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New Dragon Asia Corporation (NWD)

Q4 2006 Earnings Call

March 23, 2007 9:00 am ET

Executives

Peter Mak - CFO

Analysts

Bruce Zipper - Dakota Securities

Mark Tanaka - Citigroup

Presentation

Operator

Ladies and gentlemen, welcome to New Dragon Asia Corporation's Full Year Results Conference Call.

Before we start the call, I'd like to remind you that this conference call may contain statements which are not of historical facts, but that are forward-looking in nature. Regarding among other things, trends of the company's operations and its business strategy.

You should note that the company's actual results may differ materially from those projected in these statements due to a variety of factors affecting the business. Additional information about these factors is available in the annual and quarterly reports that the company files with the SEC.

I will now turn the call over to Peter Mak, Chief Financial Officer of New Dragon Asia Corporation. Mr. Mak, you may begin.

Peter Mak

Thank you operator. Good morning everyone, and thank you for joining me for our full fiscal year 2006 results conference call. New Dragon Asia made good progress again this year, delivering a third consecutive year of double-digit revenue growth.

Our full year 2006 revenues were $53.4 million, which is an increase of around 21% as compared to full year 2005 revenues. Our operational performance remains strong. Our EBITDA actually increased by 17.2% and our EBITDA margins remained at around 19%. We are very pleased with our position, as we begin the year 2007.

During the past fiscal year, we made several key announcements. And we expect these achievements to provide a foundation from which we can continue to grow in the year 2007.

Some of the highlights from the year 2006 include: Firstly, the acquisition of the Chengdu Plant and the expansion of Longyuan Packaging Plant. Second, the receipt of HACCP certification, which enabled New Dragon Asia to export noodles to Europe. We have already signed several key customers in Europe, including Tesco, a major supermarket chain in the UK.

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We've also expanded our soybean powder business with a major sale through one of the global beverage manufacturers. We also increased our export business. We are now exporting, in addition to the Asian countries, Europe, including Great Britain, France, UK and Italy. And this year, we already achieved our target of our export sales, amounting to 15%.

I would now like to review the numbers for year 2006 compared with those from year 2005. As I previously mentioned, our revenues have gone up to 21% to $53.4 million, which is an increase of $9.2 million, compared with year 2005. There are several reasons for this increase.

Firstly, there is continuous increase in demand for our Noodle and Flour products. For our Noodle and Flour products segment, we actually achieved a 20% increase.

Secondly, we also included the full year result of our soybean business compared with '05. Our soybean business achieved 7.4 million in revenues, which is higher than what we had expected previously of 5 million.

And we also increased our export sales. As I said, we already achieved 15% among our instant noodle sales. We export around 15% to overseas countries.

In terms of operational results, we maintained a gross margin of 19%. We already achieved these for the past four years. We keep gross margins at around 18% and this year we achieved 19% basically because of our higher margin export sales and also the soybean sales.

Our G&A expenses also increased. Actually, it increased quite significantly because of a non-cash, non-recurring stock-based compensation charge of $8.1 million. This is because of the option pricing valuation results of the $2 million and $6 million options that we granted in the year 2006.

If we take these out, our G&A expenses is actually only $2.8 million, which is 19% more compared with last year and which is also in line with our increase in revenues.

There is another non-cash charge to our P&L, which we recorded as a loss on fair value adjustment to embedded derivatives, which is $1.4 million. Because of these two non-cash items, they add up to around $9.5 million charge. As a result, we incurred a net loss of around $2.6 million in the year 2006, which is equivalent to $0.10 per share.

Please bear in mind that this $9.5 million non-cash charge doesn't affect our normal operations. If we go back to our EBITDA, we actually have a huge increase in EBITDA to around $10 million, which is 70% up.

And if you take away these two non-cash charges and if we can adjust it by having what we call the non-GAAP income, we have a net income of over $7 million in the year 2006. Compared with almost $6 million in the year 2005, which is again a 13% up. And we maintained almost the same net income percentage around 13% because of this non-GAAP income.

Income from the balance sheet; we believe that our balance sheet remained strong with cash and cash equivalents as of December 25, 2006 at $10.3 million. Of which $2.5 million was generated from our operating activities, which is also again a significant increase compared with last year.

Our working capital increased to $17.6 million compared to $14.5 million at December 25, 2005, which is again because of the capital generated from the operating activities in line with the group of the business.

As you are most likely aware, we experienced some cash and non-cash charges during the year 2006, which has impacted our profit line, but it doesn't change our operations. Our financials are still very strong fundamentally and our strategy is still on track.

I'd like to spend a few minutes on the opportunities in the coming year 2007. We are still experiencing continuous demand for our products, including instant noodles, soybean, and the growth is continuing.

We believe that because of the GDP growth in China of around 10% in the year 2006 and will be around similar levels to 9% for the year 2007; we expect that our revenue will grow at least in line with the GDP growth, if not better.

And we also experienced a significant demand on the high-protein food, which basically relates to our soybean protein powder. Our soybean protein powder generated much higher margins. So we expect that for the year 2007, our margins will also increase.

We have made a significant progress in our export business. As I said, we already export our noodles to the United Kingdom, to France, and to Italy, in addition to beef and chicken that I told everybody last year. And we expect that we'll develop and we'll explore new markets in Europe, very, very soon.

We also announced several months ago that we are making and selling ginger powder, especially locally. We expect that we will export ginger powder to overseas countries in the year 2007.

In summary, we are pleased with the progress we are making with respect to the ongoing execution of our long-term growth strategy. We'll continue to uncover new sales opportunities, especially with respect to higher margin export sales and our new ginger powder product. We see these as key growth drivers for the fiscal year 2007.

Furthermore, we'll continue to seek out [formally COS] that can add value to our operations and help drive future growth.

Lastly, we'll continue to talk to major multinational companies, trying to leverage our distribution network. We will continue with these strategies in the year 2007.

This concludes my prepared remarks. I would like to open the call up to your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question comes from [Bruce Zipper with Dakota Securities]. Please go ahead.

Bruce Zipper - Dakota Securities

Yes good morning. My question is regarding the year 2007. Can you give the shareholders a forecast of how you think -- at least the first quarter or two would be as far as profitability is concerned?

Peter Mak

Are you referring to a net income guidance?

Bruce Zipper - Dakota Securities

Yeah, net income would be fine. If you want to expand into a different type, then that's fine. But just talk about what kind of bottom-line profits the company thinks it can achieve as you start '07?

Peter Mak

Okay. You probably understand that in the year 2006, we have experienced a net loss position because of the two non-cash charges. One of them is the stock-based compensation, which I don't think will happen again in the year 2007. But the second one, the one that relates to loss on fair value adjustments to embedded derivatives, I just cannot tell because it is correlated to the stock price.

Okay. So, assuming everything is unchanged and there would not be that loss again in the first quarter, assuming there is no change in stock price. But this is unlikely. But anyway, given that our continuous growth of business and the continuous cost control on the G&A expenses, I am very sure that if we take away these non-cash charges, we definitely will achieve a very reasonable return on the net income level.

As I explained just now, if we put these, what we call the non-GAAP income as the basis, our net income percentage for the past three years are the same, 13%.

So, if we continue to grow our business in term of revenue, like for example. If we can achieve another 20% growth in revenue, assuming we maintain the net income percentage of 13%, then you can roughly calculate the bottom-line on the first quarter and the second quarter. That's my answer.

Bruce Zipper - Dakota Securities

Okay. Also one other question, I noticed you people went into the ginger business, in other words producing ginger?

Peter Mak

It's ginger powder, not ginger.

Bruce Zipper - Dakota Securities

Yeah, ginger powder, I'm sorry. Can you discuss that and how that's going and if you think that's going to be a strong product for you guys in '07?

Peter Mak

I believe I have explained in the last announcement about the ginger powder product. I mean with ginger powder itself, we can achieve a very handsome margin. We are talking about 300% margin on ginger powder. So, today we expect that we can generate for the year 2007 a revenue of around $2 million to $3 million from ginger powder business. And obviously we would like to do more if we can export it to overseas countries. Currently, the $2 million to $3 million is the revenue that we expect to generate in the domestic market.

The revenue number does not seem a big number, but if the ginger powder business can achieve a 300% gross margin and is what it could contribute then look what it can do to our bottom-line. So, that's why we put it as one of the key drivers for our year 2007, and basically on our bottom-line.

Bruce Zipper - Dakota Securities

I see. Okay, very good. Well, thank you very much.

Peter Mak

Thank you, Bruce.

Operator

And our next question comes from the line of [Mark Tanaka] with Citigroup. Please go ahead.

Mark Tanaka - Citigroup

Yes, I'd like to congratulate you on your operating cash experience this year. You've done very well. You look like you are going in the right direction. What I'd like to talk about is the stock awards from this last year. The amount of stock awards is quite significant, so much that it changed the per share revenue from positive to negative. What strategically did you gain from those stock awards? And do you expect to be issuing similar type of awards this year?

Peter Mak

Firstly, I'd like to answer your second question first. We don't expect to issue any stock-based compensation again in the year 2007. In fact, frankly speaking, we already did that because the Board tried to put the year 2007 stock options back to year 2006. It's just to avoid a situation that we experienced in fiscal year 2006 because of the first 2 million stock options that we granted in January '06.

We subsequently [filed] that because of the US GAAP because of the valuation results as they hit our P&L. So, we don't want these to happen again in '07. That's why the Board made a very clever decision to put these '07 grants back to '06, to put all the impact in one fiscal year.

So, '07 will be fine. We now understand that there will always be a big hit in the P&L because of the stock-based compensation arising from the US GAAP. So, we have already decided not to view this as an incentive base, or at least we'll scale down this measure. We'll scale down the rate to incentivize our management.

So, my short answer to the second question is we won't do it in the year 2007.

Now, I'll come back to the first question. The reason I did that as I said is we don't want any impact on '07, just like we put in '06 in terms of the magnitude, because of the valuation methods that our independent valuator used.

We subsequently [filed] that. Our stock option has a term of like example 10 years. The hit will be very, very significant. We should have this done, like for example, for two to three years, and then the hit will be much smaller.

And again, we learned a lesson and we don't think we will do it in '07 using this type a long-life option and we will put everything back to cash. We'll design a (inaudible) to incentivize the management. So, this is the answer.

Mark Tanaka - Citigroup

Okay. As a follow-up question, what are the individuals who are receiving these stock awards bringing to the company from a strategic position that would warrant such a high amount of stock options?

Peter Mak

The option was granted to the employee who actually did a lot of significant contribution to the company, including, the acquisition of the Chengdu plant and the restructuring of the packing company called Longyuan Packaging. And also it relates to the second fund raising that we did in late December, year 2005. And also part of option grant to him is to incentivize him to do better for the year 2007 and 2008. Because the term, the employment contract with this gentleman, i.e. the CFO, will last until the year 2008. So, that's his total remuneration package

Mark Tanaka - Citigroup

Okay. I hope you see the results from it. Thank you.

Peter Mak

Okay.

Operator

(Operator Instructions). Mr. Mak, we have no further questions sir. Please continue with your presentation.

Peter Mak

Okay. So, thank you again for your participation this morning. Please do not hesitate to contact me or my colleagues at Taylor Rafferty with additional questions. Thank you very much.

Operator

And ladies and gentlemen that does conclude our conference for today. We thank you for your participation. You may now disconnect.

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China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

To sponsor a Seeking Alpha transcript click here.

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