Northern Technologies International Corp - Earnings Call - Q2 2025

Executive Summary

• Q2 FY2025 revenue was $19.07M, down 8.5% YoY and down ~10.6% QoQ; GAAP diluted EPS was $0.04 and non-GAAP adjusted EPS was $(0.03). Versus S&P Global consensus, revenue missed $20.20M* and EPS missed $0.06* (GAAP $0.04 vs $0.06; adjusted $(0.03) vs consensus primary EPS)*.
• Gross margin contracted 440 bps YoY to 35.6% (from 40.0% prior year) driven by less profitable mix and Natur‑Tec pricing actions; sequentially down vs Q1’s 38.3%.
• Management is prioritizing cash discipline: temporary dividend cut to $0.01 (from $0.07) and focus on debt reduction; ERC cash of $1.14M boosted GAAP other income this quarter.
• Near-term outlook cautious (“flat” core business for the current quarter) with expected 2H rebound in Natur‑Tec and ZERUST oil & gas supported by pipeline and seasonal patterns.
• Key catalysts: dividend reset (capital allocation signal), margin trajectory stabilization, 2H oil & gas ramp, and progress on API/NACE standards acceptance timing (late FY2025).

What Went Well and What Went Wrong

What Went Well

• NTIC China showed resilience: Q2 net sales +8.1% YoY to $3.7M; management noted limited tariff exposure and stabilization toward FY2021–22 levels. Quote: “NTIC China… increased by 8.1% to $3.7 million… sales in this geography continue to stabilize” — G. Patrick Lynch.
• Operating cost control sequentially: Q2 OpEx down 6.9% QoQ, while YoY increase reflects strategic O&G investments; balance sheet liquidity remains solid ($5.1M cash, JV cash ~$13M).
• Strategic pipeline: management reiterated growing oil & gas pipeline across geographies and a new Natur‑Tec food packaging technology opportunity with positive trial results.

What Went Wrong

• Top-line and EPS misses vs consensus: revenue $19.07M vs $20.20M*; GAAP diluted EPS $0.04 vs $0.06*, non‑GAAP adjusted EPS $(0.03)*. Natur‑Tec price reductions (4–8%) pressured gross margin; less profitable sales mix weighed as well.
• ZERUST oil & gas sales fell 28.5% YoY to $1.55M on seasonality and prior-year timing benefit; JV sales/operating income also declined (JV net sales −15.7% YoY to $19.8M; JV OI −31.8% to $1.69M).
• Europe headwinds persisted (EXCOR Germany weakness tied to elevated energy costs and auto market pressure), dampening JV contributions.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Northern Technologies International Corporation's Second Quarter 2025 Earnings Conference call and webcast. At this time, all participants are on 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 11 on your telephone. You will then hear an automated message advising your hand is raised. Please note that today's conference is being recorded. As part of the discussions today, the representative 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 Provisions. 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-K, 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 over to your speaker for today, Mr. Patrick Lynch, NTIC Chief Executive Officer. Please go ahead, sir.

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 second quarter 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 second quarter fiscal 2025 financial results, provide a brief business update, and then conclude with the question-and-answer session. Please note that when we discuss year-over-year performance, we are referring to the second quarter of our fiscal 2025 in comparison to the second quarter of the last fiscal year. Our fiscal 2025 second quarter performance demonstrates the increasing intensity of the headwinds we are currently facing, including recent unprecedented changes in U.S. trade and economic policies, the seasonality of our industrial and oil and gas business, and the timing of certain Natur-Tec orders.

Furthermore, regardless of this considerable uncertainty, we believe we are poised for a rebound in Natur-Tec and Zerust oil and gas sales in the second half of the fiscal year. These expectations are supported by our current sales pipeline and demand from new and existing customers within our Natur-Tec and Zerust oil and gas segments. NTIC and our joint venture partners have successfully navigated difficult economic cycles before, and we believe we enter this period from a position of strength as a result of our asset-light and profitable business model, experienced leadership team, and size, scale, and diversity of our business. In addition, it is also important to note that we continue to have a solid cash position with over $5 million in cash and cash equivalents and available for sale securities in the U.S., as well as $13 million of additional cash at our international joint ventures.

Our disciplined approach to managing cash, including adjustments to our quarterly dividend and prioritizing debt reduction, is intended to position us to seize future growth opportunities in our oil and gas and compostable plastics businesses. We believe that our strategic growth priorities and financial discipline will drive sustainable growth and long-term shareholder value. With this overview, let's examine the drivers for the second quarter in more detail. For the second quarter ended February 28, 2025, our total consolidated net sales decreased 8.5% to $19.1 million as compared to the second quarter ended February 29, 2024. Broken down by business unit, this included a 28.5% decrease in Zerust oil and gas net sales, an 11.8% decrease in Natur-Tec net sales, and a 3.7% decrease in Zerust industrial net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements.

After a year-over-year increase in the fiscal 2025 first quarter, total net sales for the fiscal 2025 second quarter by our joint ventures decreased year-over-year by 15.7% to $19.8 million. We believe this year-over-year decline in joint venture sales reflects the continued impacts of high energy prices and regional economic pressures in the European economy, as well as increased uncertainty related to U.S. trade and economic policies and the potential disruptive impacts these will have on global supply chains. I am encouraged by the continued improvement of sales trends at our wholly owned NTIC China subsidiary. Fiscal 2025 second quarter net sales at NTIC China increased by 8.1% to $3.7 million. The slight decline compared to first quarter sales levels was due to the seasonal impacts of the Chinese New Year.

Overall, sales in this geography continue to stabilize and are approaching quarterly sales levels that we last experienced in fiscal 2021 and 2022. The majority of NTIC China's production and sales are for local consumption, and therefore we believe NTIC China's exposure to tariffs, including those recently imposed by the U.S., is limited. We expect demand in China will continue to improve in fiscal 2025, helping to support higher incremental sales and profitability in this market. In addition, we are committed to the long-term opportunities the Chinese market provides our industrial and bioplastic segments, and we continue to take steps to enhance our operation 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 and gas.

Zerust oil and gas sales were $1.5 million in the second quarter of fiscal 2025, compared to $2.2 million in the same period last year. Please remember, however, that last fiscal year's second quarter benefited from certain oil and gas customers shifting deliveries from the first quarter to the second quarter. Seasonality and the timing of orders can impact quarterly comparisons, which is why we encourage investors to look at Zerust oil and gas sales on a trailing 12-month basis. On a trailing 12-month basis, Zerust oil and gas sales were $8.6 million, a 7.2% increase from $8 million for the trailing 12-month period at February 29, 2024. Our sales pipeline continues to grow among both new and existing customers for our Zerust oil and gas solutions, which still focus primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion.

While we continue to expect seasonal ordering patterns to drive fluctuations in Zerust oil and gas sales, we believe we are well-positioned for compelling growth in this sector through fiscal 2025 and beyond. As I mentioned on prior calls, we made strategic investments to expand our oil and gas sales infrastructure during the first quarter to support accelerated Zerust oil and gas sales that we expect to start occurring in the second half of fiscal 2025. Turning to our Natur-Tec bioplastics business. Natur-Tec sales were $5 million in the second quarter of fiscal 2025, compared to $5.6 million in the same period a year ago. We believe the 11.8% year-over-year decline in Natur-Tec sales was due to a couple of factors, including order timing and seasonal variation. While we are assessing the near-term impacts tariffs recently imposed by the U.S.

and those that may be imposed by other countries in response may have on Natur-Tec sales, we believe our long-term market opportunities remain strong. In addition, U.S. organic waste diversion mandates and waste management rules are created at the local municipality and state levels, so we do not expect changes to federal priorities to impact local U.S. demand for our compostable solutions. We are also working on several large opportunities for our Natur-Tec solutions that we believe could help to reaccelerate our growth in the coming quarters. As we navigate dynamic global and economic uncertainty, please consider that NTIC's long-standing leadership team has previously navigated several challenging economic periods, including the Great Recession of 2008 and 2009, and more recently, the COVID-19 pandemic. Since then, the size, scale, and diversity of our business has increased.

Finally, the strength of our balance sheet and benefits of our asset-light business model provide us with significant flexibility and resources to navigate this type of economic and business uncertainty. We remain confident in the direction we are headed and that our strategic growth priorities and financial discipline will create sustainable growth and long-term value for our shareholders. 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 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 2025 second quarter.

Matthew Wolsfeld (CFO & Corporate Secretary)

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 8.5% in the second quarter of fiscal 2025 to $19.1 million because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures decreased 15.7% in the second quarter compared to the prior fiscal year period. Joint venture operating income decreased 31.8% compared to the prior fiscal year period, primarily due to a decrease in equity income from joint ventures and fees for services provided to joint ventures, both of which were primarily driven by lower sales at many of NTIC's joint ventures.

Total operating expenses for the fiscal 2025 second quarter increased 2.4% compared to the prior fiscal year period to $8.8 million, primarily due to strategic investments we're making to support expected growth in the second half of the year within our oil and gas business and, to a lesser extent, increased personnel costs across the company. On a sequential basis, second quarter operating expenses were down 6.9% from the first quarter. As a percentage of net sales, operating expenses were 46.2% for the second quarter compared to 41.3% for the prior fiscal year period. Gross profit as a percentage of net sales was 35.6% during the three months ended February 28, 2025, compared to 40.0% during the prior fiscal year period. The 440 basis point decline was primarily a result of a less profitable mix of sales.

NTIC reported net income of $434,000 or $0.04 per diluted share for the fiscal 2025 second quarter compared to $1.7 million or $0.17 per diluted share for the fiscal 2024 second quarter. NTIC recognized other income of $1.1 million during the three and six months ended February 28, 2025, due to the receipt of the employee retention credit payment. For the fiscal 2025 second quarter, NTIC's non-GAAP adjusted income was a loss of $300,000 or $0.03 per diluted share compared to non-GAAP adjusted income of $1.8 million or $0.19 per diluted share for the fiscal second quarter of 2024. A reconciliation of GAAP to non-GAAP financial measures is available on our second quarter fiscal year 2025 earnings press release that was issued this morning.

As of February 28, 2025, working capital was $21.4 million, including $5.1 million in cash and cash equivalents, compared to $23.7 million, including $5.0 million in cash and cash equivalents as of August 31, 2024. As of February 28, 2025, we had outstanding debt of $8.1 million. This included $5.4 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 in the remainder of fiscal 2025. We generated $3.2 million in operating cash flows for the six months ended February 28, 2025. At quarter end, the company had $25.0 million in investments in joint ventures, of which 52% or $13 million was in cash, with the remaining balance primarily invested in working capital.

During fiscal 2025 second quarter, NTIC's board of directors declared a quarterly cash dividend of $0.07 per common share that was payable on February 12, 2025, to stockholders of record on January 29, 2025. As Patrick commented earlier in the call, to manage our cash position, reduce debt, and enhance flexibility, we're taking a disciplined approach to capital allocation and temporarily adjusting our quarterly dividend to $0.01 per share effective with our next quarterly dividend. To conclude our prepared remarks, we're committed to our long-term growth opportunities. We're confident that our strategic priorities and financial discipline will drive sustainable growth and create value for our shareholders. With this overview, Patrick and I are happy to take your questions.

Operator (participant)

Thank you. As reminded to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, you may press star 11 again. Please stand by while we compile the candidate roster. Now, first question coming from the line of Tim Clarkson with Van Clemens & Co. Incorporated, KeyBanc Capital Markets.

Timothy Clarkson (Stock Broker)

Hey, guys. Obviously, a tough environment to do business. Just wanted to ask, I know we're making some pretty big investments on the oil and gas on the sales team. How are those working out? I mean, how many people have we hired? Have we changed out any of those people yet? Are they all performing the way we expected?

Patrick Lynch (CEO)

It's an extended question. Yes, we hired, I believe it was eight people. Some of them did not work out, and they have left the company since then. We're expecting the impact to start showing in the second half of this year. Other than that, it's going ahead full steam.

Timothy Clarkson (Stock Broker)

Okay. Good. In terms of the compostable, you mentioned that there's some potential deals in that area that could reignite business there. Are those in new areas, or what's the dynamic behind those?

Patrick Lynch (CEO)

One of the opportunities is just a large distributor in the United States that we've added, which is going to add significant business for us. Also, there's a new line of technology in food packaging that we're currently building. I think the trial results are looking good, and if it works out, it should be a significant opportunity for us.

Timothy Clarkson (Stock Broker)

Okay. Good. Good. In terms of, I see that you got this employee retention payment. Was that an actual cash payment, or was that just an accounting adjustment?

Patrick Lynch (CEO)

That was an actual cash payment.

Timothy Clarkson (Stock Broker)

Okay. Good. All right. It looks like your—how's your core business doing right now? Is it still de-accelerating, or is business about the same, slightly worse, or what are your expectations for this quarter with your core business?

Patrick Lynch (CEO)

It's going to be flat.

Timothy Clarkson (Stock Broker)

Flat might be good. All right. Thank you. I'm done with my questions.

Patrick Lynch (CEO)

Yeah. Thanks, Tim.

Operator (participant)

Thank you. Now, our next question coming from the line of Gus Richard Northland Capital Market, Field and Snowben.

Gus Richard (Managing Director and Senior Research Analyst)

Yes. Thanks for taking the questions. Just on the gross margin, it was down fairly significantly year over year. Natur-Tec actually was down as a percentage of revenue. I am just sort of wondering, $500,000 of oil and gas, the loss of that, was that the pressure in gross margin, or? A little bit of color there would be helpful.

Matthew Wolsfeld (CFO & Corporate Secretary)

Yeah. There are two main impacts from a gross margin standpoint. The gross margin across the traditional Zerust industrial business has remained relatively steady, and we have not seen significant deviations there. I'll say that there was increased pricing pressures from competitors in the Natur-Tec business. We have decreased our top-line sales price probably on an average of anywhere from 4%-6%, even up to 8% in some areas, to maintain competitive and to kind of keep that business. That has been one of the impacts to gross margin. You'll note that over the past two years, we have been able to increase that gross margin from the lower 20% up into the higher 30 plus, 35%. We saw a little bit of pullback on the gross margin at the Natur-Tec business to what I would say is more of a mean level.

Additionally, from the oil and gas business, gross margins remained flat. Obviously, with gross margin sales being down year over year, that is just the weighted average of the product today.

Gus Richard (Managing Director and Senior Research Analyst)

Got it. Very helpful. Thank you. Just on the niche tech opportunity that you talked about, can you add a little bit more color with the application might be? Is it resin versus finished product? Is it cutlery or some other product category?

Patrick Lynch (CEO)

It's food packaging.

Gus Richard (Managing Director and Senior Research Analyst)

Sorry?

Patrick Lynch (CEO)

It's food packaging.

Gus Richard (Managing Director and Senior Research Analyst)

Okay. Got it. Got it. Very helpful. All right. That's it for me. Thank you.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press star 11 and wait for your name to be announced. Our next question coming from the line of Zach Liggett from Desmond Liggett Wealth Advisors, Field and Snowben.

Zach Liggett (Principal)

Hey, good morning. Thanks for taking the question. Could you give us some more color on XCOR and what's happening there and what levers you have to affect change? I appreciate macro is very difficult, but any color on levers you have to affect change and the outlook for dividends to improve from those joint ventures. Thank you.

Patrick Lynch (CEO)

You've been mentioning export Germany specifically. The problem is that the German economy and more broadly the European economy has been suffering from the fact that with the Ukraine crisis, the cost of energy has gone up dramatically in Europe, so much so that certain plants that are high-energy users, let's say foundries, steel mills, etc., are not profitable to operate at all. A lot of these manufacturing plants are actually shutting down and laying off their workers. That's an ongoing situation that's not going to change very soon in Germany. XCOR, I hope that the decline is going to level off at some point in the not too distant future. For right now, it's going to be more of the same for the foreseeable future.

Matthew Wolsfeld (CFO & Corporate Secretary)

Okay. Thank you.

Operator (participant)

Thank you. Our next question coming from the line of Gregory Weaver with Invector Capital Management, Field and Snowben.

Gregory Weaver (CEO)

Hey, good morning, guys. Could you give a little more color about the second-half ramp you're expecting on oil and gas in terms of applications and maybe some chunky customers ordering?

Patrick Lynch (CEO)

It's going to be, again, the oil storage tank bottoms and pipeline casings primarily in various geographies around the world. In terms of lumpy customers, I mean, we are working closely with some very large companies that are obviously looking into a number of quite a large number of tanks and bottoms and pipeline casings. I'm not exactly sure how many in total, but it should be a decent pickup.

Gregory Weaver (CEO)

All right. In terms of the sales guys that you hired, is that geographic or any segment, or how do you divide that up?

Patrick Lynch (CEO)

It's all over. We added in North America, in the Middle East, Asia, and in Europe.

Gregory Weaver (CEO)

Has anything come out of the BP relationship in terms of other customers or other geographies in which they're interested?

Patrick Lynch (CEO)

BP, we're talking to them in various locations, but nothing that's significant that's come out of it yet, no.

Gregory Weaver (CEO)

Okay. Lastly, how about Brazil in terms of, I guess, that kind of getting straightened out and back on track, and you had some pretty good activity there?

Patrick Lynch (CEO)

Yes. Brazil is actually doing very well with the oil and gas industry. They're picking up some significant business, and their sales are ramping up very nicely.

Gregory Weaver (CEO)

Okay. It sounds like this is the business that's going to make the difference here in terms of the numbers in the second half anyway. Hopefully, we can get some deals closed.

Patrick Lynch (CEO)

Yes. I agree.

Gregory Weaver (CEO)

Okay. Thanks, guys. Good luck.

Operator (participant)

Thank you. I am showing 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.

Patrick Lynch (CEO)

Thanks again for everybody for calling in this morning. I hope you have a nice rest of the week.

Operator (participant)

Thank you for joining the Dawson Conference for today. Thank you for your participation, and you may now disconnect.