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Edited Transcript of CTIB earnings conference call or presentation 13-Nov-18 3:00pm GMT

Q3 2018 CTI Industries Corp Earnings Call

Barrington Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of CTI Industries Corp earnings conference call or presentation Tuesday, November 13, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank J. Cesario

CTI Industries Corporation - CFO

* Jeffrey S. Hyland

CTI Industries Corporation - CEO, President & Director

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Conference Call Participants

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* Gary Ribe

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the CTI Industries 2018 Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this call will be recorded.

This conference may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things, the company's business strategy and growth strategy.

Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on this company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond their control.

Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate.

I would now like to introduce your host for today's conference, Mr. Jeffrey Hyland, President of CTI.

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Jeffrey S. Hyland, CTI Industries Corporation - CEO, President & Director [2]

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Good morning, and thank you, everyone, for joining us on the call today. I'm here today with Steve Merrick, our CEO; and Frank Cesario, our CFO.

On the last quarterly earnings call, we were pleased to report one of the strongest second quarter results in CTI's history. This year has been a bit choppy with respect to revenue, some of it caused by seasonal factors as with the current Q3 and some of it driven by customer order deferral, which we saw in Q1. We are now well into Q4, which has traditionally been our best quarter.

Despite lower sales in Q3, we are very encouraged by the continued positive impact of our cost reduction and operational improvement initiatives on our overall results, as a substantial decrease in operating expenses made an outsized difference for us by mitigating a $1.7 million seasonal sales decline in the quarter.

We removed $1.4 million of costs from the business through the first 9 months of 2018. The initiatives we put in place, beginning in 2017, should yield approximately $3 million in annualized cost savings by the end of 2018.

Those who know me know I'm about driving forward, and the steps we have taken form the foundation of a company that can see far greater success beginning in 2019.

Another major development is the tabling of our capital raising efforts, via a fully marketed rights offering. While fully prepared to go forward, we decided, along with our investment bank, to not begin the roadshow, given the choppiness in the stock market over the last month or so.

In our opinion, it does not make sense to pursue it if we do not feel comfortable that we will have a successful capital raise. We may reinitiate the rights offering at some future date, but at this time, we are not moving forward with it.

The decision does not change any of our operating sales strategies and tactics. We still intend on capitalizing on new sales opportunities, further reducing costs and growing through acquisition.

I attribute much of our overall improved results and the ongoing transformation of CTI to the efforts and talents of the members of CTI's leadership team. That includes the guy sitting next to me, Frank Cesario, our CFO.

Frank, would you please walk us through the numbers?

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Frank J. Cesario, CTI Industries Corporation - CFO [3]

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Thank you, Jeff, and good morning, everyone. We'll discuss our performance in the third quarter and the first 9 months of 2018 in more detail, then we'll talk about the equity filing and the credit facility.

Revenues were essentially flat for the 9-month period ended September 30 at $41.5 million this year versus $41.4 million last year. The quarter showed volatility at $11.5 million this year versus $13.2 million last year.

Gross profit didn't make up any ground this year due to low volume during Q3 at $8.8 million compared to $9.9 million for the 9 months last year. SG&A expenses, however told a very different story. For 9 months, those costs were $8.5 million versus $9.9 million last year. The quarter was even more pronounced at $2.5 million this year versus $3.2 million last year. We are far more efficient in these areas and are bringing that into operations through several work streams designed to improve material flow and reduce waste.

Interest expense increased from $1.1 million last year to $1.6 million this year, and the quarter was $0.5 million versus $0.4 million last year. We have discussed the need to reduce our debt levels throughout the year, particularly in a rising interest rate environment. This is one of the many reasons to look at adjusting our capital structure.

On a net basis, this year is only $30,000 different than last year, but our EBITDA increased by $0.4 million or 38% from $1.2 million to $1.6 million.

At September 30, 2018, we had cash balances of $0.3 million compared to $0.2 million at December 31, 2017. As long as we're funded with a revolving credit facility, we do not expect to maintain large cash balances.

You may remember from last quarter that we were not in compliance with 2 financial covenants as of March 31, 2018, worked with our bank and amended the facility during June. When we filed the registration statement for a potential equity raise, we again engaged our bank, modifying covenants that would allow us to retain more flexibility in the use of proceeds, and eliminate certain immediate covenant requirements during that process. In exchange, we committed to raise at least $7.5 million by November 15, 2018.

Unfortunately, the market didn't hold up, with market conditions causing us to delay rather than try to jam through a transaction that had increased risk of failure. Our bank knew what we were doing throughout and won't be surprised when we don't complete an event by November 15.

As we haven't secured a waiver at this time, we filed our financials and we'll be filing our 10-Q today based on what will be noncompliance with the agreement, with related long-term liabilities moved to current and a note ongoing concern related to pending noncompliance with the credit facility. We believe the bank will work with us and we'll get back in step, but it isn't done until it's done.

As much as many things haven't gone our way, many others have. Most of our customers by dollar volume who purchase products impacted by recent tariffs have accepted price increases to flow these tariff costs through. So the negative impact is less than it could have been 3 months ago.

Still not helpful in terms of cash flows and another challenge we don't need, no question. But the worst outcome has been resolved. Jeff will talk about what we've been doing on the sales front to diversify our offerings and customer base, and the cost reduction programs are continuing, with the effects becoming more pronounced as time goes by.

With that, I turn things back to Jeff.

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Jeffrey S. Hyland, CTI Industries Corporation - CEO, President & Director [4]

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Thanks, Frank. In general, we continue to have very strong worldwide sales opportunities. The newly redesigned Candy Blossoms and a similar follow-on product were a big part of our first half, absent during the third quarter, and are now seasonally ramping up again to Q4, Q1 and Q2. Operationally, our 2 new foil balloon converting machines are producing high-quality products at the speeds and the consistency that we anticipated. This has helped us improve on timely delivery of customer orders and implement our World's Finest Balloon quality program. We're retrofitting the 6 existing foil balloon converting machines with the most effective hardware features of the new machines.

Our new 2018 repair and maintenance program is focused on addressing deferred maintenance and ongoing potential manufacturing bottlenecks. This is a very important work stream and critical for short and long-term financial performance.

Over roughly the past year, we have removed $3 million in expenses throughout the organization. That success has paved the way for us to look at the next level of profit improvement initiatives, and we believe we will add significant new profitability elements to what is already demonstrating substantial results.

Spending reductions are only second to expanding our revenue reach. We are targeting industries that would have been dismissed out of hand last year.

There is one industry, in particular, that I'm really excited about and hoping to talk about next quarter based on the result of our product samples that we have sent to potential customers.

The opportunity and industry is red hot, and not quite sufficiently baked through to talk about in detail here. We also have some very large potential customers that could impact our results right out the gate. These significant opportunities are both international and domestic.

Also, we have some very interesting new product developments that we will share with everyone as soon as we are market-ready.

One of the primary assets of CTI is that we have experience in selling large amounts of product across geographies into the most demanding customers you'll find. We can build on these strengths.

With all this we do, why are we still focused on M&A? Because that's how we get stronger faster.

We won't do a deal to just do a deal. If that were our goal, we would have already announced one. We reviewed multiple options and passed on them but continue to look. One way or another, I am as certain as I can be that a strategic acquisition would allow us to lever our strengths and combat our weaknesses, not the least of which is the customer concentration issue that bit us during the first quarter 2018 and could bite us again. We don't forget, and we will work to fix issues.

For the full year 2018, we continue to expect higher net sales, lower operating expenses and improved profitability over 2017. And with almost a year under our belts, we have much larger expectations of 2019.

That concludes our report. Operator, may we have your assistance please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gary Ribe from Macro Consultants.

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Gary Ribe, [2]

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I apologize, I missed like the first 3 or 4 minutes, and this was not a very long call. I'm just curious, the reason cited for the rights offering kind of being suspended, is that something you would anticipate? I guess, 2 questions. One is you cited market conditions. That's kind of a little -- can you give a little more color on that? And then two, is that something you hope to come back and do via a rights offering at a later date?

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Jeffrey S. Hyland, CTI Industries Corporation - CEO, President & Director [3]

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No, absolutely. It's hard to say, the market obviously over the last month or so has been incredibly choppy and therefore not conducive to a successful capital raise. So therefore, rather than go through the effort and start a road show and start talking to people about CTI, we decided to just table it. And that tabling could mean a permanent table or it could mean that we start again in Q1, Q2. We just don't know. It depends on the market. It depends on our capital needs. Obviously, we are -- we have a lot of leverage so we need to address that.

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Gary Ribe, [4]

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Yes, you're talking about deals and stuff like -- that would be my question. You, obviously, need capital to do that. So I mean, money is needed, so what are you guys considering, then?

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Frank J. Cesario, CTI Industries Corporation - CFO [5]

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Well, this is Frank, let me chime in. We have a couple of different answers there. Number one is with the deal in hand, that opened up different financing options, and those are things that we've reviewed at times as we've gotten closer. And the other is the -- part of the charm of the raise is it would have given us some dry powder to get started on that. So if we're able to go back to it, great. We talked about our interest expense. We talked about our debt levels and rebalancing our capital structure would have value. But one is not required for the other.

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Operator [6]

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(Operator Instructions) And I am showing no other questions in the queue.

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Jeffrey S. Hyland, CTI Industries Corporation - CEO, President & Director [7]

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All right. Very good. Well, thank you very much, we appreciate -- and we have another one?

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Operator [8]

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One just popped up. [Aaron Solan] with [Marion Road].

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Unidentified Analyst, [9]

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I just -- it's around the, just the debt financing as well. Am I right that without completing the equity raise, there's going to be an immediate amended default, is that correct?

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Frank J. Cesario, CTI Industries Corporation - CFO [10]

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So this would be the second time this year, we and our bank have talked about what we have to change. So the answer is, yes, right? Our commitment to the bank was, "Hey we want to keep more of the proceeds than our facility allows." It would have required us to spend more about $5 million and pay off the term loan. We negotiated to only use $2 million for the term loan, use $3 million for the business, and that would've been very helpful to us. Part of the giveback was to commit to raise money by November 15. Once we made the decision to table the offering, that was not lost on us that we would not be able to go do that. All I can say is our -- we have been in constant communication with our bank. They knew the market as we're going. They knew the decision, the reasons for the decision. We aren't -- we didn't surprise them. We aren't going to surprise them. So I have every expectation that we will come to an agreement just like we did at the beginning of the year when Q1 sales shifted into Q2. So the answer is yes, and as the finance guy, certainly, that's the starting point, but we have every expectation of working through it.

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Unidentified Analyst, [11]

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And so is it, I guess, you would just be maybe pushing out some of the covenants? Or is there -- what are the other options that are kind of on the table?

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Frank J. Cesario, CTI Industries Corporation - CFO [12]

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Really, it's talking to the bank about here's where the business is going, and what makes sense from both sides. To protect their investments, at the same time, to arm the business to go win. And we are -- we are aligned on that. We both want CTI to do great, and part of this process will be what makes sense going forward based on where everyone is sitting.

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Unidentified Analyst, [13]

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Okay. And as far as the cost cuts that you're putting through, so last year I think total OpEx was like $13.3 million. If we take this quarter and annualize it, it's about $10 million. Do you feel like where the business is at today, you're at a good place? Or is there still room to go?

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Jeffrey S. Hyland, CTI Industries Corporation - CEO, President & Director [14]

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There's still room to go. We have specific work streams targeted. The cost reductions are significantly -- would significantly hit above the line. But there's also some that would be even in the SG&A category. And they're significant, but we have work to do. We've got to keep challenging our business model. We've got to keep pushing forward and doing what we did yesterday, doesn't mean that's what we should do tomorrow. But there are some quite significant ones that we intend on attacking.

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Operator [15]

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(Operator Instructions)

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Jeffrey S. Hyland, CTI Industries Corporation - CEO, President & Director [16]

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All right. It looks like that's it. We appreciate everybody for joining, and we look forward to talking to everybody on the next quarterly earnings call. Thank you.

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Frank J. Cesario, CTI Industries Corporation - CFO [17]

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Thank you.

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Operator [18]

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Thank you, ladies and gentlemen, for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.