Resin Systems (fka RSSYF)

[Chance To See]

Below is a post containing the latest research report from John Chu. The Yahoo board isn’t very active either, but there are a few people hanging around.

As you probably know, in the past when the stock price has gone steadily downward like it has over the past couple of weeks it usually means something dreadful has happened that small shareholders know nothing about, like the disaster with GCM. Yet John Chu’s report from April 7th was mildly positive, implying that Q1 2010 was better than Q4 (let’s hope so). That was a week or so before the stock price started tanking.

I re-bought a small position a few months ago just to keep it on the radar and also on the off chance that some big company would snap it up and get the best utility poles in the world. But I really don’t know at this point whether they will make it.

Q4 at $3.2 million in revenue would have been excellent a couple of years ago, but I’m beginning to doubt that cells 1 and 2 can get anywhere near the $12 million per quarter output we have been promised for so long. I don’t’ know what to expect if they can’t reach break-even without the planned four new production cells, which would cost something like $40 million. If the new cells are a real design improvement, then maybe some investors will step up once again.

Chu’s comment about raw material sourcing improvements is interesting, as I think the raw materials may be the main cost component of the poles. I remember Paul G once saying that labor was only about 10% of the cost.

The rollers could be a big help, but where are they?

Anyway, as to whether it is a sinking ship, I don’t know. [edit: But the Q3 and Q4 results were the first time that I really began to seriously question whether they will make it.]

YAHOO POST:

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_R/threadview?m=te&bn=74477&tid=287&mid=287&tof=3&frt=1#287

John Chu's Latest Report 27-Apr-10 03:55 pm
Below is the most recent report from John Chu at Mackie Research (from April 7th).

http://www.mackieresearch.com/index.php

My Comments:
-- I’m not sure that “tweak” is the right word to use concerning getting the Tilbury plant up to speed.
-- Chu also says, “…YTD production utilization has improved over Q4/09.” I assume that means during Q1 2010, which sounds positive. I hope it improved a lot.
-- Also, “Management indicated to us that it is comfortable it will meet its shipment schedule [of $100 million to HD Supply] of mid-2012.” I’m afraid I just don’t believe Paul any more, but let's hope it's true.

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APRIL 7TH REPORT

EVENT – Q4 Results
The company reported Q4 results recently.

OPINION – Positive. Operations Continue to Improve. On Target to Complete HD Supply Shipments by Mid-2012

Q4 results summary: EPS for the quarter was a loss of $(0.04) driven by sales of $3.2 million. Year-over-year comparisons are not applicable in this case given the resumption of direct manufacturing by the company for 2009 (as opposed to the company outsourcing in 2008 and the subsequent issues with its manufacturing outsourcer). Gross margins were negative for the quarter as the manufacturing plant was operating below optimal production levels. An inventory write-down of $1 million was incurred and future write-downs should decline and eventually be eliminated once optimal production levels are achieved. Lastly, the company had $3 million of cash on the balance sheet at the end of Q4/09 and recently announced (March 22) the initial completion of its equity offering for the amount of $7.4 million at $0.33/share. The company also announced an extension to a $7 million credit facility originally set to expire March 31, 2010, which has been now pushed back to October 31, 2010.

Operational update: The Tilbury plant continues to ramp up production and the process is still being tweaked. More importantly, YTD production utilization has improved over Q4/09. As previously stated by the company, it expects to complete shipments of $100 million in product to HD Supply by mid-2012. With the Tilbury plant having production capacity of upwards to ~$50 million (two production lines with capacity of ~$20-$25 million each), the plant will need to ramp up to full production over the next several months to reach this goal. Management indicated to us that it is comfortable it will meet its shipment schedule of mid-2012.

Cost-cutting: As the production lines ramp up, the company expects margins to improve. In addition, the company is looking to source raw materials (e.g. resin components) to help reduce costs. The company has already been able to source a resin component, which should reduce costs for that component by 15%. The company hopes to source more cheap raw material components going forward