Yunhong CTI Ltd.
Q2 2015 Earnings Call Transcript

Published: 12 Aug 2015

[Operator:]

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation Announces Second Quarter and Year-to-Date 2015 Financial Results Conference Call. This call is being recorded. This conference call may contain forward-looking statements, as defined in Section 27AI1 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 these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information proved to be accurate. I will now turn the call over to Stephen Merrick, President. Please go ahead, sir.

[Stephen Merrick:]

Good morning, everyone and thank you for participating in the call. My name is Stephen Merrick, I am the President of CTI and will be presenting a report with Tim Patterson, our Chief Financial Officer and Stan Brown, a Director of the 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 have just recorded the best second quarter results we have had in the past five years. Second quarter has tended to be our weakest quarter of the year, but this year we have had a positive result, which we believe reflects our steady progress towards improved and consistent profitability and strong cash flow. For the second quarter, we had net revenues of $13,621,000 compared to net revenues of $13,159,000 in the second quarter last year. Net income for the quarter was $52,000 or $0.01 per share fully diluted compared to a loss in the second quarter last year of $122,000. For the six months ended June 30, we had net revenues of $28,596,000 compared to net revenues for the same period last year of $28,079,000. Net income for the six months was $336,000, representing $0.10 per share compared to a loss of $77,000 for the same period last year. On a trailing 12-month basis to June 30 this year, our net income per share is now $0.27, the best that has been in a long time. From a cash flow standpoint, our results are strong. For the second quarter, EBITDA, earnings before interest, taxes and depreciation, was $918,000 compared to $568,000 for the second quarter last year. This is an increase of 62%. For the six-month period, EBITDA was $2,291,000 compared to $1,490,000 for the same period last year. I do want to reiterate that 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 the reconciliation to our GAAP numbers. These much improved results are reflected in our financials in a number of different ways. Certainly, a significant factor is the improvement in our gross margin rate and gross margins. In the second quarter last year, our gross margin rate was 23%. In the second quarter this year, the gross margin rate jumped to 25.8%. This increase is directly reflected in our gross profit levels. We generated almost $3.5 million in gross profit this year compared to just over $3 million in gross profit in the second quarter last year. Gross margin improvement for the first half of the year is equally strong. The gross margin rate for the first half of this year was 26.3% compared to 23.2% for the first half of 2014. In the first half this year, we generated $7.5 million in gross profit compared to just over $6.5 million for the same period 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 and our household container products. Income from operations has improved as well. For the second quarter this year, income from operations was $250,000 compared to a loss of $56,000 in the second quarter last year. For the first half, income from operations was $1,169,000 compared to $270,000 for that period last year. There are a couple of other general factors to mention which do have an effect on our results. First, interest remains a factor in our earnings equation. In the second quarter this year, net interest expense was $289,000 compared to $205,000 in the second quarter last year. For the six months, net interest expense was $692,000 compared to $506,000 for the same period last year. Second, the changes in currency exchange rates are having some impact on results. In Mexico, for example, many of our sales are denominated in Mexican pesos, which have declined in value against the dollar. So, the dollar value of their sales, 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, a product we sell to them from the U.S. has increased and the dollar value of their sales has declined. Let me turn now to our sales results in our product lines. Revenues in our vacuum sealing line continued to improve, reaching $2,654,000 in the second quarter compared to $2,040,000 in the second quarter last year, an increase of 30%. For the six months, revenues in this line were $5,464,000 compared to $4,822,000 for the same period last year, that’s an increase of over 13%. Sales in this line tend to increase over the course of the year with the third and fourth quarters being the strongest. We continue to have placement for this product line and good sales results in the largest U.S. retail chain, as well as in other chains and online retailers and we are pursuing additional chain store placement for the line. In our foil balloon line, we saw some increase in net sales in the second quarter from $6,115,000 last year to $6,262,000 in the second quarter this year. For the first half, net sales of foil balloons decreased slightly from $13,388,000 last year to $13,356,000 this year. However, this is a place in which currency exchange rates have had their effect as the dollar value of revenues for sale of foil balloons in the UK, Europe and Mexico have declined. In the U.S., net sales, including sales for our largest customer, were actually up for the quarter. In general, sales in our foil balloon line remained strong and we continue to see increases in unit sales, although we are experiencing some currency exchange rate impact. This year, we have introduced several new balloon designs, including a successful blackboard drawn product and will be introducing additional designs during the year. We expect strong foil balloon sales in the second half of 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 decline in value of the peso against the dollar. Unit sales and gross margins on latex products remained strong and we continue to develop new sales in this line in all of our markets, including Mexico, the U.S., the UK and Europe. During the quarter, we experienced good revenue growth in new lines of products, particularly our household container product line, which enjoys high margins. Revenues in this product line increased by 46% in the quarter to $850,000 from $581,000 in the second quarter last year. We do expect continued growth in this line and in our Candy Blossoms line of products during the second half of the year. Our financial condition is good. During the second quarter this year, we generated positive cash flow from operations in the amount of $3.5 million. As of June 30 this year, we had a working capital balance of $11.8 million and we had about $780,000 in cash and availability on our line of credit. As we go forward this year, we continue to be 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 balloon lines. We have a number of prospects and are actively pursuing new customers and opportunities in these lines in the United States, the UK, Mexico, Latin America and Europe. And we expect to see growth in our newer lines, including Candy Blossoms and Candy Loons and in our household container product line. While we are working to increase revenues, we are as much focused on maintaining an increasing profitability. At this point, we do not have any significant new expenses planned for the development or introduction of new 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 from calls from our participants?

[Operator:]

[Operator Instructions] We will now take a question from Todd Brady with Oppenheimer.

[Todd Brady:]

Good morning Steve.

[Stephen Merrick:]

Good morning.

[Todd Brady:]

Quick question, could you kindly just break out the gross margins, I think you gave the gross margins for the two out of three divisions, but the home division, the direct sale business, what type of gross margins is that carrying versus the other two reported segments?

[Stephen Merrick:]

Well, we have tended not to report gross margin by product line, partly because – and one of the good reasons for that is that, for example among foil balloons gross margins can vary widely from one product to another. And the same is true in the home container product line. In general, the home container product line is represents in its sales a significantly higher gross margin than – overall than our average gross margins for other products, probably 40% to 50% higher.

[Todd Brady:]

Okay, I appreciate that. In terms of OpEx going forward for the second half of this year, is it fair to say that you are going to keep a flat line on the OpEx side of the business or should we see any changes there?

[Stephen Merrick:]

There won’t be any significant increases in operating expenses over the course of the year. As a percentage of sales, operating expenses have gone down. And they – over the year so far this year, they are slightly up from last year, but only slightly in terms of dollar amount, in terms of percentage of sales they are down.

[Todd Brady:]

Steve, one final quick one then I will let somebody else take the floor. But obviously, your business and a lot of businesses are experiencing the benefits of lower raw commodity costs, can you just tell us a little bit more about the declining prices you are seeing and I know it’s more of an art than a science, but do you foresee this lower pricing environment for an extended period of time, are you seeing certain areas that you have been saving on a cost side start to stabilize, what exactly are you guys seeing on the cost side as the actual raw cost container to come down? Thank you.

[Stephen Merrick:]

Well, we have seen some benefits, a significant benefit, the reduction in cost of raw materials. I don’t have the specific number in front of me. But I think it’s something to the – for last year, for example I think our raw materials cost was compared to the year before, went from like 46% or 47% of sales down to 43% of sales or 42% of sales. And I think we are continuing to have that kind of benefit. On the latex side, that’s the most striking change. Raw latex, 2 years, 2.5 years, 3 years ago had risen as high as almost $6 a kilo, it’s now less than $3. So it’s literally less than half of what it was just a couple of years ago and that has been a significant benefit to us. Obviously, oil prices are down. So films, to some degree film costs based upon oil are down. And we have had some benefits on film costs. Some of the film that we used actually is based upon production from natural gas. We have seen as much decline in terms of cost on natural gas. But in that arena we have had – in the polyethylene films we have had some decline in cost as well. And our principal raw materials consist of the films and the latex. So those are – with the decline in all of those, that has given us some significant benefit.

[Todd Brady:]

I appreciate it. Thank you again.

[Operator:]

[Operator Instructions] We will take our next question from Vincent Gargano, a Private Investor.

[Vincent Gargano:]

Good morning Mr. Merrick. How are you?

[Stephen Merrick:]

Good morning, sir. How are you doing [ph]?

[Vincent Gargano:]

Very good, congratulations on another good quarter.

[Stephen Merrick:]

Thank you.

[Vincent Gargano:]

Could you touch on the Creative Consulting contract win in June, can you talk anything about that, what size, revenue gains you guys anticipate, any kind of detail on that contract?

[Stephen Merrick:]

Sure. We have begun a relationship with Creative Consulting and all of this was – Creating Converting. Excuse me, I had the name wrong there. It’s Creative Converting. Creating Converting is a significant supplier of party goods items in the United States and in a number of foreign countries. And we – our relationship with them has developed in several different ways. One, we have become a distributor for them for their party goods products in Mexico. So that we now sell balloons, both foil and latex and party goods in Mexico together, which we think is a valuable addition to our ability to capture various retail accounts. We are – have become a supplier to Creative Converting in the United States of foil balloons because they sell foil balloons as part of their offering party goods to their customers. So that is another arena in which we have become associated. And through a distributor of theirs in the UK, we have also become a supplier of foil balloons to that distributor. So that’s kind of the current level of activity where we – it’s a relationship that we think is a very positive one for the company and we are working to expand it as we go.

[Vincent Gargano:]

Okay. Have you been booking revenues already or is it something looking forward in the next quarter?

[Stephen Merrick:]

We have begun to generate revenues. I would say that the results for the second quarter don’t reflect significant revenues yet, but we have begun to generate revenues.

[Vincent Gargano:]

Okay, great. Second question is regarding the stock price, which I, in my opinion seems extremely undervalued and very low, I would like to get your opinion on that?

[Stephen Merrick:]

Well, we believe that the price of the stock is undervalued. And we are working diligently to do the things that we can do responsibly to help that in the marketplace. And obviously ultimately, it’s the investors who look at our company and make a determination ultimately at what they perceive to be are the value of our company and our value. But I can tell you that we are doing – we do focus efforts on our Investor Relations activities. And we do work to both in terms of the substance of our results and our efforts in the marketplace to support it.

[Vincent Gargano:]

Yes. You obviously have turned the operations around. I know you are personally buying stock, which is always a vote of confidence, any consideration on doing a stock buyback. Obviously, cash flow is very strong, has the company and Board considered doing that or announcing at least a stock buyback?

[Stephen Merrick:]

That’s something that is a subject matter of discussion at the Board of Director level. We – there are variety of considerations in that, including cash flow and including issues of our obligations with our principal lenders that we have to take into account, but it certainly is a – it is a matter that we have discussed as a possibility.

[Vincent Gargano:]

Alright, I appreciate your answers this morning and congratulations again on a great quarter.

[Stephen Merrick:]

Thank you very much. Appreciate it.

[Vincent Gargano:]

Thank you. Thank you.

[Operator:]

[Operator Instructions] It appears there are no further questions at this time. Mr. Merrick, I would like to turn the conference back to you for any additional or closing remarks.

[Stephen Merrick:]

Thank you. I appreciate that. I appreciate all of you being on the call and having interest in our company. And we look forward to speaking with you again as results of the third quarter are generated. Thanks. See you soon.

[Operator:]

This does conclude today’s conference. Thank you for your participation.