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Executives

Lonnie D. Schnell – Chief Executive Officer

Nancy Agger-Nielsen – Chief Financial Officer

Analysts

Marco Rodriguez – Stonegate Securities

Richard Hamburg – Private Investor

Talon International, Inc. (OTCQB:TALN) Q2 2014 Earnings Conference Call August 11, 2014 4:30 PM ET

Operator

Good afternoon and thank you for participating in today's conference call to discuss Talon International Financial Results for the Second Quarter and six months ended June 30, 2014. All lines have been placed on mute to prevent any background noise. Please note this call is being recorded.

I’ll now turn the call over to (Indiscernible) Investor Relations. You may begin your conference.

Unidentified Company Representative

Thank you, good afternoon and thank you for participating in today’s conference call with Talon International. Joining me today is Lonnie Schnell, Chief Executive Officer of Talon International and. Nancy Agger-Nielsen Chief Financial Officer.

Following management’s opening remarks, we will open up the call for your questions. Before I continue, I would like to take a moment to read the company's Safe Harbor statement. This call contains forward-looking statements as referenced in the Private Securities Litigation Reform Act.

Forward-looking statements include but are not limited to the company’s views on market growth, changing trends in apparel retailing, new product introductions, and the Company's ability to execute on its sales strategies, and are generally identified by phrases such as "thinks," "anticipates," "believes," "estimates," "expects," "intends," "plans," and similar words.

Forward-looking statements are not guarantees of future performance and are inherently subject to uncertainties and other factors which could cause actual results to differ materially from the forward-looking statements. These statements are based upon, among other things, assumptions made by, and information currently available to management, including management’s own knowledge and assessment of the Company's industry, competition and capital requirements.

These and other risks are more fully described in the Company's filings with the Securities and Exchange Commission including the Company's most recently filed Form 10-K and Quarterly Report on Form 10-Q, which should be read in conjunction herewith for a further discussion of important factors that could cause actual results to differ materially from those in the forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I would like to remind everyone that this call will be available for replay through September 11, 2014 starting this evening approximately two hours after completion of this call. Please refer to today’s press release for dial-in replay instructions.

Now I would like to turn the call over to Talon International CEO Lonnie Schnell. Lonnie?

Lonnie D. Schnell

Thank you, Jennie and good afternoon everyone, thank you for joining our call and for your continued support of our company. We just issued a press release announcing our financial results for the second quarter and six months of 2014 and our quarterly report on Form 10-Q with the SEC is in process of being filed.

The details of our financial performance are described in that report and I encourage you to read that as well as our annual report for fiscal year 2013 for complete understanding of our company and our performance in the risk and opportunities we face.

We were disappointed with our revenue results for the second quarter, although not totally surprised given the significant challenges and generally poor results within the retail industry this year.

Revenues for our second quarter were $16 million roughly $600,000 less than our revenues for the same period in 2013. The lower sales in the second quarter of this year compared to 2013 were primarily within our zipper products, where we traditionally have our smallest backlogs and fastest delivery times. Our mass merchandizing and more price sensitive retail customers evidenced the sharpest decline followed by a few of our larger specialty retail customers, and then our specialty trend business.

We believe sales to these customers evidenced the industry’s overall weakness at retail during the first quarter of 2014, leaving them with higher than expected inventory levels going into the second quarter. The higher inventories prompted these retailers to cutback and delay planned programs early within the second quarter and thereby resulted in softer demand for our products during this quarter.

The effective of this inventory rebalancing those commonplace within the industry and can promptly correct itself or take several quarters to resolve depending on the individual retailer and the overall industry responsiveness. Since the majority of our products are custom products made to order, we carry very little and inventory to buffer these changes and with our quick delivery times, we can quickly see not only the softness when it occurs, but also a rapid recovery and that occurs.

While the overall industry affected our business and softened our sales results for the quarter, we will nevertheless successful in building our new brand additions consistent with our plan and expectations. This reaffirms our overall growth strategy, the success of our business development efforts and the strength of our product portfolio.

Sales from new brand nominations added in 2014 accounted for nearly $700,000 in revenue within the quarter and just over $1 million in the first half of this year. In addition sales from new brands added during 2013 contributed an additional $1.3 million in the quarter and $2.2 million in the first half of this first year, we are proud to now include and our list of market brands that we serve brands like Scotch & Soda, Original Marines, Jack & Jones, Old Navy as well Burton Group, Groupe Dynamite and Allsaints.

During the quarter we also announced a two year renewal of our agreement with FatFace Group Ltd to supply them all of their apparel trim and Zipper products. FatFace is a premier UK based retailer specializing in the design and sale of active lifestyle clothing related accessories, this is our second renewal with FatFace and we look forward to a continued successful partnership, significant progress was also made during the quarter in our TekFit division where we have now initiated production to incorporate the TekFit waistbands into select styles of a major retail brand, we hope to continue to bring more great news of this product to you in the coming months.

The innovative TekFit waistband represents a creative advance and apparel design and the initial production efforts are key step in remarketing of our TekFit stretch technology. In addition we are working with other major retailers to include this innovative comfort technology into products such as dress shirt collars, denim jeans, and intimate wear. Dress shirts incorporating the innovative stretch collar by Tekfit are currently available in selected test markets under the Van Heusen brand. We are hopeful to change the way consumers think about dress shirts with us, this dynamic product.

Now, I would like to turn the call over to our Chief Financial officer, Nancy, who will take you through the financials, once Nancy concludes her remarks, I will touch on a few additional highlights from the quarter and then ask any questions you may have. Nancy?

Nancy Agger-Nielsen

Thank you, Lonnie. Total sales for the second quarter of 2014 were $16 million reflecting a 4.1% decrease versus the same period in 2013. Total sales for the first half of 2014 were up $521,000 or 1.9% over the first half of 2013. Our Talent Zipper product division sales for the second quarter were 1ower by $885,000 versus the second quarter of 2013, this included a reduction of $658,000 within our mass merchandizing brand customers and $227,000 reduction within specialty retail brand customers. The Talon Shrimp products division sales increased by $191,000 in Q2 compared to the same period in 2013, substantially all of our Talon Shrimp products are to our specialty retail branded customers.

Total Talon zipper sales for the first half of 2014 were lower by $893,000 versus the first half of 2013, which included a reduction of $942,000 within our mass merchandizing brand customers and partially offset by an increase of $49,000 within specialty retail brand customers.

Talon trim product sales increased by $1.4 million compared to the same period in 2013 representing an increase in sales growth to our specialty retail branded customers. Gross profit for the three months ended June 30, 2014 was $5.4 million, or 33.9% of sales, slightly less than the same period in 2013.

Gross profit for the six months ended June 30, 2014 were $9.1 million or 33.5% of sales reflecting an increase of $412,000 as compared to the same period in 2013. The reduction in gross profit in the quarter was principally attributable to lower overall sales volumes offset by improved product mix, lower cost manufacturing support, freight and duty costs. While the increase in gross profit for the first half of 2014 was principally attributable to greater overall sales volumes in the Talon trim products and improved product mix offset by higher manufacturing support freight and duty costs.

For the first three months ended June 30, 2014 total operating expenses were $3.9 million lower by $39,000 as compared to the same period of 2013 and $586,000 higher at $7.5 million for the first six months of 2014 as compared to the first half of 2013.

Sales and marketing expenses for the three months ended June 30, 2014 totaled $1.7 million, an increase of $170,000 as compared to the same period in 2013 mainly due to increasing product development costs and $3.1 million, an increase of $320,000 for the six months ended June 30, 2014 compared to the same period in 2013 mainly due to higher compensation cost relating to expansion of our global sales force and increases of new product development cost.

General and administrative expenses for the three months ended June 30, 2014 totaled $2.9 million or 13.9% of sales as compared to G&A expenses on the prior year of $2.4 million or 14.6% of sales. These expenses were lower by $209,000 mainly due to lower professional services fees. Depreciation expenses and other cost reductions.

General and administrative expenses increased by $265,000 for the first six months of 2014 as compared to the same period in 2013. However, this really reflects a net reduction and spending of $85,000 after accounting for a $350,000 cash settlement from a legal dispute regarding our intellectual property rights we received in the prior year.

Interest expense for the three months ended June 30, 2014 increased by $109,000 to $111,000 as compared to the same period in 2013 and by $220,000 for the six months ending June 30, 2014 as compared to the first half of 2013.

The provision for income taxes for the three months ended June 30, 2014 was $557,000 as compared to $326,000 for the three months ended June 2013 and $571,000 for the six months ended June 30, 2014, as compared to $254,000 for the first half of 2013, reflecting US taxes assessed on earnings from our foreign operations as well as the impact of deferred tax adjustments.

We reported net income of $814,000 for the three months ended June 30, 2014 and $832,000 for the six months ended June 30, 2014, compared to a nearly $1.3 million and $1.5 million for the same period in 2013 respectively.

Net income per share applicable to common stockholders as one basic cent and diluted for the quarter and six months ended June 30, 2014 as compared to net income per share available to common stockholders of $0.01 for the three months ended June 30, 2013 and a net loss per share applicable to common stockholders of $0.01 for the six months ended June 30, 2013.

Per share results for three months and six months ended June 30, 2013 included a $0.04 and $0.07 per share net loss respectively, which was previously allocated to the preferred shares which are now fully redeemed. We ended the second quarter at June 30, 2014 with cash and cash equivalents of nearly $4.5 million an increase of $693,000 compared to December 31, 2013 principally due to $1.7 million or $1.8 million in cash provided by operating activities and $30,000 in proceeds from the exercise of stock options offset by $833,000 in term loan payments and $144,000 in payments related to taxes associated with exercise as stock options are a few settlements and $144,000 in payments for the acquisition of property and equipment.

I’ll now turn the call back to Lonnie for his final comments and questions. Lonnie?

Lonnie D. Schnell

Thank you, again, Nancy. Our business is a custom wholesale supplier to the retail industry and accordingly well always be subject to the overall performance trends of the industry.

However, our growth expectations are routed in several key strategies to go beyond these industry trends. And we remain confident in our plans and long-term expectations of these strategies, which focus on first leveraging existing relationships and significantly expanding the Roster specialty brands that we served.

Second, expanding our presence in emerging market. Third, driving sales through product innovation and finally, accessing strategic alliances in tuck-in acquisitions. We continue to remain confident that these strategies were drive significant growth in our revenues and earnings, despite periodic variances within the retail industry that will occur. With the addition of our new and emerging innovative products, we believe the opportunities within our business are significant, and we are more optimistic than ever about the value we can bring to our shareholders.

I’d like to once again thank everyone for calling in today and for your continued interest and support. I’ll now take a few moments to address any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from Marco Rodriguez of Stonegate Securities. Please go ahead.

Marco Rodriguez – Stonegate Securities

Good afternoon, guys, thank you taking my questions.

Lonnie D. Schnell

Sure.

Marco Rodriguez – Stonegate Securities

I was wondering Lonnie, Nancy, if you guys can maybe a little more time on the inventory impact that you guys saw. I think Lonnie in your prepared remarks you said that you guys seen to have some pretty good visibility into when inventory levels are high or low, but just can you maybe help us to understand a little bit more in terms of what you actually see on the inventory side with your clients?

Lonnie D. Schnell

Well, its obviously, its difficult and it was our softness of the revenues was not in one particular customer or brand, it was generally trend that we saw across the board. And what happens within the industry, since, I said most of our products are custom products and we have a very short delivery times, what happens is when the industry as a difficult quarter or short down term, the brands and retailers tend to react as quickly as they can by first and foremost delaying orders. And they do this with the order delay as with their direct factories not with us specifically. But the factories are buying essentially just in time from us and so probably within a 45 days period after the retailers have started making these changes. We can see some impact in our orders, where we will get request from a factory to delay delivery on our order or to perhaps put that order on hold or cancel the order in some cases not even place the order that which is what we tend to see.

So, it becomes very difficult, but we’ve seen this happen in the past, it’s directly related to their inventory trends. And quite frankly it’s a lot more prevalent today, since the 2008 severe recession in the economy a lot of retailers will burn severally with inventories in 2008, and most all of them now buy very close to divest in these things and that’s why we see kind of fluctuations occur. That helps?

Marco Rodriguez – Stonegate Securities

No, that’s definitely helpful. And then on the flip side, where the inventory start to come back down and the factories and your clients is it the same sort of a 45 day lag that you kind of see or so something different there?

Lonnie D. Schnell

No, it’s actually pretty similar to that we are working with the brands and retailers. We are always working with them probably nine to even some cases 12 months out on new developments and new designs in the like, but the release of those new developments and design is done very closely divest. Back to my analogy in 2008 and 2009, we saw a sharp uptick in the – I think the second quarter if I recall correctly of 2009, as retailers shelves were essentially bare at that point and time and they had to start restocking. And so these kind of fluctuations occur. We haven’t seen a massive rebound from our second quarter, but we haven’t seen a further softening of it. So, it seems to be like it’s just kind of leveling out for a little bit at this point and we hope to see a little bit more of a pickup as the third quarter develops.

Marco Rodriguez – Stonegate Securities

Got it. Something more of a second half Q3 or things are can improve a little bit is your expectation?

Lonnie D. Schnell

We are hopeful, it’s very difficult to predict where the economy and where the retailers are growing at this point and time. The mass merchants are the most sensitive and the once to react quickly than first, because they are most price sensitive. Our specialty brands like that we’ve been adding and then our focus has been on tend to be less responsive in that regard and they are looking more for the long-term, but we will just have to see how it develops.

Marco Rodriguez – Stonegate Securities

Got it. And one last item here on the inventory side, I guess it appears that the trim was an impacted as much as the zippers and I’m assuming that’s because of the mass merchant clients you have on the zipper side versus trim?

Lonnie D. Schnell

That’s a part of it absolutely on the trim side virtually all of our customers here on the specialty side. And the trim business also can take a little bit more time to shift from this kind of fluctuations, because sometimes those orders have a little bit longer lead time and there already in place and emotion by the time the retailers want to cut them back.

Marco Rodriguez – Stonegate Securities

Got it. And shifting gears are really quick on TekFit. Can you be provides a little bit of an update us as far as where you stand with the additional opportunities just kind of like where you are in terms of perhaps like timelines or we kind of in the beginning earnings or last two earnings any sort of color there?

Lonnie D. Schnell

Those are really tough questions, Mark. I wish, I could have good clear answers to those. From where we are the brands every brands is little bit different. I’ll say that first and foremost. So, you get some brands that they want to move very, very cautiously and very slowly they start with small sample orders and test orders in the marketplace then they’ll start with one or two styles in the production. This is where we are principally on the waistbands that we’re manufacturing at this point of time.

And as their plans developed they’re merchants start adopting these – the waistband into their entry more and more programs, we see it building. In our history with this product, we saw a very rapid uptick after the product we’ve been introduced back in 2003 and 2004. At this stage, I think we’re going to see a little bit slower adoption of this in the waistbands, it just – it takes more time there is more cautious buyers and merchants in the market place and so we’ll just have to see.

So, I see it more as a 2015 piece on the waistband side. On the opposite side of the coin is the other retailers who see this is a very keen market opportunity, and they want to act rapidly, and they want to act in the market. And this is what we’ve seen with the shirt collars. Already those are in, I think it’s almost like 25 test stores and the initial results have been very exciting. And we’re looking at a much more rapid schedule in terms of rolling out production on a much wider scale with that product, so we could see more of that occurring in the fourth quarter of this year and certainly a high expectations for 2015.

Marco Rodriguez – Stonegate Securities

Got it. That’s definitely very helpful and then just on the Levi Strauss opportunity can you perhaps maybe talk a little bit more about how we should be thinking about the rollout there what sort of level of production or revenues you might expect and say 12 months from now.

Lonnie D. Schnell

Its really on their shoulders at this point in time the product is there we’ve shown the product we proved the product it’s a matter of the adoption that they incorporate into their pants and that something that we just really can’t it certainly can’t control and we can’t predict at this point.

Marco Rodriguez – Stonegate Securities

And was there any impact in this quarter from Levis on the TekFit side?

Lonnie D. Schnell

Very small amount of some of the initial raw materials that we delivered for the production that’s going on right now.

Marco Rodriguez – Stonegate Securities

Got it thanks a lot guys.

Lonnie D. Schnell

Thank you very much.

Operator

(Operator Instructions) The next question comes from Richard Hamburg of Private Investor. Please go ahead.

Richard Hamburg – Private Investor

Good afternoon, Lonnie. What’s the bigger quarter for Talon in terms of when the orders coming in for the Christmas selling season.

That would be our second quarter Richard. Our second quarter has always been our peak quarter as followed by our third quarter which is typically down maybe 15% from the second quarter and then our fourth quarter as fairly light that’s when most of the fall season holiday season orders in the like have been completed and we’re looking at early Spring orders and so the fourth quarters are our third lowest and then the first quarters are lowest quarter and that’s often because a lot of the early spring deliveries have taken place and we also have almost three weeks of production down during that period with Chinese New Year and the factory side closer.

Richard Hamburg – Private Investor

So this quarter we’re talking about now where it was “The Big Quarter”.

Lonnie D. Schnell

That’s correct.

Richard Hamburg – Private Investor

In the previous call we were talking about the size of the market for zippers and I think you have indicated some multi billion dollar industry with like YKK being I guess its (indiscernible) joint in the thing. If YKK so big and even though business was off in the current quarter how come what’s being done to go after their accounts and trying gather new business as a oppose to the existing business you currently have?

Lonnie D. Schnell

Well, that’s one of our primary focuses and we were – our focus is on the specialty retailers who have a very high concern for the quality and image of their product we market Talon zipper there side by side with the YKK product as the quality alternative the key thing that we bring to those specialty retailers who are – they’re relatively small as a customer for YKK represent just a very small component of their total business but they represent a significant partner for us and we provide them customization, flexibility and service that they can’t get from YKK. And we’ve been successful in the last several years and convincing a number of those brands to switch to our brand that’s where our success is really been driven to a large degree in the last couple of years.

Richard Hamburg – Private Investor

In terms of that subset of the market place which you just talked about what percentage of it is still available for you go after?

Lonnie D. Schnell

Well, that’s also a tough question its very difficult to break the market down in these categories but we just had our own internal sales meeting and they’re literally hundreds and hundreds of brands that I think in our profile that we just haven’t had the ability – not the ability but the resources in the people to go into those brands. So we have we think we have growing share in that market but I see that is being still a very substantial size market for us to attack and given our size in the market its there is a I don’t see any limitation in the first several years.

Richard Hamburg – Private Investor

So in others words its still real substantial opportunity I guess the question is how they capitalize on you going forward in terms of resources.

Lonnie D. Schnell

Yes, absolutely, well it’s a I won’t be (indiscernible) about this it’s a tough sale you have to go in you have to work your way into it towards it’s a lot of feed on the street. So to speak you got to get into the brands convinced them that they should make a switch. And you do that with a lot of exciting innovative products some design flexibility and the promise of some service and that’s why we often see this customers will try as first on the trim side and then switch to incorporate the zip side or sometimes they see us first on the zip side and then they incorporate the trim once they become familiar with the company and the service that we can bring to them. Do you anticipate having to get more feet on the street in order to penetrate it I mean clearly them the more ups you have or the more contacts you have with this marketplace you know the greater your percentages is are actually bring it home to bakken?

Lonnie D. Schnell

Agree 100% for the last three years I’ve been working extensively at expanding the sales teams both in the US and then in Europe and we are constantly recruiting and looking to expand in that area, if you look at our spendings that we had for the last several years, put virtually all of the spending that I can into the sales team. Building sales teams in opening officers, we just opened an office earlier this year in Vietnam. We have an office, we opened last year in Bangladesh. Our Europe business which we opened about four years ago is very successful and growing significantly. So we’re going into new markets that adding the sales people throughout and trying to do it in a very strategic and thoughtful process, but we think that’s really the key is getting to more and more to these customs.

Richard Hamburg – Private Investor

Thank you, good luck going forward.

Lonnie D. Schnell

Thank you very much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Lonnie Schnell for any closing remarks.

Lonnie D. Schnell

Thank you, again, operator, and again thanks to everyone for joining us this afternoon. We really appreciate your support, and I look forward to our next call when we can report our results for the third quarter. So with that operator I’ll let you end the call.

Operator

The conference is now concluded, thank you for attending today’s presentation. You may now disconnect.

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