Yunhong Green CTI Ltd (YHGJ) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corporation announces 2012 third-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 strategies. Expressions which identify forward-looking statements speak only as of the date the statement is made. The 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 may 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. Stephen Merrick, President and CFO. Please go ahead, sir.

Good morning and welcome to CTI Industries' earnings conference call in which we will report on the results for the third quarter of 2012 and the nine months ended September 30, 2012.

My name is Stephen Merrick. I am the President of CTI and will be presenting our report. With me today are John Schwan, our Chief Executive Officer and Chairman, and Tim Patterson, our Senior Vice President of Finance and Administration.

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 on the overall numbers. In terms of sales, we're running a bit ahead of last year. For the third quarter, our consolidated net sales were $11,786,000 compared to net sales of $11,731,000 for the third quarter last year. For the nine months ended September 30, net sales were $37,410,000, an increase of 2.8% over our net sales for the same period last year of $36,393,000.

For the quarter, we realized a small profit of $6000 compared to a similar small profit of $18,000 for the third quarter last year. For the nine months ended September 30, 2012, we realized a net profit of $317,000 or $0.10 per share compared to a net profit for the same period of 2011 in the amount of $329,000, also $0.10 per share.

Let me point out what I believe are some of the most important elements of our results for the third quarter and for the nine months. First, our gross profit levels for both the third quarter and the nine months have increased significantly. In the third quarter last year, we had gross profit of $2,270,000, while this year in the third quarter, our gross profit increased by $400,000 to $2,671,000. For the nine months last year, our gross profit was $6,810,000, which increased this year by $1.3 million to $8,120,000.

So for both the third quarter and the nine months, our gross profits from operations has increased significantly. Despite this increase in gross profit, our net profit has not yet kept pace with that increase because to this point at least, our operating expenses have also increased.

In the third quarter, operating expenses were $2,403,000 compared to operating expenses of $1,946,000 in the third quarter last year. For the nine months, our operating expenses this year were $6,995,000 compared to $5,738,000 last year. Much of this increase in operating expense is attributable to expenses we have incurred both in personnel and other development expenses in the development and marketing and sale of our new Ziploc-branded line of vacuum sealing machines and associated pouches. We do anticipate that these expenses will moderate to some extent in the future, but also that these additional expenses will be covered by continuing increases in the revenues we are now generating from our sales of this new line of products.

Our investment in the development of our new branded product line is now starting to pay off. Toward the end of the third quarter, our sales of the new line began in earnest, and by the end of the quarter, we installed the line in about 2700 stores throughout the United States.

For the third quarter, our sales in this line -- that is, the vacuum sealing machines and associated pouches and rolls -- doubled compared to the third quarter last year from $1,098,000 to $2,014,000 this last quarter.

Overall, for the third quarter, our sales of pouch products increased by almost 50% compared to last year from $2,424,000 last year to $3,625,000 this year. And for the nine months, our sales of pouch products have increased by 15% over last year from $6,284,000 to $7,237,000.

Another factor to note is that our pouch products generate higher margins than many of our other products with a result that, as the sale of our pouch products increase, our gross margin rate also increases. We expect sales of pouch products to continue to increase as we realize sales through the stores we have already installed and as we continue to make installations in additional stores over the next year.

In the third quarter, our gross margin rate was 22.7% compared to a rate of 19.3% for the third quarter last year. For the nine months this year, our gross margin rate was 21.7% compared to 18.7% for the same period last year.

To some degree, this improvement in gross margin reflects a moderation in some material costs, but is affected significantly by the increase in higher-margin pouch sales.

In addition to our pouch line, which is growing rapidly, our foil line of products remains the largest in terms of sales. In the third quarter, sales were essentially even with last year at $4,092,000 compared to $4,173,000 in the third quarter last year. For the nine months, foil balloon sales are up 2.5% to $16,557,000 compared to $16,150,000 for the same period last year.

Generally, foil balloon sales remained strong. In the US, sales to our largest customer are down about $750,000 for the year-to-date, but sales to other customers are up by more than $1 million.

Foreign sales in Mexico, the UK, and Europe also show modest growth compared to last year.

The shortage in helium, which we believe is short lived, has had some effect on the sales of the larger balloon sizes which are intended to be filled with helium. But that has been offset by an increase in the sales of smaller balloons which are air-filled. We anticipate a good fourth quarter in foil balloon sales and growth in sales in all of our markets, including the US, Mexico, the UK and Europe next year.

Sales of latex balloons continue to increase. Sales for the nine months reached $8,232,000 or 22% of our total sales compared to $7,782,000 for the same period last year. We continue to see growth in sales in Mexico and Latin America and new sales and prospects in the UK and Europe. In Mexico the dollar value of sales were negatively affected to some degree by the decline -- the recent decline in the value of the Mexican peso.

Sales of film products are down to $3.8 million for the nine months this year compared to $5.2 million for the same period last year. Most of this decline relates to a principal customer.

While we do not provide guidance on revenues, we do believe that sales will be strong in each of our foil balloon, pouch, and latex balloon product categories in the fourth quarter and into 2013 and that sales of pouch products will show good increases compared to prior periods.

Let me now turn to some other information on our financial results and condition and developments. During the third quarter, we entered into a new and expanded financing arrangement with BMO Harris and BMO Equity -- BMO standing for Bank of Montreal. BMO Harris agreed to expand our revolving line of credit from $9 million to $12 million and to extend the term of our loans with them to July 2017. BMO Equity loaned $5 million to the Company for a term of five and a half years with interest at the rate of 11.5%. The Company issued to BMO Equity a warrant to purchase 140,000 shares of common stock to the Company at the price of $0.01 per share. This financing was intended to provide sufficient financial resources for the Company for its operating needs and for various capital expenditures.

If sales of our pouch line of products increase to the levels we anticipate, we will require significant additional credit to finance increases in inventory and receivables.

In addition, we anticipate the need for funding of various capital investments in the US, Mexico and Europe. With this financing, our liquidity has improved substantially. As of September 30, our working capital balance was $10,959,000 compared to a working capital balance on December 31, 2011 of $5,612,000.

That essentially concludes our report, but let me just say that we are quite optimistic about our prospects in the fourth quarter and beyond. We are experiencing strong growth in our pouch line of products, and we expect that growth to continue, along with good results for foil and latex balloon sales as well. Our margins are rising, and our gross profit levels are expanding. We see these indicators as being positive for CTI.

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 & Company.

Real quick, a couple of questions. Steve, what was the helium and other revenue for the quarter?

Well, that's a small -- it's basically all our other items and includes such things as accessories and items like that. In some years in past, we have marketed helium as a broker/agent and are actually in the process of doing that again. And so that was where we categorized that revenue.

Okay. I'm just going through because my numbers aren't adding up here. You had metallized balloons of $4,092,000, films of $1,907,000, pouches of $3,625,000, and then latex balloons of $2,641,000; correct?

I think that is what it shows in our -Q; is that right, Tim?

Film products should be $1,033,000.

Film products is $1,033,000.

Okay, $1,033,000. Okay. That makes sense. Thank you.

My other questions, so you are in 27 retail stores currently with the new Ziploc machine, correct?

Well, fortunately, it is 2700.

2700, I'm sorry. 2700. So is there a goal to get to a certain number? I mean do you think you will be at 3000 by year end?

I expect we probably will be. Our goal is well beyond the 3000.

Okay. By this year?

Well, I wouldn't say necessarily by December 31. I think that we do have known prospects and expectations for a significant number of additional installations. Those are not -- until -- it didn't happen until it happens. But we have strong expectations that there will be a significant number of additional installations in stores.

Okay. And I'm assuming the stores -- can you give us a little bit more color? I'm assuming -- I've seen it at Walmart and I'm assuming Target, but are there any other new players that we should take a look at?

We're installed currently in all the Target stores and a number of Walmart, Menards, Myers, and there are others that we are in the process of working with. So like I said, our expectation is based on those existing installations and the ones that we are working on.

I mean, are you past the trial stage and now it's more of them installing it into a larger number of their stores?

Generally, that is true, yes. Generally we're past the trial stage, but not in every case.

Okay. And Steve, can you give us some color on latex pricing and how the hedging strategy is going?

Well, it's been an interesting experience. Latex margins have improved, but it's somewhat -- partly that's because we're increasing our sales of latex in areas other than Mexico and Latin America.

The cost of latex, the dollar price for latex has declined fairly significantly from where it was at its peak. So one would think that is good, and that improves your margin. But our operation in Mexico obviously operates in pesos. So, as the value of the peso declines, that affects how much, in effect, they are paying for latex. So for example, if latex were to stay the same in dollar terms, it would actually cost more in peso terms. So the variation in the value of the pesos had some effect on that.

Generally, we improved our margins in the latex arena, but to some degree, it's been affected by a decline in the peso.

And can you get some color on -- I know you guys did a big push into Europe in the first half of this year with the euro stores there. What is the breakout? Are you seeing better growth abroad as opposed to the US? How can we take a look at that?

Well, we were, I think, very optimistic about our opportunities in Europe. And, in general, I think they are going well. We have installed in all both for foil and latex in all of the euro shop stores in Europe. And that's going well.

We -- Europe has been in terms of the foil balloons has been affected somewhat by the fact that the helium shortage has been -- has had an even greater impact in Europe than it has in the United States. So that has had some short-term effect. And, as I said, we believe the shortage in helium is definitely short lived and that certainly by the middle of 2013, unlike there will be a shortage affecting our business at all.

And in terms of latex, we do have a number of opportunities in Europe, not all of which have been realized yet, but both in the UK and in mainland Europe, we have eight, 10, 12, 15 opportunities of significance in the latex arena.

Okay. I was -- for the stake of modeling, could you guys break out what the OpEx expense was for the quarter -- general, administrative, selling, and advertising? In the release it is not broken out.

Sure. We will be filing our 10-Q momentarily or maybe not today but a day or so on that, but that will break that out. Basically, for the quarter, the general and administrative expenses were $1,570,000 compared to $1,295,000 last year in the third quarter. Selling was $483,000 compared to $234,000, and advertising and marketing was $350,000. Actually it is down some compared to $417,000 in 2011. Those are the third-quarter numbers.

Okay. So pretty much what you just said, like the doubling in selling expense, that's resources that you are devoting towards the Ziploc, right?

Pretty much, yes. That's where most of that would go.

Some of it is in Europe, too, Joe. As we've expanded our footprint in Europe, some of the sales and selling expenses have increased there, as well.

Okay. And you expect that to moderate then increase as you guys continue to roll out some of these -- to newer -- to more stores, correct? Or are you guys hiring more reps? I'm just wondering where that increase is going to come from.

Okay. To some degree, it depends on the nature of the expense. Some of the expenses we incurred. Developmental-type expenses will actually moderate or decline. Some of the selling expenses we hope will increase because we do have reps. And, of course, as our sales increase, we will be paying more commissions to our reps. So we're hoping and expecting that expense will increase.

Okay. And Steve, what was CapEx through the first nine months?

It was a little over $1 million, as I recall.

No, it was a little bit less than that.

It was less.

It was about $750,000.

$750,000.

And it was actually a little bit less than it was the previous year.

Okay. So just from my perspective, how can we look at CapEx going forward? Are you guys fully invested from the Ziploc standpoint where you don't feel like you're going to have to devote more capital buildout? Is that pretty much set, that piece?

In terms of the basic business, we're probably not going to incur what I would call material and significant capital expenditures. We will incur some. For example, we're going to have an expense into it for an addition to our line.

So that will happen. And there will be -- we've added some productive capacity to our existing machines, which, while it's not a huge number, there is some CapEx there. We are extending -- we have a brand-new warehouse distribution facility, which is lovely, and we'd love to have you all see it. It's a great place, but we're also spending some money there in terms of the leasehold improvements and that kind of thing.

So there is a level of CapEx, probably at a rate that is somewhat greater than what we had for the first part of the year, but not hugely different.

There are a couple of projects that we are looking at as possibilities that would be larger than that, but we have not decided yet when or whether we will make those investments.

Okay. Thanks, guys. I'll hop back in the queue.

(Operator Instructions). Steve Schnipper, Stourbridge Investments.

I jumped on a couple of minutes late, so I don't know if you dressed it. I noticed that Target had the product, the Ziploc in one of the weekly adds a couple of weeks ago, and I heard you mention that you are in some of the Walmart stores. However, when I look on either Walmart.com or Target.com, the product doesn't seem to be carried on any of the websites. Any color on why that is? Is that something that's going to change given broader distribution to that?

I think that is purely their own decision as to the extent to which they want to do it in store or online. And I know the retail stores generally are struggling with that issue, the extent to which they want to put things online or not.

So the conversations, have they been more, hey, we want this as an in-store exclusive, or they really -- they just said, hey, orders for these stores and you really haven't had better color on the discussions?

But we don't really have any real guidance in terms of what the intention is. We are installed in all of the Targets and in a fair number of Walmarts. But what they will do in terms of the online, we just don't know.

Got you. Okay. Thanks.

And currently we have no further questions in queue.

Well, very good. I guess if that completes it, we appreciate very much everybody listening and participating. We, as I indicated, are very optimistic about where we are and where we're headed, and we look forward to sharing with you our results at the end of the year.

Thanks very much and talk to you again soon.

That does conclude today's presentation. We thank you again for your participation.