Northern Technologies International - Q1 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to NTIC Q1 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that 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, subsequently 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 hand the conference over to your speaker today, Patrick Lynch. Please go ahead.

Patrick Lynch (CEO)

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 Q1 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 Q1 financial results, provide a brief business update, and then conclude with a question-and-answer session. I'm pleased with the strong start to fiscal 2024, highlighting stable demand across our ZERUST Industrial and Natur-Tec markets. While the timing of certain orders did hold back ZERUST Oil & Gas sales, we experienced higher consolidated sales and a 78% increase in Q1 net income over the prior year's Q1 net income.

I am particularly encouraged by the year-over-year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended. As we mentioned last quarter, we are also making strategic investments to bolster our infrastructure and support our long-term expansion needs, particularly in our oil and gas and in Natur-Tec businesses. These investments are primarily focused on adding sales and support capabilities to enable us to take greater advantage of both current demand as well as what we anticipate unfolding during the course of fiscal 2024 and beyond. We are striving to improve our operational efficiencies across our business, as evidenced by our operating expenses as a percent of net sales holding relatively stable over the past three months. We expect higher profitability and strong operating cash flow to continue throughout fiscal 2024.

During the Q1, cash from operating activities improved year-over-year by nearly 54%. 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 and Gas, and Natur-Tec product categories. We also plan to improve the performance and profitability of our joint ventures across our European and Asian markets. 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 improved profitability.

So with this overview, let's examine the drivers for the Q1 ended November 30, 2023, in more detail. For the quarter, our total consolidated net sales increased 1.1% to a Q1 record of $20.2 million as compared to the Q1 ended November 30, 2022. Broken down by business unit, this included a 4.2% increase in Natur-Tec net sales and a 1.1% increase in ZERUST Industrial net sales. These increases were partially offset by a 7.4% decline in ZERUST Oil & Gas net sales. Total net sales for Q1 by our joint ventures, which we do not consolidate in our financial statements, decreased year-over-year by 4.7% to $23.6 million.

Excor Germany, our largest joint venture, experienced a 17% decrease in net sales compared to the prior fiscal year period, due primarily to the loss of a customer and softer demand within Europe related to higher energy prices and other externalities linked to the war between Ukraine and Russia. Fiscal 2024 Q1 net sales by our wholly owned NTIC China subsidiary decreased on a year-over-year basis by 1.8% to $3.7 million due to weaker economic conditions in that country. On a sequential basis, NTIC China sales increased by 4.1%, which was the third consecutive quarter of higher sales sequentially. After we recorded a small annual net loss at NTIC China last fiscal year, we remain cautiously optimistic that demand in China will improve throughout fiscal 2024, helping to support higher incremental sales and profitability in this market.

While near-term economic conditions in China continue to remain uncertain, we are committed to the Chinese market and continue to take steps to enhance our Chinese operations. 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 Q1 of fiscal 2024 was the seventh 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 Q1, ZERUST Oil & Gas sales were $1.5 million, compared to $1.6 million for the same period last year. The 7.4% year-over-year decline in ZERUST Oil & Gas sales was primarily due to the timing of certain oil and gas projects, which pushed the associated revenue to the Q2.

As a result, we expect Zerust Oil & Gas sales will have a stronger fiscal 2024 Q2 than Q1. Demand remained strong and growing among both new and existing customers for our Zerust Oil & Gas solutions, which today still focus primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another good year for Zerust Oil & Gas as this business further scales and continues to contribute to our overall profitability. Turning to our Natur-Tec Bioplastics business. As expected, Natur-Tec sales remained robust during the Q1 and increased 4.2% year-over-year to a Q1 record of $4.8 million. We expect Natur-Tec sales growth will continue throughout fiscal 2024, supported by favorable demand in North America and India, and significant new customer wins and orders in these geographies.

Globally, we continue to see growing market demand for new applications of certified compostable plastic products and resin compounds, as well as increased interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics. As a result, we believe we are well positioned for long-term sustainable growth within our Natur-Tec Bioplastics business. As you can see, our fiscal 2024 Q1 financial results reflect the progress we are making towards growing our business and improving profitability. 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 is 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 Q1.

Matt Wolsfeld (CFO)

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 1.1% for the fiscal 2024 Q1 to a Q1 record because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures declined 4.7% in fiscal 2024 Q1. Joint venture operating income was down 0.8% 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 at our German joint venture, partially offset by improved profitability across many of our other joint ventures. Total operating expenses for fiscal 2024 Q1 increased 5.2% to $8.3 million, compared to $7.9 million 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 41.2% for the fiscal 2024 Q1, compared to 39.6% for the prior fiscal year period. Gross profit as a percentage of net sales was 36.3% during the three months ended November 30, 2023, compared to 31.8% during the prior fiscal year period. The 450 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures. Net income attributable to NTIC was $896,000, or $0.09 per diluted share, for the fiscal 2024 Q1, compared to $502,000, or $0.05 per share, for the fiscal 2023 Q1.

For the fiscal 2024 Q1, NTIC's non-GAAP adjusted net income was $1 million, or $0.10 per diluted share, compared to non-GAAP net income of $608,000, or $0.06 per diluted share, for the same period last year. A reconciliation of GAAP to non-GAAP financial measures is available in our 2024 Q1 earnings press release that was issued this morning. As of November 30th, 2023, working capital was $22.4 million, including $6.1 million in cash and cash equivalents, compared to $23 million, including $5.4 million in cash and cash equivalents as of August 31st, 2023. As of November 30th, 2023, we had outstanding debt of $5.8 million.

This included $3 million in borrowings under our existing revolving line of credit, compared to $3.6 million as of August 31, 2023. We generated $3.1 million in operating cash flows for the three months ended November 30, 2023, compared to $2 million for the three months ended November 30, 2022. The 53.6% year-over-year improvement in operating cash flow was driven primarily by stronger core profitability and positive changes in current assets and liabilities. Throughout fiscal 2024, we expect to generate continued operating cash flow, which we plan to invest in the growth of our business, support our quarterly cash dividend, and pay down the balance of our existing revolving line of credit.

On November 30, 2023, the company had $24.6 million of investments in joint ventures, of which 61.8% or $15.2 million was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2024 Q1, NTIC's board of directors declared a quarterly cash dividend of $0.07 per common share that was payable on November 15, 2023, to stockholders of record on November 1, 2023. So with this overview, and to conclude our prepared remarks, we continue navigating a fluid business environment while pursuing our product and market and geographical diversification strategies. We're seeing stable North American demand trends and robust growth across our global oil and gas and bioplastic markets.

While the economic environment remains uncertain, we believe fiscal 2024 will be another good year of sales and profitability for NTIC, and we're excited about our long-term prospects. With this overview, Patrick and I are happy to take your questions.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tim Clarkson from Van Clemens & Co., Inc.

Tim Clarkson (Stock Broker)

Good morning, Patrick. Good morning, Matt. How are you guys?

Patrick Lynch (CEO)

Hi. Thanks, Tim. Good to hear from you.

Tim Clarkson (Stock Broker)

Good. Yeah. Anyhow, so just, you know, I always dream in a little bit. I mean, is there a scenario where I know you guys are doing about $1.5 million in the Oil and Gas business? I mean, is there a potential this year to have a $2.5 million or $3 million quarter?

Patrick Lynch (CEO)

Absolutely. That's what-

Tim Clarkson (Stock Broker)

Okay, great.

Patrick Lynch (CEO)

We're swinging for.

Tim Clarkson (Stock Broker)

Yeah. And, the gross margins on that business are higher than the rest of the business, right?

Patrick Lynch (CEO)

Yes, that's correct.

Tim Clarkson (Stock Broker)

Right. Good. My other dream is... But I'll get to that secondly. Just on the compostable again, what would be the typical applications for your compostable plastics?

Patrick Lynch (CEO)

You're talking cutlery, for example, is a major one for injection molded plastic articles and also, bags are a major application that we're servicing in the United States.

Tim Clarkson (Stock Broker)

Right. And one of the major advantages of that stuff is it's stronger than a lot of the competition?

Patrick Lynch (CEO)

Yes, and cheaper.

Tim Clarkson (Stock Broker)

Right. And cheaper. And cheaper. And there's no problem with. I know a couple of years ago, you had problem with getting the material to make that.

Patrick Lynch (CEO)

No, they've added capacity on a worldwide basis, so there's no shortage right now of raw materials for us.

Tim Clarkson (Stock Broker)

Right. Right. Now, is there a scenario where you could link up with another company, either on a marketing basis or on a manufacturing basis, or on a technology basis, or it makes sense to, you could add a piece to the compostable thing and separate and bring it public? I mean, is that a, is there a potentiality of that, or is it still too early?

Matt Wolsfeld (CFO)

Well, I think it's gonna. Two, there's two different questions there, Tim. One, one is ultimately what do we think would happen with Natur-Tec when it hits a level of revenue or level of profitability where it makes more sense to be a standalone entity? I think we've always said that that's certainly a possibility. But, you know, right now, when you look at the total revenues of Natur-Tec, although they're growing, they're not really at a level where I think it's sustainable to be a standalone entity where it would be properly valued. The other part of your question, where you talk about partnering with other companies, that's one of the main ways that we are growing Natur-Tec are by developing, you know, specialty applications for larger companies that are using container load quantities of resin.

And so a lot of the growth that we're expecting to see over the next, you know, 12 months, 24 months, 36 months, comes from working with companies that are looking to use, you know, large container load quantities of of our specialty resin to for them to make their own compostable products. So I think both of those kind of in combination are really what's going to help the overall Natur-Tec, you know, as a company and as a brand, grow. But there's certainly significant opportunities.

In the United States, in Europe, in parts of Asia, where we're seeing these applications sell well.

Tim Clarkson (Stock Broker)

Sure, sure. Now, I know that, you know, on the foreign basis, the Germany was kind of a weak quarter for them for a variety of reasons. Is that starting to come back, or is that still pretty weak?

Patrick Lynch (CEO)

I don't see it coming back immediately. There are two reasons. One, I mean, they lost a very large customer that they've had for a very long time, and that's not that easy to replace. Also, as long as the Ukraine and Russia conflict continues, you're going to have higher energy prices and raw material prices in Europe, which is also putting a bit downward pressure on sales.

Tim Clarkson (Stock Broker)

Right. Right. And in terms of just overall inflation, are you guys seeing you know, better costs across the board with the lower oil prices now and some of the claim that inflation's been moderating?

Patrick Lynch (CEO)

I think, and certainly in the United States, so I think we've got inflation well under control. So, that's not an issue. Like I said, it continues to be an issue in all of Europe, because of in Europe, they get most of their energy, gas and oil from Russia or used to. And until that conflict is settled, it's gonna continue to be an issue in that region. But elsewhere, we're fine in that regard.

Tim Clarkson (Stock Broker)

Right. Right. Got it. I'm done. Thank you.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. At this time, I would now like to turn the conference back over to Patrick Lynch for closing remarks.

Patrick Lynch (CEO)

Well, thank you very much for attending this morning, and I wish you a nice day. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.