Yunhong CTI Ltd. (NASDAQ:CTIB) Q4 2022 Earnings Call Transcript

Yunhong CTI Ltd. (NASDAQ:CTIB) Q4 2022 Earnings Call Transcript February 25, 2023

Operator: Good day, and welcome to the Yunhong CTI Fourth Quarter and Year End 2022 Earnings Conference Call. . This conference is being recorded today, February 23 of 2023. The earnings press release accompanying this conference call was issued after the close of market on Wednesday, February 22. 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 full 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, 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 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 Yunhong CTI. Sir, please go ahead.

Frank Cesario: Thank you, Ali. Good morning, and thank you, everyone, for joining us on our call today. Hopefully, you’ve had a chance to look at our press release issued at the close yesterday with summarized financial information. We saw nice improvement results during the fourth quarter as we sold product for Valentine’s Day, our favorite holiday, and had a better mix of products that don’t involve helium. Much of 2022 is plagued by the elevated price of helium, as our top-selling product line is foil balloons, usually filled with helium by our customers. The price of helium roughly doubled during the first half of 2022 and then gradually declined during the second half of the year and heading into 2023. It remains elevated and a challenge for our customers to manage, but far less so than it was last year.

Photo by Adi Goldstein on Unsplash

With more stable helium pricing, we have seen a nice recovery in demand. And if the Russian supply returns to the market at some point, that would be most welcome. But we aren’t counting on that in the near future. While the story of 2022 was the out of helium-related revenue challenges, we hung in on the bottom line and put some points on the board. Foil balloon sales were down $7 million last year, and yet we improved our overall gross margin from 15% to 17%. We increased sales of unrelated products by about $1.4 million. We ended the year with a modest debt position. And as previously discussed with shareholders, we went from what we term a debt-rich position a few years ago to more of a debt-poor position today, and today is far better.

We walk into 2023 with deferred income and improving backlog. Thanks to the efforts of our entire team, we demonstrated a resiliency that was not available a few years ago. With all these good elements, we are accountable for our results. Adjusted EBITDA of less than $100,000 during 2022 is a bad answer. Period. We have to get that fixed regardless of challenges. 2022 was supposed to be our coming-out party as the last of our legacy subsidiaries was sold in the fourth quarter of 2021, and massive noncash charges were taken. Instead, 2022 became a measure of our collective will and creativity. We will shoot for our coming-out party in 2023. Many of you who follow the broader space have seen the Chapter 11 filing by Party City. Party City owns the largest balloon company in its Anagram subsidiary.

Their comments include many of the same factors that affected us: helium prices and concerns over inflation, shipping costs and changing consumer behavior during and after the pandemic. One of the aspects that we have attacked in our business has been our debt load, going from about $20 million down to about $5 million. With interest rates increasing so dramatically, this has become very important to our financial health. We have also benefited from our connection to the Yunhong Group over the past few years as their support has been critical in reducing our debt. So what will 2023 bring? I’m glad you asked. Jana Schwan, our Chief Operating Officer, will share what she sees in terms of operations and her customer-facing position. Welcome, Jana.

Jana Schwan: Thanks, Frank, and hello, everyone. We have spoken in the past about our use of robotic technology. I’m pleased to share that we are continuing to make investments in that area and should have more robots in place during 2023. The payback on these investments are in less than 9 months, so it’s a no-brainer for us to do. On the customer side, we are seeing improved availability and pricing of helium, which is opening up the foil balloon market. Having been through 4 helium situations in my career, the recovery tends to be good for us. We are ready to fulfill this market need with additional — with the addition of several new designs for all occasions launching this year with , giving our customers the ability to fill select 17-inch standard balloons with air and hang from the ceiling for display or a traditional helium fill.

Finally, it’s worth noting that the availability of labor has improved during the past 12 months as has the cost and ease of moving goods. Those are helpful as we look to serve our customers efficiently. As the price of helium significantly reduces or reduced the sales of our foil balloons during 2022, we were able to redeploy resources into non-helium areas. This allowed us to avoid some of the temporary staffing and overtime we have used in the past to meet our seasonal demand. As Frank noted, our margins are up, and these are some of the key factors as to why. Frank?

Frank Cesario: Thank you, Jana. 2022 was full of challenges in our marketplace and at the macro level with inflation supply chains challenges. We are first and foremost a foil balloon company, and foil balloons are primarily filled with helium. We all see challenges in the retail space broadly, so the helium issue was an unwelcome piling on. We fought through it. The efficient resource deployment that Jana had described went a long way as did outstanding sales of candy and balloon gift items during 2021 that led to larger orders in 2022. That benefit was heightened since these gift items are not tied to helium. Looking at what we can do with our traditional business and what we can develop from the material solutions advanced by the Yunhong Group and other strategic partners, we ran, not walked, into 2023.

We know that most people catch this call on replay. But for anyone who’s on the call live, we invite you to ask a question. Ali, would you please start the Q&A session?

Operator: . We have a question from Glenn Hamilton.

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Q&A Session

Glenn Hamilton: Frank and Jana, thanks for the earnings call. I see progress here. But my — one of my questions is the Yunhong Group. What technology or revenues do you guys expect in 2023 from this new technology we keep on hearing about?

Frank Cesario: So the new technology we’re talking about is — deals with compostability. So it takes plastic and other landfill-type products and finds compostable replacement or a more sustainable replacement. And this is a push. We all know it. I mean the whole world is pushing for these kinds of solutions. And they’re going to take time to get out commercially, certainly at scale, but we’ve been experimenting. We have prototypes, quite a different product, frankly, with these new materials, and we’re working to make them better. So do we have any of them that we think are ready to go commercial today? No. Are we working up the chain to try to present to our customers, hey, these are environmentally friendly options available for you as you work through your own supply chain commitments?

Yes. And so what does that turn out to be for 2023, which is your specific question, I don’t know. I don’t know enough in February to know what sorts of revenue could be attributed, right, to these pushes. All I know is we have to push in this topic, and we can’t ignore it. The world wants sustainable answers to a lot of different things. And we are fortunate to have some inroads to get there, so we’re going to push that and see what comes.

Glenn Hamilton: Okay. And I know I keep on harping on this for the past 2 years. I would love to see an insider purchase at least by somebody in the company. There’s not been one director employee that I can see that has purchased even 1 share of stock. I’d like to see that management has an ownership interest in this company besides shareholders. So you know how I feel about that, Frank.

Frank Cesario: No, and I appreciate it. It’s true. And insiders spend most of the year unable to transact stock, but your point is well taken. Certainly, we all want to do the right thing, so for sure.

Operator: Thank you. We currently have no more questions in queue at this time. So I will hand it back to management for any closing remarks.

Frank Cesario: All right. Well, look, thanks for participating. We love our story. We love telling our story. And even though last year was not the way we thought the story would be told, it did present us an opportunity to fight through challenges and get to a better spot. And I’m glad to say we got through it. So even though there are some lingering aspects, by and large, we proved that we can get through as tough a condition as our space, I think, can present. So I’m looking forward to this being a better year. I’m looking forward to seeing that recovery. It’s usually good for us. If we go into any sort of recession, that’s typically good for a countercyclical company like us. So there are a lot of reasons that we are optimistic about our future this year, and I look forward to having a chat in a couple of months to talk about the first quarter and see how we’ve got started. So thank you for your interest, and I wish everyone a good day.

Operator: Thank you. This does conclude today’s conference call, and you may disconnect your lines at this time. We thank you for your participation.