Transcript
Good day, and welcome to the Third 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 session. 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. I will now turn the call over to Patrick Lynch. Please go ahead.
Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. A press release regarding our fiscal 2024 third 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 third quarter financial results, provide a brief business update and then conclude with a question-and-answer session. Please note that when we discuss year-over-year performance, we are referring to the third quarter from our current fiscal year in comparison to the third quarter from our previous fiscal year. Our third quarter results reflect the progress we're making, navigating a fluid macro environment, while capitalizing on growing demand within our Natur-Tec and ZERUST Oil & Gas markets. We achieved record quarterly Natur-Tec sales driven by continued growth in North America and India for our compostable plastic products and specialty resins. While shipping delays caused the timing of approximately $600,000 in orders to be moved from the third quarter to the fourth quarter negatively impacting our third quarter results, demand for our oil and gas solutions is expanding. As a result, we expect a significant rebound in oil and gas sales in the fourth quarter. Furthermore, I'm particularly encouraged by the continued year-over-year improvement in our gross margin demonstrating that our initiatives aimed at offsetting supply chain and raw material challenges 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 remainder of fiscal 2024. Year-over-year cash from operating activities improved by 116% to $7.6 million primarily due to higher net income for the nine months ended May 31, 2024 and positive changes in working capital. We intend to continue allocating capital to support our growth initiatives and quarterly dividend payments 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 driven by our ZERUST Oil & Gas and Natur-Tec product categories. We also remain focused on enhancing the performance and profitability of our international joint ventures. In addition, we continue to make strategic investments in our operations, aimed at supporting additional growth opportunities across our markets, most notably in North America, Brazil, and India. I am pleased with NTIC's performance and believe fiscal 2024 will be another good year of growth and profitability.
Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 1.4% for the fiscal 2024 third quarter because of the trends that Patrick reviewed in his prepared remarks. Sales across our global joint ventures declined 2.7% in the fiscal 2024 third quarter. Joint venture operating income was down 3.6% 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 of our German joint venture, partially offset by improved profitability across many of our joint ventures. Total operating expenses for fiscal 2024 third quarter increased 7.1% to $9 million compared to $8.4 million for the same period last fiscal year. Higher operating expenses were primarily due to increased personnel costs. Gross profit as a percentage of net sales was 38.2% during the three months ended May 31, 2024, compared to 36.1% during the prior fiscal year period. The 210 basis point improvement was primarily a result of successful actions taken by the company to offset supply chain disruptions and raw material challenges, including insourcing of various production. Net income attributable to NTIC was $977,000 or $0.10 per diluted share for the fiscal 2024 third quarter compared to $1.1 million or $0.11 per diluted share for the fiscal 2023 third quarter.
Now moving on to ZERUST Oil & Gas. For the fiscal 2024 third quarter, ZERUST Oil & Gas sales were $1.4 million compared to $2.0 million for the same period last fiscal year. The 31.9% year-over-year decrease in ZERUST Oil & Gas sales was primarily associated with approximately $600,000 in sales that were expected to ship before the end of the third quarter of fiscal 2024 but got delayed until the beginning of the fourth quarter. Overall, demand continues to grow among both new and existing customers of our ZERUST Oil & Gas solutions, which today still focus primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion. We are optimistic these trends will continue into fiscal 2025. Turning to our Natur-Tec bioplastic business, Natur-Tec sales were strong during the third quarter and increased 20.1% year-over-year to a quarterly record of $5.8 million. Natur-Tec's growth during the third quarter was a result of new customer wins in North America and India, as well as expanding relationships with existing customers. We expect Natur-Tec sales growth to continue throughout fiscal 2024 and into fiscal 2025. We also continue to invest in our domestic operations as demonstrated by the new Circle Pines, Minnesota facility that came online earlier this year. At this location, we've been able to insource certain manufacturing processes that were previously outsourced as part of our efforts to improve gross margin. 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. Our recent success and the opportunities we are pursuing to drive value for our shareholders in the future are a direct result of their efforts. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2024 third quarter.
As of May 31, 2024, working capital was $23.2 million, including $5.8 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 May 31, 2024, we had outstanding debt of $4.8 million. This included $2 million in borrowings under our existing revolving line of credit compared to $3.6 million as of August 31, 2023.
Hi, guys. Decent quarter. Just wondering about, I saw that, obviously your fixed expenses were up a little bit. What was the typical increase in salaries at Northern Tech for this year?
We changed salaries, in September 1 of this year with the fiscal year. Last year, I want to say the average increase was probably 3% to 4%.
Okay. And in terms of looking at the two big growth areas, the compostable and the oil and gas, any significant changes in the players who are buying, say, compostables? Is that still about the same people? Are there any new positives that you're seeing out there?
They're certainly the same types of players. It's really a matter of expanding the distributors that we have across North America and then getting into new markets, whether they're in Europe or other opportunities that we're seeing throughout Southeast Asia. So they're the same types of players, but we're just seeing that the market is continuing to increase due to various municipal legislation, state legislation, or even national legislation that we're seeing around the world related to the use of conventional plastics and the ability to use compostable plastics instead. So it's just a lot more people getting into the industry and getting into the space from a consumption standpoint. We're selling both. We certainly started out selling the finished products to various customers where we're selling bin liners or trash bags, cutlery. And now we're working towards a lot of the newer opportunities and sales that we've had are with the selling of specialty blended resins so that companies can make their own products out of the proprietary resins that we have.
Which is more profitable?
They're pretty close from a gross margin standpoint. We just feel like the specialty resin market of being able to sell container-load quantities of resin appears to be long-term probably the bigger market as far as how things are transitioning.
How about on the oil and gas? Any changes in the kinds of people buying the product or is it pretty much the same guys you've been seeing?
Certainly it's a similar customer base. What we're seeing is more adoption of the technology of using the VCI solution compared to the alternative solutions. And so when we're going to trade shows, when we are presenting to customers, when we are moving forward and looking at the opportunities, more people understand the solution and what the value-added proposition that it brings. This is why we're starting to see kind of the expansion of the oil and gas group now.
Great. Okay, I'm done. Thanks, guys.
Yes, thanks for taking the questions. Just on ZERUST Industrial, that was down year-over-year. Is that a function of the weakness in Germany?
As we mentioned, we were down in Germany because we had lost a significant customer, but also our European joint ventures overall are feeling a bit of economic pressure based on the ongoing war with Ukraine and the externalities that's causing, for example, higher energy prices in Europe.
And then just looking at ZERUST Oil & Gas, in the first half you did $3.7 million round numbers. You had a soft Q2. Is it sort of reasonable to assume that you're on roughly a $2.25 million run rate?
It could be even stronger than that. But as far as a $2 million run rate for oil and gas, if I look at that, I think that's a pretty fair baseline to look at. But as I said, it is volatile.
Right. And then thinking about 2025 and oil and gas, is it reasonable to assume that the base run rate is going to increment up a little bit, maybe $2.5 million, $3 million a quarter, plus volatility?
I think that as we exit the fiscal '25 in the third and fourth quarter, you're going to continue to see the increase. But I think that's certainly what we're targeting.
Got it. That's very helpful. And then just going back to industrial, and thinking about that business, Europe has been a big portion of your revenue. Is that business going to stabilize?
Well, there's two different ways that we kind of look at it. One is if you look at, obviously, the largest individual player is the German joint venture that we have. From a positive standpoint, we have seen increases. The German joint venture kind of bottomed out from a revenue standpoint and we've been seeing increases in each of the last two quarters. With the expectation that we're going to continue to see growth coming out of that entity.
Okay. And then just, your thoughts on growth rates for that business going forward, and seasonality for the fourth quarter.
Well, typically third and fourth quarters are stronger quarters for us. But typically the industrial ZERUST Industrial sales will outpace GDP by 3% or 4%. So we typically target 10%, 11% of growth across the industrial market, whether it's in North America or Brazil or other areas.
Got it. Thanks. Very helpful.
Thank you. I'm showing no further questions. Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.