports. So you are looking actually for the price to gradually increase. That is reflected it is (inaudible) level in entire US.
Carl Dorf - Dorf Asset Management
Okay. Can you comment on the substantial increase in receivables, why they are up that much?
Sure. I will answer. Excuse me.
Please proceed, Rich.
Okay. You know, any time you take a snapshot of receivables, you may have some certain variance, but keep in mind when you look, when you compare the September quarter of this year to the September quarter of last year, you have a ramping business that is doing more revenue than you had previously when you compare it to that other snapshot. So we are building our revenue, we are building our business from a standpoint of both what we are ramping up in inventory as well as what we’re selling, but our receivables are higher because they reflect the higher level of business within all of our segments.
(Operator instructions) The next question is from Abraham Stubenhaus with KAT Exploration. Please go ahead with your questions.
Abraham Stubenhaus - KAT Exploration
Hi, first of all thank you for your great presentation. I just like to ask a question about Kat [ph] and find out if Kat Exploration is a player in your future, and if so please try to give more detailed information about how Kat will be able to help CDI and perhaps CDII can help Kat?
I will be happy to talk to you off-line regarding that. Regarding this call, we like to keep it more to general information about the company, where it is headed and that sort of information. Certainly off-line, if you want to have that call and discuss that we will be more than happy.
Abraham Stubenhaus - KAT Exploration
Okay. Thank you.
(Operator instructions) There are no further questions in queue; I’d like to turn the call back to management for closing remarks.
Once again, we would like to thank everyone for joining us for our year-end conference call. We look forward to delivering a stronger performance in fiscal 2011, and look forward to providing more detailed guidance as to where we see the company headed for the remainder of fiscal 2011 in our conference call in February. Thank you. Have Happy Holidays and a Happy New Year, and we wish you all the best heading into the coming year, and that concludes our call.
Thank you. This concludes today teleconference. You may disconnect your lines. Thank you for your participation.
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