Yunhong CTI Ltd.

Good day and welcome to the Yunhong Green CTI Third Quarter and Nine Months Ended September 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open to questions. This conference is being recorded today, November 2, 2023. The earnings press release accompanying this conference call was issued last night. On the call today is Yunheng Green, CTI's Chief Executive Officer, Frank Cesario, as well as Chief Operating Officer, Jana Schwan. Before we begin, we want to make 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 expectations on future events that are subject to risks and uncertainties. The company's Form 10-K for the year ended December 31, 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 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 is 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 Yunpeng Green CTI. Sir, please go ahead.

Thank you, Holly. Good morning, everyone. I would like to thank you for joining us on our call today. This is the time of year where we take a breath and appreciate the transition from what has historically been our weakest quarter, Q3, to our strongest quarter, Q4, thanks to Valentine's Day shipments. However, it isn't every day that a company is rebranded, so let's start there. During August, our stockholders approved renaming our company from Yunhong CTI Limited to Yunhong Green CTI Limited as a way of communicating the new biodegradable and compostable products designed to reduce our reliance on single-use plastics. Along these lines, we've also changed our ticker symbol to reflect our name. CTIB has given way to YHGJ. Our new ticker may be more awkward to speak out loud, and I know that, but it is more reflective of our company name, Yunhong Green CTI Limited. We have added significant new assets to our website and have been sharing product samples while undergoing performance testing in the U.S. as we begin the process of entering the U.S. marketplace. I encourage anyone interested in this product area to look at our website and see what these solutions are about. With that as our backdrop, let's start with the numbers. Year-to-date sales were $11 million in 2023 compared to $12.4 million during 2022. Helium became the story in the second quarter of 2022 as a good start to the year became particularly challenging with a skyrocketing cost of helium following the loss of Russian supply after the invasion of Ukraine. We also had a short-term supply issue in the United States that has since been resolved. It's no surprise the Q1-22 was a strong balloon quarter and Q2 was weak. 2023 was more consistent, building as the year went along. I'm pleased to share that we have finally caught up on a year-to-date basis. It's been a tough road, one that has seen our two largest competitors in the U.S. file Chapter 11 in 2023. Film products dropped off in the third quarter and lagged 2022 substantially. Film product orders ebb and flow in a market where consolidation is common, competitors are plentiful, and each quarter has a wide range of potential outcomes. I believe the fourth quarter will be better, but the gap is significant. Our other category is led by balloon-inspired gift items, which continues to show strong order growth. We note that because we recorded all of our Valentine's Day shipments by the end of December of 22, something we did not do during 2021, the first nine months of this year shows a drop in the category despite an increase in overall order flow. The timing of our shipments may cause challenges in comparing finite periods, But overall, this area has been working well for us, and I believe it will continue to do so. The gross margin was off 1.6 percent from 16.7 last year to 15.1 this year on a reduction in overall revenue volume during 23, driven by our commercial films area. However, the rest of the income statement shows a much better outcome, such that a 28-cent-per-share loss last year is now 4 cents per share this year. We had one-time costs and benefits, particularly from the income recognition of the employee retention tax credit. But overall, our spending discipline helped us weather the helium storm. We believe that bodes well for our future profitability as we find ways to deal with cost challenges that have exploded broadly these past couple years. In the prior quarter, we discussed the deployment of automation in our manufacturing process to create efficiencies and in the long-term lower our operating costs. Perhaps this quarter I can ask our Chief Operating Officer, Jonna Schwan, to share the seasonality of our traditional business such that listeners can better manage their expectations. Jonna?

Thank you, Frank, and good morning, everyone. As foil balloons drive the bus, let's focus on the seasonality for balloons and related gift items. Roughly half our business is every day. Think birthdays, get well, anniversary, and other sentiments. while the rest is driven by such events as Valentine's Day, Mother's Day, and the graduation season. We ship approximately two months prior to the holiday, while production is underway months before that. We naturally gear up starting in August, operate feverishly through October through November, and then take a moment to reorganize after shipping Valentine's Day. We then ramp up from February to April as we focus on Mother's Day and graduation. Our third quarter is about spending controls and longer-term planning as we prepare to do this all again. And the payoff is millions of happy customers, which makes it all worthwhile. Frank?

Thank you, John. As we indicated during our prior call, our credit line expired September 30th. We've agreed with our lender to extend this line for two years until September 30, 2025, under similar terms. We've completed the name change, We are now getting compostable product samples out. We are updating third-party test results domestically. We will be participating at the China International Import Expo 2023 next week, November 5 through 10. Our company, together with Yunhong Biotechnology Inc., another member of the Yunhong Group family of companies, will be displaying our traditional balloons and balloon-inspired gifts, but also our group's patented compostable, biodegradable, and recyclable materials, to enhance environmental sustainability. We continue to find our footing. Helium pricing continues to slowly improve. 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 now we get to fulfill customer holiday orders This hasn't been easy, but few things worthwhile are. We know most people catch this call on the replay, but for anyone who's on live, we invite you to ask a question. Holly, would you please open the Q&A?

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. Your first question for today is coming from Glenn Hamilton, a private investor.

Hi, Glenn. Hey, Frank. My question is either you or John are going to be attending the Yang Hong conference in China coming up.

So this time we decided that just Yunhong folks were going to do that one. We have a variety of things being presented. So we have been supporting that conference with a lot of materials. You don't want to know how many packages have gone overseas, but we are coordinated and ready to roll. But to answer your question, This time we get to avoid the long plane trip and have local assets take care of it.

Okay. Second, I'm familiar with Party City and bankruptcy. Who was the second company you mentioned in BK? I wasn't familiar with that.

Yeah, there's a private company called Pioneer. They're based in Wichita, Kansas. They own brands such as Qualitex. They have another entity name called Continental Inc. But they were the largest latex company and overall the second largest balloon company behind Anagram slash Party City.

Would you say you are the third largest producer in the United States at this point?

For foil, for domestic, I think that answer is correct. The next largest besides us is a company called Convertidor out of Mexico. But as far as an American domestic manufacturer, I think it's clearly us.

Okay, I'm going to end this pretty shortly. With all the competitors pretty much very weak, I would think it would be easy to start stealing some of their sales. And how is next year going to be any different than this year? I would think you should be able to just go in and just take a lot of these weaker customers. That's just my off the cuff.

Well, it's a conversation we've certainly had because as people go through any transitional period, right, that creates some uncertainty that, you know, somebody else could hope to fulfill. I will note that both were Chapter 11, not Chapter 7, which means that the entities continue just in a reorganized fashion. On the one hand, for example, Party City came out of their issue with, what, a billion dollars less debt. So that'll certainly help their competitive position and no longer public, by the way, they're a privately held company now. So there are differences in that, but clearly it's, you know, I think it's advantageous for us to operate continuously and to add new items to our mix.

Okay, last question, I swear, no more. With the increase in the number of shares, which I was not really happy with, I'd like to think those shares increase. Somehow, Young Hung is going to be looking at acquisitions in the future. And that's great. Okay, no problem using shares to buy other companies. But for a $3 stock, let's say, I'd rather the stock be a $10 to $20 stock and start doing that. So I'm just wondering, have you had any conversations with senior management in China? Have they looked at anything possible acquisitions? I don't want any specifics, but is that on their game plan? Because why issue the number of shares if you're not going to use them?

Well, absolutely. So what a great way to finish that, right? So we authorized more shares. We did not issue any of those shares. So we have more shares available to our board of directors if we find an appropriate technology partner, M&A target, whatever. And frankly, we are looking at uses for those shares that will develop our business. But this isn't one of those things where we're racing around with a handful of shares saying, whatever the most is that we can get for this, that's what we want. That's not how we're going about this. We're saying, how can we get better at our traditional business and particularly with the new business venture that we're deploying? How can we get better at doing that? And so these shares give us an asset that we can use to leverage into getting more of those hard assets, technologies, partners, et cetera. So it's wonderful to have more flexibility and something to work with. But be clear, we are only intending to deploy these where they're value-add.

Okay, great. No more questions. I'm going to try to come out and see you guys in the next couple weeks, depending on your schedule. So I'll give you a call just to see your availability. Thank you.

All right, terrific. Thank you. So to everyone else, we're in the Chicagoland area.

Once again, if there are any questions, please press star 1. We have reached the end of the question and answer session, and I will now turn the call over to Frank for closing remarks. All right.

Thank you, Holly. So, again, we know most people catch this on the replay. We thank you for your interest in our company, and we're working hard to, you know, to give you reports that you're going to be interested in going forward. So a lot of stuff is happening. This is our wonderful Valentine's Day shipment season, so we're really enjoying that here. And we look forward to talking to you with year-end results and heading into 24. Can't believe we're saying that, but we're heading into 24. So thank you all.

Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.