Yunhong Green CTI Ltd (YHGJ) 2012 Q1 法說會逐字稿

Good day and welcome to the CTI Industries Corporation announces first-quarter 2012 and year-to-date financial results conference call. 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 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.

At this time, I would like to turn the conference over to Stephen Merrick, Executive Vice President. Please go ahead.

Good morning, everyone, and welcome to CTI Industries' earnings conference call in which we will report on our results for the first quarter of 2012. My name is Stephen Merrick. I am the Chief Financial Officer of CTI and will be presenting our report.

I am joined today on the call by Tim Patterson, our Vice President of Finance and Administration, and John Schwan, our Chairman. At the conclusion of our report, those of you who would like will have the opportunity to ask questions.

We're off to a very good start in 2012. Sales were up 8.7% over the first quarter of 2011 to $13.8 million, the first quarter this year, which I believe is the highest quarterly sales level in our history. Profits were up 31% from $297,000 in the first quarter last year to $389,000 in the first quarter this year. Per-share profits in the first quarter this year were $0.12 compared to $0.09 for the first quarter last year.

It is particularly pleasing to report that we achieved these levels of sales and profits without significant contribution from two areas in which we do anticipate contribution later this year. Sales from our new line of ZipLoc brand sealing machines and associated bags and rolls and from anticipated novelty balloons sales in Europe and the UK.

Another important factor in our improved results is that our gross margin levels increased significantly over the first quarter 2011. This year in the first quarter, the gross margin rate was 22.4% compared to the first quarter 2011 in which the rate was 19.5%. This increase in the gross margin rate was the result of a number of factors, including, first, moderation in the cost of some of our raw materials, particularly latex; second, increases we were able to achieve in the selling prices of some of our products; and third, a shift in the mix of products sold to products which carry a better margin rate than some others.

Gross margin rates are difficult to predict but we believe over this year we will be able to achieve better gross margins than we did in 2011 due to the factors I just mentioned, as well as the fact that we anticipate sales of some higher margin products later this year.

Let me get to some specifics on our product lines. With respect to foil balloons, which continue to represent about half of our sales, revenue was up in the quarter by 8.6% from $6.399 million in the first quarter last year to $6.951 million in the first quarter this year. Most of the increase resulted from increasing sales to a number of customers in the United States. Usually, the first quarter represents our strongest period for foil balloon sales, but we do anticipate that we will be rolling out sales to some new retail chain customers in the UK and Europe during the balance of the year, which should enhance our foil balloon sales levels, particularly during the third and fourth quarter.

In the first quarter this year, sales of latex balloons were up 31.4% over the first quarter last year from $2.096 million to $2.754 million. As we have reported previously, due to strong demand for our latex balloons, we invested in a new latex balloon production machine which has increased our production capacity by more than half. Sales in the first quarter this year reflect the fact that this equipment is now in full production and is providing us the capacity to meet demand. Latex balloons revenues are up, particularly in México, but are up also in the United States, and we are anticipating increased sales in the UK and Europe as well.

With respect to our laminated film products, revenues were down a bit in the first quarter this year compared to the first quarter last year from $1.745 million to $1.661 million.

Turning to our pouch sales, revenues overall were down by 10.4% in the first quarter this year compared to the first quarter last year from $2.154 million to $1.930 million. This decrease was the result of a decline in our sales of zippered pouches to a principal customer. However, our sales of open top pouches and rolls, the products which are used with vacuum sealing machines, increased by 55% from $667,000 in the first quarter last year to $1.033 million in the first quarter this year. These pouch revenues do not reflect significant sales of vacuum sealing machines, pouches or rolls, which we have introduced under the ZipLoc brand. This line was just introduced earlier this year. While we have initiated sales in two principal chains and are optimistic about our prospects, we do not anticipate significant increases in revenues in this line until the third and fourth quarters this year.

On the expense side, our operating expenses have increased compared to the first quarter last year by about 20% or almost $400,000. We do anticipate that, for the balance of the year, our operating expenses will be increased compared to last year. These increases reflect additional amounts we are investing in marketing, selling, and advertising expenses related to the introduction and support of our new ZipLoc brand vacuum sealer product line and for our novelty products as well. We firmly believe that our investment in this new line and in our sales and marketing efforts will be justified by the results.

Our financial position remains strong. As of March 31, 2012, we had over $366,000 in cash and cash equivalents and approximately $2.4 million available to us under our line of credit. Also as of March 31, our current assets exceeded current liabilities by $6.3 million. However, we do anticipate significant cash needs over the balance of the year to support our investment in our new product line, new sales, marketing, increased investment in inventory, and some capital investments to support our production capacity.

We expect to continue our efforts to build sales during the balance of this year and beyond. We expect those efforts to include a principal focus on placing our ZipLoc brand line of vacuum sealer pouch and roll products with major retail chains throughout the United States; concluding arrangements with retail chains and outlets in Europe and the UK to build our foil balloon and latex balloons sales there; pursuing new and expanded opportunities in the United States for our novelty products, both foil and latex; and pursuing several new opportunities we have for our film and pouch products.

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.

Nice quarter. Keep up the good work. A quick question. Can you just outline a little bit further? You're talking about operating expenses moving up through the balance of the year. You are also discussing cash and you will need significantly more cash as you are building out and growing for the balance of the year. Any particular -- can you just talk a little bit more about that and how you guys plan on achieving these goals? Based upon where your stock is currently and the tone of business and what your cash and credit lines look like, how that all impacts what we will be talking about a year from now? Thanks.

That's a mouthful.

Happy Monday morning.

Let me try to respond on that. We do expect that we will have increased operating expenses mostly in the area of selling expenses and marketing expenses, which we are incurring now and expect to continue to do. Those include such things as new personnel who are engaged in our activities in relation to the new product line we have and various costs, advertising and marketing costs, related to that product line, as well as efforts we are making, both domestically and in Europe and the UK, to build our sales there.

We do expect that we will have additional cash flow requirements over the year because, to the extent we are successful in building our sales, we're going to be investing significantly in new inventory, which obviously has a cash demand component to it and other operating kinds of expenses that relate to building of sales. For example, when we install a rollout to a major chain, we will typically have some fairly significant expenses related to the rollout into the chain such as displays, advertising materials, and so on that relate to that activity. So, all that has cash requirements to it.

We do expect that -- the good news is that we have expectations about sales and the associated news is that those carry with them some cash needs and demands.

We are looking at -- we do have good credit lines with our current -- with our bank, and we are evaluating and looking at expanding our credit facilities so that we will have availability of cash as needed. We do, assuming that we are successful in generating new sales from the new product line and from other products as well in the novelty arena, we do anticipate that those will generate good cash flow as we move along so that, a year from now, we would anticipate that our cash position would be strong if those sales materialize and we're optimistic about them.

Steve, one quick follow-up. You are anticipating a stronger back half of the year in the novelty balloon segment in Europe. Talk a little bit more about what you are seeing in Europe currently, your level of excitement and this Q3, Q4 you see a nice ramp? Give us some color there. Thanks.

we expect that, throughout the year, that our novelty sales will be reasonably strong. Typically in the foil balloon arena, the strongest sales may be in the first quarter. However, we do think that we will see some additional revenues out of in particular Europe and the UK. We are engaged currently in installations and rollouts to two or three new chains, both in the UK and in Europe. Our expectation is that the revenues from those rollouts will be more focused on the third and fourth quarters than in the second, but we do anticipate that we will see some good, new revenues from that activity.

One final question and then I'll let somebody else jump in. Would it be fair to say that, as of this date, Monday, May 7, 2012, you are more comfortable with your expense, your operating expense side of the business and the visibility and growth that you are seeing currently and for the balance of the year than you were last year at this particular time?

Well, I can't remember. It's hard for somebody my age to remember what I was thinking a year ago.

Last year, it appeared that we were a bridge on troubled waters on the expense side, and we weren't really sure about some of the raw commodity costs and there was some lumpiness and some margin pressure and this sort of stuff. It sounds like you are a little bit more at ease. I just wanted to hear a little bit more about that. Thanks.

Okay. Well, we have experienced, on the cost side particularly with raw materials, we have experienced some moderation in that. It does certainly appear that, currently, the pressure that we felt last year, rapid increase in commodities prices, is not something that we are going to have to deal with at least for the present. So we are optimistic about the ability, our ability to maintain better margins this year than we did last year.

In terms of -- I think we do have a level of optimism about our sales. We are optimistic about the sales that we hope to generate in our new line of products, the ZipLoc brand vacuum sealer and bags and rolls. Probably, as we indicated, we will see more of that in terms of revenue in the third of fourth quarters than in the second quarter, but we are optimistic about that.

In terms of our novelty sales, those have been kind of steadily advancing, and we're optimistic about the results in that arena, both in terms of the foil balloon and in terms of latex. Latex tends to get lost in the forest but as you noted, we had over a 30% increase in sales in the first quarter this year in latex compared to last year and our sales are strong in that arena.

I appreciate your time. Keep up the good work. Thank you.

Joe Munda, Sidoti.

I was wondering if you guys could break out the operating expenses, G&A, selling and advertising?

We will break them out in some detail in our 10-Q which will be filed shortly. Our administrative expenses have not increased. We -- our admin expenses basically for first quarter this year compared to first quarter last year were essentially even. They might have dropped $10,000 or something like that, but not very much.

The increase that we have experienced in operating expenses has been in selling expenses and in advertising and marketing expenses. Those increases -- and that was about, in comparison to first quarter this year from first quarter last year, that was an increase of about $400,000.

There is a variety of those -- a variety of elements to those operations. One of them is that we have had increased selling expenses, commissions. We have had increased marketing expenses, and we've also had increases in our both consulting fees and salaries as we have added personnel to help us, particularly in relation to the ZipLoc brand line of products but also in our selling efforts related to novelty products where we have increased some costs in that area as well. So -- go ahead.

No, so you're saying the number of sales people have increased --?

Yes.

-- for the quarter?

Sales and marketing and commission sales.

What's the sales count, what's the number of sales people right now?

The number of sales people?

Yes.

Well, if you include all people who are both commission salespeople and direct sales people, we're probably, at this point, in excess of 30 individuals who are engaged in selling for us both for our pouch lines and for our novelty lines. But in terms of direct employed people, it is less than that. It's in the range of around 10 people I would say total.

Okay. Then in terms of cash flow, what was CapEx for the quarter?

CapEx for the quarter was -- I'll have to take a quick look at that. Hold on just a second.

Are there any other questions?

I was just looking just a second. I was trying to get some information. $200,000? Just over $200,000, Joe.

Okay. You had mentioned expanding on the CapEx spend for the year. Are we looking at something 10% or 20% year-over-year? How should we think about that?

I think our total CapEx, I don't have the number right here front of me, but as I recall, our total CapEx last year was about $1.2 million, somewhere in that range.

Okay.

I think that -- and that includes maintenance CapEx and so on.

Our expectation is, depending upon our cash availability and cash flow and resources, that we might well have a capital expenditure level that would exceed that this year. To the extent that we are able and have the cash to do it, we probably would construct or purchase two or three additional manufacturing machines, converting machines, both in relation to foil balloons and in relation to latex balloons. Those machines range in cost from $300,000 to $600,000 apiece, somewhere in that range. So, we do have some CapEx anticipation. Currently, we're running at a pretty high rate of production for our foil balloons in the United States and could justify some addition to our productive capacity. So that is an area where we are certainly looking at some additional expenditure.

Great, thanks guys.

John Banks, BG Capital.

Hey, Steve, just a couple of quick questions. On the new product coming out, you know, the vacuum one, what is the gross margins on it? I don't know if you go into detail. Is it higher than what you have right now?

The gross margins on the product line, we don't address kind of product by product, in terms of our disclosures, specific gross margins partly because gross margins vary widely depending upon the individual product. For example, a gross margin on a roll of film might be considerably different than a gross margin on a pouch that we would sell. So, in general though, on the pouch and roll products that we will sell -- that we do sell and that we will sell -- gross margins tend to be on the higher side than some of our other products. The gross margin on our machines we will have back in machines will be a decent gross margin but will be not as high as on the pouches or rolls.

Okay. Just to get a feel, I know you can't break it down. What is the size of the market in general? Do you have any idea on that?

The market -- a general estimate of the market size for the vacuum machine and pouch market in the United States is somewhere in the range of $250 million-plus, that which includes the machines and the pouches, although that is limited to that particular market. That is the vacuum sealing machines and the pouches and rolls that go with them. Also that is a general estimate. There isn't specific public company reporting that would give you, tell you exactly what that market size is.

In terms of the size of the market for pouches, plastic pouches, zippered and otherwise, the marketplace is several billion dollars. So, in our vacuum sealing machine and associated products, we are focused on a component of that marketplace which has a size generally that I reported to you.

okay. I think you said you started shipping to two chains. Is that like Wal-Mart, Target, those types of chains like that?

We have started shipping. Actually it's there were two chains of some substance that we've started shipping to and there are a few other smaller chains that we have also started shipping to. Our effort this year will be to bring ourselves into most of the major retail chains.

Okay. Is $20 million, $30 million peak earnings for that thing, is that too optimistic?

I'm sorry, I didn't understand.

For revenue for the vacuum, is $20 million, $30 million in revenue, is that too optimistic on -- is that your goal, going forward, saying a year or two years out? I'm just trying to get a feel on how big the ramp is going to be.

Sure. I think the issue that one has here is predicting revenues. I think the way that one can put it is this. If one were to capture 10% of the market that exists, you could reasonably expect to have revenues in the range of $25 million. How much of that marketplace we will be able to capture is something that I'm not sure anybody could predict. On the other hand, one of the reasons for our optimism in this is that we've been fortunate to be able to enter into an arrangement with S.C. Johnson for a trademark license on a very important and valuable trademark, which is the ZipLoc brand. Our expectation and belief is that that brand will be significant to us in our ability to penetrate the market.

Okay, thank you so much for your time.

Thank you.

(Operator Instructions). [Steve Schnipper], [Starbridge] Investments.

Following up on a couple of questions that were asked. Obviously latex, commodities, raw commodities pulling back is a good thing. Did you guys ever get very far with your hedging program or never really too deep into that?

We have done hedging to a limited degree. I would say that my attitude about the hedging is mixed in terms of its utility. Actually, the -- since we commenced our hedging, the price of raw latex has come down somewhat. Typically, what you are doing when you are hedging is hedging against an increase in the cost of raw latex. So, it hasn't had any material impact on us at this point.

On the other hand, I think we have learned how to do it and have initiated hedging transactions to a limited portion of our latex commitment.

So assuming prices continue a decline, you potentially would increase your hedging accordingly?

Well, it's something we are watching and gauging on a daily basis and getting some professional advice as well on what to do. I would say at this point hedging has not had any material impact on us one way or the other. I think the place where it would have a material impact is if latex once more went through that process where there was a huge and sudden increase in the cost of raw latex. That hasn't happened in the last nine months, eight months. So I think to measure how that program would work for us I think would depend on us seeing that happen again. And frankly, I am hopeful that we won't see that happen again.

As to your cash needs through the balance of the year, obviously having more availability under the credit lines or other facilities is always a plus. Do you guys anticipate, based on your projections, that with your current facilities that are in place, assuming you don't expand them, that you will be able to carry out your plan or your plan is dependent on additional finance needs?

I wouldn't say that the plan is dependent on additional finance. I think an expansion of our credit facilities may be something. We haven't made a determination on that yet. We're exploring it. I think that an expansion of our credit facilities might be quite useful to us. That is something we're looking at but have not made any commitment or decision on it.

Are you guys looking at the potential to do another small additional equity raise or are you just really looking at the credit lines at this time?

Well, I think our principal view is that we're looking at credit, but we haven't made any determination about what we would do yet.

One last question and I will get out of the way. On the ZipLoc rollout for the advertising, you guys are looking at some sort of a national advertising campaign or it's really going to be marketing allowances on a chain by chain kind of placement to get noticed?

Well, we're not going to engage in a huge national advertising campaign. Those costs, a campaign of that sort, TV advertising, print advertising, you are talking millions of dollars in commitment. So, we're not looking at that kind of commitment.

However, we are beginning to participate in and are looking at a variety of promotional we call it advertising, marketing efforts which do carry with it some expense. That is something that we anticipate -- what we're doing to some degree and we anticipate that we will do more of.

I guess I will keep looking at the shelves rather than my newspaper then for --. Great quarter guys. Thank you.

Thank you very much.

Todd Cooper, private investor.

Thank you for the good quarter. A couple of questions. Do you have any explanation for the shortfall in the ZipLoc line or the zippered category? That was one question.

The second one was do you have any insight or -- to the effect of the helium shortage? Understanding is that there is some key distributors and retailers out there that are -- have no helium. Do you know what the impact might be on your business based on that? Do you have any (inaudible) input to helping that situation out?

The last question was since you have already inked a deal and started shipping to some of the new chains, can you give the names of those chains?

Okay, what was your first question?

The first question was on the shortfall in the (multiple speakers).

Oh (multiple speakers). Right, okay. Well, our zippered product continues to be a significant product for us. Historically, since we started in it, it has fluctuated pretty significantly from quarter to quarter. So the fact that there are fluctuations is not unusual. It continues to be a product which we think is significant and which we hope and believe will have some growth potential for us.

I think that, in a particular quarter, an increase or decline over that period of time in the past and in this particular one, I can't give you any specific reason for it. I think, to some degree, it has to do with just the planning process and trying to anticipate what future sales will be. Say, in some cases, production may have exceeded sales, so inventory levels may be up, which means that production in the next quarter would be down. So -- but other than that, there really isn't any particularly specific information that we would have that would indicate where things are in the zippered pouch line and where we would anticipate they would go.

So nothing that causes you any concern?

Not at this point, no, not at all.

Okay. The second was the helium shortage.

Yes, with regard to helium, that is -- we have reported that as a risk factor in our reporting in the past. There certainly has been some indications in various areas of a shortage in helium, which would have an impact potentially on our business because of the fact that a fairly significant amount of the foil balloons that we sell are designed to be sold with helium for helium use.

I was shown a press release a week ago that basically said there were a whole bunch of distributors who are out of helium and there were big problems with helium and there was a big helium shortage. You know what the date on that press release was? 10 years ago.

So, I think the point is that, to some degree, this issue of a shortage in helium is somewhat overblown. As you may know, if you know anything about helium, the United States has had a storage facility for helium which it has made available to people who distribute helium. The determination was made by the US not to continue to deposit helium into that storage facility and to let it decline so that there was that issue. There was also the issue that there has been foreign demand, particularly demand from China, for helium, which has affected the supply and the price of helium.

I don't know that anybody other than maybe some very connected people, connected in the sense of knowing the business intimately and in detail, know exactly where things are or where things will go with helium. We certainly don't. I'm hopeful that helium is still being refined and produced. It's being refined and produced in the United States and in North Africa and the Middle East, in Poland. My hope and expectation is that helium will continue to be made available and that it will be something that we will be able to depend on in the long-term.

Certainly, there have been issues of supply and there have been issues of cost which are not fully resolved and at this point I don't know that I can give you any more than anybody else a very specific prediction as to exactly where that is going to go at this point. We don't really know.

Have you been given any guidance from your retailer that you distribute through as to the number of units that they have that are out of helium?

We go through, we sell through a number of retail outlets. They purchase helium, the retail outlets purchase helium from a number of different sources. So we understand that there have been some shortages and that those shortages among some of the distributors are the product of competitive issues as well as other issues that arise. But I can't tell you -- I don't have specific information about the exact status of that market.

One question to the inked deals that you are currently shipping to the new retailers, can you give us the names of those new retailers?

Well, typically, we do not identify specific customers except to the extent that we are required to for a variety of reasons. In some cases, when our sales to a particular customer exceed 10% of our total sales, we are then obligated to disclose the identity of the purchaser and we do that. But short of that, we typically do not do that and there are a variety of competitive and other reasons for not doing that. So the number of major retailers are relatively limited and obvious, and we are seeking to do business with substantially all of them, and we have begun to do business with some of them.

Okay, fair enough. One final question is if you had one metric to judge the health and growth of your company, which metric which you follow?

I think that I have become very, very focused on margin, personally. I'm not sure that everybody would necessarily agree with me. But I think margin levels are extremely important in the ultimate health and success of a business of our kind. As margin levels increase, I think that our health becomes much stronger.

Okay. Well thank you very much and continued success.

Thank you. Appreciate it.

And with no further questions, I would now like to turn the call back over to Mr. Merrick for any final and closing remarks.

Thank you, everyone, for showing interest in our company and participating in the call. We appreciate it very much. Obviously, we're very happy with the results that we had this quarter. We certainly are going to work towards achieving results of this kind and better in the future. Thanks again and good day.

With that, ladies and gentlemen, that does conclude today's call. Thank you for your participation and have a great day.