China Architectural Engineering, Inc. Q1 2008 Earnings Call Transcript

May.30.08 | About: China Architectural (CAEI)

China Architectural Engineering, Inc. (RCH) Q1 2008 Earnings Call May 14, 2008 11:00 AM ET

Executives

Xinyue Jasmine Geffner – Chief Financial Officer

Ken Yi Luo – Chairman of the Board, Chief Executive Officer & Chief Operating Office

Charles John Anderson – President of CAE Building Systems, Inc.

Analysts

Michael Cox – Piper Jaffray

[Michael Vogel – Sunwise Services Corp.]

Operator

Welcome to the China Architectural Engineering, Inc. first quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host Jasmine Geffner, CFO for China Architectural Engineering, Inc.

Xinyue Jasmine Geffner

As our operator indicated, my name is Xinyue Jasmine Geffner, and I am the CFO for China Architectural Engineering, Inc. Also with me today is Ken Luo, China Architectural Engineering’s Chairman and Chief Executive Officer in addition to several members of our senior management team both here in China as well as from the US. I will shortly be presenting China Architectural Engineering’s first quarter 2008 financial results and after that we will take your questions.

But first, I would like to provide you with a cautionary safe harbor note regarding forward-looking statement which is as follows. Forward-looking statements in addition to historical information, the statements made during today’s conference call and webcast may include forward-looking statements that may involve risks and uncertainties and actual results could differ materially from the expectations contained in the forward-looking statements as a result of several factors including regulatory approval requirements and competitive conditions. This and other factors that may cause differences in actual results are discussed in greater detail in the company’s reports and other filings with the Securities & Exchange Commission.

Now, here are China Architectural Engineering’s latest results. Revenues in the first quarter ended March 31, 2008 totaled $25.35 million up 76% from $14.43 million in the first quarter of 2007. We attribute this increase primarily to a sharp rise as part of our international expansion strategy. Net income for the first quarter of 2008 was $5.17 million or $0.09 per fully diluted share up 205% or 200% on a per share basis from $1.7 million or $0.03 per fully diluted share in the first quarter of 2007. As you can see from this top and bottom line numbers we not only continued to increase sales but also became significantly more profitable over the past quarter as compared to the same period in 2007. A big reason for this is the growth in projects outside of China which tend to have higher margins than our traditional Chinese contracts.

In the first quarter of 2008 our gross profit was $8.45 million or 33% of sales compared to $2.9 million or 20% of sales in the first quarter of 2007. On the [inaudible] our investments in to our international expansion strategy led to a sharp jump in sales, general and administrative expenses to $3 million in the latest quarter from just under $875,000 a year earlier. This anticipated increase in SG&A is a reflection of new staffing, offices and other costs related to establishing operations in international markets such as Dubai in the United States. But, even with this added expenses our operating profit more than doubled year-over-year from $5.45 million in the first quarter of 2008 up from $2.02 million in the first quarter of 2007. That is an increase o over 169%.

Interest expense was higher in the first quarter of 2008, $334,000 compared to just over $4,000 in the first quarter of 2007. But, it was partially offset by $111,000 in non-operating income versus year-over-year earlier and a substantially lower tax burden. Income taxes were just over $47,000 in the first quarter of 2008 an effective rate of nine tenths of 1% compared to $327,000 and an effective rate of 16.2% in the first quarter of 2007. Now, the difference in taxation was mainly due to a deal [inaudible] corporate income tax rate associated with our work in Dubai.

On the balance sheet we reported cash and cash equivalents of $5.95 million on March 31, 2008 an increase from $4.04 million on December 31, 2007. Long term debt in the form of bank loans, convertible bonds totaled $7.85 million up from $3.91 million at the end of 2007. I would like to make a few comments about these numbers.

It is clear, first of all, that China Architectural Engineering has just achieved another record quarterly in nearly all of our financial metrics including revenues, earnings and earnings per share. We are especially pleased that we have not sacrificed profitability to achieve our recent growth in revenue. Our growth expansion is not cost free of course, it increases SG&A expenses as we can see in today’s report and we required financing that will obviously add to our interest expenses in the coming quarters. But, the high growth margins we can achieve from projects outside of China more than make up for any added costs so far and we continue this trend to continue.

In addition, our global strategy should make revenue and earnings increasingly predictable and less prone to the ups and downs to any particularly national market. We expect China to remain a crucial market for us but we also recognize that a significant amount of our historical revenue has been derived from one customer, the government. And that future decisions on contract awards and amounts are subject to political as well as economic uncertainties. Our move in to multiple markets is already given us a broader growth platform of public and private customers. We also have a strong position in now in the Persian Gulf region, arguably the world’s largest construction market and also now in the world’s largest national economy, the United States.

As we reported recently, China Architectural Engineering has just been awarded its first US contract worth $11.6 million to supply the curtain wall system for a luxury condominium project in Manhattan designed by Jean Nouvel, winner of this year’s Pritzker Award. This is our second project with Mr. Nouvel and it specifies to the high regard in which our elegant and efficient design and engineering are held by the world’s top architects.

We have also just received a $15 million contract connected to the Silicone Valley commercial development in the Chinese City of Guangzhou. So, you can see that our China business is not slacking off by any means. Earlier in March of this year, we announced the award of contracts worth $50 million to build the external enclosures for stations of the Dubai Metro System’s new Red Line. At about the same time we also announced the award of a $3.8 million contract connected with the renovation of the National Museum and Beijing, another project that attests to our reputation as well as adding to our revenue and profits growth.

As I mentioned earlier, we are making use of external as well as internally generated cash flows to fund our expansion plans. Going forward, our external debt [inaudible] in the form of high interest expense however, enables us to secure more of high margin projects that are spurring our revenue and profits growth. We continue to have a solid cash position and we believe our debt load is reasonable in relation to our revenue and operating profits.

In summary, I would like to reiterate that China Architectural Engineering has never been in a stronger position before in its history and that we look forward to keeping you, our shareholders, updated on our progress as we continue to successfully execute on our business plan.

Now, I would like to take any questions you might have. Thank you for your attention.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Cox – Piper Jaffray.

Michael Cox – Piper Jaffray

Would it be possible to break out international sales versus domestic sales?

Xinyue Jasmine Geffner

Unfortunately Michael, we do not give this type of information at this time.

Michael Cox – Piper Jaffray

Could you comment on the current project pipeline as you see it today in terms of your bidding and quoting, the breadth of projects both domestically as well as internationally?

Xinyue Jasmine Geffner

We see strong trends both in international markets and also in our China markets as you can see from our recent big wins. We did disclose in April during [inaudible] show conducted in the United States that as of April, we have $200 million in backlog right now.

Michael Cox – Piper Jaffray

From a seasonality standpoint it looks like the first quarter has historically been your lowest quarter in terms of sales. Do you expect that to be the case again in 2008?

Xinyue Jasmine Geffner

As we also point out a couple times in various events, that our business is a lumpy business so it’s probably not the best way to compare quarter-to-quarter. It would probably be best to look at it from a year-over-year basis. Some of the recognition of revenues are subject to a lot of factors outside of our control so what we tell people obviously, our internal corporate goal this year is 45% growth in both revenues and net income and we are optimistic that we will achieve, if not surpass that goal.

Michael Cox – Piper Jaffray

The gross margin was up sharply which it sounds like is attributable to the international segment of the business. Is it fair to assume that gross margins can remain near 30% for the full year?

Xinyue Jasmine Geffner

That’s what we strive for because we are being very selected from the types of projects that we take on both in China as well as outside of China. We would like to take bigger projects and more profitable projects.

Michael Cox – Piper Jaffray

On interest expense you had noted a couple of times in your prepared remarks that you expect that to rise in the coming quarters. Would it be possible to quantify what your expectation is for interest expense on a quarterly basis going forward with the new debt issuances?

Xinyue Jasmine Geffner

I’m sure you’re aware of this but we recently put in to place a $20 million vertical bond and that is of higher interest than our last bond that we did last year so you could probably make some calculations and figure out pretty much what the interest expense would look like in the coming quarters.

Michael Cox – Piper Jaffray

But nothing outside of that unusual that we should be aware of in terms of amortization of the notes or anything like that?

Xinyue Jasmine Geffner

The amortization on the notes will be similar to what you have seen in the last note that we placed in 2007.

Operator

Your next question comes from [Michael Vogel – Sunwise Services Corp.]

[Michael Vogel – Sunwise Services Corp.]

I’d like to please get the spelling of the architect, was it Jean Nouvel?

Xinyue Jasmine Geffner

Yes. N-o-u-v-e-l.

[Michael Vogel – Sunwise Services Corp.]

Is he located in the New York area?

Xinyue Jasmine Geffner

I believe he’s from France.

[Michael Vogel – Sunwise Services Corp.]

Can you tell me which building or the address of the building in New York City that you’re going to be installing the curtain wall in?

Charles John Anderson

The address is 100 11th Avenue.

[Michael Vogel – Sunwise Services Corp.]

What stage is that project in John?

Charles John Anderson

The building just came out of the ground of pouring the third floor on Monday of the 22 story building.

[Michael Vogel – Sunwise Services Corp.]

How is your company organized with respect to the labor portion of the work? Do you sub out the labor in New York or do you expect to have your own labor force?

Charles John Anderson

We have our own labor management but we do sub out the labor. We have an erection partner for this project.

[Michael Vogel – Sunwise Services Corp.]

Who is that?

Charles John Anderson

It’s [Eagan] Architectural.

[Michael Vogel – Sunwise Services Corp.]

One concern I do have is how do you bridge the communications gap with respect to the [inaudible] process and the intricacies that are involved with working overseas?

Charles John Anderson

Well Michael, I’m in China right now spending time with our engineering team for the last two weeks. We have people that are coming over to also fill in and work with them through this first project in the United States. We anticipate having someone here fulltime and also bringing someone here [inaudible] to learn the methods and procedures that we follow.

[Operator

There are no further questions in the queue at this time.

Ken Yi Luo

Thank you everyone for coming to attend our conference call. Thank you very much.

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