Yunhong Green CTI Ltd (YHGJ) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corporation announces fourth-quarter 2011 and year-end financial results conference call. 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 the 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.

As a reminder, today's call is being recorded. At this time I would like to turn the call over to Stephen Merrick. Please go ahead.

Good day and welcome to CTI Industries earnings conference call in which we will report on our results for the fourth quarter of 2011 and for the full year. My name is Stephen Merrick. I am the Chief Financial Officer of CTI, and will be presenting our report.

I'm joined on the call today by Tim Patterson, our Vice President of Finance and Administration, and by our Chairman of the Board, John Schwan. At the conclusion of our report there will be an opportunity for those of you who would like to ask questions of us.

Our earnings report was released first thing this morning, so most of you have probably already seen that information. From a revenue standpoint we kept pace with our record year of 2010. Revenues for the year were $47.171 million, just short of 2010 revenues of $47.748 million.

However, profits decreased from net profits after tax of $1.828 million in 2010 to $484,000 in 2012. Despite this decline upon analysis of financial performance in 2011 actually compared well with 2010. We will get into the specifics on that in a moment.

For the fourth quarter we generated revenues of $10.778 million compared to $11.701 million for the fourth quarter 2010. Profits were $155,000 in the fourth quarter compared to $379,000 for the fourth quarter of 2010.

While our net reported earnings were down for both the year and the fourth quarter, an analysis of them shows that in fact our financial performance in 2011 compared well with our 2010 results, and that factors affecting the results bode well for our future.

First, both for the year and the fourth quarter there were two important factors that affected the net reported earnings. First, the fact that in 2011 we recorded tax expense at the full rate, whereas in prior years the tax rate was much lower due to our utilization of a valuation allowance on our tax loss carryforward.

And, second, we experienced a very large increase in raw materials cost, particularly of raw latex, during 2011. Absent those two factors our results in 2011 would have been essentially the same, actually a little bit better, than in 2010.

In the fourth quarter we experienced factors which affected results in the fourth quarter, which we believe bode well for 2012 and beyond. For the full year our gross margin rate was 19.5%. However, due to moderation in some materials costs, particularly latex, our gross margin rate in the fourth quarter rose to 21.7%, which we believe reflects a trend to improve margins for 2012.

Also, in the fourth quarter we incurred expenses which affected results for the quarter, but which we believe will enhance our results in the future. These expenses included administrative, marketing, development and promotional expenses for our new Ziploc line of vacuum machines and pouches, together with investments in the setup of new customer accounts in the United States and in Europe.

In each of our principal product lines we have been investing in the development of our lines and sales in order to expand our Company's sales as a whole. In terms of foil balloons we remain one of the premier designers, producers and marketers and suppliers in the world. For the sixth year in a row the Dollar Tree chain has been our largest customer for foil balloons and has itself become one of, if not the, leading retailers of foil balloons in the United States.

During 2011 we developed several new chain customers in the United States and are experiencing growing sales in the US market. We have also made significant progress toward establishing foil balloons sales in Mainland Europe, and continue to be one of the largest suppliers of foil balloons in the United Kingdom. Both in Mainland Europe and in the UK we see significant opportunities for growth in foil balloons sales.

During 2011 we entered into a major new trademark license agreement with SC Johnson & Son, Inc, under which we are now entitled to market and sell household vacuum sealing machines and pouches under the Ziploc brand for use with those machines for the vacuum sealing of food and related items in the home.

We have initiated sales of this product line in the first quarter of 2012 and are extremely optimistic at the prospects for this line.

Latex balloon sales increased by over 18% in 2011 from $8.589 million in 2010 to $10.202 million in 2011. Most of this increase came as a result of increased sales by Flexo Universal, our Mexico subsidiary, to customers in Mexico and Latin America, but we also enjoyed increased sales in the United States.

We sell latex balloons throughout the United States, Canada, Mexico, Latin America and in Europe. Demand for these products, particularly in Mexico and Latin America, has been strong and we are identifying a number of new opportunities for sales in all of our markets.

In order to meet demand during the latter part of 2010 we acquired and assembled new latex balloon production equipment. This equipment was substantially completed and fully operational by mid-2011. And we estimate that this new equipment increases Flexo's latex balloon production capacity by approximately 70%.

One aspect of latex sales in 2011 that was most challenging was the dramatic increases we experienced in the cost of raw latex. In 2010 the average cost of raw latex to us was approximately $3.73 per kilo. In 2011 the average price was $5.07 per kilo, an increase of almost 36%. I will speak to the margin and profit impact of this next.

Gross margins overall were about 19.5% for the year 2011 compared to 22.2% for 2010. During 2011 raw materials continued to increase on an absolute basis and also as a percentage of sales. During 2010 raw materials cost represent 45% of sales. During 2011 these costs increased to 47% of sales.

To some degree, but not completely, we are able to offset these increases in raw materials cost by raising the selling prices of our products. The latex pricing increase just mentioned resulted in a reduction of our overall margin by 3%. We have determined to take action to protect ourselves from this type of fluctuation, and to that end in the beginning of 2012 we established a partial hedge against fluctuation -- the fluctuations that we experienced in 2011. This hedge consists of futures contracts on latex, which we believe will mitigate the effect if prices to increase again.

Other factors affecting our gross margins include the cost of other raw materials, labor and overhead components of production, pricing of our finished product and the mix of products sold. Other materials, labor and overhead did not increase materially as a percentage of sales.

Our operating expenses are up from $7.556 million in 2010 to $7.769 million, an increase of about 2.8%. These increases were due to anticipated additional costs related to growth opportunities.

We continue to work hard to maintain good controls on our expenses in an effort to remain as lean as possible without sacrificing performance. We believe these cost controls will contribute to our increasing profitability.

Our cash flow has been good. We generated net cash from operations in 2011 of just over $800,000. We invested $1.107 million in plant and equipment during 2011, a portion of that in maintenance of our existing equipment and some for equipment additions. We do anticipate maintenance capital expenditures at the level of about $500,000 in 2012. And while we do not have specific plans at this time, we do anticipate some expenditures for new equipment in 2012 to increase our production capacity.

Our working capital balance has increased from about $3.5 million at the end of 2010 to over $5.6 million at the end of 2011. We ended the year with cash of just over $300,000 and availability on our line of credit of over $2 million. 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 at our current level of sales. If opportunities require additional financing we believe that opportunities are available for that expansion.

Our stockholders equity has increased from $8.7 million at the end of 2009 to over $11.8 million by the end of 2011, representing a current book value per share of over $3.62.

While we do not provide guidance on revenues or earnings, we do believe that we have excellent opportunity to grow both revenues and profits in 2012.

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

(Operator Instructions). Joe Munda, Sidoti.

Real quick, Steve, you talked about the tax rate and that you guys for the first time are paying a full realized tax rate. For the year it came out around 45%. Is that something that we are looking at going forward or it is going to be more in like the 35% to 38% range?

Well, it is a combination of different things. It is the US rate and foreign rates, so there is a balance of things that affect that.

Okay, so it is a combined rate.

Right. We are actually still not paying tax in the United States. We have to record tax income -- or record an expense on our income statement, but we still have a tax loss carryforward. So from a cash flow standpoint we are not paying tax yet.

More on a P&L (multiple speakers) point.

Right. And in terms of the US rate, I think the full rate probably is -- we record it to the extent that we recorded a full US rate at about 40%.

Well, part of that is the increase in Illinois. Illinois' corporate tax rate went up considerably this year. That is why you are seeing a bigger effective tax rate this year compared to previous years.

Okay.

Well, that and the end of the valuation allowance.

Got you. And then, Steve, you didn't really touch on the Eurostores. I was just wondering how is the progress going there? You talked a little bit about Dollar Tree. How is the EuroShops going?

That is going very well. We are engaged in the chain -- that particular chain in Europe. It is not fully installed yet, but it is on the way to that being done -- and that is a particular chain. But we also are dealing with two or three other chains in Europe where we anticipate to be able to sell both foil balloons and latex balloons.

So in Europe do you think the expansion into these chains could match what you guys are doing with Dollar Tree?

You know, that is difficult to say. I think the foil balloon market in the United States is more mature than it is in Europe. And I think that -- I personally believe the opportunity for growth in Europe is very significant because of that fact, but is a little bit difficult to say exactly how that market will grow.

We -- I can tell you that in the EuroShop chain, it in the stores that we are in, they have -- my numbers are not exactly right here, but it is something like 1,000 different SKUs. And in the stores that we were in the foil balloon were in the top 10 in sales of the 1,000 units that they have.

How nice. Okay. And my other question, in regards to the Ziploc branding -- Ziploc effort with SC Johnson that launched -- when did that launched -- in the first quarter?

Yes. Well, we signed the agreement in -- I think it was October. And we began actually deliveries at the very end of the first quarter of this year.

Okay. Can you give us a ballpark on the revenue or the sales with that in the first quarter?

I don't really have a -- it will be relatively minor in the first quarter, because I think that for the most part our expectation for sales in that line will be more during the second, third and fourth quarter. But, John Schwan, who is our Chairman, and has been responsible principally for that is here and maybe he could speak to that a little.

I was just wondering, John, what is your revenue expectation from that -- I mean without -- I know you guys don't give guidance, but without going into specifics?

We made our first set of shipments to a major retailer. We anticipate the second major retailer shipping their trial in June, and it looks most positive.

Okay, and by most positive are you looking at $5 million, $10 million, is there some --?

Well, I think it is a little bit -- it is difficult, particularly when you're brand-new to give any specifics in terms of revenue expectations. I think a thing that one can say is that in that particular market, that is the machine -- the vacuum machine and pouch market, that the current levels is somewhere above $200 million in revenue overall in the total market. So I think that can give some idea of the potential for what we might be able to establish.

Well, is it exceeding your expectations as of right now?

It is doing very well. We are quite happy with it.

Okay.

John Banks, BG Capital.

Hey Steve, just a couple quick questions. Forget about fourth quarter, I am just moving forward, what is the gross margins on the SC Johnson product, just ballpark?

Well, we don't break our -- by our products for a variety of reasons, competitive and otherwise. We don't break down specific margins by product. I can tell you that our pouch products tend to be among our higher -- our highest in terms of gross margin. The machines will tend to be somewhat less in gross margin, but more than adequate.

Okay, my second question, just on a ballpark figure with the new products and all that, 2012 pretty conservatively should be your best year on record, right, revenues-wise?

From your mouth to (multiple speakers) (laughter). I think -- you know what, I think that our expectations are positive. And I think that we are -- we have -- we are optimistic in our expectations about where sales are and where they're going.

Okay. And I am would say with SC Johnson, you know, that you said it is a $200 million market, so if you could say, fair to say, what are you guys looking at 5%, 10% of the market?

Well, again, I think predicting what one is going to capture the market is not an easy thing to do. And I think it is also whatever prediction anybody would give probably wouldn't be accurate. However, one of the reasons that we are very excited about this opportunity is that the Ziploc brand is one of the premier brands in the world. I think it ranks -- John, what was it among the top?

Top eight.

Among the top eight brands in the world.

It is considered iconic or the new phrase is it is a Cadillac brand.

And, so, our feeling is that having the opportunity to participate with SC Johnson in that brand with the product is a significant opportunity for us and gives us the potential opportunity to capture a good percentage of that market.

Okay, great. So that is certainly good news. It is the most excited I have seen you guys in the last couple of years, so that is good news.

We are looking forward to this year.

Juan Noble, Taglich Brothers.

You mentioned that you were able to offset some of the increase in raw material prices by raising your prices. I was just wondering if you could help us understand how good your pricing flexibility is now compared to what it was like a year ago? And also what areas, or what particular markets are you enjoying better pricing flexibility?

My second question is a follow-up on your effective income tax rate. What does it look like it is going to be for 2012?

What would you say on the tax rate?

I would say it is probably going to be closer to 40%. It is going to be somewhere between 35% and 40%. In the US we have right around 40% between the federal and the state tax. But the other taxes that we have in the foreign affiliates is a little bit lower, closer to 35%. So it would be somewhere in between there depending on where the profitability comes in.

Unless our politicians decide to get intelligent and change the rates.

Add on pricing?

Enough said, huh? Well, we did raise prices, for example, during the year, during 2011 on latex balloons. And we are -- did have some success in achieving some increases in pricing on latex.

And I think the issue of pricing really is a product by product situation. In the pouch business, for example, we are able to generally maintain pricing levels that provide good margins to us. In the foil balloon business, just for example, pricing in Europe actually tends to be somewhat higher than it is in the United States, where it is considerably more competitive in that market.

So the opportunities for pricing flexibility vary depending upon the market and the customer and the particular product. But we did have some success during the year in modifying some prices. And we have also now experienced some moderation in our raw materials costs, so as you can see from the fourth quarter, our gross margins went to almost 22%, which is not far off from the year in which we kind of recognized our best margins in recent years, which was 23.6%, I think, something like that.

All right, thank you. That is helpful.

(Operator Instructions). At this time there are no other questions in the queue.

I guess we will conclude at this point, and thank you all for participating in the call, and your interest in our Company. We are, as I said, looking forward to 2012 with optimism and enthusiasm. Thank you very much for participating. Good day.

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