Yunhong Green CTI Ltd (YHGJ) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corporation conference call and live webcast to discuss second quarter 2009 earnings and year-to-date financial results. Today's call is being recorded.

This conference call may contain forward-looking statements including statements regarding, among other things, the Company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on this Company's expectations, and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond their control. Future developments and actual results could differ materially from those set forth in, contemplated by, and underlying the forward-looking statement. In light of these risk risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.

At this time, I would like to turn the conference over to Mr. Steven Merrick, Chief Financial Officer. Please go ahead, sir.

Good morning, and welcome to CTI Industries' first conference call, in which we will report on our results for the second quarter of 2009 and for the year-to-date through June 30.

My name is Stephen Merrick. I am the Chief Financial Officer of CTI, and I will be presenting the report. I'll be joined on the call today by John Schwan, our Chairman; Howard Schwan, our President; and Tim Patterson, our Vice President of Finance and Administration. At the conclusion of our report, there will be an opportunity for those of you who would like to ask questions of us.

Our earnings report was released first thing this morning, so many of you have probably already seen that information. We are pleased to report that despite difficult economic conditions during the period, we enjoyed solid results for second quarter of 2009 and for the six months ended June 30, 2009. For the quarter, our net sales were $10.8 million, and for the six months ended June 30 our net sales were $20.4 million. These numbers are down a bit from the second quarter net sales of $12.5 million last year, and $23.2 million for the six months last year. But I would point out that except for a couple of $12 million quarters last year, which occurred due to the buildup of sales for the launch by SC Johnson of its vacuumable zip lock product, the sales in the second quarter of this year were the highest quarterly sales we have had over the past five years.

For the quarter, we have reported net income of $409,000 or $0.15 per share basic and diluted, compared to net income of $485,000 for the second quarter of 2008, which represented net income per share of $0.17. For the six months we reported net income of $502,000 or $0.18 per share basic and diluted, compared to net income of $764,000 for the six months of 2008, which represented net income per share then of $0.28 basic and $0.26 diluted.

Our product line consists of four principal product categories; Foil novelty balloons; plastic pouches and bags for storing food and other household items; latex balloons; and laminated and printed films, which are used principally for packaging applications. We report our sales separately in each of these categories.

Turning first to foil balloons, we have been one of principal designers and producers of novelty foil balloons for more than 35 years, and we sell these products throughout the Americas and in Europe. Our sales of this product line have continued to grow and prosper, even during the economic downturn. In the second quarter our net sales of foil balloons reached $5,747,000, almost a 17% increase over prior year second quarter sales of $4,918,000. For the six months our foil balloon sales were $10,786,000, up from $9,516,000 in the same period of 2008. This is an increase of over 13%. Substantially, all of this increase is due to our increasing sales to the Dollar Tree chain. Dollar Tree has become one of the leading retailers of foil balloons in the United States, as well as many other items, and we are pleased that we have become a principal balloon supplier to them.

The dollar volume of our latex sales shows a decline of about 15% in the second and about 8% for the six months. However, this decline is due principally to the decline in the value of the Mexican peso over the past year. A significant portion of our sales of latex balloons is in Mexico, and although the unit volume of our sales actually increased a bit during these periods, the dollar value of these sales has declined due to the decline in the peso. Our latex sales in Mexico were also affected to a degree by the influenza problem and scare there this Spring.

We are actively pursuing sales opportunities for our novelty products in the United States, as well as in Mexico and Europe, and we believe we have good prospects for new sales in each of those markets. Sales of novelty products do not seem to have been affected much by the economic downturn, and we are working to take advantages -- advantage of the opportunities for expanded sales that we believe exist.

With respect to pouches, our net revenues this year are down quite a bit, actually about 50% compared to the second quarter and six months of 2008. However, the fact that our pouch sales so far this year are lower than the same periods last year is due principally to the circumstance that in the first, second and third quarters of last year, we were producing large quantities of pouches for SC Johnson as part of an inventory buildup in preparation for their launch in July 2008 of their Ziploc vacuumable pouch system. We are not producing for an inventory buildup this year, but we do continue to produce and sell pouches for SC Johnson for their ongoing needs. Our pouch sales for the first six months of 2009 are actually 30% to 40% higher than they were for the first six months of both 2006 and 2007. With respect to pouches, we are also actively engaged in projects to develop new sales for our pouch products. We believe our pouch products are of high quality, and include some unique proprietary features and we are working to generate new sales from those advantages.

Let me turn now to some other aspects of our results. Gross margins overall in the second quarter were about 24% and 22.9% for the six months. These gross margins compare favorably to our gross margin rates for the second quarter and first six months of 2008. However, our cost of sales this year have been positively affected by the amount we have recovered in connection with the defalcation by a former employee.

Our operating expenses are down from 2008. Operating expenses for the second quarter were about $230,000 less than the second quarter last year, and for the six months they're down about $320,000 compared to the same period last year.

Our cash flow has been good. We generated net cash from operations in the first six months of this year of $1,688,000, compared to net cash that was used in operations of $928,000 for the same period last year. That's a swing of over $2.6 million, a favorable swing. We used quite a bit of that cash to pay down our borrowings. In the first six months of this year, we paid down long-term debt of $617,000, and we reduced the balance on our revolving loan by $734,000.

Our working capital balance has increased from $1,466,000 at the end of 2008 to just over over $2 million as of June 30 this year. We believe our liquidity is sound, and that we have more than adequate cash resources to fund our operations for the balance of the year.

That concludes our report. At this point we will open the call for questions. Operator, may we have your assistance please?

Thank you. (Operator Instructions). Our first question comes from Steve [Schniper], who is a private investor.

Hello, Steve.

Hi, guys. Good quarter, nice to see you starting these conference calls, looking to raise the profile.

Thank you.

What is the status of the share repurchase program? Have you -- it looks like the share count did go down; I assume some of that was the share repurchases?

We did -- in the -- we started it in the second quarter, and we purchased, I think it was a total of 26,000 shares on the corporate repurchase. I'll double-check that and make sure the number's right. So we have purchased some part of what was identified in the program but not all.

What's the thinking as to the valuations that you are looking to buy at? Is it under $2 or a certain percentage of sales? Book value? How are you guys looking at that?

Well, we -- I don't know that we've set a specific number. I think that the conclusion of our Board was that at the prices that the stock was at, it was a good value, and a good thing for the corporation to do repurchasing. And I think that continues to be the case at the levels that we have been at through the -- up until the current time.

Okay. Other than -- are these quarterly conference calls something you anticipate continuing going forward?

We do, unless you criticize us too much.

No, I'm not criticizing anything.

Just kidding.

As long as your results are good, I don't mind. I mean, are there other types of things that you are looking to do to enhance the profile, raise some investor awareness and get some other people in the stock?

We do plan to do -- to attend at least one conference later this year, and we are going to be spending some time and effort presenting to various institutional investors.

Perfect. Thank you very much.

Thank you.

(Operator Instructions). Our next question comes from Gregg Hillman from First Wilshire Securities Management.

Yes, good morning, gentlemen.

Hi, Gregg.

Hi. Just a couple of questions. In terms of, you know, utilization of your machine, you know, to make the foil balloons, put colors -- different colors, what was the utilization for the quarter?

Well, on the foil balloons we use several different machines. We use a -- presses for the printing, we use a laminating machine on the film, and we use converting machines. And the utilization rate for each of them would be somewhat different. In all cases, we continue to have some capacity. We're certainly not at -- anywhere near 100% capacity in terms of our current production. It -- in each case it would be some significant level over 50% of our capacity that we use. And at least in terms of where we are now and our reasonable expectations for the balance of this year, we don't anticipate that we will need to add new capacity. That may be a consideration for us during 2010.

Okay. In terms of, you know, the gross margin --

Yes. You are breaking up a little there.

Gross margin by -- hello?

Gregg, you are breaking up a bit. Try again.

Okay. Did you talk about gross margin by segment?

We do -- we have not done gross margin by-product line, and that is not something that is part of our regular reporting. One of the reasons for that is that each product within each product line may vary fairly significantly in terms of their margin, so that we -- that is one of the reasons that we -- we report and track margin on a gross basis for all of our products, rather than separately by each product line.

Okay. Steven, I do not know how to pick this up, but where did the improvement in gross margin come from? I mean where did the favorable mix come from for the quarter?

Well, part of it had to do with the fact that we did get -- receive restitution from a former employee, and the amount of restitution received, all was applied to cost of sales, so it reduced cost of sales and improved margin. That is one of the -- that is one of the factors. I think that there are -- there are other factors as well, in the sense that we -- I think our percentage of cost on raw materials is down somewhat from the highs -- some of the very high levels that we reached last year. And I think we -- we work constantly to be efficient in terms of our overhead costs, and I think we've maintained -- our overhead costs have been maintained pretty steady as we have increased some production this year.

Okay. And then also could you just kind of talk a little bit about the -- the overall strategy, you know, for the Company in going forward, in terms of maybe just give me an idea of some of the markets you're currently addressing with your current products, and talk about whether you have any, you know, basically emerging businesses that you're getting into, and whether you consider any emerging businesses that you are in right now kind of to be -- I guess some of pouches would be an emerging business, but do you have any other businesses with some of the other divisions that you could get into that would be material to your Company?

I -- I'll try to remember each of those questions. And the answer is that we are working constantly to expand our sales, generally within the lines of products that we currently have; that is novelty products, novelty balloon products and film products and pouches. We have programs that we are working on in each of those area areas which could expand sales. We do not report specifically on them because obviously they are -- to some degree, they are confidential and to some degree we can't assure that any of them will come to fruition.

I can tell you that we believe, as we said in our report, we believe that there are opportunities in each of those product areas, and I'm lumping latex balloons and foil balloons together on that in the novelty area. We are working on new potential sales in the United States, in Europe and in Mexico. So we -- we have projects that we're working on in each of those marketplaces.

With respect to pouches, we have a number of projects that we're working on that are designed to extend our sales to new channels and new customers. And as and when those reach some fruition there will certainly be a report concerning them. And we have projects -- in the film area, our business tends to be ones in which we respond to specialized needs of customers, and where we will develop a particular film or a particular product for their need. We do have projects ongoing now in which we are working on those kinds of things. So in each of our areas, that -- and that's our plan and focus, is to extend within our areas of expertise that we have and within the areas of marketing about which we have knowledge, to extend our sales to new customers and to some degree the new channels in those markets.

Okay. And speaking of Europe, you know, what percentage of your sales are in Europe right now?

It probably is about it's about -- Tim, correct me if I'm -- I would say that it runs about six to 7%.

That sounds about right. That's -- that's --

And do you have a channel of distribution in Europe, you know, to let people know about the services and your capabilities and whatnot? Do you have people working in Europe, sales people or consultant-type people working for the Company that can help you to bring before various customers?

When I say Europe I'm including the UK in that, and we have a facility and have had a facility in the UK for some time that -- with several employees, and we actually have significant customers, two of the largest customers in the UK are customers -- for foil balloon products, are customers of ours in the in the UK. We have people who are working in the UK to extend sales to new customers, and we are working on the development of our sales efforts in the Continent as well. That's a relatively new effort on our part, but that is underway.

Okay. Good. And -- and finally, have you made any significant acquisitions of licenses for, you know, characters or concepts to be used on your balloons?

We do have a couple of new licenses. I would not call them -- in the sense of being widely known and very substantial characters, probably not. Probably our most well-known character license is Garfield, and we've had that licence for a number of years.

Okay. I guess in -- I guess one last thing. Could the CFO, could you comment on the cash flow statement a little bit, what was going on, and what was the cash flow operations and CapEx, for example.

I'm sorry, say -- I apologize, say it again?

Could you comment on the cash flow statements, cash flow from operations and CapEx for the quarter?

Sure. Basically we -- we had -- well, for the -- for the six months net cash was -- provided by operations was about -- just about a $1.7 million. That's for the six months. I don't have it broken down here by the quarter. But certainly during the second quarter, cash generated was probably greater than it was in the first quarter. Of some of the changes, things that go into the -- into the cash flow analysis was our depreciation and amortization was $945,000 for the six months; compared to last year, the same period, was $760,000. The -- our accounts receivable increased -- or decreased by a significant number, and trade payables decreased as well. So those were elements of the -- of the cash flow. But we -- last year was exactly the opposite in terms of cash by operating activities.

And the CapEx versus last year?

CapEx is down. The -- for the first six months last year it was $850,000. For the six months of this year it was $435,000 approximately.

Okay. Thanks very much, Steve.

Thank you.

And it appears there are no further questions. However I would like to give everyone one final opportunity. (Operator Instructions). And it appears there are no further questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

I'd just like to express our appreciation to all of you for participating in our call. We do intend to do these calls on a regular basis, and certainly are interested in any feedback on the content of the calls, and what you would like to be hearing about in the future. Thank you, very much, and have a good day.

This concludes today's presentation. Thank you for your participation.