Yunhong Green CTI Ltd. (YHGJ) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the CTI Industries Corporation 2018 Second Quarter Financial Results. 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]. As a reminder, this conference is being recorded. 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 this statement is made. These forward-looking statements are based largely on this 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 could no assurance that the forward-looking information will prove to be accurate. I would now like to introduce your host for today’s conference, Stephen Merrick, Chief Executive Officer. Sir, you may begin.

Thank you. Good morning and thank you everyone for joining us on the call today. I’m here today with Jeffrey Hyland, our President; Frank Cesario, our CFO; and Stan Brown, our Director of Investor Relations. We are very pleased to be able to report one of the strongest second quarter results in CTI’s history. The sales momentum that commenced in March of this year continued through June, allowing us to grow second quarter net sales by approximately 25% over second quarter 2017. The cost reduction and operational initiatives that we commenced in 2017 and which continue resulted in a more than 17% decline in total operating expenses, improved manufacturing efficiencies, and higher production capacity. The combined effect of higher net sales, a lower cost structure, and an improved manufacturing and product profile allowed us to return to profitability in the second quarter this year. While we acknowledge that certain challenges and uncertainties remain in our business and industry for the full year of 2018, we continue to expect higher net sales, lower -- total operating expenses and more profitable operations when compared to 2017. I attribute much of these improved results and the ongoing transformation of CTI to the efforts and talents of the new members of our management team, in particular Jeff Hyland, our President and Frank Cesario our CFO and as well as Jeff Memenga, our new Production Manager. So at this point, I would like to turn to Frank and Jeff Hyland for them to provide their reports on the quarter. With that said, I’ll turn the conversation over to Frank.

Thanks, Steve. Good morning everyone. To start, let’s discuss our performance in the second quarter and the first six months of 2018 in more detail. Revenues improved by $3.2 million or 25% to $16 million from $12.8 million in last year’s second quarter. $3 million of Candy Blossoms sales during the second quarter is the primary driver of that growth. Feedback from the marketplace is that Candy Blossoms and related products are perceived favorably and expected to be a significant part of our story going forward. For the six month period ended June 30, our 2018 revenues were $30 million, surpassing the $28.2 million during the same period last year. Gross profit grew by 700,000 during the quarter to $3.8 million during 2018 compared to $3.1 million during 2017. This has allowed our year-to-date numbers to catch up at $6.7 million for the first half of each 2018 and 2017. Our gross profit percentage is down at 23.7% compared to 24.3% during the second quarter of last year as we brought to bear some new processes and the learning curve that goes with them. We expect to improve our gross margins over time and have programs underway to make this happen. Total operating expenses in the second quarter of 2018 declined by $700,000 or 17% to $2.9 million from $3.6 million in the second quarter of 2017. For the six month period, 2018 also saw 700,000 less than 2017 at $6 million flat versus $6.7 million, a 10% reduction. This is what Steve was referring to in terms of profit improvement programs launched during 2017 and 2018 that are starting to show through in our financials. We reported profit from operations of $800,000 during the second quarter of 2018, a $1.3 million improvement from the net loss from operations of $500,000 last year. On a six-month basis, 2018 showed a profit from operations of $700,000 compared to $100,000 last year. Our interest expense is $540,000 for the quarter, up from $360,000 in last year’s second quarter. As we expected coming into the year, rising market interest rates and our total amount borrowed have created a larger cost here. Additionally, we have a temporary 2% surcharge on our credit facility that I’ll discuss in a moment that began during June adding to this total. For the six months, interest is up to $1.1 million from $700,000 last year. We posted net income attributable I can say that to CTI for the quarter of $300,000 compared to a loss of $500,000 during the same period last year. For the six month period, 2018 improved to a loss of $200,000 compared to a loss of $500,000 last year. Now, let’s begin with numbers. At June 30, we had cash balances almost of $500,000 compared to $200,000 at the end of last year. As long as we are funded with revolving credit facility, we do not expect to maintain large cash balances. You may remember from last quarter that we were not in compliance with two financial covenants as of March 31, 2018 and we said we’ll be working with our bank. During June, we amended this facility, secured a waiver for our prior compliance failure, revised covenants, paid amendment fee, and as we just reported have a temporary 2% increase in the interest rate. With our return to compliance, we have reclassified our long-term debt back to long term liabilities. Finally, I’d like to talk about the recent issues surrounding tariffs. This topic will impact atleast two of our business areas. First, we imported vacuum sealing machines from China that we sell into the retail marketplace and would be subject to a 25% tariff. We are applying for relief along a number of fronts, including working with our retail customers and exploring the sale of these products into non-U.S. markets. This is an area of high priority and we are cautiously optimistic about our ability to mitigate the impact of these tariffs. However, until we have a solution in hand, this remains an area of enhanced risk. The other part of the company most directly impacted will be our 28% owned subsidiary Clever Container. That business is looking at a potential 10% tariff on goods imported from China. This will be less impactful than the potential issue for vacuum sealing but a headwind nonetheless. With that, I’ll turn things over to Jeff.

Thanks, Frank. The strong 2Q results were the direct result of the significant and far reaching changes implemented by the CTI leadership team. We focused on introducing new and redesigned products such as Candy Blossom’s and to a lesser extent vacuum sealing products. The sales teams across the world are performing very well and attacking their markets to continuously find both new and expanded opportunities. We have significant sales prospects as we focus on a few very large domestic and international opportunities and a multitude of other smaller opportunities across all aspects of our product line. And certain of those opportunities we are leveraging our partner relationships to deliver on otherwise unavailable leads. We have some very exciting new products that are close to market introduction, that are intended to expand existing customer relationships and open new customers to CTI. Operationally, our two new foil balloon converting machines are producing high-quality product at the speeds and consistency that we anticipated. This helps us to improve on delivery of complete and timely customer orders. We’re in the process of installing a third new converting machine and this one will be in Lake Barrington facility during Q4 of this year. We are in the process of retrofitting the six existing balloon converting machines with the most effective hardware features of the new machines. Our new 2018 repair and maintenance program is focused on addressing deferred maintenance and ongoing potential manufacturing bottlenecks. This is very important work stream and critical for short and long-term financial performance. Our $2 million 2017 expense reduction program is providing part of the framework for much improved financial results in 2018 via COGS and SG&A expense reductions. We have already implemented over a $1 million of additional expense reductions in the first half of 2018 and should see the benefits of those actions beginning in the second half of 2018. These expense reductions appear to be holding and we do not anticipate new expenses as a result of the reductions being too aggressive. We have several work streams to continue reducing our costs and making ourselves more efficient and we are in various levels of assessment and implementation. Although we will continue to refine our existing operations by identifying incremental business improvements, our primary objective is to evolve the business in a thoughtful, effective, profitability focused manner. We are taking the steps necessary to become a more aggressive competitor in the marketplace. We have active overall work streams that are challenging all aspects of our historic business model. This includes sales and customer relationships, new product introductions, what and where products are manufactured, overall cost structure and balance sheet components. We believe this challenge of our business model and the continuous ongoing profit improvement initiative will make us a stronger company and position CTI to pursue multiple avenues of growth. While our primary focus remains on strengthening our current operations, we continue to consider acquisitions that would address areas such as customer concentration, product line extension, and market demand. While Q3 is historically one of our slower quarters, we anticipate our initiatives will lessen the potential negative impact of lower revenues in that quarter. For the full year of 2018 we continue to expect higher net sales, lower operating expenses, and improved profitability over 2017. I'm pleased with CTI's direction and likewise believe you will as we roll out our new direction. And now I'll turn things back over to Steve.

Thank you, Jeff and Frank. And again, I want to recognize the value that both of you have brought to our efforts to transform and strengthen our company. That concludes our report. Operator, may we have your assistance please.

Thank you. [Operator Instructions] And we do have a question from line of Vincent Gargano, a Private Investor. Your line is now open.

Good morning, gentlemen, great job.

Good morning.

Thank you.

Really, really, really nice to see you after all you guys have put in. And so, just a couple of general questions, aside for a great quarter, higher margins, higher revenues, the foil balloon business, it looks like it was down a bit. My -- I've gone to Dollar Tree about three or four times in the last few months and I bought 10, 12 balloons and only one of them was a CTI balloon. Should I read into that at all or is there something bigger going on?

I think we have to work on your selection mix if any, but Dollar Tree is still our largest customer. We have a – really the first quarter where we had our drop – I won't say drop off, a slow start and then we got reengaged in the second quarter overall in the foil business. We have the two new converting machines going. We have a lot of foil business going through the pipeline. So obviously we're trying to compete for as much of that wall as we can get. We're trying to compete with other customers as well, but we're still quite prevalent in foil. It was just a slow start to the year.

Okay. I'm sorry, go ahead.

No. I was going to say, I agree with exactly what Frank said.

Okay. Turning to the stock price, obviously the Street likes it. It looks good this morning. Where do you guys think of the stock? And I know it is just upping and it’s kind of muddy waters to get into. But where do you -- A, do you think stock is undervalued? And B, where do you think it will be in a year?

Sure. I don't think there is a good answer to that question, but certainly we can of course. We're all engaged in the value of our company to our stockholders, and it's our job to drive up the value of our company to our ownership. The share price is the first way that we see that. So, do I have an expectation that as we perform our share price will be reflective of that? The answer is yes. Do I have any sort of projection? No, because I'm not that smart. And if I were, I'd be much wealthier than I am. All I can tell you is we've got our heads down and we are driving for it every day to make this company as valuable as possible.

Well, I could definitely see it. I mean, you guys have really gelled together as a management team. The calls are definitely more positive. The earnings releases are positive and the results seem to show it, so, again good job guys, really, really nice.

Thanks very much. Appreciate it.

Thank you. [Operator Instructions]. And at this time I'm showing no further questions. This concludes today's Q&A session. I would now like to turn the call back over to Stephen Merrick for closing remarks.

Thanks very much everyone for participating in our call at this time. It was a great pleasure to be able to make this call and to give the report that we did and we look forward. I can tell you that as Frank said we all have our heads down and we're working very hard to continue to perform well and to increase shareholder value. Thanks and we'll talk to you again soon.

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