Yunhong Green CTI Ltd. (YHGJ) Q2 2023 Earnings Report, Transcript and Summary

Good day and welcome to the Yunhong CTI Second Quarter and Year-to-Date 2023 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 3, 2023. The earnings press release accompanying this conference call was issued last night. On the call today is Yunhong CTI's Chief Executive Officer, Frank Cesario, as well as Chief Operating Officer, Jana Schwan. Before we begin, we want to note that we should read the forward-looking statements in the company's earnings press release. During today's call, management will make certain predictive statements that reflect its current views about future performance and financial results. The company bases these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. The company's Form 10-K for the year ended December 31, 2022, list some of the most important risk factors that could cause actual results to differ from its predictions. Please also note that the company's earnings press release makes reference to adjusted EBITDA, a non-GAAP financial measure. The company views adjusted EBITDA as an operating performance measure and as such, the company believes that the GAAP financial measures most directly comparable to it is net income or loss. For further information, please refer to the earnings press release and the company's periodic filings with the Securities and Exchange Commission. At this time, I'd like to turn the call over to Frank Cesario, Chief Executive Officer of Yunhong CTI. Sir, please go ahead.

Thank you, Matthew. Good morning and thank you for everyone joining us on our call today. We'll review the numbers in a bit but first, I'd like to address the rebranding that many of you have seen in our public filings in the Annual Shareholders Meeting materials. As we've been discussing for some time, our company has been working increasingly on compostable and biodegradable solutions, both involved in our existing product families and separate from them. Our name for decades, CTI stood for Container Technologies, Inc. In 2020, we added Yunhong as a way to connect to the Yunhong, China Group. For the first time, we weren't alone. Now supported by a diverse enterprise. This year, we decided to add the term green to share that we do more than containers. The term container includes our balloons and packaging films with our gift items being a natural extension of the balloon products. Now we are presenting other solutions unrelated to containers which offer better stewardship for our planet. That's why we are asking our shareholders to approve the name of YunHong GreenCTI Limited as our company name. As a related matter, our trading symbol of CTIB was easy to remember, CTI balloons. That was a fine symbol in the past but today isn't as descriptive as it used to be. That's why we have reserved YHGJ, the YH for Yunhong and G for Green. We plan to do many things unrelated to our past. And I should mention that trading symbol is not in use as of now but if our shareholders approve the name change, then we can deploy it and we intend to. We plan to do many things in the future that are through our well-established retail channel; that process was part of the initial investment calculus and continues to build. The Yunhong Group sells quite a variety of items from health supplements to solar panels to software apps with tens of millions of subscribers to advanced materials solutions. They have an industrial park in China with companies spread across China and interest around the world. Our company serves as a valuable point of connectivity for the North American market, one which hasn't been served in the past. At the same time, we benefit from the financial support that helped us pay down debt and weather storms when they occur and material solutions that we could never develop on our own. With that as our backdrop, let's talk about numbers. Year-to-date sales were $9.1 million this year compared to $10.2 million last year. Helium was the story of 2022 as a good start to that year became particularly challenging with the skyrocketing cost of helium following the loss of Russian supply after the invasion of Ukraine and a short-term supply issue in the United States that has since been resolved. It's no surprise that Q1 2022 was a strong balloon quarter and Q2 of '22 was weak. While 2023 has been more consistent, building as the year went along. Film products bounced back from a non-existent first quarter this year to narrowly beat last year's second quarter. Film product orders ebb and flow and market were consolidation is common and competitors are plentiful. So each quarter has a wide range of potential outcomes. Our other categories led by balloon inspired gift items which has reported an increase of $1.7 million from full year '21 to '22. Because we recorded all of our Valentine's Day shipments by the end of December '22, something we did not do during '21. The first 6 months of this year shows a drop in that category despite an increase in overall order flow. It's hard to complain about shipping a bit earlier, so I won't but it does make comparability more difficult and thought it important for our shareholders to be aware of this as you review our results. The gross margin was identical during the first 6 months of each year despite a 10% drop in reported revenue during '23. We believe that bodes well for future profitability. As we find ways to deal with the cost challenges that have exploded broadly in the last couple of years. As is often the case, we had an unusual items flowing in either direction. We've spoken in the past about an employee retention tax credit claims that were factored for $0.9 million in proceeds in 2022 but for which related income or expense offsets weren't recognized until those returns were ultimately processed. That has now happened, resulting in noncash income recognition of that deferred income. Audit fees were very high as we onboard a new audit firm during the first quarter for immediate service on our year-end audit in annual report on Form 10-K filing. Those are coming down for the rest of the year but I note auditing expenses are expected to remain stubbornly high going forward as the profession has been impacted by personnel shortages. We also have to deal with interest rates like everybody else. We've discussed using automation in our manufacturing process to create efficiencies in the long term, lower our operating costs. The leader of that charge is our Chief Operating Officer, Jana Schwan, Jana, they ask for an update on our automation campaign.

Thank you, Frank and hello, everyone. We have talked in the past about gradual investments in our automation on our manufacturing floor. The first robotic cell we installed is consistently our most profitable line in terms of cost reduction coupled with throughput. I'm pleased to share that we are currently installing automation on our second manufacturing line and expected to be operational in the coming days. We are also planning for the installation of a third line which we currently expect to be completed by early next year. Each requires fewer people which allows us to allocate scarce human resources to more optimal activities. Gradual investment has been effective for us as we are ready for each new installation. I would also like to go faster but appreciate the measured approach in which we are integrating. I would be remiss if I didn't mention that customer indication of upcoming Valentine's Day order looks like a solid increase over the past year. Frank?

Thanks for the heads up, Jana. In addition to the company branding and new products we're trying to launch domestically, we also have the conclusion of our credit facility in September. We'll advise you just as soon as we have an agreement to replace this facility, something we expect to be successful in doing but nobody around here to declare victory until it's done. I'm hoping to have quite a bit to talk to you on our next call. For now, I'm pleased that our shareholders' equity has increased as we continue to find our footing. Helium pricing continues to moderate but remain stubbornly elevated and must be managed, particularly while the Russian supply isn't available. People desire to celebrate and we can play an important role in making those experiences special and memorable. Our balloon inspired gift category continues to grow and we offer our customers outstanding designs and quality products. Adding more automation will help us as well the development of new product areas and customer indications of stronger upcoming holiday orders certainly indicates their optimism and future sales. We know that most people catch this call on the replay but for anyone who's on live, we invite you to ask a question. Matthew, will you please start the Q&A session?

[Operator Instructions] Your first question is coming from Glenn Hamilton [ph].

Frank, I'm probably the only one on the line here, right? As always, I have two questions. One is going to be for Jana. Jana, does your dad John Schwan, aware of the name change, number of shares increasing, the simple change, I cannot believe your dad will be on board for this. You may not answer that question.

Let me chime in for a moment. For anyone who listens to this and doesn't know, we're talking our former Chairman, John Schwan, who's been retired for years. So Glenn, you're welcome to talk to. I know you know him on the side. But I can tell you there's a lot of support for what we're doing with everybody associated with our company.

Here's my fear. Just yesterday, China has been announcing that it's increasing its petroleum reserve beyond the leaf. And you say, well, who cares? The rumor on the street is China is preparing for a possible invasion of Taiwan next year. That's why stocking up its oil beyond the leaf. And guess what our country is doing, our country is depleting its reserves, Genius is that we are. So my question is, not a question, observation, if there is any form of invasion by China. Here, we are basically, CTI is primarily owned by a Chinese investor, who we all, I think, know very little about. For the past year, I've been hearing all this Green stuff Green stuff, Green stuff. I haven't seen $1 of revenue coming in, just a lot of talk. I have a lot of Chinese friends over there who have their doubts also. So I know you're not going to say anything, Frank, I just don't see them doing anything that benefits shareholders, increasing the shares to the billions is unbelievable. It doesn't work as Nokia. So I don't know what you can say here but I just don't see shareholder interest being aligned with management. I just don't see it. And if you could convince me, please do. Okay. I'm done.

Okay. So let me tackle that as best I can. Obviously, that's a very large broad question, a series of questions on -- but let me do what I can. So first, whenever there is instability anywhere in the world and we saw this with Ukraine, right? That's damaging. It consumes resources, it causes inefficiencies. It causes problems. And that's true anything. So not singling out anybody and anybody, I'm just saying, to the extent there's disruption, that's mostly bad. So if there is, we'll deal with that as best we can, like everyone else because that's the only choice that you've got. When we get to the U.S. and China, I mean, the two largest economies, we're natural trading partners. There's a lot of stuff. And oh, by the way, we've gotten a lot of support from this investor group that's allowed us to pay down our debt. If we hadn't, the increase in interest rates would have hurt us tremendously, quite a bit more than they did and already was in trivial. But look, I understand your concerns. At the same time, I will tell you that this investor group has been helpful and continues to be helpful and is giving us things that we're both working on that hopefully can be commercialized successfully. That's what we're all trying to do. Are there any guarantees of this Green stuff that you put on, being tremendous. We never said we have revenue this year. We said we're working on it. We're prototyping. We're doing a lot of work around it because the payoff could be huge. Yes, that's why we're committed to this path and that's why we're doing what we're doing. But I do want to specifically call out your mentioned billions of shares so that everyone understands what this is and isn't. In our materials for the upcoming Annual Meeting of Shareholders, our Board has asked the shareholders to approve authorizing additional shares, specifically to the tune of $2 billion additional -- total outstanding shares. And it's a huge number for us, right? The old number, the current number is $50 million. So why $2 billion? In authorizing these shares, not a single share gets issued automatically or by any process other than the normal one which is the Board agrees to terms of some sort of share issuance, they're bound by the rules of the NASDAQ Stock Exchange, the SEC, the U.S. laws, I can go down all day long. At the end of the day, if any of those shares are ultimately issued then they would be subject all the rules around issuance today. We have 50 million authorized shares today, of which 21 are accounted for. That gives 29 million shares that could be issued subject to all the rules that we talk about. So whether that's $29 million or a larger number, it's the same thing. The reason I asked to shareholders for this change is to be ready. We're going to a whole another line of business truly and that might include new facilities, include merger partners, M&A, joint ventures and so we want to already be ready to then come to those agreements, go through shareholder approval if appropriate, for whatever that is and move forward. But none of that is committed as of today. We are not issuing additional shares because of that request of shareholders. So everyone should just understand we don't have an immediate plan for deploying those share assets. We just want to be able to if circumstances warrant. So I know that was long and I apologize for that but Glenn, you raised a lot of important issues and we want to be responsive to them.

Yes. And I understand that you and I -- we've talked separately about it. And I would have no problem issuing 1 billion, 2 billion shares if you were in a $2 stock, if you're a $10 stock, $20 stock, it makes sense, maybe to do that for acquisition purposes, it just doesn't make sense at 2$ and I just don't know what's going to get the stock up from $2 to $4. There's very little trading volume these days as you can see. And the market doesn't seem to perceive these future developments as bringing in revenues because I think we see more institutional activity, just volume. We just -- the stock is just like a little hamster on the wheel, just going nowhere, just sitting on two boxes.

And I appreciate that. It wasn't long ago, it was quite a bit under $2. And we shouldn't lose sight of the fact that the largest entity in our space is currently in Chapter 11. So this has been a hard year since the price of helium went bananas 1.5 years ago. And so we fought through it. And I -- frankly, I take a measure of pride in how this team has fought through it. We do more with less, I think, than anybody and that shows. And we think it's going to show through as we get out of this as we see the sales volume perking up as things like helium get resolved, if we ever get the Russian supply in the market, I can't wait to see what those prices go to. But in the meantime, we're not counting on that. So we're going to fight through and do the very best that we can. And hopefully, we'll impress people. We'll see.

Okay. No more questions. I'm good.

[Operator Instructions] That concludes our Q&A session. I will now hand the conference back to Frank Cesario, Chief Executive Officer of Yunhong CTI for closing remarks. Please go ahead.

Thank you, Matthew. I hope people weren't intimidated by all that but we did get a lot of topics out and that's good. So we look forward to the next quarter and we'll have new things to talk about. We appreciate everyone who's voted their shares already for the upcoming annual meeting. For anyone who hasn't. This is a great time to do it and we look forward to talking to you soon. Take care.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.