Yunhong Green CTI Ltd (YHGJ) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CTI Industries Corporation announces it 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 of the statement is made. These forward-looking statements are based largely on the 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 and contemplated by or underlying the forward-looking statements.

In light of these risks and uncertainties, there are no assurances that the forward-looking information will prove to be accurate.

I will now turn the call over to Mr. Stephen Merrick, President. Please go ahead, sir.

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, a 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, it 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 of 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 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 will 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 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 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 related to the mezzanine loan we have outstanding.

In the second quarter 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 have 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 specifics 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 to $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 and 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 from $1,568,000 million to $2,954,000. This line is also a major contributor to our increasing 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 principal 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 principal raw material, raw latex, in dollars but sells much of its product in pesos. This has had a substantial effect 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 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 are 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 effect related to the peso is likely to moderate.

So going forward, we do expect 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 costs 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 a 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 and 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 to 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. It is our intention to utilize those excess funds for payment of all or a 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 have 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 or calls from our participants?

(Operator Instructions). [Steve Snipner], Star Bridge Investments.

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?

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

Also you had indicated obviously with this large order that you announced a couple of weeks ago delivery in the fourth quarter, you are referencing increased cash coming in fourth quarter, first couple of months. Is that just it is a slow delivery and then you are just getting paid 3060 behind or are there additional sales that you are referencing with that cash flow?

Well, we expect that our sales in the fourth quarter will be in general as strong as they are. In addition to that, we have a major order that we have reported. We will receive payment on sales over the period of time. However, with respect to the major order, the 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.

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 order of magnitude may be a reasonable expectation? 25% of those level, I assume they are 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?

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

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

Right.

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?

December 2017.

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

(Operator Instructions). Vincent Gargano.

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

Well, we will recognize revenue in the sense that all of that order will be billed in the fourth quarter. Not all of the payment will be received in the fourth quarter.

Okay. Do you have any issue completing this order?

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

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

Sure. It is a significant new machine. One of the things that is a little bit hard to picture is that these latex production machines are actually quite large, probably 60, 70 yards long so they are big machines. 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 is one that has been constructed and it is a very good one but it took until then to get it functioning well. It should increase our capacity by in the range of 30% overall.

Okay, I understand that. So sales were down for latex balloons. Do you anticipate the machine helping to 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.

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 gotten 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.

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

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

Okay, I am excited -- one last question, the mezzanine loan, the outstanding balance is $5 million currently?

It is, yes. That is correct.

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

We are working to get there.

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

All right. Appreciate your help. Thank you.

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 or closing remarks.

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 is going to be a very exciting year for us. Thank you much and talk to you soon.

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect.