Yunhong CTI Ltd.
Q3 2016 Earnings Call Transcript

Published: 14 Nov 2016

[Operator:]

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation announces Third Quarter and Year-to-Date 2016 Financial Results Conference Call. This call is being recorded. This conference call may contain forward-looking statements, as identified in Section 27A-1 of 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 will now turn the call over to Stephen Merrick, President. Please go ahead, sir.

[Stephen Merrick:]

Good morning, everyone, and thank you for participating in the call. I will be presenting our report. 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 you may have. Our sales and results were down some for the third quarter compared to last year. We’ll review this specifics on that in a minute. But first, I do want to report that we fully expect to more than make-up for the third quarter shortfall in the fourth quarter. In fact, based on orders we have received and are now fulfilling, we fully expect that both the fourth quarter and the full year will reach record sales levels and that we will achieve strong profits in both the fourth quarter and for the full year. We’ll get into some detail about our expectations for the fourth quarter and the year, but first let me review the results for the third quarter and the factors that resulted in our shortfall for the quarter. In the third quarter, our net sales were 13,476,000 million compared to net sales of 14,881,000 million in the third quarter last year, down about 1.4 million from last year. The shortfall in sales this last quarter was due to the lower dollar value of latex balloon sales and lower sales of vacuum sealing machines in the quarter, both of which we expect will be more than made-up for in the fourth quarter. With those exceptions sales for the quarter was strong and growing. For the nine months ended September 30, 2016, our net revenues have been 42,832,000 million, which is down only about 1.5% on the year from 43,477,000 million for that period last year. The shortfall in this case is due almost entirely to lower sales of latex balloon so far this year, which we will discuss. For the quarter, we had a net loss of 180,000 or $0.05 per share and for the nine months we have had a loss of 257,000 or $0.07 per share. Again as I said, we expect to more than fully make-up those amounts in the fourth quarter and for the year. Let me turn now to review of our results and our expectations by product line. In our foil balloon product line results for the quarter and for the year-to-date have been strong. Revenues in the third quarter were 6,178,000 million compared to 5,253,000 million for the third quarter last year an increase of 17.6%. For the nine months foil balloon revenues have been 20,540,000 million compared to 18,607,000 million for that period last year, an increase of 10.4%. We expect revenues in the fourth quarter from foil balloons to continue to be strong and increasing. In our branded vacuum sealing product line, revenues in the third quarter were down about 543,000 compared to the third quarter last year. 3,137,000 million last year against 2,594,000 million this year. However, we believe that this was in anticipation, a very substantial sales that this line, we are experiencing in the fourth quarter. For the nine months this year, sales of branded vacuum sealing machines and rolls of film have been 7,240,000 million, very close to last year sales of 7,386,000 million for this period last year. However, the big story is that we are expecting a major increase in sales of our vacuum sealing line in the fourth quarter and for the year. We’ve already received orders from vacuum sealing systems for the fourth quarter alone from more than $8 million and we anticipate that our sales in this line of products will reach at least 17 million for the year, compared to 2015 full year sales of 10,624,000 million. Let me just add a note that factor in our overall sales of vacuum sealing products this year is that we are no longer selling zippered vacuum bags to customer we had for that product last year. And most of our sales of vacuum sealing products now consist of our branded vacuum sealing machines, bags and rolls. In our home organizing and container line, our sales continue to decline. For the third quarter revenues in this line were 1,288,000 million compared to 1,121,000 million last year and increase of about 15%. For the nine months sales in this line were 4,243,000 million compared to 2,690,000 million last year, an increase of 57.7%. Turning now to our latex balloon line. For the third quarter revenues in this line were 1,875,000 million, compared to revenues in that period last year of 2,613,000 million, decline in the dollar value of sales of 738,000. For the nine months, latex balloon revenues have been 6,182,000 million, compared to 7,221,000 last year, a decline again in the dollar value of sales of about 1,039,000 million. Much of that decline in the dollar value of our latex sales has come about because of the decline in the value of the peso over the last 18 months. The beginning of 2015, the Mexican peso had a value of about MXN14 to the dollar, today it is over MXN21 to the dollar. A decline over that period of over 40%. This decline has had a double effect on our latex sales and profits. First, a good portion of our sales of latex balloons is in Mexico and Latin America denominated in pesos. So the dollar value of those sales is less than it otherwise would have been. Second, we purchase raw latex in dollars, so our cost of goods has in effect increased. Another factor is that our production was not what we anticipated, as a new production machine we expected to have online in April was not in full production until September. While, the peso value will continue to have effect on our latex balloon business, we do expect to improve our results in the line by increasing our sales of latex balloons in the United States, the UK and in Europe, which will improve the value of those sales and also by increasing our production of latex balloons and our sales with the full output of our new production machine. Just to round out our product line information for the nine months, our commercial film revenues have been up about 6.7% from 3,289,000 million last year to about 3,508,000 million this year. This year has presented some challenges from a financing standpoint due to the very large orders we received for our branded vacuum sealing line and our balloon products for delivery in the fourth quarter. We needed to obtain some additional financing to support the commitments we made for raw materials and inventory, particularly over the period from June through September. And accordingly we engaged in a private placement of stock and also received a short-term loan from our two principal shareholders in that period. At this point with the help of that financing, our financial condition is good. As of September 30th this year we had working capital of 11,322,000 million, cash balances of 624,000 and available to us on our line of credit 2,830,000 million. We are expecting to close the year on a strong note. As I indicated, we expect that our sales in the fourth quarter will be very strong in our principal product lines. Our branded vacuum sealing product line, our foil balloon product line and our home container and organizing product line and we expect to see some improvement in our latex product line as well. Well, we do not provide specific guidance, we can say that we do expect to have record sales for both the fourth quarter and for the full year. And further, we expect to generate good profits in both the fourth quarter and for the full year. That concludes our report. Operator, may we have your assistance with respect to questions from participants.

[Operator:]

Thank you. [Operator Instructions] And we’ll take our first question from Peter Sidoti with Sidoti & Company. Please go ahead.

[Peter Sidoti:]

Quick question for you. As it relates to the inventories of vacuum sealing products, do you have any feel for having inventories looked at held by your customers? And then my other question is, what the greatest limit to sales on that business right now? Is it demand or is it your ability to produce?

[Stephen Merrick:]

On the vacuum sealing line?

[Peter Sidoti:]

Yes.

[Stephen Merrick:]

Well, in terms of inventories and customers, I would say that, they are not -- we don’t see that inventories are high at all. We accept with respect to the one major promotional order that we have, we fulfill to particularly the major customers, we fulfill to their immediate needs. And so there is not a build-up that we see as inventory.

[Peter Sidoti:]

Okay. And in terms of limit, do you have production limits at this point or is it in terms of on end to the business?

[Stephen Merrick:]

We do not have production limits in relation to demand and opportunities that we have. Obviously as orders change, there is a timeframe for us to receive product on the machines which are produced in China. But other than that, if we don’t have any limitations on our ability to produce.

[Peter Sidoti:]

All right. Thank you, sir.

[Operator:]

[Operator Instructions]. We’ll take our next question from Steve Snipner with Star Bridge Investments.

[Steve Snipner:]

Taking from the commentary on the pace of that as much as you export, you never got into any hedging on the currencies?

[Stephen Merrick:]

Well, that currencies, we did do some hedging, we had some hedging in place on latex, but of course that hasn’t changed very much in terms of its dollar value. In terms of currency, we have not put any hedging specifically in place on currencies, there is some complications that we see doing it as it relates particularly to the latex business that we have. And so, we’re hopeful that with the increase in production that we have and hopefully some limitation on the changing value of the latex that will improve our results.

[Steve Snipner:]

Following along in the pace, so what’s going on obviously in the election -- I have to admit I'm not expect on NAFTA. Are there any particular provisions or benefits that if that tree started getting tweaked one way or the other, you think could have some impact since the Mexican operations have a lot of variability?

[Stephen Merrick:]

Well actually, we've thought about that and then there's some interesting questions that one might ask. We do not import from Mexico a lot of latex, there is some that we do and we sell some in the U.S., so I suppose if the decision were made to impose a tariff on goods coming in from Mexico that it would have some impact on that. But most of our sales of latex balloons are in Mexico, Latin America and in Europe. So we wouldn’t anticipate that any change related to NAFTA would effect this particularly in that.

[Steve Snipner:]

Alright, it's really just a currency issuance as the economies move but nothing broader than that?

[Stephen Merrick:]

I think it is the currency issue, you’re right and we’re doing our best to try to manage that and we’re looking carefully at options.

[Steve Snipner:]

Look forward to that fourth quarter. Sounds interesting.

[Operator:]

It appears we have no further questions. I would like to turn conference back over to Mr. Merrick for any additional or closing remarks.

[Stephen Merrick:]

Thank you all for participating. We appreciate your involvement and interesting questions. We hope to be able to present a strong report at the end of this year and we're looking forward to that and to our fourth quarter. Thank you very much for participating. Have a good day.

[Operator:]

And that concludes today’s presentation. We thank you all for your participation and you may now disconnect.