Yunhong CTI Ltd.

Good day and welcome to the Yunhong CTI fourth quarter and year-end 2021 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. 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, Jonna Swan. 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 in certain assumptions 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, 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 measure most directly comparable to it are 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 Yonghong 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 a 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 hit a level of clarity on what we should and should not be. We then went out and made it happen. Transforming a business that has 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 required 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 was a significant financial burden, and our leverage was simply too high. The strain of trying to support the $20 million debt burden and the periodic cash needs of these businesses forced us into tough positions. We were in violation of our credit facility terms for much of this period, and we knew that 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 and related items. We weren't shy about reaching out to growth. 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. But business is about more than the top line. It requires the bottom line to keep up. Ours didn't. While all those distractions were happening, our foundation and 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 indication is 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 film, candy blossoms, and other gift items. Our products make people smile. You've got to save 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 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 U.S.-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 of subsidiaries while maintaining a healthy stockholders' equity. The Yunhong team bought into this transformation, and we were 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 Jonna Schwan, our Chief Operating Officer here to share recent success in this area. Jonna?

Thanks, Frank, and hello, everyone. One of the issues we have regularly had to work through was 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 automates it while maintaining our quality control features on the line. Think of the flexibility in managing our critical human resources as we can better cover our manufacturing needs. We calculate payback from this strategic investment occurring in 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 advancement to six converting lines. One other change that has been made in order to maximize our production personnel is an investment on our seasonal production flow, 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 grad 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 reduce 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 product because we can retain good, trained staff for a longer period of time. After so many years of managing some of these challenges, I'm very happy to be a part of leading Yunhong CTI today. Frank?

Thank you, Johnna. That shows how we aren't 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 the latex manufacturer, FlexiUniversal in Mexico, something that will not recur. Please note that $6 million of this was the recognition of currency loss over time becoming a recovery at the other comprehensive income level. Only an accountant can appreciate that, and even then just barely. Going forward, we are committed to being easier to understand. Now that we have freed our U.S. 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?

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.

Once again, if there are any questions or comments, please press star 1 on your phone at this time.

Your first question for today is coming from Michael Corrasani. Michael, your line is live.

Hello, Michael. How are you doing? Good morning, folks, and congratulations on this turnaround. I don't know if you're able to, but I'd love it if you 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 You know, 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 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 U.S. 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 at. And so we're very excited to see how that shapes up.

Thank you. Thank you.

Once again, if there are any questions or comments, please press star 1 on your phone at this time. Your next question for today is coming from Mike Zunico. Mike, your line is live.

I just had a quick question. When you look at... Board ownership or key employee ownership. I'm not sure if it's accurate. So much of the data on CTIB is old or inaccurate. If you look on Yahoo Finance or any of the overviews of the company. I just am making a comment that I would love to see more ownership from key employees, you know, 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 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, you know, ending 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 has turned over tremendously in 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, you know, when you look at it, it will look very, very different from what it was not long ago.

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

To our customers? We have. We've made a huge push. Nobody wants to have their prices raised. No one wants to be the guy in the room raising prices. They 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. You know, we've held price for many years with 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 this, and the vast majority of our customers and business said we understand. At the same time, you know, if we push too far, you know, we hear about it. And we did lose some business that wasn't profitable. So, frankly, I'm good with that. 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.

Your next question for today is coming from Glenn Hamilton. Glenn, your line is live.

Hey, Frank. Nice to talk to you guys again. Here's my question. I didn't see any bad or great income information. It'd be nice down the road instead of going to the SEC and NASDAQ and all those to find your balance sheet and just be, you know, transparent in that regard, at least on a quicker basis. So.

Glenn, I couldn't agree more. And my commitment to you is every quarter, you know, going forward forever, we're going to have the traditional income statement balance sheet disclosures. This time was complicated because, frankly, we thought our 10K would have been 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 without a whole lot of discussions. So through the end of last year, we did this 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 U.S. business is doing.

Okay, good answer. Can 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 UHAB. I'm in a lot of chat rooms with CTI, and a lot of people still consider this a Chinese company with a lot of negative connotations with that. Why can't it still be called CTI Industries, again, with Yuhang still being the primary owner? Because whenever there's negative news on China, overall, boom, I see a drop in our price. Coincidence? Maybe, maybe not. It's true.

It is a change, right? It's a different animal. So having Yunhong in our name was frankly, it was attached to the investment. If you go 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 U.S. company with the broader group. It's done in name and it's done in investment. It is not done in any other way. In other words, all of our operations are U.S., our people are U.S., And our customers know that. So when we walk into somebody's office, we have both Yunhong CTI and CTI Industries available. As a matter of fact, the 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'll be good. Challenges, I understand some people react But that is who we are now. And so we are committed to being who we are. We're proud of being who we are. But make no mistake, we are a U.S. company with Chinese investors that has connectivity to a broader group. But that's it. Okay.

One last observation, and then you won't hear anything more from me. The previous caller wanted to talk about insider purchases. You know how strongly I feel about that. And I know blackout periods, et cetera. But if each director can't own independently 10,000 shares of a dollar stock, to me, they shouldn't be on the board. That's my opinion. My investment group has over 100,000 shares, and we're looking to add more. So I'd like to see that ownership, management, et cetera, has a stake in the game besides getting grants every year and not putting up a dime. So that's just my observation. No more questions. And thank you, Frank and Donna, for doing a great job.

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

Okay, thank you.

As a reminder, if there are any questions or comments, please press star 1 on your phone at this time.

There are no further questions in queue. 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 the Unihong 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.