Northern Technologies International Corp (NTIC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern second-quarter 2011 earnings conference call. 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 would now like to turn the conference over to your host, Mr. Patrick Lynch, Chief Executive Officer. Please go ahead.

Good morning and thank you for participating. I am Patrick Lynch, NTIC's Chief Executive Officer, and I'm here together with Matthew Wolsfeld, NTIC's Chief Financial Officer.

I would like to begin this conference call by announcing that we just disclosed NTIC's fiscal 2011 second-quarter results in a press release issued earlier this morning, and that a copy of that press release is now available on our website at www.NTIC.com. Therefore, I would like to take the opportunity during this call to review certain highlights of the fiscal 2011 second-quarter financial results, add a brief business update, and then conclude with a brief question-and-answer session.

As part of our discussion today, we will be making certain forward-looking statements regarding our future financial and operating results, as well as our 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 our forward-looking statements due to certain risks and uncertainties, including those described in our most recent annual report on Form 10-K and subsequent quarterly report 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.

Now, overall, we are very pleased with our fiscal 2011 second-quarter sales and earnings, especially in comparison to our results for the same period in fiscal 2010. We achieved significant sales growth in both our direct operations as well as our various international joint ventures.

In addition to sales growth, we more than doubled our pretax net income compared to the first six months of fiscal 2010, in part due to dramatic increases in the profitability of our joint ventures.

Our consolidated net sales surpassed pre-recession levels by increasing 59% to $8.9 million during the first six months of fiscal 2011 compared to $5.6 million during the first six months of fiscal 2010. This sales growth was primarily linked to increased demand from the US domestic automotive sector, the addition of a number of new customers in new nonautomotive market sectors and the consolidation of our Brazilian joint venture on our consolidated financial statements.

Our international joint ventures saw a significant trend in their sales, with their sales increasing 34% to $53.4 million in the six months ended February 28, 2011 compared to $39.9 million in the six months ended February 28, 2010. Please remember here that the sales of our joint ventures, other than our Brazilian joint venture, 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.

Rather, the 34% increase in the sales by our joint ventures is reflected in the 53% increase in total income provided to us by our joint ventures in the form of both equity in 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.

For the first six months of fiscal 2011, we earned $0.42 per diluted share, which is a significant increase from the $0.19 per diluted share earned during the first six months of fiscal 2010. 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, as just mentioned.

I would like to turn now to discuss more specifically our efforts with respect to expanding our Zerust corrosion prevention technologies in the Oil & Gas industry during the fiscal 2011.

As noted in our prior webcast and public disclosures during fiscal 2010, we hit some key milestones in our Oil & Gas business. Our Brazilian joint venture won its first commercial order for flange savers with Petrobras in the fourth quarter 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.

Of this $1.4 million, Zerust Brazil recognized sales of $618,000 during the fourth quarter of fiscal 2010, $27,000 for the first quarter of fiscal 2011, and now $600,000 during the second quarter of fiscal 2011. Zerust Brazil anticipates invoicing Petrobras for the balance of these orders during the third quarter of fiscal 2011 as Petrobras rolls this product out to more of its offshore platforms.

We remain heavily focused on selling our Zerust corrosion prevention solutions and products into the Oil & Gas industry, and we believe this market sector represents a much greater potential than our core industrial Zerust market. We anticipate a long sales cycle when we first entered the Oil & 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 & Gas industry will not be immediate and may be choppy, with spikes in sales when opportunities are converted and revenue is recognized, especially during the remainder of fiscal 2011 and during fiscal 2012.

Now, turning to our Natur-Tec bioplastics business. Sales of our Natur-Tec products increased 143% to $425,000 for the first six months of fiscal 2011, compared to the first six months of fiscal 2010. This represents roughly 5% of NTIC's consolidated net sales during the most recent period.

We continue to see tremendous opportunities for finished bioplastic products and, therefore, we continue to strengthen and expand our North American distribution network for Natur-Tec bioplastic bags and cutlery, which now consists of over 20 distributors, as well as several independent manufacturer sales representatives.

We also believe that there is an even greater opportunity in selling our patented Natur-Tec bioplastic resin compounds to the manufacturers of plastic articles around the world, as demonstrated by our new distribution relationship with Naturfuels in Italy.

I will now turn things over to Matt Wolsfeld to summarize our second quarter of fiscal 2011 financial results.

Thanks, Patrick. Starting with Zerust net sales, products and services sales increased 56% to $8.5 million during the first six months of fiscal 2011 compared to $5.4 million during the first six months of fiscal 2010. This sales growth was primarily linked to increased demand from the domestic automotive sector, the addition of a number of new customers in the nonautomotive market sectors, and the consolidation of $1.6 million in sales from our Brazilian joint venture on our consolidated financial statements.

Net sales of Natur-Tec products increased 143% to $425,000 during the first six months of 2011, compared to $175,000 in the first six months of fiscal 2010.

Cost of goods sold as a percentage of net sales decreased slightly to just over 64.2% in the first six months of fiscal 2011 compared to 64.4% in the first six months of 2010, primarily as a result of our increased sales, partially offset by a slight increase in production expenses.

As previously mentioned, our international joint ventures continued their revenue growth in the second quarter of fiscal 2011. We had equity in income of joint ventures of $2.8 million during the first six months of fiscal 2011 compared to equity in income of joint ventures of $1.4 million during the first six months in fiscal 2010. This increase was due to increased profitability of our joint ventures, primarily resulting from the 34% increase in net sales of our worldwide joint ventures.

There was a sequential quarterly decrease in equity in income of joint ventures of roughly $600,000, going from first quarter of 2011 to second quarter of 2011. This was a result of an unusually profitable first quarter for our joint ventures compared to second quarter.

We also recognized increased fee income for services provided to our joint ventures which amounted to just under $2.9 million during the first six months of fiscal 2011 compared to $2.3 million during the first six months of fiscal 2010, representing a 24% increase. This increase was due primarily to the same 34% increase in net sales of the joint ventures.

Our total operating expenses increased 34% during the first six months of fiscal 2011 compared to the first six months of fiscal 2010, primarily as a result of the consolidation of the selling and general and administrative expenses of Zerust Brazil on our consolidated financial statements and the increased personnel and other expenses to support the increased sales efforts with respect to both our traditional Zerust corrosion-inhibiting packaging products and our Natur-Tec products.

Net income was up 136% to just under $1.9 million, or $0.42 per diluted common share, for the first six months of fiscal 2011 compared to $782,000, or $0.19 per diluted common share, for the first six months of fiscal 2010.

As of February 11, 2011, our working capital was just under $9.3 million, including $1.8 million in cash and cash equivalents, compared to working capital of over $5.9 million, including $1.8 million in cash and cash equivalents, as of August 31, 2010.

As of February 28, 2011 and August 31, 2010, we had no borrowings outstanding under our line of credit, which we recently increased from $2.3 million to $3 million to preserve our flexibility.

With respect to our financial guidance, we are increasing our annual 2011 guidance that was originally provided in November 2010. For fiscal year-end August 31, 2011, we now expect net sales to be in the range of $18.5 million to $19.5 million, inclusive of sales made to NTIC's subsidiary in Brazil, and net income to be in the range of $3.7 million to $3.9 million, or $0.86 to $0.90 per diluted share.

Previously, we expected annual net sales to be in the range of $18 million to $19.5 million, and the annual net income to be in the range of $3.6 million to $3.8 million, or $0.84 to $0.88 per diluted share.

As we previously discussed, we intend to update our fiscal year guidance on a quarterly basis. We do not intend to provide guidance today or going forward regarding our anticipated quarterly financial results. We anticipate, and historically there have been, a significant amount of volatility in our earnings per share numbers, and this is why we provide only annual financial guidance.

The volatility in our quarterly numbers is primarily due to our financial performance of our joint ventures and the financial performance of our newer businesses, including Zerust Oil & Gas and Natur-Tec bioplastic businesses, which seem to fluctuate more on a quarterly basis than our traditional Zerust business. 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.

Ned Borland, Hudson Securities.

Good morning, guys. First, I would just -- if we could get kind of a breakdown of how big a factor auto was in the quarter. I know you said it was basically the primary driver, the domestic auto in the Zerust business. But is there sort of an order of magnitude that you could share with us?

There isn't really a specific order of magnitude that we can put out there that is specifically automotive. I think, for the most part, what we have seen is a pretty large recovery -- I'd say a continued recovery in the automotive sectors and the general industrial sectors. So at this point in time, there isn't anything specifically I can say that -- as far as what percentage is automotive-based.

Okay. And then in the release, you guys commented that you have not seen any issues from some of the events, particularly in Japan. Just wondering -- I think some of the Japanese OEMs have suggested that production is slowing due to events over there. Can you comment on maybe your exposure going forward on that?

So far, the sales level in Japan has been relatively consistent, certainly in the last quarter. And you have to understand also that our sales to the automotive sector are always a very small proportion of the total parts produced.

Okay. And then --

Additionally, Ned, in Japan there are -- the Japanese contribution to our worldwide sales is roughly 5%.

Oh, okay.

So you're not talking about the Japanese joint venture being -- while it is a material joint venture, it's not as if it makes up a really large portion of the overall worldwide sales that we have.

Okay. And then any clarity on what's going on at PEMEX? I know you guys have been approved. You haven't seen order flow yet. Any sense on the timing there?

Well, two things. Let me just go back to address your previous question for a second. Geographically, in Japan, most of the automotive metal parts production happens somewhere between Tokyo and Osaka, so basically south of where the disaster struck. Where you are seeing some parts slowdown is more in the northern sector, where you're talking about electronics components, which is generally a market we don't really supply to anyways.

Now, going back to PEMEX, PEMEX, as we said, we got our approvals. We are right now in the negotiation phase. And sometimes, as we have both learned over the last couple of years, dealing with large oil companies and their approval process and negotiations takes more time than we anticipate when we go into these things.

Okay. And then finally on Natur-Tec, the agreement with Naturfuels, it seems like that's the first order for just the resin. Is there -- is there any way to kind of ballpark the opportunity or the pipeline of other countries that you are talking to? How would this agreement kind of play out in terms of the revenue?

Sure, sure, that's a great question. Right now, we are seeing three potential opportunities for large resin sales in three different applications. One is, as you mentioned, Italy, that now, because of regulatory change, they are seeing a massive shift over to demand for truly compostable film production.

Then we are dealing with another prospective customer in India, where they are looking more into having a bioplastic coating on paper, which also promises, if the product rollout is successful, that it could reach some significant volumes.

And finally, also due to certain regulatory changes, we are still in the final stages of putting together an injection-molded biodegradable resin -- compostable resin, more for injection-molded articles, which also could transfer into some significant volumes.

Okay, thanks.

Frank McEvoy, Craig-Hallum.

Good morning, Matt and Patrick. How are you doing? Congratulations. Nice quarter.

Say, just wanted to follow up on some of the Oil & Gas opportunities. I think last call, you may have had around eight kind of trials in progress. Can you give an update on maybe the number of trials?

And then in addition to how many of them, I guess a follow-up question to that would be how many of those have gone to the contract negotiation stage, aside from the PEMEX, which you just talked about a moment ago?

Well, at PEMEX it was -- they were talking about two different products that were in trial. So that's already -- you're talking about two trials there. Then you are talking about what we were doing in Russia, where the technical trials are going quite well, it's my understanding. Then you're talking about what we are doing in Singapore. And also some of the things we have been working on in Malaysia.

Matt -- hold on. I've just got to (technical difficulty). I'm just wondering if I've hit all the other ones that I was thinking of, that we've mentioned before. I'm always trying to make sure that I don't start talking about things that we haven't disclosed.

No, that's okay. I just wondered, were there any new ones in the last -- since the last call?

No.

And have any of them kind of -- have they progressed to negotiation stage, aside from the PEMEX one you just talked about a few minutes ago?

No.

Okay. And then I think -- with -- you've got several, obviously, of these trials out there. Can you talk a little bit about what you're doing to support them to ensure that they will be successful? How many people do you have, roughly? Have you added some people in the recent months to help support these trials?

Generally speaking, these trials, once initiated, run for extended periods of time. On average, they have been somewhere between one to two years, once initiated. Occasionally, when they see dramatically improved results in the short term, they might cut it down to six months or something like that. But still, it's install and go, and wait, actually. And so far we have not needed to add any additional personnel to support additional trials, no.

Okay. It looks like the Zerust sales for traditional applications were up very nicely year-over-year. And I think you talked a bit about auto picking up. But was there any -- in the past, you talked about agricultural and military also doing well. Were those -- did you see strength in those sectors or any other particular sector in the quarter as well?

We've seen strength, actually, across all of the industrial sectors we serve.

Excellent. And then with respect to gross margins, if my math is right, looks like they improved about 280 basis points sequentially up to about 37.1%. Can you talk a little bit maybe, Matt, about what drove the improvement and what we might expect going further, and to what extent the commodity costs affect that?

I don't think -- it's not necessarily a function of commodity costs. One of the things that drives that is the margins on some of the Oil & Gas sales that we had in Brazil are better.

You're seeing, let's say, a little bit of raw material price improvement that we have been able to get in Q2. But obviously, those are things that tend to fluctuate a few basis points from quarter to quarter. It just kind of depends.

One of the difficulties that we have is when you're taking sales of Natur-Tec products, taking sales of Oil & Gas products, and taking sales of Zerust products and it's kind of a different mix each quarter, it's difficult to have a really steady gross margin number.

Got it. Very good. Thank you very much.

(Operator Instructions) Tim Clarkson, Van Clemens.

Very good quarter. I was just asking in terms of your competitive position, I know you have a local competitor. How would you look at your competitive position versus them the last year or two coming out of this recession?

In our --

In the traditional areas, actually.

Yes, in our traditional areas, we don't tend to run into them nearly as often as we used to.

Okay. Is there any other new competitors out there?

Not in the United States. Not in Europe, either. Occasionally, we run into some small newer competitors in Asia, but they come and go.

Okay. All right. Great. Thanks.

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

In that case, I'd like to thank everyone for participating today. In closing, we are making significant headway toward our fiscal 2011 goals and look to continue this growth in both our net sales and earnings moving forward.

Specifically, we are dedicated to achieving revenue growth in our core Zerust business. while expanding the market penetration for both our Oil & Gas products and our Natur-Tec bioplastics business. Thank you for listening today and your interest in NTIC.

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