Yunhong CTI Ltd.

Good day and welcome to the Yonhung CTI second quarter 2022 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, August 16, 2022. The earnings press release accompanying this conference call was issued this morning. On the call today is Yonhung CTI's Chief Executive Officer, Frank Cesario, as well as Chief Operating Officer, Jaina 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 are reflective of its current views about future performance and its 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, 2021, 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 references 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 is net income or loss. For further information, please refer to their 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, Matthew. Good morning, everyone. Thank you for joining us today. Hopefully, you've had a chance to look at our press release that we issued at close yesterday with summarized financial information, as well as the press release we issued last week regarding the arrival of Yunhong Biotechnology, Inc. Let's start with a summary of financial performance. The second quarter started out pretty well. with April coming in ahead of last year. Then we experienced a more challenging May and June, with sales to our customers negatively impacted by the significant rise in the price of helium. As many know, our top-selling product line is foil balloons. Of these, most are filled with helium, while the rest are filled with air. Like so many materials this year, the price of helium increased drastically, close to double what it was last year. Russia provided about 5% of the supply and could scale up for more. We all know what's going on with that. There was a fire in the largest U.S. plant that shut it down for an extended period. All in, it was a tough year for helium supply, which hurt those customers who purchased foil balloons from us and filled them with helium. Many of those customers have shared the expectation that the price will improve over the next few months. While this is good news, the high price of helium had a negative impact on our revenue for the second quarter. For April to be higher revenue than last year and close $1.3 million down was certainly disappointing. And yet, our reconfigured, more focused, efficient business showed its newfound resiliency. If we look at our net loss for the quarter, $400,000, compared to a gain from last year, it's important to note that we had a $3.4 million one-time gain from selling our Lake Barrington building last year to help with debt reduction. Without this one-time event, we posted a better bottom line this year than last year, on $1.3 million less revenue. And that's before we consider the $300,000 loss contributed by the subsidiary we sold in October of 2021. With those pieces defined, we beat last year's bottom line soundly, again, despite $1.3 million less revenue. Looking at our adjusted EBITDA, which is detailed in our non-GAAP measure in the press release, we posted a half-million-dollar improvement during the second quarter. and a three-quarters of a million dollar improvement during the six-month period over last year. And that's on 1.3 and 2.1 million less revenue, respectively. Nobody likes a storm, but our ability to weather that storm has improved exponentially. After the second quarter, one might ask if we're less confident about our expectation for 1.2 million of adjusted EBITDA for the full year 2022. With all the usual caveats involved in predicting results, our answer is no. We are not going to change that expectation. We believe we should get there. One top variable is how quickly helium settles down. If that happens during the third quarter, then I think we'll be able to hit our number. If it takes longer, we may have to reevaluate that forecast. But for now, we are sticking with our expectation. The fourth quarter has typically been our strongest, and we are building inventory to be better able to handle a potentially higher order flow later this year. We continue to attack our cost structure, looking for savings opportunities. We believe there are more opportunities to streamline operations and make us more efficient. Our robotic initiative is a good example of that effort, which Jonna Schwan, our Chief Operating Officer, talked about previously. Jonna will provide more insights in a moment. We're also planning to leverage the shares in the equity plan that our shareholders approved during June as we look to add more talent and support as we pursue new customers in the sales area. Many are looking forward and see a potential recession if we're not in one already. Our experience has been that balloon sales tend to be fairly strong during challenging times, as we have retail partners who are preferred destinations by families looking for value, and our products are a low-cost way to bring smiles to faces. Add to that the likelihood of more at-home parties, and we see a potential economic challenge as an opportunity. Jonna, as we celebrate your 20 years with our company, you have seen it all. I think this is helium number four for you. May I ask you to share what you see in our space these days?

Thanks, Frank, and hello, everyone. We have discussed the efficiency of manufacturing recently. Our robotic arms are being integrated into the process and are proving to be quite effective. Today, I would like to highlight our planning process. During recent years, we have become much more effective in incorporating material costs, supply interruptions, and production throughput into our designs that we offer. We have a unique ability to expand and contract all areas of our production activities quickly to adjust to our customers' needs. This has given us an advantage to be able to control our material flow and production capacity while we await stability in the helium market. Frank?

Thank you, John. We see meaningful benefits with the expansion of our robotic arms in the manufacturing area and are working on getting more of those assets in place when more lines as quickly as practical. There is ample headroom in the marketplace for our existing products, and we believe some natural extension areas to pursue in a measured way. We expect to weather the helium storm and come out in a good position. And now, let's turn to another piece of the future, the beginning of Yunhong Biotechnology, Inc. in the United States. For those who did not see the press release on August 11th, Yunhong Biotech will bring an advanced material solution to North America. Specifically, it offers a starch-based compostable alternative to many of the styrofoam and plastic products we use today. It's our thought that Yunhong CTI can leverage its experience in supplying retail customers to help Yunhong Biotech gain traction here. Every displacement is intended to enhance our environmental stewardship. We look forward to getting much deeper into this exciting and very timely material solution. In closing, we entered 2022 with a sounder financial and operational position and are confident in our ability to continue to execute against our transformation strategy. We are much more resilient financially and operationally than we were last year. We are better able to take advantage of positive movements in the marketplace. We have plenty of challenges to tackle like the current helium pricing issue and look forward to building on our progress in 2022 and beyond. With that, let's take some questions. Matthew?

Mind hitting up the Q&A? Matthew, can I ask you to start with the Q&A session? Certainly.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while you poll for questions. Your first question is coming from Michael Korsani from Orion Capital. Your line is live.

Hi, Michael. Good morning, Frank. How are you? Doing well. How are you? Good. Good. Thank you. I have two sort of categories of questions, I guess, and I'll leave it open for you to expand as you can. I'm just curious, on the helium side, how much helium do you guys actually buy? And what the quarter may have looked like if we didn't have the helium issue? How do I think about that?

And your other question?

The other one is on the biotech side. I don't know, again, if you guys are able to talk about it now. My question is, what's sort of the business model there? When do you expect to maybe see some revenues hit the top line? Anything you can expand on that would be great, too.

Very good. So I'll do it in order. Start at helium. We don't buy the helium. We do it for internal testing, but we don't buy helium for the product. Our customers do, and that's the issue. Okay. When the price of helium doubles, you know, then to our customers, the price of a filled balloon has gone up. And, you know, that has caused some of them, you know, a lot of pain. It depends how flexible you are in your pricing model. There are a whole lot of factors here. But certainly, you know, when any material goes up, right, the item that's attached to it is going to be negatively impacted. I mean, you know, think of car sales of gasoline getting up, et cetera. So that's the issue we have with helium. It's not affecting us directly. It affects our customers. But when you look and say 70% of our revenue is foil balloons, right, and most of those are helium-filled, you know, that's a lot of our product line is negatively impacted by that. And it was huge. You're talking about, you know, a couple million dollars in swing. And so it's a big deal to us. The nice thing is When those prices settle out, we see a surge in order flow for helium-filled products because the market wants it. And so as people let their inventories, you know, dribble down, that tends to be good for us, which is why we are slowly but surely building our inventory position to be able to fulfill those orders when that turns. And we've seen this before, and we expect to see it again. On the biotech side, you know, it's new, right, for here. So the entity has been created. You know, the technology is coming over from China, which is where it's got its legs and a lot of testing. In the press release, we talked about some of that. The business model is really as a material solution. So think of plasticware. Think of styrofoam containers, you know, all sorts of materials. you know, non-compostable alternatives that we use today that we don't want to, right? We don't want to keep loading up landfills. And so, the idea is this would be a material replacement for those materials currently in use. And, you know, it's a massive market, but it's one that we sell to retail all the time, and that experience should be helpful in kick-starting biotech, selling biotech its material solutions to retail customers at first, and then you get into all sorts of levels of people who use this stuff, right? If you haven't seen a foam or paper cup today, I'd be surprised.

Does that make any sense?

Yes, yes. Thank you for clarifying the helium issue as well.

Thank you.

Thank you. Your next question is coming from Mike Zunica. Your line is live.

Hi, Mike. Hi. Hey, how are you guys doing? Just one quick question. Do you have the equipment to produce this bio-friendly material?

Yunhong Biotech does. So the equipment is all ported from China, which is where the legs of this entire line come from. And so the idea is that's contributed by the Yunhong China Group into Yunhong Biotech Inc., the American company. And then Yunhong Biotech will then use that equipment to make product.

And they would ship that product to us and we would market it here?

We would help Yunhong Biotech sell to North American customers, and so we would help with the selling activity of that entity.

And that would find its way to our bottom line?

Yes. Okay. Thank you. Yep.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then 1 on your phone at this time.

Thank you.

That concludes our Q&A session. I'll now hand the conference back to Frank Cesario for closing remarks. Please go ahead.

Thank you, Matthew. And we know that a lot of people access this by the replay, and we thank everybody who's on live and joining us, and frankly, anyone who accesses by replay. We are excited to share our story. It's no surprise that Yunhong Biotech has captured some interest. Frankly, this was part of the calculus two years ago. We had when we and Yunhong China Group connected. This is an entity that has large reach in Asia, did not have the reach in North America. We have experience with North American retail, and it was a natural combination. So we're all looking forward to growing that and demonstrating to you the value that that can create. We are a proud member of the group. At the same time, we're, we think, a fabulous balloon company, world's finest balloons, if you look at the boxes. And we think we do a good job of that. We have a great creative team. And if you think about how much disruption has impacted this company in the past, and now you look at this year and say, yeah, it's a better company now. And I'm looking forward to showing you what that can become. So thank you for being on the ride with us. We'll look forward to speaking to you in the next quarter.

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