Transcript
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Northern Technologies International Corporation First Quarter 2023 Earnings Conference Call and Webcast. As part of today's discussion, 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. 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 that 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-K, subsequent 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. This call may also include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles, or GAAP, which are generally referred to as non-GAAP financial measures. Reconciliations of the historical non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release NTIC issued this morning on the Investor Relations portion of its corporate website at ntic.com. At this time, I would like to turn the conference over to Mr. Patrick Lynch, CEO. Sir, you may begin.
Good morning. I am Patrick Lynch, NTIC's CEO. And I'm here with Matt Wolsfeld, NTIC's CFO. I want to begin this morning's call by wishing everyone a happy, healthy, and prosperous New Year 2023. Please note that a press release regarding our fiscal 2023 first quarter was issued earlier this morning and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2023 first quarter financial results, provide a brief business update, and then conclude with a question-and-answer session. Stable demand for our Zerust industrial products and services in North America, coupled with growing interest in our Natur-Tec and Zerust Oil & Gas products, both in the U.S. and abroad, provided record sales again in this first quarter. This is particularly encouraging considering the prevailing complex business environment. NTIC has continued to navigate supply chain and shipping issues, persistent inflation, raw material cost increases, geopolitical conflicts in Europe, and the lingering effects of the COVID-19 pandemic in Asia, with the intent of minimizing the impact of these challenges on our business. Price adjustments made during the last fiscal year helped improve net sales and profitability in North America. While we expect some inflationary pressures and supply chain issues to persist throughout the second quarter, we continue to see improvements, most notably being the increased availability of raw materials for our Natur-Tec bioplastics business during the quarter. Overall, momentum has remained positive, and we expect that NTIC will continue to offset near-term uncertainty within our European and Asian markets. In addition, we expect annual profitability to improve in fiscal 2023 as we continue to focus on rebuilding our margins. For the first quarter ended November 30, 2022, our total consolidated net sales increased 9.7% to a first quarter record of nearly $20 million compared to the first quarter ended November 30, 2021. Broken down by the business units, this includes a 66.9% increase in Zerust Oil & Gas net sales, a 21.6% increase in Natur-Tec net sales, and a 4% increase in Zerust industrial net sales. Total net sales for the fiscal 2023 first quarter by our joint ventures, which we do not consolidate in our financial statements, decreased 8.5% to $24.7 million. This decrease was due primarily to slower demand across the territories serviced by our global joint ventures due to certain geopolitical conflicts and their impact on higher energy costs and availability. Fiscal 2023 first quarter net sales by our wholly-owned NTIC China subsidiary decreased by 7.7% to $3.7 million due to the negative impact of severe COVID-19 related lockdowns across much of that country during the quarter and the weaker economic conditions as a result. We continue to closely watch market conditions in China, and we are hopeful the recent suspension of that country's Zero-COVID policy will help to improve demand in China later this fiscal year. Overall, we remain committed to the Chinese market and the long-term opportunities it represents for NTIC. We have taken steps to enhance and protect our Chinese operations and continue to believe China will likely become our largest geographic market in the future. Now moving on to Zerust Oil & Gas. The fiscal 2023 first quarter was one of the strongest quarters we have ever had for Zerust Oil & Gas as sales increased 66.9% to $1.6 million. The first quarter of fiscal 2023 is also the third consecutive quarter of Zerust Oil & Gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business. We believe interest is growing for our Zerust Oil & Gas solutions, which include applications to protect above-ground oil storage tanks and pipeline casings from corrosion. And we believe the second quarter of fiscal 2023 will be another good quarter of oil and gas sales and growth. The expanding adoption of our Zerust Oil & Gas solutions within the oil and gas industry is supporting bigger opportunities for our Zerust Oil & Gas products and technologies. As a result, we believe fiscal 2023 will be a transformative year for Zerust Oil & Gas as this business scales and begins to contribute to profitability. Turning to our Natur-Tec bioplastics business. Fiscal 2023 first quarter Natur-Tec sales were $4.6 million, a 21.6% increase over the prior fiscal year period. Sales trends within the Natur-Tec have been encouraging and show that demand patterns have begun to return to pre-pandemic levels, especially in North America and India. Furthermore, the supply chain and logistics challenges that impacted Natur-Tec's results last fiscal year continued to ease during the first quarter and contributed to the strong year-over-year growth we experienced. We believe this is a testament to our strong position within the bioplastics industry and close relationships with important raw material suppliers. We've continued 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 Natur-Tec bioplastics business. While prevailing geopolitical and economic uncertainty continues to impact our outlook on the overall economy in recent months, especially in Europe and China, we believe we can continue to grow sales and improve profitability as we benefit from favorable North American demand trends, higher sales into the oil and gas industry, and higher Natur-Tec sales. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2023 first quarter.
Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 9.7% to a first quarter record because of the positive trends Patrick reviewed in his prepared remarks. An 8.5% decrease in first quarter sales across our joint ventures drove a 10% decrease in first quarter joint venture operating income compared to the prior fiscal year period. Total operating expenses for the fiscal 2023 first quarter were $7.9 million, an 11.7% increase over the prior fiscal year period. This was primarily due to increased personnel expenses and expenses incurred during the current fiscal year period in connection with the startup of a new indirect majority-owned subsidiary formed to assume the operations of a former joint venture in Taiwan. Operating expenses, as a percentage of net sales, were 39.6% compared to 38.9% for the prior fiscal year period. Gross profit as a percentage of net sales improved to 31.8% during the three months ended November 30, 2022, compared to 31.3% during the prior fiscal period, primarily a result of improved pricing to offset inflationary pressures and increased sales to customers in the oil and gas industry as products within this end market carry higher margins than our Zerust industrial products. NTIC reported net income of $502,000, or $0.05 per diluted share, for the fiscal 2023 first quarter compared to $4.5 million, or $0.46 per diluted share, for the fiscal 2022 first quarter. Recall that the first quarter of fiscal 2022 net income reflected a gain of over $3.9 million related to our acquisition of the remaining ownership interest of Zerust India. For the fiscal 2023 first quarter, NTIC's non-GAAP adjusted net income was $608,000, or $0.06 per diluted share, compared to non-GAAP net income of $781,000, or $0.08 per diluted share, for fiscal 2022. NTIC's non-GAAP adjusted net income excludes the gain of over $3.9 million relating to our acquisition of the remaining ownership interest of Zerust India and other adjustments as set forth in the GAAP and non-GAAP reconciliation at the end of our first quarter earnings press release that was issued this morning. As of November 30, 2022, working capital was $25.4 million, including $6 million in cash and cash equivalents compared to $23.2 million, including $5.3 million in cash and cash equivalents as of August 31, 2022. As of November 30, 2022, we had $5.5 million outstanding under our revolving line of credit compared to $5.9 million at August 31, 2022. On November 30, 2022, the company had $20.3 million in investments in joint ventures, of which approximately 48% or just over $9.7 million was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2023 first quarter, NTIC's board of directors declared a quarterly cash dividend of $0.07 per common share that was payable on November 16, 2022, to stockholders of record on November 3, 2022. To conclude our prepared remarks, our established product, end market, and geographic diversification strategies are helping the company navigate a complex and fluid business environment. We are seeing stable North American demand trends and accelerating growth across our global oil and gas and bioplastics markets. While the economic environment remains uncertain, we continue to believe fiscal 2023 will be another good year of sales and profitability for NTIC, and we're excited about our prospects. With this overview, Patrick and I are happy to take your questions.
Our first question or comment comes from the line of Tim Clarkson from Vanclemens.com. Mr. Clarkson, your line is now open.
Hi, Patrick and Matt. Another good quarter. I just wanted to ask exactly how much expenses were tied to the Taiwan deal.
The Taiwan deal, to provide some context, involved an entity that was previously part of one of our other subsidiaries and generated just under $1 million in revenue. Following the passing of our former partner in Taiwan, we opted to liquidate that entity and establish a new subsidiary under NTI Asean. NTIC now owns 60% of NTI Asean, which translates to NTIC owning 60% of the Taiwan entity. There were liquidation costs related to the old entity to write down our investment to zero, as well as some expenses involved in launching the new entity. The total impact from this transaction in the first quarter was approximately $300,000, comparing the previous net amount to our results in the first quarter. We anticipate that moving forward, the situation will stabilize, and it will function as a consolidated entity akin to our other subsidiaries. This is essentially a one-time charge, which contributed to our operating expenses being slightly higher than expected for the quarter, with last year’s total operating expenses up just over 11%. I expect that the increase in operating expenses for the full year will return to a growth rate in the middle single digits.
Great, great. And in terms of the oil and gas deal, it's at $1.5 million a quarter, $6 million annual pace. I mean, how big can this division potentially get? I mean, is this a potential division that can be $10 million or $20 million annually?
Yes, it can be, eventually.
Right. And in terms of suddenly now we're starting to see this consistent high growth, again, what are the drivers that are getting people to want to buy these products?
I think that we've just been pushing this now for long enough that we have a reputation in the industry, and people are coming to us now.
One important thing to remember is that the reason we originally entered the oil and gas sector years ago was due to the size of the opportunity, which is significantly larger than what we have with our core Zerust products. It has taken longer than anticipated to develop, but we are pleased to finally start seeing some of the larger opportunities emerging and the foundational aspects of our oil and gas business solidifying. We have managed to deliver several stable quarters without the volatility experienced in the past few years, enabling us to focus on growth. Looking specifically at our expectations for the second quarter and the remainder of the year, we anticipate that the oil and gas segment will perform significantly better in the second quarter due to incoming orders, including some business from the BP contract and additional opportunities in the last three quarters of the year. This gives us a heightened sense of optimism regarding our oil and gas business overall.
In terms of people, I mean, is there a limit to how much volume you can do in terms of how many people you have in that division? I know it's a relatively small division in terms of how many people are working there.
But it's scalable because we primarily have just a supervisor, engineers that then work with crews in the various geographic locations that are already vetted, trained, and bonded. So we don't really have an issue in terms of scalability.
Right, right. And really it's a little unconventional, but certainly the technology mitigates pollution in a couple of ways: one, by obviously not allowing the oil and gas to leak into groundwater, which is really bad; but also in terms of not having these huge metal tanks that have to be replaced every 30 years instead of the 10-year deal, which is obviously steel is an extremely polluting process to create. So I mean this is also a technology that really enhances the environment as we transition away from oil and gas eventually towards 100% non-fossil fuels. But in the meantime, they're there, and we want to mitigate the pollution obviously.
You said it better than I could. Thank you.
Thank you. All right, I'm done.
Thank you. Our next question or comment comes from the line of Gregory Weaver from the Invicta Fund. Mr. Weaver, your line is now open.
Hi. Good morning, guys.
Good morning. Happy New Year.
Happy New Year. Nice to see the oil and gas. I've been patiently waiting and hopefully, this is it. It's good stuff if you can get that mixed in with the rest of your business. Patrick, when you say that income will be up, profitability will be up in fiscal '23, is that including joint venture income or is this just at the corporate level?
It's kind of across the board. The expectation from our joint ventures is that we are seeing a decrease in profitability primarily due to rising raw material prices for polyethylene. However, we are beginning to notice a slight decline in polyethylene prices globally, which is benefiting all our subsidiaries and joint ventures. Additionally, we are experiencing some positive changes in currency, particularly with the euro to U.S. dollar exchange rate. These two factors should positively influence profitability at the joint venture level, and we anticipate some sales growth as well. In North America, Natur-Tec's continued growth will be advantageous, along with the strong margins we are seeing in the oil and gas sector. Overall, we expect some of the current challenges to transform into positive trends. The only ongoing challenge we still face is in China. That market has struggled recently, having previously been profitable and a source of cash flow, but is currently affected by the ongoing COVID situation. Discussions with various sources indicate that there will likely be a significant rebound once the COVID issues are resolved and normal conditions return. We expect that our sales teams and travel restrictions will improve in the latter half of the year, leading to better profitability in China as well. Consequently, we anticipate noticeable growth from the first quarter to the second quarter and into what is typically a strong third and fourth quarter, contributing to solid overall profitability for the year.
Okay, great. Thanks, Matt. That helps. And you hit my next question on China. So just in the current fiscal Q2 here, is it getting worse or is it about the same as what you saw in the just reported quarter?
In the recently reported first quarter, China experienced a loss, unlike the previous year when it made a profit of $200,000, which was still lower than a couple of years ago. This quarter was indeed a loss, and I'm uncertain if the second quarter will show significant improvement. The second quarter also coincides with Chinese New Year. I believe that we might see a rebound in China after the Chinese New Year, likely in the third and fourth quarters.
Okay, fair enough. All right. And the Taiwanese thing, so I guess how long does it take to get back those sales that you had before?
We got them all? Basically, the widow of the former partner sold the business to us, but she didn't sell us the company. We just took the book of business.
Okay. And now that it's under your direct control, what do you think about growth prospects there? Maybe a little more robust than they've been historically? I don't know how the guy was running it.
I think there will be a pickup, yes.
Yes. Okay, good. All right. That pretty much does it for me, and appreciate the hard work and maybe get Gautam on the call one time here to tell us about all the good stuff going on in oil and gas. So thanks.
Yes.
I'm showing no additional questions in the queue at this time. Gentlemen, I'd like to turn the conference back over to you for any closing remarks.
Thanks for listening in today. I hope you have a great week. Thanks.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.