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Executives

Richard Galterio – VP

Hernan Welch – CFO

Analysts

Marco Barattini – Barattini Investment Advisors

Aaron Lanning

CD International Enterprises, Inc. (OTCPK:CDII) Q1 2012 Earnings Call May 10, 2012 4:30 PM ET

Operator

Greetings and welcome to the fiscal 2012 second quarter earnings conference call for CD International Enterprises Incorporated. For those of you who may be new to the company, CD International Enterprises trades on the NASDAQ global market under the symbol CDII.

CD International Enterprises is a U.S. based company that produces, sources, and distributes industrial commodities in China and the Americas and provides business and financial corporate consulting services. For more information on this company, please visit its website at www.cdii.net.

Our call today is hosted by Mr. Hernan Welch, CFO; and Richard Galterio, Vice President. Additionally a Q&A session will follow management’s discussion of the second quarter ended March 31, 2011.

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. These 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.

At this time, I would like to introduce Mr. Richard Galterio, Vice President of CD International Enterprises. Mr. Galterio, you may begin your call.

Richard Galterio

Thank you operator and all of you who are joining us for our second quarter of fiscal 2012 conference call. CD International recorded revenues of $41.9 million for the second quarter of fiscal 2012 with gross profit of $6.6 million and net income attributable to common stockholders of $2 million. This compares to revenue of $42.3 million, with gross profit of $3.2 million and a net loss attributable to common stockholders of $14,000 recorded in the same period in fiscal 2011.

Gross margins in the second quarter of fiscal 2012 improved to 15.6%, up from 7.6% in the same period in the prior fiscal year. Net margins in the second quarter also improved to 4.8% from approximately breakeven in the same period of the prior year. Earnings per basic and diluted shares outstanding reached $0.05 per share in the second quarter of fiscal 2012 on 41.5 million basic weighted average shares and 42.2 million diluted weighted average shares. Earnings per basic and diluted share outstanding were $0.00 on 34.7 million weighted average shares in the second quarter of fiscal 2011.

For the first six months of fiscal 2012, we recorded revenues of $78.9 million with gross profit of $12.2 million and net income attributable to common stockholders of $5.1 million. This resulted in $0.12 per basic and diluted share in earnings on 41 million basic weighted average shares and 41.7 million diluted weighted average shares. This compares to revenues of $88 million with gross profit of $9.8 million and net income attributable to common stockholders of $3.4 million resulting in $0.10 per basic and diluted share on $33.3 million basic and diluted weighted average shares outstanding in the second quarter of fiscal 2011.

Gross margins and net margins for this first six months of fiscal 2012 were $15.4 million and $6.5 million respectively. This compares to a 11.1% and 3.9% respectively in the same period in fiscal 2011. In highlighting our magnesium segment, overall pricing continued to improve compared to the second quarter of fiscal 2011, averaging 2,773 per ton as compared to 2,639 per ton.

Total magnesium revenue increased to approximately $25.9 million in this quarter compared to $24.3 million recorded in the comparable period in fiscal 2011. Our magnesium segment remains profitable on an EBITDA basis and gross margin improved to 2.6% in the second quarter of fiscal 2012 up from 0.8% in the first fiscal quarter of 2012. So we had a sequential increase in our gross margins.

During the course – for the current period, we also continued to build inventory in anticipation of rising prices and increased demand as overall economic conditions slowly improve. Recent stock prices have gone up to approximately 3100 FOB China and we anticipate a firming of demand as we move through the remainder of the calendar year.

In our basic material segments, revenues totaled $10.5 million, declining by $6 million compared to same period in 2011. The decline in revenues was mainly a result of a decline in sales at our CDI Beijing subsidiary compared to the prior quarter in fiscal 2011. And this is due to reduced demand from slow urban infrastructure expansion and pricing credit in China.

In our consulting segments, we achieved strong performance with revenue reaching $5.6 million in the second quarter of fiscal 2012 compared to $1.6 million recorded in the same period in fiscal 2011. We added one new U.S. based client during the quarter bringing the total number of clients we service on a continuous basis to seven and we are confident that we will continue to add additional clients leading to future growth in this segment.

Overall, we continued to push forward with a strong second quarter earnings and having reported four consecutive quarters of profitability for the first time since 2008. We believe we are well positioned in all of our business segments and continue to build on that momentum as we move throughout the rest of this fiscal year. In an effort to expand our revenue growth we have established relationships in the Americas to help us in our efforts to build our commodity distribution business. And while we experienced a number of challenges that delayed our business efforts, we are confident that we will ramp this business throughout the remainder of fiscal 2012 and we will continue to deploy our resources in the Americas to build inventory and as well as build inventory in our magnesium segment in anticipation of demand in both of these areas.

Overall our balance sheet continues to strengthen with cash and cash equivalence of $12.5 million with an additional $19.5 million in prepaid expenses. This compares to cash and cash equivalents to $12.6 million at September 30, 2011 with an additional $14.4 million in prepaid expenses.

We will continue to execute on our strategy of being a global leader in magnesium and to globally diversify our revenues through our commodities and consulting operations. I would like to now turn over the call to our Chief Financial Officer to discuss the second quarter in more detail. Hernan?

Hernan Welch

Thank you, Rich. For the second quarter of fiscal 2012, we recorded consolidated revenues of approximately $41.9 million, compared to $42.3 million recorded in the second quarter of fiscal 2011. Gross profit for the period was $6.6 million compared to $3.2 million recorded in the same period in fiscal 2011.

After including other income and operating expenses, we recorded a net income attributable to common shareholders of $2.2 million compared to a loss $14,000 million recorded in the same period for fiscal 2011. For the first six months of fiscal 2012, we recorded consolidated revenues of approximately $78.9 million compared to $88 million recorded in the same period in fiscal 2011.

Gross profit for the first six months reached $12.2 million compared to $9.8 million recorded in the same period in fiscal 2011. We recorded net income attributable to common stockholders of $5.1 million for the first six months of fiscal 2012 compared to a net income of $3.4 million recorded in the same period of fiscal 2011.

Our net income applicable to stockholders in the second quarter of fiscal 2012 resulted in basic and diluted income per share of $0.05 on 41.5 million basic weighted average shares outstanding and 42.2 million diluted weighted average shares, compared to basic and diluted income per share are $0.00 on 34.7 million basic and diluted. Weighted average shares outstanding recorded on the comparable period in fiscal 2011.

For the first six months of fiscal 2012, basic and diluted income per share was $0.12 on 41 million basic weighted average shares outstanding and 41.7 million basic weighted average shares compared to – and diluted income per share of $0.10 on 33.3 million basic and diluted weighted average shares reported in the comparable period in fiscal 2011.

Revenues from our magnesium segment in the second quarter of fiscal 2012 were $25.9 million inclusive of one month of sales revenue from Golden Trust and Lingshi Magnesium following the acquisition that was completed on February 29, 2012. This compares to $24.3 million recorded in same period in fiscal 2011. We shipped 9,329 metric tons of magnesium related products in the second quarter of fiscal 2012 with an average sale price of $2,773 compared to 9,194 metric tons shipped at an average sales price of $2,639 in the second quarter of fiscal 2011.

We experienced softness in global demand as a result of persistent uncertainties surrounding the European debt situation that began last October. However the overall economic conditions are improving and we are seeing an increase in magnesium spot price and anticipate the volumes to pick up in the second half of this year.

For the second quarter of fiscal 2012, gross profit for this segment was approximately $680,000 compared to gross profit of $1 million recorded in the same period in fiscal 2011. Our magnesium operations resulted in an operating loss of $100,000, inclusive of $0.4 million in depreciation expense, compared to an operating loss of $2,000 inclusive of $0.9 million in depreciation recorded in the same period in fiscal 2011.

Overall profits were positively impacted by change in our depreciation methods to our magnesium segment. On an EBITDA basis our operations were slightly profitable in the second quarter of fiscal 2012. Our basic material segment revenues totaled approximately $10.5 million in the second quarter of fiscal 2012, compared to the $16.4 million recorded in the same period in fiscal 2011. Our basic materials segment generated a gross profit of $500,000 in the second quarter of fiscal 2012 compared to $1.1 million recorded in the same period in fiscal 2011.

Our operating income for the second quarter in fiscal 2012 was $71,000 compared to an operating income of $0.3 million or $300,000 recorded in the same period of fiscal 2011. Performance at our Lang Chemical Operations remain stable, while our CDI Beijing Operations contracted sharply due to lower sales and construction steel related products as a result of tightening credit environment affecting our customers ability to obtain financing to purchase products, coupled with a slowdown in China’s urban real estate development in the major metropolitan regions.

We recorded some modest expenses in association with the preparation of industrial commodity shipments out of the Americas. Revenues from our consulting segment reached $5.6 million in the second quarter of fiscal 2012 compared to $1.6 million recorded in the same period in fiscal 2011.

Gross profit for this segment totaled $5.3 million compared to $1.6 million recorded in the same period in fiscal 2011. We’ve recognized all of our management and corporate overhead in this segment and recorded an operating income of $3.9 million in the second quarter of fiscal 2012, as compared to an operating income of $200,000 in the same period in the prior year.

Our strong performance for this segment was mostly attributable to fees earned for consulting services provided to a new U.S. based client during the fiscal quarter. This addition of this client brings the total number of active company we service to seven. Revenue in our consulting segment varies depending upon the level of service, transactional events and the additions of new clients.

From an overall balance sheet perspective, we remain well positioned for the future as we deploy significant capital to fuel our growth. As previously mentioned, we ended the second quarter of fiscal 2012 with $12.5 million in cash and cash equivalents, with prepaid expenses of $19.5 million, compared to cash and cash equivalents of $12.6 million with $14.4 million in prepaid expenses at September 30, 2011.

Total assets increased to $160.6 million from $116.3 million and shareholder equity increased to $82.5 million from $68.3 million at September 30, 2011. At March 31, 2012 we have $34.2 million in working capital compared to $44.8 million at September 30, 2011. It is important to note that our overall cash and cash equivalents increased substantially from the first quarter of fiscal 2012 and net cash used in operating activities decreased to about $1.1 million for the first six months for fiscal 2012 as compared to a use of cash of $7.6 million for the same period in fiscal 2011.

In summary, while we face certain business challenges mainly within our basic materials segment, we are pleased with the overall performance of our operation and believe our capital deployment will enable us to continue on a track of growth in the current fiscal year. We continue to devote substantial efforts in improving our internal controls including the continued deployment of our ERP systems, accounting software over the course of 2012 and continue to rationalize and streamline our magnesium operation to reduce costs and increase operating efficiencies.

We also intend to rationalize and streamline our basic materials segment in order to maximize our return on capital internationally. We have positioned our operations to be more streamlined and focused. And our current staffing levels are appropriate and any additions or reductions to staff will reflect the prevailing environment. We will continue to look to reduce costs where necessary and maintain inventory levels we believe are appropriate to our business needs. Our balance sheet remains strong. We believe we are well positioned for the future.

At this time I’ll turn the call over to Richard for some closing comments.

Richard Galterio

Thanks Hernan. Our results for the second quarter of fiscal 2012 reflect an improving bottom line performance for our company. We see improving trends in our magnesium segment, a strong environment for our consulting segment and large opportunities for our commodities distributions operation. We have recorded four consecutive profitable quarters despite a number of challenges we face in our basic materials segment.

With the completion of our recent magnesium acquisition, we are now one of the leading worldwide producers by way of production capacity. Our balance sheet remains strong and our cost structure is in line with our operations, placing us in a position where further gains in our business should flow down noticeably into our bottom line performance. As we have previously stated, the global environment is improving and we continued to – and we continue to work with industry leaders in the magnesium area to develop our IMG pricing strategy to create more long-term stability in order to increase pricing stability and secure larger customer orders in this segment.

Our magnesium customers in various industries including automobile, manufacturing, aluminum alloy and steel production and slowly strengthening and our volumes are increasing with prices recently trending higher. We are focused on building our consulting operations and now have seven active clients. We will continue to look to add additional clients and expand on client base geographically.

As we look out into the second half of fiscal 2012, we see improvement in our overall operational performance compared to the first half of this fiscal year. As we anticipate internal growth in our magnesium segment as well as new contributions from our recent acquisitions in magnesium. We see additional opportunities in our consulting segment as we continue to diversify and expand our client base.

We also believe our efforts in our commodity distribution business will lead to a progressive ramp in revenue throughout the remainder of fiscal 2012. We had made some important inroads in a geographic diversification of our business and we intent to take additional steps in this direction. As we now have positioned ourself as a leader in the production and distribution of pure magnesium products, we are evaluating strategic alternatives for our other basic materials businesses in China in order to best utilize our capital.

We believe that by focusing our efforts in China on magnesium and in basic materials from our operations in the Americas, we can achieve stronger and more geographically balanced growth. In closing, I would like to emphasize that we are confident that our strong balance sheet with over $12.5 million in cash and $82.5 million in shareholder equity give our shareholders a solid foundation for growing future.

Additionally, the investments that we have made in magnesium and building our commodity distribution operations coupled with a strong environment in our consulting segments place us in a solid position to deliver market leading improved operational bottom line results in fiscal 2012. We are excited about the improvement in our performance of our operations as well as the opportunities ahead of us. We remain steadfast in our belief at CD International will continue along our overall growth track in our business segments and our entire team continues to work diligently to improve our performance.

I would like to take this time to briefly address the status of our NASDAQ listing. As we previously announced, there will be a NASDAQ panel hearing on June 14th to determine whether our shares will continue to be listed on the NASDAQ. We intent to make every effort at that hearing to convince the panel that our shares should remain listed. If we are unsuccessful in our efforts, our shares will be traded on the over-the-counter market. Regardless of where our shares are traded, we will continue to work on our common goal of building our company and will explore every alternative to maximize the value of our company for all of our stockholders.

And now let me turn thank you again for joining us and operator you can begin the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) One moment please while we poll for questions. (Operator Instructions) Our first question comes from the line of Marco Barattini [ph] from Barattini Investment Advisors [ph]. Please proceed with your question.

Marco Barattini – Barattini Investment Advisors

Congratulations on a good quarter gentlemen, just a couple of questions. Breakeven for magnesium in the quarter, was it still up in that $2,850, $2,900 or has it come down a little bit with the acquisitions?

Richard Galterio

Well we expect that it should be somewhere in that range. There are a couple of other factors that will move along with that, certainly the purchasing of raw material costs and energy. So there are a few variable items but the $2,800 mark, the $2,850 is probably a good idea of where I think start to shift in the other direction.

Marco Barattini – Barattini Investment Advisors

And do you see it coming down in the coming quarters with the consolidation of the new acquisitions, do you anticipate it?

Richard Galterio

We do anticipate that with the acquisitions, we’re going to be able to streamline our organization. We’re going to be able to move – rationalize our operations in terms of moving our production into the most cost effective areas as we ramp up. So we should start to see that in the coming quarters as we bring these acquisitions in line with our Golden and streamline everything in the right direction. So yes, that number should start to move in the right direction.

Marco Barattini – Barattini Investment Advisors

Okay. And once everything is consolidated, are you still looking at somewhere in the 80,000 to 100,000 tons per year of production capacity that you have?

Richard Galterio

Yes, that’s where we are.

Marco Barattini – Barattini Investment Advisors

And total world magnesium production, do you have an idea, I mean are we looking at million tons worldwide, 800,000?

Richard Galterio

From a capacity standpoint I guess you’re looking at two different things, but I think the total number of outputs last year was right around 650,000 700,000. So that was actual production output. The capacity is probably I would say it’s certainly not higher than that.

Marco Barattini – Barattini Investment Advisors

Okay.

Richard Galterio

There is not a whole ton of public companies out there that report this stuff.

Marco Barattini – Barattini Investment Advisors

Right.

Richard Galterio

So you’ll get varying opinions from different areas. Some will say 700,000 or 800,000. Some will say closer to a million, some will say – so I would say probably 800,000 in capacity is probably a number that you could say is probably in the ballpark.

Marco Barattini – Barattini Investment Advisors

Okay. And with – I mean right now your current market cap is I am guessing somewhere around $18 million $19 million, and $12.5 million in cash on the books. Is there any thoughts about I know you had mentioned it in previous calls about doing some kind of stock buyback, I mean with the numbers you are producing its presumes like the stock is incredibly undervalued, you would made a good investment.

Richard Galterio

Well we have a few things on the horizon that certainly have to clear themselves out first. In terms of reacting to some short term pricing, our stock has been trending in this direction for a while now and certainly the NASDAQ situation propelled that a little bit future down. I think as that situation becomes clear I think that the company is going to explore a number of potential strategic alternatives because we are in a position where we have a tremendous asset base, some significant businesses and some caption. We’re going to look at all of these potential options that are available to the companies to help maximize shareholder value.

And I guess the best way to answer that is we’re not going to rule out anything and we’re certainly at this point in time, not going to rule in anything.

Marco Barattini – Barattini Investment Advisors

Okay. Well thank you very much and congratulations on a good quarter. Hopefully there is more to come.

Richard Galterio

Thanks so much.

Operator

Thank you. Our next question comes from the line of Aaron Lanning [ph], private investor. Please proceed with your question.

Aaron Lanning

Yes, good afternoon. It’s probably a question in the basic materials segment, I believe in January you stated a goal of around 100,000 tons of iron ore as a monthly run rate. I just wanted to know if you still think you can achieve this goal in the second half of 2012. I mean also we’re talking about 200,000 run rate for 2013, is this still achievable? Thanks.

Richard Galterio

Sure. And let me practice that by saying we did experience a number of delays within this segment. When you move into any new business segment especially when you’re dealing with regulatory issues on (inaudible) already in various countries in the Americas, certain things took longer than we had anticipated. We’ve been establishing relationships quite recently to get the necessary permits and approvals put together.

I think these areas are very rich in natural resources. We are working towards logistically moving things out that will enable us to do that on a consistent basis. So I think if you’re asking the question, are the commodities there and is the demand there that we can put this business together and do a 100,000 tons per month and eventually ramp up the 200,000? Yes, that business is there.

Are we making the inroads to get there? Yes. Do we expect to begin shipments in the extreme near future? Yes. The timing that it will take to ramp up to those number as we move forward and provided that we don’t have additional challenges in terms of regulatory meaning consistent shipment and permits and things like that, we do anticipate that we can achieve those numbers eventually and we are looking to continue to move in that direction.

Aaron Lanning

Okay, thanks.

Operator

Thank you. (Operator Instructions) It appears there are no further comments – there are no further questions at this time. I’d now like to turn it back to management for any closing comments.

Richard Galterio

Well once again we’d like to thank all of our shareholders for their support. We’d like to emphasize that we’re working quite diligently to deliver on the performance of our company and though we do see some challenges ahead for the company, we intend to persevere through them and come out stronger more valuable company for our shareholders in the future. And we look forward to talking to you in our next conference call to discuss our third quarter. And with that operator, this call is concluded.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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