Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Richard Galterio – VP, IR

Andrew Wang – EVP and CFO

James Wang – Chairman, President and CEO

Analysts

Amit Dayal – Rodman & Renshaw

Ralph Weil [ph] – R. Weil and Investment Management [ph]

China Direct Industries, Inc. (OTCPK:CDII) F1Q2011 Earnings Call February 14, 2011 4:30 PM ET

Operator

Welcome to the first quarter of fiscal 2011 earnings conference call for China Direct Industries. For those of you who may not 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 holding company with the operations in China and the U.S. focusing on the pure magnesium production, distribution of basic materials and metal ores and cross border corporate advisory services. Headquartered in Deerfield Beach, Florida, China Direct Industries has a unique infrastructure that provides the platform to stand business opportunities globally while effectively and efficiently accessing the U.S. capital markets. 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 question-and-answer session, that will follow management’s discussions of the first quarter ended December 31, 2010.

At this time I would like to refer to the Safe Harbor statements under the Private Securities Litigation 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 23, 2010.

At this time, I would like to introduce Mr. Richard Galterio, Vice President of China Direct Industries. Thank you, Mr. Galterio, you may begin.

Richard Galterio

Thank you, operator and all of who are joining us for our first quarter of fiscal 2011 conference call. I am pleased to announce that China Direct Industries recorded revenue of $45.8 million for the first quarter of fiscal 2011 ended December 31, 2010 up 105% when compared to $22.3 million for the comparable quarter in fiscal 2010. Net income attributable to China Direct Industries for the first quarter reached $3.5 million compared to a net loss of $1 million in the first quarter of fiscal 2010.

Net income attributable to common stockholders for the first quarter of fiscal 2011 was $2.8 million inclusive of $600,000 non-cash in dividend expense related to our Series A Preferred. This compares to a net loss of $1 million in the first quarter of fiscal 2010. This resulted in first quarter net income for basic and diluted share of $0.09 compared to a loss of $0.04 per year in the first quarter of fiscal 2010.

Our improvement in performance was evident across all of our business segments in the first quarter of fiscal 2011. First in our magnesium segment, we witnessed – we now witnessed four consecutive quarters of double-digit growth in shipment volumes. In the first quarter of fiscal 2011, we delivered 9337 metric tons of magnesium. A 164% increase from shipping volume in the first quarter of 2010, and a 21% sequential increase from the fourth quarter of fiscal 2010. We anticipate that we will continue to see positive trends for the remainder of fiscal 2011 as we restart additional production and further integrate our Ruiming magnesium acquisition.

In our consulting segment, we had a very quarter as a result of consulting services provided to USChina Channel Inc. in connection with our acquisition of China Educational Services Ltd, our newest client. We intent to add several additional consultant clients in the remainder of fiscal 2011 and anticipate additional transactional revenue as conditions continue to improve for this segment. In our basic material segment, we continue to see a market improvement in our chemical operations where revenue in the first quarter of fiscal 2011 was up 32% from the same period in fiscal 2010 with modest profitability due to inflationary pressure in our input costs.

Our CDI Beijing subsidiary experienced strong growth with revenue in the first quarter of fiscal 2011, up 76% compared to the same period in 2010. And net income increased by 303% compared to that same period. We anticipate continued strength in CDI Beijing’s performance after having primary number of distribution agreements to service the construction industry. As we discussed in our year-end earnings call, we have secured iron ore supply contract in Mexico and parts of South America and we remain on track to deliver our first shipments of iron ore in the second quarter of fiscal 2011. We believe these operations to significantly improve our performance in this fiscal year as we continue to make growth in to join borders and isolating reliable suppliers in the region.

As we move through 2011, we are now confident that the global economic challenges we update since 2008 have substantially updated and we resume a solid growth trajectory in all of our businesses. Momentum is building across all of our businesses and we intent to capitalize on the opportunities ahead to improve our net results as revenue expands. I would like to emphasize several key factors which have and will continue to help us accelerate growth in fiscal 2011.

First, we further improved our strong balance sheet in the first quarter with cash and cash equivalents of $8.1 million with an additional $12.4 million in prepaid expenses as compared to cash and cash equivalents of $10 million with additional $8.6 million prepaid expenses at September 30, 2010. We continue also to have negligible long-term debt.

Second, we completed the sale of $4 million of our securities we’ve registered direct offerings early in January to further enhance our finance position to allow us to make opportunistic purchases or raw materials or inventory in an efforts to expand our gross margin. Third, we continued to step up our marketing efforts in China for our consulting services and anticipate adding additional clients at senior management at lease for China in the coming weeks to meet with several companies seeking various services, potentially leading to significant revenue opportunities in the coming quarter.

Fourth, we have significantly increased our magnesium production and distribution capabilities as we restart idle capacity and further the integration of our Ruiming magnesium acquisition. We provide additional capital for raw materials and inventories and we continue to market our IMG brand as we signed more contracts for our IGM name. Fifth, our basic material segment has exhibited strong top line growth with our CDI Beijing subsidiary maintaining almost an 11% gross margin, while revenue increased by 76%. The prospects of delivering on the additional orders, we obtained in this second half of 2010 further bolstered our confidence in this segment.

And last, we have $35 million in working capital to support our operations as the business environments improves and we force new trading opportunities in South America and Mexico. We will continue to execute on our strategy of being a global leader in the magnesium industry, while we expand all aspects of our consulting services and basic material distribution businesses as well as our trading operations in the US.

I would now like to turn the call over to our Chief Financial Officer, Mr. Andrew Wang to further discuss our year – quarter in more detail. Andrew?

Andrew Wang

Thank you, Richard, and welcome everyone. For the first quarter of fiscal 2011, ended December 31, 2010 China Direct Industries recorded consolidated revenues of approximately $45.8 million, up 105.7% compared to $22.3 million for the first quarter of fiscal 2010. Gross profit in the period was $6.5 million, a 258% improvement over the $1.8 million in gross profit in the first quarter of fiscal 2010. We recorded a net income attributable to common stockholders of $2.8 million. This compares to a loss of $1 million for the first quarter of fiscal 2010.

Our net income applicable to stockholders results in a basic and diluted income per share for the first quarter of fiscal 2011, up $0.09, on $31.8 million weighted average shares outstanding. This is a significant improvement from a loss of a $0.04 per share recorded in first quarter of fiscal 2010 on $27.4 weighted average of basic and diluted shares. While these results demonstrate significant overall improvement, the underlying trend in our business segments, show an acceleration in many aspects of our approach.

Looking at our magnesium segment, we saw a significant improvement in overall demand in both domestic and international markets. For the first quarter of 2011, revenues from our magnesium subsidiaries were $21.3, about a 158% improvement from the $8.3 million recorded in first quarter of fiscal 2010. We shipped 9337 metric tons of magnesium products, an increase of 164% compared to 3532 metric tons shipped in the first quarter of fiscal 2010, an increase of 21% sequentially, when compared to the 7718 metric ton shipped in the prior quarter. This was the fourth consecutive quarter of double-digit volume growth.

We achieved this growth in the quarter despite the restrictions hold by the Chinese government late in the year, with temporarily concerning [ph] production and caused a spike in ferrosilicon prices. Gross margin were also affected by the increased depreciation costs with our Ruiming magnesium subsidiary. While our magnesium segments generated a net loss of $217,000, this loss was inclusive of over $1.1 million in depreciation, with a significant portion of that decrease recorded at our Ruiming magnesium. This compares to a net loss of $8,000 inclusive of $449,000 in depreciation expenses in the first quarter of fiscal 2010.

Revenue from our consulting segment increased to $5.3 million in first quarter of fiscal 2011, up 833% from the $558,000 recorded in the comparable first quarter of fiscal 2010. Net income reached $3.6 million compared to a net loss of $1 million recorded in the first quarter of fiscal 2010. This significant improvement in both the revenue and net income is due to the addition of new clients. USChina Channel Inc., where we provided consulting services in connection with their acquisition of China Education Services Limited. Revenue in our consulting segments varies depends on the level of service, transaction events and addition of new clients.

Our basic material segment revenue totaled approximately $19.2 million in the first quarter of fiscal 2011. An increase of 43.2% compared to $13.4 million recorded in first quarter of fiscal 2010. Our basic materials segment generated a gross profit of $1.1 million in first quarter of fiscal 2011, compared to $991,000 in the first quarter of fiscal 2010. This (inaudible) for the strong performances at our Lang Chemical and CDI Beijing operations. While Lang Chemical recorded revenue up $13.4 million, up 32% compared to $10.1 million in the same period of fiscal 2010. We experienced some margin compression due to input cost inflation.

CDI Beijing recorded revenue of $5.8 million, up 76% compared to $3.3 million in the same period of fiscal 2010, while maintaining gross margin of 10.9%. Our growth (inaudible) in material segment generated net income of $146,000 before deduction of non-convertible interest as compared to $107,000 in 2010 period. Net income attributable to China Direct was $41,295 inclusive of $87,000 in costs related to our U.S. based CDI treating subsidiaries for projects in Mexico and South America, as compared to $40,566 with a no cost associated with these actually [ph] in the comparable quarter.

As with our magnesium segment, the overall business trend continues to strengthen and we believe we have sufficient capital growth in our distribution operations in China and our U.S. based trading business. From an overall business and balance sheet perspective, we maintained – we’re well positioned for future growth. We ended the first quarter of fiscal 2011 with $8.1 million in cash and $35 million in working capital as compared with cash of $10.1 million and working capital of $30.3 million as of September 31, 2010. We received an additional infusion of $3.8 million in cash, and net expenses also from January 5, 2011 from the sale of securities through our registered direct offerings which we intent to put to work in our various business segments as necessary.

In summary, we’re very pleased with improvement in our various business segments and we believe our business will improve significantly in the remaining fiscal year. We intent to devote substantial efforts in improving our internal control and positioning our operations to be more streamlined and focused in an effort to achieve significant margin expansion in our magnesium and chemical operations specifically.

We believe the significant sequential improvement in top line performance in magnesium shipments had improving top line trends in all of our segments, for evidence, that we are moving in a right direction. We continued to believe our constructing [ph] level are appropriate at our facilities in China, with exceptional are magnesium segment where we are restarting facilities and adding staff appropriately in the coming months.

Any other addition or reduction to staff where we reflect permitting environment. We will continue to look to reduce costs where necessary and opportunistically maintain inventory levels to have improved margins, consummate to level of business. Our balance sheet remains strong, and we believe we are well positioned for the future. We’re evaluating and executing our strategic initiatives for the future as we look to grow our businesses including the further consolidation of our magnesium operations as previously discussed. The further restart magnesium production facilities and other proposed acquisitions for our ongoing consolidation process as we view in our IMG brand for the future.

At this time, I will turn the call back over to Richard for some closing comments. Richard.

Richard Galterio

Thank you, Andrew. Our results for the first quarter of fiscal 2011 reflect a dramatic improvement in all of our business segments coupled with an improving overall economic trends. Our top line growth is accelerating and we have achieved our first goal of weathering the storm and reemerging on a positive trajectory in both revenue and earnings.

We are now focusing our efforts on improving results from operations as we continue to withstand our businesses. While we experienced some short-term obstacles in our magnesium segment, we still maintained double-digit sequential shipment growth and our operation fielded positive net results prior to depreciation expenses. Our magnesium customers in various industries including automobile manufacturing, aluminum alloying and steel production are strengthening, and we believe we can capitalize on this, through our facility restarts and consolidation plans.

Our efforts in consulting resulted in a significant first quarter transaction, and we are confident that we will add additional clients and do additional transactions in the coming quarters. Our basic material segment continued to grow with CDI Beijing leading the way in terms of both percentage increase and gross margin performance. With several contracts which we looked to fulfill in the coming quarters, we anticipate further growth from this company as well as growth from Lang Chemical which delivered a solid performance despite inflationary pressures which we discussed earlier in the call.

We are confident that our company is in a position where further gains in our business should flow through noticeably to our bottom line performance. As we look out into fiscal 2011, we see continued improvement in our businesses and we are confident that this 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, we will devote substantial attention to add the capacity as needed and look to opportunistically acquire raw materials to help improve margins.

We believe demand trends should yields with stronger pricing environment in the year. Second, we expect to begin shipments of iron ore through our establishments of supply contracts in Mexico and South America, in the second quarter, as our yearlong efforts to establish the trading business to leverage our relationships in China reach its fruition. Should the initial shipments prove to be delivered successfully, we believe this will add significant revenue and income stream to our U.S. based operations and will lay the foundations for shipments taking place on a monthly basis. And third, we are in active talks with potential consulting clients to perform services which could significantly further the revenue growth in this segment in the coming quarter, as well as provide recurrent services to our current clients. We are working diligently to reach closure in a number of areas as we built this segment for 2011 and beyond.

In closing, I would like to emphasize that we are confident that our strong balance sheet gives our shareholders a solid foundation for growing future. Additionally the investments that we have made in magnesium, give us a substantial room for growth as markets improve and our basic material operations are experiencing strong growth trends. As our ore trading comes online, and we look to add more clients, we believe the future for our company is very bright. We’re excited about the improvement in our operations as well as the opportunities we have mentioned in this call. We are confident that as we’ve emerged from a protracted downturn, we have the right team, the right businesses and the right plan to achieve sustainable growth for the future.

Allow me to thank you again for joining us. And now operator you may please begin to form Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Amit Dayal with Rodman & Renshaw. Please proceed with your question.

Amit Dayal – Rodman & Renshaw

Thank you. Thanks for taking my question. Congrats on the results guys. Just to begin with, in terms of the guidance you’ve provided for the year, can you break that down into what you expect from each of your business segments?

Richard Galterio

Well we haven’t broken it down formally, but we did say we expect from a revenue perspective our magnesium operations to be the largest driver of revenue. We – depending upon pricing the environment, if our gross margins expand it should be relatively big contributor to our earnings as well. We would expect our consulting operations, given from the fact that our consulting operations we’re the largest driver of earnings in the first quarter, to be the largest driving force overall in earnings for the year, our chemical operation should continue to grow trajectory. So if you model that growth trajectory, you could probably come to a conclusion of where we see that.

And the largest potential upside for us is really the trading operations, because we’re trying to see conservative even now we’re extremely optimistic that as we close these first shipments in this quarter, it’s kind of one of those situations where if you close the first one, then there is no reason to believe why we won’t be able to do this on a monthly basis. So if you look at our business, these earnings will be driven by consulting, magnesium, and basic materials, probably in that order. And our revenue will probably be driven by magnesium, basic materials, and consulting, in that order.

Amit Dayal – Rodman & Renshaw

Perfect. And then in regards to, how you are negotiating pricing for your Beijing products, given the volatility and the inflation related risks. So if you can just give us some color on how this – are this similar or different from what you’ve been doing in the past and what the environment is now?

Richard Galterio

Well I think given the environment in the near-term, we’ve been operating more on the spot margin, than we have been forward pricing. And that’s largely because of the volatility created price. The government shutdown to power created all kinds of spikes and craziness in the market. I guess, it’s really going to be depended in the future of the trends in magnesium until there are either a stabilization of the costs working with pricing. We’re going to have to operate more opportunistically by our raw materials when we think prices are down, and then look to sell are higher prices and sort to be manage our inventory levels better.

Amit Dayal – Rodman & Renshaw

In terms of the handlings [ph] from the governments tightening efforts over there, I mean how concerned should we be, with regards to the magnesium business given that this is going to be like a key contributor for the guidance you have been talking about. Are you seeing a little bit more easing off that might come into play later in the year, I mean in terms of what your visibility is on the ground level over there, if you could just give us some color on what the key issues should be that we need to keep an eye on?

Richard Galterio

James?

James Wang

Basically we are using – we use the cooking gas to fuel magnesium burners [ph]. So we doesn’t have any potential environmental issue. Last year, we did have some problem (inaudible) like attributing because you’re in an area just in a local government (inaudible) consumption. But this year we believe we did not have any problem and because our company don’t produce any particular broking [ph].

Richard Galterio

Yes, we’re – I mean, on the pollution side because we’re using the waste gas, we don’t have a lot of the issues that some other companies might have. Now there is, from a government perspective there is always wildcard in terms of what might go on, but we think they’ve been pretty good for the companies that has been trying to be environmental responsible. So you never – can’t tell that I think we’re in a pretty good position to not be impacted by any government situation in the fiscal 2011.

Amit Dayal – Rodman & Renshaw

Thanks. I will get back in the queue, gentlemen. So I get with you [ph] later on. Thanks.

Richard Galterio

Sure.

Operator

Our next question comes from the line of Ralph Weil [ph] from R. Weil and Investment Management [ph]. Please proceed with your question.

Ralph Weil – R. Weil and Investment Management

Okay, thank you and congratulations on a great quarter. I have a couple of questions. One, could you possibly comment geographically, as to where the magnesium business has been going, and where the significant increases are taking place? And secondly, could you comment on the affect to China Direct and any thoughts you may have on the ITC not sunsetting magnesium antidumping regulations for China and getting rid of them for Russia, and how this if at all affects you in your planning?

Richard Galterio

Okay, well let’s thanks for the congratulations on the quarter. And I’ll answer your second question first. The Russia approval is for magnesium alloys and we think, that it’s a positive step in the right direction for the eventual removal of antidumping rule into America into United States specifically, because it really is from everyone in the world can (inaudible) sustainable. The sunset review is taking place in for the pure magnesium, I believe coming up this year. So we’re still on the running on pure magnesium side since the majority of our business is pure magnesium, the markets that could be very helpful for us.

On the end markets to right now going back to your first question, our international markets have picked up pretty dramatically, recently and we’re starting to see movement in Europe, Canada, Australia and Japan where we’re starting to sell through and we have signed some contracts with some major Fortune-100 type customers, end-users in the various industries in which we service. So we see, and I apologize, I have cold – we see improving end market trends in that area, magnesium production from a global perspective is improving dramatically and it’s always been sort of a lag metallurgy [ph] started to see prices really starting to take off in the lot of the metals that trade on commodities basis.

Magnesium is usually the last one to go, but the demand trends for us are starting to look out that we’re going to start to see a gradual acceleration that’s going to take a greater hold as each quarter goes by. And the users are getting stronger as well. So we think they are historic blowing [ph] and that storm over the course of the next year to two years will be very favorable for us. As far as Russia goes from the pure magnesium production side, I think it may be helpful for us because if the outlaying is coming out of Russia, it might be impossible for us to be working in that areas on delivery too, as they – as they gain an edge in terms of being able to deliver alloys into the United States, which previously was not allowed. So keep in mind that stuff is pretty tricky because even companies that receive exemptions from the antigovernment (inaudible) loss them the following years.

So it’s just because that reviews said okay today. It doesn’t mean that next year, they might not say no. So it’s something that we could give a positive step in the right direction but I am not a 100% sure whether that’s going to be something that’s going to take hold for the future, long time again this for.

Ralph Weil – R. Weil and Investment Management

Are there – if I can add another question, are there any major areas or industries that you can point to where your significant increase in magnesium demand is coming from and while you’re talking about that, can you talk about what is happening to usage in the auto industry both in foreign countries and what maybe developing in the United States?

Richard Galterio

Well the aluminum alloying industry has been strengthening the fact that, now when you talk about the aluminum alloying industry that could be going into a number of other areas, such as electronics and even into the automobile industry. So that’s part is one customer. The automobile industry trends needs to be improved I think that the only thing that really is a little bit difficult in the automobile industry from a standpoint of using magnesium is the instability to hedge, and I think that creates a little bit of a problem for companies that plan out five year into the future. It’s difficult to plan on how much magnesium you’re going to be able to use, because with other simplex [ph] deal and what not you can rock in your margins on a hedge.

So we believe that eventually that will carved out, but right now the aluminum alloying industry is really the strongest one for us.

Ralph Weil – R. Weil and Investment Management

Are you participating in sales of magnesium to the foreign auto companies or is that not the case?

Richard Galterio

We deliver magnesium to foreign auto companies. That is correct.

Ralph Weil – R. Weil and Investment Management

Okay, if I may ask one more. Are there any other – if there are any other trading business that you might be doing or that might be coming up besides iron ore?

Richard Galterio

We are always actively looking at opportunities that we can import into China with leveraging our – not only our customer base but our contacts in China. We do not believe that our trading operations will ultimately be limited to iron ore, and as those opportunities become available to us, whether those opportunities be scrap metal, whether they be different types of ores, whether they be various railroad [ph] etcetera we are not in any way sure perform limited price iron ore, it’s the only thing that we’re going to be able to do in trading.

Ralph Weil – R. Weil and Investment Management

Thank you.

Richard Galterio

Thank you.

Operator

(Operator Instructions) There are no further questions in the queue. No, we did get a follow-up question from the line of Ralph Weil. Please proceed with your question.

Ralph Weil – R. Weil and Investment Management

You just mentioned the magic word railroads [ph]. Are you in anyway involved in this or?

Richard Galterio

No, at this point in time, number one, that we have nothing that we can comment on at this time, that we are involved in otherwise we would have announced it or put it in our Q. We’re actively talking to a number of different situations that vary across the board, but it would be premature to say that we’re involved in that at this particular point in time.

Operator

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Richard Galterio

Once again, we’d like to thank everyone who has come onto our first quarter conference call. We look forward to continuing to deliver improved performance over the course of the rest of this fiscal year. And we look forward to speaking with you at our second quarter conference call. And once again thank you and have a great day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: China Direct Industries CEO Discusses F1Q2011 Results - Earnings Call Transcript
This Transcript
All Transcripts