China Direct Industries, Inc. (CDII)

F2Q10 Earnings Call

May 12, 2010; 04:30 pm ET


Dr. James Wang - Chief Executive Officer & Chairman

Andrew Wang - Chief Financial Officer

Richard Galterio - Vice President


Amit Dayal - Rodman & Renshaw



Welcome to the fiscal 2010, second quarter earnings conference call for China Direct Industries, trading on the NASDAQ global markets under the symbol CDII. China Direct Industries headquartered in Deerfield Beach, Florida, operates eight subsidiaries in China and two core business segments; magnesium production and distribution of basic materials. The company also provides advisory services to other China based companies. For more information, please visit it’s website

Our call 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 following the call.

At this time I would like to refer to the Safe Harbor Statement under the Private Securities Litigations 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 filings with the Securities and Exchange Commission, including its most recent Form 10-K filed on December 31, 2009.

At this time, I would like to introduce Mr. Richard Galterio, Vice President of China Direct Industries. Mr. Galterio, you may begin.

Richard Galterio

Thank you operator, and all of you who are joining us for our fiscal 2010, second quarter conference call. China Direct Industries recorded revenue of $23.4 million for the 2010, second quarter, and I’m pleased to report that we returned to profitability in this quarter with net income of $1.7 million. This compared to a net loss of $1.5 million in the comparable period in 2009.

We continue to see positive overall gross margins in our various business segments, with our efforts to align our costs with our current revenue base, resulting in a significant improvement in overall works margins in both basic materials and magnesium in China, as well as our consulting operations compared to 2009 period.

Our efforts have resulted in earnings per basic and diluted share of $0.06, up from a loss of $0.06 in the comparable period last year. I am also pleased to report that we are seeing a market pick-up in activity in all of our segments, particularly in magnesium and consulting. We are confident that we will see continued improvements throughout fiscal 2010, as momentum continues to build in these segments, as well as in our chemical operations within our basic materials segment.

In our magnesium segment, I would like to highlight several important churns. First, volume output at our current magnesium operations was 4,215 metric tons. This was up 55% from the same period in 2009. Second, volumes also increased by 19% on a sequential basis from the first quarter of 2010.

Third, quoting activity has increased not only in number of quotes, but also in quantities quoted; and lastly, prices have continued to show a gradual improving trend, with signs that inflationary pressures are building further. Taking these factors into consideration, we have elected to reinitiate production at two facilities, which will increase our current production capacity more than three fold.

In our consulting segment, we had a particularly strong performance with revenue up over 200% from the same period in 2009, and I would like to highlight several accomplishments in this area.

First, we assisted [China Encore Metal] in achieving an uplifting to the [NYSENX]. Our ongoing relationship with this client and their strong performance, enabled us to record a $2.1 million realized capital gain in the quarter from the sales securities we had received as compensation for our consulting efforts, in addition to our normal consulting fees.

Second, Sunwin International received FDA, Generally Accepted Safe Status, on five grades of it’s all natural zero calorie CBS sweetener. Sunwin now has more grades of CDO approved for the food and beverage industry in the United States than any other company. Our efforts with Sunwin enabled us to earn a performance bonus in the quarter, contributing significantly to top and bottom line results in this segment.

In our basic materials segment we witnessed a market improvement in our chemical operations, where revenues were up 35%. This was partially offset by declines in our CDI Beijing subsidiary. Overall our operations were up as compared to the same period in 2009.

As we move forward into the remainder of the year, it is important to emphasize the number of key overall factors we believe will contribute to our success. Our balance sheet has improved dramatically, with cash of $15.1 million, a $2.2 million increase from our September 2009 year end, even after we made a substantial working capital investment of approximately $3.7 million, in order to begin building inventories at our magnesium segment in the first quarter.

Second, we still have negligible long-term debt, and our working capital increased by over 20%, to $37.9 million from the $31 million at the end of our September 30 year-end. Third, as I highlighted earlier, we are increasing magnesium production capacities, which will enable us to remarkably increase our ability to deliver product in the coming quarter, substantially increasing the potential trajectory of our revenue growth and our IMG brand.

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