Yunhong Green CTI Ltd (YHGJ) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corporation announces second-quarter 2011 and year-to-date financial results conference call. After prepared remarks we will be opening the call to a Q&A period. (Operator Instructions). As a reminder, this call is being recorded.

This conference may contain forward-looking statements as defined in the Securities Act of 1933, 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, 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.

It is now my pleasure to turn the call over to Mr. Stephen Merrick, CFO. Please go ahead, Mr. Merrick.

Good day, and welcome to CTI Industries' earnings conference call in which we will report on our results for the second quarter of 2011 and the six months ended June 30, 2011. My name is Stephen Merrick. I am the Chief Financial Officer of CTI and I will be presenting our report. I'm joined today on the call by Tim Patterson, our Vice President of Finance. At the conclusion of our report there will be an opportunity for those of you who would like to ask questions of us.

While our sales for the year to date have generally kept pace with 2010, we have experienced, particularly in the second quarter of this year, a decline in our net profit. I will talk about that in some detail, but first let me review the basic numbers.

For the second quarter our consolidated net sales were $11,965,000. This is a decrease of 7.7% from the second quarter 2010 net sales of $12,964,000. For the six months ended June 30, 2011, net sales were $24,662,000. For the same period of 2010 net sales were $25,375,000. So for the six months we had a very small decrease in sales of only about 2.8%.

From a profit standpoint in the second quarter we had a net profit of $13,000 compared to a net profit of $607,000 or $0.21 a share in the second quarter last year.

For the six months ended June 30, 2011, we realized a net profit of $310,000 or $0.10 per share compared to a net profit for the same period of 2010 in the amount of $1,206,000 or $0.43 a share.

The principal factor affecting our profitability for the second quarter this year and the six months is the decline we have experienced in our gross margin rate. As I indicated, our sales have held up reasonably well, and we remain optimistic about our sales potential for the remainder of this year and next as well.

Our operating expenses have actually declined compared to the same periods last year. What has changed is our gross margin rate. In the second quarter last year we had a gross margin rate of 23.2%. This year in the second quarter our gross margin rate was 17.3%. For the six months ended June 30, 2010, our gross margin rate was 23.3%. For the same period this year it was 18.4%. So for this year so far we have experienced a precipitous decline in our gross margins.

This decline in our gross margins has been caused principally by increases in our cost of goods, which in turn has resulted from significant increases in raw materials cost and also shipping costs. For example, our cost of raw latex in the first six months of this year was 47% higher than for the same period last year.

Actually, over the past three years the cost of raw latex has more than doubled. Similarly, the cost of plastic sheeting and resin, which are the principal raw materials for our foil balloon, pouch and laminated film products, has increased 19% this year compared to last. And our shipping and warehouse expenses have increased by more than 22% in the same period.

Due to this level and rate of these increases in costs, we have not, at least during the first six months of this year, been able to offset them by increases in our pricing or by making other adjustments.

We are engaged in intense efforts to address our margin issue, and to improve gross margin rates this year and in the future. And we believe that market conditions may also provide some relief on our costs.

Some of our efforts and market factors include -- we have seen some moderation in commodity pricing during recent weeks, including in the cost of raw latex and oil. And oil being a major factor in the cost of plastic sheeting and resin.

We're working on some product and production modifications, which we believe may result in reduced product costs. We are, where possible, increasing the pricing of our products to our customers, and we are introducing and promoting products which carry a higher gross margin rate.

We do believe we will achieve some improvements in gross margin during the balance of this year, and are working intensely to return to an overall gross margin rate equal to or better than the rate we achieved during 2010.

Let me turn now to a brief review of our product lines. Sales of our foil balloon product line for the quarter were $5,578,000, down about 11% from the second quarter of 2010 sales of $6,262,000.

For the six months foil balloon sales were $11,977,000, a decrease of about 1.6% from 2010 sales of $12,167,000 for the same period. In general, foil balloon sales continue at about the same pace as last year. We continue to pursue new sales opportunities in foil balloons in the US, Latin America and Europe, and we are beginning to see the development of some new sales in Europe.

Pouch sales for the quarter were $1,707,000, a decrease of 23% from pouch sales for the second quarter of 2010. For the six months pouch sales were $3,861,000 compared to the $5,266,000 last year, a decrease in that period of about 27%.

The decrease in pouch sales so far this year is due to decreased sales of pouches to SC Johnson. Sales of these pouches have tended to vary widely from period to period over the past couple of years, and results in one quarter are not necessarily indicative of future sales.

Pouch sales to other customers actually increased during the first six months of this year, particularly in our line of open top pouches designed to be utilized with pouch sealing machines for home storage of food products. And we are optimistic about the prospects for sales in this line.

Latex balloon sales have continued to be strong. For the quarter sales were $2,725,000 compared to sales of $2,318,000 in the second quarter of 2010. This is an increase of over 17.6%. For the six months latex balloon sales were $4,821,000, an increase of more than 16% over 2010 sales of $4,145,000 for the same period.

For the quarter our commercial film sales were $1,606,000 compared to sales of $1,905,000 in the second quarter last year. For the six months though revenues from the sales of commercial film products were up about 2.5% to $3,350,000 from $3,272,000 in 2010.

Let me turn now to some other information on our financial results and condition and developments. Operating expenses decreased slightly from the second quarter 2010 to the second quarter this year and for the six-month period as well. Moreover, operating expenses as a percentage of sales has continued to decline. For the six months ended June 30, 2011, operating expenses were 15.4% of sales compared to 16% of sales in the same period last year.

Our liquidity has continued to improve. Last year at June 30, our working capital was $3,524,000. This year at June 30, our working capital was $5,670,000. By June 30 of this year our shareholders equity has reached $3.75 per share.

Our bottom-line results this quarter were obviously disappointing. The cause is very clear, significant increases in raw materials and shipping costs we have had to incur. We are addressing these issues and we will resolve them. One quarter's results does not a year make.

Despite our disappointing earnings for the quarter, we believe our performance continues in a positive direction. For the first six months sales remain essentially at last year's levels, and we have another six months to go before the year's results are counted.

Our financial condition is strong and is improving each quarter. I can assure you that we are intensely focused on a strong second half.

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

(Operator Instructions). Juan Noble, Taglich Brothers.

Just a question one on your sales results for the quarter. I can understand the volatility on the SC Johnson line. That, as you say, isn't an ongoing condition. But the decline, for instance, in your foil balloons and your other products, could you speak a little bit about that? What do you see are the factors underlying those decreases?

Well, for the six months the foil balloon sales are essentially even with last year. So there really hasn't been any decline of any material amount at all. During the six-month period in the first quarter foil balloon sales were a little higher than last year. In the second quarter they were a little lower than last year.

Foil balloon sales don't show any trend -- any negative trend at all. And while we haven't seen, at least in the current basis, a trend that shows us a nice increase, we are doing a number of things, which are focused on expanding our foil balloon sales. And we have a lot of work going on in Mexico for Latin American sales. We have operations in both the UK and in Germany, which are focused on sales. And we have some new customers of substance in all of those areas. So I wouldn't characterize us as either have experiencing lower foil sales or expecting to experience lower foil sales.

With respect to sales of laminated film products, we are actually up a little bit for the year. And so really the only place that we are down in any significant amount is pouches, and that is attributable altogether to fluctuations in our sales to SC Johnson.

We do have many opportunities, which will become more clear as the year progresses, in our pouch business. And so we feel very optimistic about where our sales in the pouch arena will go. And those products tend to be higher margin products, which is what I was referring to in terms of addressing our margin issues.

That is helpful, Steve. If we could turn a second to the cost side now. You know, oil prices have been moderating. What effect is that having in the current quarter and what will be the outlook for the next quarter on that, if oil prices have moderated?

Also, I think you mentioned an increase in shipping costs. Is that related to the price of oil also or are there other factors at play there?

I would say principally that is an oil factor. I think what has happened, as you know, a lot of shippers are -- have imposed additional fees and costs associated with their cost of shipping.

Our shipping costs have gone up. They have gone up by over 20% for the first six months this year compared to the same period last year, and that is a significant impact.

It is -- I am not sure that is something that we can expect to moderate all that much. I think that is ultimately -- part of the issue we have in costs is not so much the question that costs increase, but the rate at which they increase. When you have a sudden and precipitous increase in your costs, you can't adjust for them immediately. If costs increase over time, you can tend to adjust for them, because you can adjust your pricing over time to some degree to deal with your additional costs, and you can make changes in the way you do things and produce things.

So one of the reasons we have been affected so much by these cost changes is not just because they have been significant, but because they have been very quick and very sudden, and have had that kind of impact on us that you cannot react in the timeframe that you would like to.

Okay, thank you, Steve, that's helpful.

[Michael Zunicka], Private Investor.

I had a couple more questions. The first was have you ever considered using commodities to hedge your risk in oil or other commodity prices?

Yes, we have, and we are. In fact, we are initiating a hedging program related to latex. One of the issues with oil is that the relationship between changes in the cost of oil and the cost of our sheeting and resin is not always direct and is not always at the same time. So sometime -- for example, while we have seen some moderation in the price of oil recently, we have not seen any moderation in the price of our plastic sheeting or resin, at least yet. So they don't all come at the same time, and so to some degree hedging in those things is a bit more difficult.

In the case of raw latex that is a commodity which does, by the way, tend to follow pretty closely changes in the price of oil. And it is something that we can hedge against. And it is -- that is a thing that we are looking at as a program that we're going to do.

Two other quick questions. Do you anticipate a special dividend this year with your -- increasing your cash position? And would you enter a buyback program if the stock continues to get crushed here?

Well, you know we can't -- we have done a buyback program in the past. And there have been several who have asked about that as something for us to consider. I can't necessarily comment. That is a decision that would have to be taken by the Board of Directors of the Company after looking at everything.

It is certainly -- repurchasing one's stock is certainly something that you may think about if you've got cash and you -- and your stock is not at a level that you think -- where you think the stock is a good buy. So I can't really comment as to whether we would do that. We have done it in the past.

Okay. How about the special dividends?

Well, I wouldn't anticipate a special dividend. I think we -- actually we have things to invest in to grow our business. And we have tended to use our cash as we have generated it for -- to reinvest in our business, which I think has been a major factor in our ability to grow at the rate we have over the last 10, 15 years. And that is something we do and continue to do, which is to invest in new equipment and plant and product development and that kind of thing.

Thank you.

(Operator Instructions). [Steve Schniper], StarBridge Investments.

A couple of questions. Following up on the -- some of the last questions the investor had regarding some of the hedging. Based on your anticipated hedging that you said you are just kind of starting to inch into, what is your guess as to the percentage of your inputs that you're going to try and hedge? And do you have an idea of like anticipated costs, what that might do to your gross margin, assuming you didn't have any real changes and the hedges weren't paying off for you, just what the anticipated cost of the base hedges are?

You know, I don't -- we haven't made a detailed analysis of what the impact would be. I can tell you that I did do a little looking at the issue of -- it wasn't a pleasant experience for me to do -- to study what the impact would have been had we hedged over the past year or two, but clearly it would have been a valuable thing for us to have done.

So it is something we are looking at. I think that one of the things that one has to look at on the hedging side is -- where is the commodity now. Is a commodity at a bubble tight peak or is it somewhere else? I think you have to think about that before you engage in a significant hedging program, which if you start hedging at a big peak you're going to lose money, not make it.

Now because you're having some difficulty, obviously, passing the pricing, so obviously you were talking about hedging some of the raw latex, and the other hedge you would do -- just some general oil hedging, offsetting shipping and some of the indirect costs, are the two hedges that you're really looking at or there are additional commodities that you're looking at?

I think the main one we are looking at is latex.

You know my position on the buyback, especially if it's breaking down below book. But I won't hammer you on that. On the dividend, has management and the Board given any thought to my suggestion of moving it from a semi-annual, even if they're leaving it at the level of smoothing it a little bit to a quarterly dividend?

Well, I have reported to the Board the communications, as I do -- and I appreciate very much getting communications from people such as yourself about these things. I have communicated to the Board and do communicate to the Board those kinds of communications about shareholder views as to whether we ought to be paying dividends, and if so, how much, and so on and so forth. And they are taken into account in the decisions that the Board makes.

I think we had started a dividend program a year or so ago, and announced it as a program. I can't speak for everybody on the Board, but I think the Board felt that having announced a program that it was appropriate to continue it, at least for a period of time.

What we pay in dividends, whether we pay dividends is something that is reviewed regularly. And we do take into account the views of people such as yourselves as about what we should do in that regard.

The current -- forgetting about any changes to it, but the current program as it is, there is nothing in the foreseeable future that would lead you to believe that that is going to change for the negative [at] results and what not?

You know, I think we look at this point, because we are relatively new at it, we look at it, I think, anew each time that we -- the time comes to think about declaring a dividend. So it is something that we will look at and reconsider on a regular basis.

Okay, thank you.

[Ivan Chow], Private Investor.

I was wondering if we could talk about your balance sheet for a little bit. You guys -- I was just wondering how much of the debt on the balance sheet is coming up in the next year and whether there is enough cash flow to cover that?

Well, the current -- what is shown on our balance sheet as our current portion is what is coming due in the next year. And we feel that given our situation -- our cash situation and our relationship between our current assets and our current liabilities, that we are well-positioned from a cash standpoint. We are not concerned really at all from a cash standpoint as we go here.

And unless we were to go into a significant and ongoing loss position, which I do not anticipate, our cash position is not going to become difficult.

Okay, great, thanks. I have another question regarding the customer mix for the foil balloon products. I know in the past you guys have talked about a large customer being the Family Dollar Tree Stores, and I was wondering if that has changed recently, and if you foresee any changes coming down the line?

The Dollar Tree chain has been a large customer, and a very successful -- they have been very successful at the balloon program, and continue to be. And they are and continue to be a large customer for us.

We are spending a lot of time and effort building our businesses, our balloon business beyond that, both in the United States and in Latin America and Europe. So our level of dependence on that is something that to some degree has declined, and as we grow in other areas will continue to.

Okay, great. Thanks.

At this time we have no further questions. I would like to turn the call back over to Mr. Merrick for any final remarks.

Thank you all for participating. We very much appreciate your interest and participation. And we look forward to having a more positive result to give you at the end of the next quarter.

Thank you very much, and good day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.