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

China Direct Inc. (OTCPK:CHND)

2006 Year End Earnings Call

April 5, 2007 4:15 pm ET

Executives

Thomas Walsh - Hayden Communications International

Marc Siegel - President

David Stein - Chief Operating Officer

James Wang - Chief Executive Officer, Chairman

Alan Sheinwald - Hayden Communications International

Analysts

Alan Stone - Wall Street Research

Richard David - Rombo Cycle

Alan Lichtenberg - Lumen Capital

Presentation

Operator

Good afternoon. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the China Direct Inc. 2006 year end financial results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Thomas Walsh of Hayden Communications International. Sir, you may begin your conference.

Thomas Walsh

Thank you, Operator, and thank you everyone for joining us today for the China Direct 2006 year-end conference call. Our call today will be hosted by Marc Siegel, President, and Mr. David Stein, Chief Operating Officer of China Direct. Additionally, Dr. James Wang, Chairman and CEO, and Jenny Liu, VP of Finance of China Direct, will be available during the Q&A session. Following management’s discussion, there will be a formal Q&A session open to participants on the call.

If anyone participating on the call this afternoon does not have a copy of the earnings release, please contact our office at 914-669-0222.

Before we get started, I am going to review the company’s safe harbor statement. Statements in the conference call that are not descriptions of historical facts are forward-looking statements relating to future events and as such, all forward-looking statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made in the course of this conference call that state China Direct’s and management’s intentions, hopes, goals, beliefs, expectations, suggestions, plans, outlook or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially.

When used on this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, plan and similar expressions as they relate to China Direct or any of its subsidiaries are intended to identify said forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause the actual results to differ materially from those anticipated by China Direct at this time.

Except to the extent required by applicable securities laws, China Direct undertakes no obligation to update or publicly revise any of the forward-looking statements that you may hear today. Please refer to our annual reports on Form 10-K, our quarterly report on Form 10-Q, or periodic reports filed on Form 8-K filed with the SEC and are available at the SEC’s website at www.sec.gov for a full discussion on the risks and other factors that may impact any estimates made here today.

Gentlemen, I want to congratulate you on your recent acquisitions and strong revenue growth. I look forward to an even more promising first quarter and a strong 2007. At this time, I would like to turn the call over to Marc Siegel, President of China Direct.

TRANSCRIPT SPONSOR

China Direct Logo

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.

Marc Siegel

Thank you, Thomas. I want to thank everyone for joining the call on this holiday afternoon. 2006 was a groundbreaking year for us. In August of 2006, China Direct Investments merged into China Direct to become a publicly traded company under the symbol CHND. Subsequent, we completed an equity finance in November of 2006 for $4.6 million. We used the capital to begin implementing our strategy of acquiring majority stakes in Chinese entities.

Our first acquisition was Lang Chemical. Lang is a distributor of industrial grade chemicals throughout Eastern China. A sampling of their clients include BASF, Lucite, and Celanese. We acquired 51% of Lang on October 25, 2006. From that date until year-end, Lang delivered $11.8 million of sales. We acquired Lang for a total investment of $701,000 in the form of working capital. The working capital used in this acquisition is being delivered in staged tranches, as with all our acquisitions, based on previously agreed upon benchmarks with the companies.

During the fourth quarter, we completed our second significant acquisition. We acquired a 51% stake in Chang Magnesium. Chang is both a manufacturer and exporter of magnesium. We closed that acquisition on December 22, 2006. Due to the timing of the Chang acquisition, our auditors determined that results for the remaining four business days of the year were immaterial and have not been included in our consolidated financials.

We acquired Chang for $2.55 million, also of working capital. The initial infusion of $1 million was made in December, 2006. Additional staged infusions will occur throughout 2007. Again, those infusions are based on previously agreed upon benchmarks as with all our acquisitions.

China currently accounts for about 70% of the world’s magnesium production. Chang is our largest investment in terms of dollars and we expect it to be our largest subsidiary in terms of revenues in 2007. Chang, by the way, is the third-largest exporter of magnesium in all of China, and that is a $500 million market.

Additionally, in China we formed a wholly-owned subsidiary called CDI Shanghai Management, located in Shanghai. CDI Shanghai employs eight professionals in China. Those people oversee the business financial performance of all our Chinese subsidiaries as well as our consulting clients.

In the U.S., we have increased our operations from five professionals to 11 professionals. As a result, China Direct now has the ability to supervise, monitor, support our existing business and we have the infrastructure in place to scale our business model for now and in the future.

In addition, we recently hired Gary Stewart as our in-house general counsel. Gary has a strong background in securities law and he will be instrumental as we move forward. Gary’s first job is to spearhead our impending application for listing on the AMEX, which we will elaborate on later in the call.

We have also launched the search for an experienced bilingual CFO. The addition of a bilingual, bicultural CFO will afford us additional financial and accounting controls for both our portfolio companies and our clients.

Staying busy, in February of 2007, we formed three new joint ventures in China: CDI Wanda Alternative Energy, of which we own 51%; Big Tree Toy, of which we own 60%; and CDI Magnesium, which we also own 60% of.

CDI Wanda, our first joint venture, was acquired for 337,000 shares of common stock. We are prepared to deliver to them $1.3 million in working capital. Again, that will be in staged tranches as we agreed on previous benchmarks. CDI Wanda has developed an environmentally safe recycling technology. The technology is patented in China and what it does is recycles waste rubber tires into distillate fuels, which can be processed further to either diesel fuel, gasoline, or other petroleum-based products.

The second joint venture was Big Tree. Big Tree operates in the toy space and the entertainment industry. They operate worldwide. They do two things; they are an OEM manufacturer and they are an exporter of toys. We acquired 60% of Big Tree, which is in Shantou City, in exchange for 240,000 shares of common stock. We are also prepared to infuse $1 million in working capital to Big Tree, again in stages. Shantou is the largest toy city in China. China today manufactures approximately 75% of the world’s toys. Big Tree offers 180,000 different products ranging from plastic toys, stuffed toys, electronic toys, and ceramic toys.

CDI Magnesium was acquired for 25,000 shares of common stock. We plan to provide up to $0.5 million of working capital to CDI Magnesium, depending again on strict performance benchmarks. CDI will operate a recently completed magnesium plant to process and manufacture magnesium alloy.

We expect the three joint ventures to contribute significantly to our growth in 2007 and beyond. CDI Wanda and CDI Shanghai Management have already contributed to our financial performance in the first quarter, combined with a full quarter of contribution from Lang Chemical and Chang Magnesium. We expect Big Tree and CDI Magnesium to contribute to our financial performance in the second quarter of this year.

We look forward to providing a comprehensive update in May, following our first quarter results.

I would like to now turn the call over to David Stein, our Chief Operating Officer, to discuss the 2006 financial results. David.

David Stein

Thank you, Marc. Our revenues for 2006 increased to $13.9 million, as compared to $1.5 million in 2005. That is an increase of approximately $12.5 million. Our consulting division, China Direct Investments, contributed $2.1 million of revenue while Lang Chemical generated $11.8 million of revenue, commencing since the acquisition on October 22nd through December 31st.

Revenues from Chang Magnesium have not been included in our results as the revenues for the last four remaining days of 2006 were determined immaterial by our auditors. On a pro forma basis, for 2006, Lang Chemical revenues were $37 million, while Chang Magnesium revenues were $27 million.

For 2006, we reported net income of $169,000, as compared to a net income of $460,000 for 2005. The decrease in ’06 was primarily attributable to our recent acquisitions and increased expenses associated with our initial listing of our parent company. Those expenses include our audit for the prior two years as well as various legal expenses.

Furthermore, as Marc mentioned, we have bolstered our staff, giving us an infrastructure capable of supporting not only our recent acquisitions but as well, we can support three to four additional portfolio companies.

As well, we have incurred travel expenses and non-cash option charges for employees, management, and advisors.

Lang Chemical experienced an operating loss of $116,000 due to increased reserves required in ’06 when the company converted to GAAP accounting requirements.

In 2007, we believe we will be able to achieve profitability in both Lang and Chang, in part due to working capital investments and by providing management assistance to these companies.

Our total assets as of December 31 ’06 increased to $20.8 million. That is an increase from $1 million at December 31 ’05. Of the total assets, approximately $10 million is related to the parent company here in the United States, while $7.7 million is related to Chang Magnesium and approximately $3 million is related to Lang Chemical.

At December 31 ’06, we held cash and cash equivalents of $3 million and working capital of $6.8 million. That is compared to cash and cash equivalents of roughly $40,000 and working capital of $0.5 million at December 31 ’05.

At this time, I would like to turn the call back over to Marc for some closing comments.

Marc Siegel

Thanks, David. As we enter 2007 on a strong note, our business model has been very well-received in China. We have provided guidance to the street previously of $100 million in annual sales for 2007 and $5 million in net profit for 2007. We believe -- here comes your forward-looking statement -- we are on target to exceed that number.

For the first quarter of 2007, we expect to exceed $25 million and we expect to exceed net earnings of $1.25 million, or roughly $0.10 a share.

As David mentioned, our most important accomplishment in 2006 was acquiring the assets that we did in China. For a little raise of $4.6 million, we have over $20 million under management today. What differentiates our company from the other public companies that are in China is that we have $10 million of our assets here in the U.S. So in other words, China Direct is a U.S. company doing business in China, not a Chinese company doing business in the U.S.

We continue to identify additional acquisitions in China and monitor our existing investments to decide if additional capital infusions could accelerate our profits. We are looking to strengthen our management team and Board of Directors by adding a CFO and new independent directors with proven financial and accounting backgrounds in the very near future.

Collectively, the company has decided to add three independent Board members and take additional measures to ensure that we are compliant and prepared to move to a fully listed exchange.

We intend to apply for listing on the AMEX Stock Exchange in the second quarter of 2007. We believe these steps will further our goal of increasing visibility of our investment opportunity and add value for our existing shareholders. Our first year-end results I believe show our proven ability to buy significant assets in China at very low valuations.

We believe that our financial performance in 2007 will further demonstrate our value at not only in financing and structuring these Chinese subsidiaries, but also in accelerating their revenues and improving their earnings. In that light, we will review our current guidance after the first quarter of 2007 is reported and provide updates as we deem appropriate.

I want to thank everyone for joining the call today. This concludes our formal comments. We would like to now take questions. Operator, could you please start the Q&A portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Alan Stone of Wall Street Research.

Alan Stone - Wall Street Research

Congratulations on a terrific year and a very nice report. Congratulations on the acquisition of Gary Stewart. He seems like a great addition for the company. The first quarter sounds very exciting, the guidance that you are giving and for the year as a whole. Maybe you could talk a little bit about some of the other acquisitions that you are looking at today and what a range of revenues would be if you are able to make some more acquisitions. Do you have adequate capital on hand today to do any more? Do you need capital to make these different payments that you mentioned on the call?

Marc Siegel

I don’t know how much I can go into as far as future guidance for 2007. However, I will tell you that we do have adequate capital on hand to complete all the acquisitions that I mentioned, fund them fully. We also intend to be cash flow positive in the first Q as well as the second Q. We have a couple of acquisitions lined up. Nothing is finalized but most of them are in the basic industry space where we are concentrated now.

Alan Stone - Wall Street Research

So the guidance for revenue, just restate that, was $100 million for the year?

Marc Siegel

We are comfortable that we will exceed 25% of that $100 million for the year in the first quarter and we will exceed the net earnings number for the first quarter as well. I am not going to now give further guidance for that. Thanks for your question though.

Operator

(Operator Instructions)

Your next question comes from Richard David of [Rombo Cycle].

Richard David - Rombo Cycle

Marc, great quarter. I have a question for us, if there are any other non-GAAP shareholders that don’t understand GAAP. The reported announcement said for the first quarter of ’07, the financial guidance, sales will exceed $25 million and net earnings will exceed $1.25 million, or approximately $0.10 a share for the first quarter, which is similar to what you just said. When you speak in those terms, does that mean $25 million for the company’s proportionate share of all the subsidiaries or is that counting 100% of the revenue and earnings of the subsidiaries, even though China Direct does not necessarily own 100% of the stock?

Marc Siegel

That’s a great question, Richard. The answer is as follows; on a GAAP basis, when we own over 51% of the companies, and in most cases we have 60%, we record 100% of the revenues. On the earnings side, we only record our proportional amount, so if we own 51% of the company we report 51% of the earnings.

There are two exceptions to that: China Direct Investments, which we own 100%, our consulting division, so we report 100% of those earnings; and CDI Shanghai Management, which we own 100%. We report 100% of those earnings.

Richard David - Rombo Cycle

Are there approximately 13 million shares currently outstanding?

Marc Siegel

Our weighted average number of shares outstanding was 10,880,000 at the end of the year -- 10,880,000 at year end. And in the first quarter -- hang on one second -- I think there will be 13.8 million shares.

Richard David - Rombo Cycle

Okay. That handles my questions. Thank you.

Operator

(Operator Instructions)

There appear to be no more questions at this time. I will turn the floor back to your host, Mr. Marc Siegel, for any closing remarks.

Marc Siegel

Did we take a question from Alan Lichtenberg of Lumen Capital?

Operator

I’m sorry, yes. Alan Lichtenberg of Lumen Capital.

Alan Lichtenberg - Lumen Capital

I wanted to ask about the pro forma operating margins at Lang, Chang in ’06. Is there any more specific commentary about how that might change with your help in ’07?

Mac McConnell

Can you repeat the question one more time, Alan, so everybody can hear it?

Alan Lichtenberg - Lumen Capital

Sure. Can you give us a sense of the pro forma operating margins at your two current companies for 2006 and if you had any specific steps that have taken place or about to take place that might change those in ’07?

Marc Siegel

Dr. James Wang runs our China operations. I am going to hand the phone to him, our Chairman.

James Wang

Basically, in the last two years, if you look at the pro forma for Chang Magnesium in 2005, they are making about a 5%, 6% and for 2006, they will probably break even. They had some GAAP accounting already in there so for example, if they have accounts receivable, we have to put it into for accounts receivable. That will reduce the earnings right away and this first case is actually is for Lang Chemical and Chang Magnesium.

For 2007, we already reviewed our first three months. We feel the operating margin is pretty good and we feel very comfortable, so we will eventually be reporting when we have -- in the middle of May.

Alan Sheinwald

This is Alan Sheinwald from Hayden. Do they have a target margin that you can talk about or you cannot?

James Wang

We are looking for Chang Magnesium about 5% to 6% of the net profit margin. We are looking for Lang Chemical from 1% to 2%. We try to increase to 2% to 3% net profit margin. Does that answer your question?

Alan Lichtenberg - Lumen Capital

Yes, thank you. I did have one other question on the realized and unrealized gains on marketable securities, if we should expect maybe the first quarter to be comparable to the fourth quarter, or was the fourth quarter a little unusual in that regard?

James Wang

I would think the first quarter of 2007 we’d do, in -- we should do probably better than the last quarter of 2006. But we still do not have the final number and I do not want to make anymore comments on it.

Alan Lichtenberg - Lumen Capital

In the fourth quarter, there was approximately $760,000 in realized and unrealized gains, and that might go up a little bit in the first quarter?

James Wang

Correct, yes. It is depending on each security price. It is tough to comment right now because I do not have any data with me guiding that.

Alan Lichtenberg - Lumen Capital

Thank you.

Operator

At this time, there appear to be no more questions. I will turn the floor to Marc Siegel for any closing remarks.

Marc Siegel

Thank you very much. I would like to thank everybody for taking the time out on this holiday week. We look forward to providing you with additional updates after our first quarter results. If you have any further questions, you can contact Alan Sheinwald at 914-669-0222. You could always call the company here at 561-989-9171. Thank you.

Operator

This concludes today’s China Direct Inc. 2006 year end financial results conference call. You may now disconnect.

TRANSCRIPT SPONSOR

China Direct Logo

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.

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 2006 Year End Earnings Call Transcript
This Transcript
All Transcripts