Yunhong Green CTI Ltd (YHGJ) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CTI Industries Corporation report results for full-year and fourth-quarter 2012 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 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 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.

And at this time, I will turn the conference over to Mr. Stephen Merrick, President and Chief Financial Officer. Please go ahead, Mr. Merrick.

Good day, and welcome to CTI Industries' earnings conference call, in which we will report on our results for the fourth quarter of 2012, and for the full year. My name is Stephen Merrick. I am the President and Chief Financial Officer of CTI, and I will be presenting our report. I am joined today on the call by Tim Patterson, our Senior Vice President of Finance and Administration and our Chief Accounting Officer. At the conclusion of the 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. In 2012, we achieved record net sales of $49.5 million, the highest in our 37-year history. This came about because we achieved growing sales in our consumer vacuum, pouch, and machine product line; and continued to expand sales in our novelty product lines of foil and latex balloons.

In the consumer pouch and machine product line, sales increased by 14% over 2011, to $9.5 million. Overall, sales increased by 5% over 2011, with net sales of $47.2 million. We anticipate continued significant revenue growth in our consumer vacuum pouch and machine product line, and expect growth in our novelty lines as well.

In the fourth-quarter 2012, our rate of revenue growth expanded. Net sales for the fourth quarter were $12,133,000 compared to $10,778,000 for the fourth quarter last year, an increase of 12.6%.

Bottom-line results for the year and for the fourth quarter were affected by substantial increases in operating expenses we incurred during 2012 as we invested in the planning, development, establishment, infrastructure, marketing, and sales of our new branded line of vacuum sealing machines, and associated pouches and rolls of films; and as we invested in infrastructure for our international operations.

For the year, we had net income of $102,000, $0.03 per share, basic and diluted, compared to $484,000 for 2011, which represented earnings of $0.15 this year, basic and diluted. For the fourth quarter, we incurred a net loss of $215,000, compared to net income of $155,000 for the fourth quarter last year.

The principal factors affecting our profitability for the year and for the fourth quarter were the increase in operating expenses we experienced. In the US, those increases included personnel and services expenses of approximately $800,000, most of which involved development, administration and operations, including sales and marketing efforts related to our new branded line of vacuum sealing machines and the pouches and rolls of film to be used with them. We also incurred increased royalty and commission expenses in connection with the sales of those products.

In our foreign operations, we incurred increases in general, administrative, and selling expenses totaling just over $500,000 as we invested in infrastructure to support the increase in our international activities and revenues.

Also, our interest expense increased, principally due to the $5 million subordinated loan we arranged in July of 2012. For 2012, our interest expense increased to $991,000 compared to $773,000 in 2011. In the fourth quarter, interest expense increased to $378,000 compared to $171,000 in the fourth quarter of last year.

We believe that obtaining this loan was appropriate and justified to provide financing for the significant investments which were required for our expansion. In addition to the increased operating expenses I've just described, we invested $2.5 million in additional inventory and $1.2 million in equipment and facilities during 2012. These investments were made possible by the loan financing.

While we believe these costs -- investments in personnel, infrastructure, development, and marketing, and in financing -- have been appropriate and necessary to establish a base for our new and enhanced product lines and our international activities, our plan and goal is now to develop the revenues which will achieve a profitable return. We do anticipate that in 2013, our revenues from the sale of the vacuum machine, pouch, and roll product line will increase substantially over 2012. Further, we anticipate that our revenues from the sale of our novelty product line, including foil and latex balloons, will also continue to expand both in the US and in our international markets.

In 2012, our revenues from sales by our international operations increased from $12.5 million in 2011 to over $14 million in 2012. So we believe that our investment in these operations is having the intended effect of enhancing our growth there.

We also anticipate that we will now experience better gross margins than we have had in several of the past few years. In 2011, our gross margin rate was 19.5%. Last year, because of a decline in the cost of certain raw materials -- particularly latex -- and the beginning of a shift to sales to better-margin products, our gross margin increased to 22% in 2012. With the continued shift of sales to products carrying a strong gross margin, we believe we have an opportunity to maintain or improve our current gross margin level.

Also, we believe that we will be able to reduce the level of our operating expenses, both domestically and internationally, to some degree in 2013. While some of the increased operating expenses we incurred in 2012 will be ongoing -- for example, the cost of new personnel needed for our expanded operations -- some of the expenses were incurred this past year can and will be reduced or eliminated. And we are working to do that now to enhance our profitability in 2013.

Let me turn for a moment, specifically, to our new branded line of vacuum-sealing machines, pouches, and rolls. A good deal of our increased expenses this past year constituted an investment in this new line. And I wanted to share with you where we are in that effort.

As we have been reporting, a few years ago, we began producing and selling a line of pouches and rolls of film designed to be used by consumers with home vacuum-sealing machines then in the market for the storage of food and household items. In December 2011, we entered into a trademark license agreement with SC Johnson & Son under which CTI is licensed to manufacture and sell a line of vacuum-sealing machines and pouches under the Ziploc brand vacuum sealer system name. The licensed product line includes vacuum-sealing machines manufactured for CTI and pouches and rolls of film manufactured by CTI for use in the home to vacuum-seal items to preserve freshness and to help prevent freezer burn.

This product line was introduced in March 2012, and we have since installed the line in several thousand stores of both major and smaller chains. By the middle of this year, we expect to be installed in over 6000 stores. Further, we intend to introduce, during 2013, product-line enhancements which we believe will further enhance our revenues.

Our sales of pouches and rolls, which in 2012 included some vacuum-sealing machines, increased from 3,606,000 in 2011 to 5,576,000 in 2012, which is an increase of more than 50%. We fully expect our revenues in this line to continue to grow at a rapid pace in 2013, and we view our anticipated new revenues from this line to be a significant factor in our ongoing profitability.

Our financial position remains strong. Our working capital balance has increased from about $5 million at the end of 2011 to over $10 million as of the end of 2012. We ended the year with cash of over $350,000 and availability on our revolving line of credit of over $3,600,000. Our stockholders' equity has increased from $11.8 million at the end of 2011 to over $12.2 million by the end of 2012, representing a current book value of over $3.77 per share.

While we do not provide guidance on revenues or earnings, we do believe that we have a very good opportunity to grow both revenue and profit in 2013.

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

Absolutely, Mr. Merrick. (Operator Instructions). Todd Brady, Oppenheimer.

Good morning, Steve. Listen, I believe that you guys have answered the question about the jump in G&A. But can you just kindly explain a little bit more about the investments that you talked about briefly internationally? Because there was a pretty large jump in G&A, and we would tend to think that, with that big a percentage jump, you guys sound very, very, excited about how 2013 calendar year is playing out for your top line. I know you don't give guidance, but kindly walk us back through the jump in G&A and in how that gives you guys excitement on the investments you've made leading into calendar 2013. Thank you.

Sure. On the international side, our increase in GS&A, as I recall, was approximately $500,000 over 2011. I don't have all of the specifics in front of me on that. But one of the places where we expanded fairly significantly was in Europe. And our sales in Europe from 20 -- even though they were still small, from 2011 to 2012, expanded I think by 100%.

In Europe, we had some fairly significant increases in our operating expenses there. To some degree, it was temporary increases because we were having to do quite a bit of individual packaging work there due to the fact that some of the things we were selling were specialty items for the marketplace, that we won't have to be doing in the future. So, to some degree, those increases in expenses will not continue.

We, in Flexo, which is our Mexico subsidiary, we had increases of -- I think it was around $350,000 total in additional expenses. That -- some of that was termination expense for an employee who was terminated of around $50,000. And there was a statutory profit-sharing obligation that we had. So there were a few things like that. I should say, though, that Flexo has been growing at a very rapid pace for several years and has been profitable for several years, and continues to be. So, to some degree, our increase there is just a reflection of the increase in the size in that business.

Domestically, much of the increase that we incurred, a very significant percentage of it, related to our investment in the branded line of machines and pouches. That was a line which we basically developed. While we were manufacturing and selling pouches and rolls of film that would be used for vacuum-sealing machines before that time, we were not selling the machines. And we did not have the branded line.

And so all of -- a lot of the work that we did towards the end of 2011 and into a significant part of 2012 was the creation and establishment of that entire line of product, both the machines and the branded line. As you can imagine, there was a tremendous amount of work that we engaged in with our important licensor. Ziploc is obviously a significant and major brand. And it was critical for us to do a good job in that entire line to properly represent that iconic brand.

And I think we have done a good job. And, in fact, while the expenses associated with that were quite substantial, I think -- I could identify, easily, $600,000 or more that was specifically limited to increased operating expenses related to that during this past year.

The result is that we did install that line, its first year, in over 2600 stores by the end of the year. And as we have said, our anticipation is that we will be installed more than 6000 stores by the middle of this year. The costs associated with creating an entire line like that and to market it, and to place it in stores, and to do all the things that you have to do to get something like that going, were significant.

And I do -- as I mentioned in the report, my expectation is that while a fair amount of those costs are ongoing, that we have undertaken a real effort to make some reductions. In those costs. And those include -- we've actually done -- we made some reductions in some executive salaries. There are two or three people who we terminated in this past year. We have reduced our travel budget by $100,000. We've done a number of things that are specifically designed now to take advantage of these increased revenues in a way that we can turn it to profitability.

I hope that is a reasonable answer to your question.

No, absolutely. And assuming that you have not seen anything goofy or wacky in the commodity markets or pricing in the marketplace, it appears and sounds like the heavy lifting on the investment side that you just talked about, shareholders really should be seeing some very, very nice topline growth year over year sequentially. And that should be dropping right down to the bottom, because the heavy lifting on the expense side was sort of put in in the last couple of quarters. Would that be a fair assessment?

As my very good friend in law school used to say to me all the time, from your mouth to God's ear.

Right. Well, on that note, keep up the good work. And thanks, guys.

(Operator Instructions). Joe Munda, Sidoti.

Good morning, Steve. Thanks for taking the question. Quick, I know you covered pouches in detail, but what are you seeing in novelty products that gives you the confidence in your comments? Is it being driven by international? What are you seeing there that is driving the growth that you are hoping to achieve?

Well, we have experienced -- there are some positive and negatives in that marketplace. The negative that exists is the kind of uncertainty related to the availability of helium. And helium has been something of a problem in the past year. And, in fact, there have been some retail stores that have been unable to get helium. And the cost of helium has been higher. So that has had some impact. And despite that, our sales in this past year of helium balloons increased, not a great deal, but it increased. It didn't decline.

And in addition to that, we've seen a pretty nice increase in our sale of what we call inflated balloons, which is basically balloons that are inflated with air that you'll see displayed on sticks that are in the retail stores. In fact, we delivered something like, in February, something like 3.8 million of those inflated balloons.

So, what our experience is is that while there is some uncertainty related to the helium aspect, in fact our sales have continued to do nicely and are continuing to grow. And I think that we are -- our expectation is that in the foil balloon arena, that they will continue to grow. And we are experiencing some decent opportunities and sales in the UK and Europe as well. And as you saw from the report there, our international sales went from $12 million to $14 million last year.

So I think that -- I wouldn't hold out that our rate of increase on the novelty side is going to be equivalent to what we hope to see on our pouch and roll side. We do think that it's going to increase. And also, on the latex side, we experienced steady increases for the last -- I'd have to go back and take a look, but I think three, four, five, years, every year, our sales in latex balloons have increased, and at a good rate, in excess of 10%. So I think there's no reason for us to expect that some increase in the latex arena won't also occur.

So those are our reasons for believing that we think that we will see, in the novelty arena, some decent increases.

Okay. And just two others. As far as the marketing of the Ziploc branded product, what is that going to entail? Can we expect maybe a television commercial? Or is it more in-store aisle advertising?

Well, to date, we have done some in-store advertising. It is called FSI. I am trying to remember -- free-standing inserts. There you go. We have done that advertising in the stores, and we think that that has had a decent impact in certain of the stores. We do displays. We have -- I am sitting here, actually, looking at a display which is intended for grocery chain stores, that's a very just attractive display and represents an advertising approach to the product line.

So that has been the focus so far. We did do one online sale, ShopNBC. And we may -- it is possible that we will do another one. And that, obviously, in addition to representing sales, also represents a significant degree of advertising. And there may be other things. We are working with SC Johnson, talking with them about other things that we might do in that arena, which I'm -- I don't have -- when they happen, then I will be able to talk about them.

Okay. And then, in regards to the expansion into -- you had said 6000 stores, are you fully -- I guess I want to say will you be able to fill those orders based on your current capitalization structure? Do you anticipate any issues there as far as filling orders, if you're pushing out all these machines and pouches at a rapid clip, like you said?

We are fully capable of fulfilling all orders that we could possibly get this year. We have invested -- one of the things that we did was that we invested significantly in inventory. And we do have significant inventory availability, and we also added significant space for our warehousing.

Okay, great. Thank you, guys.

(Operator Instructions). Art Gisonni, Futures Consultants (sic).

Good morning, Steve. Regarding the new product, have you gotten the purchase order from Wal-Mart? Yes or no?

Well, I -- one of the things that we don't do is talk about specific customers in the things that we do here. We do have a -- I will say, though, that we do have an installation in Wal-Mart.

Okay. And then, one more question here. As far as going forward this year, what do you plan on doing to increase awareness and the PR in the Company?

We attend at least two, maybe three or four, investor conferences. We have an active IR effort. One of our plans is that we intend to be out Making presentations to fund-type investors over the year. In fact, we have started the process of scheduling those this year.

Okay, great. Appreciate it.

And, Mr. Merrick, no further questions, sir. I will turn the conference back to you for closing or additional remarks.

Thank you all for listening and participating in our call. We are very excited about where we're headed this year. And we are looking forward to providing to you reports on a quarterly basis that you will be pleased to hear. Have a good day. Thank you.

And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.