Sunday, November 11, 2007
Conforce International (CFRI) conference call
CFRI had a conference call on Oct 25. Questions were sent in via email and selected ahead of time. I didn't submit any questions this time, but others asked good ones. Here's a rough transcript of the call.
CEO: Marino Kulas
VP Product Development: Joseph DeRose
Kulas states that they get a lot of feedback from shareholders. They know when shareholders are satisfied and when they're not. "Right now, we know you're impatient. We appreciate and understand." [I'm actually not that impatient right now, if anyone cares to know]
He then recaps what the company has accomplished: When they went public 2 years ago, EKO-FLOR was still a development stage idea [remember the days when you didn't go public until after you were successful?]. Last year, they passed three stages of testing to emerge with an independently certified product for use in the container industry worldwide. At the same time, they parallel tracked a development of the European trailer market. Dec 2006, they introduced EKO-FLOR at the InterModal Show in Hamburg, Germany. This year, they got feedback from customers and have "further enhanced the product to the point where they're able to receive trial orders from some of the largest shipping lines in the world. That is no small feat."
[I agree. Having spent about a quarter of a century in product development myself, nothing that's happened is surprising. The key thing is that all sorts of things go wrong that are unpredictable ahead of time. Success depends on being able to adapt and fix things, not on a lack of problems. But also very important is having a product that customers will buy, which I believe is not going to be a problem for EKO-FLOR.]
They also continued development of the trailer product to meet North American requirements. They've been in discussions with many of the top trailer participants in the industry. Between the two industries combined [presumably he means containers and trailers rather than European and North American trailers], they are either in discussions or in trials with 9 of the top 16 companies in the world in their respective markets.
They are well aware that it is not enough. They need to now fully commercialize the products. They need orders, revenues, and earnings. They have a strategy that they're executing on a daily basis. Kulas would clearly have preferred the pace to be 6-8 months ahead of where they are. There are always unforseen delays: manufacturing issues, customer cultivation issues, logistics issues. They are behind schedule. But they've dealt with every issue and have overcome all obstacles [I wouldn't make a claim like having overcome all obstacles until the cash from revenues is actually in the bank].
Kulas says it's a good time for Conforce, although you can't tell by tracking the stock price. They are confident about their success. However, shareholders want a higher stock price. They, too, are shareholders. [I'm really chopping this up a bit too much]. Shareholders expect better performance from their stock and it's their goal to deliver.
QUESTIONS AND ANSWERS
1) It's now been about 10 months since EKO-FLOR has been certified, can you explain why it's taken so long to get the company trials going?
After introducing EKO-FLOR at the trade show in Hamburg, Dec 2006, they got a lot of feedback from participants. The comments were around enhancing certain features to allow for broad scale adoption. They implemented these, but that led to difficulties in the manufacturing process. They worked with their Asian manufacturing partner [not this is not plural], but it took some time. They now have a new panel which is lighter and stronger and they're only now ready to fill the trial orders. [Translation: potential customers pointed out perhaps one or two big problems and Conforce had to go back to the drawing board. In the process, the manufacturer ended up not being able to do what they needed (see below). Thus, a very big delay.]
2) What is the status of the EKO-FLOR trials (both container and trailer)?
Regarding the container trials with Oceanex, Hamburg Sud, and others, they [I made this deliberately ambiguous] made a decision to hold off on the start of the trials until the enhancements were done. They're ready to start filling the orders in the next few weeks.
ATC Houthandel [I covered that here], based in the Netherlands, is very important to CFRI as a distributor of flooring to the European trailer market. "They remain very excited about EKO-FLOR. Starting today, they are displaying EKO-FLOR at their booth at the European Road Transport Show in Amsterdam." Contrary to rumors, booth babes will not be tap dancing on EKO-FLOR samples. [I just made that up.] This is the largest trade show for the European truck/trailer market and CFRI expects to get some excellent response from the exposure. [I'd hope for it, but I wouldn't expect it.]
The North American trailer market has some differences from Europe in terms of the design of the trailers. CFRI has confidence that several leading participants will place trial orders with Conforce shortly.
3) World Cargo News had an article about the IICL and its container flooring project, which was launched in Dec 2005. [I covered that here.] Was EKO-FLOR one of the designed selected?
That organization is a global association that represents virtually all of the major companies involved in the leasing of containers. They want to standardize materials and repair procedures.
"The project that they launched was to address what they described as a crisis facing the trailer leasing companies. The crisis stems from the declining availability of tropical hardwood plywood and the declining strength and long term durability of those plywoods. With the launch of EKO-FLOR occuring in December '06, their project was too far along in order to introduce a new material. Their project is only considering using variations using wood and steel and does not include any composite materials [I assume two things from this: the most important is that there's no killer competitor already out there and ahead of CFRI; two, I don't think they deliberately ruled out composites up front, it's just that none showed up as a contender]. We intend to join that project as soon as possible."
4) In a recent investor update, CFRI noted that there are several unnamed shipping companies involved in EKO-FLOR trials. If they later decide to sign a contract for a new product, will you then be able to PR them?
The trials now encompass 5 container carrying shipping lines, but with more discussions underway with others. Due to client confidentiality, CFRI can't provide details. CFRI would treat contracts as meaningful business disclosure and put out press releases when they happen.
5) When will CFRI release the results of the trials?
The trials will generate lots of short term information available within weeks in terms of product performance. Also longer term results. The timing will vary between different customers. CFRI will release both the short term and long term results as soon as they're available.
6) When does CFRI anticipate contracts for EKO-FLOR? Both trailer and container?
CFRI believes the contracts would be linked with successful trials in the marketplace. They're in discussions with certain customers to ensure that once the trials are completed, they will be able to transition to an order flow, having already discussed the particulars such as quantities, scheduling, delivery times, etc.
7) What is the status to the uplisting to the OTC BB?
They want to assure that a delay in uplisting is not due to a lack of interest on CFRI's part. CFRI believes the best timing is when they're able to provide a consistent flow of information. They acknowledge the importance of being in front of the right audience at the right time. CFRI made a business decision to delay the transition until they can announce EKO-FLOR contracts.
8) What company will manufacture EKO-FLOR? Is the prior agreement with the Royal Group still valid?
EKO-FLOR will be manufactured by selected partners in Asia an North America. Regarding Royal, through their development efforts, CFRI learned that the range of technologies available to Royal could not deliver on the structural needs of the flooring panels.
[I'm not surprised.]
9) What effect, if any, does the oil price have on EKO-FLOR production?
EKO-FLOR's dependence on petrolium based resins, which creating the matrix for the panel materials, account for 20% to 40% of raw material needs, depending on the formulation. Based on this relatively small proportion that the resin requires and taking advantage of longer term supply contracts, CFRI expects to offer more stable pricing than what's offered by plywood flooring.
[Oh boy, that sounds like extremely careful wording. Now I'm a little worried about this.]
10) Any details on the retail products mentioned by CFRI a while back?
They're expanding the offering to include three sectors: The industrial sector for containers and trailers, the commercial sector for industries such as cruise ships, and consumers via big-box stores for residential applications. The latter two are in development, but these won't be productized until the container and trailer markets are panning out.
11) What's the status of patent protection?
This is a complicated area [I can attest to that] that requires careful attention and there are various approaches to protection that they considered. They'll address patent portfolio quesetions in more detail in the near future.
12) Are the earnings estimates from March still valid even with the delays in getting the trials started?
The delays will push back revenues by one quarter, perhaps two [I'd guess two, maybe three].
13) COMMENT: More public communications on the website, please!
CFRI is in an interesting position right now. There are events unfolding that they'd like to share, but they're bound by customer confidentiality [couldn't they just say it, without mentioning which customer?]. "As the trials phase nears completion, I'm confident that we'll be able to provide a more consistent flow of information, not just via PR, but with the addition of media coverage that we believe will be newsworthy events."
14) How many factories exist that can make EKO-FLOR?
The Asian manufacturing partner [not plural] has three new factories available to supply the container flooring needs. The total output of these factories will reach over 300,000 20-foot container equivalents within one year. This comfortably exceeds the projected sales.
The long term plan is to have available enough production to supply half of the container flooring markets [think big, I guess] within three years.
15) How confident is CFRI that EKO-FLOR will pass the trials? How does this compare with getting the product certified? Are the trials more of a formality?
[hehe, this guy must not have ever been involved in new product development. If you create any significantly new product, you have to convince your customers that it meets their requirements and those requirements can often be things you hadn't even considered important such as the container floor color being too close to the color of the nails so you can't see them to pull them out, something like that.]
The certification tests focus on the main structural needs of the flooring. One test involves a forklift with a particular load that's well above what's expected in the field. Another test puts a double load in the container which is then lifted and checked for integrity. In the real world, the capacity will never reach twice the container capacity [however, I'm guessing that in the real world, containers get dropped, banged up, shaken by storms, and have weird loads to where you may effectively need that extra capability]
Having passed these test, CFRI is confident EKO-FLOR will pass the customers' structural tests. The customers will also choose a variety of other tests [that's what I worry about] including cleanability and ease of repairs.
"The Kulas family has over 35 years of experience related to containers and has repaired over 300,000 units. With this experience, we believe that EKO-FLOR will demonstrate many advantages relative to plywood during our customers' tests." Good quote!
16) Mr DeRose, how did you first learn about Conforce and what made you want to join them?
First introduced to Conforce late in 2005 when asked to comment on the suitability of a wood/plastic composite as a flooring material for containers. Conforce approached him because he has extensive experience with plastic and composite materials used to replace wood for residential deck applications for deck boards and guardrails. Worked amost exclusively with polymers and plastics with Chem Eng training and experience. Immediately attracted to Conforce's vision to replace tropical hardwood flooring. Conforce offered him to lead the development effort for EKO-FLOR.
17) In the next five years, what percentage of the container market do you think you can capture? How much revenue would this mean?
CFRI has only projected two years out. If this pans out, CFRI could get exponential growth in years 2-5 which could result in 15% to 20% market share. That's just in the container industry. This could translate into over $300 million in annual revenues. They believe they can achive similar market share in the highway trailer market as well.
The market cap right now is around $24 million (120 million shares as of June 30, 2007 times roughly 0.20 dollars).
I'm fairly happy with how things are going, but my sense is that these people are somewhat of newbies at productization. One of the quotes I use all the time is from the old SNES video game "Bubsy the Bobcat", who begins the game by optimistically saying, "What could possibly go wrong?" and ends the game a cynical, but competent veteran of all things gone wrong.
I figure these guys have gone through hectic periods of chaos followed now by agonizing periods of waiting for results. In the boredom, perhaps they now dream of EKO-FLOR on cruise ships and being sold at Home Depot... until those dreams are interrupted by the next hectic period of chaos when the results from field trials start coming back.
There's enough margin of safety here to handle all sorts of problems. But then again, what could possibly go wrong?
I continue to hold the stock
CEO: Marino Kulas
VP Product Development: Joseph DeRose
Kulas states that they get a lot of feedback from shareholders. They know when shareholders are satisfied and when they're not. "Right now, we know you're impatient. We appreciate and understand." [I'm actually not that impatient right now, if anyone cares to know]
He then recaps what the company has accomplished: When they went public 2 years ago, EKO-FLOR was still a development stage idea [remember the days when you didn't go public until after you were successful?]. Last year, they passed three stages of testing to emerge with an independently certified product for use in the container industry worldwide. At the same time, they parallel tracked a development of the European trailer market. Dec 2006, they introduced EKO-FLOR at the InterModal Show in Hamburg, Germany. This year, they got feedback from customers and have "further enhanced the product to the point where they're able to receive trial orders from some of the largest shipping lines in the world. That is no small feat."
[I agree. Having spent about a quarter of a century in product development myself, nothing that's happened is surprising. The key thing is that all sorts of things go wrong that are unpredictable ahead of time. Success depends on being able to adapt and fix things, not on a lack of problems. But also very important is having a product that customers will buy, which I believe is not going to be a problem for EKO-FLOR.]
They also continued development of the trailer product to meet North American requirements. They've been in discussions with many of the top trailer participants in the industry. Between the two industries combined [presumably he means containers and trailers rather than European and North American trailers], they are either in discussions or in trials with 9 of the top 16 companies in the world in their respective markets.
They are well aware that it is not enough. They need to now fully commercialize the products. They need orders, revenues, and earnings. They have a strategy that they're executing on a daily basis. Kulas would clearly have preferred the pace to be 6-8 months ahead of where they are. There are always unforseen delays: manufacturing issues, customer cultivation issues, logistics issues. They are behind schedule. But they've dealt with every issue and have overcome all obstacles [I wouldn't make a claim like having overcome all obstacles until the cash from revenues is actually in the bank].
Kulas says it's a good time for Conforce, although you can't tell by tracking the stock price. They are confident about their success. However, shareholders want a higher stock price. They, too, are shareholders. [I'm really chopping this up a bit too much]. Shareholders expect better performance from their stock and it's their goal to deliver.
QUESTIONS AND ANSWERS
1) It's now been about 10 months since EKO-FLOR has been certified, can you explain why it's taken so long to get the company trials going?
After introducing EKO-FLOR at the trade show in Hamburg, Dec 2006, they got a lot of feedback from participants. The comments were around enhancing certain features to allow for broad scale adoption. They implemented these, but that led to difficulties in the manufacturing process. They worked with their Asian manufacturing partner [not this is not plural], but it took some time. They now have a new panel which is lighter and stronger and they're only now ready to fill the trial orders. [Translation: potential customers pointed out perhaps one or two big problems and Conforce had to go back to the drawing board. In the process, the manufacturer ended up not being able to do what they needed (see below). Thus, a very big delay.]
2) What is the status of the EKO-FLOR trials (both container and trailer)?
Regarding the container trials with Oceanex, Hamburg Sud, and others, they [I made this deliberately ambiguous] made a decision to hold off on the start of the trials until the enhancements were done. They're ready to start filling the orders in the next few weeks.
ATC Houthandel [I covered that here], based in the Netherlands, is very important to CFRI as a distributor of flooring to the European trailer market. "They remain very excited about EKO-FLOR. Starting today, they are displaying EKO-FLOR at their booth at the European Road Transport Show in Amsterdam." Contrary to rumors, booth babes will not be tap dancing on EKO-FLOR samples. [I just made that up.] This is the largest trade show for the European truck/trailer market and CFRI expects to get some excellent response from the exposure. [I'd hope for it, but I wouldn't expect it.]
The North American trailer market has some differences from Europe in terms of the design of the trailers. CFRI has confidence that several leading participants will place trial orders with Conforce shortly.
3) World Cargo News had an article about the IICL and its container flooring project, which was launched in Dec 2005. [I covered that here.] Was EKO-FLOR one of the designed selected?
That organization is a global association that represents virtually all of the major companies involved in the leasing of containers. They want to standardize materials and repair procedures.
"The project that they launched was to address what they described as a crisis facing the trailer leasing companies. The crisis stems from the declining availability of tropical hardwood plywood and the declining strength and long term durability of those plywoods. With the launch of EKO-FLOR occuring in December '06, their project was too far along in order to introduce a new material. Their project is only considering using variations using wood and steel and does not include any composite materials [I assume two things from this: the most important is that there's no killer competitor already out there and ahead of CFRI; two, I don't think they deliberately ruled out composites up front, it's just that none showed up as a contender]. We intend to join that project as soon as possible."
4) In a recent investor update, CFRI noted that there are several unnamed shipping companies involved in EKO-FLOR trials. If they later decide to sign a contract for a new product, will you then be able to PR them?
The trials now encompass 5 container carrying shipping lines, but with more discussions underway with others. Due to client confidentiality, CFRI can't provide details. CFRI would treat contracts as meaningful business disclosure and put out press releases when they happen.
5) When will CFRI release the results of the trials?
The trials will generate lots of short term information available within weeks in terms of product performance. Also longer term results. The timing will vary between different customers. CFRI will release both the short term and long term results as soon as they're available.
6) When does CFRI anticipate contracts for EKO-FLOR? Both trailer and container?
CFRI believes the contracts would be linked with successful trials in the marketplace. They're in discussions with certain customers to ensure that once the trials are completed, they will be able to transition to an order flow, having already discussed the particulars such as quantities, scheduling, delivery times, etc.
7) What is the status to the uplisting to the OTC BB?
They want to assure that a delay in uplisting is not due to a lack of interest on CFRI's part. CFRI believes the best timing is when they're able to provide a consistent flow of information. They acknowledge the importance of being in front of the right audience at the right time. CFRI made a business decision to delay the transition until they can announce EKO-FLOR contracts.
8) What company will manufacture EKO-FLOR? Is the prior agreement with the Royal Group still valid?
EKO-FLOR will be manufactured by selected partners in Asia an North America. Regarding Royal, through their development efforts, CFRI learned that the range of technologies available to Royal could not deliver on the structural needs of the flooring panels.
[I'm not surprised.]
9) What effect, if any, does the oil price have on EKO-FLOR production?
EKO-FLOR's dependence on petrolium based resins, which creating the matrix for the panel materials, account for 20% to 40% of raw material needs, depending on the formulation. Based on this relatively small proportion that the resin requires and taking advantage of longer term supply contracts, CFRI expects to offer more stable pricing than what's offered by plywood flooring.
[Oh boy, that sounds like extremely careful wording. Now I'm a little worried about this.]
10) Any details on the retail products mentioned by CFRI a while back?
They're expanding the offering to include three sectors: The industrial sector for containers and trailers, the commercial sector for industries such as cruise ships, and consumers via big-box stores for residential applications. The latter two are in development, but these won't be productized until the container and trailer markets are panning out.
11) What's the status of patent protection?
This is a complicated area [I can attest to that] that requires careful attention and there are various approaches to protection that they considered. They'll address patent portfolio quesetions in more detail in the near future.
12) Are the earnings estimates from March still valid even with the delays in getting the trials started?
The delays will push back revenues by one quarter, perhaps two [I'd guess two, maybe three].
13) COMMENT: More public communications on the website, please!
CFRI is in an interesting position right now. There are events unfolding that they'd like to share, but they're bound by customer confidentiality [couldn't they just say it, without mentioning which customer?]. "As the trials phase nears completion, I'm confident that we'll be able to provide a more consistent flow of information, not just via PR, but with the addition of media coverage that we believe will be newsworthy events."
14) How many factories exist that can make EKO-FLOR?
The Asian manufacturing partner [not plural] has three new factories available to supply the container flooring needs. The total output of these factories will reach over 300,000 20-foot container equivalents within one year. This comfortably exceeds the projected sales.
The long term plan is to have available enough production to supply half of the container flooring markets [think big, I guess] within three years.
15) How confident is CFRI that EKO-FLOR will pass the trials? How does this compare with getting the product certified? Are the trials more of a formality?
[hehe, this guy must not have ever been involved in new product development. If you create any significantly new product, you have to convince your customers that it meets their requirements and those requirements can often be things you hadn't even considered important such as the container floor color being too close to the color of the nails so you can't see them to pull them out, something like that.]
The certification tests focus on the main structural needs of the flooring. One test involves a forklift with a particular load that's well above what's expected in the field. Another test puts a double load in the container which is then lifted and checked for integrity. In the real world, the capacity will never reach twice the container capacity [however, I'm guessing that in the real world, containers get dropped, banged up, shaken by storms, and have weird loads to where you may effectively need that extra capability]
Having passed these test, CFRI is confident EKO-FLOR will pass the customers' structural tests. The customers will also choose a variety of other tests [that's what I worry about] including cleanability and ease of repairs.
"The Kulas family has over 35 years of experience related to containers and has repaired over 300,000 units. With this experience, we believe that EKO-FLOR will demonstrate many advantages relative to plywood during our customers' tests." Good quote!
16) Mr DeRose, how did you first learn about Conforce and what made you want to join them?
First introduced to Conforce late in 2005 when asked to comment on the suitability of a wood/plastic composite as a flooring material for containers. Conforce approached him because he has extensive experience with plastic and composite materials used to replace wood for residential deck applications for deck boards and guardrails. Worked amost exclusively with polymers and plastics with Chem Eng training and experience. Immediately attracted to Conforce's vision to replace tropical hardwood flooring. Conforce offered him to lead the development effort for EKO-FLOR.
17) In the next five years, what percentage of the container market do you think you can capture? How much revenue would this mean?
CFRI has only projected two years out. If this pans out, CFRI could get exponential growth in years 2-5 which could result in 15% to 20% market share. That's just in the container industry. This could translate into over $300 million in annual revenues. They believe they can achive similar market share in the highway trailer market as well.
CONCLUSION
The market cap right now is around $24 million (120 million shares as of June 30, 2007 times roughly 0.20 dollars).
I'm fairly happy with how things are going, but my sense is that these people are somewhat of newbies at productization. One of the quotes I use all the time is from the old SNES video game "Bubsy the Bobcat", who begins the game by optimistically saying, "What could possibly go wrong?" and ends the game a cynical, but competent veteran of all things gone wrong.
I figure these guys have gone through hectic periods of chaos followed now by agonizing periods of waiting for results. In the boredom, perhaps they now dream of EKO-FLOR on cruise ships and being sold at Home Depot... until those dreams are interrupted by the next hectic period of chaos when the results from field trials start coming back.
There's enough margin of safety here to handle all sorts of problems. But then again, what could possibly go wrong?
I continue to hold the stock
There are only 22 surviving veterans of WWI
// posted by Bruce @ 11:22 AM 
