Transcript
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. 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 protection of the safe harbor from these statements. Please also be advised that the 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 these forward-looking statements. I will now turn the call over to NTIC management.
Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our fiscal 2024 second quarter financial results was issued earlier this morning and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2024 second quarter financial results, provide a brief business update and then conclude with a question-and-answer session. When we discuss year-over-year performance, we are referring to our fiscal 2024 second quarter as compared to our fiscal 2023 second quarter. NTIC set a series of new records in the second quarter driven by robust demand across many parts of our business. Most notable among these were record second quarter ZERUST Oil & Gas sales and record quarterly Natur-Tec sales. I'm also particularly encouraged by the continued year-over-year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended. We anticipate that profitability will continue to improve and that we will continue to generate positive operating cash flow throughout the second half of fiscal 2024. Year-over-year cash from operating activities improved by nearly 156% to $5.6 million primarily due to higher net income and positive changes in working capital. 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 & Gas, and the Natur-Tec product categories. We also remain focused on the performance and profitability of our joint ventures across Europe and Asia. 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 profitability. So with this overview, let's examine the drivers for the second quarter ended February 29, 2024, in more detail. For the quarter, our total consolidated net sales increased 14.1% to a second quarter record of $20.8 million as compared to the second quarter ended February 28, 2023. Broken down by business unit, this included a 47.5% increase in Natur-Tec net sales, a 20.1% increase in ZERUST Oil & Gas net sales, and a 3.1% increase in ZERUST Industrial net sales. Total net sales for the second quarter by our joint ventures, which we do not consolidate in our financial statements, decreased year-over-year by 7.9% to $23.5 million. EXCOR Germany, our largest joint venture, experienced a 5.6% decrease in net sales compared to the prior fiscal year period due primarily to a previously disclosed loss of a customer and softer demand within the region related to higher energy prices and other externalities linked to the ongoing war between Ukraine and Russia. Fiscal 2024 second quarter net sales by our wholly owned NTIC China subsidiary increased on a year-over-year basis by 20.3% to $3.5 million. Most notably, this was the first year-over-year increase in quarterly sales in over two years as sales during this period have been impacted by prolonged COVID-related lockdowns and overall weakness in the Chinese economy. We remain cautiously optimistic that demand in China will continue to improve throughout the second half of fiscal 2024, helping to support higher incremental sales and profitability in this market. While near-term economic conditions in China remain uncertain, we are committed to the long-term opportunities the Chinese market provides our industrial and bioplastics segments, and we continue to take steps to enhance our operations in this geography. As a result, we continue to believe China will likely become a significant geographic market for us in the future. Now moving on to ZERUST Oil & Gas. The second quarter of fiscal 2024 was the eighth consecutive quarter of ZERUST Oil & Gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business. For the fiscal 2024 second quarter, ZERUST Oil & Gas sales were $2.2 million compared to $1.8 million for the same period last year. The 20.1% year-over-year increase in ZERUST Oil & Gas sales was primarily due to the shift of certain oil and gas projects from the first quarter to the second quarter and positive overall demand for our oil and gas solutions. Our ZERUST Oil & Gas solutions are still focused primarily on protecting aboveground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another good year of growth for ZERUST Oil & Gas as this business further scales and continues to contribute to our overall profitability. Turning to our Natur-Tec bioplastics business. Natur-Tec sales were strong during the second quarter and increased 47.5% year-over-year to a quarterly record of $5.6 million. Natur-Tec's growth during the second quarter was a result of recent new customer wins in North America and India. We expect Natur-Tec sales growth will continue throughout the second half of fiscal 2024. Globally, we continue to see robust 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. As you can see, our fiscal 2024 second quarter financial results reflect the progress we are making towards growing our business and improving profitability. We believe fiscal 2024 will be a strong year of sales growth and improved profitability. We are excited by the positive momentum underway and the direction NTIC is heading. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2024 second quarter.
Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 14.1% for the fiscal 2024 second quarter to a second quarter record because of the trends Patrick reviewed in his prepared remarks. While sales across our global joint ventures declined 7.9% in the fiscal 2024 second quarter, joint venture operating income increased 4.2% compared to the prior fiscal year period. The year-over-year increase in joint venture operating income was primarily due to the efforts underway to enhance profitability at the company's joint ventures, partially offset by lower joint venture sales. Total operating expenses for fiscal 2024 second quarter increased 9.4% to $8.6 million compared to $7.9 million for the same period last fiscal year. Higher operating expenses were primarily due to increased personnel costs. As a percentage of net sales, operating expenses were 41.3% for the fiscal 2024 second quarter compared to 43.1% for the prior fiscal year period. Gross profit as a percentage of net sales was 40% during the three months ended February 29, 2024 compared to 34.5% during the prior fiscal year period. The 551 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures and in-sourcing of various production. Net income attributable to NTIC was $1.7 million or $0.17 per diluted share for the fiscal 2024 second quarter compared to $411,000 or $0.04 per diluted share for the fiscal 2023 second quarter. As of February 29, 2024, working capital was $24 million, including $4.8 million in cash and cash equivalents compared to $23 million including $5.4 million in cash and cash equivalents as of August 31, 2023. As of February 29, 2024 we had outstanding debt of $4 million. This included $1.2 million in borrowings under our existing revolving line of credit compared to $3.6 million as of August 31, 2023. We generated $5.6 million in operating cash flows for the 6 months ended February 29, 2024 compared to $2.2 million for the 6 months ended February 28, 2023. The 156% year-over-year improvement in operating cash flow was driven primarily by higher net income and positive changes in working capital. Throughout the second half of fiscal 2024, we expect to generate continued operating cash flows, which we plan to invest in the growth of our business, support our quarterly cash dividend and pay down the remaining balance on our existing revolving line of credit. On February 29, 2024, the company had $23.5 million of investments in joint ventures, of which 55.7% or $13.1 million was in cash with the remaining balance primarily invested in other working capital. During the fiscal 2024 second quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per share that was payable on February 14, 2024 to stockholders of record on January 31, 2024. To conclude our prepared remarks, our second quarter financial results reflect the progress we are making, navigating a fluid business environment while successfully pursuing our product, end market, and geographical diversification strategies. We're seeing stable North American demand trends, had robust growth across our global oil and gas and bioplastic markets. And we expect these trends to continue throughout the remainder of our fiscal year. As a result, we believe our fiscal 2024 will be another good year of sales and higher profitability for NTIC, and we're excited about our long-term prospects. With this overview, Patrick and I are happy to take your questions.
Our first question comes from Gus Richard with Northland.
Congratulations on strong results. I was just wondering if you could talk a little bit about the pipeline for ZERUST and Natur-Tec. You had to pull in, in the quarter for oil and gas. Wondering if that growth is sustainable sequentially and just sort of your outlook on those two product lines moving forward.
I guess my question, Gus, just kind of asking the question back. So your question is about what is the pipeline for ZERUST's Industrial business and the growth that we expect to see there or oil and gas?
Yes, oil and gas.
I believe oil and gas had a strong second quarter. Expectations are that the third and fourth quarters will exceed the performance of the first and second quarters. We've had many projects in development that are now coming to fruition and are expected to contribute to our revenue in the current fiscal year. This should help establish a base level of oil and gas revenue on a quarterly basis, which we see as a stepping stone. During the call, Patrick mentioned how many times we've surpassed $1.5 million in revenue. I hope to see that number raised to reflect the times we've exceeded $2 million and then $2.5 million. We view this as a step function in our growth. What excites us is the repeat business we're receiving from existing customers, which indicates that our products are effective and we're gaining market penetration. We are committed to investing in hiring new technical service personnel to assist with installations and enhancing our sales team to drive more oil and gas revenue globally.
And then sort of the same question for Natur-Tec. Very strong quarter. Is that new OEMs starting new projects? Or is it resin sales? Can you put some arms and legs around what's going on in terms of the growth trajectory of Natur-Tec?
Yes. It was obviously a strong second quarter, certainly when you're comparing Q2 to Q2. Part of that is because our second quarter last year was not as strong. I mean, if you look at the quarterly numbers last year, second quarter was certainly off a little bit compared to the other three quarters. However, it still was $5.6 million in revenue, which is significantly above any previous quarters that we've had. There are new opportunities, selling bin liners and cutlery, some traditional opportunities that we have been selling to for many years that are continuing to expand in North America as far as the opportunity that we have. There's also new projects coming online as far as increasing the amount of resin that we're selling as well. At any time, there's a lot of projects in the pipeline from a Natur-Tec standpoint that we're working on, and those are starting to kind of come to fruition as well. Similar to the stuff that we're working on from an oil and gas standpoint, there's a lot of projects we're working on in Natur-Tec that are going to set themselves up as recurring monthly, recurring quarterly revenues that are going to continue to build on the total Natur-Tec sales. And so, I expect from what I look at as far as kind of the base level of business, the base level Natur-Tec business is simply growing on a month-to-month basis. And we're starting to see those results. So my expectations are that Natur-Tec is going to have a very strong second half to the year. I expect oil and gas to have a strong second half to the year. And typically, our industrial business has a much stronger Q3 and Q4 than in Q1 and Q2. So we're pretty excited about the prospects right now.
Do you have a target for gross margins going forward? It's significantly above the run rate over the last five or six years. Is 40 a long-term target, or how much higher do you think those can go as your revenue increases and considering the expected mix?
Well, I certainly think that we've achieved some economies of scale as far as being able to harvest more of the gross margin dollars. And obviously, our goal is to keep our fixed expenses as stable as possible, and the variable cost components, the cost of goods sold is going to go up based on a function of revenues. And so I think the gross margin we achieved in the quarter was obviously very good. It certainly is a target. I don't know if it's completely sustainable that I would target that number or a higher number going forward. But I can say that one of the objectives that we have at the company is to continue to work on improving gross margins for all the product lines. And that's one of the reasons why we invested in the building that we have right next door to our Circle Pines facility that basically came online a few months ago where we've been able to in-source certain production and manufacturing of certain small light manufacturing items that we were previously outsourcing. Additionally, there's going to be some investments that we're going to be making in Natur-Tec, where we can do some of the manufacturing of the resins and blending of the resin on our own. These are things that we're strategically doing to specifically work on improving gross margin. And so the increase in gross margin we've seen over the past two quarters is exciting for us. I think 40% is a good target. I certainly think that's sustainable for the next few quarters. But obviously, there is a lot going on from a global standpoint, energy prices, things like that, that could have an impact on some of the base materials and cost unit-based materials that we have. Does that make sense?
Yes, that does. And then last one for me, and I'll turn it over. China was strong, up for the first time in a very long time. Could you provide a little bit of color on is that the automotive sector in China, internal combustion engines? Is it industrial? What sort of what is leading to the improvement in your China operations?
I believe there are new opportunities in markets we are pursuing. Compared to previous trends, we are starting to notice signs of improvement, although I hesitate to call it a recovery since not all macroeconomic factors support that view. However, among the customers we are targeting, we are experiencing a rebound in order volumes. Positive indicators in our second quarter give us hope that we will see continued improvements in the third and fourth quarters. Furthermore, we have implemented cost-cutting measures in China to boost profitability. Our subsidiary in China is expected to contribute more this year compared to last year, which was essentially breakeven. As the economy there recovers and the opportunities we are targeting begin to materialize, I believe we will see a recovery in China. It remains uncertain when we will return to the growth rates we anticipated years ago, but we indeed see significant potential in that market, both in the automotive sector and in other new markets we are exploring.
Our next question comes from Tim Clarkson with Van Clemens & Co.
Obviously a great quarter. Just a couple of questions on the stuff that's working here. What percentage of the oil and gas business at this point would you say is repeatable? So you did, what, $2.2 million. What percentage of that was kind of repeat stuff?
It's all repeatable; we're engaged with customers who have significant opportunities. There are no saturated markets in oil and gas that we are involved with. Currently, our customers are utilizing a small portion of their repair and maintenance budgets for VCI technology to safeguard their infrastructure. Specifically, regarding tank bottoms, we expect recurring revenue over time as they require recharging. However, the locations of these installations typically have hundreds of tanks, while we only have a small number at various facilities. We believe that as the technology gains mainstream acceptance and as more standards are established by groups like API and other regulatory entities, the market opportunity for us will continue to be substantial.
Right. So obviously, you guys have only exploited a small percentage of that market, like less than 2% or something like that.
I'd say 0.2%. I mean, it's a very big market compared to the revenues.
Right. Well, let me ask you this. I mean, do these guys ever get excited about the fact they can take a tank and make it last 30 years versus having to replace it 10 years? To me, that would be pretty exciting, I mean, just as a technological feat, I mean, it's really breakthrough technology. I mean, is there any kind of like, keywords this is wonderful stuff?
People are generally very enthusiastic about rust. I understand your point. When our sales team is out in the field meeting with those responsible for infrastructure protection, it seems that they are beginning to recognize the potential long-term cost savings from using our products. This understanding is evident as we engage with individuals up the hierarchy within these companies, who are starting to see the added value of our offerings. The oil and gas industry is typically slow to adopt new technologies, but we are actively pursuing business opportunities and making progress. I can confidently say that we are witnessing some acceleration in our activities, which is why we are looking to hire and invest further in this sector. We are starting to see important milestones and are now comfortable with the growth trajectory, leading us to focus on ensuring we can support and capitalize on this increase in business.
Right. Okay. Let's switch to the compostable a little bit. Now does that product really differentiate itself against the competition? I mean, can you find specific applications where somebody says, 'Yes, we want to do business with this Natur-Tec stuff rather than the competition because of A, B and C.' I mean does that show up? Or is it just another compostable product?
No, that definitely shows up. We certainly sell commodity products, and some of the Natur-Tec products are commodity items like certain bin liners. However, the majority of our business and many of the larger projects we've implemented involve proprietary resins that we develop for companies to successfully manufacture compostable products using their own equipment. Other companies that have tried competitors, basic resins, or developed solutions internally have struggled to achieve this. The value we provide through the Natur-Tec group is the ability to customize offerings specifically for our customers, which positions us to supply them with products and foster long-term partnerships with companies looking to create compostable items. I believe the growth we anticipate in the next 12 to 24 months will come from these opportunities, where our product cannot be replaced by other compostable resins. It is specifically developed by us in collaboration with some of the key suppliers.
Right. Super. And would you say at this point, Natur-Tec is profitable on a standalone basis?
Natur-Tec is indeed profitable on its own, which has been one of the most exciting developments for us over the past six quarters. We are witnessing significant growth and profitability from Natur-Tec, contributing positively to our overall bottom line. However, one challenge for those following the company is that over the last four or five quarters, the contribution from our joint venture has been relatively flat or even declining. We've noted that the major joint venture we have in Germany has seen a considerable decrease in its income over the past two to three years due to challenges in the German economy. The overall growth in profitability for the company has primarily come from Natur-Tec's significant contributions, along with profitability from oil and gas. My hope is that as the joint ventures experience favorable conditions, we will see a turnaround that leads to growth at that level, which would provide an additional boost to our earnings.
Right. Well, great. I mean, I'm pleased obviously pleased with how things are going, and I expect things to continue. And I mean one thing I'll make, I don't know why I'm saying this, but I mean, it's this unbelievable how long it takes people to be convinced of technologies. Everybody thinks people want to change and do innovative stuff, but the experience at Northern Technologies historically just shows that it takes 10 years sometimes for people to see the obvious and start to change their behavior. So I'm glad you guys are hanging in there. Everything you're doing is clearly not only making money but it's also helping the environment, even the tank technology, obviously. So great quarter.
Our next question comes from John Bair with Ascend Wealth Advisors.
In looking at your slide deck, the slide with your joint venture operating income has been relatively steady in that 10% to 11% range over the past few years. So I'm wondering if there's opportunities there to expand that segment of your business. I know you just referenced hopefully that overall things might increase would prevent or provide a good tailwind. You did in your prepared remarks mentioned that China has shown some improvement. Didn't really mention anything about India. I'm just kind of wondering what you're seeing there.
Sure. Regarding our operations in India, the investment we made to acquire the additional 50% of HNTI, also known as ZERUST India, was completed at the end of 2001, so its impact was visible starting in 2002. After the acquisition, we experienced a significant drop in expected contributions, which were about $0.2 million to our total profit. By fiscal 2023, this increased to approximately $1.5 million, and we anticipate that it will reach close to $2 million this year. The Indian business has shown strength, with growth in sales and overall profitability, which is very encouraging. Although there was a slight decline right after the investment, we are now in a position where the $2 million operating profit is making a positive impact. The Indian market remains strong for us in both Natur-Tec and ZERUST industrial sectors. If I focus specifically on the Natur-Tec business, which is separate from the previously mentioned numbers, that segment has also experienced substantial growth, akin to what we've seen in North America. The opportunities for supplying various compostable materials in that market are promising. Additionally, we are looking to invest in China as we have the chance to produce Natur-Tec resins at a new facility in India, which should help improve our gross margins across Natur-Tec. We consider India a vital contributor from both Natur-Tec and ZERUST industrial perspectives. As for your inquiry regarding joint venture contributions, the percentage contribution you referred to, which is around 10% to 11% of top-line revenue affecting our bottom line income, has remained fairly consistent, fluctuating slightly. There are currently no anticipated new joint ventures in different geographic regions that aren't already served by our entities. Our joint ventures collaborate and share insights, learning from each other's successes and challenges while developing products for our distribution network. Currently, Patrick is participating in a joint venture partners meeting in Europe where they discuss performance and strategies for accelerating revenue. I expect that as we move into Q3 and Q4 and into fiscal 2025, we will witness an increase in joint venture contributions and sales due to these ongoing efforts.
Is there much opportunity in acquiring full ownership of some of these joint ventures like you did with the operation in India? Is that something you consider as a long-term relationship that evolves when the right circumstances arise, like with your India operation? What is the background of that situation? Are there many similarities? Are there other joint ventures that are somewhat like that?
We approach this situation on a case-by-case basis. There are about 10 or 11 joint ventures in Europe and 4 or 5 in Asia. We evaluate how transitions happen and determine the regions where it makes sense for us to consider acquiring an ownership interest if the opportunity arises. We are not actively seeking to buy out partners or push them out. However, if a suitable opportunity presents itself in a region where we believe we could effectively gain more control, we will certainly consider taking advantage of it.
Right. Yes, that's what I was looking to understand, whether this is an ongoing effort or if the operator might eventually decide to relinquish their ownership.
We see the ownership percentage held by other shareholders as part of the succession planning for our joint ventures. We're evaluating whether to acquire that stake or if it would be more beneficial to seek a different strategic partner that could potentially bring more value than NTIC making a purchase. Our joint ventures consist of long-standing partnerships built on trust, and there's much more involved than simply what appears on the balance sheet or from an operating income perspective. We value our joint venture partners and strive to ensure that our collaborations are in the best interests of all parties involved and the entire NTIC organization.
Sure. One last question. You did indicate you thought the third and fourth quarter should be stronger with ZERUST and the oil and gas. Do you feel that that's as much a function of the higher oil prices that we're seeing right now? Or is it a combination of that plus a greater adoption of your technology to be used in their infrastructure?
I believe the adoption of the technology plays a more significant role than the volatility of oil prices. There is a correlation between oil prices and repair and maintenance budgets for some of the companies we collaborate with. However, these companies have been trialing technologies and gathering data for some time. As we demonstrate our capability to protect their infrastructure, we use that success to expand our programs within those companies. Therefore, I anticipate that the expected increases in the oil and gas sector over the next three to five years will be driven by technology adoption rather than fluctuations in oil prices.
Does that have application to other infrastructure outside of the holding tanks?
Yes. There are applications dealing with pipeline casings. There's applications dealing with just protecting infrastructure with some of our existing industrial products. So there certainly are lots of other applications that we're looking at other than just the tank bottom solutions.
Yes. Reducing, say, emissions and so forth along pipelines or pipeline repair perhaps?
Yes. Exactly. You're looking to protect an infrastructure to make it safer and less likely to have leaks or anything else that would potentially be hazardous from an environmental standpoint.
Would that have application in water infrastructure as well?
Possibly, but it's not an area that we're targeting right now. I mean, I think the potential risk and the amount that people are willing to look at from a water standpoint, I just don't think it's comparable to what we've seen from an oil and gas standpoint.
Our next question comes from Walter Ramsley with Walrus.
Congratulations. A really good quarter. A couple of follow-ups. I guess Patrick is in Europe. Can you give us an idea if the economy over there has begun to improve or is it still kind of flatlining or getting worse? I mean, what's the story in Europe nowadays?
According to what I've been hearing in the last couple of days, it's just holding steady.
Okay. And in the United States, can you give us an update on how the automobile part of the business is doing? And maybe just overall U.S. ZERUST Industrial in general?
ZERUST Industrial is performing adequately overall. However, I don't have any major updates regarding significant growth expectations in the near future.
Okay. All right. And then I guess just one other thing. The last couple of days, there's been economic reports about inflation increasing again. Has that begun to affect your company?
Not that I'm aware of.
And I'm not showing any further questions at this time. I'd like to turn the call back over to Matt and Patrick for any closing remarks.
I'd like to thank everybody for that. Go ahead, Patrick.
No go ahead. You go ahead.
Just want to thank everybody for participating, and enjoy the rest of the day. Thanks.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.