Yunhong Green CTI Ltd (YHGJ) 2021 Q4 法說會逐字稿

Good day, and welcome to the Yunhong CTI fourth quarter and year end 2021 earnings conference call. (Operator Instructions) This conference is being recorded today, April 13, 2022. The earnings press release accompanying this conference call was issued this morning. 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 you 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 knowledge and expectations on future events that are subject to risks and uncertainties.

The company's Form 10-K 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 make reference to adjusted EBITDA, and non-GAAP financial measure. The company views adjusted EBITDA as an operating performance measure, and as such, the company believes that the GAAP financial measure most directly comparable to it, or its 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 would like to turn the call over to Frank Cesario, Chief Executive Officer of Yunhong CTI. Sir, please go ahead.

Thank you, [Holly]. Good morning, and thank you everyone, for joining us on our call today. Normally, we would start with review of our financial performance and talk about expectations. We will discuss our financial performance later in the call. But first, I would like to provide an overview of some of the challenges overcome, and the direction going forward for our business.

As 2021 was the end of a run of financial statements, complicated with losses on the disposition of subsidiaries, I'd like to start with the business itself. It's been quite a ride these past few years. You know what folks say, about doing the same thing over and over, and expecting a different result.

During 2019, we had a level of clarity on what we should and should not be. We then went out and made it happen. Transforming a business, there's far too much leverage proved every bit as challenging as one would expect. But I'm pleased to say that we achieved our goals.

We had sales and distribution entities in the UK and Germany. We owned our own latex balloon manufacturer in Guadalajara, Mexico. We owned a piece of an unrelated business, that was once thought to be a future avenue for selling the company's products. And we continued to supply a vacuum sealing business line that offered significant revenue but could not hit record cash flow performance.

Make no mistake, each of these businesses had successes and good reasons to exist. But over time, each was unable to offer the profitability required to continue. Supporting these areas, it was a significant financial burden, and our leverage was simply too high. The strain of trying to support $20 million debt burden, and the periodic cash needs of these businesses, forced us into a tough position.

We were in violation of our credit facility terms for much of this period, and we knew dramatic change was required. Thanks to the support from Mr. Lee and the Yunhong China group, we were able to pay down our lender debt to only $6 million and cushion the roughly $15 million of write-downs, associated with disposing these subsidiaries. The obvious question is why. Why was CTI worth saving? That's what we'd like to talk about today.

For almost 50 years, CTI has produced film-based products related items. We weren't shy about reaching out to grow. We sold all varieties of packaging film, developed an excellent foil balloon program, and look to take advantage of different paths to market.

When we couldn't do latex balloons well in the Chicago area, we developed a latex producer in Mexico. The business is about more than the top line, it requires the bottom line to keep up; ours did. While all those distractions were happening, our foundation strong base kept us going, and provides the solid ground we need to expand our company in a profitable way today.

We supply the most demanding retailers in the world. That's saying something. Every indications that we offer very strong product quality, and our in-house creative department never fails to generate new eye-catching designs. We know how to satisfy retail customers, and how to effectively engage in those sometimes, challenging relationships.

We knew that we had a strong base in foil balloons, certain packaging films, candy blossoms, and other gift items. Our products make people smile; you have saved that. Along comes the Yunhong China Group, that is looking to engage the North American market, with a product offering largely designed around retail.

We believe our experience and know-how, will help them to provide new products to our local marketplace. At the same time, I believe having an expert in sourcing and manufacturing in Asia, will provide direct value to what our company does as well. It can only help to have more qualified people to lean on.

We are that US based manufacturer, that our nearly 300 customers have come to rely on. But now we are more, we are a member of the broader Yunhong family. That investment was essential, as we need every bit of it to bring down our debt load to a reasonable level, avoid millions of dollars in related fees and charges, and write off those subsidiaries while maintaining a healthy stockholders' equity.

The Yunhong team bought into this transformation, and we are all committed to proving it was the right thing to do. From our own cash related challenges to the 2019 helium shortage to COVID inflation, supply chain issues, challenges obtaining qualified employees; we've been forced to adapt. I'm pleased to have Jana Schwan, our Chief Operating Officer, here to share recent success in this area. Jana?

Thanks, Frank, and hello everyone. One of the issues we have regularly had to work through, was with the tightness in the local labor market. After three years of hard work, I'm pleased to share that we have made a breakthrough in this area.

After a modest investment and a significant amount of teamwork from our operating folks, and our engineering partner, we now have robotic arms working reliably on a converting line. This takes a manual process and automated, while maintaining our quality control features on the line. Because of flexibility and managing our critical human resources, as we can better cover our manufacturing needs.

We calculate payback from this strategic investment occurring at about nine months, by lowering the headcount per line. Now that the first line is working up to our expectations, we are working on the second line. Before long, we should be able to apply advancements to six converting lines.

One other change that has been made, in order to maximize our production personnel, is -- an adjustment to our seasonal production flow. We have two large spikes during the year, Valentine's Day, and Mother's Day, Father's Day, grads season combined. About half of our business is everyday type events and celebrations, and the other half is driven by these three specific events.

In the past, we would staff up our temporary workforce in the fall for Valentine's Day, then reduce it for a month, then staff up again for Mother's Day, Father's Day, graduation, and then reduced staffing as we approach the end of our seasonal spike. With it being so difficult to find and train good people in manufacturing, we have adapted by starting to ramp up earlier in the fall, and continuing production efforts through April.

This change in shape has allowed us to meet customer demands, without doing anything extraordinary, in terms of labor costs; it's working. We make better products because we can retain good train staff for a longer period of time. After so many years -- at managing some of these challenges, I'm very happy to be a part of leading Yunhong CTI today. Frank?

Thank you, Jana. That shows how we are satisfied with business as usual, particularly when we believe there's a better way. We have plans for expanding our sales channel, but with full accountability to expectations throughout. I commit to you that we will more actively manage risk. We will better lever our assets into value.

Now about our financials. Revenue increased $3 million, as smaller customers continued to recover from the 2020 shutdowns, and our largest customer increased its demand. We noted a roughly $10 million charge to our net income related to selling latex manufacturer, Flexo Universal in Mexico, something that will not recur.

Please note that $6 million of this, was the recognition of currency loss over time, becoming recovery at the other comprehensive income level. Only an account can appreciate that even then [just barrels]. Going forward, we are committed to being easier to understand. Now that we have freed our US business and can show its operating performance, without external elements, that clarity should be there.

Our financing cost is substantially reduced. We have largely addressed inflationary cost increases. We continue to address freight shipping challenges, and we won't rest, until we demonstrate what our company can do. Thank you for being part of Yunhong CTI Limited. And now for the fun part, Holly may we have any questions, please.

(Operator Instructions)

Michael [Corasani].

Hello Michael.

Good morning, folks, and congratulations on this turnaround. I don't know if you're able to, but I'd love it if we could maybe share some insight, in terms of now that this is behind you. How you expect to see top line growth, and future opportunities coming down with all these lines coming together?

You're my new favorite person. Thank you for asking me about top line. As you can see, we've built top line over the past year, and we expect that to continue. We offer good products. We target the areas of the market. We service the best. We're looking to expand our sales function later in the year.

There's a lot of things that we're doing to grow it, but grow it on a risk-managed perspective, right? We're not going to just dump resources into top line growth. We're going to pick our spots. And we think that's going to work.

At the same time, a new wrinkle for us, is that we believe we can supply support for other Yunhong companies, right with the US retail market. That's something that we had contemplated, back when the investment was done two years ago.

And now I think we're in a position to much better do that. So, between working with entities that are more known to us, to providing foil balloons to more types of customers, to providing our candy blossoms, and gift solutions to a lot more types of customers. We think that we have, a lot of good things to shoot out. And so, we're very excited to see how that shapes up.

Thank you.

Thank you.

(Operator Instructions)

Mike [Synenco].

I just had a quick question. One, when you look at Ford ownership or key employee ownership, I'm not sure if that's accurate. And so much of the data on CTI is older, inaccurate, if you look at Yahoo Finance or any of the overviews of the company.

I just making a comment that, I would love to see more ownership from key employees, more of a belief internally in the company. And I know you have blackout periods. When can employees and Board members come back to the market and buy stock if they want to.

Sure. So, our normal blackout and I think this is true for most entities, goes from the end of a quarter until a couple of days after those results are announced. We as an entity have been very, very late in announcing results. I think we can do a better job.

But for now, that means for the end of the year, through the numbers beyond any of the 10-K filing, everyone is barred from doing anything. And because of where we are in this process now we're in Q1, right? And so Q1 is finished and so when we report Q1 in May, that's when things open up.

The other facet that I'll share is that our entity is turned over tremendously. If you look at it five years ago, we had a couple of dominant shareholders, who were employees of the company. They have retired. We have a new investor group. We have a lot more people involved. And so, when you look at it, it will look very, very different from what it was, not long ago.

And okay. I have a follow-up question. As far as inflation in raw material costs, you're confident that you can pass those costs along to the consumer.

To our customers, we have. We've made a huge push and look; nobody wants to have their prices raise. No one wants to be the guy in the room raising price, but you have to do it, right? If you're going to be healthy, you have to maintain a healthy margin. It's just part of the deal.

And a lot of people understand that, because we don't sell price, we sell value. And if we do that correctly, our customers will respond, and be our partners all the way through. We've held price for many years. A lot of customers, everyone knows what the world looks like.

And we went out and we said, okay, the new price structure looks like thus, and the vast majority of our customers and business said, we understand. At the same time, we push too far, we know we hear about it. And we did lose some business that wasn't profitable. So frankly, I'm good with that.

And so, all in, I can tell you, I think we've been successful in taking those additional costs and passing them through to our customers. It was not easy. But I believe we've been successful, and we will keep our eye on the ball because, margins can't fail on a company, that is looking to perform.

Thank you.

Thank you.

Glen Hamilton.

Here's my question. I guess the best fee or great income information, the night down the road, instead of going to the SEC and NASDAQ and others to find your balance sheet. And that's the transparent in that regard, least on a quicker basis. So that's just my one.

Glen, I couldn't agree more, and my commitment to use every quarter going forward forever, we're going to have the traditional income statement balance sheet disclosures. This time was complicated because, frankly, we thought our 10-K would be filed already. And I think it's tomorrow.

And so, all of that made us say, look, people will have a harder time understanding, the last of the deconsolidation charges zero, about a whole lot of discussion. So, through the end of last year, we did the high-level summary, and we thank everybody for their tolerance. But starting in Q1, you'll see more traditional disclosures, and they're going to make a lot more sense, because we don't have so many things clouding what the US businesses is doing.

May I have a follow-up question here?

You may.

You and I have discussed this in the past, and it's a touchy subject is the name Yunhong. I mean a lot of chat rooms with CTI, and they have a lot of people still consider, this a Chinese company with a lot of negative P&L connotations with that.

Why can't it still be called CTI industries again, with Yunhong still being the primary owner, because whenever there is negative news on China overall, I see a drop in our [fight]. Coincidence, maybe, maybe not itself ended up?

Yes, it is a change, right? It's a different animal. So having Yunhong in our name was, frankly, it was attached to the investment, fuel back to the paperwork from the beginning of 2020. There's a 5 million investment, we committed to change our name, to add Yunhong to connect the US company with the broader group.

It's done in name, and it's done investment. It is not done in any other way. In other words, all of our operations are US, our people are US, and our customers know that. So, when we walk into somebody's office, we have both, Yunhong CTI and CTI industries available. (inaudible)

Our product labels haven't changed. My business card has both, right? So, it's because we are in both worlds. We have a foot in each world. And if China becomes favorable, maybe that will be good challenges. I understand some people react, but that is who we are now. And so, we are we are committed to being who we are. We're proud of being who we are, but make no mistake, we are a US company with Chinese investors, that has connectivity to a broader group, but that's it.

Okay. One last observation. You won't hear anything more from me. The other previous call, one of them talk about insider purchases. You know how strongly I feel about that, and I know blackout periods. But at least director can't own independently 10,000 shares of the data sack, they seem to be on the board.

My opinion, my investment group has over 100,000 shares, and we're looking to add more. I like to see that ownership management, has a stake in the game besides getting grants every year, not putting up a bag. So that is my observation. No more questions, and thank you, Frank, and Jana, doing a great job.

So, thank you, Glen, and I'll certainly share that with our broader team. You know I will.

Okay, thank you.

(Operator Instructions) I would like to hand the call over to Frank for any closing comments.

Thank you, Holly, and thank you, everyone, for being on the call. I know a lot of folks, read the transcript, or catch the replay later. I'm certainly guilty of that a lot, but we do appreciate you being involved in CTI story. We're proud of the story, and we believe, and we'll say again, that we think will be a lot more easy to understand as we roll out during 2022. So, I look forward to talking to you now in just over a month, and I look forward to this becoming a habit. So, thank you all.

Thank you, ladies, and gentlemen, this does conclude today's event. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.