Charles & Colvard Ltd (CTHR) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Charles and Colvard, Ltd. first quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS).

With that, I would now like to turn the presentation over to your host for today's conference, Ms. Jean Fontana with ICR Relations. You may proceed.

Thank you. Good afternoon, everyone. Thank you for participating in the Charles & Colvard first quarter 2008 conference call. Joining us from management are Bob Thomas, Chairman and Chief Executive Officer; Jim Braun, Chief Financial Officer; and Dennis Reed, President and Chief Marketing Officer.

Before we begin, I would like to remind everyone that except for the historical information presented, the matters disclosed in the conference call include forward-looking statements. These statements represent the Company's current judgment on the future and are subject to risk factors and uncertainties that could cause actual results to differ materially. To the extent that there are any statements that could be construed as forward-looking, they should be considered in the context of all of our previous releases and federal filings.

With that said, I would now like to turn the call over to Jim Braun. Jim?

Thank you, Jean. Good afternoon, and thank you for joining us for today's conference call.

For the three months ended March 31, 2008, net sales decreased 41% to $3.4 million as compared to $5.8 million in the first quarter of 2007. Domestic sales in the first quarter decreased 47% to $2.4 million compared to the first quarter of 2007. International sales for the first quarter decreased 20% to $961,000, primarily due to decreased sales in the United Kingdom, Thailand, and Canada, partially offset by higher sales to Hong Kong.

Gross profit decreased 49% to $2.2 million compared to $4.4 million in the prior-year period. Gross profit margin decreased to 66% in the first quarter of 2008 from 76.7% in the comparable quarter of 2007, primarily due to the damaged condition of the consigned jewels being returned to us by K&G Creations, a manufacturing customer who, as previously noted, is exiting the moissanite business. We are invoicing K&G Creations for the damaged jewels, but are prudently not recording those billings.

Total operating expenses decreased 13% to $3.4 million in the first quarter of 2008 compared to $3.8 million in the first quarter of 2007. Marketing and sales expense was down $758,000 in the first quarter versus the prior year, primarily due to $631,000 of decreased advertising expense and a $122,000 reduction in travel expense. In addition, general and administrative expenses increased by $272,000, primarily resulting from an increase in professional fees, of which $187,000 was due to the fees paid to Cantor International, a consultant that was engaged by the Board of Directors to provide a review of the business strategies of the Company.

This resulted in an operating loss for the three months ended March 31, 2008 of $1.1 million compared to an operating profit of $587,000 in the same period in 2007. Net loss for the first quarter of 2008 was $698,000 or $0.04 per diluted share as compared to net income of $339,000 or $0.02 per diluted share in the first quarter of 2007.

The average selling price per carat for the first quarter increased 12% when compared to the first quarter of 2007. As we have discussed in past calls, we expect that the average selling price per carat will fluctuate based on the stone size requirements of our customers.

I would like to point out that the effective tax rate of the income tax benefit is 34% for the three months ended March 31, 2008, which is lower than the statutory rate, due to the effect of our losses at our non-U.S. operations causing our effective tax benefit rate to be lower when compared to the effective tax rate in 2007.

In the first quarter, the Company's cash position decreased to $5.3 million at March 31, 2008 from $7 million at December 31, 2007. This $1.7 million first quarter decrease was primarily due to the $1.6 million decrease in accounts payable; $850,000 of inventory purchases; and that $698,000 net loss for the quarter, partially offset by the $1.7 million decrease in accounts receivable.

Total shipments of 18,400 carats for the current period were 48% less than the 35,300 carats shipped in the same period of 2007. Shipments of carats in the U.S. decreased 53%, while international shipments of carats decreased 28%. At March 31, 2008, total inventory, including consignment, increased by $890,000 compared to December 31, 2007 due to the level of raw material purchases. Accounts receivable net decreased to $7.7 million at March 31, 2008 compared to $9.4 million at December 31, 2007.

Bob Thomas, the Company's CEO, will now discuss the business.

Thank you, Jim, and good afternoon, ladies and gentlemen.

Well, we were and are disappointed with our first quarter financial results, as the sales trends at retail continue to be soft. But we remain focused on addressing the challenges our Company is facing by taking positive actions that I will highlight for you shortly. Operationally, revenue in the first quarter was down 41% to $3.4 million as compared to the prior year first quarter. Net loss was $698,000 or $0.04 per share versus net earnings of $339,000 or $0.02 per share in the first quarter of 2007.

I can report that during the first quarter of 2008 on a combined basis, the retailers, from whom we receive reliable sales data, report an approximate 10% decline in the NK sales volumes -- those are the retail sales. This decline reflects the overall performance of the retailer sales results during the period, and reflects the general softness that exists for all jewelry retailers.

The disparity between the retail activity and our revenue in the first quarter should be viewed in the context of the decisions made by the retailers to actively lower their own inventories in light of the overall economic environment. Given the current environment, which is not something we can control, it will take longer for the retailers and our direct customers to work through any inventory overhang that exists.

Another factor that negatively impacted our revenue during the quarter was the time and effort required for several important retailers to transition to new moissanite jewelry suppliers to replace the jewelry previously sourced through K&G Creations. That process is being concluded in the second quarter, and we expect to see the revenue contributions from those retailers return to a more normal pattern in the second half of the year.

Early in the fourth quarter of 2007, the Charles & Colvard Board of Directors initiated several undertakings to enhance the performance of our Company. One of those initiatives was to engage an independent consulting firm to perform a strategic review of the Company. As we have previously announced, Cantor International was engaged to conduct that review, and we have now received the final Cantor report.

During the last call, I reported that it was our intention to provide you with a report on our planned actions as a result of the Cantor work. The report and recommendations received from Cantor are currently being studied and evaluated by the Board, and a complete action plan is being developed.

The report is comprehensive and challenging. It contains recommendations for both the short run as defined by Cantor as the rest of 2008 and 2009 and the long run. The recommendations address the Company's business model, the Company's financial situation, the Company's branding, marketing and selling activities, and the management oversight of the Company. At the appropriate time, we will report actions we are taking, but only when such disclosures do not jeopardize the likelihood of their success. I will return briefly to this topic after describing other Board-led initiatives that began and have been ongoing, concurrent with the Cantor review.

A second initiative is to make significant changes in the composition of the Board of Directors. These changes are described in the proxy statement. Three of our current directors will not stand for reelection of the Board, primarily because of the time commitment we envision for our directors in 2008 and 2009.

We have made a determined effort to identify and recruit the talent and expertise required to guide your Company in this challenging time. Many of our largest shareholders were encouraged to supply suggestions for Board nominees, and each of the three new director nominees was endorsed by one or more of those large shareholders.

Additionally, we have attempted to recruit director nominees from the jewelry industry. And while those efforts were not successful in time for inclusion in the current proxy statement, those efforts continue, and we are hopeful that we can add someone from the industry with experience applicable to our current situation in the near future.

The third initiative propelled by your Board Chairman -- myself -- propelled by your Board Chairman, is to begin the planning to attract new talent to our organization that would include separating the positions of Chairman and CEO, as we work to improve our performance and realize the opportunity that each of us recognizes and embraces.

A fourth initiative, taken in conjunction with the management team, is an aggressive review of our planned spending for 2008, given the weakness in the economy and our revenue outlook over the near-term. As a result, we have reduced our staff levels as well as other planned expenditures. In particular, those staff reductions will cause us to incur charges of approximately $185,000 in the current quarter, but will result in annualized savings of approximately $550,000.

A fifth initiative, also taken in conjunction with management, is the development of a more aggressive e-commerce presence. You will see the execution of this initiative late next month. Each one of the Board and management initiatives I have just described is consistent with recommendations found in the Cantor report.

With regard to other Cantor recommendations, there are multiple points of view about what to say and when to say it. We have concluded, however, that committing to certain recommendations and disclosing those plans is inappropriate now for several reasons. Telling you what we expect to do only a week after receiving the report trivializes the recommendations, the thought and analysis that went into them, and the planning needed to execute those we decide to implement. Deciding on action plans, before a new Board has a chance to weigh in, ties the hands of the new Board and negates their ability to make meaningful contributions to the process and outcomes. Almost any of the recommendations we adopt will have an impact on channel relationships, corporate structure, or our competitive position. So when and what we disclose has to be done in a way that produces the best opportunities for success.

As I indicated previously, the Cantor report was extremely thorough and aggressive, and the Board will benefit from their insight as we improve our strategic plan and implement changes in our execution going forward. As part of their work, that Cantor team interviewed each of the principles of our direct customers; the senior managers of the retailers who offer the moissanite category; each of our current directors; each member of the executive team; and other members of the Charles & Colvard staff. They also did focus groups with consumers.

Additionally, the Cantor team heard directly from many of you, and the observations, criticisms, and suggestions of each group helped form the findings and recommendations contained in the final report. Your Board of Directors and management takes each of the findings and recommendations seriously, and in a deliberate fashion, we'll use the report to help shape and build the Company in both the short and long-term.

In the Cantor presentation to the Board, the following observation was made by the Cantor team in the context of evaluating the sell-through at the existing retailers where the moissanite category of fine jewelry is sold. The Company was not as successful during 2005 and 2006 as the quarterly results implied, and the Company's performance in more recent quarters is not as bad as the most recent quarterly results imply.

Looking ahead, we fully acknowledge the challenges and the issues we face, and we understand that process change is required. We will work to deliver positive change in our performance. In our history, we have demonstrated the capacity and the ability to embrace change when it's called for, and you should expect that we will identify and make necessary changes at this critical juncture.

It has been my observation that those that have been attracted to this Company and our brilliant jewel -- either as employees, direct customers, early adopter consumers, as Board members, consultants and even as investors -- each member of those groups develop a passion and a commitment to see the moissanite category grow and succeed.

I know of no other product or company where that passion is so deeply and widely held. Because we feel the way we do, it is certainly understandable that frustration can grow when progress is not evident. Our task is to not allow that frustration to prevent us from taking positive actions that will fulfill our expectations for moissanite and for Charles & Colvard.

We will now respond to your questions and comments.

(OPERATOR INSTRUCTIONS). Chris Krueger, Northland Securities.

I was wondering what this Cantor stuff is going to bring. I know you can't talk too much about it. After the Board is elected on May 27, maybe I missed it, but do you expect to have sort of a thorough press release or something following that? Or is it just going to take several months for the Board to kind of mull over things to get to that point?

Chris, I don't think it will take several months. I do think it's only fair to allow the new members to process what is in the Cantor report. We are not going to prevent them from doing that ahead of May 27, but before any real formal action can take place, that group will need to be assembled. That doesn't mean we're sitting on our hands in the meantime. There are several actions that we can take and are taking; I've described some of them for you.

But the more strategic issues that Cantor has identified do require some Board initiative and some Board action. And so it may take a few days, a few weeks after that May 27 meeting before the total strategic plan has been developed. And our intention and our commitment is to share with the investment community everything that we can, as long as it's not damaging in the short run to our business.

Okay. Can you talk at all about a pipeline of potential new retailers or just activity in general on trying to sign up new chain -- store chains or individual stores and whatnot?

In this environment, as you might imagine, it's pretty difficult. We do have some e-commerce -- brand name e-commerce sites that are ready to launch very shortly. Internationally in Great Britain we have a 40-plus store test that we'll start later this summer. And we have some additional ranges of jewelry that have been developed to go into existing retailers, and the final decisions hasn't been made on those, that particular range, but it was most significant at this point.

But there's a lot of that type activity that is taking place, but nothing that we would be very specific about this afternoon.

Okay. A couple of numbers questions -- was there any CapEx expenses this quarter?

Very minimal. Just a couple of computers; but very minimal.

Okay. And last, your marketing expenses were down quite a bit from last year during the first quarter. I know you're not giving guidance on specific lines for the year, but maybe just looking to the second quarter, we're a third of the way into, would you see it being similar as a total dollar expense, as similar to the first quarter or can't you say right now?

I think it's tough for us to say, other then we are, because of the current sales environment, being very prudent in approving all expenses. But I don't think we're in a position to say that we will be less than or equal to the level of expenses in the first quarter. But we are being very prudent in spending any money anywhere within the Company.

That's accurate. But also, our ongoing support is in place for the installed retailer base. So, there will be obviously sales and marketing expenses, advertising expenses. But to try to put a number on it today is difficult. You should be aware that we accrue 9% to 10% of our revenue as an advertising co-op expense. And so the revenue line has a direct impact and can be a meaningful impact on what that total sales and marketing expense number is over the course of the period. And we don't know what May and June will bring in the way of revenue today, so it's very difficult for us to quantify it.

Okay. That's all I've got. Thanks.

Thank you, sir.

And it appears at this time that there are no further questions, so I'd like to turn the call back over to Mr. Thomas for any additional or closing remarks.

Thank you very much for being with us this afternoon. And we are being diligent in trying to make this a better place to spend your time. Thank you very much and good night.

This concludes today's teleconference. You may now disconnect and have a nice day.