Charles & Colvard Ltd (CTHR) 2011 Q1 法說會逐字稿

Hello and welcome to the Charles & Colvard Limited first-quarter fiscal year 2011 conference call. (Operator Instructions). Please also note that today's event is being recorded.

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 with the Company's filings with the Securities and Exchange Commission. You may obtain these documents from the Company's website at www.Charles&Colvard.com. There they are also available on the SEC website, www.SEC.gov.

At this time, I would like to turn the conference call over to Mr. Randy McCullough, CEO. Mr. McCullough, please go ahead.

Thanks Jamie. Good morning and thank you for taking the time to join us in recapping our first quarter of 2011 and allowing me to share the progress made towards growing our business.

Our first-quarter results do not reflect the significant progress our management team made towards expanding customer relationships that can increase future sales of finished jewelry and loose stones. While January and February are seasonally a couple of the slower months of the year for wholesale jewelry sales, we were able to generate sales primarily of loose stones, over 86% of our sales, and finished jewelry that exceed first-quarter sales by 130%.

Our focus remains on positioning Charles & Colvard for long-term sustainable growth. Historically, the vast majority of our revenue has been derived from the sale of loose gemstones to distributors and jewelry manufacturers, which precluded us from participating in the incremental revenue and gross profit generated by the sale of finished jewelry to retailers and consumers. As a result, Charles & Colvard had very little control over the final product and how it was positioned to the marketplace.

Last year, we made a strategic decision to increase jewelry manufacturing activities and finished jewelry sales as a percent of our total revenues. While gross profit margins on finished jewelry due to labor and overhead are generally lower than margins on loose gemstones, we believe the success of this new business initiative will increase the topline revenue and the total gross profit dollars that Charles & Colvard generates from the sale of moissanite jewelry to the consumer. We believe this will increase the Company's total profit potential significantly and position us to expand consumer awareness of moissanite. To that end, management's efforts to broaden our customer base and extend marketing channel relationships have been successful over the past months. We believe this will be evident in our operating results for the year ending December 31, 2011.

Development of exclusive branded finished jewelry featuring moissanite such as the Estrella brand being promoted by Shop NBC beginning in May. It's designed to increase overall desirability of moissanite jewelry to consumers.

We are continuing to expand our brand strategy with the development of strong multiple brands around moissanite and attractive and desirable designs for some of which Charles & Colvard plans to pursue copyrights. To this end, our in-house design team will be featuring the new Star Princess collection leveraging moissanite as born from the stars and creating a long-term core capability.

Jewelry collections featuring larger center stones that leverage moissanite's point of differentiation are in various stages of development and scheduled for launch this fall season. All of this will be supported by viral marketing initiatives to begin the positioning of Charles & Colvard's brands to consumers via the Internet and through social media campaigns.

We continue to position created moissanite gemstones and finished jewelry containing moissanite to capture a growing share of the $120 billion global jewelry market. As more retailers and consumers become aware of the value proposition of moissanite, which offers greater brilliance and fire than diamonds at significantly lower prices, we are confident in our ability to successfully execute a multi-brand strategy that can realize the full potential of the most brilliant jewel in the world.

Initiatives that were put in place several months ago that target direct-to-consumer marketing opportunities are Charles & Colvard's direct-to-consumer e-commerce Internet site. Moissanite.com featuring finished moissanite jewelry and including some exclusive brands is currently in a beta test mode and expected to be open to the public next month.

We currently have about 30 people working here in the office in the beta test mode, and we hope to expand that to about 300, which would include investors. You'll be getting that notification hopefully within the next week.

We have engaged an industry professional to lead Charles & Colvard's efforts in targeting consumers via direct sales and home parties and possibly offer trunk shows. All of this will be branded under Moi with a tag line like it's all about me. That appeals to females in upper middle income families, including professionals. We are targeting the infrastructure support, including a standard distribution and merchandising capabilities that are necessary to support this initiative to be completed by this fall with test parties planned for the 2011 Christmas season.

In addition, we envision a large potential opportunity through franchise stores designed and merchandised by Charles & Colvard. However, the timeline for testing this initiative will be dictated by the appropriate real estate opportunities. All of these provide more control over the presentation of moissanite jewelry and the relationships with the ever-important consumer.

Meanwhile, we continue to develop valuable relationships with distributors and retailers, both domestically and abroad. During the first quarter, we expanded these initiatives to gain sales momentum as we moved through the balance of the year. I hope it is apparent that our Charles & Colvard team is working diligently towards our common goal of positioning the Company towards long-term sustainable growth in sales and earnings, which should significantly enhance shareholder value.

I'd like to now turn over the call to our Chief Financial Officer, Tim Krist, who will review in greater detail the financial results of our first quarter.

Thank you Randy. Good morning, everyone, and thank you for joining us today. I will discuss the financial results for the first quarter ended March 31, 2011.

As announced in today's press release, net sales for the first quarter of 2011 increased 4% to approximately $3 million compared with approximately $2.9 million in net sales during the same period of 2010. Domestic sales for the quarter decreased 16% from the same period in 2010 to approximately $1.4 million and represented 47% of total net sales. International sales for the quarter increased 32% from the same period in 2010 to approximately $1.6 million and represented 53% of total net sales. Our loose gemstones sales were relatively flat compared with the first quarter of 2010 and represented 86% of our total net sales. We enjoyed an increase of approximately 130% in finished jewelry sales to $410,000 as a result of our strategic initiative to expand this new line of business.

Our domestic sales decreased from the first quarter of 2010 primarily as a result of the timing of restocking orders from our two largest US distributors, offset in part by sales to new retail jeweler and television shopping network customers. Our international sales increased from the first quarter of 2010 primarily as a result of gaining a new distributor in India and increased sales to an existing distributor in India.

Our first-quarter comparable sales decreased 15% when compared with the same period of the previous year, primarily as a result of the timing of restocking orders with our largest US customers, as previously discussed. We define comparable sales as active customers with which we generated revenue during both periods on which we are reporting. We use this as a metric to measure sales growth within our existing customer base.

We recorded a net loss of $236,000, or $0.01 per share, during the quarter, compared with net income of $298,000, or $0.02 per diluted share, during the first quarter of 2010. This net loss was primarily due to higher manufacturing overhead and operating expenses related to our investments in new business initiatives to support future revenue streams.

Operating expenses totaled approximately $1.9 million in the quarter compared with approximately $1.7 million for the same period of 2010, an increase of $227,000, or 14%.

We ended the quarter with a higher level of cash and liquid long-term investments on our balance sheet relative to the end of 2010. Cash and liquid long-term investments totaled $9 million at March 31, 2011, up from $8.8 million at December 31, 2010. During the quarter, $500,000 in bonds were called by the issuers which we reinvested in non-callable similar liquid long-term investments.

We generated approximately $491,000 in cash from operations during the first quarter.

Total inventory, which includes long-term and consignment inventory, approximated $36.8 billion at the end of the first quarter, down from $37.4 million at the end of 2010. This decrease was primarily the result of higher sales offset in part by purchases of jewelry castings, signings and other jewelry components, as well as limited production of moissanite gemstones.

I would now like to turn the call back to Randy.

Thanks Tim. This concludes our formal remarks this morning. Now, we'd like to open the call up to any questions that participants may have. Operator, could you please open up the floor so we could handle the Q&A session?

We will now begin the question-and-answer session. (Operator Instructions). Jerry Falkner, RJ Falkner.

Randy, you've talked in the past about a number of exciting new relationships and partnerships that you've put in place during the last year. I was kind of wondering if you could address the sell-through, how effective these retailers and other partners are being in selling through directly to the consumer.

The two that really come to the top of mind, Jerry, are Home Shopping Network, being Shop NBC and Jewelry TV, both of which during the fall, the fourth quarter, experienced sales on a per-hour basis that were at the top of their queue within their company. As a result of that, we have worked out agreements that will go forward and the new shows will start in early to mid May, and the schedules are beefed up. I don't know exactly what, speaking here right now, the number of the schedule is versus what was done in the past, but I know it's a significant increase in the number of hours, and the schedules are moving forward that way throughout the year. That's just one segmentation. But that's certainly positive to us in terms of the sell-through and what it maintains.

We've seen significant reorders from AAFES. They're actually expanding their line as we move through that queue. Unfortunately, you don't get to see it on revenue yet because as part of the AAFES deal, we had to help relieve them of some old dated inventory that was there from the prior years of buying moissanite jewelry. But we'll work through that inventory and the second half of this year will begin to see that revenue hitting our line.

One follow-up, Randy. At the retail store level, if I were to go into jewelry stores that carry Charles & Colvard moissanite jewelry, would I see a lot higher degree of visibility in terms of kind of point-of-sale materials and tools that the salespeople would have in the stores now versus what it was before the new management team came in?

We virtually had no exposure to the retail store. It was being phased out when we got involved with it. Today, Ultra a is expanding it to all of their 160 some-odd stores. They are also increasing their assortment. It's been one of their best selling items, the moissanite product that was put in there last year. Those meetings are taking place this week in New York and the CDG stores we've expanded -- I don't know the number of stores. They have about 130 retailers that have about 300 stores.

Today, I couldn't sit here and tell you -- there was a show in Chicago and Dallas and then a follow-up show in Chicago. I know they've signed up several new several more of the CDG stores. But all those stores are supported with marketing collateral as well as training programs that we've put in place. But I will say the stores that have taken -- that have come online with the programs are all experiencing increases in sales of the moissanite product.

(Operator Instructions). Stephanie Phillips, Paulson Investment Company.

I see that your finished jewelry sales were way up, which was really good. Do you expect that to trend through the rest of the year?

Absolutely. It's going to become a much more significant part of our sales. A lot of the work that we've done over the past six months has been setting up partnerships that really leverage the finished jewelry portion of our company, and we are moving forward in that vein.

Could you just remind me what are the differences in the margins between selling just the gems, the moissanite, as opposed to the finished jewelry?

You know, look at it, let's break it apart. Every time you make a finished jewelry sale, you're selling a gem at the normal gem margin. So, we get the latest gem sale at the normal margin and then you're selling the attached gold and labor at about a 35% or 40% margin. So that's an incremental margin in incremental margin dollars. The net sale of the two together will be in the low 50%s.

That compares to when you're just selling the gem unfinished?

Yes, the gems range depending on the size of the stone. The smaller the stone, the more the labor eats into the cost and the margin percent. The larger the stone, obviously you yield a much better margin. And -- but the average is in that 65%-ish range

Okay. And then in terms of your operating expenses going up because of all of this different sort of distribution, could we look at the first quarter as to how one should look at your expenses are going to be? Is that - -do you expect that to stay consistent within the year?

It extends from dollars definitely.

Or percentages -- yes, either way. However you could help me to understand it.

That's a great question. We're just launching the Home Party initiative. I've just retained a consultant professional in the industry for over 15 years, so we'll have that hitting our expense line as we build the infrastructure. Obviously, we'll be buying systems and all of the support mechanisms to roll out the parties, but that type stuff can be capitalized to some extent, but we'll see the monthly write-offs involved with that capitalization.

So you think that -- I'm not sure I follow. Does --

Let Tim jump in on that.

Overall, I would say our G&A line item, as we said on previous calls, will remain relatively constant. You know, we incur a significant amount of expense just being a public company, things that will not scale as our business scales, so I think our G&A will remain relatively consistent. We will expect sales and marketing to increase as we invest in expenses such as advertising and consulting ahead of future revenue streams. We saw some of that start to take shape in the first quarter and anticipate that will also probably ramp up in the second and third quarters as we are building these businesses. I think that there will also be some associated marketing and advertising with the launch of our e-commerce site that will probably precede significant revenue stream from that. But you know, it's a necessary part of launching (multiple speakers) business. So, I would expect sales and marketing to increase a little bit, and I would expect -- R&D is a very small, so those remain pretty much worth that.

That's terrific. Thank you.

(Operator Instructions). [Dennis Stubbs].

I've got a question. I got on a little late, but I thought I heard something about an All About Me promotion or something. Maybe you can refresh me. But my question is, in the past, the Company tried a thing called Brilliance of Me, and that kind of failed miserably. It doesn't seem like there's really an audience (technical difficulty) that kind of appeal and maybe you disagree or maybe you can explain how this is going to be different to me.

Okay yes. That's a good question. The Home Party initiative -- and I don't know how much you are aware of what's happening in that segmentation of retail. The Home Party -- and let me give you a good example. Stella & Dot who started up the Company just a few short years ago, in 2009 they achieved in excess of $30 million in sales. In 2010, they ramped it up to in excess of $100 million. In 2011, they are trending toward $150-plus million. What they are doing, they have a network of several thousand women that sell their product. They provide party kits to independent contractors who purchase the kit with all the supporting training and various materials that they need and then they schedule these parties in people's homes that host them. Everybody makes something for hosting the party, for making the sales. There is merchandise that's surprises, things that they can achieve. Those parties are averaging about $1000. And you can do the math. If you have 2000 or 3000 women hosting a party a week, say it's 50 parties a year, it doesn't take much to -- I mean, per thousand, you're talking about $50 million.

So, we are saying we're going to take Moi, which is the first three letters of moissanite, it's in French; it's "me". It helps us tie the theme in with the French, Andre Moissan.

Henri Moissan.

Henri Moissan, the French scientist that discovered moissanite. It's just a story that we can put together, but the fun part of it is -- and we're not -- we haven't settled on a tag line yet but it's going to be something like It's All About Me, Fun For Me. It's just a theme of a line that is going to be available for these parties to host to these women.

So it's not going to apply to the jewel or (multiple speakers) so much as it is to just this one home party thing?

It's a business. It's really a separate business initiative. It'd be as if you were going to open a store and call it Moi.

Yes, I guess I worry about this me, me, me thing being applied to the jewel or to the Company like the Brilliance Of Me thing was.

No, the theme that you want to project -- and you might want to go and look at Stella & Dot on the Internet because they do a great, great job of exciting women about their product offering, and the opportunity to join their team and sell the product.

But the theme is to -- it's focused on the party itself (inaudible) so a group of women, some 10 to 15 women getting together it's all about them, meaning it's all about me, and this is jewelry for me, and I can have fun in the privacy of my home and enjoy this thing.

The fun part sounds good. The All About Me sounds a little risky in terms of where it might go, but maybe I'll look up the things you said. What about the Company or the efforts in general in marketing? What kind of tag lines or themes are we aiming, or are we going to be consistent? Are we having something that lets everybody know it's a fine jewel?

I would answer yes to all of those questions. We are going to do some of that in an overview at our May 19 shareholders meeting. We've been working on some things that we want to unveil at that point. So, I would make my marketing people very upset if I spilled the beans on that right now. But I think you will see.

Here is what is happening in marketing. Maybe this is just the way retail is going in the future. When we work with Shop NBC, Shop NBC wants marketing that's tailored and specific and exclusive to them. They don't want to be part of a national marketing campaign. When we work with Jewelry TV, we have the same issues. When we work with Ultras 160 stores, they have their catalogs; they have their billboards. Everything they do, they don't want to be part of a national campaign. They want a tailored campaign for them exclusively. So it's a different world out there. It's not -- everybody doesn't want to participate and be the same thing that you can go and buy from all the other venues. They want to try to differentiate themselves.

I can understand why retailers would want to compete with each other and differentiate, but how does our Company gets some consistent branding out there for our product, the jewel that we sell, in light of the fact that we are working with these different partners?

We do it one with our partners because that's where we are going to get our business. That's where we're going to reach the consumer. Second, we'll be doing it on our website and that will be branding that we think is more on a national theme that we will make available to others, but we're not going to force them to use it. Again, we want to look at what they're doing and see if we can dovetail into their marketing in order to get them on board to sell moissanite jewelry.

So, will it be social media or other initiatives to try to drive consumers to our website to get that clear message across, to piggyback on the retailers' efforts?

My understanding is we'll have to use a combination of clicks and social media. Social media has to reach well beyond Twitter and Facebook. There's some -- there's over 100 different sites that you have to be fairly active on. You have to have blogger packages that you're working with the various bloggers with that have huge followings. There's just a multitude of initiatives that's been -- that's in place now and being put up to support our e-commerce initiative.

That sounds good. Speaking to the shareholder meeting, will that be video broadcast for those who can't attend?

Yes it will.

(Operator Instructions). At this time, I'm showing no additional questions. I would like to turn the call conference call back over to management for any closing remarks.

Thanks. I'd like to just thank everyone for taking the time to participate in the call this morning. I hope that you share our enthusiasm for the balance of 2011 and the future years. We look forward to talking to you again next quarter but hopefully we get to see you May 19 here in Raleigh at the Sheraton Hotel. There will be information on the shareholders meeting, the annual meeting, on our website, Charles&Colvard.com.

To access the digital replay of today's conference, you may dial 877-344-7529 or 412-317-0088, and use conference ID number 450483. You will be prompted to record your name and company when joining. Today's conference is now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.