Yunhong CTI Ltd.

Good day and welcome to the Yunheng CTI second quarter and year-to-date 2023 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will open up to questions. This conference is being recorded today, August 3rd, 2023. The earnings press release accompanying this conference call was issued last night. On the call today is Yunheng CTI's Chief Executive Officer, Frank Cesario, as well as Chief Operating Officer, John O'Shaughan. 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 risk and uncertainties. The company's forum 10-K for the year ended December 31st, 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 measure is most directly comparable to it as 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

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 and 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 Incorporated, 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 Green CTI 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 Unown Group sells quite a variety of items, from health supplements to solar panels to software apps with tens of millions of subscribers, to advance material 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, one 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 category is led by balloon-inspired gift items, which has reported an increase of $1.7 million from full year 21 to 22. Because we record all of our Valentine's Day shipments by the end of December 22, something we did not do during 21, the first six 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 six 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 in the last couple of years. As is often the case, we have unusual items flowing in either direction. We've spoken in the past about an 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 non-cash income recognition of that deferred income. Audit fees were very high as we onboard a new audit firm during the first quarter for immediate service on our year-end audit and annual report in the 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 and in the long term lower our operating costs. The leader of that charge is our Chief Operating Officer, Jonna Schwan. Jonna, may I ask 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 indication of upcoming Valentine's Day orders looks like a solid increase over the past year. Frank?

Thanks for the heads up, Jonna. 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 in future sales. We know that most people catch this call in 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?

Certainly. Everyone at this time will be conducting a question and answer session. 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 we poll for questions. Your first question is coming from Glenn Hamilton. Your line is live.

Hi, Glenn. Hey, Frank. I'm probably the only one on the line here, right, as always? I don't know.

I don't know, but you're the only one for me. So what's going on?

Well, this question is going to actually – I have two questions. One is going to be for Jonna. Jonna, does your dad, John Schwan, aware of the name change, the number of shares increasing, the symbol change? I cannot believe your dad would be on board for this. You may not answer that question.

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.

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's 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's doing? Our country's depleting its reserves, you know, geniuses that we are. So my question is not question observation. If there is any form of invasion and, you know, by China here, we are basically ZTI 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 revenue coming in. Just a lot of talk. I have a lot of Chinese friends over there who have their doubts also. So I, I know you're not going to say anything, Frank, you know, uh, 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, you know? So I don't know what you can say here, but I just don't see shareholder interest being aligned, you know, with management. I just don't see it. And if you could convince me, please do. Okay. I'm done.

Okay. So let me tackle that as best I can. Obviously that's a, That's a very large, broad question, a series of questions. But let me do what I can. So first, whenever there's instability anywhere in the world, and we saw this with Ukraine, right, that's damaging. It consumes resources. It causes inefficiencies. It causes problems. And that's true of anything. So I'm not singling out anybody and anybody. I'm just saying to the extent there's disruption, that's mostly bad. So if there is, we'll deal with that as best we can, like everyone else, because that's the only choice that you've got. When we get to the U.S. and China, I mean, we're the two largest economies. We're natural trading partners. There's a lot of stuff. And oh, by the way, we've gotten a lot of support from this investor group, which allowed us to pay down our debt. If we hadn't, the increase in interest rates would have hurt us tremendously, quite a bit more than they did, and already wasn't trivial. But look, I understand... You know, you're concerned at the same time I will tell you, you know, that, you know, this investor group has been helpful and continues to be helpful and is giving us things that we're both working on that hopefully can be commercialized successfully. That's what we're all trying to do. Are there any guarantees of this green stuff as you put on, you know, being tremendous? We never said we'd have revenue this year. We said we're working on it. We're prototyping it. We're doing a lot of work around it because the payoff could be huge. So, yes, that's why we're committed to this path, and that's why we're doing what we're doing. I do want to specifically call out your mention of billions of shares so that everyone understands what this is and isn't. In our materials for the upcoming annual meeting of shareholders, our board has asked the shareholders to approve authorizing additional shares, specifically to the tune of 2 billion total outstanding shares. And it's a huge number for us, right? The old number, the current number is 50 million. So why 2 billion? In authorizing these shares, not a single share gets issued automatically or by any process other than the normal one, which is the board agrees to terms of some sort of share issuance They're bound by the rules of the NASDAQ Stock Exchange, the SEC, the U.S. laws. They can go down all day long. At the end of the day, if any of those shares are ultimately issued, then they would be subject to all the rules around issuance today. We have 50 million authorized shares today, of which 21 are accounted for. That gives 29 million shares that could be issued subject to all the rules that we talk about. Whether that's $29 million or a larger number, it's the same thing. The reason I ask the shareholders for this change is to be ready. We're going into a whole other line of business, truly, and that might include new facilities. It might include merger partners, M&A, joint ventures. And so we want to already be ready to then come to those agreements, go through shareholder approval, if appropriate, for whatever that is. and move forward. But none of that is committed as of today. We're not issuing additional shares because of that request of shareholders. So everyone should just understand, we don't have an immediate plan for deploying those share assets. We just want to be able to if circumstances warrant. So I know that was long, and I apologize for that. But, you know, Glenn, you raised, you know, a lot of important issues, and we want to be responsive to them.

Yeah. And I understand that you and I, we've talked separately about it and I, I would have no problem issuing 1 billion, 2 billion shares. If you weren't a $2 stock, if you were a $10 stock, $20 stock, it makes sense, you know, maybe to do that, you know, for acquisition purposes, it's just doesn't make sense at $2. And I just don't know what's going to get the stock up from $2 to $4. There's very little trading value these days, as you can see. And, The market doesn't seem to perceive these future developments as bringing in revenues because I think we see more institutional activity, just volume. The stock is just like a little hamster on a wheel, just going nowhere.

And I appreciate that. It wasn't long ago it was quite a bit under $2, and we shouldn't lose sight of the fact that the largest entity in our space is currently in Chapter 11. So this has been a hard year since the price of helium went bananas a year and a half ago. And so we fought through it. And frankly, I take a measure of pride in how this team has fought through it. We do more with less, I think, than anybody, and that shows. And we think it's going to show through as we get out of this, as we see the sales volume perking up, as things like helium get resolved. If we ever get the Russian supply in the market, I can't wait to see what those prices go to. But in the meantime, we're not counting on that. So we're going to fight through and do the very best that we can, and hopefully we'll impress people. We'll see.

Okay. No more questions. I'm good. Thank you.

All right. Thanks, Glenn.

Thank you. Once again, everyone, if you have any questions or comments, please press star then 1 on your phone. Please hold while we poll for questions. Thank you. That concludes our Q&A session. I will now hand the conference back to Frank Cesario, Chief Executive Officer of Yonhung 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. 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.