Transcript
Good day, and welcome to the Yunhong CTI Second Quarter and Year-to-Date 2023 Earnings Conference Call. This conference is being recorded today, August 3, 2023. The earnings press release accompanying this conference call was issued last night. On the call today is Yunhong CTI's Chief Executive Officer, Frank Cesario, as well as Chief Operating Officer, Jana Schwan. Before we begin, we want to note that we should read the forward-looking statements in the company's earnings press release. During today's call, management will make certain predictive statements that reflect its current views about future performance and financial results. The company bases these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. The company's Form 10-K for the year ended December 31, 2022, lists some of the most important risk factors that could cause actual results to differ from its predictions. Please also note that the company's earnings press release makes reference to adjusted EBITDA, a non-GAAP financial measure. The company views adjusted EBITDA as an operating performance measure, and as such, the company believes that the GAAP financial measures most directly comparable to it is net income or loss. For further information, please refer to the earnings press release and the company's periodic filings with the Securities and Exchange Commission. At this time, I'd like to turn the call over to Frank Cesario, Chief Executive Officer of Yunhong CTI. Sir, please go ahead.
Thank you, Matthew. Good morning, and thank you for everyone joining us on our call today. We'll review the numbers in a bit, but first, I'd like to address the rebranding that many of you have seen in our public filings in the Annual Shareholders Meeting materials. As we've been discussing for some time, our company has been working increasingly on compostable and biodegradable solutions, both involved in our existing product families and separate from them. Our name for decades, CTI stood for Container Technologies, Inc. In 2020, we added Yunhong as a way to connect to the Yunhong, China Group. For the first time, we weren't alone. Now supported by a diverse enterprise. This year, we decided to add the term green to share that we do more than containers. The term container includes our balloons and packaging films with our gift items being a natural extension of the balloon products. Now we are presenting other solutions unrelated to containers, which offer better stewardship for our planet. That's why we are asking our shareholders to approve the name of Yunhong GreenCTI Limited as our company name. As a related matter, our trading symbol of CTIB was easy to remember, CTI balloons. That was a fine symbol in the past, but today isn't as descriptive as it used to be. That's why we have reserved YHGJ, the YH for Yunhong and G for Green. We plan to do many things unrelated to our past. And I should mention that trading symbol is not in use as of now, but if our shareholders approve the name change, then we can deploy it, and we intend to. We plan to do many things in the future that are through our well-established retail channel. That process was part of the initial investment calculus and continues to build. The Yunhong Group sells quite a variety of items from health supplements to solar panels to software apps with tens of millions of subscribers to advanced materials solutions. They have an industrial park in China with companies spread across China and interests around the world. Our company serves as a valuable point of connectivity for the North American market, which hasn't been served in the past. At the same time, we benefit from the financial support that helped us pay down debt and weather storms when they occur and material solutions that we could never develop on our own. With that as our backdrop, let's talk about numbers. Year-to-date sales were $9.1 million this year compared to $10.2 million last year. Helium was the story of 2022 as a good start to that year became particularly challenging with the skyrocketing cost of helium following the loss of Russian supply after the invasion of Ukraine and a short-term supply issue in the United States that has since been resolved. It's no surprise that Q1 2022 was a strong balloon quarter and Q2 of '22 was weak. While 2023 has been more consistent, building as the year went along. Film products bounced back from a nonexistent first quarter this year to narrowly beat last year's second quarter. Film product orders ebb and flow in a market where consolidation is common and competitors are plentiful. So each quarter has a wide range of potential outcomes. Our other categories led by balloon inspired gift items, which has reported an increase of $1.7 million from full year '21 to '22. Because we recorded all of our Valentine's Day shipments by the end of December '22, something we did not do during '21. The first 6 months of this year shows a drop in that category despite an increase in overall order flow. It's hard to complain about shipping a bit earlier, so I won't, but it does make comparability more difficult and thought it important for our shareholders to be aware of this as you review our results. The gross margin was identical during the first 6 months of each year despite a 10% drop in reported revenue during '23. We believe that bodes well for future profitability as we find ways to deal with the cost challenges that have exploded broadly the last couple of years. As is often the case, we had unusual items flowing in either direction. We've spoken in the past about employee retention tax credit claims that were factored for $0.9 million in proceeds in 2022, but for which related income or expense offsets weren't recognized until those returns were ultimately processed. That has now happened, resulting in noncash income recognition of that deferred income. Audit fees were very high as we onboarded a new audit firm during the first quarter for immediate service on our year-end audit in annual report on Form 10-K filing. Those are coming down for the rest of the year, but I note auditing expenses are expected to remain stubbornly high going forward as the profession has been impacted by personnel shortages. We also have to deal with interest rates like everybody else. We've discussed using automation in our manufacturing process to create efficiencies in the long term to lower our operating costs. The leader of that charge is our Chief Operating Officer, Jana Schwan. Jana, they asked for an update on our automation campaign.
Thank you, Frank, and hello, everyone. We have talked in the past about gradual investments in our automation on our manufacturing floor. The first robotic cell we installed is consistently our most profitable line in terms of cost reduction coupled with throughput. I'm pleased to share that we are currently installing automation on our second manufacturing line and expect it to be operational in the coming days. We are also planning for the installation of a third line, which we currently expect to be completed by early next year. Each requires fewer people, which allows us to allocate scarce human resources to more optimal activities. Gradual investment has been effective for us as we are ready for each new installation. I would also like to go faster, but appreciate the measured approach in which we are integrating. I would be remiss if I didn't mention that customer indications of upcoming Valentine's Day orders look like a solid increase over the past year. Frank?
Thanks for the heads up, Jana. In addition to the company branding and new products we're trying to launch domestically, we also have the conclusion of our credit facility in September. We'll advise you just as soon as we have an agreement to replace this facility, something we expect to be successful in doing, but nobody around here declares victory until it's done. I'm hoping to have quite a bit to talk to you on our next call. For now, I'm pleased that our shareholders' equity has increased as we continue to find our footing. Helium pricing continues to moderate but remains stubbornly elevated and must be managed, particularly while the Russian supply is unavailable. People desire to celebrate, and we can play an important role in making those experiences special and memorable. Our balloon inspired gift category continues to grow, and we offer our customers outstanding designs and quality products. Adding more automation will help us as will the development of new product areas and customer indications of stronger upcoming holiday orders certainly indicates their optimism and future sales. We know that most people catch this call on the replay, but for anyone who's on live, we invite you to ask a question. Matthew, will you please start the Q&A session?
Your first question is coming from Glenn Hamilton.
Frank, I'm probably the only one on the line here, right? As always. I have 2 questions. One is going to be for Jana. Jana, does your dad John Schwan, aware of the name change, number of shares increasing, the symbol change, I cannot believe your dad will be on board for this. You may not answer that question. Frank Cesario: Let me chime in for a moment. For anyone who listens to this and doesn't know, we're talking about our former Chairman, John Schwan, who's been retired for years. So Glenn, you're welcome to talk to him. I know you know him on the side. But I can tell you there's a lot of support for what we're doing with everybody associated with our company. Glenn Hamilton: Here's my fear. Just yesterday, China has been announcing that it's increasing its petroleum reserve beyond belief. And you say, well, who cares? The rumor on the street is China is preparing for a possible invasion of Taiwan next year. That's why it's stocking up its oil beyond belief. And guess what our country is doing, Our country is depleting its reserves, geniuses that we are. So my question is, not a question, observation, if there is any form of invasion by China. Here, we are basically, CTI is primarily owned by a Chinese investor, who we all, I think, know very little about. For the past year, I've been hearing all this Green stuff, Green stuff, Green stuff. I haven't seen $1 of revenue coming in, just a lot of talk. I have a lot of Chinese friends over there who have their doubts also. So I know you're not going to say anything, Frank, I just don't see them doing anything that benefits shareholders, increasing the shares to the billions is unbelievable. It doesn't work, ask Nokia. So I don't know what you can say here, but I just don't see shareholder interest being aligned with management. I just don't see it. And if you could convince me, please do. Okay. I'm done.
Let me address that as best as I can. That's a broad question, but I'll do my best. Whenever there's instability in the world, such as what we've seen with Ukraine, it can be damaging. It consumes resources and creates inefficiencies, which is generally negative. If disruptions occur, we'll handle them like everyone else because that's all we can do. Regarding the U.S. and China, as the two largest economies, we are natural trading partners, and we've received substantial support from our investor group that has enabled us to reduce our debt. Without this support, the rise in interest rates would have significantly impacted us, much more than it already has. I understand your concerns, but this investor group has been beneficial and continues to assist us with initiatives we hope to commercialize successfully. However, there are no guarantees regarding the potential of our green initiatives, as we never promised revenue this year. We are currently in the prototyping phase and putting in the effort because the potential returns could be significant. We are committed to this path for that reason. I want to clarify your point about billions of shares to ensure everyone understands the situation. For our upcoming Annual Meeting of Shareholders, our Board has requested shareholder approval to authorize an additional 2 billion total outstanding shares, which is a considerable increase from our current 50 million. This authorization does not mean that any shares will be issued automatically; share issuance would only occur if the Board agrees to the terms, complying with Nasdaq, SEC, and U.S. law. Currently, we have 50 million authorized shares, with 21 million accounted for, leaving 29 million available for issuance under the same regulations. The reason for requesting this change is to prepare for future opportunities, like entering new business lines, securing new facilities, or pursuing mergers and joint ventures. We want to be ready to proceed with any necessary agreements and shareholder approvals in the future, but we have no immediate plans to issue additional shares. I know that was lengthy, and I appreciate your understanding, Glenn, as you raised many important points that we wanted to address.
Yes, I understand we've discussed this separately. I wouldn't have an issue issuing 1 billion or 2 billion shares if our stock were priced at $10 or $20. It would make sense for acquisition purposes, but it doesn't at $2. I'm uncertain about what could boost the stock from $2 to $4. Trading volume has significantly decreased recently, and the market doesn't seem to believe that our future developments will generate revenue. We're seeing more institutional activity, but the stock feels stagnant, as if it's just a hamster on a wheel, going nowhere.
And I appreciate that. It wasn't long ago that the price was significantly below $2. We shouldn't forget that the largest company in our sector is currently in Chapter 11. This has been a challenging year since helium prices rose a year and a half ago. We've persevered through it, and I take pride in how our team has managed. We accomplish more with fewer resources than anyone else, and that is evident. We believe that as we navigate through this situation, we will see improvement when sales volumes increase and issues like helium are resolved. If the Russian supply returns to the market, I am eager to see how prices will change, but for now, we are not depending on that. We will continue to push forward and do our best, and hopefully, we will impress people. We will see.
Okay. No more questions. I'm good.
That concludes our Q&A session. I will now hand the conference back to Frank Cesario, Chief Executive Officer of Yunhong CTI for closing remarks. Please go ahead.
Thank you, Matthew. I hope people weren't intimidated by all that, but we did get a lot of topics out and that's good. So we look forward to the next quarter when we'll have new things to talk about. We appreciate everyone who's voted their shares already for the upcoming annual meeting. For anyone who hasn't, this is a great time to do it and we look forward to talking to you soon. Take care.
Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.