Yunhong CTI Ltd.
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation’s First Quarter 2016 Financial Results Conference Call. Today’s 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 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 can be no assurance that the forward-looking information will prove to be accurate. I would now like to turn the call over to Stephen Merrick, President of CTI Industries. Please go ahead, sir.

[Stephen Merrick:]

Good morning, everyone and thank you for participating in the call. My name is Stephen Merrick, I am the President of CTI, and I will be presenting our report with John Schwan, our CEO; Tim Patterson, our CFO, and Stan Brown, Director of our Company and Director of Investor Relations. At the conclusion of our report, there will be an opportunity for you to ask any questions you may have. Overall, we had a good first quarter, sales were up over the first quarter last year which itself if one of the strongest quarters we’ve had. For the quarter, net sales reached $15,205,000 compared to net sales of $14,975,000 in the first quarter of last year. We had strong increases in sales in our foil balloon and home organizing product lines in the quarter. Foil balloon sales were up 13% from $7,094,000 in the first quarter of last year to over $8 million in the first quarter this year. Revenues in our home organizing line were up over 103% from $718,000 in the first quarter last year to $1,458,000 this year. Sales were strong with respect to our branded vacuum sealing line, although our sales of zippered vacuum bags were down for the quarter. Our expectations for our branded vacuum sealing line remained very strong for the balance of this year. Dollar amount of our revenues in our latex balloon line were down somewhat due to the continued decline in the value of the peso. But we anticipate much improved results in this line for the balance of the year as well. Our operating results for the first quarter were good, although a bit down from last year. For the first quarter we had income from operations of $647,000. Last year in the first quarter our income from operations was $919,000. The difference reflects some higher selling and administrative expenses we had in the first quarter of this year, as well as slightly lower gross margin rate. But the biggest factor affecting our bottom line for the first quarter this year is the interest we incur much on our mezzanine loan, and the cost associated with the warrants we issued in connection with the mezzanine loan. Our total interest and warrant related charges for the quarter this year were $546,000. So you can see the effect that amount has when you deduct it from our good operating income of $647,000. The interest we incurred in the first quarter on our regular bank loans, that is our revolver loan, mortgage loan and term loan, totaled about $118,000. All of the rest of the $546,000 charge, about $373,000 in total, relates to the mezzanine loan and the warrants associated with it. Interest on the mezzanine loan was $145,000 in the first quarter, the debt discount charge was $40,000 and the biggest cost of $188,000 was the charge we incurred for the increase in the value of the warrants due to the increase in our stock price in the first quarter. What I am pointing out and I want to emphasize is that we had a good quarter from an operating income standpoint, but most of that good result was wiped out by these special charges relating to the mezzanine loan. Because of those charges, we are reporting net income of $7,000 for the quarter. Our goal is to retire the mezzanine loan of $5 million and the associated warrants as soon as we can, so that this non-cash drag on our income will be eliminated. We had hoped to be able to take that action during the early part of 2016. However, in light of some significant new business we anticipate this year which will require a substantial investment in inventory. We will be required to use our available funds for those purposes for a good part of the balance of this year. While that business will require us to delay the payoff of the mezzanine loan until later this year, the good thing is that we anticipate significant new sales in the second half of this year. We do fully intend to retire the mezzanine debt as soon as feasible and plan to do that when we have completed the new business opportunities we have this year. Now let me turn to some specifics on our product lines. In our foil balloon line, we are experiencing strong growth in the United States, Europe and the UK. Overall, foil balloon sales were up 13% in the quarter from $794,000 in the first quarter of last year to $814,000 this year. With our biggest customer in the U.S., sales increased from $4,276,000 last year to $5,130,000 in the first quarter this year. We experienced improved sales to the biggest U.S. retailer as well, and we had increases in sales to principal retail change in the UK and in Germany. We’ve introduced a new augmented reality line of balloons which triggers animations on smartphones and tablets, and we’ve also introduced a line of what is called emoticon balloons which are becoming very popular. Revenues for our ZipVac branded vacuum sealing line continue to improve, reaching $2,209,000 in the first quarter compared to $2,130,000 in the first quarter last year. Sales in this line tend to increase over the course of the year with the third and fourth quarters being the strongest. We are anticipating a significant increase in revenues in this line during the course of this year. We have placement for this product line and good sales results in the largest U.S. retail chain, and we are pursuing additional change to our placement to the line this year. Our newer home organizing and container line, which we market through our consolidated affiliate fabric container, is continuing to experience rapid growth. In the first quarter this year, revenues in this line grew by 103% from $718,000 in the first quarter last year to $1,458,000 in the first quarter this year. Fiber container distribute its home organizing and container products through a network of independent consultants. This network of consultants is growing rapidly and now exceeds 2,500 individuals throughout the United States. With respect to latex balloon sales we experienced some decline in the dollar value of net sales in the quarter compared to last year. But for the most part, that decline relates to the decline in the value of the peso against the dollar. Unit sales and gross margins on the latex products remained strong and we continue to develop new sales in this line in all of our markets including Mexico, the U.S., the UK and Europe. A significant new balloon production machine will go online this month, which will increase our capacity for production of latex balloons by about 30%. We expect to generate new revenues from that production for the balance of this year. Our commercial sales business commercial films business is also doing well. While most of our sales in this line reflect sales to a single customer, sales to that customer have increased by 30% in the first quarter this year to over $1 million. Our financial condition is good. During the first quarter this year, we generated EBITDA of almost $1 million, and positive cash flow from operations in the amount of $876,000. As of March 31st this year, we had working capital balance of over $12.2 million. As we go forward this year, we are focused both on growing our revenues and our profitability. We expect significant growth in our vacuum sealing product line as well as very positive results in our foil balloon and latex balloon lines over the balance of this year. And we expect to continue to see rapid growth in our newer home organizing and container line. While we are working to increase revenues, we are as much focused on maintaining an increasing profitability. At this point, we do not have any significant new expenses planned for the development or introduction of new lines, and we are working to manage our operating expenses to levels consistent with maintaining profitability. We will continue to incur charges for interest and warrant related costs on our mezzanine loan, while that loan and the warrants remain in place. However, a good portion of these charges are non-cash, and do not affect our growing operating earnings or cash flow. As I indicated at the earliest possible date, we intent to retire that mezzanine debt and the warrants associated with that debt and to eliminate the drag on income they represent. That concludes our report. Operator, may we have your assistance with respect to questions for calls from our participants.

[Operator:]

Thank you [Operator Instructions]. Our first question is from Todd Brady from Oppenheimer.

[Todd Brady:]

Question, you guys saw a nice jump in the film products part of your business. What should we be thinking about upcoming quarters in that particular business line? Secondly, you guys continue to see good healthy growth in the home organization or home organizing products. How should we be thinking about growth over the balance of this year in that segment? Thank you.

[John Schwan:]

Well, with respect to the films business, I think it's difficult to predict where that business will go. It has been strong for us so far this year and I am hopeful that it will continue to be -- maybe I guess to some degree a pleasant surprise for us. And we hope that that will continue. On the home organization and container line, that has been -- that had steady growth, significant in terms of the percentage of the business over the last couple of years and that later growth is continuing. Just to reflect that we had our biggest month a year ago in history in bringing in new consultants and we triple that in February of this year. So, there is reason to believe that the growth in that business will continue, I don’t know that it will continue at a rate of 100% increase over each period of time but it is doing well and we expect it to continue to do well.

[Todd Brady:]

Steve, one quick follow up. It appears that you guys are now reaping the benefits of the investments that Company made years back in the vacuum -- sealing line. You’re seeing obviously very-very good growth here domestically. Is there something positive on the international side? Or is this just more of a domestic story right now?

[Stephen Merrick:]

It's principally domestic. We are -- as we reported, we are anticipating and expecting a very significant transaction at the end this year, which will result in a significant increase in our sales in that line. And we’re focused mostly on the U.S., although the product line is available in Canada and Mexico as well. And at some point we’ll probably look to expand the product line into other foreign markets. However, we have a significant market opportunity in the U.S. that we’re still in the process of capturing. We only -- the market size in the U.S. is probably in the range of $250 million and we are, at this point, even if we have a great year this year, we’ll be under 10% of that market that’s available to us.

[Operator:]

And moving on, our next question comes from John Banks from BG Capital.

[John Banks:]

Steve, just a couple of quick questions. You keep bringing up, the first thing, you bring up a lot and I know you guys are conservative, significant order or significant thing coming with the vacuum saying, what you guys got a huge order coming from one of the top retailers? Can you elaborate, or can you describe significant with the vacuum coming up? And two, I know last year I think EBITDA was around $1 million. Can we expect that to be higher this year?

[Stephen Merrick:]

Well, we use a little caution John, and it would be nice to be able to be very explicit about specific transactions. But one of the issues that you have there is that identifying specific customers is often an issue for the customer, and which is the reason that we’re a little bit cautious about that. We do expect a significant trend -- in addition to growth in the line which is occurring anyway. We do anticipate a significant transaction and significant means that we’re talking about in terms of the percentage of our current level of sales, an amount which would not quite double our sales but would come close to doing that. And we anticipate that that will occur this year. We’re not all of the elements of the transaction have not been finalized yet. But where we are reasonably confident of things going forward and we’re expecting it and we thought it was appropriate to reflect it because it also involve significant investment on our part that we’re going to needing to make over the next several months to prepare ourselves to meet the obligations. So, it's really good positive news, we’re all very excited about it. It's going to take a significant effort in investment on our part to get it done. And you’ve asked another part of that question and I forget what the second part was, yes EBITDA. Yes, we do expect our EBITDA assuming that we complete the transactions that we’re talking about. We would expect that our EBITDA would increase pretty substantially over the EBITDA that we have last year which was $5 million.

[John Banks:]

Congratulations on that. On that one, is $10 million EBITDA, is that too aggressive?

[Stephen Merrick:]

Well, I would say from year miles to got here, but that probably -- my guess is that we probably won’t reach that level but we’re sure of working it.

[John Banks:]

And then my final question on this one. We guys say in the next six to nine months and the backend. Can you guys generate enough cash to pay down the mezzanine debt?

[Stephen Merrick:]

Again assuming things go as we expect then and trend, and the answer is yes.

[Operator:]

And I have no further questions at this time [Operator Instructions]. It appears there are no further questions today. Speakers I’ll turn the conference back to you for additional or closing remarks.

[Stephen Merrick:]

Well, thank you everyone for participating in our call. We appreciate your interest and your involvement in our Company. And we want to you know that we are working very hard to generate good results for our shareholders and I think we’re getting there. So appreciate your interest and we look forward to speaking with you again at the end of the second quarter. Thank you. Have a good day.

[Operator:]

And that does conclude our conference call today. Thank you all for your participation.