Yunhong Green CTI Ltd (YHGJ) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corp. second-quarter 2010 financial results conference call. Today's call is being recorded.

This conference may contain forward-looking statements as defined in section 27AI1 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 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.

Further developments and actual results could differ materially from those set forth in, contemplated by or underlining 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. At this time I would like to turn the conference server to Mr. Steven Merrick, Chief Financial Officer. Please go ahead, sir.

Good morning, everyone, and welcome to the CTI Industries earnings conference call in which we will report on our results for the second quarter of 2010 and the six months ended June 30, 2010. My name is Steven Merrick, I'm the Chief Financial Officer of CTI and I will be presenting our report.

I'll be joined on the call today by Tim Patterson, our Vice President of Finance, and we're pleased that we're also joined today by Howard Schwan, our President, and John Schwan, our Chairman. 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.

We're very pleased to report another extremely good quarter. For the second quarter our consolidated net sales were $12,964,000; this is an increase of 20% over the second-quarter 2009 net sales of $10,779,000. For the six months ended June 30, 2010 net sales were $25,375,000. For the same period of 2009 net sales were $20,382,000. So sales for the first six months this year increased by almost $5 million, which represents a 24.5% increase over the same period last year.

From a profit standpoint in the second quarter we realized a net profit of $607,000, or $0.21 per share basic, $0.20 fully diluted, compared to a net profit of $409,000 or $0.15 per share in the second quarter last year. This is an increase of over 48%.

For the six months ended June 30, 2010 we realized a net profit of $1,206,000, or $0.43 per share basic and $0.42 diluted, compared to a net profit for the same period of 2009 in the amount of $502,000 or $0.18 per share. This is an increase of 140% in that period.

I should mention that these net profit results do not include any book expense for US tax on our income due to our tax loss carry-forward and adjustments to our deferred tax asset reserve. We do anticipate that beginning in the third quarter this year we will begin to reflect a book expense for US income tax on our income.

Our results for this quarter and the six months reflect the fact that our sales in each of our product categories have been strong for both of those periods. Sales of foil balloon product -- of the foil balloon product line for the quarter were $6,262,000, an increase of 9% over second-quarter 2009 sales.

For the six months foil balloon sales were $12,167,000, an increase of 12.8% over 2009 sales of $10,876,000 for the same period. Most of that increase is attributable to increased sales to a principle balloon customer, although we did have some increases in sales to other customers as well.

Pouch sales for the quarter were $2,225,000, an increase of 41% over pouch sales for the second quarter 2009. For the six months pouch sales were $5,266,000 compared to $2,562,000 last year, an increase of almost 105%. Most of this increase is the result of increased sales to our principle pouch customer; we also experienced increases in sales of our zip bag line.

Latex balloon sales have also been quite strong. For the quarter sales were $2,318,000 compared to sales of $1,653,000 in the second quarter last year, an increase of almost 40%. For the six months latex balloon sales were $4,145,000, an increase of almost 30% over 2009 sales of $3,196,000 for the same period. Most of this increase is attributable to increased sales in Mexico by Flexo Universal, our subsidiary there, although we have also increased sales to various customers in the United States.

For the quarter our commercial film sales were up almost 16% from $1,644,000 in the second quarter last year to $1,905,000 in the second quarter this year. For the six months though revenues from the sales of commercial film products were down 7% to $3,272,000 from $3,519,000 in 2009.

While we do not provide guidance on revenues, we do believe that revenues for 2010 will continue to exceed revenue levels of 2009. We do anticipate generating new revenues during the second half of 2010 from the sale of vacuumable pouches for use with vacuum sealing machines, and of our new patient transfer bag product. We continue to develop new sales opportunities in each of our product lines and we expect to have new production capacity for latex balloons online by November.

Let me turn now to some other information on our financial results and our condition and developments. During the second quarter our gross margin rate was 22.2% and for the six months ended June 30 the rate was 23.3%. This compares to a gross margin rate in the second quarter of 2009 at 24.1% and for the six months at 22.9%. So for the year to date we've achieved a modest increase in gross margin of about 0.05%.

Variations in gross margin rate are affected by a number of factors including changes in product pricing, the mix of products sold, cost of raw materials and production expenses. On the plus side, as our volumes have increased, we have experienced some improvement in unit cost by allocating production expenses over a larger number of units.

On the negative side we have experienced increases in raw materials costs for films, resin and latex which are our principle categories of raw materials. A moderation in raw materials costs over the next year could result in overall improvement in our gross margins.

Operating expenses increased slightly from the second quarter 2009 to the second quarter this year and for the six-month period as well. However, operating expenses as a percentage of sales declined. For the six months ended June 30, 2010 operating expenses were 15.7% of sales compared to 17.3% of sales in the same period last year.

Our liquidity has continued to improve. Last year at June 30 our working capital was $2,055,000, this year at June 30 our working capital is $3,630,000. Last year June 30, our shareholders equity was $8,396,000, this year at June 30 shareholders equity is $11,203,000, about $3.73 per share and an increase of 33% in that time.

Clearly these are results and numbers about which we can all be very pleased and I can tell you that we greatly appreciate the effective dedicated hard work of our senior management starting with Howard Schwan, our President, and a number of others in our ranks who have labored so long and hard to make this happen.

Our recent success is not the result of some sudden stroke of luck or good fortune, it is the result of years of investment, application and effort which helps us to believe that these good results are sustainable. Naturally for all of us here and for those of you investing in our company the question arises whether we can sustain our levels of growth and success.

We cannot predict the future with any degree of precision, but I think we can provide information which can help us evaluate the likely future. First, we have to understand that, as with all enterprises, we have elements of risk which often cannot be predicted or controlled and which may affect our results significantly.

Some of these risks include -- first, a significant percentage of our sales are to a limited number of customers. Our top three customers represent 56% of our total sales and our top 10 customers represent almost 72% of our sales. For the most part we do not have long-term purchase agreements with our customers and the loss of a major customer or a significant decline in sales to one or more of those customers could have a negative affect on our results.

Second, raw materials costs represent approximately 44% of our revenues. We do not have agreements guaranteeing the availability or price of our raw materials. We cannot always adjust our pricing to reflect changes in raw materials costs. So, changes in the cost or availability of raw materials could have a significant negative effect on our results.

Third, we rely heavily on a limited number of members of our senior management for our operations. Loss of one or more of those members of management could have a negative effect on our ability to perform and our results.

Fourth, we rely on two plants to produce all of our products, one in the Chicago area and the other in Guadalajara, Mexico. Damage to one of those plants would negatively affect our ability to produce our products on a timely basis.

Recognizing those and other risks to which we are subject we believe we have the foundation of talent, technology, products, customer relationships and established channels of distribution which we believe will enable us to sustain the levels we've achieved and to continue to grow.

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 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 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've been working with a medical device supplier customer on an entirely new product, a patient transfer bag, and started deliveries of that product in the second quarter 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 a new distribution and sales for both our pouch and novelty products in Europe and Australia and we've developed a number of new customers and prospects in all of our markets. The rate of increase in our pouch sales has been particularly rapid this year and has essentially doubled in the first six months of this year compared to the same period last year.

We have three principle pouch lines of products which we are now producing and marketing. A zippered vacuumable pouch line which we make for S.C. Johnson & Son which they sell under the Ziploc brand; OUR own proprietary zippered vacuumable pouch line which we sell under the name ZipVac; and a line of vacuumable pouches designed to be used with vacuum sealing machines on the market, these are our 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 new sales opportunities in that line.

Turning to our foil line, we have been one of the principle 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've been fortunate to participate in their success as one of their principle 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, Latin America, 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 for the first six months is 12.8%.

We are engaged in a number of efforts and programs to generate new boil 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 balloon product line tends to receive less attention than our pouch and foil product lines, but it has 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 in 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're experiencing more rapid growth now. In the first six months of 2010 sales grew by almost 30% compared to the first half of 2009 reaching $4.1 million.

As with our foil 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. We anticipate that we will have new production online which will increase our production by over 50% by November.

So in sum, we are pleased to be able to bring you this strong report on our results and we are optimistic about our future. That concludes our report; at this point we will open the call for questions. Operator, may we have your assistance, please?

(Operator Instructions). Todd Brady, Oppenheimer.

Good morning.

Good morning, Todd.

Nice quarter, guys. A couple of questions here let's start with housekeeping balance sheet. You mentioned at the beginning of the call a tax rate, carry-forward tax loss changing. What type of tax rate should we anticipate going forward?

Well, we have not -- for the past two or three years, maybe more, we have not recorded on a book as a book expense in US income tax. That's because of the fact that we -- of our tax loss carry-forward and because we had a reserve against the deferred tax asset which was -- which would affect the reporting of income tax. We pretty much used up that reserve.

So, as a result as we have income in the future, even though we won't be paying tax for some period of time yet, because we still have a tax loss carry-forward, we will have book expense for income tax. And while we have some of that reserve against the deferred tax asset left to write off, which will keep the rate of income tax lower than the norm at least in the next quarter, at some point fairly soon we will be recording US income tax on our income at the normal US rate.

Okay, that's fair. Secondly, it seems and it appears that your pouch business is growing very nicely and it appears your visibility is pretty good looking in the back half of this year. That being said, can you just outline a little bit more your confidence in the visibility in that particular product line? And how does the margins different or, yes, how are they different from the latex balloons?

And my final question is on the operating expense line. It appears that business is good, you guys are grabbing new markets domestically and internationally. How should we think about the operating expense line looking out over the next six to 12 months? Should we see an increase absolute or should we continue to see revenues outpacing the increase in operating expenses? Thank you.

Okay, that's a mouthful. Well, in terms of visibility, we don't really provide guidance on revenues or net income. And we do rely heavily on our customers, our significant customers and their needs and on market conditions. So, it is not -- it is difficult to make predictions about that.

We think we do have, in terms of our existing business, it seems to be going well and there's a level of consistency to it. And there would be no reason I think to expect that that would not continue. And we also have some significant new opportunities in what we call our Universal Bag product line. So, we do anticipate that there will be some increased sales in that particular line. Quantifying it is difficult to do.

With regard to margins, our margins vary widely depending on the particular product, even within a product line. For example, metalized balloons, in some cases margin -- gross margin on a product may be as much as 45%, it may also be as low as 18%. So, there can be item by item a pretty wide variation. Latex balloons tend to be on the lower end of the margin range, although again there are some that we sell where there's a good margin. And some of our commercial film business is in the lower margin range.

With regard to the pouches, again those vary. They can range -- margin can range anywhere from a high of upper 40% down to the 20% range. So, it does vary and it varies within product classification. Obviously we strive to build margin, that's one of our goals here is to work very hard at maintaining and building margin. And I would say we're not entirely satisfied with a gross overall margin of about 20% to 23%. Our goals are higher than that.

And to some degree they're affected by the raw materials fluctuations. There have been wide fluctuations in raw materials costs over the past year. There have been significant increases both in latex and in films and resin. While to some degree we can offset increases in those costs by increasing our pricing, to some degree we can't. So, that does have an impact and I am hopeful that there will be some moderation in some commodities pricing over the next year, which would, if that happened, would help our margins.

As far as operating expenses are concerned, we have managed to keep them pretty much under control over the past several years and have been able to reduce operating expenses as a percentage of sales. There was some increase, absolute increase in operating expenses this year I think -- in the first six months I think it was up about 400 and some thousand dollars over the first six month last year. But still the percentage -- the operating expenses as a percentage of sales declined.

I think that naturally with levels of growth we will have some absolute increases in operating expenses, but I don't anticipate that the operating expenses are going to rise as a percentage of sales, at least in the immediate future. And they may in fact even continue to fall depending upon how rapidly our revenues grow.

We do not need to add significant operating expenses at this point even if we generate some new revenues. At some point in time as you grow the need will exist and we'll have to add expense to our operations. But at least for the immediate future it doesn't look that way.

One final question, then I'll get back into the queue. Your liquidity and working capital continue to improve, congratulations.

Thank you.

What does the Board and management plan on doing with this capital? Do you currently have a stock buyback program in place? What do you envision over the next 12 to 18 months assuming you continue to generate the type of cash flow from operations that you are, what's the best use of cash on behalf of shareholders? Thank you.

We actually did announce a buyback program -- it was probably nine months ago, something like that. We bought some shares back, we have not bought all the shares that were in the program. That buyback program was entered into at a time when the price per share was considerably lower than it is now and I think it's -- we probably will not use a considerable amount of cash for stock buyback.

We are investing in the growth of our business and capacity. We are -- as I said, we're building now new capacity in Mexico which is going to increase our capacity by as much as 50% in terms of latex balloon production. We have -- we're investing in some upgrades of our equipment at facilities in Barrington now and I think that -- I think I like the idea of being and maintaining liquidity.

So, I think that to some degree building our liquidity even more is a good idea. But to the extent we invest it, I think the likelihood is that for the most part it will be invested in plant and equipment and growth.

Thank you, keep up the good work.

Thank you.

(Operator Instructions). [John Banks], [BNG Capital Management].

Hey, guys, great quarter.

Thank you, John.

Just one quick question. I remember last quarter we were talking about a medical device product that you're looking to release maybe with a partner. And I just wanted to see if you can give us some color on what's going on there?

We have begun -- we've been developing that with a customer for more than a year. We began deliveries of the product in the second quarter. It is a -- best described as a patient transfer bag, we provide it to a significant medical devices supplier manufacturer. It's used in the emergency vehicles, hospitals for the quick and easy movement of patients from one -- like from a gurney to a bed or from a bed to another bed, that kind of thing. And like I said, we do have it developed and we are manufacturing it now.

Will the revenues this year be non-material then?

I don't know that we can predict.

The second quarter they were immaterial.

Right. In the second quarter they were not material, right. And I don't know that we can predict -- we're pretty excited about the product, we think it's a very good one. And it's really very consistent with our business, that is helping to develop proprietary products, proprietary film products for customers and this is one we've done. And we don't really know what the numbers are going to look like yet, but we're very excited about it.

Are the margins considerably higher than your other businesses right now?

Margins are good on the product, yes.

Okay, great, congratulations. As a long-term shareholder liquidity and everything looks great. Congratulations.

Thank you very much.

(Operator Instructions). There are no questions in queue.

All right.

Actually we do have another question from Mr. Banks.

Just a quick follow-up. I was just wondering if you guys decided ever to hire a PR firm or investor relations firm? You guys are doing great, I just wanted to see if you're looking to do something like that?

Well, actually we do have a firm in Chicago who provides IR services to us and we think does a good job. And so we are doing that and I think we're making an effort to present ourselves effectively to the marketplace and to communicate in an effective way.

Okay, thank you so much.

Michael Markowski, Overbrook Capital.

Hey, guys, great quarter, good job.

Thank you.

You mentioned on the conference call earlier that you had some new revenue streams coming in or one new revenue stream coming in in the second half. Can you expand on that a little bit and give us a little more detail on what that is?

Okay, well, there are a couple. Like I said, we started to -- actually there are several. One, we've started to produce the base and transfer bag and to deliver that. As Tim mentioned, the volumes in that were not material in the second quarter, but that is -- has been started.

Second, we do have some opportunities with regard to our -- what we call our universal or open top pouch which is a product that's used with existing machines that draw a vacuum -- put the food in the pouch, put the pouch in the machine, the machine draws a vacuum and seals the pouch. We do have some opportunities in that arena and anticipate that there will be some added revenues in the second half in that area. We -- I can't be specific about the specific customers at this point, but we do anticipate that there will be some sales.

We're having some success and one of the things we've done is to be very aggressive in working to develop sales at a number of different locations, not in Mexico where our foil balloon sales have expanded significantly over the past year and a half. Their sales are growing and those are in Mexico and Latin America.

We have developed some new customers in the United States for both foil and latex balloons. We have some new commercial film business that we're working on, we're developing relationships and potential customers in Europe including the UK and the continent. So there are a number of things that we're working on. We're trying to be very aggressive in our efforts to build sales.

Okay, thank you for that. And could you comment too on seasonality? I mean, it's hard to really get a trend for seasonality in your business --

Yes.

-- your quarters don't seem to fluctuate too much. With the new business coming in and the new product launch, can you talk a little bit about that? Is there going to be any seasonal flow or do you guys feel like the quarters are going to kind of all be in that same area?

We used to have a fair amount of seasonality where -- when we relied on sales through distributors and principally foil balloon sales. And typically in the third quarter sales were slower than they were in, for example, the fourth and the first quarter. That seasonality has been muted significantly in recent times because in our pouch business, for example, that's not particularly seasonal. And commercial films business is not particularly seasonal. And even in the novelty balloon area, by reason of the nature of our customers the seasonality has been reduced.

So there still is I think historic -- in recent history there still is some level of seasonality that's consistent with the -- what was before where typically the three quarters, the fourth quarter, the first and sometimes the second would be stronger than the third, but that's -- in terms of sales, anyway. The extent to which that's the case now I think is considerably lessened to the extent that it exists at all.

Okay, thank you. Good job.

[Simon Buroge], private investor.

Good morning. A further question on the tax rate. Once you are fully tax paying, do you have a gauge when you combine federal, state, foreign for whatever percentage of income that is, whether you're likely to be around 38%?

Yes, we would be. But let me repeat again that actually we will be recording book expense for taxes in the next year or so or next -- starting in the next quarter, but we will not actually be paying income tax because we still have a significant tax loss carry-forward which exceeds $3 million.

Right. But for book you expect total for all the different jurisdictions to be about 38%?

I think that's pretty close to the amount. It may be -- we'll still have some benefit from our -- of the reduction of our valuation allowance and our deferred tax asset next quarter. But after that we should reach that level.

Thank you.

(Operator Instructions). And there are no other questions in queue.

Thank you, everyone, for participating in the call and for your interest in our company. We're very pleased and excited about where we are and we think where we're going and we're very pleased at your interest. And we welcome communications, questions. One of our goals is to be effective at communicating with our investors and with the investment community. So please call on us to the extent that you would like. Thank you very much and good day.

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