Northern Technologies International Corp (NTIC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern Technologies International Corporation fourth-quarter 2010 earnings conference call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). And as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Matthew Wolsfeld. Please go ahead.

Thank you and good morning. Today we'll discuss our fiscal 2010 operating results and provide fiscal 2011 guidance. I appreciate you joining me today. As introduced, I'm Matthew Wolsfeld, NTIC's Chief Financial Officer. Patrick Lynch, NTIC's President and CEO, is present on the call, but currently in Tokyo.

To mitigate for the possibility of any technical difficulties, I'll discuss the operating results and provide the fiscal 2011 guidance. However, Patrick will be available to answer questions during the Q&A portion of the call.

As many of you are familiar with NTIC now, we typically have not done quarterly conference calls or live audio webcasts to discuss our financial results and have not typically issued guidance. Depending on how this call goes today, and if you, our investors, find this helpful, we intend to do these webcasts on a quarterly basis going forward.

With respect to financial guidance, we'll discuss today our sales and earnings guidance for fiscal 2011 and going forward we intend to update our annual guidance on a quarterly basis. We do not intend to provide guidance today or going forward regarding our anticipated quarterly results.

We issued a press release yesterday afternoon regarding our fiscal 2010 results. A copy of that press release is available on our website at www.NTIC.com. The agenda for this call will include a business update, a review of our financial results, and we'll provide annual sales and earnings guidance for fiscal 2011 followed by a brief question-and-answer session.

Before we begin I'd like to remind you that during the course of this webcast we'll make forward-looking statements regarding our future financial and operating results and our business plans, objectives and expectations. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and NTIC desires to avail itself of any protections of the Safe Harbor for these statements.

Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q. We suggest that you read these reports and other future filings that we may make with the SEC. We disclaim any duty to update or revise our forward-looking statements.

Overall we're very pleased with our fiscal 2010 sales and earnings, especially in comparison to our results for fiscal 2009. We achieved significant sales growth in both our direct operations and at our various international joint ventures. In addition to sales growth we returned to profitability during 2010 and had several key milestones as we continued our push into both the ZERUST oil and gas markets as well as the biodegradable compostable product markets.

During fiscal 2010 our consolidated net sales increased over 67% to $14.4 million compared to $8.58 million during fiscal 2009 due to increased demand primarily as a result of the economic recovery of the domestic manufacturing sector, the addition of many new customers and the consolidation of our joint venture in Brazil, which we refer to as Zerust Brazil on our consolidated financial statements.

As we previously disclosed, we did not lose significant customers during fiscal 2009 during the recession. Our existing customers simply stopped or dramatically decreased their normal ordering levels. As the recovery took place in fiscal 2010, a majority of our existing customers increased their product orders back to their pre-recession levels.

Additionally, the decrease in sales during fiscal 2009 forced our sales force to target new markets outside of our traditional automotive and industrial areas of expertise. As a result, once the recovery started to materialize our ZERUST sales rebounded during fiscal 2010 to levels slightly higher than our pre-recession levels. We intend to continue this diversification of our sales effort out of the traditional automotive and industrial areas.

Our international joint ventures saw a similar trend in their sales during and also coming out of the recession. The results from our joint ventures played a large part in our return to profitability in 2010. We saw joint venture sales increase over 37% to almost $85 million in total.

Although also as a reminder, the sales of our joint ventures, other than our Brazilian joint venture which we now consolidate with our results, are not included in our consolidated net sales and are not combined with our sales in our consolidated financial statements or in any description of our sales.

The 37% increase in sales by our joint ventures led to a 130% increase in total income provided to us by our joint ventures in the form of both equity income and fees for services provided to our joint ventures and should result in a significant increase in the amount of dividend cash we receive from our joint ventures during fiscal 2011 as compared to 2010.

Let me comment on our very recent decision to consolidate the operations of our Brazilian joint venture, which we refer to as Zerust Brazil, with our operating results. As you probably know, we typically own 50% -- we typically own a 50% ownership interest in our joint ventures and do not otherwise control them. And thus do not consolidate their operating results with our operating results in our consolidated financial statements.

In connection with the preparation of our consolidated financial statements for fiscal 2010 we made the determination to consolidate Zerust Brazil since we hold 85% of the equity and 85% of the voting rights of this entity. We previously had not consolidated Zerust Brazil and instead accounted for our investments under the equity method.

We owned only 50% and that's less than a majority of the equity and voting rights of Zerust Brazil prior to September 2006. Although we acquired an additional 35% ownership interest in Zerust Brazil in September 2006 and thus own 85% of the equity and voting rights of the entity.

Prior to fourth quarter fiscal 2010 we held the 35% ownership interest with the intent of finding a new joint venture partner and thus believed our majority control in Zerust Brazil would be temporary and determined not to consolidate Zerust Brazil in light of the fact that the operations would need to be de-consolidated once we found a new joint venture partner. And we believe that the impact of not consolidating Zerust Brazil in our per consolidated financial statements was immaterial.

During the fourth quarter of 2010, however, we decided to stop actively looking for a new joint venture partner in Brazil and decided to fully consolidate the financial results for the entire fiscal year ended August 31, 2010, especially in light of the Petrobras contract and the effect of such contracts on our fourth-quarter of fiscal 2010 operating results and our anticipated operating results going forward, specifically in the oil and gas business.

Fiscal 2010 consolidated net sales include $1.9 million of sales made by Zerust Brazil; of those sales almost $775,000 in sales were made to the oil and gas industry. In our annual report on Form 10-K for fiscal year ended August 31, 2010 which we intend to file today we'll describe the pro forma impact of our fiscal 2009 financial results had we consolidated Zerust Brazil so you can see the impact and the numbers.

As a reminder and while we're on the subject, other than our joint venture in Brazil our fiscal 2010 consolidated financial statements do not include the financial accounts of any of our joint ventures. This is because despite one additional joint venture, Polymer Energy LLC joint venture which I'll discuss in a moment, we do not control our joint ventures. We typically own a 50% ownership interest and thus have no voting or other significant control over them.

With respect to Polymer Energy LLC, we still have not consolidated this entity on our consolidated financial statements for fiscal 2010, fiscal 2009, or any prior period since it has had limited activity since its inception in 2003. We continue to believe that the impact of not consolidating this entity on our consolidated financial statements has been immaterial.

During fiscal 2010 the only financial activity that Polymer Energy LLC was the receipt of an immaterial amount of license fees which were distributed to its owners in proportion to their respective ownership percentages.

Our earnings per share for fiscal 2010 were $0.61, which is a dramatic turnaround from the $0.89 per share loss in fiscal 2009. This strong profitability was driven primarily by our solid top-line revenue growth, as noted previously, and a significant improvement in income generated from our various joint ventures. Our bottom-line results would have been slightly higher had we not taken a $360,000 non-cash write down of our Natur-Tec inventory during fourth quarter of fiscal 2010 to its current market value which I'll discuss in more detail later in this webcast.

Getting into the oil and gas market -- I've already discussed to some extent our core ZERUST corrosion prevention business and its rebound during fiscal 2010 as compared to fiscal 2009. I'd like to turn now to discuss more specifically our efforts with respect to expanding our ZERUST corrosion prevention technology into the oil and gas industry during fiscal 2010.

During 2010 we had some key milestones in our oil and gas business. Our Brazilian joint venture won its first commercial order for Flange Savers with Petrobras in Q4 of fiscal 2010. This contract was for $1.1 million to provide Flange Savers to be used on six offshore platforms in Brazil. As mentioned previously, we now consolidate the financial results of our Brazilian joint venture, Zerust Brazil, into our results.

Of this $1.1 million contract we recognized sales of $618,000 during Q4. In addition, in August 2010 we received a second PO for $300,000 -- for $300,000 from a different operating unit of Petrobras to provide Flange Savers for two additional platforms. We anticipate invoicing Petrobras for the remaining balance of the first contract and the full second contract during fiscal 2011.

Additionally, we anticipate more Flange Saver orders from Petrobras during fiscal 2011 as Petrobras rolls this product out to more of its platforms.

The sales process with respect to our oil tank top rust protection solution has been much slower than expected. We currently have installations on three tanks at the Petrobras REDUC facility. However, additional implementation has been slow. We're finding that the sales and contract approval process for our oil tank top roof protection solutions simply involve a longer timeline than we previously expected.

Regarding PEMEX, it's our understanding that initial indications from PEMEX are that they have been impressed with the performance results of our ZERUST oil and gas solutions. We continue to work with PEMEX to convert the trial we started in fiscal 2010 into commercial orders for both Flange Savers and our oil tank top roof protection solutions.

In addition to Flange Savers and oil tank top roof protection solutions, we've also been successful in selling some of our existing core ZERUST products to customers in the oil and gas industry. We recently signed two contracts to provide core ZERUST products to two oil and gas industry suppliers. We intend to continue to focus on this aspect of the oil and gas industry as well during fiscal 2011.

After having focused on adapting our core technologies for a few years now to meet the requirements of the oil and gas industry, we've been more recently focusing on selling our ZERUST corrosion prevention solutions and products in that industry. We continue to believe that this market represents an excellent and real opportunity for us to diversify from our manufacturing base to a new industry vertical with much potential.

We also anticipated when we first entered the oil and gas business a long sales cycles. And this has definitely proven to be true, especially with respect to our oil tank top -- our oil tank top roof protection solutions. Accordingly, although we anticipate continued growth and expansion in this market, we believe the effect on our financial results from sales in the oil and gas industry will not be immediate and may be choppy with spikes in our sales when opportunities are converting.

Now turning to our Natur-Tec vinyl plastic business. Sales of our Natur-Tec products were somewhat underwhelming during fiscal 2010 compared to our internal expectations. During the economic crisis many commercial entities either slowed or suspended their green sustainability initiatives.

We anticipated achieving a higher level of sales than the $572,000 or 4% of our fiscal 2007 consolidated net sales that were derived from ZERUST sales -- that were derived from sales of Natur-Tec products. However, there were still several bright spots for Natur-Tec, and we believe there are still significant opportunities.

We're continuing to strengthen and expand our West Coast distribution network in California while expanding our industrial distribution reach to geographical green hotspots such as Oregon, Washington, Minnesota and New England. We now sell our Natur-Tec products through a network of over 20 distributors and independent manufacturer sales reps.

Additionally, we continue to target key national and regional retailers using our independent sales agents. That being said, we realize that this market will take time to develop and bring Natur-Tec to significant sales and profitability levels.

I'll now summarize our fiscal 2010 financial results and fiscal 2011 sales and earnings guidance, starting with ZERUST.

Net sales of our ZERUST products and services increased 72.4% to $13.8 million during fiscal 2010 compared to just over $8 million during fiscal 2009. This increase was due to increased demand primarily as a result of the recovery -- to some extent of the domestic manufacturing sector and the addition of new customers outside the automotive industry, and the consolidation of $1.9 million in sales from Zerust Brazil in our consolidated financial statements.

Sales of Natur-Tec products increased just over 6% to $570,000 during fiscal 2010 compared to $538,000 in fiscal 2009. This increase was primarily due to the addition of new distributors on the West Coast, partially offset by several large stocking orders of Natur-Tec products that occurred early in 2009 that were not repeat orders.

Cost of goods sold as a percentage of net sales decreased to just over 65% in fiscal 2010 compared to 65.5% in fiscal 2009, primarily as a result of the slightly improved margins resulting from fixed costs spread over increased net sales, partially offset by a $360,000 write-down of the Natur-Tec inventory to its market value.

With respect to the Natur-Tec inventory write-down, we anticipated a greater demand for our Natur-Tec products than we experienced during the past couple of fiscal years. Accordingly, we've been unable to sell our Natur-Tec inventory at the times and prices and in the volumes that we initially anticipated.

Since our Natur-Tec raw material and finished goods inventory was purchased and manufactured previously when the base resins were significantly more expensive, we needed to reduce the value of our Natur-Tec inventory during the fourth quarter of fiscal 2010 to reflect its net realizable value.

As previously mentioned, our international joint ventures did well in fiscal 2010 compared to fiscal 2009. We had equity and income of joint ventures of $3.9 million during fiscal 2010 compared to equity and income of joint ventures of just $367,000 during fiscal 2009. This increase was due to the increased profitability of our joint ventures primarily resulting from the increased sales and cost control measures put in place during the last two quarters of fiscal 2009, many of which remained in place during fiscal 2010.

We also recognized increased fee income for services provided to our joint ventures which amounted to just over $4.7 million during fiscal 2010 compared to just under $3.4 million during fiscal 2009 representing an increase of almost 39%. This increase was due primarily to the 37% increase in net sales of our joint ventures.

Our total operating expenses increased 9.2% during fiscal 2010 compared to fiscal 2009, primarily as a result of the consolidation of Zerust Brazil on our consolidated financial statements. The increased sales efforts in both ZERUST and Natur-Tec markets increased general and administrative costs due to increased compensation costs as a result of an increased number of employees and increased base salaries. Additionally, there was an increased management bonus expense in each case compared to fiscal 2009.

We continue to invest heavily in R&D efforts and we incurred just over $3.3 million in R&D expense during fiscal 2010 compared to $3 million in fiscal 2009. Net income was just over $2.6 million, or $0.61 per diluted common share for fiscal 2010 compared to a net loss of over $3.3 million or $0.89 per diluted common share at fiscal 2009.

As of August 31, 2010 our working capital was over $5.9 million, including over $1.77 million in cash and cash equivalents compared to a working capital of over $2.7 million including $138,000 in cash and cash equivalents as of August 31, 2009. As of August 31, 2010 we had no borrowings outstanding under our $2.3 million demand line of credit.

And as you may know, our term debt for our corporate headquarters becomes due May of 2011. At this point we anticipate refinancing the debt at a lower interest rate than the current fixed-rate of just over 8% per year.

Turning now to our guidance for net sales and earnings for fiscal 2011, as detailed in yesterday's press release, for the fiscal year ending August 31, 2011 we expect consolidated net sales to range between $18 million and $19.5 million and net income of between $3.6 million and $3.8 million or between $0.84 and $0.88 per diluted common share.

We anticipate both sales and profits to ramp up slightly from Q1 of fiscal 2011 to Q4 of fiscal 2011. However, we anticipate, and historically there's been, a significant amount of volatility in our quarterly earnings per share numbers.

This is largely due to the financial performance of our joint ventures and the financial performance of our newer businesses, including the ZERUST oil and gas business and our Natur-Tec bioplastics business which seems to fluctuate more on a quarterly basis than our traditional ZERUST business. This is primarily why we intend to provide only annual financial guidance. As we grow we anticipate some of the volatility to dissipate and our earnings per share to be more predictable.

With that update I will now answer, and Patrick will answer, any questions you may have. Operator, I think we're ready to take some questions.

(Operator Instructions). Ned Borland, Hudson Securities.

Good morning, guys. First just a clarification on the Brazilian consolidation. The $1.9 million, that's one year's worth of sales or was that the fourth quarter?

No, that's one year's worth of sales. We had traditionally -- or just kind of the breakout of Brazil, they did roughly an average of $300,000 in Q1, Q2 and Q3 and did just short of $1 million in Q4 to bring the total up to the $1.9 million or just under $2 million in sales.

Okay, so the difference there would be some of the opportunities for Petrobras?

That's what -- in Q4 is when we had the sales of the Flange Savers on that first commercial order.

Right, okay, okay. Add the balance of that is going to be recognized in the next couple of --

Correct.

-- quarters along with the additional contract.

We recognized $600,000, just over $600,000 in sales on the contract -- on the first $1.1 million contract which leaves $500,000 left to be sold and invoiced in 2011. And then the full second contract, which is a $300,000 contract. So there's $800,000 of Flange Saver orders that are yet to be fulfilled that we hope to fulfill in 2011 in Brazil.

And I guess with the discussion about the tank tops, you're sort of stuck at this level of three tanks. What has sort of thrown sand in the gears of this process? Because it seems like it's an almost limitless opportunity, even with Petrobras here.

Patrick, do you want to comment on that?

Sure. First of all, the Flange Savers that we're selling to the offshore rigs have a completely different management team that's overseeing that versus more the refinery side. And it's also while the Flange Saver is considered a consumer -- more maintenance article, the tank tops are I'll call it going to the capital equipment purchasing cycle and consequently it takes a much longer decision-making process.

Now over the last two years, especially with the economic downturn, the oil industry has been suffering and they have been coming a little bit more averse to investing in something new versus just maintaining things the old-fashioned way. And that's why they have been holding back on introducing some of these more (technical difficulty) than they originally anticipated.

Okay. And then switching over to the core ZERUST business and putting aside the oil and gas opportunities for a second. Could you maybe color in some of the diversification you guys have seen? Where you -- a percentage of sales in auto, say pre-downturn versus where it is today? And then what are some of the key (inaudible) markets you've been able to gain some traction in?

Sure. I would say that pre-downturn we were still easily in the 85% range in terms of relying on pure automotive. Over the last years certainly in the United States we've been pushing very heavily into agriculture sales, earth moving equipment, some general machines and things of that nature.

Okay, thank you.

Does that answer your question?

Yes. Yes, that's all I've got. Thanks.

Frank McEvoy, Craig-Hallum.

Good morning, guys, nice quarter. I guess the first kind of question -- I just want to ask a few on the oil and gas opportunity, but I'll just start with the tank tops. So I understand that the sales cycle is taking a bit longer and, Patrick, you talked about maybe how it's a capital budget item and that might impact the sales cycle as well. But are you -- you're still -- as I understand it are you still in the running for these opportunities within Brazil or is there something else they --?

(Technical difficulty). We are currently in negotiations with Petrobras to get more tanks. But it is taking us more time than we originally anticipated. We also have certain trials going on right now with Mexico at PEMEX that we anticipate concluding favorably within the next few months.

One of the things that Matt I think started mentioning in the beginning of the call is we did already get a favorable evaluation report from PEMEX regarding the Flange Savers, and the formal report came out just I think two weeks ago. And so we are now officially in the PEMEX system that allows them now to officially purchased Flange Savers. We haven't got any where yet, but now at least we're cleared for purchases whenever their maintenance crew feels like it.

Okay. But as far as the guidance is concerned, is it fair to say that the tank tops probably are not in the guidance for fiscal 2011?

Only in very limited quantities.

Okay. And then turning to the Flange Savers, I understand you've got the first orders for six rigs and I guess the second order is for two. How many -- can you just remind us how many rigs that Petrobras has that might be -- potentially use the Flange Saver product?

You're looking at about 109 (technical difficulty).

109. And then with respect to PEMEX, what would be the opportunity there in terms of the number of rigs?

I'm told it's about 200 rigs.

Okay. And then in the press release you touched on -- and, Matt, you kind of touched on this too as well in the opening remarks -- some of the activity, field trial activity in other areas outside of Petrobras and PEMEX, most specifically Russia and Singapore and the United States. Can you give us some color on what stage you're at there? And based on your experience at Petrobras and PEMEX how that might affect the timing of the opportunities in those other regions?

Well, we've got the Flange Savers on with four different rig operators -- US rig operators in the Gulf of Mexico right now. And certainly expect these trials to complete within the next three to four months.

With respect to Russia, we got our first large scale trial started just last month, so that probably is going to take another four or five months for that cycle to complete. Singapore is in trial and I have to say I'm (technical difficulty). I don't exactly when that trial (technical difficulty) will be completed.

Okay. And then in terms of the decision process that you go -- you go through the trial, can you guys outline -- you go through the trial, it completes after X period of time, and then it's just sort of -- what is the process end? Does the potential customer go through an evaluation process and look at -- who are you competing against? Are you competing against the standard method of providing corrosion protection or is there someone else out there who's trying to jump in too? Or maybe you can just kind of give us some help --?

There are technologies out there that historically used to try to protect flanges in operation on rigs. We find those to be -- the competitive alternatives to cost more in terms of either material or labor cost (technical difficulty), and also that they don't provide the long-term protection that our solution seems to.

So, we -- the value proposition we're essentially making is we provide better corrosion protection at a lower total cost because both the material and inflation costs it's much simpler and more cost effective than the alternatives out there right now.

Okay, great. And shifting gears here to the write-down -- Matt, I think I heard you say it would have been slightly higher if you didn't have the write-down. If I just do the math, $360,000 on the number of shares you have I get around $0.08 pre-tax. Am I doing that -- am I calculating that correctly?

Yes, that's true. Also one thing so everybody understands is that $360,000 was a direct hit in Q4 to our cost of goods sold. So that also had a several percentage point impact on our cost of goods in Q4 and for the year if you're diving into those numbers.

And so my calculation is that your gross margins would have been a little over 41%?

Correct.

Okay. And then just to follow up on Ned's question earlier, I think maybe -- do you have any revenue impact from new customers, kind of a different way of asking it, what the revenue receipt in your Q4 or fiscal 2010 from customers that you didn't have in the previous year?

That's not something I have at my fingertips right now.

But in terms of the area -- the industries if I heard correctly was that agriculture was one area that was kind of some incremental growth on a year-over-year basis?

(technical difficulty). And also some of our industries -- I prefer not to mention here simply because (technical difficulty) we don't necessarily want to publicize that.

No problem at all. All right, thanks a lot, guys.

All right, thanks, Frank.

Tim Clarkson, Van Clemens.

Hi, guys, nice quarter. Just wanted to go into this Flange Saver technology a little bit. Could you just give me a detail, how much is the cost of one Flange Saver?

It depends on the size and the application. Let's say that an average price would be probably in the $25 range.

Okay, considering how slow the oil industry does stuff, why are people switching to this? What are the -- from the end-user's point of view, what's exciting about using a Flange Saver?

So as opposed to the question of people asking about the tank tops, to make a decision on installing one of our tank -- storage tank top solution, here you're talking about a capital investment that really costs several hundred thousand dollars per installation.

With the Flange Savers you're looking at a very cheap but proven effective solution for reducing maintenance issues on offshore oil rigs which tends to be, given recent history, a fairly hot topic because rust and corrosion on offshore oil rigs tends to keep systems from operating the way they're supposed to which causes safety hazards.

In terms of the convenience factor, how hard is it to put these Flange Savers on? Is it --?

A single operator can put one on in under four minutes.

Okay. And it sounds like it's pretty apparent after what, three, five, six months that either they work or they don't?

We did extensive field trials now both in Mexico and in Brazil where we could show quite clearly that when you use the Flange Saver you got very nice protection, the metal -- certainly underneath the Flange Saver basically they remain clean and pristine in comparison to alternative technologies that were being used in side-by-side comparisons that were failing.

Are there any other ancillary applications in the oil industry that would be in addition to flanges? apart I mean are you looking at other possible applications in that industry?

Actually not necessarily in the oil industry, but there are similar applications in other industries where you have got a flanges like the chemical processing industry.

Okay, all right. I'm done, thanks.

Thanks, Tim.

[Joe Furst], [Furst] Associates.

Good morning, gentlemen, nice quarter. Question, how many flanges are there on like one oil rig? Aren't there quite a few?

The estimate that I was given on a larger size oil rig, you're looking at somewhere of -- actually, Matt, do you have the number handy?

I believe you're looking at about an average of 30,000 flanges per offshore oil rig.

That's good, quite an opportunity. And then one other question. Can you go over the economics of the tank top stuff again? Because it's (inaudible) the economics are so good that it shouldn't be too hard a decision for the oil companies to do this.

Well, the economics work; it's more a question of changing habits and (technical difficulty) talking about is putting people's mind at ease over time that these solutions work over an extended period of time. The field trial we did in Brazil before we got our first contract had already run I believe three years before we got the first contracts.

Now Petrobras is kind of putting us through an extended supplier trial where they want to make sure that we do what we said we were going to do and that the system performs also under contract the way we said it was going to. And I think once we get their (inaudible) concerns to less and as the economy picks up a little bit at the same time that's when we certainly think they're willing start seeing additional installations (technical difficulty) refineries.

Thank you. And you mentioned you are making some progress at some of the Texas oil companies and the (inaudible) oil companies, is that correct?

We are doing that with (technical difficulty) so far we do not have any trial installations so the tank top protection in the United States.

Okay, thanks. Keep up the good work.

Thanks, Joe.

Thank you.

(Operator Instructions). Greg Weaver, Invicta Capital.

Good morning. Thanks for doing the call, I think it's helpful. Just in terms of the guide, Matt, if we could get into that a little. In terms of the ZERUST sales, what kind of growth are you looking at for those?

As far as the ZERUST -- as far as -- well --.

We can go the other way. How about Natur-Tec, do you expect that to grow?

We certainly expect Natur-Tec to grow. At this point in time we are tracking at about $100,000 a month still. So, we did $600,000 or just short of $600,000 last year, so tracking at $1 million. I would hope that we'd at least be able to maintain that which would at least come in at $1.2 million.

Zerust Brazil is a track that did normal level; it should come in over $2 million. We anticipate some oil -- increase in oil and gas revenue from our North American sales, and some growth in our core ZERUST business. So, when you kind of add up a bunch of different -- all those different areas that's kind of how we're getting to the $18 million to $19.5 million.

It seems like the bulk of it is coming from the core ZERUST, not the oil and gas. It's about $4 million, right, that you're looking for incremental revenue?

Sure, yes.

So, from an oil and gas perspective, I mean it sounds like -- for the total was it just Petrobras was the only sales in that segment?

Correct. I mean there were some -- there was probably $150,000 to $200,000 in sales outside of the Petrobras revenue that came in in 2010. So we certainly plan on growing that number. We plan on growing the Petrobras number.

And as we talked about before, the core ZERUST business is continuing to grow and expand with both existing customers coming back and also new products that we have come up with and are taking to market now and anticipate rolling out in 2011. So, there's kind of a lot of different areas where we're trying to capitalize on in 2011.

So assuming the economy kind stays on this path globally speaking, is it realistic to think that our joint ventures as a whole could be growing 15%, 20%?

It's certainly possible; that's what they've trended. They certainly -- if you take the recession out of the picture our joint venture growth has been consistent with that number.

All right.

It will also vary slightly obviously by joint venture. Some might even be growing faster than that.

Okay, great. And in terms of the guide -- what's the tax rate assumed there in terms of your net?

Well, that's also one that's a little bit tricky with our tax rate. As you know, it kind of -- it obviously depends based on dividends received. We generally go off of an effective tax rate after you pull out the equity and earnings and ad back in dividends that we anticipate receiving I think the effective tax rate in this year was a bit of an anomaly, but traditionally it's been somewhere between 15% and 19%.

Okay. So obviously your EPS growth is a lot more robust than it seems on the surface, but you had a negative tax rate this year?

Correct. The one thing to also consider is obviously as we receive dividends in that increase our cash on hand we're obviously paying taxes on dividends at that time. So, I can tell you that we're going to receive significantly more dividends in this year than we did last year, which is going to impact our taxes.

Okay, and just to help me square that up then. So from an OpEx perspective what should we expect? You did a little over 11 this year, I guess that's including all of Brazil, right, for the full year?

Correct.

Should we expect much growth? Are you building out expenses on the oil and gas side?

No. The only thing we're significantly building out from an OpEx standpoint is the hiring of some additional salespeople. We plan to expand a little bit or take advantage of the oil and gas situation. But for the most part our system -- as you know, the Company is really set up to leverage the existing investments that we've made. So I don't anticipate a significant increase in operating expenses during 2011.

Okay, that's it for me. Thanks. Appreciate the call.

Okay, thanks, Greg.

Michael Ross, Van Clemens.

Thanks, guys. Great quarter and I also appreciate the fact that you're doing conference calls now and we encourage you to keep it up. Just one question -- what's the lifecycle of the Flange Savers?

We recommend them for use for up to two years, but generally we find them in use for only one. The reason for that is that the maintenance cycles tend to require that every flange is inspected for fitness for use on an annual basis for safety purposes. And that fitness for use involves a full inspection of a flange. And it can and will include removing the cover, removing the bolts, checking inside the flange and then making sure that the bolts are reattached and then a new Flange Saver will be put over the top of that.

Okay, very good. Thank you.

Joe Furst, Furst & Associates.

On the Natur-Tec business, what level of annual revenue do you need to get to before that becomes profitable?

Go ahead, Matt.

We had expenses in Natur-Tec of right around I want to say $1.4 million. So 30% margins, you're going to need to have sales of around $4 million, $4.5 million in order to break even.

Okay, and the way this is I would think you would want to keep that going for a certain amount of time. At what point would you decide maybe it's not worth continuing the business? Or do you think you have a chance of getting maybe some large customers to get up to that point in the not too distant future? What are your thoughts on that?

And that's kind of exactly what we're looking at. We're looking at different opportunities to get some big wins. The entire -- the entire sales component of the Natur-Tec business up until now and what's included in our 2010 results is all from what I would call organic growth at the distributor level. Sales of several distributors that are mostly on the West Coast have been smaller organic growth compared to -- there are some larger opportunities that we're going after that would certainly help us get to that breakeven point much quicker.

Okay, thank you, good luck with it. Also I commend you for having this conference call and I hope you continue doing it. Thank you.

Great, we intend to. Thanks, Joe.

And I'm showing no further questions at this time, gentlemen.

Okay. Well, I'd like to thank everybody for participating today. In closing, we believe we had a very solid fiscal 2010 and are certainly looking forward to fiscal 2011. During fiscal 2011 we're going to remain focused on achieving our revenue growth in our core ZERUST business and new market penetration in both oil and gas in our Natur-Tec business.

So, we believe this focus should ultimately lead us to higher sales levels and increase profitability. So, I'm looking forward to reporting on our progress throughout 2011. So thank you for listening today and thank you for your interest in NTIC. Take care, everybody.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.