Operator
Good morning. 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 and 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 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 its forward-looking statements. I would now like to turn the call over to Patrick Lynch, CEO. You may begin.
I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolfsfeld, NTIC's CFO. Please note that a press release regarding our second quarter fiscal 2026 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 2026 second 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 second quarter of our fiscal 2026 in comparison to the second quarter of last fiscal year. Our results were in line with expectations as we continued to execute against our long-term growth strategy. Second quarter performance was driven by solid top-line growth across our businesses, including record second quarter zero-rest oil and gas net sales with year-over-year growth across all geographies, reflecting the investments we've made in our global sales infrastructure and the increasing adoption of our VCI solutions within the global oil and gas industry. We have also seen continued strength at NTSC China, despite the seasonal impact of the Lunar New Year, and achieved another solid quarter of Nature Tech growth. Overall, second quarter and year-to-date results customers place on our corrosion prevention and compostable plastic solutions. While the macro environment, including geopolitical tensions in the Middle East, ongoing supply chain pressures and continued challenges in the european economy has become more uncertain we remain confident in the direction of our business and the strategies we are executing to drive long-term value the diversity of our end markets geographic footprint and product portfolio positions as well to navigate near-term volatility as we move through the second half of fiscal 2026 we expect continued sales growth and improved profitability, supported by stable trends in North America and ongoing strength in NTSI China, Serious Oil and Gas, and Nature Tech. So, with this overview, let's examine the drivers for February 28, 2026. Our total consolidated net sales increased 15.3% to $22 million, as compared to the second quarter ended February 28, 2025. Broken down by business unit, this included a 72.1% increase in zero-est oil and gas net sales, an 11.2% increase in zero-est industrial net sales, and an 8.1% increase in NatureTech net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements, total net sales for the fiscal 2026 second quarter by our joint ventures increased year-over-year by 18.6 percent to $23.5 million, reflecting improved year-over-year demand across many of our joint ventures. We continue to closely monitor trends across our European markets for signs of stabilization to implement targeted 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 continued at our wholly owned NTIC China subsidiary. The school 2026 second quarter net sales at NTIC China increased by 18.5 percent to $4.4 million, demonstrating strong demand in this geography. Furthermore, given that the majority of NTIC's 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 believe that China will likely become a significant market for our industrial and bioplastic segments, so we will continue to take steps to enhance our operations in this geography. Now, moving on to Xerost Oil & Gas. Xerost Oil & Gas sales were $2.7 million, a second quarter record, and increased 72.1% from the same period last year. This growth reflects the investments we've made in our global sales infrastructure and the increasing adoption of our VCI solutions within the global oil and gas industry. A highlight of increasing Xeris oil and gas adoption includes the three-year contract with an estimated total value of approximately $13 million we announced in November 2025 for a major offshore project with a leading global EPC company. We expect this project to ramp throughout the current fiscal year and continue through calendar under 2028. This is a significant validation of our engineering capabilities, the scalability of our zeroes 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 deep water markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. During the second quarter, we also experienced higher year-over-year oil and gas sales in the Middle East, North America, India, and China from both new and existing customers, reflecting the contribution of recent investments we've made to enhance our sales team and add resources to support future growth. This has improved our sales pipeline and the size and number of opportunities have expanded. 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 serious oil and gas sales. Nevertheless, we still expect to see serious oil and gas sales and profitability improve significantly in fiscal 2026 as we continue to leverage these investments and rein in operating expense growth. Turning to our Nature Tech bioplastics business, second quarter Nature Tech sales were $5.4 million dollars, representing an 8.1% year-over-year increase in NatureTech sales. We continue to pursue several larger opportunities in North America and India for our NatureTech 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 prior calls. Overall, we believe NatureTech is a best-in-class compostable plastic business that is well positioned for significant future growth in the united states and abroad and we expect sales to continue to expand throughout the year 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 success and our ability to navigate more complex economic periods are indirect results of their efforts with this overview let me now turn the call over to matt wolffeld to summarize our financial results for the fiscal 2026 second quarter.
Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 15.3 percent in the fiscal 2026 second quarter, the strongest year-over-year growth rate we've achieved since fiscal 2022 because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 18.6 percent in the second quarter. Joint venture operating income in the second quarter increased 19.8 percent compared to the prior fiscal year period, primarily due to higher sales at our joint ventures. Total operating expenses for the fiscal 2026 second quarter increased 7.7 percent to $9.5 million, primarily due to higher selling and general and administrative expenses, partially offset by a reduction in research and development expenses. Operating expenses as a percentage of second quarter sales were 43.2% compared to 46.2% in the prior fiscal year period. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations. Gross profit as a percentage of net sales was 35.7% during the three months ended February 28, 2026 compared to 35.6% during the prior fiscal year period. Higher gross margin for the second quarter was primarily due to the increase in sales. We expect gross margin to improve sequentially during fiscal 2026. As a reminder, during the second quarter last fiscal year, NTIC recognized $1.1 million in other income due to the receipt of a one-time cash employee retention credit payment. No other income was recognized in this fiscal year's second quarter. NTIC reported a net loss of $35,000 or zero cents per share for the fiscal 2026 second quarter compared to a net income of $434,000 or four cents per diluted share for the fiscal 2025 second quarter. For the fiscal 2026 second quarter, NTIC's non-GAAP adjusted net income was $70,000 or one cent per diluted share compared to a non-GAAP adjusted net loss of $300,000 or loss of three cents per diluted share for the fiscal 2025 second quarter. A reconciliation of GAAP to non-GAAP financial measures is available in our second quarter fiscal 2026 earnings press release that was issued this morning. As of February 28, 2026, working capital was $20.2 million, including $5.6 million in cash and cash equivalents, compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025. As of February 28, 2026, we had outstanding debt of $14.3 million. This included $11.3 million in borrowings under our existing revolving line of credit, compared to $12.2 million as of August 31, 2025. Reducing debt through positive operating cash flow and improving working capital efficiencies is a strategic focus for fiscal 2026 and beyond. On February 28, 2026, the company had $29.7 million of investments in joint ventures, of which 51.8% or $15.4 million was in cash, with the remaining balance primarily invested in other working capital. In January 2026, NTIC's Board of Directors declared a quarterly cash dividend of one cent per common share that was payable on February 11, 2026 to stockholders of record on January 28, 2026. To conclude our prepared remarks, we believe our second quarter results demonstrate the continued strength and resilience of our business, led by strong year-over-year sales growth and improving year-to-date profitability. While the macro environment remains uncertain, we are encouraged by the underlying trends across our business and the momentum we are seeing across our operations. As we move through the balance of fiscal 2026, we expect revenue growth to increase, increasingly translate to improved profitability, supported by operating leverage, disciplined expense management, and continued focus on working capital efficiencies and debt reduction. We believe these factors position us well to navigate near-term macro uncertainty while driving stronger financial performance and cash flow generation over time. With this overview, Patrick and I are happy to take your questions.
Operator
As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Sure. And our first question will come from the line of Timothy Clarkson of Van Clemens. Your line is open, Timothy.
Hey, guys. Obviously, a really good quarter revenues-wise.
Earnings still aren't quite there, but maybe you can talk a little bit about the investments that have been made over the last year or so, and if you think the investments are worthwhile. um yeah i mean i'd say there's there's kind of a what i'll call the long-term investment and the short-term investment i mean the immediate investments we made over the past two years you know are the are the really the hiring of a lot of people and starting the new subsidiary that we have in uh in the uae specifically to deal with the oil and gas opportunities there And we have seen success from that entity. Part of what has fueled the oil and gas revenue increase has been some of the revenues that we have achieved in the Middle East. If I look at kind of the breakout of oil and gas revenue, I think part of the expectation was that the increase was due to the Brazil contract, which is true. But we're really looking at, let's say, a non-Brazil increase this quarter of about 85% compared to second quarter last year, and a Brazil oil and gas increase of about 55% this year compared to Q2 of last year. So the growth we're seeing in oil and gas is not localized to Brazil. It's happening based on opportunities in North America, in the Middle East, and other regions. so we certainly get the sense that we're starting to get traction in that area from the investments that we made over the past two years um you know so at this point in time we're we're happy with those investments we're kind of at a point now with oil and gas where it's a transition from the work that we've been doing behind the scenes to really focusing on closing business and adding revenue to the uh to the top line that'll ultimately flow down uh to an earnings per share standpoint the other investments you know key investments that we've made are you know we'll come through the investment section the cash flow over the past couple years where you look at purchasing the building next door and making improvements that building and adding you know where I was in capability and manufacturing capability to our facility you know which helped us maintain the gross margins the new products that we have so we don't have to outsource and can potentially achieve better gross margins those products you know so we've spent about four million plus on that facility and bringing into manufacturing capabilities here and then additionally over the past two years we implemented a new S&P system which certainly has been a little bit more painful to deal with but long term I think the data that we're getting out of that S&P system and the way that we will be able to kind of integrate things worldwide with the you know kind of how the company is set up with the subsidiaries around the world in the joint ventures it's going to give us much better data to be able to grow from a, you know, a total global company perspective. So those are really the three main investments we've made over the past two years. I think although a lot of them have been, you know, difficult and certainly added to operating expense over the past two years, I think that's really what's going to fuel the company for the coming three to five years.
Right, right. Now, obviously, China is doing really well. I mean, there was some concern that, you know, as they transitioned to electric cars, there wouldn't be very much demand for zeros. It looks like there's still plenty of demand for zeros, electric cars or not.
Yeah, China has done well, surprisingly well. They're transitioning, you know, if I look back at kind of where we were selling in China when we established the subsidiary in 2014, 15, 16, compared to where we are now, there's been a little bit of a transition between supplying the let's say the US based or European based automotive companies to now you know focusing on supplying for domestic consumption which is which is good given kind of the volatility of what happens in China from a from an exportation standpoint so a lot of the increases that we've seen in China have been for you know for domestic consumption of the Z-Rest product, which is very positive from our standpoint.
Right. One last question. Just in general on the R&D end, I mean, are there any – is the R&D spent particularly on zeros-type products or on the compostable stuff or some of both? Are there some new emerging technologies coming from all the R&D spending? Okay, and that was what, creating the compostable packaging that doesn't allow moisture in, right?
Right, right. No one else has that product, right? Well, good. All right, I'm done. I mean, obviously, well, one last question I'll ask it is, I mean, is there still, I mean, historically, you know, Northern Tech would net, you know, 10% net at kind of optimum sales level. Is that still the goal of the company, 10% after tax?
It's difficult to kind of look at it just from that standpoint of what the traditional net is because obviously the joint venture operating income that comes in is not included from a top-line standpoint. And so I think the big difficulty we have as a company is if you look back at kind of the historical contributions from the joint venture, it was significantly higher. I mean, just looking at what we previously received from the German joint venture, that would be anywhere from, you know, 10, 12 cents per share per quarter coming in where now you're looking at, you know, five or six cents, you know, per quarter coming in. So what we're seeing is that as we get back to, you know, getting up to, you know, which we expect to see in Q3 and Q4, you know, assuming an increase in the earnings compared to Q1 and Q2, you know, it's really a matter of how are the nature tech business, the oil and gas business and the industrial businesses that we have, how are those really kind of offsetting some of the declines we've seen from the difficulties that the German joint venture is specifically dealing with the German economy? They've done a good job with what they're dealing with, given the difficulties with energy prices and things like that in Germany specifically. But it's really a matter of getting the income from the new businesses and seeing those take off to really augment or would have been kind of a decline in Germany.
Okay. The revenue growth is already showing, so that's good. So I'm done. Thanks, Tim.
Operator
And our next question will be coming from the line of Jake Patterson of Talanta Investment Your line is open, Jake.
Hey, guys. Just a couple quick ones. First off, on gross margin, I know you guided for sequential expansion and are continuing to guide for that um we saw margins kind of flattish even down slightly quarter over quarter and it looks like a lot of that was from nature tech kind of one of the weaker margins we've seen in the at least the last couple years so i was kind of curious maybe what happened there and the outlook for the second half going forward on that margin well there's a lot of different factors that have kind of impacted nature tech i'd say over the past uh if i look back four or quarters.
It's historic. It's going to be a more volatile gross margin. The reason for the volatility is twofold. One is you have kind of fluctuating input prices from the materials that we're using. And two, you know, a bigger component of that is that we're doing global manufacturing for the nature of resin. And so there's been a lot of impact from the tariffs and the changing and the change in tariffs that we have in place. So when we were focused more on manufacturing in China and there was some volatility with tariffs there, we saw some increases and then increases. We're now set up where, or we're going to be set up very quickly, where we're able to do manufacturing in China, in Vietnam, in India, and longer term looking for some North American manufacturing capabilities for nature. side. The other component to the gross margin is the selling price. And we certainly have seen that the nature tech end products, you know, it is a competitive environment. And we certainly are seeing that the companies we're dealing with are dealing with razor thin margins. And, you know, at times we have had to decrease price to remain competitive in some of those larger bids. So, So certainly the goal is to move forward in selling more of the proprietary resin compared to the end products that are in the more competitive space. But ultimately, there's just a lot of input factors to what impacts the gross profit for Nature Tech specifically. Certainly the goal is to hold it, hold the Nature Tech from gross margin and increase margin as much as possible. It's just sometimes difficult depending on the region.
Okay, still on the margin side, I mean, ZRUS, too, I mean, just looking at the oil and gas mix relative to last year, I mean, it's 500 basis points higher and gross margins down every year there. Is that still any impact on that supplier issue you guys had in the first quarter? It doesn't really seem like as much improvement as I would have thought.
Yeah, we did continue to have, you know, the impact on inventory and the impact from the supplier issue we talked about in Q1 and kind of the carrier over to Q2. But, you know, the other difficulty we have that hasn't impacted us from a second quarter standpoint is what's going to happen in Q3 and Q4, given what's going on with energy prices and polyethylene prices and things like that worldwide. You know, we've dealt with this before, whether during COVID or whether during other time periods. But we do our best to pass through increases in raw material prices to customers as much as possible. but certainly we're seeing an increase in some of the main base materials that go into our polyethylene-based products. So it's certainly something to kind of watch out for in Q3 and Q4.
Yeah, I saw that as like Dow and Lionel. I think razor price is 60% or so, so that should be interesting to see. I guess one last one. You just mentioned that the Middle East contributed to some of your oil and gas revenue growth. and they were up, I think, like 80% or something every year. When you go look at your investor presentations, you guys, I think you break out the geographies for zero-ass oil and gas, and it only lists Brazil and North America, at least as of November, or fiscal 25 year. So I was kind of curious. It sounded like there was some Middle East revenue from that geography last year, but I'm assuming it's pretty minimal at this point.
I mean, I wouldn't say it's minimal. I mean, if I look at kind of what they did, you know, we previously were selling to some of these Middle Eastern opportunities as far as, you know, we had larger contracts with British Petroleum in Georgia and some other areas like that. We've historically since sold to Reliance in India. um and these sales were happening through north america now what we're doing is pushing some of these um opportunities to be more you know localized in that area because they're better set up to serve that region um you know so it's kind of a those previously were going through north america i think kind of going forward once the uh once the subsidiary in the uae it's fully up and running fully functional and you know operating completely independently will break out the revenues for that area you know in the investment presentation the other thing that's kind of changed is we are using the subsidiary network that we have in place to go after the oil and gas opportunities I mentioned specifically you know opportunities in India there's opportunities in China, certainly the subsidiary in Brazil. These are all areas where we want to go after oil and gas opportunities with those subsidiaries. Some of them are also bringing in and hiring people that specialize in the oil and gas space to be able to go after those opportunities there. So, you know, we'll establish kind of a regional hub in Asia, as we talked about in the middle east which makes sense ultimately we're looking to push those you know those oil and gas products out through all the subsidiaries that we have to take advantage of that network that we spent so long to build up gotcha no that makes sense um cool barry that's it for me i appreciate it thanks jake and our next question will be coming from the line of gus richard of Northland Capital Markets.
Operator
Gus, your line's open.
Yes, thanks so much for taking the questions. I kind of want to focus on the impact of the war. You guys reported the last quarter, the last quarter ended before the war started.
There's been a lot of change in the world, and I'm first curious, is that changing regional demand in terms of where companies or countries or regions are getting more active or less active um I guess there's a bunch of different impacts from from from what's happening you know kind of kind of across the board you've got the very very you know up-and-close impact where you know the individuals that we have as a subsidiary in in Dubai are you know getting getting air raid sirens and are you know locked in place and told not to go out at various times and they're seeing um you know they're seeing this firsthand and so you know a lot of the areas where they're going to sell products and do installations and things like that um you know are on lockdown but you know you do have the opportunity that you know with some of the infrastructure that's been um you know essentially blown up you are going to have opportunities where there's rebuilding and where there's different things going on and increased uh increased spending in those areas where they're going to need some corrosion protection and things like that so there's there's a very direct impact from those things then you have kind of the you know the secondary impact of what's happening with supply chain energy price and things like that with um with what's going on in the strait and what's going on kind of with the relationship standpoint which is causing energy prices to increase which is causing raw material prices to increase, which is obviously impacting not just NTSD, but certainly all the joint ventures and the subsidiaries. On top of that, you've got subsidiaries that I'd say are further away. Take your example, Brazil, where they potentially have supply constraints from the standpoint of the product needs to be shipped, the raw material products need to be shipped there um there's potentially shortages of the product we're not seeing shortages of products in north america um it's it's the prices are going up but we're not seeing shortages but we're looking at certain regions around the world where they're potentially staying you know we're they're running the issues of even having raw materials in place to be able to make the product which is different than just seeing price increases and so there's a lot of different ways where you know with what's going on in the middle east with what's going on with the war is kind of impacting the company um you know but but certainly you know it it's certainly a concern but we have you know i think we're in a position where we're able to deal with those issues um you know if i look at kind of what's happening in you know brazil we had a conversation in brazil about what's kind of a supply line we're fortunate that we have we have other subsidiaries and other entities around the world that potentially be able to you know meet the meet those customer in Brazil meet their demand and provide product to them so we're not sole sourced in areas it allows us flexibility it allows us the ability to pick and choose what we want to go after and have options as far as
picking you know lowest cost supplier stuff things like that got it and then you know so you've got increase in input prices is that you know are you able to pass that increase on to your customers? How, you know, how are you adjusting to, you know, higher input costs and, you know, how receptive are your customers to that or contractually?
Well, the good thing that we have is that one, we have initially when things kicked off, we did build up inventory a little bit. We're doing our best to hold prices where we can, but we also don't want to be in a situation like what we had in COVID where we reacted too slowly and you know ultimately we didn't raise prices for like six months and we had issues so we're kind of in a situation where we're monitoring prices we are looking at raising prices where we can specifically when we are selling custom-made products that is based off of the price that we pay it's easy to push that increase on the customers the other benefit that you have is it's not like this is an anomaly where the customers don't understand what's going on from an international standpoint from from from a a row and chill pricing standpoint I mean they see what's happening at the gas pump specifically they can read and hear what's happening from the supply chain and prices going up and so it's easy to come in and explain as they look the price of you know polyethylene is increased from you know by 20 cents this is how your price of our product is increasing and why and so you know it's a matter of walking the customers through it and explaining what's happening but we can certainly point to very clear data that shows you know exactly how our input prices are increasing that certainly helps with passing those increases on to customers in an increased final price of the cost and then you know you talked about operating leverage you know it does the operating leverage come from holding OPEX flat and rising rising revenue or is there an opportunity to trim your peer op action a little little color there would be helpful the goal from an hop the goal from a leveraging standpoint is to increase revenue and if we kind of look forward right now at the backlog that we have and the projects that we have you know the expectations are that you know our third and fourth quarter will be significantly better than first and second quarter we've historically had very strong third and fourth quarters from a revenue standpoint and I would expect that trend to continue second quarter is historically a every not every second quarter but traditionally our second quarters are our slowest quarters for revenue standpoint you know the reason why revenues look good in second quarter this year is because second quarter last year was was down so much it was such a bad quarter last year from a comparative standpoint but given what we're at from a backlog and expected project we had to close, the third and fourth quarter should really show, you know, I think how the company is going to get back on track from an earning standpoint, the profitability standpoint, where, you know, we can see how we're going to utilize that leverage and, you know, push as many gross margin dollars to the bottom line as possible. So holding OPEX, you know, flat or as low as possible is certainly the objective and not necessarily cutting expense at this point.
Okay. Got it. And then the last one for me, just looking at the balance sheet, cash has declined last five quarters in a row, or net cash, right, has declined. Your indebt has increased. The cash has kind of stayed the same. And I just want to understand, you know, what's the plan to get, you know, cash back to a better place?
You know, can you repatriate some of the cash in some of the JVs, for example, you know any any in any thoughts there yeah there's this is kind of a three prong approach one is certainly to bring back from a dividend standpoint cash at the subsidiaries and at the JV level to just to help increase the amount of cash we have here and ultimately get out of the line of credit the the number one thing that we need to do is we need to increase earnings if you look back you know quarter by quarter what we're doing from an earnings standpoint it's you're not going to be able to build your cash back you know obviously in fiscal 25 um you know we would with virtually no earnings um you know the last time you know fiscal 24 we certainly generated uh you know we generated 60 cents a share which helped from a cash standpoint but obviously everything we did in 2005 from an earnings standpoint hurt us you know a big component to our income is the equity income, which obviously isn't cash coming in. It's the dividends that come in from the equity income that ultimately get you there. And so the goal is to increase earnings, which is I think what you're going to see in Q3 and Q4, which will help pay down the debt. The other item is the investing section from a cash flow standpoint. We've made, as I kind of explained earlier in the call we made significant investments you know in PP any items as far as the building next door and the S&P system that we had cash out the door to fund the actual investments that we're going to be making you know from a cash flow standpoint over the next few years is going to be significantly smaller than we've done in the past two years and I think that's going to ultimately that that's also going to significantly put more cash back on the books. So I think the trend is going to start kind of with Q3 and Q4 to work on reducing the debt exposure.
I think that's it for me. Thanks so much. Thanks, Gus.
Operator
And I'm showing no further questions. I would now like to turn the call back to management for closing remarks.
I just want to thank everybody for coming out this morning and wish you the day.
Operator
And this concludes today's program. Thank you for participating. You may now disconnect.
