Yunhong CTI Ltd.
Q1 2018 Earnings Call Transcript

Published: 14 May 2018

[Operator:]

Good day, ladies and gentlemen. And welcome to the CTI Industries Corporation to host Conference Call to discuss 2018 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this call 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 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. I would now like to introduce your host for today’s conference, Mr. Stephen Merrick, CEO. You may begin.

[Stephen Merrick:]

Good morning. And thank you for joining us on the call today. I am here today with Jeff Hyland, our President; Frank Cesario, our CFO; and Stan Brown, our Director of Investor Relations. It’s been about six weeks since we last spoke on our fourth quarter 2017 conference call. So we will keep our commentary brief this morning with a specific focus on what has transpired during the short period of time. Our first quarter financial results were very much steady in contrast. Order flow in January and February was slow from a few of our larger clients. We understand due to the inventory management activities at those firms, which caused their orders to be temporarily deferred. Then in March, we had a broad surge in sales led by large orders for foil balloons and candy blossoms, as well as strong sales in latex balloons and home containers. In March, we generated nearly $7 million in consolidated sales, the highest sales month in our history other than November 16th sales for the Black Friday promotion. Strong sales continued in April and thus far into May, supporting our forecast for an evolving positive sales trend that will drive improved total sales for all of 2018. As we discussed in our fourth quarter call, we have undertaken a series of initiatives that have stabilized our operations and created a foundation for improved performance in 2018. These actions are expected to strengthen profitability, enhance efficiencies, improve product quality, catalyze business development and expand our geographic and product footprint. Principal among these actions is the plan we believe will remove more than $2 million of annualized cost over the course of 2018. These reductions are wide-ranging and include; further reductions and personnel costs; changes in suppliers and supplier agreements; the initiation of certain manufacturing in Mexico; and commencing operations on new more efficient manufacturing machinery. We initiated a similar program in 2017, the impact of which was reflected in our first quarter 2018 results. Despite a nearly 9% drop in sales, we reported a modest operating loss of just under $150,000 due in large part to a decline in quarterly operating expenses. I want to stress that we are never excited about losses in any amount. However, it is encouraging to see the tangible impact of our cost reduction initiatives. The reductions that we expect will be realized under this new initiative will become more apparent and beneficial over the next several quarters. As we continue to grow and elevate our brand, our global brand profile, we must ensure that we deliver the highest quality of foil balloons in our industry. To this end, we have embarked on a new quality initiative, called finest balloon. This program builds upon our previously established quality program. The finest balloon initiative is being managed by Jeff Memenga, our U.S. plant manager. We are forecasting investments totaling approximately $1 million in 2018 in areas, including new equipment, equipment upgrades, testing, QC measures, personnel, packaging and design. Finally, before I turn things over to Frank Cesario, our CFO, I am pleased to provide our outlook for the full year 2018. This is the first time we have felt confident enough to provide any meaningful insight into the future of our operations. While acknowledging that certain challenges and uncertainties remain in our business and industry, for 2018, we expect to generate higher net sales, lower total operating expenses and operate profitably when compared to 2017 full-year results. With that said, I'll turn the conversation over to Frank.

[Frank Cesario:]

Thanks, Steve. Good morning everyone. To start, let's discuss our performance in the first quarter 2018 in more detail. Revenues declined by $1.4 million or 9% to $14 million from $15.4 million last year's first quarter. As Steve mentioned, we have a very slow start in January and February, and some of our larger customers reduced their deferred orders. We came back with a surge in March, and would have been even larger had approximately $1.7 million of Mother's Day related orders not shifted from March into April. That helped with a strong April, and this trend of stronger sales has continued through the first half of May. But none of that shows up in the first quarter revenue. As Steve mentioned, we expect 2018 net sales to increase from net sales of $56.2 million in 2017. Lower revenues led to decline in gross profit to $2.9 million or 20.5% of net sales from $3.6 million or 23.6% of net sales. Total operating expenses declined by $95,000 or 3% to $3 million from $3.1 million in the first quarter of 2017. The decline in general and administrative, and advertising and marketing costs was offset in part by higher selling expenses. We reported a loss from operations of $147,000 as compared to operating income of $508,000 in last year's first quarter. Our interest expense was $564,000 for the quarter, up from $377,000 last year's first quarter. Interest expense trended higher during 2017, and we expect higher interest expense for the full year as compared to last year due to increases in market interest rates and their borrowing levels. In addition, as I'll get into in a moment, we might have a temporary increase in interest rate related to our credit facility. Our net loss for the quarter was $463,000 or $0.13 per share as compared to net income of $58,000 or $0.02 per share in first quarter 2017. At March 31, 2018, we had cash balances of $596,000 compared to $181,000 at the end of last year. As long as we’re funded with revolving credit facility, we do not expect to maintain large cash balances. With respect to our debt profile, you may recall from our prior call that we entered into a two-part [technical difficulty] $6 million term note that is being repaid monthly over five years and revolving credit facility supported by receivables and inventory worth up to $18 million. As of today, we have more surplus availability than I've seen since joining CTI last November. As you will see in our 10-Q filing, as of March 31, 2018, our Company was not in compliance with two financial covenants under the credit facility. This is caused by the slow start in January and February. March made up some of that ground but not enough. We’re currently discussing the appropriate actions with our lender, and are optimistic that we can reach an agreement at a timely manner. Our credit agreement includes an interest rate penalty of 2%. This has not been charged and may not be charged, but should provide some insight into what is available. Until this is behind us, we have reclassified the $4.4 million in long-term debt under the term note from long-term liabilities to current liabilities as that may impact comparatives we wanted to call that out. And with that, I'll turn things over to Jeff.

[Jeff Hyland:]

Thanks, Frank. While we experienced substantial sales headwinds in January and February, we’ve responded aggressively with initiatives to increase other sales and reduce expenses in the business. We came together as a team, and excluding the anomaly of the November 2016 Black Friday sale, achieved record high sales in the month of March. And we are improving the framework for profitable ongoing growth. As we discussed in March, CTI has embarked on multiple critical initiatives, covering all aspects of our business. We’ve had an aggressive ongoing sales initiative and expansion of our foil balloon manufacturing capabilities, and a multifaceted expense and working capital reduction plan. We continue to [technical difficulty] of improving our operating, financial and cash flow results. We’ve seen the early impact of these efforts in Q1 with a more significant impact expected for full year 2018. Operationally, we are very excited about our finest balloon quality program that Steve discussed, and the strategic advantages that creates. In addition, we’ve added two new foil converting machines; one in Lake Barrington; and an sister machine at Flexo in Mexico. Given the quality and output generated by the new machines, we anticipate 40% total increase in foil balloon production capacity. Thus far, the new Lake Barrington machine has increased production capacity and efficiency by approximately 20%, while the new foil converting machine in Guadalajara is installed, we expect it to be fully operational this week once additional parts are received. The ramp up of this production in Guadalajara should give us approximately 20% additional foil balloon operating capacity. This added capacity is critical to resolving capacity constraints and positioning us to fulfill anticipated higher demand throughout 2018. We’re also pursuing very significant specific new sales opportunities with existing and new customers. We are in various stages of quotes and presentations with customers regarding projects of varying scope, some quite significant. Our forecast for higher 2018 sales does not include any wins that may emanate from our sales pipeline. We’re currently pursuing this robust sales pipeline that entails new and existing customers, and it reaches across all of our geographies and product lines. We are finding that several customers are very receptive to carrying a broader range of our products, and we are enjoying the resulting increase in sales in March, April and forecast in May. We are also making strategic investments that it should expand our capabilities on sales and product lines. For example, we've added a new experienced 100% commissioned salesperson in UK. We’re in the process of expanding our worldwide relationship with a party goods manufacturer that increases the breadth of our product offering and should open up new customers and increase sales with existing customers. Also, we’re in the process of adding several new balloon designs and other complementary products that should demonstrate our creativity and responsiveness to customer trends. We are becoming increasingly comfortable with the performance of our initiatives, and we’ll continue to consider acquisitions that are intended to address areas such as customer concentration, product line extension and market demand. We have analyzed and passed on two acquisitions to-date, and we’ll continue to be opportunistic and strategic on other acquisitions. I'll now turn things over the Steve.

[Stephen Merrick:]

Thank you, Frank and Jeff. As Jeff indicated, we are becoming increasingly comfortable as our new team coalesces and drives our performance. We are eagerly looking forward to reporting to you in early August on the results we expect to achieve in our second quarter. That concludes our report. Operator, may we have your assistance please.

[Operator:]

[Operator Instructions] And we have a question from [Vincent Gargano]. Your line is now open.

[Unidentified Analyst:]

So the $2.2 million in cuts, cost cuts. Are these new cuts or are these continue over from 2017?

[Stephen Merrick:]

The 2017 cuts were $2.2 million, and that those have been implemented. A new profit improvement cost reduction program going on for 2018.

[Unidentified Analyst:]

So these are above and beyond additional cuts. That’s the way I am understanding that?

[Stephen Merrick:]

That’s correct. We’ve already implement some of them, and I anticipate having all of our 2018 cuts implemented by the end of Q3.

[Unidentified Analyst:]

And that's obviously minus the $1 million process improvement plan you have coming, that's additional cost as noted?

[Stephen Merrick:]

So the two are complementary, so you're right, we have 2018 initiatives that’s separate from the 2017 initiative. And you will see cumulative benefit as we go through the year.

[Unidentified Analyst:]

Next question is are you guys comfortable making open market purchases with your own money. I know you have blackout periods. I know there is certain requirements and restrictions. But you have a level of confidence to make open market purchases as a team?

[Stephen Merrick:]

Well, we’ve already had some that have taken place and I can’t speak for individuals, but I think that that’s certainly been something that some of the management team has considered.

[Frank Cesario:]

This is Frank, the finance element, let me just answer it more directly and I will own this answer. But I personally do, I think -- look, this company is a good spot going forward. And so I am inclined to agree with you. And yes, the end of the year is really hard for that, because blackout periods as you know tend to linger. But we feel good about where we’re at and I would agree with that statement that you just made.

[Unidentified Analyst:]

Yes, I know you have and I know Stephen Merrick has bought a ton of shares over the years. But I sense a renewed excitement with the team. I just -- you know, sometimes you like to see it followed up with some confidence, and that's really a good sign of confidence, if you will.

[Stephen Merrick:]

Good point.

[Unidentified Analyst:]

Great, thank you.

[Operator:]

[Operator Instructions] At this time, I am showing no further questions. I would now like to turn the call back over for closing remarks.

[Stephen Merrick:]

Thank you all for participating in the call today. We feel very positive about where we are and where we’re headed. And as I said, we look forward very eagerly to being able to report to you our anticipated results for the second quarter very soon. Thank you and have a good day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. And that conclude the program, you may now disconnect. Everyone, have a great day.