Yunhong CTI Ltd.
Q3 2015 Earnings Call Transcript

Published: 11 Nov 2015

[Operator:]

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation Announces Third Quarter and Year-to-Date 2015 Financial Results Call. 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 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 our call. My name is Stephen Merrick, I am the President of CTI and I will be presenting a report with Tim Patterson, our Chief Financial Officer and Stan Brown, a Director of the 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. We had good results for the third quarter. net sales were $14,881,000 compared to net sales of $14,569,000 in the third quarter last year, an increase of 2.1%. Earnings for the quarter were $209,000 or $0.06 per share about even with our results for the third quarter last year. But the real story is our results for the nine months, which indicates that we have now reached the consistent level of sales and profitability. For the nine months we had net income of $546,000 or $0.17 per share, which is more than four times the level for the same period last year and includes contribution to income from each of the three quarters this year. In that same period last year, we had earnings of $132,000 or $0.04 a share. Net sales for the nine months were $$43,477,000 compared to net sales in the same period last year of $42,649,000. From a cash flow standpoint, our results have been strong as well. For the third quarter, EBITDA was $1,196,000 compared to $1,126,000 for the third quarter last year. For the nine-month period though, the comparison is particularly strong. EBITDA was $3,487,000 for the nine month period ended September 30, 2015, compared to $2,616,000 for the same period last year. That's a 33% increase. I do want to reiterate that EBITDA is not a GAAP accounting measure, but we do use it internally to measure our core operating results, so have included it in the earnings release with a reconciliation to our GAAP numbers. These much improved results are reflected in our financials in a number of different ways. Certainly, a significant factor is the improvement in our gross margin rate and gross margins. For the nine months, our gross margin rate this year has been 26.7% compared to a rate of 24.1% for the same period last year. This increase is directly reflected in our gross profit levels. We generated $11,614,000 in gross profit for the nine months this year compared to just over $10,268,000 for the same period last year. This increase in margins has come about for several reasons. First, in our latex balloon business, margins have increased over the past year due to the decline in the cost of raw latex as well as production efficiencies we've achieved at our plant in Mexico. Second, in general, our cost of raw materials has declined overall as we have seen some improvement in film costs as well as in raw latex. Third, we are generating more revenue from products, which have a higher margin rate, including some of our vacuum sealing line of products and our household container products. Income from operations has improved as well. For the third quarter this year, income from operations was $713,000 compared to $519,000 in the third quarter last year. For the nine months, income from operations was $1,882,000 compared to $789,000 for that same period last year. There are a couple of other general factors, which I should mention that do have an effect on our results. First, interest remains a significant factor in our earnings equation. In the third quarter this year, interest expense was $351,000 compared to $241,000 in the second quarter last year. For the nine months, our interest expense has been $1,068,000 compared to $761,000 for the same period last year. Second, the changes in currency exchange rates are having some impact on our results. In Mexico, for example, many of our sales are denominated in Mexican pesos, which has declined in value against the dollar. So, the dollar value of those sales, have declined. Similarly in Europe the dollar value of sales there have declined, with the decline in the value of the euro. Also the decline in the value of these currencies against the dollar, the cost to our foreign subsidiaries in their local currencies, a product we sell them has increased. Let me now turn to our sales results in our product lines. Revenues in our vacuum sealing line continue to improve, reaching $3,983,000 in the third quarter compared to $3,770,000 in the third quarter last year, which is an increase of 5.5%. For the nine months, revenues in this line were $9,446,000 compared to $8,599,000 for the same period last year, an increase of almost 10%. Sales in this line tend to increase over the course of the year with the fourth quarter being the strongest. We continue to have placement for this product line and good sales results in the largest U.S. retail chain, as well as in other chains and online retailers and we are pursuing additional chain store placement for the line. In our foil balloon line, we saw a small decrease in the dollar value of sales in the nine months at $19,045,000 compared to $18,607,000. However sales to our largest customer in the United States continue to increase for the nine months to $11,335,000 from $10,982,000 last year. The small decline in the dollar value of sales to other customers reflects in part the effect on revenues from sales in Europe and Mexico, which are denominated in currencies that have declined in value against the dollar during 2015. In general though, sales in our foil balloon line remained strong and we continue to see increases in unit sales at a number of customers end markets. This year we had introduced several new balloon designs, including a successful blackboard drawn product and will be introducing additional designs later this year and into next year. With respect to latex balloon sales, we've experienced some decline in the dollar value of net sales 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 latex products remained strong and we continue to develop new sales in this line in all of our markets, including Mexico, the United States, the U.K. and Europe. During the quarter, we experienced good revenue growth in new lines of products, particularly our household container product line, which enjoys high margins. Revenues in this product line increased in the third quarter to $1,623,000 from $699,000 in the third quarter last year. For the nine months, sales in our new lines that is household containers and Candy Blossoms increased to $4,914,000 compared to $2,655,000 in the same period last year. Our financial condition is good. During the nine months this year, we generated positive cash flow from operations in the amount of $3,395,000. As of September 30 this year, we had working capital balance of $11.5 million and we had about $2.4 million in cash and availability on our line of credit. While we do not provide earnings guidance, our fourth quarter is generally our strongest quarter and we believe that it is likely to be the case this year as well. We believe we have opportunities for growth in our novelty foil balloon and latex lines. We have a number of prospects and are actively pursuing new customers and opportunities in those lines in the United States, the U.K., Mexico, Latin America and Europe. We're currently constructing a new latex balloon production machine at our facility in Mexico, which we expect to have online in the first quarter of 2016. This machine will increase our latex balloon capacity in the range of 30%. We see continued growth in our vacuum sealing product line and we continue to -- expect to continue to see growth in our household container product line. And I do want to say that while we're always working to increase our revenues, we are as much focused on maintaining an increasing profitability as well. That concludes our report. Operator, may we have your assistance with respect to questions for calls from our participants?

[Operator:]

[Operator Instructions] And we'll take our first question from Michael Goodrich with C&G Capital

[Mike Goodrich:]

Good morning, gentlemen. Congratulations on a great quarter.

[Stephen Merrick:]

Thank you, Michael.

[Tim Patterson:]

We appreciate.

[Mike Goodrich:]

The margin expansion, is that something that you think is going to maybe continue to inch up? You think this is something that you're going to continue to work with and you think it gets a little bit better?

[Stephen Merrick:]

Well, it's a product of things that we think are continuing, that is that it relates to a decline in the cost of our raw materials. I don't know that we can expect raw materials to continue to decline more than they have but I think that, that ratio is going to continue that is the raw material cost is going to be somewhat lower. Second, it relates to the sales of products, greater sales of products that have a higher margin and as those sales of those products continue to increase, the margin rate should continue to increase. So I think we have a good chance of certainly maintaining and potentially increasing our gross margin rate.

[Mike Goodrich:]

Excellent, and can you talk about the Europe opportunity a little? I understand there are some regulations over there and that you guys might be able to take advantage of that? Can you maybe elaborate a little bit about what this new machine is?

[Stephen Merrick:]

Sure, Europe they're we -- about regulations in the United States, but Europe manages to have surpassed that by leaps and bounds. There is a regulation in Europe that limits the level of what's called nitrosamines in latex balloons and latex products and so that has been a challenge for companies that are making latex products in Europe. What we're doing is we're constructing a new machine that will significantly increase our capacity, but also will assure that all of the latex products that we make completely comply with that regulation in Europe about the amount of the nitrosamine content you can have in latex. So we think that will give us a significant competitive advantage in Europe and we expect to be price competitive and have plenty of capacity and have a strong product there.

[Mike Goodrich:]

Very good. Well, thank you very much gentlemen.

[Stephen Merrick:]

Thank you.

[Tim Patterson:]

Thank you, Mike.

[Operator:]

[Operator Instructions] And it appears we have no further question. That concludes the Q&A session. I'll turn the conference back over to Stephen Merrick for any additional or closing remarks.

[Stephen Merrick:]

Thank you, everyone for participating in our call. We appreciate your interest in CTI and we're working hard to perform strongly and well for our shareholders and we've a optimistic view of where we're headed. Thanks much. Talk to you soon.

[Operator:]

And that does conclude our conference for today. We thank you for your participation.