Yunhong Green CTI Ltd (YHGJ) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation Announces Year End And Fourth Quarter 2015 Financial Results Conference Call. This call is being recorded. This conference call may contain forward-looking statements as defined in Section 27A1 of the Securities Act of 1933 as amended, 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.

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

Good morning, everyone, and welcome to our CTI Industries earnings conference call in which we will report on our results for the fourth quarter of 2015 and for the full year. I am joined on the call today by John Schwan, our Chief Executive Officer, and Stan Brown, our Director of Investor Relations. And Tim Patterson is also on the line remotely, our CFO.

At the conclusion of our report, we will open the call for questions. Our earnings press release has been issued and is available now.

I am very pleased to report that we have just completed one of the best years in our 40-year history. For the year, we had net profits of $1,047,000, which is double the profit level we achieved in 2014 of $514,000. On a per-share basis, our earnings were $0.32 per share, $0.30 on a diluted basis, compared to $0.16 per share last year. In 2015, we achieved record net sales of just under $60 million, the highest in our 40-year history.

During 2015 we had modest revenue increases in both our consumer vacuum pouch and machine product line, and in our novelty product lines of foil and latex balloons. And, we had some significant new sources of revenue in our direct to consumer sales of container and organizing products, our Candy Blossom and Candyloon products, and in the distribution of party goods.

Overall, sales increased by 2.7% from $57,828,000 in 2014 to $59,365,000 in 2015.

I will get into some specifics by product line a bit later, but first I wanted to point out the effect of currency exchange rates on our revenues this past year. Had it not been for the decline in the value of the Mexican peso, and the euro last year, the dollar value of revenues in 2015 would have been significantly greater. A significant portion of our sales of foil and latex balloons now are in Mexico and Europe, and the decline in value of the currencies in those areas impacted the dollar value of our sales there.

With respect to latex balloons alone, we estimate that the dollar amount of our revenue from sales in Mexico was impacted to the extent of about $2.1 million because of the decline in the value of the peso.

Currency exchange rates also affected our profits. We estimate that net income in 2015 was adversely affected due to the decline in the Mexican peso by approximately $190,000.

So, the point is that our sales and results related to foil and latex balloons were actually much stronger than they may seem, due to the effect of currency exchange rate changes last year.

Fourth-quarter results for 2015 were also quite strong. Net sales for the fourth quarter were $15,888,000 compared to net sales in the fourth quarter of 2014 of $15,180,000, an increase of 4.7%. Net income in the fourth quarter was $502,000 or $0.15 per share, compared to net income of $382,000 or $0.12 per share for the fourth quarter of 2014.

Other metrics concerning our results in 2015 were also strong. One of the reasons for our strong results was that gross margins continue to improve in 2015. Gross margin levels increased from a 24.6% rate in 2014 to 27.5% in 2015. This increase was the result of increased sales of higher-margin products, particularly our direct to consumer sales of home containers and organizing products, and also of production efficiencies we achieved as the result of reduction in our factory overhead expenses.

Income from operations in 2015 increased by more than $1.2 million over 2014 from $1,609,000 in 2014 to $2,817,000 in 2015. EBITDA, our earnings before interest, taxes, depreciation and amortization, also increased substantially, reaching almost $5 million for the first time in our history. EBITDA for 2015 was $4,957,000, an increase of almost 23% over 2014 EBITDA of $4,036,000.

I do want to reiterate that this EBITDA is not a GAAP accounting measure, but we do use it internally to measure our core operating results, so have included it in the earnings release with a reconciliation to our GAAP numbers.

Cash flow from operations in 2015 reached $2.6 million as the result of our strong income from operations and the fact that we moderated the increase in inventories and receivables during the year. As of December 31, 2015, our working capital was over $12 million and we had cash and availability on our line of credit of $1.8 million. So, our financial position going into 2016 is strong.

As we will discuss, though, we do anticipate significant increases in sales during 2016, which we believe will require additional funding to finance increases in purchases of raw materials and inventory as well as anticipated increases in receivables, particularly during the second half of the year. We are currently exploring means to finance these anticipated additional funding needs.

Let me turn now to a review of our various product lines. With respect to our vacuum sealing systems line, we had modest growth in revenues during 2015 from $13,106,000 in 2014 to $13,206,000 in 2015. We market our vacuum sealing products principally through several major chain store accounts in the United States. We continued to maintain a strong position in those accounts during 2015.

Based on indications we have received from these customers, we anticipate substantial increase in sales of vacuum sealing products during 2016, particularly in the second half of the year. In addition to our line of vacuum sealing machines, pouches and rolls of film, we also produce a line of zippered vacuumable bags which we have marketed under the ZipVac brand.

In 2016 we are introducing a line of zippered vacuumable bags and vacuumable canisters under the brand Clever Fresh, which we intend to market through our direct sales operation.

With respect to our foil balloon product line, sales reached $25,187,000 in 2015 compared to 2014 sales of $24,932,000. Exchange rate changes, particularly in Europe with respect to the euro, adversely impacted the dollar value of foil balloon sales there during 2015, with the result that the increase in unit sales, which did occur, particularly in Europe, are not reflected in the revenue number.

A significant portion of our sales of foil balloons are to major chain store accounts in the United States, the United Kingdom and Germany. Sales to those chains remained strong in 2015, and we anticipate continued strong sales to our existing chain accounts.

In addition, we have established a new relationship with a major party goods company to whom we are now supplying foil and latex balloons. Further, we are pursuing and believe we have opportunities for additional chain accounts both in the United States and Europe. Over the past couple of years, our sales of smaller 9-inch air filled balloons have expanded and we have acquired several new customers for that product line in the United States, the United Kingdom and Europe.

Overall, we do anticipate good growth in foil balloon sales during 2016.

Turning to our latex balloon product line, the dollar volume of latex sales declined in 2015 to $9,739,000 from $11,576,000 in 2014. This decline is attributable almost entirely to the decline in the exchange rate of the Mexican peso to the dollar during 2015. Over the course of 2015, the exchange rate for the peso to the dollar declined by about 20%. A significant portion of our sales of latex balloon products are made in Mexico and denominated in pesos. We estimate that the effect of this exchange rate decline in 2015 on the dollar value of revenues from the sale of latex balloons in Mexico was about $2.1 million. In terms of unit volume, however, sales of latex balloons actually increased during 2015.

For 2016, we anticipate an increase in both the unit and dollar volume of latex products. In April 2016, a new latex balloon production machine at our facility in Mexico will be fully operational, and we expect that machine to increase our capacity to produce latex balloons by about 30%.

Further, we are pursuing and experiencing additional latex balloon sales in the United States, the United Kingdom and Europe where any further exchange rate decline for the peso will not affect the dollar value of sales.

Over the past two years, we have begun to generate revenues from new sources, including our Candyloon and Candy Blossom lines, from the direct to consumer sales of container and organizing products, and most recently, from the distribution in Mexico of party goods for a large US producer of party goods. In 2015, our sales from these other lines grew to $6,710,000 from $3,408,000 in 2014.

We are experiencing and anticipate strong continued growth in our sales of container and organizing products and the distribution of party good products in Mexico. And we believe we have opportunities to develop additional sales of the Candyloon and Candy Blossom products at certain major chains.

In sum, we believe that in 2016 our Company will resume a phase of rapid growth in sales in several of our product lines and overall. While we do not provide specific guidance on revenue or earnings, we believe we will grow both revenues and profits in 2016. 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.

Congratulations on the nice quarter and nice year. A question, Steve; gross margins continue to improve. Is it fair to say that the continued improvement we have seen over the last couple of quarters is sort of the new base case scenario for margins? Also, you talked about a significant sales jump next year. How should we be thinking about OpEx as a percentage growth versus what you guys are maybe projecting on topline growth? And third of all, you talked about continued growth in the container and direct product side of your business. You guys grew that really, really nicely year over year from 2014 to 2015. Would it be fair to say that we could continue to see this type of percentage growth in that area of your business? Thank you.

I forgot the first question (laughter) -- what was your first question?

My first question was around gross margins.

Gross margins, yes, okay; I remember. (multiple speakers)

I apologize, I am dialing in remotely myself.

With regard to gross margins, I think that we do expect that we will be able to maintain a gross margin rate generally at the level that we achieved in 2015. I don't know that we anticipate significant new increases in gross margin rates, but I -- we think that we will expect to maintain and we are consistently working on margin levels with an effort to try to make them as high as we possibly can. But to some degree, we have benefited now from an increase in sale of higher-margin products, and also over the last couple of years, decline in value of raw materials. And we think that the benefit -- the continuing benefit of that will moderate, but that we will be able to maintain our margin levels going forward.

With respect to the impact of operating expenses related to increase in sales, we do not think that operating expenses will increase at a pace that is equal to -- or a percentage equal to sales. That is, that we will get some leverage from increase in revenues that does not reflect an increase in operating expenses.

With respect to the growth in the container and organizing products, we had significant growth in that area of our business this past year. We expect -- we are experiencing and expect to experience significant growth in that business again this year.

Steve, just one quick follow-up. Can you give us just some color on the tone of business with the dollar stores and it sounds like one of your customers has really stepped up their business with you folks looking into 2016. Is this a domestic partner or customer?

Well, we are experiencing -- we had nice increases with the dollar stores last year and we maintain a strong position in the dollar store business. We also have other -- we have business with several -- a number of other major chain businesses, both related to vacuum sealing products and balloons. And we are anticipating and have been -- have some indications of some significant increases with one or more of those major chains during 2016.

Thank you. I will go back into queue.

(Operator Instructions) [Vincent Gargano].

Just wanted to congratulate you guys on a really great fourth-quarter and full-year. (multiple speakers) the results look really good. (multiple speakers)

Yes, some sizable delay on my end. It sounds like you guys are really -- sounds like you have already approached that revenue growth this coming year.

We are, and we have reported obviously -- one cannot be -- we did not give specific guidance and don't think that we can. On the other hand, we have reasonable indications from several sources of growth in our -- in several of our product lines, as we reported, and we are anticipating it.

Right. And I think you just kind of touched on a little bit of the borrowing needed for that revenue growth. The only concern I see was your interest expense going up. Is that something you guys think you can manage going forward?

Well, we certainly want to do that. One of the things that impacts our -- what we record as interest expense, is the debt discount level or rate that relates to the warrants that we issued in connection with our mezzanine debt. And as the stock price varies, the amount of that discount that we have to record also varies. So, it does have an impact and it is a factor in one of the things over the longer term that we expect to address.

All right, sounds good. Again, congratulations; really, really good finish to the year and 2015 close.

Thanks very much.

Thank you.

(Operator Instructions) Michael Goodrich, B&G Capital.

Congratulations on a great year, and it looks like your margin goals are finally starting to reach the numbers you have been looking for for the last few years.

I think that's a good way to put it.

(laughter) Question I had is regarding the merger with Family Dollar and Dollar Tree. Can you guys give us any color on how that will help you guys? Is that kind of where you are getting the benefit here in the second half of the year? Can you give me some color on that?

Well, we are doing well with Dollar Tree. We have been a relatively long-term significant supplier with them and we worked very hard at doing a good job. Family Dollar, some of the Family Dollar stores have been converted to Dollar Tree stores. In that respect, we can, I think, reasonably expect that we would have access to some of those stores.

Beyond that, I think it is not in terms of what the ultimate impact will be. In terms of Family Dollar, I think that is still uncertain. And we really can't make a prediction about it.

Okay. Can you talk a little bit about Europe? I know that's an area you guys have been spending a lot of time in and building. Can you talk about your growth over there?

We really have two operations in the European area, one in the UK and one in -- well, it is in Germany, but covers a number of countries in middle Europe. In both cases, our -- we have developed and are developing significant relationships and sales into major chain store accounts, and also in particular into the discount chain store accounts. That has been very successful for us in the United States, obviously, but is also becoming a -- more and more successful for us in Europe, in the UK and Europe.

We are also developing the latex balloon business in both the UK and in Europe, and that is -- there had been some challenge in that for us, because of some regulatory issues in the past. We have surmounted those, and particularly with our new equipment that we now have online in Mexico, that will be fully operational and producing in April, we expect that we will have a significant penetration into the European market for latex balloons as well.

So that is something fairly new then, right, with the regulations and the balloons? You had to adapt to that. Is that it?

Well --

(multiple speakers) that investment in the machine?

It's relatively new in the -- we were not impacted by that as much in the UK as we were in Europe, although the regulations now cover all of both the UK and Europe. But, it did have an impact in the past, because of that regulatory requirement. It has to do with the element of having a component called nitrous amine in the latex product, which we now have been capable of producing without that material.

So the result is that we have full access to the market, both in the UK and all of Europe at this point. And we are growing our business there in latex, and we expect to.

That's great. Again, congratulations, guys. Thanks for your time today.

Todd Brady, Oppenheimer.

Steve and John, just one quick follow-up. Thanks for giving us some clarity on the relationship with the dollar stores. You have been working also with some other retailers, namely Walmart. Can you maybe give us an update on your relationship with Walmart, and how things look heading into the next fiscal year? Thank you.

Well, I would defer on that one with your (technical difficulty). Some of the -- we usually don't make reference to specific customers in our reporting. We are required to do that within some limits, because of our legal requirement that we have to identify customers where the customer represents over 10% of our sales.

Other than that, we really don't identify and make information -- provide information about specific customers, because in great part the customers do not want us to do that. So, while it certainly -- we do have a disclosure that Walmart is a customer of ours and has been a significant customer of ours, beyond that, I think -- and we obviously view them as important and significant to us -- I think reporting specifically on things related to Walmart, we would rather not do.

Okay, that is very fair. But listen, once again, congratulations on the nice year. Thank you.

(Operator Instructions) There are no further questions in the queue at this time.

Very good. Thank you very much, everyone, for participating and we are certainly excited to be able to bring the positive results and news to you that we have had for the past year. And we can assure you that we are all working very hard to continue that. Thanks again, and we will speak again soon.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.