Yunhong CTI Ltd.
Q3 2017 Earnings Call Transcript

Published: 13 Nov 2017

[Operator:]

Welcome to the CTI Industries Corporation Announces Third Quarter and Year-to-date 2017 Financial Results Conference Call. [Operator Instructions]. As a reminder minor, 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, President. Please go ahead, sir.

[Stephen Merrick:]

Good morning, everyone I thank you for participating in our call. I will be presenting our report and with me is Tim Patterson, our Chief Financial Officer; and Stan Brown, Director of our company and Director of Investor Relations. At the conclusion of the report, we will be available to answer questions that you may have. Our sales and results are down somewhat for the third quarter and for the year-to-date through September 30, compared to the same period as last year. We will get into specifics on these results in a minute, but I do want to say that we are expecting to have a strong fourth quarter. In most recent years, our strongest quarter is the fourth quarter, and we expect that will be the case this year as well. First, let me review the results of the third quarter and the nine months, and the factors that resulted in our shortfall and results so far this year. In the third quarter, our net sales were $13,226,000, compared to net sales of $13,476,000 in the third quarter last year, a decline of only about 2% compared to the third quarter last year. That small decline for the third quarter resulted from foil balloon sales being down by about $400,000 from the third quarter last year, and our commercial film sales being down about $480,000 for the third quarter last year. However, foil balloon sales have been strong through much of the year, and are up against last year through the nine months. We expect that, that will be the case through the fourth quarter this year as well. For the nine months ended September 30, 2017, our net revenues have been $41,397,000, which is down about 3.4% on the year from $42,832,000 for that period last year. For the year-to-date, sales of foil balloons and latex balloons have been strong and are higher than last year. And sales in our other lines of Candyloons and home container products have kept pace. However, we have experienced some decline in the sale of our vacuum sealing products and our commercial film product lines, which account for the overall modest decline in sales. In a minute, I will review sales results and prospects in each of the product lines. For the third quarter, we incurred a net loss of $275,000 or $0.08 per share, and for the nine months, we had a loss of $742,000 or $0.20 per share. We do anticipate significantly improved results in the fourth quarter as we will discuss. Let me turn now to a review of our results and our expectations by product line. In our foil product line, revenues for the year-to-date have been strong. For the nine months, foil balloon revenues have been $21,447,000 this year compared to $20,540,000 for that period last year, an increase of 4.4%. We have seen increases in sales over a range of customers, both new and existing, particularly in the United States and Europe. We have developed and maintained foil balloon programs at a number of retail chains in the United States, Europe, the United Kingdom and Mexico, and also are developing new sales with distributors and specialty customers. We do expect revenues in the fourth quarter to continue to be strong and increasing. Over the next couple of months, we will be putting into service 2 new foil balloon converting machines, which will increase our production capacity by almost 30%. We believe this increased capacity will enable us to achieve stronger sales growth in our foil balloon line in 2018. Our latex balloon product line has recovered from weaker results last year, growing by almost 40% in the third quarter, to $2,620,000 from $1,875,000 in the third quarter last year. For the nine months, latex balloon revenues have been $6,969,000 compared to $6,182,000 for the same period last year, that's an increase of 12.7%. A new latex balloon line came on stream late last year, significantly increasing our latex balloon capacity, and is supporting our growth and revenues in this product line. Much of our growth in sales of latex balloons this year has been achieved with retail chains and distributors in Mexico, where our latex balloon plant is located, but we are pursuing sales opportunities for this product line in the U.S., Europe and the U.K. We have experienced weakness in the sales of our branded vacuum sealing line this year compared to last. For the nine months ended September 30, our revenues in this line have been $5,668,000 compared to $7,362,000 for the same period last year, a decline of about 23%. We believe that most of this decline, which occurred in the first 6 months of this year is attributable to the selloff of excess inventory at discounted prices by a major customer, who purchased a large quantity of vacuum sealing machines from us for a promotion in the fourth quarter of last year. These sales at discounted prices, we believe, impacted the sale of our current line of vacuum sealing machines in those stores, at least through June. In the third quarter this year though, sales of our branded vacuum sealing product lines returned to a more normalized rate, and we expect will achieve strong volumes in the fourth quarter and into next year. We are pleased to report that we have renewed our trademark license for Ziploc brand vacuum sealing products for 2 more years, and that the line remains a mainstay at the largest retail chain in the United States. We continue to have a position with this line in another retail chain through Amazon and online, and we continue to pursue additional retail channels. In our other product lines, including Candyloons and home container products, sales generally continue to keep pace with 2016. In our commercial film product line, we have experienced some decline this year from $3,508,000 for the nine months last year to $2,194,000 for that period this year. One of the products we provided to our principle customer for this line was discontinued this year, resulting in this decline. However, we continue to provide other products to this customer and are developing a new customer relationship for commercial film processing. Factors affecting our profitability so far this year has been a decline in our overall gross margin rate. For the third quarter, gross margin rate declined from 25.3% for the third quarter last year to 24 1% for the third quarter this year. And for the nine months this year, the gross margin rate was 24% compared to 26.1% for the same period last year. Gross margin rates this year have been affected by changes in the mix of the product sold, with high-margin products such as our vacuum sealing line declining as a percent of products sold, and somewhat lower margin products like latex balloons increasing as a percent of product sold. Going forward, we do expect to see some improvement in gross margin rates as our vacuum sealing products sales and foil balloon sales continue to improve, and as we achieve some of the efficiencies in production cost savings we are implementing now. We have initiated a program to achieve operational cost reductions and production cost improvements, which is in the process of being implemented now. In total, we have targeted total reductions in cost improvements of approximately $2.4 million. We expect to realize these reductions in improvements fully in 2018, but have already begun to implement a number of them for effect in the third and fourth quarters this year. These reductions and improvements include significant reductions in marketing consulting fees, reduced production cost by transferring some foil balloon production to our Mexico operation, reduction in our healthcare costs, elimination of losses in the U.K. operation and reductions among our personnel. In the third quarter, we did realize some of these cost reduction benefits, particularly related to the reduction of marketing, consulting cost and personnel. However, these benefits were offset by one-time additional expenses of $238,000 we incurred for financial consulting and legal expenses associated with our current financing relationship and efforts to achieve refinancing. As we have reported, we are actively engaged in addressing the status of our financing relationship with our present senior and mezzanine lenders, and in efforts to complete a financing of those lenders with another financial institution. We are deeply engaged now in this refinancing effort and believe that we will be able to conclude a refinancing soon. However, until the refinancing is fully concluded, we cannot give an assurance that a refinancing will be completed. As we proceed with these efforts, we will of course, provide prompt information on the results. We are expecting to close the year on a strong note. As I indicated, we expect our sales in the fourth quarter will be strong in our principle product lines, our foil balloon product line, our latex balloon products and our branded vacuum sealing line, and we do expect to realize some of the cost reductions and improvements I outlined. That concludes our report. Operator, may we have your assistance with respect to questions from our participants?

[Stephen Merrick:]

Thank you very much, everyone, for participating in our call. We appreciate it. We look forward to being able to provide a report at the end of the year that we'll be happy to do. And we appreciate very much your interest and your participation. Have a great day.

[Operator:]

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