Northern Technologies International Q1 2024 Earnings Call Transcript

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January 11, 2024

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to NTIC First Quarter 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. As part of the discussion today, the representatives from NTIC will be making certain forward looking statements regarding NTIC's future financial and operating results as well as their business plans, objectives and expectations.

Operator

Please be advised that these forward looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself of the protections of the Safe Harbor for these statements. Please also be advised I said actual results could differ materially from those stated or implied by the forward looking statements due to certain risks and uncertainties, including those described in NTIC's most recent annual report on Form 10 ks, subsequently quarterly reports on Form 10 Q and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward looking statements. I would now like to hand the conference over to your speaker today, Patrick Lynch.

Operator

Please go ahead.

Speaker 1

Good morning. I'm Patrick Lynch, NTIC's CEO. And I'm here with Matt Welsfield, NTIC's CFO. Please note that a press release regarding our fiscal 2024 Q1 financial results was issued earlier this morning and is available at ntic.com. During today's call, we will review various I'm pleased with the strong start to fiscal 2024, highlighting stable demand across our ZERUST industrial and NHTech Markets.

Speaker 1

While the timing of certain orders did hold back ZERUST Oil and Gas sales, we experienced higher consolidated sales and a 78% increase in 1st quarter net income over the prior year's Q1 net income. I'm particularly encouraged by the year over year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended. As we mentioned last quarter, we are also making strategic investments to bolster our infrastructure and support our long term expansion needs, particularly in our Oil and Gas and in Natur Tec businesses. These investments are primarily focused on adding sales and support capabilities to enable us to take greater advantage of both current demand as well as what we anticipate unfolding during the course of fiscal 2024 and beyond. We are striving to improve our operational efficiencies Across our business as evidenced by our operating expenses as a percent of net sales holding relatively stable over the past 3 months.

Speaker 1

We expect higher profitability and strong operating cash flow to continue throughout fiscal 2024. During the Q1, cash from operating activities improved year over year by nearly 54%. We intend to continue to allocate capital to support our growth initiatives and quarterly dividend payment, while using excess cash flow to pay down the balance on our existing line of credit. As we look to the remainder of fiscal 2024, we believe we are well positioned for top line growth across our ZERUST industrial, ZERUST Oil and Gas and Natur Tec product categories. We also plan to improve the performance and profitability of our joint ventures across our European and Asian markets.

Speaker 1

As our team continues to navigate a fluid global economic environment, I am pleased with NTIC's improving performance and believe fiscal 2024 will be another good year of growth and improved profitability. So with this overview, let's examine the drivers for the Q1 ended November 30, 2023 in more detail. For the quarter, our total consolidated net sales increased 1.1% to a 1st quarter record of 20 $200,000 as compared to the Q1 ended November 30, 2022. Broken down by business unit, this included a 4.2% increase in Natur Tec net sales and a 1.1% increase in Xerus Industrial net sales. These increases were partially offset by a 7.4% decline in U.

Speaker 1

S. Oil and Gas Net Sales. Total net sales for Q1 by our joint ventures, which we do not consolidate in our financial statements, decreased year over year by 4.7 percent to $23,600,000 Excor Germany, our largest joint venture experienced a 17% decrease in net sales compared to the prior fiscal year period due primarily to the loss of a customer and the softer demand within Europe related to higher energy prices and other externalities linked to the war between Ukraine And Russia. Fiscal 2024 Q1 net sales by our wholly owned NTSC China subsidiary decreased on a year over year basis by 1.8 percent to $3,700,000 due to weaker economic conditions in that country. On a sequential basis, NTIC China sales increased by 4.1%, which was the 3rd consecutive quarter of higher sales sequentially.

Speaker 1

After we recorded a small annual net loss at NTIC China last fiscal year, we remain cautiously optimistic that demand in China will improve throughout fiscal 2024, helping to support higher incremental sales and profitability in this market. While near term economic conditions in China continue to remain uncertain, we are committed to the Chinese market and continue to take We continue to believe China will likely become a significant geographic market for us in the future. Now moving on to ZERUST Oil and Gas. The Q1 of fiscal 2024 was the 7th consecutive quarter of ZERUST Oil and Gas sales over $1,500,000 reflecting the positive momentum within our oil and gas business. For the fiscal 2024 Q1, SeaREST Oil and Gas sales were $1,500,000 compared to $1,600,000 for the same period last year.

Speaker 1

A 7.4% year over year decline in ZERUST Oil and Gas sales was primarily due to the timing of certain oil and gas projects, which pushed the associated revenue to the 2nd quarter. As a result, we expect ZERUST Oil and Gas sales will have a stronger fiscal 2024 second quarter than Q1. Demand remains strong and growing among both new and existing customers for our ZERUST Oil and Gas Solutions, which today still focus primarily on protecting above ground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another good year for ZERUST Oil and Gas as this business further scales and continues to contribute to our overall profitability. Turning to our Natur Tec Bioplastics business.

Speaker 1

As expected, Natur Tec sales remained robust during the Q1 and increased 4.2% year over year to a Q1 record of $4,800,000 We expect Natur Tec sales growth will continue throughout fiscal 2024, supported by favorable demand in North America and India and significant new customer wins and orders in these geographies. Globally, we continue to see growing market demand for new applications of certified compostable plastic products and Resin Compounds as well as increased interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics. As a result, we believe we are well positioned for long term sustainable growth within our NHTIC Bioplastics business. As you can see, our fiscal 2024 Q1 financial results reflect the progress we are making towards growing our business and improving profitability. Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners.

Speaker 1

Our recent success and the opportunities we are pursuing to drive value for our shareholders in the future is a direct result of their efforts. With this overview, let me now turn the call over to Matt

Speaker 2

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 1.1% for the fiscal 2024 Q1 to a 1st quarter record because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures declined 4.7% in fiscal 2024 Q1. Joint venture operating income was down 0.8% compared to the prior fiscal year period. The year over year reduction in joint venture operating income was primarily due to lower sales and the resulting lower net income at our German joint venture, partially offset by improved profitability across many of our other joint ventures.

Speaker 2

Total operating expenses for fiscal 2024 Q1 increased 5.2% to $8,300,000 compared to $7,900,000 for the same period last fiscal year. Higher operating expenses were primarily due to As a percentage of net sales, operating expenses were 41.2% for the fiscal 2024 Q1 compared to 39.6% for the prior fiscal year period. Gross profit as a percentage of net sales was 36.3% during the 3 months ended November 30, 2023, compared to 31.8% during the prior fiscal year period. The 450 basis improvement was primarily a result of successful actions taken by the company to address inflationary pressures. Net income attributable to NTIC was $896,000 or $0.09 per diluted share for the fiscal 2024 Q1 compared to $502,000 or $0.05 per share for the fiscal 2023 Q1.

Speaker 2

For the fiscal 2024 Q1, NTIC's non GAAP adjusted net income was $1,000,000 or $0.10 per diluted share compared to non GAAP net income of $608,000 or $0.06 per diluted share for the same period last year. A reconciliation of GAAP to non GAAP financial measures is available on our 2024 Q1 earnings press release that was issued this morning. As of November 30, 2023, working capital was $22,400,000 including $6,100,000 in cash and cash equivalents compared to $23,000,000 Including $5,400,000 in cash and cash equivalents as of August 31, 2023. As of November 30, 2023, we had outstanding debt to $3,600,000 as of August 31, 2023. We generated $3,100,000 in operating cash flows for the 3 months ended November 30, 2023 compared to $2,000,000 for the 3 months ended November 30, 2022.

Speaker 2

The 53.6% year over year improvement in operating cash flow was driven primarily by stronger core profitability and positive changes in current assets and liabilities. Throughout fiscal 2024, we expect to generate continued operating cash flow, which we plan to invest in the growth of our business, support our quarterly cash dividend and pay down the balance of our existing revolving line of credit. On November 30, 2023, the company had $24,600,000 of investments in joint ventures, of which 1.8 percent or $15,200,000 was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2024, 2019, 2019, 2019, and 2019, we expect to be in the range of $0.07 per common share that was payable on November 15, 2023, to stack those of record on November 1, 2023. So with this overview and to We continue navigating a fluid business environment while pursuing our product, end market and geographical diversification strategies.

Speaker 2

We're seeing stable North American demand trends and robust growth across our global oil and gas and bioplastic markets. While the economic environment remains uncertain, we believe fiscal 2024 will be another good year of sales and profitability for NTIC, We're excited about our long term prospects. With this overview, Patrick and I are happy to take your questions.

Operator

Thank and wait for your name to be announced. Please standby while we compile the Q and A roster. Our first question comes from the line of Tim Clarkson from Van Clemens and Company

Speaker 3

Inc. Good morning, Patrick. Good morning, Matt. How are you guys?

Speaker 4

Fine. Thanks, Tim. Good to hear from you.

Speaker 3

Good. Yes. Anyhow, so just I always dreaming a little bit. I mean, is there a scenario where I know you guys are doing about 1,500,000 In the oil tank business, I mean, is there a potential this year to have a $2,500,000 or $3,000,000 quarter?

Speaker 4

Absolutely. That's what I think is going forward. Okay. Great.

Speaker 3

Yes. And the gross margins on that business are Higher than the rest of the business, right?

Speaker 4

Yes, that's correct.

Speaker 3

Right. Good. My other dream is, But I'll get to that second. Just on the compostable, again, what would be the typical applications for your compostable plastics?

Speaker 4

You're talking cutlery, for example, is a major one for injection molded plastic particles and also bags Our major application that we're servicing in the United States.

Speaker 3

Right. And one of the major advantages of that stuff is it's stronger than a lot of the competition?

Speaker 4

Yes. And cheaper for you.

Speaker 3

And cheaper and cheaper. And there's no problem with I know a couple of years ago you had problem with getting of the material to make that.

Speaker 4

No, they've added capacity on a worldwide basis. So there's no shortage right now of raw materials for us.

Speaker 3

Right, right. Now is there a scenario where you could link up with another company either on a marketing basis or on a manufacturing basis or on a technology basis So it makes sense to you could add a piece to the compostable thing and separate and bring it public. I mean, Is there a potentiality of that? Or is it still too early?

Speaker 5

Well, I think it's going to there's Two different questions there, Tim. One is ultimately what do we think would happen with Natur Tec when it hits a level of revenue or level of profitability where it More sense to be a standalone entity. I think we've always said that, that's certainly a possibility. But right now, when you look at the Total revenues of Natur Tec, although they're growing, they're not really at a level where I think it's sustainable to be a standalone entity where it would be properly valued. The other

Speaker 2

part of your question where

Speaker 5

you talk about partnering with other companies, that's the main one of the main ways that we are growing Natur Tec By developing specialty applications for larger companies that are using container load quantities of resin. And so a lot of the growth that we're expecting to see over the next 12 months, 24 months, 36 months Comes from working with companies that are looking to use large container low quantities of our specialty resin to for them to make their own compostable products. So I think both of those kind of in combination are really what's going to help The overall Natur Tec as a company and as a brand grow. But there's certainly significant opportunities in the United States, in Europe, In parts of Asia, where we're seeing these applications sell well.

Speaker 3

Sure, Sure. Now I know that on the foreign basis, the Germany was kind of a weak quarter for them for a variety of reasons. Is that starting to Come back or is that still pretty weak?

Speaker 4

I don't see it coming back immediately. There are two reasons. One, I mean, they lost a very large customer that They had for a very long time and that's not that easy to replace. Also, as long as the Ukraine and Russia conflict continues, You're going to have higher energy prices and raw material prices in Europe, which is also putting a bit downward pressure on sales.

Speaker 3

Right, right. And in terms of just overall inflation, are you guys seeing Better costs across the board with the lower oil prices now and some of the claim that inflation has been moderating?

Speaker 4

I think certainly in the United States, I think we've got inflation well under control. So That's not an issue. Like I said, it continues to be an issue in all of Europe because of in Europe they get most of their energy, Gas and oil from Russia are used to and until that conflict is settled, it's going to continue to be an issue in that region, But elsewhere, we're fine in that regard.

Speaker 3

Right, right. Got it. I'm done. Thank you.

Operator

Thank and wait for your name to be announced. At this time, I would now like to turn the conference back over to Patrick Lynch for closing remarks.

Speaker 4

Well, thank you very much for attending this morning and wish you a nice day. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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