Yunhong Green CTI Ltd (YHGJ) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries fourth quarter 2009 and year end 2009 results conference call. Today's call is being recorded.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements such as terms as defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the Company with the Securities and Exchange Commission. Many of the factors that will determine the Company's future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements which reflect management's views only as of the date hereof. The Company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise.

Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking information include attaining certain growth goals, changes in the way products are introduced to the market, the recall of significant product by the Company, seasonality, the impact of general economic trends on the Company's business, the timing and effectiveness of marketing programs offered by the Company, the timing of the introduction of new products and services by the Company, and competition. These other factors include changes in the rate of inflation, changes in state or federal legislation or regulation, and changes in the general economy.

Now, for opening remarks, I would like to turn the conference over to Steven Merrick, Chief Financial Officer. Please go ahead, sir.

Good morning, everyone, and welcome to CTI Industries's earnings conference call in which we will report on our results for the fourth quarter of 2009 and for the full year. My name is Steven Merrick. I am the Chief Financial Officer of CTI and will be presenting our report. As you can tell by the sound of my voice, this is not recorded. This is the result of a cold. I'll be joined on the call today by Tim Patterson, our Vice President of Finance and Administration. At the conclusion of the report, there will be an opportunity for those of you who would like to ask questions of us.

We're pleased to be able to report that we were profitable again in the fourth quarter, and for the full year of 2009. We've now been profitable for each of the last nine quarters and for ten of the last 11 quarters. For the quarter, our net sales were $10,737,000, an increase of about 9.2% over our fourth quarter 2008 sales of $9,832,000. These results reflected strong sales both in our novelty and pouch product lines, as we exit the recession. Sales of foil balloons were up about 14% over the fourth quarter 2008, while our pouch sales were up 61% over the fourth quarter 2008. These strong sales reflected in our profits.

For the quarter, we achieved net profit of $296,000, or $0.11 per share, which compares very favorably to our fourth quarter 2008 profit of $121,000, which represented $0.04 per share for that quarter. Although we did experience a small decline in sales for the year, compared to 2008, we were quite pleased with our sales levels, given the economic environment over the last year, and in light of the fact that in the second half of the year our sales momentum accelerated. For the year, our net sales were $41,295,000, compared to net sales of $44,981,000 for 2008. A decline overall of about 8.2%. For the year, we generated net income of just over $1 million, $1,003,000, or $0.36 per share, compared to net income of $1,154,000 in 2008, which represented net income per share of $0.42, basic, and $0.40 diluted.

Let me spend a few minutes on our overall business and strategy and then turn to some specifics on our results. We view ourselves as being in the business of providing value added design, engineering and production for flexible film products. We have over 35 years of experience in flexible films and have developed, we believe, considerable technology and know-how in the area. We now have 27 patents in the field, and several patent applications pending on new developments. We have created, developed and produced several advanced and proprietary product lines. And we provide engineering, design and development services for the development of unique, high margin, flexible film products for our customers. Our strategy is to leverage these strengths, to build our business and our existing product lines, and in new products which we develop for ourselves and for our customers.

With regard to our existing product lines, we continue to develop product extensions and additions, new items and new designs. In our novelty line we introduce many new graphic designs and shapes each year. And in our pouch and bag products we are constantly innovating to improve and add to the product line. Over the past year we have been working with a customer on an entirely new product, which will have a medical application, and have begun producing that product this year. In addition to product development, we also focus on developing our sales in new channels and geographic areas. During the past year, we have developed new distribution and sales for both our pouch and novelty products in Europe and Australia and we believe have developed new sales prospects in all of our markets. Our current product lines include flexible film pouches for food and household storage, novelty foil helium balloons, laminated and printed films for packaging applications, custom film products including products for medical application, and latex balloons.

Let me give you a review for each of our principal product lines. Turning first to foil balloons, we have been one of the 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. For the year, our sales of foil balloons reached $19.8 million, compared to $17.6 million in 2008. This is an increase of about 12.5%. We experienced increased sales volume for foil balloons throughout the year, but the rate of increase accelerated in the fourth quarter with sales increasing 14% over our sales in the fourth quarter of 2008. For the most part, 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, and we have been able to participate in their success as a principal supplier of foil balloons to them. However, we've also been engaged in a number of efforts and programs to generate new foil balloon sales, both in the US and in our other markets. We have generated new sales to new customers in the US and in Mexico and Latin America, and we are actively pursuing new customers in Europe.

With respect to pouches, we have experienced accelerated growth in pouch sales, particularly in the fourth quarter of 2009, and into this year. Pouch sales were up from $1.2 million in the fourth quarter of 2008, to almost $2 million in the fourth quarter of 2009, an increase of almost 60%. For the year, pouch sales were down from $10.9 million in 2008, to about $6.9 million in 2009. However, much of that difference is accounted for by the fact that in the first half of 2008, we were producing large quantity of pouches for SC Johnson for the launch of their Ziploc vacuum bag in August 2008. After the product build for that launch, our pouch sales to SC Johnson slowed. However, we continue to produce pouches for SC Johnson. In fact, they are our largest pouch customer and sales to them have increased substantially in recent months.

In addition, we produce our own line of pouch products including open top pouches for use with vacuum sealing machines and our proprietary Zip-Vac line of zippered vacuumable pouches. We are actively engaged in a number of projects to market and sell these pouch products both in the United States and several other markets. And these efforts have begun to generate sales results which are reflected in the fourth quarter numbers.

Both for the fourth quarter and for the year, our dollar volume of sales of latex balloon products showed a modest decline. For the year, it was about 7.5%. However, the unit volume of sales of this product line was actually up for both the fourth quarter and for the year. The decline in the dollar volume reflects the decline in the value of the Mexican peso from 2008 to 2009. A significant portion of our latex sales are in Mexico, and the decline in the peso affected the dollar volume of sales. In fact, though, our sales of latex balloons have been strong and are increasing. As with foil balloons, we've been engaged in a number of projects and efforts to expand our reach and sales in all of our markets. And we are now generating new sales in the US and Europe as well as in Mexico and Latin America.

With respect to our film products, sales decreased about 16% in 2009, compared to 2008. Reflecting economic conditions and the decline in sales to our largest film customer. We have been engaged in a development project for a new custom film product and we do anticipate sales of that new product to commence in 2010.

Now let me turn to some other aspects of our results. Gross margins overall were about 22.3% for the year, compared to 22.9% for 2008. This modest decline in the gross margin rate reflects some change in the mix of our products sold to some novelty balloon items which carry a lower margin rate than others. Also, our cost of raw materials increased from 43.2% of revenues in 2008, to 43.9% of revenues in 2009. Our operating expenses are down from 2008 by over $950,000, or 12%, principally as a result of decreases in our general and administrative expenses. We work hard to maintain good controls on our expenses in an effort to remain as lean as possible, without sacrificing performance. Clearly, these cost controls have contributed to our profitability in what we all know is a very difficult economic environment.

Our cash flow has been good. We generated net cash from operations in 2009 of over $3.1 million, compared to about $400,000 in 2008. We used quite a bit of that cash to reduce our debt levels. For the year we reduced our debt by about $1.7 million, including a reduction in long-term debt of [$1,250,000] and a reduction in our revolving line balance of $362,000. In 2009, we invested $732,000 in plant and equipment, most of that in maintenance of our existing equipment and a few equipment additions. We do anticipate that maintenance capital expenditures in 2010 in the range of $500,000, and while we do not have specific plans yet, we do anticipate some expenditures for new equipment in 2010 to increase our capacity. Our working capital balance has increased from about $1.5 million at the end of 2008, to over $2.4 million at the end of 2009. We ended the year with cash of almost $900,000, and in addition to that, availability on our revolving line of credit of about $900,000. We believe our liquidity is sound and that we have more than adequate cash resources to fund our operations for the balance of this year. Our stockholders' equity has increased from $7.7 million at the end of 2008 to over $8.7 million at the end of 2009, representing a current book value per share of about $3.28, a value that today actually has exceeded our market price per share.

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

Thank you, Mr. Merrick. We'll take our first question from Juan Noble with Taglich Brothers.

Good afternoon, Steve. Congratulations on the quarter and the year. Just a couple questions, Steve. Seems like a no-brainer but with the economy starting to recover, disposable income up and all that, I presume that will be at least a moderately powerful driver for you in 2010, as will the perhaps easier comparisons due to SC Johnson. Is it safe to surmise that?

I think, to some degree, our product lines have not been affected by the economic downturn as much as maybe some others have. But I think clearly we are in consumer products to some significant degree, and I think as the economy improves, that it's reasonable to hope and expect that our results will reflect that.

Okay. Just two other questions, Steve. On the flip side of the economy, of course, might be oil prices. They're up somewhat since we last spoke. I think it was only like $70, about two, three, four months ago but now it's more like, from what I just saw, around $80 or so. What kind of an impact do you think that will have going forward? And the next question is you were in the process of trying to recover misappropriated funds at some point last year and I was just wondering what the outlook for that is?

First, with respect to raw materials costs and the cost of oil, as oil changes, it is true that it does affect, to some degree, the cost of our raw materials. And as the cost of oil increases, we do in our films experience increases in costs of at least petrochemical based product lines. The effect of that on our results is mixed. To some degree, we are able to reflect the increased cost in films by increasing the price of our products. And in some of our arrangements with customers, we do have arrangements under which we are able to increase the price of the product based upon the increase in the cost. To some degree, we do not have that protection and so the ability to raise prices to reflect an increase in cost sometimes can be achieved and in some cases cannot be achieved. Generally, as you can see from the level of margin that we showed last year, we have been able to maintain margin despite the fact that there has been some increase in raw materials costs and that certainly will be our effort on an ongoing basis.

With regard to the recovery of funds from defalcation, we have recovered a level of funds. We do not anticipate that we will recover all of those, despite the fact that are pursuing by legal means an effort to recover all of them.

That's helpful, Steve. Once again, congratulations on the year and good luck in the coming one. I'll talk to you soon.

Thank you, Juan. It's a pleasure to talk to you.

We'll take our next question from John Banks with BG Capital Management.

Steve, great cash year, great quick cash quarter Just a couple question.s Can you give us some color on the new product coming or what dates we should look for the release? The second question is we control about 35% of the float now. We're wondering if you're going to divest any businesses or sell some product lines off? Thanks.

Okay. Thanks, John. Nice to talk to you. In terms of divesting or selling any businesses, we don't anticipate doing that. Our growth goal and strategy is that we have certain areas that we have product lines, technology, and knowledge in and our strategy is to build those. It's conceivable that at some point in time we might make additions of one kind or another, but we're not looking at the sale of any particular division or part of our business. I think the other part of your question was our new product. Really, we're at a point where we can't really talk in any detail about the product until it's introduced and it has not been yet so that's our status.

Is the time frame three months, six months so we can look for it?

Yes, in that range.

Thanks so much.

(Operator Instructions). We'll take our next question from Ivan Chow, a private investor.

Hi, congratulations on a great year. Also thanks for hosting this conference call. I have a question first about the breakdown of your top ten customers or whatever you can give light on that, for the foil products.

Sure. We do break down in our report and in our 10-K, we identify specifically the top three customers. We've done that before and we will do that in the 10-K that we file again. Our top three customers are Dollar Tree Stores, a company by the name of Raypak which is a film customer, and an affiliate of SC Johnson & Son. Those are the top three. The others we don't specifically identify but the top three represent over 50% of our total sales.

Okay, great. Thanks. And I'll look forward to the other information in the 10-Q, 10-K. I have one other question about the long-term debt. When is the bulk of that due? And what is the interest expense on that?

Okay. The bulk of our long-term debt is our bank debt and we have a term loan, couple of term loans, which expire at the end of January 2011. So from the standpoint of long-term debt, we do have quite a bit of that coming due at that point. We're in the process of working on a renegotiation, renewal, regarding our debt and we do expect that we will be able to achieve an extended or new long-term lending relationship with a principal bank.

Okay, great. Thank you.

(Operator Instructions). We'll take our next question from [Mark Bosiordi], a private investor.

Hi, guys. Just one question. What was the total effect on earnings of the defeasement for last year?

You mean of the defalcation or whatever we call it?

The recovery of the embezzled funds, yes.

I'm not sure of the exact number. I think in 2009, I think the amount in 2009 was several hundred thousand dollars.

Okay. Several hundred, 300? 400? Any estimate?

That range. I don't remember exactly the number, but it was in that range.

Okay. Thank you.

(Operator Instructions). With no further questions in the queue, I would like to turn it back to Steven Merrick for any additional or closing remarks.

Thank you, everybody. We really appreciate your interest and your participation in our call. We are very pleased at our results and it makes it a pleasure to have a call like this and report to you on how we're doing. Thank you again and we appreciate your continued interest. Good day.

This does conclude today's conference. We thank you for your participation.