Yunhong Green CTI Ltd. (YHGJ) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the CTI Industries Corporation Year-End and Fourth Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] This conference call may contain forward-looking statements as defined in Section 27A 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 the 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 the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. With that, I would now like to turn the call over to Stephen Merrick, CEO. Please go ahead.

Good morning, everyone, and welcome to the CTI Industries earnings conference call in which we will report on our results for the fourth quarter of 2017 and for the full-year, as well as our developments in financing, our management, our initiatives, and our business strategy. I am joined today on the call by Jeffrey Hyland, our President who joined us in December; Frank Cesario, our Chief Financial Officer who also joined us late last year, and Stan Brown, our Director of Investor Relations. It's a pleasure to be able to report to you with both Jeff and Frank Cesario who are two of the significant new members of our management team, and who are central to our strategies for success this coming year and the implementation of our plans. Both of them will participate in this call. At the conclusion of the call, we will provide an opportunity for those of you who want to ask questions. First, let me say a few words about our status, some important developments in our strategies and plans. Simply put our bottom line results in 2017 were disappointing. Frank will provide a summary report on our financial results, but in the simplest terms we lost money. However, I would like to provide you with some context of those results and share some very important developments with you which I believe positions our Company very well for a successful 2018 and beyond. We faced a number of challenges this past year. We needed to complete a new financing which would pay-off our outstanding bank and mezzanine loan obligations. We had an interest burden particularly due to our then outstanding mezzanine debt of almost $1.6 million for the year. We had to incur a large financial consulting, legal, and transactional expenses in connection with both our existing debt obligations and the effort to identify and complete a new financing. We did not perform as well as we had hoped, particularly in the first half of the year. Our working capital resources were strained during the year and we had an expense structure last year that was high for our level of sales and margins. Despite all of these challenges, I would like to point out that our performance was actually better than it might seem when looking at the bottom line numbers. As you may recall in 2016, we had a one-time large Black Friday sale of vacuum sealing machines to a major retailer for $7.8 million in November, which skewed our numbers for that year. In fact, if you eliminate the Black Friday sale from 2016 revenues, our revenues for 2017 were essentially equal to 2016. And our fourth quarter 2017 revenues of $14,839,000 were $1.2 million greater than our fourth quarter 2016 revenues, if you eliminate the Black Friday sale. In the fourth quarter, we did have income from operations of almost $600,000 and we had income from operations for the year of $630,000. Unfortunately this income was more than offset by the large consulting and legal fees and transactional costs we incurred related to financing. The interest charges we had of almost $1.6 million and the one-time large tax charge we were required to take against our deferred tax assets because of the change in U.S. tax law. Frank will review those results with you in a couple of minutes. But I feel it’s most important to share with you is that we have accomplished a great deal during the late months of 2017 and the first several months of 2018, which we believe positions our Company to do well in 2018 and beyond. In December, we were able to complete a refinancing with PNC Bank in which we received a five-year term loan of $6 million and an $18 million revolving line of credit. With this financing, we were able to pay-off both the entire amount of our previous bank and mezzanine financing and to repurchase the warrants associated with the mezzanine financing, and to provide us with working capital. Our Board of Directors determined during the course of last year that it was in the best interests of our Company to strengthen our management team with key new executive talent. In December, we were fortunate that Jeff Hyland agreed to join our Company as a President. Jeff has over 30 years of management experience in consulting and with several companies and his experience ranges over finance, accounting, operations, sales, production, and acquisitions. Jeff has an MBA from Northwestern University, Kellogg School of Business and is a CPA. Additionally, we were fortunate to attract Frank Cesario to take over the position of Chief Financial Officer. Frank has an MBA from DePaul University, is a CPA and has over 26 years experience as a Financial Executive and a Chief Financial Officer with several companies. At the same time, we retained Jeffrey Memenga as our Plant Manager. Jeff is a highly experienced manufacturing manager with over 28 years of experience. He brings both technical knowledge and leadership abilities to our team. We also named Manfred Jakobi, our successful Managing Director of CTI Europe to the additional position of Managing Director of our UK operation. With our retained strong personnel and sales purchasing and operational matters, we have formed a cohesive and experienced management team to lead our Company and I'm proud to be part of it. Already our new management team has developed plans and undertaken initiatives in cost reduction, profit improvement, capacity increases, quality management, and sales development. And I will ask Jeff Hyland to share our work in that area with you. First, let me turn over to Frank Cesario to review and comment on our financial results for the fourth quarter and full-year 2017. Frank?

Thank you, Steve. Good morning and thank you all for the warm welcome to CTI Industries. For those who haven't had a chance to review our financial release this morning, here are the highlights stated in the proximate terms. As Steve mentioned, 2017 revenue was $56 million, roughly $8 million below the $64 million in 2016. The silver lining was the balloon sales foil and latex grew by $3.5 million combined. This could not offset the $10 million drop in vacuum sealing product sales after the hangover from the November 2016 Black Friday sales felt during 2017. This revenue swing along with costs associated with our refinancing efforts and the large expense incurred and reducing the value of our deferred tax assets resulting from the change in U.S. tax law during December, combined to cause net income attributable to CTI of $0.7 million during 2016 to become a loss of $1.6 million during 2017. Why do I share Steve's confidence, we make products that are wanted and valued in the marketplace, we can work from there. We don't plan on going through another enormously expensive and resource training refinancing effort as we did during 2017. The impact of the tax law changes was a one-time hit shared by many other companies with deferred tax assets and failed to focus on what matters most that we are likely to pay fewer dollars in tax over time. It's ironic that increasing tax rates causes deferred tax assets to become more valuable, but that means higher tax bills in the future. In our case because the tax rate has dropped, shielding future taxable income becomes less valuable. What that ultimately means the tax payments will be lower in the future. Ultimately a good thing now that we have the non-cash charge behind us. The other area that should be addressed here is our credit facility. We have two pieces of debt with PNC, a $6 million term-loan that would be repaid $100,000 per month throughout its five-year term and a five-year revolving credit facility worth up to $18 million based on the value of our assets, receivables and inventory supporting it. This structure fits well with one of our corporate goals, which is to gradually paydown our debt and gain flexibility by reducing our overall debt level. As much as I'd like to spend an hour in accounting topics, the areas that are going to drive the business are up next. We can address any accounting and financial issues during Q&A. Steve?

Thank you, Frank. Now I'd like to ask Jeff Hyland to speak to the initiatives that we have undertaken to drive our corporate performance.

Thank you, Steve. First, let me say that I am pleased and honored to be part of the CTI team and very appreciative of the confidence that the Board has placed in me. I have seen a lot of different companies in my career and I can say that we've assembled an amazing management team with a highly skilled and committed group of employees. Upon joining the CTI, we agreed upon an aggressive 100-day action plan that encompassed every aspect of the business. Within the first two weeks, each member of CTI’s leadership team had a 100-day action plan as well. We shared the plan with the Board and they have been extremely helpful to ensure accountability to the plan successful completion. During 2017, CTI embarked on two critical initiatives. The first was an expense reduction plan. This was critical because CTI needed the cash flow to support the anticipated debt service required after the refinancing. Over $2 million of expenses were permanently eliminated in the process. The second initiative was to refinance the Company's bank debt. As Steve and Frank have explained the refinancing was also successful and included CTI’s entire previous bank debt tranches of senior term and mezzanine. One of my first primary objectives was to enhance the management team, which was quickly accomplished as Steve has already articulated. Through that process of enhancing the management team, we also implemented three critical objectives. First, we initiated weekly CTI leadership team meetings to ensure strong communication throughout all aspects of the business. Second, we've been enforcing with all CTI employees that they are critical to our success. And third, we initiated a monthly internal communication system to articulate with all worldwide employees of the noteworthy successes of the business. Personally, I am very pleased to see how the leadership team and employees in all the locations are committed to the success of CTI. Operationally, we are addressing them the mission critical need for additional foil converting machine capacity and have added a new machine at Lake Barrington that is running approximately 20% faster than our existing converting machines due to technological advancements. We have its sister machine being constructed in our Guadalajara facility and the new machine is scheduled for completion next month. This additional capacity allows both improving quality while fulfilling our growing demand from balloon customers. Finally, on the operational side, we have initiated a repair and maintenance machine upgrade program to enhance quality and improve efficiencies. On an ongoing basis, we are striving to improve our operating, financial, and cash flow results. As a result, we’ve initiated a new aggressive profit improvement plan that encompasses both revenue increases and expense reductions with some of those already impacting current results. This is a healthy process that should make us a better Company in the short and long-term. For sales, we prepared and are implementing sales plans for each product line in geographic location with the objective of aggressive and profitable growth. We are already seeing the results of those efforts in new business and have won approximately $4.6 million of the opportunities. In addition to the new business won, our new sales pipeline report has over 50 new opportunities in various sales sizes covering all of our business lines. Items make it to the pipeline report only when they are chasing a specific actionable opportunity. To be clear, by definition the sales pipeline opportunity is not one business, it's a specific opportunity for new business. As you can imagine, we are thrilled with the sales team along with the support of our creative group, attacking the market to take market share from our competitors and creatively developing new products and revenue streams. Once we are comfortable with the success and proper cadence of these initiatives during 2018, we anticipate pursuing an inorganic growth strategy of acquisitions. We have already analyzed one acquisition and passed on it due to not being a strategic fit. With this acquisition strategy – while this acquisition strategy is inconsistent with CTI’s historic growth strategy, we believe that growth through acquisition is an important strategy to address our increasing customer demands, our current customer concentration and the opportunity for product line expansion. Steve?

Thanks, Jeff. That was great. I hope you can all see why I am inspired and energized by our management team and understand and believe on their commitment and our ability to perform. As Jeff indicated, the initial strategy and goal of this management team is to build a strong financially stable and profitable business founded on the current line of products we have, Foil Balloons, Latex Balloons, Vacuum Sealing products, Candy Blossoms, Film products and Home Container products. As we achieve these goals, we intend to seek opportunities to extend our product lines by developing and introducing new products or by acquisition. We expect to be able to pursue the second stage of our strategy by the third quarter of 2018. That concludes our report. At this point, we will open the call for questions. Operator, may we have your assistance please.

[Operator Instructions] And our first question is from Vincent Gargano. Your line is now open.

Good morning.

Hello, good morning.

Good morning to the new members of management as well.

Thank you.

So guys just a quick history of myself. I've been a shareholder for over four years. Mr. Brown knows my support and loyalty. We've had many conversations over the years. It's been a disappointing four years. The members of management seem excited, energized, so that's really enlightening, but I also have a few questions. I’d like to maybe possibly have answered.

Please.

So I am reading the release that says you guys have sold $4.6 million new business in the first quarter. There hasn’t been one press release regarding any of these sales wins. Can you answer why that is?

Well, we will have a – we'll be doing a quarterly report very quickly after our 10-K filing now and so there will be information that is out in a very short order on the transactions we've done in the first quarter and which is over in a day.

Okay. But I understand that. I followed many companies. If I win a sales contract, I'm announcing a press release. I'm not saying anything about forward statements, not saying anything about how much it's going to increase my EPS. It's just the sales win and I would think you guys would want to celebrate that and get that out to the [investing in public]. $4.6 million is got to be a few good sales.

Well, that's right. Some of the issues that arise in specific releases and transactions is that often and in a couple of cases it's very definitely. So the company with whom you do the transaction does not want public press releases using their names. And so sometimes you have limitations on the extent to which we can provide public information that identifies particular customers that we have because of the fact that they require us not to use their names.

Okay. Just seems like I’d be celebrating a win, omitting their names in that, but you guys seen any…

I hear you and thank you for that thought process and we'll try to respond to it.

Yes. And hopefully we’ll have a lot more to share in the future here.

I mean guys, this is four years of – you guys in front of a computer, let's pull up a five-year chart and take a look. I mean it is painful. It's been painful and it's been story after story, a new machine, new financing, blah, blah, blah, and I’m here to make money. I'm not getting a dividend. I'm not getting a salary. I've been loyal. I’ve been here in story after story, and it’s just – I don't see the emphasis on winning here and getting this price stock – stock price up and the insider buying has completely evaporated, dried up. There's very little confidence in my opinion and it's been a painful four years financially for me.

We will do everything we can do to justify the commitment that you made and to gain your confidence.

Are you guys seeing any decrease balloon sales with the force majeure on helium?

No, not at all, in fact the helium balloon sales have continued to increase. We had an increase last year in helium that have just about every year over the past several years that that has increased. Helium is that there has been some recent publicity about the potential restrictions on the availability of helium. We haven't seen any significant effect on our sales or on the availability of helium in stores for balloons. So far that has not been – that hasn’t affected us. There was a time two or three years ago, where there was a thought that there was going to be a significant helium shortage and that was pretty short lived and really didn't have any real effect on the market.

Okay, good. Also you guys said you’ve turned $2 million in cost out of the business. Do you see further opportunities or reductions?

We're working on that in any number of ways. Just to give you some specifics, we significantly changed our health insurance program, so that we saved I think the number was – what was it Jeff, somewhere in the range of a couple $100,000 – $300,000 annually on our health insurance programs. That’s 10 or 15 initiatives that we have done in an effort to control expenses. One of the other things that we're doing is that we are moving some element of our production of foil balloons to Mexico and the cost of production in Mexico is considerably less than it is here. So we have a savings of each unit that we make in Mexico. So there's a whole series of things like that that we have done and are continuing to do.

Okay. Last…

Part of the changes that are related to operational improvements, purchasing, running the business smarter as far as utility utilization, it's a very specific down and dirty changes in the business model.

The process improvements, which will lead to higher margins it sounds great. Last question on the fees, I know Mr. Schwan has since retired.

He is the Chairman of our Board of Directors.

Okay. Last year I asked a question and it was a pointed question and I kind of got a kind of a vague response. So I'm reading the DEF 14A filing and this is from May of 2017, so this is old news, but it's something that I asked last year. We're paying Mr. Schwan’s country club fees as a shareholder for $13,000 for 2016. Is that something that will be targeted as a cost reduction because I really don't think I should be paying for his country club fees and you guys are losing money?

This is Frank. Let me do that one. Not targeted to any individual, as an entity we've gone through a process of evaluating. What is if we do? Right. And so as Steve has talked about, we have an ongoing process of – what is the company in the business of what do we do and I think over time you'll find with our disclosures that the identity of the company is changing and you'll see tangible results of that effort.

And you will be – you will see that we will – you will not see those kinds of personal expenses being paid by the company.

Right. Honestly Steve, this has been years, I mean how was this okay ever with losing money, that's one thing if you guys are extremely profitable, but with losses how was this even justifiable, it’s troubling?

We hear you and I think you will see from our reporting that we are responding specifically to that question.

Thank you, guys. Honestly, I am cautious just with the history here. It sounds exciting. I think you guys are making the right moves, but again, I'm not in this for anything, but stock appreciation. I mean let's be honest, I'm not getting dividend, I'm not getting salary, I have dead money in this company for four years. So hopefully the energy that I hear on the call and have the new management members is something to comment. I appreciate you answering my questions.

Thank you. Good question.

We’re going to win or lose together.

Okay. Sounds good. Thank you. End of Q&A

[Operator Instructions] And I am showing no further questions. I would now like to turn the call back to Steve Merrick for any further remarks.

Thank you very much. Appreciate your participating in our call and hearing our story. We are committed to our cause, and are going to do – use every one of our talents and abilities to achieve a success in this Company and for you as shareholders of this Company. We appreciate your participation and look forward to talking to you again soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.