Charles & Colvard Ltd (CTHR) 2010 Q2 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, Fran Barsky, Investor Relations for Charles & Colvard. Thank you, Ms. Barsky, 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.charlesandcolvard.com.

With me today are Randy McCullough, Chief Executive Officer, Tom Pautz, VP Sales and Marketing, 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 Securities 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. Randy?

Thanks, Fran. Good afternoon. I want to first thank each of you for taking time to join us in the excitement of our successful second quarter. As I stated in the press release today, it is extremely gratifying to the team here at Charles & Covard to report our second consecutive profitable quarter. Even moreso, 152% increase on the top line over last year, same period, coupled with a $1.5 million improvement on the bottom line. Our team continues to improve their ability to stay focused on driving the business and managing expenses while implementing a complete new software system throughout the Charles & Colvard operation. No small task, indeed.

I am very excited about the progress we have made and look forward to our continued successful execution on our strategy. Let's take a minute and have Tim, our CFO, review the numbers for the second quarter.

Thank you, Randy. Good afternoon, everyone, thank you for joining us today. I will discuss the financial results for the three and six months that ended June 30, 2010.

As announced in today's press release, net sales for the quarter were $3.33 million, an increase of 152% from $1.32 million in the second quarter of 2009, and an increase of 17% from net sales of $2.85 million in the first quarter of 2010.

Domestic sales for the quarter increased to 164% from the same period in 2009 to $1.82 million and were 55% of total net sales. This increase was the result of increases in sales to existing customers and the addition of new customers during the first half of 2010.

International sales for the second quarter increased 139% over the same period in 2009 to $1.5 million, or 45% of total net sales primarily due to the addition of a new customer in Russia during the quarter.

Net sales for the six months ended June 30, 2010, were $6.18 million, an increase of 62% from $3.81 million during the same period in 2009. Domestic sales for the six months ended June 30th, increased 44% from the same period in 2009 to $3.47 million and were 56% of total net sales. And international sales for the six months ended June 30th increased 95% from the same period in 2009 to $2.71 million and were 44% of total net sales.

We achieved our second consecutive quarter of profitability with net income of $336,000, or $0.02 per diluted share, a $1.85 million improvement over net loss as adjusted in the second quarter of 2009 of $1.24 million, or $0.07 per diluted share.

Net income for the six months ended June 30th was $635,000, or $0.03 per diluted share, a $3.09 million improvement over net loss of adjusted in the same period of 2009.

We shipped 26,000 carats during the quarter, an increase of 291% over the same period in 2009. Domestic shipments increased 322%, and international shipments increased 270%.

The average selling price per carat for our loose jewel sales decreased 12% when compared with last year's second quarter.

Our growth in sales resulted from our continuing efforts to revitalize existing customer relationships as well as the addition of several new customers during the quarter including two domestic and one international. As previously reported, we are also beginning to produce finished jewelry featuring moissanite and reported jewelry net sales of $610,000 during the quarter, an 89% increase over the same period of 2009.

Cost of goods sold was up $702,000, or 101%, to $1.4 million due to higher sales over the same period in 2009. Operating expenses were down $247,000, or 13%, during the quarter to $1.61 million primarily due to ongoing cost control initiatives that commenced in the latter part of 2009. For the six months ended June 30th, cost of goods sold was up $726,000, or 42% due to higher sales. Operating expenses were down $1.25 million, or 28%, to $3.26 million.

We recognized income tax expense in the second quarter of $18,000 compared with income tax expense in the same period of 2009 of $18,000, both of which are the result of estimated penalties and interest associated with other uncertain tax positions on our 1048.

We ended the second quarter with an improved cash and liquid long-term investment position from the end of the last quarter. Cash and investments were $8.12 million up from $7.84 million at the end of the first quarter. We generated approximately $141,000 in cash from operations during the quarter primarily due to our net income of $336,000, a net decrease in inventory of $348,000, an increase in accounts payable of $156,000, and an increase in accrued cooperative advertising of $173,000 that more than offset an increase in trade accounts receivable of $945,000 resulting from higher sales.

Total inventory, which includes long-term and consignment inventory was $38.14 million down from $39.13 million at the end of fiscal year 2009. This decrease is primarily the result of improving sales offset, in part, by purchases of silicon carbide and jewelry castings, findings and other jewelry components.

Lastly, as previously reported, we changed our method of accounting for inventories from the first-in-first-out, or FIFO method to the average cost method as of January 1, 2010. The effect of this adoption was that prior-year results are shown as adjusted with second quarter 2009's cost of goods sold increasing by $48,000, and net income for that quarter decreasing by the same amount. In addition, inventory at March 31, 2009, decreased $2.08 million due to the cumulative change in accounting principle.

With that, let me turn the call over Randy.

Thanks, Tim. We have worked diligently for the first half of 2010 on several initiatives that resulted in increased sales, reduced expenses, and improved profitability. Charles & Colvard has aligned itself closely with our business partners, both old and new, around the globe, formulating strategies that provide exclusive supply relationships that maximize our opportunity to reach key consumers.

To that end, we are currently finalizing jewelry assortments for over 250 stores collectively supported with in-case marketing and direct mail catalogs, a revise distribution of the AFA stores both in military bases in the US and abroad, will be supported directly from Charles & Colvard. This effort will also include direct mail marketing catalogs and flyers. In addition, airtime has been scheduled on several home shopping networks to begin in October.

A new 500-square-foot Charles & Colvard jewelry center just opened in conjunction with the jewelry branding section of a new mall in Beijing, China. As you heard earlier, a new distributor in major jewelry manufacturer in Russia has been opened. Also, a large distributor in Vietnam has come onboard reporting robust sales. We have expanded our distributorship in India and in the Middle East.

Product development featuring moissanite coupled with target marketing are key components of our business strategy. Many of our business partners are reporting significant sales increases in moissanite jewelry and reorders for loose stones are up month-over-month.

The Charles & Colvard team is building a foundation, which provides a sustainable business platform that supports the operation necessary for growth while minimizing overhead and expenses. All of this is essential in order to continue growing our core business with key jewelry manufacturers and distributors developing leading jewelry brands globally featuring moissanite as a key ingredient and maintaining the necessary focus on the end consumer.

The road ahead for Charles & Colvard is both challenging and filled with opportunity. We here at Charles & Colvard are looking forward to our third quarter.

Doug, now we'll be available to take questions.

Thank you. (Operator Instructions) There are no questions in the queue at this time.

With that, I guess we will --

We did just get one question. Our first question comes from the line of Tom Zoulas, No Limits Capital.

Hey, gentlemen, nice execution -- great job.

Thanks, Tom.

A question -- this opening of the jewelry outlet in a mall -- is this a test of a business model that possibly will be expanded both internationally and domestically? Or what are your thoughts there?

I would love to see it expanded international and there's always the opportunity for domestic.

Okay. The big increase in sales of finished goods, finished jewelry, did you find that it conflicted at all with any of your retailers? Were they okay with seeing them competing with a supplier like yourselves?

You know, thus far, we have been -- first, we've been very open with our suppliers as to who we are supplying and doing agreements with. And we have been able to maintain a channel separate from where they're at. You know, the military bases are not it. And the home shopping networks, they're not supporting, and the jewelry companies that we are aligning with, they were companies that are not currently buying from the distributors that we have here in the US. So far, it's worked out real well. Again, I think being open and keeping that line of communication open is the key.

Now, also, can you comment at all on any progress that Goldman has made with your new relationship?

We just got back from a meeting in New York yesterday, Tom and I, and I can't comment on it. Not yet.

Are we expected to maybe see a presence for the Christmas season through some of their efforts?

We are very hopeful that we may have a test out there. The problem with moving with large companies is it is a slow process. It goes through a series of approvals, and it takes a while.

Yes, yes. The overall view of Charles & Colvard, you know, is it starting to improve out there from some of the lack of execution in the prior years now that you're getting some traction? And it looks like you're going to be viable. Are you seeing a decent reputation building again?

Well, I think it's a combination of things, and you are asking some great questions. I think the fact that the board -- we've got on board some expertise including Marvin and Chuck, and then Tom and myself here. I really think that has changed the view and, if nothing else, they are at least stepping back and saying, "Okay, we know that you guys, we have to give them a chance," and we haven't been turned down on any conversation, and they're pretty open. We've had a lot of substantive conversation, and we've got a lot of things in the works that I'm feeling real good about. Like I told you, we just got back from another -- they had a small show in New York but a series of meetings and very successful for us.

Yes, great. Glad to see you guys are putting the effort in. I've loved the product. The only thing I haven't loved is the ability to have a business model that can get this product in the right hands, and it looks like you guys are doing it. Keep up the execution.

Thank you.

There are no further questions in the queue at this time. I'd like to hand the floor back over to management.

Thank you for your participation today, and we do look forward to speaking with you again next quarter when we report the third quarter results. Thank you.

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