China Direct Industries, Inc. (NASDAQ:CDII)
F3Q 2011 Earnings Call
August 15, 2011 4:30 PM ET
Richard Galterio – VP
Andrew Wang – CFO
James Wang – CEO and Chairman
Amit Dayal – Rodman & Renshaw
Greetings and welcome to the Third Quarter of Fiscal 2011 Earnings Conference Call for China Direct Industries’. For those of you who maybe new to the company, China Direct Industries trade’s on the NASDAQ global market under the symbol CDII.
China Direct Industries is a U.S.-based holding company that sources, produces and distributes industrial commodities in China and the Americas and provides cross-border business and financial advisory services.
Headquartered in Deerfield Beach, Florida, China Direct Industries have a unique infrastructure that provides a platform to expand business opportunities globally while effectively and efficiently assessing the U.S. capital markets. 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 discussion of the third quarter ended June 30, 2011.
At this time, I would like to refer to the Safe Harbor statement 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 filing 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. Mr. Galterio, you may begin your call.
Thank you, Operator. And all of you who are joining us for our third quarter fiscal 2011 conference call. I am pleased to announce that China Direct Industries recorded revenue of $145.1 million for the first nine months of fiscal 2011 ended June 30, 2011; this was up 87% from revenues of $77.6 million recorded in the nine months of fiscal 2010.
Net income attributable to China Direct Industries for the first nine months was $7.8 million, improving significantly from a loss of $412,000 recorded in the comparable period in fiscal 2010.
Net income attributable to common stockholders for the first nine months of fiscal 2011 was $7 million, inclusive of approximately $600,000 in non-cash items related to our Series A preferred and this is compared to a loss of $492,000 in the same period of fiscal 2010.
Earnings per basic and diluted share were $0.20 for the first nine months compared to a loss per basic and diluted share of $0.02 recorded in the same period in fiscal 2010.
We recorded revenues of $57 for the third quarter of fiscal 2011 ended June 30, 2011, and this was up 78% when compared to $31.9 million recorded in the third quarter of fiscal 2010. Net income attributable to common stockholders for the third quarter of fiscal 2011 was $4.3 million and this compares to a net loss of $1.1 million attributable to common stockholders in the third quarter of fiscal 2010. This resulted in third quarter net income per basic and delicate share of $0.11 as compared to a loss of $0.04 in the third quarter of fiscal 2010.
We continue to see an expansion across all of our business segments and in the third quarter I would like to highlight a few areas. First in our Magnesium segment we delivered 9,049 metric tons of magnesium, a 52% increase in shipping volume compared to the same period in fiscal 2010. We generated $25 million in revenue in the third quarter of fiscal 2010 (sic)  from magnesium with an average selling price increasing to $2,766 per metric ton. This is a significant improvement compared to $14.3 million in revenues in the third quarter of fiscal 2010 with an average selling price of $2,400. I would also like to point out that this is a 4.8% improvement in average selling price from the previous quarter or second quarter of fiscal 2011.
As we have increased production through the restart of facilities our gross margin excluding depreciation reached 6% in the third quarter and totals an average of 5.1% for the first nine months of the year as a quarterly numbers are improving with the restart of these facilities. We anticipate that we will continue to see positive trend for the remainder of this year as prices and demand continued to firm and our business mix shifts towards production from distribution.
In our Consulting segment, we had a very strong quarter compared to the third quarter of fiscal 2010. Our revenue reached $11.8 million and this compares to $682,000 recorded in the same period in fiscal 2010. This is a result mainly of transactional revenue we conducted for a new client in the quarter. We have added two new clients this fiscal year for transactional services and maintain the same number of clients as last fiscal year for ongoing services.
We continue to see significant improvement in our Basic Materials segment with overall revenue reaching $20.2 million and that’s after 19% from the third quarter of fiscal 2010. Growth has been fuelled by a 21% increase in sales of our specialty chemical as well as shipments of iron ore from our U.S.-based industrial commodities business. We believe this business will play an increasingly important role for the segment the fourth quarter and in fiscal 2012 as we expand our efforts in South America.
Revenue from our CDI Beijing subsidiary was down slightly due to a slowdown in the pace of new construction spending as compared to the previous quarter. Gross profit for this segment increased by overall 52% compared to the third quarter of fiscal 2010, and gross margins reached 6% as compared to 4.7%.
As we move through the end of this fiscal year and into 2012 we have witnessed a strong improvement in our end markets in addition and our consulting operations. Our Basic Materials segment has grown and we have begun to ramp our industrial commodities business in Mexico and South America. Our top-line performance accelerated and we have begun to see our bottom-line improvement in magnesium as prices have firmed and production resumes at certain facilities.
As we work to improve performance in the coming quarters I would like to emphasize some key factors which we believe will help to continue to accelerate our growth in fiscal 2011 and beyond. First, our operating activity generated approximately $1.8 million in cash in the quarter and these positive trends in this area have helped us to invest additional capital towards the growth of our businesses and we believe will further improve our performance.
Secondly, the improving trends in prices and production levels from our magnesium operation are now surfacing throughout our overall performance. These operations were essentially at a breakeven for us on a net basis and that is inclusive of over $900,000 in non-cash depreciation cost. Through our recent acquisitions to make gold and magnesium a wholly-owned subsidiary and our current plan to acquire additional facilities we are confident that the segment will expand substantially in the years to come.
Third, we have continued to ship iron ore from Mexico into China and we expect to begin distribution from Bolivia as well as other parts of South America when we have expectations of quadrupling our overall shipments from this past quarter. We believe this will be an important driver of growth for the future taking advantage of our capabilities in China through the U.S.-based profit centre.
Fourth, our marketing efforts in China from our consulting services have yielded two new clients through this year and helped us build a stronger base for our fiscal 2012 as we look to add additional clients in the coming fiscal year.
And last. Our balance sheet continues to strengthen as increased cash by $900,000 compared to the second quarter and overall we now have $22.8 million in cash and prepaid expenses along with over $56.6 million in working capital. This compares to $18.6 million in cash and prepaid expenses along with working capital $30.3 million as of our September 30 year-end. We continue to have negligible long-term debt as well.
So as we move into the final quarter of fiscal 2011 and into 2012 we will continue to execute on our strategy of being a global leader in the magnesium industry. We are also working diligently to build our U.S.-based industrial commodities business as well as consulting and basic material distribution businesses in China.
I would like to turn the call over to our Chief financial Officer Mr. Andrew Wang to further discuss this quarter in more detail. Andrew?
Yeah, thank you, Richard and welcome everyone.
For the third quarter of fiscal 2011 ended June 30, 2011 China Direct Industries recorded consolidated revenues of approximately $37.0 million, up 78% strong when compared to revenue of $31.9 million recorded in the third quarter of fiscal 2010.
Growth profit in the period was $7.6 million, a 286% improvement over the $2.0 million in growth profit recorded in the third quarter of the fiscal 2010. We recorded a net income attributable to common stockholders of $4.3 million, this compared to a net loss of $1.1 million in the third quarter of fiscal 2010.
Our net income applicable to stockholders resulted in a basic and diluted income per share of $0.11 for the third quarter of fiscal 2011 on 38 million weighted average shares outstanding. This compared to a net loss of $0.04per share recorded in the third quarter of fiscal 2010 on 29 million weighted average shares outstanding.
For the first nine months of fiscal 2011 we recorded revenue of $145.1 million and a net income attributable to common stockholders of $7.0 million. This compares to revenue of $77.6 billion and net loss attributable to stockholders of $492,000. Our earnings per basic and directed share in the first nine months were $0.20 on 35 million weighted average share as compared to a loss of $0.02 per basic and added a share and 29 million weighted average share in the first nine months of fiscal 2010. While this result demonstrates significant overall improvement thus far in fiscal 2011 we see the underlying trend laying the groundwork for the improvement in the next quarter.
Looking at our Magnesium segment, we continue to see significant improvement in overall pricing trend and demand in both domestic and international markets. The third quarter of 2011 revenue from our magnesium subsidiaries was $25.0 million, a 75% improvement from the $14.3 million recorded in the third quarter of fiscal 2010. We shipped 9,048 metric ton of magnesium products, an increase of 52% compared to 5,967 metric tons shipped in the third quarter of fiscal 2010.
As previously noted our adjusted gross profit excluding depreciation was $1.1 million in the third quarter of fiscal 2010 as compared to 903,000 in the same period of fiscal 2011. Including depreciation gross margin were fractionally above 6% in both periods. Depreciation as part of cost of goods sold increased by approximately $600,000 resulting in a slight growth profit, inclusive of this depreciation expenses. Overall our magnesium segment generated an operating loss $124,000 in the third quarter of fiscal 2011 including $885,000 in depreciation expenses compared to the operating loss of – in the prior year.
Revenue for our consulting segment increased to $11.8 million in the third quarter of fiscal 2011, up significantly from $682,000 recorded in the comparable period of fiscal 2010. Net income was $4.4 million compared to a net loss of $741,000 recorded in the third quarter of fiscal 2010. Both revenue and net income reflects an improved environment for our services as well as the addition of transactional revenue from a recent added client.
Revenue in our consulting segment varies depend up on the level of service, transactional events and the addition of new clients. Our basic material segment revenue totaled approximately 20.2 million in the first quarter of fiscal 2011. An increase of 19% compared to 16.9 million at the quarter end third quarter of fiscal 2010.
Our basic material segment generates a growth profit of 1.2 million in the third quarter of fiscal 2011 compared to 802,000 in the third quarter of fiscal 2010. This is attributable to the strong performances at our specialty chemical operations and the addition of revenue from our U.S. based industrial commodity business.
This business generates 2.3 million in revenue in the third quarter of fiscal 2010. Our basic material segment generates operating income of 215,000 compared to our operating loss of 119,000 in the third quarter of fiscal 2010. Of with our magnesium segment, the overall business trends are strengthening with respect to the chemical and industrial commodities source from Mexico and South America. And we continue to look to grow our distribution operations in China and our U.S. based trading business.
From an overall balance sheet perspective, we remain well positioned for future growth. We ended third quarter of fiscal 2011 with 22.8 million in cash and prepaid expenses, are now with over 56.6 million in working capital, this compared to 18.6 million cash and prepaid expenses along with working capital of 30.3 million at September 30, 2010. Our cash position increased by 900,000, our operating activities generated 1.8 million in cash. By almost all measures our balance sheet has improved sequentially from the fiscal year end 2010. In summary we are very pleased with the improvement in our various business segments and we believe our business will improve significantly in the remaining quarter of this fiscal year, especially from the bottom line standpoint.
We remain focused on improving our internal controls including the company wide deployment of our enterprise resource planning, ERP systems. And our 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 continue to believe our current staffing level appropriately at our facilities in China with exception of our magnesium segment where we are restocking facilities and adding staff appropriately. We’ll continue to look to reduce cost where necessary and optimistically maintain inventory level to help improve margins, consummate to our level of business. Our balance sheet remains strong and we believe we are well positioned for continued growth. We continue to evaluate and execute our strategic initiatives with group for the future growth and we look to grow our businesses including the ongoing reach installation of production at our current magnesium production facilities as well as the further consolidation of our magnesium operations as previously discussed.
At this time I will return the call back over to Richard for some final comments.
Thanks, Andrew. Our results for the third quarter fiscal 2011 reflect significant improvement in revenue across all of our business segments. Additionally as our top line revenue increases and our bottom line results improved. We are poised to achieve strong overall growth not only for the remainder of this year and into fiscal 2012 in all of our business segments. Our end markets in magnesium and basic materials have improved and continue to do so. Our consulting business remains strong at it into this next fiscal year.
We are focusing our efforts on improving results from operations and we believe that improving trends in magnesium are finally filtering through our results. Our magnesium segment is gaining momentum as pricing continues to increase and we moved towards higher margins production versus distribution. Our magnesium customers in various industries including automobile manufacturing, aluminum alloy and fuel production have been stronger this year and we believe and intend to ramp our sales through our facility restarts and our consolidation plan.
Our efforts in consulting have led us on a strong growth track and we are confident that through the addition of our clients this year and looking add additional in the coming year we will do very well in this segment as well. Our basic materials segment continues to grow with our U.S. based industrial commodities business driving our expansion and strong performance from our chemical operations. We are confident that our company is in position where further gains in our business should flow through noticeably into our bottom line performance.
As we look out for the remainder of this fiscal year, we anticipated market improvement in our overall performance as we continue to grow our magnesium and expanding our trading and consulting operations. Our future success depends on several factors. First, we are aggressively ramping production at our Baotou facility and are trying – as we move through the rest of the quarter and into next year we are increasing our utilization rates at Chang and Ruiming Magnesium. Sales from these facilities should help us to continue to drive revenue growth, but more importantly improve margins as we shift towards the higher margin production business and away from the distribution which is lower margin.
We continue to look to opportunistically acquire raw materials to further help us improve our margins throughout the remainder of this year and into 2012. We believe demand trend should lead to a sustainable and stronger pricing environment into 2012 as well. Second, we anticipate a substantial increase in revenue from our U.S. based industrial commodities business as we ship ore from Mexico and began to ship ores from South America into China. We remain on track to deliver about four times more products in the fourth quarter than we did in the third quarter. And this will help us not only diversify, but it will also build a profitable and growing revenue stream that fits in U.S. dollars and while taking advantage of our capabilities in China.
And lastly we entered into a contract a definitive agreement to sell our interest in Pan Asia magnesium, which will lead to the recapture a significant portion of our investment in the Pan Asia facilities, totaling about $3 million. This will provide us with additional capital to further fuel our growth both in magnesium and our industrial businesses in China and U.S. As our top line performance has increased substantially, we believe certain short-term factors affecting our bottom line performance are essentially behind us namely the restart of facilities are now moving forward and we also see the net income from China Direct Industries at 12 million, but we now see our revenue exceeding to 100 million as compared to our previous guidance of 180 to 200 million.
So in closing I would like to emphasize that we are working diligently to achieve or exceed our goals and are confident once again that hat we have the right plan in place to deliver in all of our business segments.
We remain committed to being a worldwide leader in magnesium distribution, while we built diverse revenue streams centered around the dynamic growth taking place in China to enable our company to reach profitable, sustainable growth for the future.
And now I’d like to thank you again for joining us and operator you can please begin the formal Q&A.
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instruction) Our first question is coming from the line of Mr. Amit Dayal with Rodman & Renshaw. Your line is now open. You may proceed with your question.
Amit Dayal – Rodman & Renshaw
Thank you, good evening everyone. Just really quickly on the recent strategic sale, what are the rationale behind that and was purpose primarily to show working capital, if you could just provide some color on what –
Sure. Amit, if you remember back a couple of years ago, we discontinued the Pan Asia operations. Pan Asia operations were the only magnesium operations that we had that were not with our main Chinese partner and member of our Board of Directors’ Chairman, Wang. We had some disputes and things like that which caused us to basically discontinue these operations and write those investments in those operations down. We through negotiations with the Chairman of Pan Asia reached an agreement with a company to sell those operations so essentially we’re going to get $3 million for the sales of those operations which we had previously discontinued.
Amit Dayal – Rodman & Renshaw
Okay. And just from an overall strategic perspective, how should we be viewing the CBI story going forward now that magnesium prices potentially coming back for export business taking off. Where will be emphasis with the – how are the resources going to be allocated how should –?
I think one of the things I think that you can look at first and foremost is when you look at the operating the margins and things of that nature in stripping out depreciation and taking a look at with the operations themselves. The margins over the course of this year had begun to improve the business is contributing to our overall activity as revenues by what’s going on in our cash flow. And I think that we have a lot of depreciation going somewhere depreciation sort of max what the actual contribution is, but I think at this particular point in time borrowing global events and taking our hard downturn to the worse, which obviously no one can predict. But certainly some of the things coming out of the U.S., which is further mandating higher miles for gallon standard now in light trucks and making further goal out pass the original once they’ve done.
And other trends receivable for our company. We’ve made some acquisitions to acquire our facilities and wholly owned facilities, we’ve isolated some additional targets and I think our story is at magnesium continues to improve, we’re now at point where we’re at pricing level X works that this is all starting to flow down towards our bottom line a little bit more than in previous position where the prices were a little bit lower. So I think reaching an inflection point where further gains will really start to show up a lot more throughout our financials and as position our acquisitions if things continue to strengthen and things improve over the course of fiscal 2012 and fiscal 2013, we see ourselves is being one of the dominant players.
Amit Dayal – Rodman & Renshaw
Perfect Thank you so much Richard.
Thank you, (Operator Instructions). At this time, there are no further questions in the queue. I’d like to turn the floor back to management for any closing comments.
Once again, we would like to thank everyone for joining us on this conference call to discuss our third. quarter We will be working diligently to deliver a strong fourth quarter and look forward to speaking with everyone about our year end results sometime in December. And that concludes our call. Thank you very much.
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.
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