Charles & Colvard Ltd (CTHR) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Charles & Colvard First Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Fran Barsky, Investor Relations for Charles & Colvard. Thank you, you may begin.

Thank you, Scott, and good afternoon, everyone. We appreciate your interest in Charles & Colvard and your participation in our first quarter 2010 earnings conference call. You should have a copy of the news release detailing the Company's financial results that was distributed after market close today. If you do not have the release, you may obtain a copy from the Company's website at www.charlesandcovard.com.

With me today are Randy McCullough, Chief Executive Officer, and Tim Krist, Chief Financial Officer. Randy and Tim will discuss the results for the quarter, the direction of the Company, and its strategy to position moissanite as the most brilliant jewel in the world. Following their remarks, we will open the floor for questions.

As you are aware, we may make forward-looking-statements both during the call and in the following question and answer session. These forward-looking-statements are not guarantees of future performance and are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from what we discuss here. These risks and uncertainties are available for you in the press release itself, as well as the Company's filings with the Security and Exchange Commission. You may obtain these documents from the Company's website at www.charlesandcolvard.com. They are also available on the SEC website, sec.gov. With that, let me turn the call over to Randy to begin the review and discussions.

Thank you, Fran. Good afternoon, everybody. Our first quarter 2010 results have been released, and to say we are extremely pleased is an understatement. Not only did our sales improve over fourth quarter 2009, but we also achieved a 15% increase over first quarter of 2009 and reported our first profitable quarter since third quarter 2007. We feel these results are an initial indication that our new strategy of growing our core business with key jewelry manufacturers and distributors, developing leading jewelry brands globally featuring moissanite and increasing our focus on the end consumer is beginning to take hold.

As we continue to execute this strategy and keep tight control on expenses, we believe the results will propel Charles & Colvard to continued revenue growth and profitability. Let's take a minute and have Tim, our CFO, review the numbers.

Thank you, Randy. Good afternoon, everyone. We appreciate your time today. I'll discuss the financial results for the first quarter that ended March 31, 2010.

As announced in today's press release, net sales for the quarter were $2.85 million, an increase of 15% from $2.49 million in the first quarter of 2009 and an increase of 21% from net sales of $2.36 million in the fourth quarter of 2009. Domestic sales for the quarter decreased 5% from the same period in 2009 to $1.64 million, and were 58% of total sales. This slight decrease was a result of increases in sales to existing customers and the addition of several new customers that were offset by the loss of sales to customers such as JC Penney that occurred in the first quarter of 2009.

International sales for the first quarter increased 60% over the same period in 2009 to $1.21 million, or 42% of total sales primarily due to the addition of a new customer in India during the quarter. We are very pleased to report that we achieved profitability in the first quarter with a net income of $298,000, or $0.02 per diluted share, a $1.58 million improvement over net losses adjusted of $1.28 million, or $0.07 per diluted share in the same quarter last year.

We shipped 20,000 carats during the quarter, an increase of 56% over the same period in 2009. Domestic shipments increased 58%, and international shipments increased 54%. The average selling price per carat for our loose jewel sales decreased 9% when compared with last year's first quarter.

Our growth in sales resulted from our efforts to revitalize existing customer relationships as well as the addition of several new customers during the quarter including three domestic and one international. Though our domestic sales were down from first quarter of 2009, we are still in the process of replacing sales loss from previous relationships of a significant nature such as JC Penney, and we are encouraged by the upward sales trend we are experiencing with our larger remaining accounts.

Total costs and expenses were down $1.04 million, or 28% to $2.71 million for the quarter due primarily to ongoing cost control initiatives that commenced in the latter part of 2009. We recognized an income tax benefit in the first quarter of $130,000 compared with income tax expense in the same period of 2009 of $27,000. This income tax benefit was the net of a $143,000 offset of income tax liabilities associated with an uncertain tax position and approximately $13,000 of income tax expense recorded for estimated penalties and interest associated with other uncertain tax positions under FIN 48.

The $143,000 offset of income tax liabilities included the reversal of previously expensed penalties and interest associated with the position of $41,000 and a deferred tax asset at March 31, 2010, in the amount of $102,000.

During the quarter, we invested excess cash not needed for operations in highly liquid US government agency bonds. Because the bonds have maturities beyond one year, and our intent at the present time is to hold the bonds until maturity, we have classified them as non-current assets on our balance sheet.

We ended the first quarter with an improved cash and investment position from the end of last quarter. Cash and investments were $7.84 million, up from $7.14 million at the end of 2009. We generated approximately $489,000 in cash from operations during the quarter primarily due to our net income of $298,000; a net decrease in inventory of $639,000; and an increase in accrued cooperative advertising of $138,000 that more than offset an increase in trade accounts receivable of $595,000 that resulted from higher sales.

Total inventory, which includes long term and consignment inventory was $38.49 million at the end of the quarter, down from $39.13 million at the end of fiscal year 2009. We purchased $289,000 in raw material during the quarter.

Lastly, as of January 1, 2010, we changed our method of accounting for inventories from the first-in, first-out, or FIFO method to the average cost method. We believe this method is preferable on the basis that it conforms to the manner in which we operationally manage our inventories and evaluate wholesale and retail pricing. We are also shifting the focus of our business from solely a loose jewel manufacturer to a jewelry manufacturer, and we now consider our peers to be jewelry manufacturers and retailers, many of which utilize the average cost method for valuing their inventories.

As a result, we feel that our reporting will be more consistent with these peers. The effect of this adoption with our prior-year results are shown as adjusted with first quarter 2009's cost of goods sold increasing by $18,000 and net income for that quarter decreasing by the same amount. In addition, inventory at March 31, 2009, decreased $2.03 million due to the cumulative change in accounting principle.

With that, let me turn the call over to Randy.

Thanks, Tim. We are continuing to focus our sales efforts on developing new and enhancing our current partnerships with select jewelry manufacturers providing them with exclusive sales and distribution rights for key retailers currently in their portfolio. Progress has been made both on the domestic and the international fronts. We were excited today to announce that we signed a new manufacturing distribution agreement with Frederick Goldman, Inc., one of the largest fine jewelry manufacturing companies in North America.

In addition, we have boosted our distributorship in India, Vietnam, China, and the Middle East. The target retail outlets include TV shopping networks, independent jewelers, mass merchandisers, e-commerce, outlet jewelers, department stores, mall-based jewelers, and alternate channels.

Effective tomorrow morning, we will be providing you with access to a completely revised Charles & Colvard Friends & Family website store, exclusively for our friends and family and, of course, our shareholders. You will be able to purchase moissanite product at a very special price by going to moissanite.com/store. Many pieces that are one of a kind from our jewelry line will also be available for purchase. Product will be updated weekly.

In addition, we are now supplying finished fine jewelry product containing moissanite under our Charles & Colvard brand to major television and selected Internet retailers. I look forward to actually showing you stunning product designs accompanied with exciting new marketing materials from Teshler Creative when we meet here in Raleigh on May 20th at the Charles & Colvard's annual shareholders meeting.

Scott, we now can take questions and answers.

Thank you. (Operator Instructions) Alan Wolf, News and Observer.

Hey, folks, thanks for taking the time. I had a question about the new website. I was wondering -- it's only open to friends and family and what that means and why not start a website where you could sell this stuff directly to customers -- to everybody?

It's a good question, Alan, but you are welcome to purchase because we consider you a friend, also. The reason we don't -- we priced this to be competitive with our -- really, all for our friends and family about where our distributors would be selling to the retailers. And if we went live to retail consumers, then we would be undercutting our retail network by some 50%, and that would not be looked upon very positive.

So is the site going to be policed in some fashion so that you limit who you are selling to?

Well, I don't think we have to police it or limit it. I mean, you've got to know the link to go to it. The link is not going to be public. We're going to, obviously, our employees will send it to their family members. We'll get it out to the shareholders that we have their e-mail records. Or, of course, you could e-mail through our website and request it. And we should be able to look at that under the contacts there.

Thank you. (Operator Instructions). George Eggers, Paulson Investment Company.

Thank you, gentlemen, congratulations on the great quarter. I was wondering if you could elaborate on today's announcement with Frederick Goldman? In other words, is your partnership with one of their clients or several of their clients?

This distributor agreement with Goldman provides them the distribution of moissanite jewelry to two of their major users.

Okay, can you disclose at this time who they are?

I'd love to, but currently I can't do that. As soon as we get the green light from the retailer, we will make an announcement.

Well, thanks again and congratulations one more time.

Thank you. At this time, there are no further questions. I'd like to turn the floor back to management for any closing comments.

Thank you for your participation -- oops, I believe we have another.

[Dennis Stubbs], private investor.

Good afternoon. Not too busy today, so I have just kind of a general question. I'm sorry I missed the beginning of the call, I hope I didn't miss anything. But with the next holiday season coming up at the end of this year, I just wondered if there is anything being targeted to get some marketing things ramped up and be ready to make a big push through that holiday season with some partners or individually by the Company?

That's a good question, Dennis. Dennis, in the jewelry industry, the majority of that holiday season really culminates in Las Vegas at the end of May, beginning of June. There is a five-day -- actually, if you look at the pre-activities, it's almost eight or nine days where all of the major manufacturers from around the world, and the major retailers from around the world but especially here in the US come together. And it's really the main shot to put together the fall product presentation. And we are -- you know, I'd have to do a count, but we are being represented there with more than six and, like I say, I'd have to do the count -- major jewelry manufacturers that will be having substantial conversation. Appointments are currently made with many of those retailers.

Okay, that sounds good. Is there anything that Charles & Colvard are doing directly to contact some retailers to get them interested in that conversation with the manufacturers to try to prime it? And then either Charles & Colvard or the retailers and the manufacturers prepping to drive some sell through when we get to the holiday season?

Yes. Well, as you know, I'm an old retailer, and I've been around this industry for 38 years. So you can be assured that I am continuing to have conversation with all of the retail associates that I have relationships out there with. And we are very active in the product presentation that's being presented to the retailers today. And we are also, with all of our new distributorship contracts, we are requiring that we get substantive information so that we can look at and track the sell through. And then our marketing people are working in conjunction with their marketing people to try to enhance -- obviously, we don't share data that's proprietary per retailer, but where there is data in general that will help everyone enhance their sales, we want to leverage that to sell more moissanite.

That sounds good. Do some of them do the exclusive contracts or are they going to include a requirement that the retailers or the manufacturers put a certain amount of money or effort into the marketing?

We can't require them to do that. The distributor may. We don't control that part of it. But in order to get the benefit of the marketing dollars we make available, they have to spend an equal amount. We match dollar for dollar up to a certain percent, whatever the percent is in their contract.

But that doesn't necessarily require them to spend the money to even get that matching money?

So far as I've seen, they're spending it.

Thank you. (Operator Instructions) David Ratliff, Doucet Asset Management.

Geat, thank you, congratulations, gentlemen. A question -- is your stock buyback still in place?

It is.

It is? Okay. And did you give a number of, like, shares and a price that you bought those shares for the previous quarter?

We did. Just one moment. We purchased 41,670 shares, and that was at an average price of $1.21.

Okay, (inaudible) stock out moved nicely in the last several months, so glad to see that. You probably don't provide guidance, but the level of sales were -- basically, the level of sales from this previous quarter, almost $2.9 million, are you comfortable with that level of sales or can you comment as to -- you know, maybe even expected level of sales, maybe, going forward?

Well, that would be guidance, and we don't give guidance. However, we are optimistic as we continue to work during 2009 to improve our position to maximize the sales that we're able to achieve. So I know that's not saying much, but we're optimistic that we can continue to improve upon last year.

Right. We had a positive quarter on the bottom line, so I'd like to see that continue. The last question with -- we're making progress on bringing down inventory, and you gave the level of purchases from Cree in the press release. Can you update us on where we stand on the agreement with Cree on the minimum level of purchases?

We do, as disclosed in our 10-K, we do have a purchase commitment that we are going back to 2008 that we are fulfilling at this time, but we do not have any future minimum purchase commitments to maintain our exclusivity through 2015.

Well, great, that's all my questions, and I wish you continued success.

Thank you very much.

Thank you. Ladies and gentlemen, at this time, there are no further questions in the queue.

Thank you, ladies and gentlemen, and we look forward to your participation in our next conference call, and if you are available, please stop by for our shareholders meeting on May 20th. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a great afternoon.