Yunhong Green CTI Ltd (YHGJ) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation announces first-quarter 2015 financial results conference call. This call 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 of the statements 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 and 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.

I will now turn the call over to Stefan Merrick, President. Please go ahead, sir.

Good morning, everyone, and thank you for participating in the call. My name is Stephen Merrick, I am the President of CTI, and I will be presenting our report with Tim Patterson, our Chief Financial Officer, and Stan Brown, the Director of Our Company and Director of Investor Relations.

At the conclusion of our report, there will be an opportunity for you to ask any questions you may have.

We are off to a good start this year, and we are pleased to report strong bottom-line results for the first quarter. For the quarter, we had net income of $285,000, which represents earnings of $0.09 per share, $0.08 fully diluted. This is more than 6 times the earnings we generated in the first quarter last year, which was $45,000 at $0.01 per share.

These much improved results are reflected in our financials in a number of different ways. Probably the most significant is the improvement in our gross margin rate and our gross margins.

In the first quarter last year, our gross margin rate was 23.4%. In the first quarter this year, the gross margin rate jumped to 26.6%. This increase is directly reflected in our gross profit levels. On revenues which were essentially equal with the first quarter of last year, we generated almost $4 million in gross profit this year compared to about $3.5 million in gross profit in the first quarter last year.

This increase in margins has come about for several reasons. First, in our latex balloon business, margins have increased over the past year due to the decline in the cost of raw latex. Second, in general, our cost of raw materials has declined overall as we have seen some improvement in film costs, as well as in raw latex. Third, we are generating more revenue from products which have a higher margin rate, including some of our vacuum sealing line of products, our new Candy Loon product line and our household container products.

The general improvement in financial results is also reflected in some other significant measures. Income from operations in the first quarter this year was $919,000 compared to $326,000 for the first quarter last year.

Also, this quarter we reported EBITDA, earnings before interest, taxes, depreciation and amortization in our earnings release. I want to note that this is not a GAAP accounting measure, but we do use it internally to measure our core operating results. So we have included it in the earnings release with a reconciliation to our GAAP numbers.

For the first quarter this year, EBITDA was $1,372,000 compared to $922,000 last year, showing the significant improvement in operating results we have achieved so far this year.

I do also want to note that a factor in our improved results is that we have actually reduced our operating expenses compared to the first quarter last year by over $100,000, reducing operating expenses as a percentage of sales from 21.2% in the first quarter last year to 20.5% in the first quarter this year.

Interest remains a significant factor in our earnings equation. In the first quarter this year, total interest expense was $409,000 compared to $307,000 in the first quarter of last year. As we have reported, a significant part of this interest expense relates to the interest we pay on our $5 million mezzanine loan and on the debt discount charge associated with that loan.

Also, I do want to note that changes in currency exchange rates are having some impact on our results. In Mexico for example, many of our sales are denominated in Mexican pesos which have declined in value against the dollar. But the dollar value of sales in Mexico have declined.

Also, with the decline in the value of the euro, the pound and the peso against the dollar, the cost to our foreign subsidiaries in their local currencies of product we sell to them from the US has increased and the dollar value of their sales has declined.

Let me turn now to our sales results and product lines. In general, sales remain strong in the first quarter, reaching a total of $14,975,000 compared to net sales of $14,920,000 in the first quarter last year. Revenues in our vacuum sealing line continue to improve, reaching $2,810,000 in the first quarter compared to $2,781,000 in the first quarter last year.

These sales reflect a small decline in the sale of zippered pouches for the quarter, but a continued steady increase in our branded line of vacuum sealing machines and pouches from $1,975,000 in the first quarter last year to $2.1 million in the first quarter this year.

Sales in this line tend to increase over the course of the year with the third and fourth quarters being the strongest. We continued to have placement for this product line and good sales results in the largest US retail chain, as well as in other chains and online retailers, and we are pursuing additional chainstore placement through the line.

In our foil balloon line, we saw a modest decrease in net sales for the first quarter from $7,273,000 last year to $7,940,000 in the first quarter this year. However, this is a place in which currency exchange rates have had their effect as the dollar value of revenues for the sale of oil balloons in the UK, Europe and Mexico declined.

In the US, net sales, including sales to our largest customer, were actually up for the quarter. In general, sales in our foil balloon line remain strong, and we continue to see increases in unit sales, although we are experiencing some currency exchange rate impact.

This year, we've introduced several new building designs, including a successful blackboard draw-on product, and we will be introducing additional designs during the year.

With respect to latex balloon sales, we experienced some decline in the dollar value of net sales in the quarter compared to last year, but for the most part, that decline relates to the decline in value of the peso against the dollar.

Unit sales and gross margins on latex products remains strong, and we continue to develop new sales in this line in all of our markets, including Mexico, the US, the UK and Europe.

During the quarter, we experienced good revenue growth in new lines of products, including Candy Loons and Candy Blossoms and our household container products, both of which enjoy high margins. Revenues in these product lines and some accessory products increased to $1,968,000 for the first quarter this year compared to $1,139,000 in the same period last year. We do expect both of these lines to continue to contribute increasing levels of revenue and margin.

Our financial condition is good. During the first quarter this year, we generated positive cash flow from operations in the amount of $1,586,000. As of March 31 this year, we had working capital balance of almost $12 million, and we had over $1 million in cash and availability on our line of credit.

As we go forward this year, we are focused both on growing our revenues and our profitability. We believe we have opportunities for growth in our vacuum sealing system product line and in our novelty foil balloon and latex lines. We have a number of prospects and are actively pursuing new customers and opportunities in those lines in the United States, the UK, Mexico and Europe. And we expect to continue to see growth in our newer lines, including Candy Blossoms and Candy Loons and our household container product line.

While we are working to increase revenues, we are as much focused on maintaining and increasing profitability. At this point, we do not have any significant new expenses planned for the development or introduction of new product lines, and we are working to manage our operating expenses to levels consistent with maintaining profitability.

That concludes our report. Operator, may we have your assistance with respect to questions for calls from our participants?

(Operator Instructions) And I'm showing no questions at this time in the queue. I apologize there is a Mike Goodrich with B&G Capital. Go ahead. Your line is open.

Good morning, gentlemen. I bet you thought you were off the hook! Only kidding. It was a great quarter, guys. What do you see going forward in the next two and three quarters of CTI? Are you going to continue to cut costs? Because it sounds like that was a big part of the success in the quarter. Can you give me a little color?

Well, I think that we -- as I said, our focus is going to be both on revenue growth and on profitability. We are not going to stop our efforts to grow the business. We do have lots of opportunities for sales growth both in the vacuum sealing line and in our other product lines. And I think it's reasonable for us to expect that our sales compared to last year's sales will improve over the course of the year.

But we also, as you know from our communications and so on, we have worked very hard at rationalizing our costs to the point that we can operate consistently at a profitable level.

As we introduced our new product line, our vacuum sealing product line a couple of years ago, we got to the point where we were engaged in significant costs and investments related to that line. And so one of the strong efforts that we have made is to manage those costs consistent with being profitable, and we're going to continue to do that. That's very much a focus of ours so that we can maintain profitability.

So basically it's smart growth, right?

I think that would be a good way to state it, and we're going to do everything we can to meet that standard.

Awesome. Can you also talk a little bit about the direct sales company? Because I think that's a new entity for you guys that appears to really be doing a little bit better every single quarter.

Well, we are engaged through a related company in the direct sale of products to consumers, their container products, and that business has grown at a nice pace, and in fact, the first quarter this year sales were $700,000 and some for the quarter, up significantly, and that operation is profitable.

It has enjoyed some fairly rapid growth, and we're looking forward to it to being a growing and significant part of our business.

Are you selling CTI products also to that?

Yes, we sell CTI as a supplier to the entity. And so we supply, in particular, vacuum sealing, the zippered vacuum sealing bags, some travel bags and some other products that are sold to that business, as well as other products that we purchase and supply to them.

Okay and last question. I guess the margins on that business and where do you see the margins as it continues to grow?

Well, the gross margins in that business, the gross margins are quite high, and they are well in excess of the probably double what our overall Company margin is. However, that can be a little bit deceiving because in a operation of that kind you also have higher sales costs and particular commissions and so on that you pay to the various people who are selling the product. And so margins are quite high, and the margins in that business have contributed to our increase in margins overall at CTI since we consolidate with them.

Okay. That's great. That business seems like it's starting to get some legs.

Yes, I think that's right.

Awesome. Well, guys. Thank you very much again for the time. Great quarter. Keep it going. Obviously, I know you guys are working hard there. So we'd like to see a little bit in the value of the Company at some point, and I think that will come, if you keep doing well.

We would too.

Well, keep plugging away, guys. If you keep earning money like this, the Company is going to do well, so.

Thank you. All right. Well, we're going to keep at it. (multiple speakers)

Thank you, guys. Have a great day.

(Operator Instructions) And I'm showing no further questions at this time.

Thank you, everybody. This is Steve Merrick speaking again. We appreciate your participation in the call and your interest. We are pleased to be able to report a good quarter, and we're looking forward to a strong year this year. Thanks very much and have a good day.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.