Yunhong Green CTI Ltd (YHGJ) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corporation announces 2012 second-quarter and year-to-date financial results conference call. Today's call is being recorded. This conference 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. At this time, I would like to turn the call over to Mr. Tim Patterson, Senior Vice President of Finance. Please go ahead, sir.

Good day and welcome to CTI Industries' earnings conference call in which we will report on our results for the second quarter 2012 and the six months ended June 30, 2012. My name is Tim Patterson. I am the Senior Vice President of Finance and Administration of CTI. I will be presenting a report. Steve Merrick, our CFO, is traveling today and may be joining the call remotely. At the conclusion of our report, there will be an opportunity for those of you who would like to ask questions.

So far this year, our results have generally kept pace with the same periods of last year. In fact, net sales are up by about 4% with some increases in our novelty balloon lines and small declines in our pouch and laminated film lines. Earnings for the year to date through June 30 are even with last year at $311,000, or $0.10 a share.

However, we do want to particularly note that these sales of [proper] results do not yet include any significant sales of our branded vacuum sealing machine and pouch lines, which we introduced in the first quarter of this year. We anticipate that sales of this new line will begin to be more material in our third and fourth-quarter results.

For the second quarter, consolidated net sales were $11.816 million. This is a decrease of just over 1% from second-quarter 2011 net sales of $11.965 million. For the six months ended June 30, 2012, net sales were $25.624 million. For the same period of 2011, net sales were $24.662 million. So for the six months, we had an increase of sales of about 4%.

From a profit standpoint in the second quarter, we had a net loss of $78,000 or $0.02 a share compared to a net profit of $13,000, or $0.00 a share last year. For the six months ended June 30, 2012, we realized a net profit of $311 million (sic-see press release "311,000"), or $0.10 per share, virtually the same as 2011 where our profit was $310,000 (sic) and again $0.10 a share.

We have continued to improve our gross margin rates compared to the last year. In the second quarter, our gross margin rate was 19.9% compared to a rate of 17.3% last year. For the six months, our gross margin rate was 21.3% compared to 18.4% for the same period last year.

This increase in our gross margin rates this year has resulted principally from an improvement in our cost of raw materials, particularly raw latex, as well as some other items and also reflects an improvement in margins based on the mix of products we have sold.

While the margins have improved so far this year compared to last, we are not satisfied with our gross margin levels and are working intensely to continue to improve them. We believe that our gross margin rate will continue to improve both by continued moderation in the cost of our raw materials and by the increased sales of certain products, including our pouch products, which normally carry better margin levels.

Let me turn now to a brief review of our productlines. Sales of our foil balloon productline for the quarter were $5.513 million, down slightly from the second-quarter 2011 sales of $5.578 million. For the six months, sales of this line were $12.465 million, an increase of about 4% from 2011 sales of $11.977 million.

In general, foil balloon sales continue at about the same pace as last year. We continue to pursue new sales opportunities in the US, Latin America and Europe and we are beginning to see the development of new sales in Europe.

Pouch sales for the quarter were $1.682 million, a decrease of 1.5% from the second quarter 2011 of $1.707 million. For the six months, pouch sales were $3.612 million compared to $3.861 million last year, a decrease in that period of about 6%. The decrease so far this year is due to decreased sales of pouches to SC Johnson in that period. 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 and food product.

Most significantly, pouch sales this year do not yet reflect any significant amount of sales of our new branded vacuum sealing machines and pouches, which were introduced in the first quarter. We anticipate that the third and fourth-quarter results will reflect substantial sales of that new line.

Latex balloon sales have continued to be strong. For the quarter, sales were $2.837 million compared to sales of $2.725 million in 2011, an increase of over 4%. For the six months, latex balloon sales were $5.591 million, an increase of more than 16% over 2011 sales of $4.821 million. For the quarter, our commercial film sales were $1.182 million compared to sales of $1.606 million in the second quarter last year. For the six months, revenues from the sale of commercial film products were down 15% to $2.843 million from $3.350 million in the same period in 2011.

Now let me turn to some other information on our financial results, condition and developments. Operating expenses this year, both in the second quarter and for the six months, reflecting principally -- while the increase this year reflecting principally our investment in infrastructure and personnel related to our new branded vacuum sealer and pouch line of products.

As a percentage of revenue, operating expenses increased from 15% of sales in the six months ended June 30, 2011 to 18% of sales in the same period of 2012. Our liquidity has continued to improve. Last year at June 30, our working capital was at $5.669 million. This year at June 30, our working capital was at $5.746 million. By June 30 this year, our shareholder equity has reached $3.71 per share.

In early July, we entered into a new financing arrangement with our principal bank, BMO Harris, and also with BMO Private Equity, which provided total additional working capital financing to our Company in the amount of $8 million. With BMO Harris, we entered into an amended loan agreement under which a revolving line of credit was increased from $9 million to $12 million and the maturity date on our loans with the bank were extended to July 17, 2017.

With BMO Equity, we obtained a 5.5 year loan of $5 million, which bears an interest rate of 11.5%. Under the terms of the loan, we also issued a warrant to BMO Equity to purchase up to 4% of the outstanding equity of the Company, approximately 140,000 shares at the price of $0.01 per share.

Upon maturity of the loan or full payment of the principal amount of the loan, we will be obligated to repurchase the warrants from BMO Equity at their option. Details concerning the specific terms of the loan, including copies of the loan documents, are included in our report on Form 10-Q, which should be filed within the next day.

We have obtained this financing in order to provide the funding we believe will be necessary to support anticipated growth in our sales, particularly our new line of branded vacuum sealing machines and pouches. We anticipate utilizing the funding to finance significant increases in inventory purchases and in receivables. We also anticipate other expenditures, including CapEx for production equipment and facilities, as well as operational expenses.

While we do not provide specific guidance in terms of sales or profits, we do anticipate a strong second half of 2012. We do expect that going forward our sales of our new branded line of vacuum sealing machines and pouches will be considerably more material and we anticipate installing over 2000 retail outlets in the second half of this year with this new line.

In addition, we anticipate continued strong sales in our novelty lines of foil and latex balloons. Latex sales have been increasing at a good pace for more than a year and we expect the increase to continue. Sales of foil balloons may be impacted to some degree by the current shortage in helium, which we believe is not a long-term issue. But we believe our sales of foil balloons will continue to increase this year due to new markets and customers and the increase sale of air-inflated balloons. So for these reasons, we do anticipate a good 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). Joe Munda, Sidoti.

Good morning, Tim.

Good morning, Joe.

Real quick, what was general and administrative, all the operating (technical difficulty) go down the line -- general and administrative, selling, advertising and marketing?

For the quarter, the general and administrative was $1.5 million, selling was 411. Advertising and marketing was $391,000. For the six months, it was general and administrative was $2.9 million, selling was 822 and advertising and marketing was just about $900,000.

Okay. And what was CapEx through the six months?

I think it was about $500,000.

All right. So are you guys expecting to ramp that up with the launch in I am guessing third, fourth quarter with the Ziploc? Or is it --?

Actually, Joe, for the Ziploc, we don't anticipate having a lot of CapEx. We think we have most of the production equipment online with capacity. There are a couple of other things that we're looking at that might cause us to put some money in CapEx where we are talking about possibly increasing our capacity more in Mexico with the latex. And maybe even on the foil side having some additional capacity there.

So should we annualize that CapEx or normalize it? Should it be around $1 million this year?

It is hard to say. We anticipate over the next year or 18 months having the CapEx tick up a little bit. We have been pretty much maintenance CapEx for a while, but we do anticipate adding some more equipment and machinery because of additional -- for additional capacity not pertaining to the open-top bags and the sealing machines.

Okay. So you launched it already, the Ziploc with SC Johnson, but no material sales or I'm a little confused?

Okay, that's fine. And it is understandable. In the first quarter, we started off with some test stores at some different locations. Those tests have been successful. The sales, while not extremely material, have been fairly good and we have been very pleased with the amount of sales going through the amount of stores. What is happening now is some of the bigger retailers are doing full rollouts and we expect, in the third and fourth quarter, that we'll be doing that with a couple of the major chains.

So 2000, you said, it is going to be in?

Two different -- we anticipate rolling out to an additional 2000 stores in the remainder of 2012.

Okay.

This is Steve Merrick speaking also. Our expectation there is the 2000 is a minimum, but we expect that the number of stores it will be in will be at least that much, probably more.

Okay. And what is the cost of latex right now, market cost?

The raw latex price is now down around $3.80 as I recall, $3.80 a kilo. In the beginning of the year, we were about $5.80.

Do you expect that trend to continue to go down?

The trend on a commodity like that is very difficult to predict, but I think that there has been a significant decline. Our costs don't reflect all of that decline yet. Obviously, in the earlier part of the year, we had higher costs than we do now. So we have had better costs and I think that, at least for the immediate future, the costs are considerably less than they were a year ago.

Okay. And can you guys talk a little bit about what is causing this helium shortage and why do you expect it to kind of dissipate?

Well, that is a very long story. The helium -- helium was plentiful in many respects, particularly in the United States, because of the fact that the United States had a helium reserve that was made -- basically maintained through a government program. That helium reserve was available for a number of years and the decision was made actually some time ago to not maintain that reserve. And as a result, there has been the need to make a transition from the public support of that in this US helium reserve to private production and we are kind of in the middle of that transition.

Actually, I saw something the other day in which Congress apparently is considering continuing the US helium reserve. So things are in a state of flux. Right now, the availability of helium, both in the United States and in Europe and other places, is limited and as a result, it has impacted to some degree the availability of helium for helium balloon purposes.

But I think that based on our understanding of the marketplace over the longer term, we don't think that helium is going to be unavailable, significantly unavailable for balloon purposes and what the price will be -- again, it is a commodity. One doesn't know what the price will be, but I don't think that there is an indication that the price is going to be prohibitive.

Okay. All right. I will hop back in the queue. Thanks.

(Operator Instructions). [John Banks], DG Capital.

Hey, guys, just a couple questions. On the vacuum, the new product, is the gross margin over 30% on that?

Do you want me to respond there, Tim?

We usually don't give specific margins on individual products. We do anticipate that the overall margin on the bags themselves will be considerably higher than what we are running at now. The machines will be somewhat less than the bags.

Okay, my second question, you guys seem pretty excited about the rollout. I know you don't give estimates. Second half of the year of $5 million, $10 million in sales, is that fair or you are not going to make a comment on that?

We don't specifically comment on what we feel the sales are going to be.

So I need to go to Target and Walmart and start counting them?

You need to go to Target and Walmart and start buying them.

Things look pretty good. Also, Steve, margins should trend up second half of the year, you believe?

Well, I think that, for a couple of reasons, margins we hope and expect that margins will improve from where they were in the first half, both because of the fact that, as we, in the pouch side of the business, which in terms of volume we anticipate will expand, that the margins are higher than the margin levels that we reflect overall in the Company. And second, we are experiencing some good reduction in raw materials cost. So I think our hope and expectation is that margins will continue to improve.

Okay, on the vacuum, how many units can you sell? What is the max for productivity?

Well, we are outsourcing the machines, so we are not -- we are certainly capable of making as many as we anticipate selling this year and the bags, we have, I don't want to say unlimited capacity, but again we have much more capacity than we are anticipating. So we are hopeful that we start pushing that.

Okay. How about in Europe and Germany? How is that going?

So European sales, and I think by Europe we include both UK and on the continent of Europe, the sales in Europe are reasonably good this year. They are up some from last year. On the continent side, we have installed one significant new chain this year and we expect that to reflect, particularly over the second half of this year.

There was one customer of some size in the UK that had some financial issues, so from that particular customer, our sales declined. But overall, our sales are up some and I think we are optimistic about where our sales will be there.

Okay, my last question, you guys seem like you have a pretty good relationship with SC Johnson. Fortunately, they are probably the best name maybe on consumer goods. Do you anticipate in the future doing more deals with them?

Well, we do have -- we have developed we think a good relationship with them that comes from I believe doing a good job with them and producing product of high quality and generating a good relationship. The branded program we have now is one that we are very excited about and has significant potential for us and obviously we are highly focused on that. It is an organization that has a large operation and many things that they do and I think our opportunities with them, if we continue to do a good job, may be expanded.

Okay, thanks. Second half looks good. I am looking forward to it. Thanks, Steve.

Great, thanks, John.

Mike Zunacka, Private Investor.

I have two questions. A quick one was do you expect a dividend at any point this year for the shareholders?

Go ahead, Steve.

We have -- the approach that we have done for dividends is that we have not established a definitive from the very beginning when we started to pay a dividend not established a fixed dividend program and the dividends were based upon the cash flow and results from time to time and the Board of Directors looks at that on at least a quarterly basis in terms of whether or not a dividend should be paid.

We do have restrictions in our lending agreements that limit the amount of dividends that we can pay, although we are permitted to pay some dividends. It is something that the Board looks at on a regular basis and a current basis, but we don't have a specific dividend program.

Okay, it kind of leads into the second question. I know you guys have showcased yourself at some of these microcap conferences. Are you frustrated at all that -- I kind of watch the way the stock trades every day. Are you frustrated at all that nobody seems to want to come in and do you think it is a function of the lack of liquidity in the stock and would you guys ever consider providing liquidity, basically a bid and offer that tighten things up a little bit?

Well, I am not sure I understand what you mean by providing liquidity. I think that often the liquidity issue has to do with the number of shares that are outstanding. So I suppose --.

Say a microcap fund wanted to come in and take a stake in CTI, they would have to do it in the open market, correct?

Well, unless there were a specific private transaction, that is correct. They would do it in the open market.

Okay. Because I saw that some of the owners of the Company were able to do it -- they didn't force them to do it in the open market. I was wondering if that was available to a fund that way as well.

To do a private transaction?

Right.

Well, we don't have any specific plan or program to do private sales of securities.

I was just curious if you felt your instincts were that funds would avoid our stock because it's just -- there is no liquidity.

Well, I think your question is a good one and I think that one of the things -- there is a number of dynamics that go into the price and liquidity of a stock, one of which is obviously your performance, your financial performance and the other is the availability of stock and the volumes that you have in terms of trading. And we do have a relatively limited float number of shares -- float exactly -- which probably has some impact on the level of trading and the people who invest in the stock. And that is something we certainly take into account and it is a part of our effort, has been over the past couple of years to work hard at developing an effective public market for our stock, one of which has been to make presentations at conferences. And we expect to continue to do that and we certainly do want to be in a place where we can present ourselves as an effective public company.

If you look a few years back, it seemed -- and I don't have the numbers -- but it seemed like there was more liquidity a couple years ago than there is now. It just doesn't seem like there is any interest.

There was a period of time, there's short periods of time when the Company had good results from time to time where there would be very high levels of trading for short periods of time. I think that we have generally had somewhat better volume, better consistent volume in the last couple of years, but no very high volume days, very few high volume days, which frankly we would prefer. I think that having steady volume rather than very short periods of intense volume would be preferable, but of course we are not in control of that.

Are you notified immediately when a fund comes in to try to take a stake in your Company?

No.

So they do that under the radar?

Right. Except to the extent that anybody purchases in excess of a certain amount in which they have to file a report at that time, we would not otherwise get a notice of it.

Okay, all right, thank you.

With no further questions in the queue, I would like to turn the call back over to Mr. Patterson for any additional or closing remarks.

Well, we would just like to thank everybody for joining us today. We look forward to the second half of this year and we anticipate that it is going to be a good one. Thank you.

Again, that does conclude today's presentation. We thank you for your participation.