Yunhong Green CTI Ltd (YHGJ) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corporation first-quarter 2010 conference call.

This conference may contain forward-looking statements as defined in Section 27A-i-1 of the Securities Act of 1933, as amended, 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 that 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, or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.

I would now like to turn the call over to Steven M. Merrick, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning, everyone, and welcome to CTI Industries' earnings conference call in which we will report on our results for the first quarter of 2010. My name is Steven Merrick. I am the Chief Financial Officer of CTI and I will be presenting our report. I will be joined today on the call by Tim Patterson, our Vice President of Finance & Administration. At the conclusion of our report there will be an opportunity for those of you who would like to ask questions of us to do so.

If you've seen our earnings release this morning I hope you share our excitement over the results. If you haven't, let me just say that CTI has just enjoyed one of its best quarters ever. In the first quarter of this year, the trend of increasing sales and profits we saw in the fourth quarter last year continued and accelerated.

In the first quarter this year, our consolidated net sales were $12.411 million, which was an increase of almost 30% over first-quarter 2009 net sales of $9.603 million. Profits showed an even greater increase. Our net profit for the first quarter was $599,000, or $0.22 a share basic and $0.21 per share diluted. This is an increase of more than six times the profit we achieved in the first quarter of last year, which was $93,000, or $0.03 a share.

From a sales standpoint, we were hitting on all cylinders. Sales of pouch products were $3.041 million for the quarter compared to sales of $986,000 in the first quarter last year. This is an increase of 208%. Most of this increase is a reflection of our continued strong sales of vacuumable pouches to a principal customer who markets the sales independently. Sales of our proprietary pouch line known as ZipVac were also up, particularly in foreign markets.

Sales of novelty balloon products were also very strong, increasing by almost 19% over first quarter 2009 levels. Sales rose from $6.6 million in the first quarter of 2009 to $7.8 million for the first quarter this year.

We believe that we have the opportunity to enjoy continuing growth in sales. These first quarter results do not, for example, include any significant sales of new products we are introducing, including vacuumable pouches for use with vacuum sealing machines and a new pouch having a medical application. Moreover, we are working on a number of new sales opportunities in each of our product lines -- pouches, foil balloons, latex balloons, and laminated film products. And at least some of those we believe are likely to come to fruition. Of course, we do and will experience fluctuations in sales to our customers, but we believe our sales prospects are good.

Let me turn now to some other information on our financial results and condition, and some developments. First, I want to mention that our gross margin rate increased in the first quarter to 24.5% compared to a rate of 21.5% for the first quarter last year, and compared to an annualized gross margin rate for 2009 of 22.3%. We were pleased to see this increase in gross margin, which obviously contributed to the level of our profitability for the quarter.

This increase in gross margin we believe results principally from two things -- first, a reduction in unit cost resulting from spreading production overhead costs over a larger number of units produced; and, second, a change in the mix of products sold in the quarter, so that more of our higher-margin pouches and foil balloons were sold.

Our liquidity continued strong and our shareholders' equity increased by close to $1 million just in the first quarter alone, with the result that by March 31, 2010 our shareholders' equity had reached almost $3.50 a share.

Also, I wanted to report that we have just completed a new bank financing arrangement with Harris Bank in Chicago. The term of our current bank financing line was coming to an end, so we engaged in an in-depth process to arrange for a new long-term banking relationship. Several banks made proposals to us and we were very pleased that a bank with the reputation and strength of Harris would show interest in us. They made what we believe is a very strong proposal and we decided to pursue a new financing relationship with them.

Just yesterday we entered into a new credit agreement with Harris under which they will provide to us a credit facility in the total amount of $14.5 million. The facility includes a revolving line of credit for advances of up to $9 million, based on our levels of receivables and inventory; a mortgage loan of $2.3 million on our property and plant in Barrington, IL to replace our existing mortgage; an equipment line of up to $2.5 million, which will permit us to fund acquisitions of new production equipment; and a $580,000 term loan to replace the balance on our current term loan. We are delighted to have this new relationship with Harris and believe it will provide us with financial liquidity and access to capital we need to continue to grow.

Now let me spend just a few minutes on our business and strategies. I have referenced this subject in recent earnings calls, so will not rehash it fully here. But I do want to emphasize that we do have a focused view of our business, our strategies, and our goals. As I have said a couple of times before, 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 core strategy is to leverage these strengths to build our business in 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 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've 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 have developed a number of new customers and prospects in all of our markets.

The rate of increase in pouch sales has been particularly rapid during the past two quarters, increasing at the rate of 60% in the fourth quarter of 2009 and at the rate of over 200% in the first quarter of this year compared to the same periods of the previous year. We have essentially three principal pouch lines of products, which we are now producing and marketing -- a zippered vacuumable pouch line, which we make for SC Johnson & Sons and which they sell under the Ziploc brand; our own proprietary zippered vacuumable pouch line, which we sell under the ZipVac name; and a line of vacuumable pouches designed to be used with vacuum sealing machines on the market, which we refer to as Universal pouches.

Sales of the Ziploc brand line have been very strong over the past six months, and growing. Sales of our ZipVac line have been increasing recently, particularly in terms of sales in foreign markets such as Europe and Australia. Sales of our Universal pouches have been steady and we believe we have some significant sales opportunities in that line.

Turning to our foil balloon line, 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 largest customer for foil balloons is the Dollar Tree chain in the United States. Dollar Tree has become one of the world's leading retailers of foil balloons and we have been fortunate to participate in their success as one of their principal suppliers.

But our reach in foil balloons extends to many other customers and geographic areas. We provide foil balloons to thousands of customers in the United States, Mexico, Canada, the United Kingdom and Europe. These sales and our efforts to generate sales in these markets are steadily expanding. Last year, in a very difficult economic environment, our sales of foil balloons increased by 12.5% overall. This year, the rate of increase is accelerating and reached the level of 18.6% in the first quarter. We are 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.

Our latex product line tends to receive less attention than our pouch and foil product lines, but it has also become a significant, profitable, and growing portion of our business. Latex balloons tend to be viewed as a commodity business. But, in fact, the market for latex balloons in the US and worldwide is probably five times the size of the foil balloon market. And over recent years we have become one of the significant participants in that market. We produce latex balloons at our facility in Guadalajara, Mexico and we market and sell them throughout the United States, Mexico, Latin America and, increasingly, in Europe. Over the past several years we have experienced good growth in our latex sales, from about $4.8 million in 2005 to over $7 million in 2009.

As with our foil and pouch lines, we are experiencing more rapid growth now. In the first quarter of 2010, sales grew by 18.5% compared to the first quarter of 2009, growing from just over $1.5 million in the first quarter of 2009 to over $1.8 million in the first quarter this year. As with our foil, balloon, and pouch lines, we are actively engaged in efforts to increase sales and have new sales and sales prospects in the United States, Mexico, Latin America, and Europe. In fact, we are engaged in planning to increase our production capacity at our plant in Guadalajara to accommodate these increased sales.

Finally, with respect to our films and specialty product lines, revenues are down somewhat in the first quarter of 2010, as our sales to a principal customer have declined. However, we have a new project for a custom film project -- product, which is beginning to generate revenues, and have prospects for various additional revenue sources.

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

Absolutely. (Operator instructions.) John Banks; [B&G] Capital Management.

Hey, congratulations. Great quarter. Very, very impressive. As you know, we represent about 35% of the float, our clients control that and our -- and we're very impressed, what's going on. We have two questions. One, if the margins -- do you see the margins increasing going forward? And the second question is about the medical products, new product. Are we going to get more color than that in the future?

Well, with regard to margins, predictability on margins is somewhat difficult because there's so many different variables in it. And we don't make specific predictions on it. I had hoped that we enjoy some increased margins as we increased volume and as the focus of our sales in terms of product mix became more and more focused on products that carried a higher margin. And that has certainly occurred in the first quarter. I think that going forward that that will -- is likely to continue in terms of that focus. I can't say that margins necessarily will continue to expand, but certainly they have to some degree at this point. And I think our -- that change in volume and product mix is likely to continue.

Yes, I'm happy. And I asked you about five times before, so I was glad to see them finally tick up a little.

Right. Thank you. And I'm sorry, I forgot your --

On the medical products, are we going to get more color than that? Are we looking for material sales on that or is it too early?

Well, I think that the -- there probably will be, with the company that we're making the product for, some information that will come out regarding that before too long. And at that point I think we'll probably have some additional color on it.

Okay. My final question, general question, could you see this company two to three years out being a $100 million revenue company? Is that kind of the game plan, just to keep growing it? Or is that a little too high at these levels?

From your mouth to God's ear.

Oh, you're doing a great job, believe me.

I'm not projecting that, but --

No, I know you're looking to grow the business.

We're certainly working in the direction of growth, that's right.

No. Congratulations on everything. We're very happy. You have a good weekend.

Thank you, sir.

(Operator instructions.) Simon [Barah]; private investor.

Good morning. Is there any seasonality to speak of in your business?

Very little any more. It used to be that we had pretty significant seasonality in the foil balloon business, which would have been higher levels of sales in the winter months and, surprisingly, lower level of sales in the mid-summer months. That has tended to reduce significantly and we don't see significant variations at this point that are focused on seasonality, particularly. There are other things that cause fluctuations, but not so much that.

Okay. And also, it looks like you have enough NOL carryforwards to last for quite a while and that the income tax rate is likely to stay fairly close to what it is now. Is that accurate?

Well, we do have significant NOL. So in terms of actually paying tax, it will be some time before that occurs. However, due to the complexities of the deferred tax asset and reserves against it and so on, which I won't get into here, the likelihood is that if things continue at the level that we are at in terms of revenues and profits, that we will begin to record some tax expense during 2011, even though we may not actually have tax payments that we have to make.

Okay, tell me if I'm correct. I'm looking at the press release. I'm a little confused. I see income before income taxes and noncontrolling interests of $702,000. And then the next line says net income of $116,000. Should that say income taxes?

That's the income tax line, yes.

That's the income tax line. You're right.

Okay. So there is some income tax at that -- 15% or whatever level right now. But you're saying in 2011 that's likely for GAAP purposes to increase to fairly close to the statutory rate. Is that accurate?

The taxes that are reflected today are taxes that are accrued for our foreign subsidiaries, Mexico and UK. There is no accrued taxes for the US operations at this point. So when you see an income tax expense accrued, that's what it relates to now. But what I was referring to was the -- next year we would be- -- we probably would begin sometime next year to record a tax expense on income related to the US.

And how much of your sales -- what percentage is domestic, roughly?

I don't have the number. But what would you say, Tim? I think it's probably, let's see --

75%?

75 to 80%.

Okay. Okay. Thank you very much.

Very good. Thank you.

(Operator instructions.) John [Hite]; private investor.

Hello, this is John. I've just got a question about your Ziploc sales. Is this an extraordinary quarter or is this going to continue on for the quarters to come, the amount of increase?

Well, I think that we don't -- first of all, we don't record or recite sales separately by customer. And, second, I think that the level of sales of a particular customer or a particular product is not something that we can predict or project with any specificity. Obviously, the results in the last quarter or two in that arena have been good and we're delighted with it. I don't know that we would be able to make any kind of projection or prediction on it.

Because I noticed in the past that -- first quarter I think of last year was good. And now sales fell off after -- I mean, originally you said you just gave it to, I guess, Johnson and they had a big increase because of the order. And after that the orders fell off for the rest of the year. That's all I was just wondering, if the same thing could happen now, or you don't know, or you can't say.

Well, I think that actually last year the pouch sales were relatively low in Ja- -- in the first quarter. And it was the year before that they were quite high. And I think to some degree in the year before reflected the fact that we were building for a product introduction. So I don't know that the comparison is any kind of reflection of what we could anticipate for the future. And we don't have specific guarantees or assurances in terms of what the sales will be. We're pleased with where they are and we're pleased with the trend of those sales as well.

Is there going to be a shareholders' meeting at some point in time coming up?

There will be. The shareholders' meeting is scheduled for --

June 4th.

-- June 4th? June 4th. And proxy materials will be going out momentarily.

Okay. I might see you there.

Great. We would look forward to that.

Okay. Thank you. Take care.

Thank you.

Simon Barah; private investor.

Hi, again. It looks like your operating expenses you're getting some pretty good leverage. Do you expect that -- let's say that your sales continue to increase. Do you see operating expenses increasing still at a slower rate, the way it has been?

Generally, the answer to that is yes. We -- there are some operating expenses that inevitably will increase as we grow in size. But we don't anticipate that we would have to make major changes in the structure of our operations in order to handle a level of growth, certainly not a level of growth that would -- in a reasonable range. So, the likelihood is that we will continue to experience some degree of leverage in that, if we experience growth. And we're hopeful that we will.

Okay. And if the medical product pans out, that shouldn't increase operating expenses any more than any other product would?

That is correct. You're right.

Okay. Thank you.

Okay. Thank you.

And with that, it appears we have no further questions in queue. I'd like to turn the program back over to Mr. Merrick for any additional or closing comments.

Thank you, everyone, for participating in the call. Obviously, we enjoyed very much being able to present to you the results that we had for the first quarter of this year. And we want you all to know that we're working very hard to do everything we can to maintain and improve them. Thank you much and we'll speak to you again in a quarter. Good day.

And that does conclude today's conference. Thank you for your participation.