Transcript
Good day, and thank you for standing by. Welcome to NTIC's Fourth Quarter 2025 Earnings Conference Call and Webcast. 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. 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. I will now hand the conference call over to Mr. Patrick Lynch, NTIC's CEO. Please go ahead, sir.
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 fourth quarter and full year fiscal 2025 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 2025 fourth quarter and full year 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 fourth quarter and full year of our fiscal 2025 in comparison to the fourth quarter and full year of last fiscal year. Fiscal 2025 was marked by order timing shifts and selective softness in our ZERUST oil and gas and Natur-Tec markets. So NTIC used this period to strengthen its competitive position and to execute strategic initiatives that we believe will enhance our long-term growth potential. We accelerated product innovation within Natur-Tec, advanced new ZERUST solutions across global industrial markets and pursued emerging opportunities in the South American offshore oil and gas sector. These actions have expanded our pipeline, sharpened our focus and positioned NTIC to reaccelerate growth and improve profitability in fiscal 2026 and beyond. In fiscal 2026, we expect to start reaping the benefits gained from the strategic investments NTIC made over the past 3 years to upgrade our global operations and support future growth. We are also focused on flattening our operating expenses while expanding gross margins and driving sales in the higher-margin parts of our business, which we expect will improve our profitability and strengthen our balance sheet in fiscal 2026. While we anticipate macroeconomic headwinds to persist, especially in Europe, we believe NTIC is positioned to deliver growth and improved profitability across many of our key markets in the coming fiscal year. So with this overview, let's examine the drivers of the fourth quarter in more detail. For the fourth quarter ended August 31, 2025, our total consolidated net sales decreased 4.4% to $22.3 million as compared to the fourth quarter ended August 31, 2024. Broken down by business unit, this included a 29.4% decrease in ZERUST oil and gas net sales and a 10% decrease in Natur-Tec net sales, partially offset by a 5.8% increase in ZERUST industrial net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2025 fourth quarter by our joint ventures increased year-over-year by 4.7% to $24.4 million. For fiscal 2025, joint venture sales declined 4.9%, reflecting the continued impact of high energy prices and regional political pressures on the European economy as well as significantly increased uncertainty related to U.S. trade and economic policies and the potential impact this will have on global supply chains. We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement target economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Improving sales trends at our wholly owned NTIC China subsidiary continue. Fiscal 2025 fourth quarter net sales at NTIC China increased by 12% to $4 million. For fiscal 2025, NTIC China sales increased 14% to $16.2 million, the second strongest year of sales we have experienced in this market. NTIC China sales for fiscal 2025 demonstrate that demand continues to grow in this geography. Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to improve in fiscal 2026, helping to support higher incremental sales and profitability in this market. We continue to believe that China will likely become a significant market for our industrial and bioplastics segments, so we'll continue to take steps to enhance our operations in this geography. Now moving on to ZERUST oil and gas. Fourth quarter of fiscal 2025, ZERUST oil and gas sales were $3 million compared to $4.2 million in the same period last year. As a reminder, ZERUST oil and gas sales for the fourth quarter last year benefited from approximately $600,000 in sales that shifted from the third quarter due to timing. On an annual basis, ZERUST oil and gas sales were $7.3 million compared to $9.2 million for the prior full fiscal year. This decline was primarily due to timing of orders. We have continually invested in ZERUST oil and gas to enhance our sales team and add resources to support future growth. This has improved our sales pipeline as the size and the number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings and offshore oil rigs from corrosion. The nature of this industry will always cause certain fluctuations in ZERUST oil and gas sales. Nevertheless, we still expect to see ZERUST oil and gas sales and profitability to improve significantly in fiscal 2026 as we leverage these investments and rein in operating expense growth. Earlier this month, we announced that our 85% owned subsidiary, ZERUST Brazil, secured a new 3-year contract for a major offshore project with a leading global EPC company. Under this agreement, ZERUST Brazil will provide advanced corrosion protection solutions for floating production storage and offloading units, or FPSOs, with an estimated total value of approximately BRL 70 million, which is equal to approximately USD 13 million based on current exchange rates. The project started in Q4 and is expected to ramp up during our fiscal 2026 and then continue through calendar 2028. This is a significant validation of our engineering capabilities, scalability of our ZERUST oil and gas business and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. Turning to our Natur-Tec bioplastics business. Fourth quarter Natur-Tec sales were $5.1 million, representing a 10% year-over-year decline in Natur-Tec sales, primarily due to pricing dynamics and the timing of orders. For example, during the past year, a large North American customer of our resin compounds late purchasing for nearly 6 months as they made tooling adjustments to increase the output of their manufacturing line. While this contributed to Natur-Tec's decline in sales for fiscal 2025, we have already received orders for the first and second quarters of the new fiscal year for the equivalent of what this customer purchased from us in all of fiscal 2025. It's also worth mentioning that in Q4 of fiscal 2025, we entered into a preferred supplier agreement with the nation's leading specialized distributor for JanSan, food service and industrial packaging. We expect this new relationship to translate into higher Natur-Tec sales growth in fiscal 2026. We are also working on several larger opportunities for our Natur-Tec solutions that we believe hold significant promise to benefit our sales in the coming quarters, including advancing the compostable food packaging solution we mentioned on our last call. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant further growth in the U.S. and abroad. While fiscal 2025 was more challenging than we expected at the beginning of the fiscal year, we remain steadfast in pursuing our strategic growth plan. We are confident in the direction we are headed. Before I turn the call over to Matt, I wanted to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our success and our ability to navigate more complex economic periods 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 fourth quarter and full fiscal year 2025.
Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 1.0% in fiscal 2025 and decreased 4.4% in fiscal 2025 fourth quarter because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 4.7% in the fourth quarter. Joint venture operating income in the fourth quarter increased 6.6% compared to the prior fiscal year period, primarily due to the corresponding increase in net sales. For fiscal 2025, sales across our global joint ventures decreased 4.9%, while joint venture operating income decreased 9.8% compared to the prior fiscal period. Total operating expenses for the fiscal 2025 fourth quarter increased 2.2% or $9.7 million for the fiscal 2025, primarily due to strategic investments in ZERUST oil and gas, sales infrastructure and increased personnel expenses, including new hires, benefits and higher travel and professional fees. As a percentage of net sales, operating expenses were 43.5% for the fourth quarter compared to 40.7% for the prior fiscal year period. For fiscal 2025, operating expenses as a percentage of net sales were 44.7% compared to 41.6% for the prior fiscal year. Gross profit as a percentage of net sales was 37.9% during the 3 months ended August 31, 2025, compared to 43.8% during the prior fiscal year period. Gross profit as a percentage of net sales was 37.6% for the fiscal year ended August 31, 2025, compared to 39.7% for the prior fiscal year. Lower gross margin for the fourth quarter and full year periods were primarily due to a less profitable mix of sales. There were a couple of one-time items that impacted profitability during the fiscal year, including a $1.1 million benefit to other income due to the receipt of cash from the employee retention credit that was payable in February of 2025. Secondly, NTIC recognized $387,000 in other expense during the fourth quarter of 2025 as NTIC's Chinese subsidiary was assessed penalties from Ningbo Customs, a customs authority in China as a result of a technical classification matter. We have since updated our export documents and internal review procedures and believe this issue has now been fully resolved. We also experienced an increase in our effective tax rate for fiscal 2025, which was 67.5% for fiscal 2025 compared to 17.3% in the prior fiscal year. The changes primarily reflect increased income tax expenses in our foreign subsidiaries and is primarily due to the increase in income tax expense as compared to reduced consolidated pre-book tax income. As a result, our effective tax rate was unusually high and volatile in fiscal 2025. We expect the effective rate to normalize in future periods when additional profits are recognized in our North American operations. NTIC reported a net loss of $1.1 million or $0.11 per diluted share for the fiscal 2025 fourth quarter compared to net income of $1.8 million or $0.19 per diluted share for the fiscal 2024 fourth quarter. For the full year, NTIC reported net income of $18,000 or $0.00 per diluted share compared to $5.4 million or $0.55 per diluted share for the fiscal 2024 full year. For the fiscal 2025 fourth quarter, NTIC's non-GAAP adjusted net loss was $607,000 or $0.06 per diluted share compared to non-GAAP adjusted net income of $1.9 million or $0.20 per diluted share for the fiscal 2024 fourth quarter. For the fiscal 2025, non-GAAP adjusted net loss was $12,000 or $0.00 per diluted share compared to net income of $5.8 million or $0.59 per diluted share for fiscal 2024. A reconciliation of GAAP to non-GAAP financial measures is available in our fourth quarter fiscal year 2025 earnings press release that was issued this morning. As of August 31, 2025, working capital was $20.4 million, including $3.7 million in cash and cash equivalents compared to $23.7 million, including $5 million in cash and cash equivalents as of August 31, 2024. As of August 31, 2025, we had outstanding debt of $12.2 million. This included $9.3 million in borrowings under our existing revolving line of credit compared to $4.3 million as of August 31, 2024. Reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus for fiscal 2026. We generated $2.4 million in operating cash flows for the fiscal year ended August 31, 2025. At year-end, the company had $28.6 million of investment in joint ventures, of which 51.7% or $14.8 million was in cash, with the remaining balance primarily invested in other working capital. During fiscal 2025 fourth quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on August 13, 2025, to stockholders of record on July 30, 2025. To conclude our prepared remarks, we are optimistic NTIC's momentum is building across many parts of our business. We believe our multi-year strategies are working, our global markets are expanding, and our team is delivering results. With a clear vision and disciplined execution, we're confident that the foundation we have built will drive continued growth, stronger profitability and meaningful value creation for our shareholders. With this overview, Patrick and I are happy to take your questions.
We have a question coming from Tim Clarkson with Van Clemens.
Patrick, Matt, obviously, this year was not what everyone wanted. But just a couple of background questions. In general, are the income taxes on our international business, are they higher than the taxes domestically in the United States?
It's not that the tax rate is higher; rather, our main five subsidiaries have a standard statutory tax rate that ranges from 20% to 34%, depending on the country. All of these subsidiaries are profitable, which means they generate tax expenses. When we look at the effective tax rate as a whole, the numerator in that calculation is a fixed number. There isn’t much tax expense from North America, but we do incur some due to the royalties and dividends we receive from joint ventures. The problem is that the denominator in the calculation has very little profit, especially in the fourth quarter. This situation has resulted in a high effective tax rate for that quarter. Moving forward, as profitability in North America increases, the denominator will rise. For instance, if we had higher profits in North America, the numerator and tax expense would remain the same, but the denominator would be significantly larger, leading to a more normalized effective tax rate. This issue stems from how the tax provision is calculated and the challenges we faced in North America during the fourth quarter. I anticipate that by fiscal 2026, as we return to previous profit levels, the effective tax rate will normalize.
Okay. Sure. I understand you mentioned plans to reduce expenses within the company. How realistic is this, and how much do you think you can cut to enhance profitability?
The goal at this point isn't to cut expenses. The goal is to, I would say, maintain the same level of operating expenses that we had or close to the same level of operating expenses that we had in fiscal '25. I mean you recall all through the end of 2024 and through 2025, we talked about the increased investments that we've made in the oil and gas group and a couple of other areas inside the company with the ability to kind of use those investments to drive revenues going forward. We didn't see the revenue increases in fiscal 2025. The expectations are the investments that we made in 2024 and 2025, we'll start seeing the results of that in 2026 and beyond as those investments, specifically the people that we hired are able to gain traction and drive revenue growth. So the expectation is that we're going to drive revenue growth in 2026, those gross margin dollars falling down to the operating profit line as we're able to hold operating expenses as stable as possible.
Sure. Okay. On the oil and gas, it sounds like there's some additional business that will kick into the first quarter and further on out with some of these larger orders. Now what is driving this business? Is it just having more sales out in the field in places like the Middle East and Brazil? Or is it as the technology finally getting to be accepted as superior to the legacy technology of the cathodic arc stuff?
Yes. Can you hear me?
Yes, I can hear you. Go ahead.
Right. Okay. It's a combination of having a general acceptance of the technology in the market, where we've proven that it works over and over again. We're getting repeat business from existing customers as we're putting in new customers. And that's really starting to give our oil and gas business the attention that we think it deserves.
Sure, sure. In terms of the packaging, I know that you guys had a breakthrough in terms of being able to kind of replace the traditional Saran wrap packaging that doesn't allow air to go out and you've now developed packaging that's similar to that, that's compostable. I mean how close are we from getting some business from that?
For that, I'd like to turn the question over to Vineet Dalal, who runs our Natur-Tec business. Vineet, go ahead.
Yes, this is Vineet. Yes, we have several customers where we're doing trials with compostable packaging, especially for consumer food applications. So this is something that we're working on. We've gotten some good feedback, not just here in North America, but also in India, where there's a big market for these kinds of applications. So we expect some of those opportunities to start hitting our sales in 2026.
Okay. Are the costs similar for the compostable product versus the legacy product?
No. The cost is definitely higher as a premium solution, but due to legislation and government regulations in countries like India, these companies are forced to use compostable packaging instead of traditional plastic packaging.
Our next question coming from the line of Gus Richard with Northland Capital Markets.
You mentioned weakness in North America. Could you just describe where that's coming from?
The main weakness in North America, we experienced throughout the entire fiscal 2025 was primarily the Natur-Tec group and the oil and gas group. If you look at the oil and gas group in North America was down close to 46% on the year. Natur-Tec North America was down about 13% on the year.
Got it. Okay. And then in the floating platforms for the oil and gas, I'm trying to wrap my mind around how your solution works floating on the water and how much does that open up the market opportunity for you?
So it's a new market for us overall. It's not like you're trying to put the entire rig into a package, but you're taking sections of it and finding unique ways to apply our technology in those sections to provide long-term corrosion protection. And based on what we've seen in practice in Brazil so far, we think this is an opportunity, obviously, that can be very beneficial for us in Brazil, but in other areas around the world where they use offshore platforms.
The only thing I'll add, Gus, is that the work that we talked about in Brazil, specifically on these FPSOs, there's a service component to it, where there are actual ZERUST oil and gas employees that are living on the floating platforms and applying the ZERUST solution to the infrastructure, and then they're on the rig for a period of time and then they leave and then replacements come in. And so it's been a long process in order to be able to get slots where our specific workers can be on those platforms to do the installation work. And so that's a different sales process than we typically see with onshore, where we're typically selling the solution and it's getting installed and then you don't need to continually apply and continually upkeep it.
Okay. And just out of curiosity, is that having to have folks on the rigs and continually reapplying, does that have an impact on the margin profile for the floating platforms?
Yes. There is a slightly decreased margin due to the service component and related factors compared to simply selling the other ZERUST oil and gas solutions, where the product is sold and someone else handles the installation work.
Got it. That's super helpful. And then the one-time, I guess, is the Chinese tariff, custom, whatever the heck that charge was. Was that a one-time event and nonrecurring? Or is there an impact to the P&L going forward?
Well, Vineet, would you like to respond to that?
Yes. It was a one-time event. Essentially, we produce certain compounds in China that are filled with minerals and then export them. We have always adhered to international norms for HTS codes used in the U.S., India, and Europe. When exporting from China, we typically receive a VAT credit. However, due to the trade war between the U.S. and China and increased scrutiny from Chinese customs on exports containing minerals or rare earths, a customs official indicated that because our compounds contain these minerals, we were not eligible for the VAT refund. Consequently, we needed to repay the credit we received. We expect this to be a one-time event going forward, which will be reflected in our cost of goods sold.
So essentially, it was a couple of years' worth of VAT that the Chinese government clawed back as well as a penalty on top of that for using what they deem to be the wrong code for the VAT. So the expectations are it's a one-time charge that we took and decided we weren't going to challenge the Chinese government and this we wanted to move forward as quickly as possible with the process so we can continue the import and export of the product.
Got it. Regarding the food packaging application, is this related to packaging for a vegetable produce supplier or is it something used in supermarkets for items like chicken breast? Please go ahead.
We are exploring various applications, particularly in India where we aim to transform milk packaging. We are collaborating with major dairies to switch from traditional polyethylene to fully compostable packaging solutions. We've conducted trials to ensure that our product meets the necessary barrier and shelf life performance, as well as handling requirements. Additionally, we have verified that our solution achieves equivalent production efficiency on their form film machines compared to traditional plastic technologies. We are optimistic about this becoming a growth area in India. In the U.S., we are partnering with consumer foods companies to develop multilayer structures for packaging items such as sauces and salad dressings.
Okay. So replacement for Tetra Pak, am I getting it right?
Yes, or pouches, like these little pouches for salad dressings or short shelf life sauces.
Got it. And when do you expect that to sort of add to Natur-Tec revenue? Is that revenue second half of fiscal '26? Is it starting today? Can you give a little bit of color as to when you expect that to contribute to revenue?
The application in the U.S. that requires some, I would say, fine-tuning. So we are working closely with the customer on trials and prototype validation. So that will probably take several quarters at least before we can introduce that in the market. But the application in India, we've already gotten an initial appeal from one of the dairy companies. And so we expect that business to kind of grow probably by Q2, Q3 of fiscal 2026.
And I'm showing there are no further questions in the queue at this time. I will now turn the call back over to Mr. Patrick Lynch for any closing remarks. One just queue up coming from the line of Zach Liggett, Desmond Liggett Wealth Advisors.
On your presentations here over the last, I think, couple of years, you've had a strategic objective of hitting greater than 15% top line growth and slower expense growth. I'm just curious, I know the last couple of years have been sort of investment years for you. But how are you thinking about those objectives looking forward?
Matt, I think you're better qualified to handle this one.
From a top line growth perspective, we remain optimistic. We see opportunities specifically in oil and gas and Natur-Tec, and we expect significant growth from these two areas in 2026. The traditional ZERUST business is expected to be stable with some slight growth. However, we believe that the opportunities in Natur-Tec and oil and gas globally will drive our aim for 15% growth this year. Although we did not achieve that last year, we believe our investments will enable us to return to that growth rate, which would have a substantial impact on our gross margin, and ultimately affect our earnings per share positively.
Yes. Okay. And then the operating cash flow came off quite a bit this year. How are you thinking about that for FY '26 and free cash flow for that matter? If you could give us an update on your CapEx expectations?
Our fiscal 2025 was significant, particularly in terms of capital expenditures for both 2024 and 2025. We implemented a new SAP ERP system, which was quite costly and funded through our operating cash. Additionally, we acquired a building next to our current headquarters to expand production and warehousing, as we are outgrowing our existing space. This expansion increased our office space by about 60% to 70%. Looking ahead to 2026, we anticipate minimal capital improvements will be necessary in North America. We are exploring additional facilities in Brazil, which will be funded independently and not draw from North America's operating cash, as Brazil has a cash surplus. Similarly, Natur-Tec India plans to build facilities to meet production and warehousing demands for the Indian market, financing it entirely from their operational cash and any local financing. Our expectations for 2026 in North America include the ability to significantly increase cash flow to pay down our line of credit. We aim to reduce this debt as much as possible, which will help us reinstate dividends and maintain a cash reserve to support future growth and needs over the coming years.
That sounds promising. I have a couple of small questions. Are you seeing any benefits this year from One Big Beautiful Bill?
Not really. I mean...
No. That's our business.
Okay. And then any AI use cases that you guys have identified for the coming year?
No.
Thank you. I'll now turn it back over to Mr. Patrick Lynch.
All right. Thank you all for joining this morning. I hope you have a nice day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.