Northern Technologies International Corp (NTIC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern first quarter 2011 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) As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Patrick Lynch, President and CEO. Please go ahead.

Good morning, everyone and thank you for participating. Today we will discuss our fiscal 2011 first quarter operating results. I'm Patrick Lynch, NTIC's Chief Executive Officer. Matthew Wolsfeld, NTIC's Chief Financial Officer, is also present this morning.

We issued a press release yesterday afternoon regarding our fiscal 2011 first quarter results. A copy of that press release is available on our website at www.ntic.com. The agenda today will include a business update and a review of our fiscal 2011 first quarter financial results, followed by a brief question-and-answer session.

Before we begin, I'd like to remind you that we will make forward-looking statements today, regarding our future financial and operating results, as well as 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 the 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. We suggest that you read this report and other future filings that we may make with the SEC. We disclaim any duty to update or revise our forward-looking statements.

Now, overall, we are very pleased with our fiscal 2011 first quarter sales and earnings, especially in comparison to our results from the same period in fiscal 2010. We achieved significant sales growth in both our direct operations (inaudible) international joint ventures. In addition to sales growth, we are more -- we more than doubled our pretax net income compared to first quarter fiscal 2010 and saw a dramatic increase in the sales and profitability of our joint ventures. During the first quarter of fiscal 2011, our consolidated net sales increased over 51%, to $4.1 million, compared to $2.7 million during the first quarter of fiscal 2010 due to increased demand primarily as a result of the economic recovery of the domestic manufacturing sector, the addition of many new customers and with the consolidation of our joint venture ZERUST Brazil on our consolidated financial statements.

This increase in sales is the direct result of our sales force targeting new markets outside of our traditional automotive and industrial areas of expertise. We are continuing to grow our ZERUST sales at levels higher than our pre-recession levels, and we intend to continue this diversification of our sales effort out of our traditional automotive and industrial areas, as part of our long-term strategic plan.

Our international joint ventures saw a similar trend in their sales. We saw joint venture sales increase 39% to $27.1 million in the three months ended November 30, 2010, compared to $19.1 million in the three months ended November 30, 2009. Although, as a continued 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 39% increase in sales by our joint ventures led to a 69% 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 cash dividends we will receive from our joint ventures during fiscal 2012 as compared to fiscal 2011. Other than our joint venture in Brazil, our first quarter fiscal 2011 consolidated financial statements do not include the financial accounts of any of our joint ventures.

Our earnings per share for the first quarter of fiscal 2011 were $0.21, which is a significant increase from the $0.10 per share earned during the first quarter in fiscal 2010. This strong profitability was driven primarily by our solid top line revenue growth, as noted previously, and our significant improvements in income generated from our various joint ventures as just mentioned.

I've already discussed to some extent our joint -- excuse me, our core ZERUST corrosion prevention business and its strong sales during the first quarter of fiscal 2011 as compared to the same period in fiscal 2010. I'd like to turn now to discuss more specifically our efforts with respect to the expanding of our ZERUST corrosion prevention technologies into the oil and gas industry during fiscal 2011. As noted in our prior webcast and public disclosures, during fiscal 2010, we hit some key milestones in our oil and gas business. Our Brazilian joint venture won its first commercial order for Flange Savers with Petrobras in our Q4 of fiscal 2010. As previously disclosed, during the fourth quarter of fiscal 2010, ZERUST Brazil received purchase orders for Flange Savers representing an aggregate of $1.4 million. ZERUST Brazil recognized sales of $618,000 during the fourth quarter of fiscal 2010 and $27,000 during the first quarter of fiscal 2011. ZERUST Brazil still anticipates invoicing Petrobras for the remaining amount of these orders during fiscal 2011, as Petrobras rolls this product out to more of its platforms, with a much more significant portion of the orders expected to be recognized as sales during the second quarter of fiscal 2011 than during the first quarter of fiscal 2011.

Regarding PEMEX, we are still confident that we should be able to convert various Flange Savers and tent up trials into commercial contracts during fiscal 2011. It is still our understanding that indications from PEMEX are that they have been impressed with the performance results of our ZERUST oil and gas solutions. We remain heavily focused now on actually selling our ZERUST corrosion prevention solutions and products into this industry. We believe this market represents an excellent and real opportunity for us to diversify from our manufacturing base to a new industry vertical, with much larger potential than our core industrial ZERUST market.

We anticipated very long sales cycles when we first entered the oil and gas business, and this has definitely proven to be true. Accordingly, although we anticipate continued growth and expansion into 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 sales when opportunities are converted and revenue is recognized, especially during fiscal 2011 and 2012.

Now, turning to our Natur-Tec bioplastic business. Sales of our Natur-Tec products increased 166% to $223,000 for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. This represents over 5% of NTIC's consolidated net sales during the most recent period. We believe there are still significant opportunities in the green packaging space, and we continue to strengthen and expand our distribution network which now consists of over 20 distributors, as well as several independent manufacturers' sales representatives.

With the addition of West Coast Paper Solutions, one of the largest distributors in the Pacific Northwest, we expect to extend our market reach from California into the Pacific Northwest and Alaska. We are also encouraged by receiving a third Phase 1 contract from the US Government, this one from the Department of Defense, worth $70,000, for the development of marine biodegradable, bio-based non-plastic waste bags. The bags are intended for use by the US Navy and will be designed to biodegrade as per the ASTM D7081 Standard, as well as to meet specific regulations which prohibit plastic waste disposal at sea.

The entire amount of the grant will be recognized during our second quarter of fiscal 2011. Successful implementation of this proposal will open up a wider range of applications for biodegradable bags that also meet the marine standard, as many of these biodegradable bags will end up in the ocean waters if they're not disposed of by other channels. I will now turn over things to Matt Wolsfeld to summarize our first quarter fiscal 2011 financial results.

Thanks, Patrick.

Matt, it's all yours.

Starting with ZERUST, the net sales of our ZERUST products and services increased 48% to 3.1 -- I'm sorry $3.9 million during first quarter of fiscal 2011, compared to just under $2.6 million during the first quarter of 2010. This sales increase is due primarily to increased demand as a result of the economic recovery of the domestic manufacturing sector, the addition of new customers and a consolidation of $547,000 in sales from ZERUST Brazil to our consolidated financial statements.

Net sales of Natur-Tec product increased over 166% to $223,000 during the first quarter of 2011, compared to just $83,000 in the first quarter of 2010. Cost of goods sold and the percentage of net sales decreased slightly to just over 65.6% in the first quarter of 2011, compared to 64.8% in the first quarter of fiscal 2010, primarily as a result of the slight increase in raw material prices.

As previously mentioned, our international joint ventures continued their growth into the first quarter of 2011 compared to the first quarter of fiscal 2010. We had equity and income of joint ventures of $1.7 million during the first quarter of 2011 compared to equity and income of joint ventures of $706,000 during the first quarter of 2010. This increase was due to the increased profitability of our joint ventures, primarily resulting from the 39% increase in net sales. We also recognized increased fee income for services provided to our joint ventures, which amounted to just under $1.5 million during the first quarter of fiscal 2010 compared to just under -- 2011, compared to just under $1.2 million during the first quarter of 2010, representing a 26% increase. This increase is due primarily to the same 39% increase in net sales from these joint ventures.

Our total operating expenses increased 48% during the first quarter of 2011, compared to the first quarter of 2010, primarily as a result of the consolidation of selling, general and administrative expenses of ZERUST Brazil on our consolidated financial statements. The increase in personnel and other expenses to support the increased sales efforts with respect to both the traditional ZERUST corrosion inhibiting packaging products and our Natur-Tec products.

Net income was up 105% to just under $900,000 or $0.11 per diluted common share, for the first quarter of 2011, compared to $436,000, or $0.10 per diluted common share for the first part of 2010. As of November 30, 2010, our working capital was over $8.2 million, including over $1.3 million in cash and cash equivalents compared to working capital of over $5.9 million, including $1.77 million in cash and cash equivalents as of August 31, 2010. As of November 30, 2010, and August 31, 2010, we had no borrowings outstanding under our line of credit. Subsequent to year end, I'm sorry, subsequent to the end of first quarter of fiscal 2011, we have refinanced our $1.275 million original principal amount term loan and we've increased our line of credit with PNC Bank from $2.3 million to $3 million. The maturity date of the term loan was extended from May 2011 to January 2016.

With respect to our financial guidance, we're not currently changing our annual 2011 guidance that was provided in November 2010. If in the future there are changes to our anticipated fiscal year end results, 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 financial results.

For our fiscal year end -- for fiscal year ending August 31, 2011, we still expect and believe that we're on track to recognize consolidated net sales between $18 million and $19.5 million, and net income of between $3.6 million to $3.8 million, or between $0.84 and $0.88 per diluted common share. We anticipate both fiscal 2011 sales and net income to ramp up slightly from fiscal 2010 sales and income. However, we anticipate that historically there have been a significant amount of volatility in our quarterly earnings per share numbers, and this is why we provide only annual financial guidance. The volatility in our quarterly numbers is primarily due to the financial performance of our joint ventures and the financial performance of our new businesses, including the ZERUST oil and gas business and our Natur-Tec bioplastics business, which seem to fluctuate more on a quarterly basis than our traditional ZERUST businesses. As we grow, we anticipate some of this volatility to dissipate and our quarterly earnings per share to become more predictable. With that update, Patrick and I will now answer any questions you may have. Are there any questions?

(Operator Instructions) Our first question comes from Ned Borland of Hudson Securities. Please go ahead.

Good morning, guys. Great quarter. Just looking at Brazil, if I heard you right, Patrick on the rundown, you had $1.4 million in contracts or orders from Petrobras, and it looks like you've delivered what, I think $618 million in the fourth quarter, and I think you said $27 million in the first quarter. Does that mean that you basically have $750 million or so remaining that's going to be delivered in the second and third quarters? And what is in your guidance I guess for Brazil?

Wait a second there, Ned. You're throwing out some very big numbers there, I don't know if you heard yourself, but I think you said something around the order of $700 million and I'd like to get an order that size but I'm keeping my fingers crossed for that one.

I meant $750,000 of course. But, sorry.

Yes. No, no, no. I appreciate your optimism. We're working in that direction. Right now, I think we're anticipating-- Matt do you think (inaudible) on that particular contract?

Yes, the-- previously in fourth quarter we talked about $1.4 million from Petrobras in total orders. As you said and we alluded to earlier, about $618,000 of that was recorded as sales in Q4. When we delivered those sales in Q4, those Flange Savers were installed on the various rigs during Q1. We've received the order for the second half of the $1.1 million contract which we intend to be delivered to Petrobras in Q2. So we anticipate at a minimum $500,000 to complete that $1.1 million contract to happen in Q2. The additional $300,000, which was the second contract, we would anticipate selling in either late in Q2 or sometime in Q3. So the entire $1.4 million in sales from that -- the first two contracts from Petrobras, should be fully invoiced by the end of Q3. And then ongoing right now, we're looking at additional opportunities to expand that inside of Petrobras. It just happened that during Q1, the-- we didn't fill any orders-- we didn't fill these orders at Petrobras. They-- our time was spent making sure these were actually installed on the rigs after they were delivered to Petrobras. Does that clear it up for you?

No, that's definitely helpful. So I mean is there some sort of learning curve there on the installation, so maybe the sales cycle is a little shorter going forward?

It's not necessarily a learning curve. It's just that when you deliver that many Flange Savers, you're talking about a lot of logistics involved in which flanges get covered on which rig, that it takes a little bit time to, especially with the first -- call it the first larger scale roll out, it took a little bit more time just to get the initial order of several thousand Flange Savers installed on the various rigs, that they are now ready for their second order. So but I anticipate going forward, it'll be a little bit smoother. But as I said, it's going to be a little bit spiky, the sales. The sales are going to be a little bit spiky, especially in the oil and gas group for the next six to 18 months, I would guess.

Okay. And then just with regard to the JV sales to Brazil, what was the balance in the quarter, if you only shipped $27,000, or recognized $27,000 in sales?

Well, Brazil had sales of about $517,000 in sales. Of that, $27,000 of it was sales to the oil and gas group.

Okay. Okay, so --

They had sales, non-oil and gas sales of $490,000.

Okay.

And that's been a pretty consistent, steadily growing, call it base of core business, traditional ZERUST business that our joint-- that the Brazilian subsidiary has.

Okay. And I guess with regard to PEMEX, it sounds like you're just still kind of in a wait and see mode on the activity there? Well, in that particular case, we got the final report, as I mentioned there, where they approved and endorsed the products, the R&L, in their system, all of the products have been registered, the prices have been set and negotiated. It's right now-- the holidays kind of got in the middle of things, but we're anticipating that we can finally get down to hammering out really the implementation schedule, what time frame, how many and really when they should start at least rolling out the Flange Savers. But we are still novices at PEMEX, so we're not quite sure yet what their time line is and how quickly things move once you go commercial there.

Okay. And then just sort of switching to raw materials, Matt, I mean you mentioned that it sort of compressed the gross margin, and I would imagine that it probably affected some of your JV partners also, but what-- I guess what can be done to sort of offset that raw material pressure? And what kind of raw materials are we looking at and what's the outlook for those?

I mean there isn't that much that we can do to offset that. I mean it's tough, because we obviously-- it's a commodity business, so we have to deal with the pricing. We have-- one thing that we've done is we have, as you can see from looking at our inventory balances, you can see that we've started stacking, making, call it strategic purchases to bring more product in-house at times when we feel that we have favorable pricing or when we can get, try and run different product at our subcontractors at times when they're -- when they have capacity available. So you potentially get a decrease in the pricing. But for the most part, it's obviously a commodity-based extrusion and we're subject to a lot of the pricing pressures associated with it.

Okay. Thank you.

(Operator Instructions) And I am showing no further questions at this time.

Well, always like to hear it when we've left everybody speechless. I hope that's a good thing. Under the circumstances, I'd like to thank everyone for participating today. In closing, we believe we are off to a very positive start for fiscal 2011 and look to continue the growth in both our net sales and earnings. Specifically we are dedicated to achieving revenue growth in our core ZERUST business, along with market development in both the oil and gas industry and our Natur-Tec bioplastics business. Thank you for listening today and for your interest in NTIC.

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