Yunhong Green CTI Ltd (YHGJ) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to CTI Industries Corporation announces third-quarter 2011 and year-to-date financial results conference call. After prepared remarks, we will conduct a question and answer session. (Operator Instructions). As a reminder, today's conference 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 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 conference over to Mr. Stephen Merrick. Please go ahead, sir.

Good morning and welcome to CTI Industries earnings conference call in which we will report on our results for the third-quarter 2011 and the nine months ended September 30, 2011.

My name is Stephen Merrick. I am the Chief Financial Officer of CTI, and we will be presenting our report. I'm joined today 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.

First, let me report the basic numbers. In terms of sales, we are running a bit ahead of last year. For the third quarter, our consolidated net sales were $11,731,000. This is an increase of 7% over third-quarter 2010 net sales of $10,962,000. For the nine months ended September 30, 2011, net sales were $36,393,000, just slightly better than our net sales for the same period last year of $36,337,000.

From a profit standpoint, even though we have had some improvement in our gross margins compared to earlier periods of this year, we are still affected by significant increases in our raw materials and shipping costs. As a result, due to those effects and an expense we incurred in relation to our interest rate hedging, in the third quarter, we realized a net profit of only $18,000. Last year in the third quarter, we realized a profit of $243,000 or $0.08 per share.

For the nine months ended September 30, 2011, we realized a net profit of $329,000 or $0.10 per share, compared to a net profit for the same period of 2010 in the amount of $1,449,000 or $0.49 a share.

Certainly our biggest issue and concern is profitability since this year so far we are experiencing significantly reduced levels of profit on sales which are equal to the sales we generated last year and on which we earned a much greater level of profit.

I do want to mention that in terms of income from operations for the third quarter, our results are not so far off from the third quarter last year. In this third quarter, our income from operations was $324,000 compared to income from operations in the third quarter last year of $509,000.

Our net income this quarter was affected by an expense we incurred caused by the decline in value of an interest rate hedge we initiated in July this year. That decline in value for the quarter was $158,000, which was recorded as interest expense. We do not anticipate incurring similar expense in future quarters.

Most of the pressure on our profitability, however, comes from the fact that we have experienced significant increases in our costs of raw materials and shipping expenses during 2011. For example, the cost of raw latex over the first nine months of 2011 increased by 28.8% over the costs we incurred during the first nine months of 2010. The cost of plastic sheeting and resin, which are other principal raw materials, were on average 19% higher during the first nine months of this year compared to the same period in 2010. And our shipping costs have increased by more than 28% in the nine months this year compared to last year. These increases in our costs and the rapidity of the increases have had a significant impact on our margins.

For the first nine months of 2010, we had a gross margin rate of 22.5%. So far this year through the third quarter, our gross margin rate has been reduced to 18.7%. That difference alone represents a reduction in $1,383,000 in our income from operations for the nine months.

We firmly believe that over time we will be able to return to gross margin rates consistent with, if not better, than the rates we experienced in 2010. In fact, we have already begun to experience some improvement. Our gross margin rate in the second quarter this year was 17.3%.

In the third quarter, the gross margin rate improved to 19.3%, a full 2 point margin increase. We are taking action to improve our gross margins, and market conditions may also help to improve our margins as well.

Here are some of the actions we are taking and factors we believe will help. First, as and when market conditions permit, we are increasing the selling prices of our products and modifying sales arrangements and terms. We have affected several price increases and term changes in the third quarter and plan additional increases when possible.

Second, we are working to change the mix of products we sell toward products which carry higher margins. In each of our product categories -- foil balloons, latex balloons, pouches and film products -- there are opportunities to configure or package products or to change the mix of products so that the margin on the product is improved.

Third, we are introducing and plan to introduce new products which carry generally higher margins than some of our existing lines.

Fourth, in some cases we are able with major customers or by contract to increase the selling price of some products based upon the increase in raw materials costs.

And finally, we are working on ways to manage the costs of some of our raw materials, including by changing our sourcing and by hedging transactions. We have begun to experience some moderation in raw materials costs, particularly with respect to latex.

Let me turn now to our sales results and prospects. Sales of our foil balloon products continue generally at about the same levels as 2010. In the third quarter, foil balloon sales decreased by 0.007% over the third quarter of 2010 from $4,204,000 in the third quarter of 2010 to $4,173,000 in the third quarter this year.

For the nine months, foil balloon sales were down about 1.3% compared to last year from $16,370,000 to $16,150,000 for the nine months this year. Sales to our principal foil balloon customer, Dollar Tree stores, have increased again this year from $9,573,000 for the nine-month period last year to $10,272,000 for the same period this year.

Sales of foil balloons to other customers declined a bit in the nine months from $6,790,000 last year to $5,878,000 this year. Most of that decline came about due to a decline in sales to a principal customer in the United Kingdom.

In the United States and in Europe, sales of foil balloons have shown increases. In both the United Kingdom and Europe, we have recently acquired new customers whom we believe will represent increased sales in those markets during the fourth quarter and 2012.

Latex balloons sales have been strong. For the quarter, sales were $2,961,000 compared to sales of $2,523,000 in the third quarter of 2010, an increase of over 17.4%. For the nine months, latex balloons sales were $7,782,000, an increase of 16.7% over 2010 sales of $6,668,000 for the same period. These growing sales of latex balloons are occurring in Mexico, Latin America, the United States and Europe.

Pouch sales for the quarter were up sharply, reflecting our growing business in vacuum pouch sales. For the third quarter this year, pouch sales reached $2,424,000, which is a 69.4% increase over third-quarter 2010 sales of $1,431,000. For the nine months, pouch sales were $6,284,000 compared to pouch sales of $6,697,000 for the same period last year. Our growing pouch sales are based upon the introduction of new pouch products this year, and we are planning the introduction of additional new products for 2012.

For the quarter, our commercial film sales were $1,907,000 compared to $2,538,000 in the third quarter last year. For the nine months, revenues from the sales of commercial film products were $5,258,000 compared to $5,811,000 for the same period last year.

While we do not provide guidance on revenues, we do believe that we will achieve revenue increases in each of our foil balloon, pouch and latex balloon products categories over the next 15 months. In foil balloons we are acquiring new customers and anticipate increased sales in the United States, the United Kingdom and Europe. We plan to introduce new pouch products, which we believe will generate enhanced revenues, particularly in 2012. And we believe the trend of increased latex balloons revenues in Mexico, the United States and Europe will continue. Let me turn now to some other information on our financial results and conditions and developments.

Operating expenses increased slightly from the third-quarter 2010 to the third quarter of this year, but declined for the nine-month period compared to last year. Operating expenses as a percentage of sales have continued to decline. For the nine months ended September 30, 2011, operating expenses were 15.8% of sales compared to 16% of sales in the same period last year. Our liquidity has continued to improve. As of September 30, our working capital was $5,012,000, and our shareholders equity was $11,700,000 or about $3.72 per share.

That essentially concludes our report, but let me just say that we see no reason that CTI cannot achieve both continued revenue growth and a return to strong profitability. As I indicated, we believe we have very good prospects to maintain and increase our foil balloon, pouch and latex balloons product lines. Our issue with profitability has come from having to go through a period of massive commodity price inflation. Hopefully that period of rapid inflation and the price of commodities has come to an end, which will permit us to rationalize our product costs and pricing so that we can return to solid margins. In any event, though, we do have in place strategies which we believe will enable us to improve our margins and ultimately our profitability.

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 quick question on your comment regarding increases in selling price and modification of your selling terms. Could you give us a little color on exactly what you mean by changing your sales terms?

Yes, I can give you an example. The issue of margin as much as it relates to the raw materials costs and some of our costs is kind of a customer by customer issue. And, for example, with one of our customers this year, that is a fairly significant one in the foil balloon business, we essentially change the terms in which we would participate with them at a major retail customer so that the net amount we would receive on sales after all the expenses related to the sale increased substantially. It was not so much an issue of changing the pricing, but it was an issue of changing the share of the revenue that was generated from the sales, and it has resulted in a significant increase in our margins on that customer.

Okay. Thanks, Steve. That is helpful.

(Operator Instructions). Joe Munda, Sidoti & Co.

A couple of quick questions. What were the operating expenses? Can you break it out for us -- general, administrative, selling and advertising and marketing?

Sure. For what? For the third quarter?

Yes, for the third quarter.

Okay. In the third quarter, the general and administrative were $1,295,000. That is compared to $1,239,000 for 2010, for the third-quarter 2010. Selling was $234,000 for the quarter compared to $113,000 in the third quarter last year. For the nine months, selling was $655,000 compared to $671,000 in 2010, so it is actually down for the nine months. Advertising and marketing for the quarter was $417,000 compared to $389,000 in the third quarter last year. The big increase in expense was that our interest expense went up from $159,000 in 2010 to $319,000 in this year --

But that is the one-time increase, right?

That relates to the issue of the interest rate swap where because of the fact that interest rates did not go up, the value of our swap went down, and we had to record that as expense.

So how do we look at that going forward? Should we look at it more in the $150,000 range or this new range of $300,000 --?

No, we would expect that the -- well, a couple of comments on that. We entered into an interest rate swap in the first of July or right at the beginning of the quarter. The effect of that is to fix our rates. Rather than having floating rates, we fix our rates, and I think the fixed rate on the amount covered by the swap is 4.73%.

And so we actually pay on a current basis a little more -- if interest rates stayed the same, we were actually going to pay a little more than we would have paid because we are, in effect, paying a premium for that swap agreement. However, from now on to the end of the swap period, we end up recovering that $158,000. We cannot say what quarter or month we will recover it, but over the period of the swap, which was 38 months, I think, or something like that, we will recover that $158,000.

Okay. And that other income that you guys -- that is the currency gain?

Right. There was some currency gain, a small amount of currency gain in the period. Right. We had a $35,000 gain.

Okay. What was CapEx for the quarter?

I don't have the CapEx for the quarter in front --

Or for the nine months?

For the nine months, the CapEx was -- hold on just one second, and let me give you the exact number. CapEx was about $700,000 -- almost $800,000, $796,000. That compares to $850,000 last year for the nine months.

So it was $800,000 for nine months, right now?

Right.

Are you guys expecting to add CapEx going forward? Is it safe to assume $1 million, $1.2 million for CapEx this year?

Yes, I would say in that range. We may have -- probably in the fourth quarter I don't expect all that significant CapEx. We will have some CapEx on some new programs in 2012.

And that number is going to jump up in 2012?

Yes, I think it will.

Does it go over $2 million?

Probably not, but I would say we don't have a specific number. We have got, but we do have some programs that we are engaged in that will have some CapEx in them. To some degree, what the amount of the CapEx will be will vary depending upon decisions we make about what we are going to go forward with or not as the case may be. But there will be more CapEx in 2012 than there was in 2011.

Okay. All right. I just have two other quick questions. You talked about sourcing. What new sourcing opportunities are you guys seeing? Are you looking more towards Asia, or are you just getting better pricing now that commodities have come down a little bit -- commodity pricing?

Well, that is -- again, it depends on the particular commodity. In the case of plastic sheeting and resin, we are engaged in a pretty intensive effort to identify alternative sources of supply and are on a regular basis identifying both sources and particular items, which that is particular sheeting components, for example, which may result in more efficient costs.

In the case of latex, we are exploring the issue of hedging, and we are also looking at the possibility of identifying some alternative sources of supply, which if we did, the purpose of it would be to provide us with a more consistent assured sources of supply and one where the pricing would be more level.

Okay. And what is the price right now for latex?

Well, right this moment there is a difference between the futures price and what we pay. As of last week, we were still paying about $5 per kilo for latex, which is considerably above where the futures price is right now.

Where is the futures price right now?

You know, I'm not 100% sure. I think it is in the $4 range as I recall per kilo, but I would have to look at -- (multiple speakers) much lower than the $5, I can tell you that.

So are you guys now out in the futures market buying up -- buying it up at a lower price?

In a very small way. We are -- at this point we are just exploring the possibility of it and testing to see the extent to which there is an issue of liquidity of the futures markets. There is the issue of the extent to which spot prices are really consistent with futures prices in terms of the way they move. So we are doing -- on a very limited basis, we are beginning the process of looking at hedging. I think that I can tell you that my initial reaction to that is that if in a market in which latex prices were increasing rapidly, hedging would be a good thing to do. In a market -- otherwise, I don't think it particularly pays.

Okay. And my last question, you mentioned you don't provide guidance, but you said you expect growth from metallized balloons, pouches, latex. You did not touch on films. What are you guys seeing there? You are seeing kind of a slowing there. Is that safe to assume going forward as well?

Well, in the film business, in excess of 90% of our film sales are with one customer. And that customer has been a long-term customer who has been consistent with us, and obviously there has been variance over the years in terms of the volume from month to month and quarter to quarter. But that relationship continues, and we do have in the film area we are working on and looking at opportunities for additional business. And, in fact, there are some significant opportunities.

I did not reference the likelihood there of specific increases in the near-term future because while there are those opportunities they have not gotten to a point yet where I would be in a place to say that it looked to me like the numbers were going to increase in relatively short order.

But you are in, like, the negotiation process?

Yes, we are working on a couple of projects that may have some future volume to them, but I don't think they are not -- they are not projects which I would certainly want to say now that there are specific future results that we are going to have. In the other areas, there are specific things that are ongoing and that are underway, which indicate, again, give support to the idea that as we stated in this call that we anticipate that we will achieve some increases in revenues.

Steve Schnipper, Stourbridge Investment.

Going to the comment you made about toying in the futures market a little bit on the latex, have you made any other progress on the hedging that you referenced on last quarter's conference call?

No, the only thing that we are looking at from a hedging standpoint is the latex. I cannot -- even though we are beginning to look at it and to explore it, I cannot say that we are fully engaged in it by any means. And we have not viewed the interest -- and, of course, we are engaged in interest rate hedging because we do have the swap agreement that we entered into. So, in that case, we are doing hedging.

In terms of currencies, we have not felt that hedging was particularly valuable to us because at least on a current transactional basis, as you see, our variance, our currency gains and losses are very small.

That's pretty much what I had. Thank you.

(Operator Instructions). Art Gisonni, Futures Consulting.

Earlier on the call you mentioned new customers in the UK and Europe and also some new pouch customers here in the US. Can you give us a little bit of detail on what type of distribution and forecasts you have with these clients?

Well, as I said, we don't give guidance or specific forecasts on them. We are engaged in the development of new customers for our balloon products in the United Kingdom and in Europe, and we do have some developments in that arena and reason to believe that the volumes that we are going to achieve there will increase. And there are some specific customers that we are engaged with where we have already started doing some business and where there is indications of additional business both in the foil balloon business and in the latex balloon business.

They tend to be -- the nature of the customers tend to be retail chains and generally discount chains.

Okay. And then on a Company note, are you looking to do any stock buybacks or purchasing on your own?

The Board has not made any determination on that. There has not been any action taken at the Board level, and if there is, it certainly would be something that we would announce.

(Operator Instructions). With no questions in the queue, I would like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you all for listening and participating in the call. We appreciate that, and we are happy that we are able to report that we are beginning to make some progress in terms of improving our margins and hope to be able to present a strong report for you at the end of the year.

Thank you very much and good day.

Ladies and gentlemen, that does conclude today's conference. We thank you all for joining.