Yunhong CTI Ltd.
Q2 2016 Earnings Call Transcript

Published: 22 Aug 2016

[Operator:]

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation announces its Second Quarter and Year-to-Date 2016 Financial Results Conference Call. This call is being recorded. This conference may contain forward-looking statements, as defined in Section 27A-1 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 can be no assurance that the forward-looking information will prove to be accurate. I'll now turn the call over to Mr. Stephen Merrick, President. Please go ahead, sir.

[Stephen Merrick:]

Good morning, everyone, and thank you for participating in our call. My name is Stephen Merrick. I am the President of CTI, and I will be presenting our report with Tim Patterson, our Chief Financial Officer; 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. In general, our second quarter results were reasonably good and in line with our second quarter results over the past several years. As we progress this year toward what we expect will be the strongest year in our history. As recently reported, we have received purchase orders for 168,000 units of our branded vacuum sealing machine products and for associated film products for delivery in November. The orders have a total purchase order value or about $7.9 million. These orders are in addition to our other anticipated orders for all of our product lines during the third and fourth quarters this year, so we are anticipating a substantial increase in total company revenues this year compared to 2015. Typically, our second quarter is our weakest quarter of our year. However, we did have an overall increase in sales of about 4% for the quarter compared to the second quarter of last year. We had strong increases in sales in several of our principal product lines, including our branded vacuum sealing product line, our home organization product line, foil balloons, and our commercial film products. However, we did experience weakness in our latex balloon product line, which affected both our net sales and our profitability for the quarter. I'll get into some details on each of these areas, but let me first summarize the results for the quarter and for the first six months. For the second quarter of this year, we had net revenues of $14,151,000 compared to net revenues of $13,621,000 in the second quarter last year, an increase of 3.9%. For the six-month period, we had net revenues of $29,355,000, compared to net revenues of $28,596,000 for the first six months of 2015. This is an increase of 2.7%. For the quarter, we had net income from operations of $202,000 compared to net income from operations in the second quarter last year of $250,000. For the six-month period, our income from operations was $849,000 compared to $1,169,000 for the same period of last year. For the second quarter this year, EBITDA was $745,000, compared to EBITDA of $918,000 for the second quarter last year. As has been the case for some time, however, our net income has been affected significantly by the interest in interest-related expenses we are required to record for these periods, much of it relating to the mezzanine loan we have outstanding. In the second quarter of this year, our net interest expense was $396,000, compared to net interest expense in the second quarter last year of $289,000. For the first six months this year, net interest expense was $943,000 compared to net interest expense for the same period last year of $692,000. Our net interest expense is affected in part by changes in our stock price, which result in an increase in the warrant-related expense we are required to record. So as our stock price increased this year, the amount of warrant-related interest expense we had to record also increased. As we have reported, these large interest charges had a significant impact on the net income we report, despite our positive net operating profit results. As a result, for the second quarter this year, we have reported a net loss of $83,000 or $0.02 per share, compared to net income of $52,000 for the second quarter last year. For the six-month period, we had a net loss of $76,000 compared to net income of $336,000 for that same period last year. Let me turn now to some specific on our various product line areas. First, with respect to Vacuum Sealing products, we have continued to have consistent and positive growth in this product line. In the second quarter this year, sales of our branded vacuum sealing products were up 15% over the second quarter last year with $2,435,000 compared to $2,119,000 last year. For the six-month period, sales in this line are up 10% to $4,646,000 from $4,249,000 last year. We expect strong increases in that line to continue and of course we will have the additional $7.9 million of additional revenue in this line in the fourth quarter. We believe that these steady increases in sales in this major fourth quarter sale indicate we have achieved a credible position as one of the major participants in this significant market. Our growth in our newer home organization products line continues at a rapid pace. In the second quarter this year, sales in this line increased by 76% compared to the same period last year from $850,000 last year to $1,496,000 this year. For the six months this year, sales in this line have increased by 88% over the same period last year or $1,568,000 to $2,954,000. This line is also a major contributor to our increase in gross margin rates as sales in this line generally carry higher margin rates. We fully expect that the rapid expansion of this business will continue and that our home organization product business will be a principle source of our growth and future success. Sales of foil balloon products have continued to grow at a good pace this year. For the six months, foil balloon sales increased by 7.5% from $13,356,000 for this period last year to $14,362,000 this year. And film sales have increased nicely this year as well. For the six months, sales of commercial film products have increased by 26% from $1,880,000 last year to $2,370,000 this year. Our latex product line on the other hand has struggled so far this year and results in this line have negatively affected both our revenues and our profitability during the second quarter and for the first six months. Sales of latex balloons for the second quarter were $2,263,000 compared to 2015 sales of $2,288,000. For the six months, sales of latex products have been $4,768,000 compared to $5,464,000 last year. Profitability on that line for the year-to-date has significantly reduced compared to last year. There are several factors affecting these results. First, much of our sales of latex balloons are denominated in Mexican pesos. Over the last year, there has been a significant decline in the value of the peso against the dollar. This decline has affected the dollar value of our sales in Mexico in the first six months of this year alone by as much as $900,000. Second, our Mexico subsidiary purchases its principle raw material, raw latex in dollars, but sells much of its product in pesos. This has had a substantial affect on margins and profitability we believe in the range of about $80,000 for the first six months of this year. Also we have been constructing a new product -- production machine in Mexico during the first half of this year and have incurred substantial costs related to that effort. The machine is expected to increase capacity by at least 30%, but has not been in line during the first half of this year. We're pleased to report now that this machine is in full production and is expected to contribute significant revenues and margins to operations in the second half of this year, and we believe that the exchange rate affect related to peso is likely to moderate. So going forward, we do expect the latex product line to contribute to sales and profits in accordance with our expectations. Now let me spend a few minutes on our financial condition and financing. As you might imagine, the costs associated with preparing for the major order later this year and for all of the cost of raw materials and other preparations for what we expect will be a very strong fourth quarter, have placed a significant demand on our financial resources. In order to meet those new large commitments, we have undertaken efforts to enhance our resources. In July we engaged in a private placement to raise funds and sold 152,850 shares of our common stock to several investors at $6 per share. The investors also received for each share purchased one half warrant to purchase an additional share at $7 per share. The gross proceeds of the placement were $917,000. In addition, our bank has agreed to amend our loan agreement to increase the amount available to us on our line of credit from $12 million to $14 million through February 2017 and also to increase the maximum amount we can borrow on our increased inventory levels we will have for a portion of this fall. The financial and logistical demands of our programs for the fourth quarter this year are substantial, but we believe we will be able to meet those demands until the major revenues we anticipate this fall in winter are realized. As we have indicated, it is our intention to pay-off or reduce as much as possible, the balance on our mezzanine loan as soon as we can and correspondingly to reduce the large interest burden caused by that loan. The substantial financial commitments required for our major orders and planned sales for the fourth quarter have required that we devote all of our financial resources and new funding those commitments for the present. However, we do anticipate that we will generate considerable funds at the end of this year and in the first couple of months of 2017. And it is our intention to utilize those excess funds for payment of all or in part of the mezzanine loan in the first quarter of 2017. So we do anticipate that much of our current interest burden will be reduced next year. In closing, let me say we are extremely excited about the opportunity we've been given to have the biggest year in our history by far and we are all intensely focused on the effort to make that happen. That concludes our report. Operator, may we have your assistance with respect to questions for calls from our participants.

[Operator:]

Absolutely. [Operator Instructions] We'll now take our first question from Steve Snipner with Star Bridge Investments.

[Steve Snipner:]

Hey Steve. How are you doing?

[Steve Snipner:]

A couple of questions. On some of the prior calls we had discussed that the company was sticking their toe into contemplating some hedges on the latex when that was more of an issue. Have you guys thought about doing any currency hedging with the peso issues that have been coming up?

[Steve Snipner:]

We are exploring that possibility and we've not done any currency hedging to date, but that is something that we are exploring for potential application in the future.

[Steve Snipner:]

Okay. Also you had indicated obviously with this large order that you announced a couple of weeks ago delivery in the fourth quarter, you're referencing increased cash coming in fourth quarter, first couple of months. Is that just -- it's a slow delivery and then you are just getting paid 30-60 behind that, or are there additional sales that you are referencing with that cash flow?

[Steve Snipner:]

Well, we expected our sales in the fourth quarter will be in general strong as they are. In addition to that, we have a major order that we've reported, but we'll receive payment on sales over the period of time. However, with respect to the major order payment, with respect to that order and some of our larger sales in the fourth quarter will come at the very end of the year or in January.

[Steve Snipner:]

Do you have any -- I assume this is some sort of a stocking order. Do you have any sense assuming sales are -- or to projections what kind of follow through orders may be there, what type of an order of magnitude may be a reasonable expectation; 25% of those level. I assume they're not going to continue ordering at the pace that an initial order is placed. Do you have any sense of how that may play out?

[Steve Snipner:]

Well, this is a single -- in that particular case, it's a single order for a promotional activity. However, that is a customer which we have an ongoing substantial relationship and with whom we expect to continue to have significant orders.

[Steve Snipner:]

Oh, so this is from an existing customer, not opening up something new?

[Steve Snipner:]

Right.

[Steve Snipner:]

Got you. Just refresh my memory, I don't have the Ks or the Qs in front of me, when is the actual mezzanine loan due assuming you haven't paid it off early as you anticipate?

[Steve Snipner:]

December 2017.

[Steve Snipner:]

Okay. So one way or another it's a 2017 event is your expectation, hopefully sooner rather than later, but it's a 2017 event. Okay. Great quarter. Thanks guys.

[Steve Snipner:]

Thank you.

[Operator:]

[Operator Instructions] We will now take the next question from [Vincent Gargano].

[Steve Snipner:]

Hello.

[Unidentified Analyst:]

Good morning.

[Steve Snipner:]

Good morning.

[Unidentified Analyst:]

Good morning. Good quarter. So future looks exciting. Do you anticipate recognizing all the revenue from this big order in the fourth quarter?

[Steve Snipner:]

Well, we'll recognize revenue in the sense that all of that -- or that order will be billed in the fourth quarter, not all of the payment will be received in the fourth quarter.

[Unidentified Analyst:]

Okay. And you have any issue completing this order?

[Stephen Merrick:]

Well, we’re working day and night to make sure that we get it right.

[Unidentified Analyst:]

Okay. Could you talk about the new latex machine coming online?

[Stephen Merrick:]

Sure. It’s a significant new machine, one of the things that's a little bit hard to picture is that these latex production machines are actually quite large, probably 60, 70 yards long. So they're big machines.

[Unidentified Analyst:]

Okay.

[Stephen Merrick:]

This machine has been in construction most of this year so far, and it did go online in production in July, so we are expecting it to generate product and sales at a good rate during the second half of the year. It did not -- we had hoped that it would have been online sooner than July, but it is a new machine, and it’s one that’s been constructed and it’s a very good one, but it took until then to get it functioning well. It should increase our capacity in the range of 30% overall.

[Unidentified Analyst:]

Okay, I understand that. So sales were down for latex balloons. Do you anticipate the machine helping fulfill sales or was it just the orders were soft? I'm trying to understand how the machine is going to increase your latex sales basically.

[Stephen Merrick:]

Okay. To some degree, the machine will increase our overall unit sales, because it will increase our capacity. There is a dynamic there of the peso and volume. One of the reasons that our dollar volume was down of course was the fact that the value of the peso against the dollar was down. And in general, our production was at or close in terms of unit volume, was at or close to what it had been before. However, that had got pretty close to capacity and so the effect here will be that the new machine will increase our capacity and will increase our total sales. What exactly the impact of the peso going forward will be, we don’t know, but we do think that the effect of the peso declining against the dollar will moderate in the future, which will help in terms of our results as well.

[Unidentified Analyst:]

Okay. Any anticipated margin improvement with the new machine or stable?

[Stephen Merrick:]

I think our margin -- I don’t know that we anticipate a significant increase in margin, but I think we're going to be able to maintain what were pretty good margins in that product line in the past.

[Unidentified Analyst:]

Okay, I am excited too. One last question, the mezzanine loan, the outstanding balance is $5 million currently?

[Stephen Merrick:]

It is, yes, that’s correct.

[Unidentified Analyst:]

Okay. I'm excited to see these fourth quarter numbers and hopefully a good 2017.

[Stephen Merrick:]

We're working to get there.

[Unidentified Analyst:]

Good, good. I like the stock too, looks good.

[Stephen Merrick:]

Thank you. Appreciate your help. Thank you.

[Operator:]

And that concludes the question-and-answer session for today. I would like to turn the conference back over to Mr. Stephen Merrick for any additional and closing remarks.

[Stephen Merrick:]

Thank you, everybody for participating in our call this quarter. I look forward to reporting over the next couple of quarters as we progress towards what's going to be a very exciting year for us. Thank you much and talk to you soon.

[Operator:]

Thank you. And that does conclude today's conference. Thank you for your participation. And you may now disconnect.