Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Global Sources Ltd. (NASDAQ:GSOL)

Q3 2013 Earnings Conference Call

November 14, 2013 08:00 ET

Executives

Cathy Mattison - Assistance Vice President, Lippert Heilshorn & Associates

Merle Hinrich - Executive Chairman

Connie Lai - Chief Financial Officer

Analysts

Jared Schramm - ROTH Capital Partners

Chong-Min Kang - Gabelli & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Global Sources’ Third Quarter 2013 Results Conference Call on November 14, 2013. Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Cathy Mattison of LHA. Please go ahead.

Cathy Mattison - Assistance Vice President, Lippert Heilshorn & Associates

Thank you, operator and I’d like to thank everyone for joining us today for the Global Sources’ third quarter 2013 earnings conference call. Speaking on the call today are Merle Hinrich, Executive Chairman and Connie Lai, Chief Financial Officer.

If you have not yet received the earnings press release, it is now available at the company’s website at globalsources.com. If you would like to be added to our distribution list or if you would like additional information about Global Sources, you may call LHA at 415-433-3777. A telephone replay of this call is scheduled to be available until November 22, 2013 and the dialing instructions are included in the press release. The replay is also scheduled to be available on the Investor Relations page of the company’s website for at least 30 days.

Before I turn the call over to management, let me remind you that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Global Sources does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Management has provided certain measures that are not in accordance with international financial reporting standards, or IFRS. Management believes non-IFRS metrics are useful measures of operations and provides IFRS to non-IFRS reconciliation tables at the end of the earnings press release. Global Sources defines non-IFRS net income as net income excluding non-cash SBC expense or credit; amortization of intangibles as it relates to certain equity compensation plans, profits or losses on acquisitions and investments net of transaction costs and related tax expenses; and/or impairment charges for all historical and future references to non-IFRS metrics.

Non-IFRS EPS is defined as non-IFRS net income divided by the weighted average of diluted common shares outstanding. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, impairment of goodwill and intangible assets, and profits or losses on acquisitions and investments net of transaction costs and related tax expenses. Management would like to remind you that the non-cash stock-based compensation charge is a charge to the income statement and a corresponding credit to additional paid-in capital. Hence, there is no impact on shareholders’ equity.

I would also like to remind you about Regulation FD restrictions. The company’s official spokespeople to the investment community are Merle Hinrich and Connie Lai.

And now, I would like to turn the call over to Mr. Hinrich. Please go ahead, sir.

Merle Hinrich - Executive Chairman

Thank you and thank you for joining our call today. In the third quarter, we reported revenue of $44.8 million and achieved IFRS and non-IFRS earnings per share of $0.15 and $0.17 respectively. In addition, we maintained a very strong balance sheet with no debt. Our core export focused business continues to experience retail macro challenges. Also the online portion of our business is in a competitive and shrinking market while the tradeshow portion is performing much better.

The third quarter’s year-on-year revenue softness in our tradeshow business was due largely to two shows and last year’s third quarter moving to different quarters this year. Our third quarter results reflect the increasing contribution of our exhibition business. We held three shows with the Mainland China domestic market during the quarter.

In July, we held the 13th China International Fashion Brand Fair in Shenzhen also known as the FashionSZshow. This is the largest and most influential fashion exhibition for the expansion in Southern China. While the show’s financial performance was disappointing, attendance was strong and we expect a rebound in sales next year. We held our Global Sourcing Fair Electronics in Shenzhen in August. It grew to include approximately 500 booths and had strong buyer attendance from both traditional and online retailers. In September we held the China International Optical Electronic Expo it had strong attendance and grew to feature more than 3200 exhibitors.

With regards to our export shows the second annual China Sourcing Fairs in Sao Paulo, Brazil were held in September. The shows featured more than 950 booths representing substantial growth over the previous year. And in October and within the fourth quarter we held our full series of China Sourcing Fairs in Hong Kong. This was also the 10th anniversary of the China Sourcing Fairs. The shows are a major barometer as we get to meet face to face with thousands of our most important buyer and supplier customers. In generally we were pleased with our buyer attempt which exceeded 63,000. However, while we were pleased with the buying activity overall, we continued to see some softness in both the buy and supply sides of the business.

The electronics space was an overwhelming success. It is our first and largest phase totaling over 4100 booths. The second phase encompassed gift and home products, while the third phase was focused on flagship accessories and apparel. Private sourcing events were held from July through the end of October 2013 were more than 120 sourcing teams from very large buying organizations including Auchan, Brookstone, El Corte Ingles, Home Retail Group, IKEA, Kesa Electricals, Kingfisher, the METRO GROUP and may others. These events created more than 700 high quality one on one selling opportunities for Global Sources suppliers.

Now I will turn the call over to Connie, after which I will conclude with comments about our strategy and direction. Connie?

Connie Lai - Chief Financial Officer

Thank you, Mr. Hinrich. I will now review our financial results for the third quarter of 2013 as compared to third quarter of 2012. Total revenue was $44.8 million as compared to $59.1 million. Online revenue was $22 million as compared to $15 million. Exhibitions revenue was $17.6 million as compared to $23.3 million. Print service revenue was $8.4 million as compared to $4.1 million. While we have long-term growth expectations for our tradeshow business this quarter reflects the move of our China Sourcing Fairs in Miami and Mumbai from the third quarter last year to the second and fourth quarter of 2013 respectively.

Total operating expenses were $36.4 million as compared to $47.4 million. Interest income was $467,000 as compared to $300,000. IFRS net income was $5.4 million or $0.15 per diluted share as compared to $8.2 million or $0.23 per diluted share. Non-IFRS net income was $6.1 million or $0.17 per diluted share as compared to $9.1 million or $0.25 per diluted share. Adjusted EBITDA for the quarter was $11 million as compared to the $15.3 million.

Now for the nine months ended September 30, 2013 as compared to the nine months ended September 2012. Revenue was $137.5 million as compared to $164.8 million. IFRS net income was $27.8 million or $0.77 per diluted share as compared to $21 million, or $0.59 per diluted share. Non-IFRS net income was $19.3 million, or $0.54 per diluted share as compared to $23.7 million or $0.66 per diluted shares. Adjusted EBITDA was $27.4 million as compared to $33.5 million.

Now, on to our balance sheet as of September 30, 2013 as compared to September 30, 2012, cash and securities as of September 30, 2013 totals $145.9 million as compared to $110.8 million. Our short-term deferred income and customer prepayments were $98.2 million as compared to $103.6 million. Total assets as of September 30, 2013 were $355.7 million as compared to $319.7 million. Also we continued to have no short-term or long-term bank debt. Days sales outstanding were seven days, the same as a year ago. We continue to give shareholder value by growing ROE. Retained earnings as of September 30, 2013 were $186.6 million as compared to $147.7 million. Total shareholders’ equity was $197.2 million as compared to $153.2 million.

Now on to our guidance, we are reiterating our guidance for the second half of 2013. Under IFRS, for the second half of 2013 ending December 31, 2013, our revenue is expected to be in the range of $101 million to $103 million as compared to $126 million for the second half of 2012. IFRS EPS is expected to be in the range of $0.32 and $0.36 as compared to $0.54 per diluted share in the second half of 2012. Non-IFRS EPS is expected to be in the range of $0.36 to $0.40 as compared to $0.63 per diluted shares for the same period in 2012. Adjusted EBITDA is expected to be between $19.7 million and $20.9 million as compared to $29.7 million in the second half of 2012.

And now, I will turn the call back to Mr. Hinrich.

Merle Hinrich - Executive Chairman

Thank you, Connie. As I mentioned in my opening remarks, we are not satisfied with the financial performance of our export focused business. This market sector has macro retailing challenges and cost and competitive pressures on the supply side. We serve the market with our online service event tradeshows. Our shows continue to make progress, but our online operations are more challenged than what is a shrinking market in terms of overall ad spend. Our objective is to help connect the right buyers with the right supplier through whatever mix (indiscernible) they prefer.

Export marketing dollars spent on shows exceeds that which is spent online. And our primary strategy is to offer services that integrate the best of online with the best tradeshows. This find them and meet them initiative is boosting value for all four of our major constituencies, buyers who attend our shows, buyers who use our online services, exhibitors and online advertisers. We have been making steady and significant progress with a variety of innovations. We are providing more valuable content to buyers at our shows, which just will allow our product showcases at the ball shows, which featured carefully in selected products for more than 800 advertisements who did not have boosts at the show.

We are connecting more advertisers with show attendees. More than 2,600 buyers made inquiries to advertisers at our whole shows with 1,600 using our personal shoppers and services. And more than 1,000 making inquiries to advertisers featured in our product showcases. We are extending the length and value of the exhibitor’s boost investment with their products and boost online exhibitors build awareness and generate leads and appointments. In addition, exhibitors reach buyers who attend the show and buyers who are unable to attend. And lastly, we are providing exclusive and valuable content to our online users. For example, more than a 140,000 exhibitor products were online for the full China Sourcing Fairs. This is a high value content to buyers and is unmatched in our industry.

Looking purely at the export focused tradeshow business, we anticipate continued top-line growth. For example, as mentioned, the October Electronic shows were an overwhelming success. These shows are leading events for global buyers, who want to source from the largest gathering of electronics manufacturers from Mainland China, Korea, Taiwan, Hong Kong and other territories. It is a very strong franchise that we intend to continue developing. Boost sales for future shows are strong. And we have various expansion plans underway. These plans include the mobile and wireless category, which is scheduled to become its own separate show in the fall of 2014.

If we look purely at our export focused online operations, despite the financial challenges, we have many satisfied customers and we are very pleased with progress we have made with our site this year. For example, our globalsources.com, we give buyers rich product and supplier capability information. Buyers search defined the type of products they are looking for and then without having to click to another location, they can get a quick sense of the supplier’s capabilities, customers and the compliances. This has become a preferred search format for buyers in our business and it is contributing to more effective searches for buyers and higher quality inquiries for suppliers. Suppliers also greatly prefer our format, because it enables them to target certain types of buyers or markets and boost their image or brand. The global retail environment continues to present challenges for our core business. However, we have managed through many similar situations in our 43-year history and we remained intensely focused on helping our respective customers buy or sell more effectively and profitably.

Shifting now to our overall corporate outlook and direction, I would like to address our capital allocation strategy. Due largely to the strength of our balance sheet, we are in the fortunate position of being able to explore wide variety of options to invest in our business, which I will quickly review. For our core business, we are looking at new online services to connect the global buyers with suppliers in Mainland China and elsewhere in Asia. The domestic market B2B market in Mainland China is an important growth opportunity. We are looking to further develop our existing properties organically. In addition, we are continuing to evaluate potential acquisitions, our complementary businesses and product lines. For our overall business, acquisitions also continue to be an important aspect of our growth strategy. We will also evaluate potential real estate transactions as opportunities arise that take into consideration our operational and office space requirements. Lastly, our board continues to review options to return cash to our shareholders. Our priority is to invest our resources back into the business, because we believe these are significant opportunities in our current markets.

In summary, we have a 43-year history of uninterrupted profitability, the highly experienced management team and a continued progress on building our competitive position while maintaining our strong balance sheet.

And with that, I would now like to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Jared Schramm from ROTH Capital Partners. Please state your question.

Jared Schramm - ROTH Capital Partners

Hi, thanks for taking my questions. Looking at your acquisition pipeline, can you discuss the opportunities you are seeing today in China any if so are there any newer geographies, you may have now looked at in recent years which are now the common interest to you?

Merle Hinrich

Jared, thank you for joining our call this evening. And the answer is yes, what we are looking at certainly within the domestic market are shows, which are tangential to shows that we already own. And by looking at that particular sector, we are able to extend not only the franchise of the original show, but able to better leverage both the exhibitor and the attendees for shows that we would look to acquire. In conjunction with that, we also look for domestic shows which would extend the jurisdiction, i.e., either from the south to the east or the south to the north. First a number of opportunities I am not able to go into substantial detail with it will be unproductive to do so. But I would also say that externally what we look for our shows with which we have an overlap in footprint and what I mean by that is in product sectors with which we can bring not only money, operating management experience, but we can bring exhibitors and a certain amount of attendee traffic.

Jared Schramm - ROTH Capital Partners

Okay, in any vertical particularly you are finding interesting from an acquisition standpoint at the moment, you mentioned some of them can jump up that you already have?

Merle Hinrich

So as you know there are three domestic shows, the CIOE show, China International Optical Electronics show, which has a very strong position in that sector. And as you will appreciate there are a number of related products and conventionally one or two in the area of automation, it’s simply a very exciting and a growth market both domestically and internationally. Within the show, within the fashion business, which is the SZ show in Shenzhen as you will appreciate there are opportunities within different product categories as well as into different geographic areas. So we also are as you know we are in the final stages of implementing with the machinery show and we will be looking for similar related activities. We are looking for in the domestic market its not limited to those three shows only, but we are looking to shows with which we feel have a substantial domestic growth as the China market matures, but also again in product lines that we have some familiarity with.

Jared Schramm - ROTH Capital Partners

Okay. And you touched on your capital allocation strategy as you look at the cash balance do you lean one way or another in regards to a buyback, a special dividend of do you measure those on a separate item metrics?

Merle Hinrich

Jared, we definitely leave this to the Board to decide which or whatever or what mix there may be and that will be looked at after the year end financials are concluded.

Jared Schramm - ROTH Capital Partners

And then higher level on the macro outlook, where do you see today versus where we spoke 90 days ago at the end of Q2 and compared today again versus a year ago and the outlook on the macro side?

Merle Hinrich

Well, of course it depends a lot on the macroeconomic changes in both the European market and the American markets. There have been also though in addition to those markets substantial improvement in the tertiary markets for China both in Africa, South America as I reported the San Paulo tradeshow was the very successful and we will continue to build on it. We feel that the U.S. market is returning, but it is recalibrated in many ways. It is being affected by e-commerce in both pricing and order sizes and the category mixes that is quite apparent that the buying attitude and actually the transactions themselves. We are encouraged at least for the time that there may be an improvement in the European market. As you know, the European market has been substantially hit recently within the last two to three years. The export market as you will note from the metrics, which now are being published improved in the month of October over September, a lot of that were in product lines and in products with which are outside of our categories.

Jared Schramm - ROTH Capital Partners

And in the China market just looking at it as a whole, would you feel like going forward, you do see more upside potential than down at this point in time, in particular, given where the market has been in the last three to four years?

Merle Hinrich

We have been of course very optimistic about the China market for many years. We continue to feel optimistic. We believe that there will be adjustments and its growth for sure. We have strong confidence at the existing new administration and the policies with which – which are now coming out. There is yes, a improved or I should say increased interest in the domestic retail growth as a factor of the GDP, but I think that there has been. And if you ask me we said the last nine months or so, there has been a return to accepting and having greater confidence in what the export market represents through China’s economy in the long-term. And I would say that even though prices have increased that the market mix of both product and availability has improved along with that. So, I am personally very optimistic about what the China domestic market and what China export market represents in the long-term.

Jared Schramm - ROTH Capital Partners

Okay, thank you very much.

Merle Hinrich

Thank you, Jared.

Operator

(Operator Instructions) The next question comes from Chong-Min Kang from Gabelli & Company. Please state your question.

Chong-Min Kang - Gabelli & Company

Hi. I was wondering if you can talk a little bit about you mentioned potential real estate transactions, if you want a little bit more detail as far as where you are looking what size and why?

Merle Hinrich

Chong-Min, thank you for joining our call. As I have said before, the top ones several times, our interest in the property is only to support our operations and has proved time and time again to be a wise in doing it that way, a wise and beneficial investment for the company and for the operations of the company. I am not able to give you specific locations as to our interest, but I do want to communicate to our shareholders that our interest again is not investing in property per se only to support the operational requirements that we need in the various areas and with which we offer.

Chong-Min Kang - Gabelli & Company

Okay. I guess, how do you evaluate I guess what kind of metrics do you use to evaluate these used spaces that you are looking at, how do you weigh whether it makes more sense to purchases as one (indiscernible)?

Merle Hinrich

Well, we always are faced with rental cost in these areas. We are also faced with an investment cost to dress out or to decorate these offices to provide a reasonable and comfortable environment for our employee store. Those investments usually are amortized over say five years. If indeed we rent a property and typically leases are for maximum two, three years with possibly a renewal at an increase in CPI or whatever or however it’s being negotiated. We have looked at the interest that we would pay in borrowing that money. And we have looked at of course and that we don’t need the money we have that have the cash, what is being earned on our bond investments. And we have seen over and over again that the offset in the cost is in favor of the acquisition of property that we would use for our operations.

Chong-Min Kang - Gabelli & Company

Thank you.

Operator

(Operator Instructions) There appear to be no further questions at this moment. Mr. Hinrich, please continue with any further points you wish to raise.

Merle Hinrich - Executive Chairman

Well, I would just like to close in saying thank you to everyone that has been in attendance and for your continued interest in Global Sources. And with that, I wish you all a good evening. Thank you.

Operator

This concludes the Global Sources third quarter 2013 results conference call. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Global Sources' Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts