Northern Technologies International Corp (NTIC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern Technologies International Corp third 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, Chief Executive Officer. Please go ahead.

Good morning. And thank you for participating. I'm 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 third 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 use this call to review certain highlights of our fiscal 2011 third quarter financial results, add a brief business update, and then conclude with a short 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 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.

Now, overall, we are very pleased with our year-to-date results and our fiscal 2011 third quarter sales and earnings, especially in comparison to our results for the same period in fiscal 2010. We continue to achieve significant sales growth, both in our direct sales as well as with the sales made by our various international joint ventures. In addition, we more than doubled our pretax net income in the first 9 months of fiscal 2011, compared to the first 9 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 58% to $14 million during the first 9 months of fiscal 2011, compared to $8.8 million during the first 9 months of fiscal 2010. This sales growth was primarily linked to increased demand from the domestic automotive sector for existing and new Zerust branded products, the addition of a number of new customers in new non automotive market sectors and the consolidation of our Brazilian joint venture on our consolidated financial statements.

Our international joint ventures saw a similar trend with their sales increasing 39% to $86.7 million in the 9 months ended May 31, 2011, compared to $62.3 million in the 9 months ended May 31, 2010. The $33.3 million in international joint venture sales for the 3 months ended May 31, 2011, was the biggest joint venture revenue quarter in the history of the Company. Please remember here that the sales of our joint ventures 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 39% fiscal year-to-date increase in sales by our joint ventures is reflected in the 42% fiscal year-to-date 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.

For the first 9 months of fiscal 2011, we earned $0.66 per diluted share, which is a significant increase from the $0.41 per diluted share earned during the first 9 months of fiscal 2010. This strong profitability was driven primarily by our solid top line revenue growth, as noted previously, and the significant improvement in income generated from our various joint ventures, as just mentioned.

I'd like to now discuss more specifically our efforts with respect to expanding our Zerust corrosion prevention technologies into the oil & 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 & gas business. Our Brazilian joint venture won a Phase 1 commercial contract for our FlangeSavers with Petrobras in Q4 of fiscal 2010, totaling $1.4 million. This contract was supposed to take Petrobras 2 years to draw down on. Instead, they exhausted it in just 9 months. Consequently, in May of this year, NTIC's Brazilian subsidiary signed a Phase 2 expanded contract with Petrobras to supply an additional $2.6 million in Zerust FlangeSaver products to Petrobras's offshore oil production rigs. Zerust Brazil anticipates invoicing Petrobras for the majority of these orders during fiscal 2012 as Petrobras rolls the implementation of these products out to more of its offshore platforms.

There were only $114,000 of sales to Petrobras in the 3 months ended May 31, 2011, as we were in between contracts and the installation of product delivered during second quarter was still in process. NTIC continues to also be in advanced contract negotiations with oil & gas industry clients in Russia, Mexico, Nigeria, Singapore and the Middle East. These efforts have produced a number of trial orders and implementations. Large-scale orders that involve the adoption of new technologies by large oil & gas institutions, however, continue to prove to take considerably more time than we see in other industrial sectors. Consequently, as we have stated before, growth and expansion into the oil & gas market will continue. However, 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.

Now, turning to our Natur-Tec bioplastics business. Sales of our Natur-Tec products increased 97% to $670,000 for the first 9 months of fiscal 2011, compared to the first 9 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 bioplastics finished products. We also believe that there is an even greater opportunity in selling our patented Natur-Tec bioplastic resin compounds to manufacturers of plastic articles around the world, as demonstrated by our new distribution relationship with Naturfuels in Italy. Additionally, during third quarter of fiscal 2011, NTIC signed a memorandum of understanding with the Indian conglomerate ITC Limited to jointly develop and commercialize biopolymer extrusion-coated paper products, targeted at the consumer goods packaging market in India. The 2 companies will jointly develop solutions in the Indian market for providing biodegradable, compostable packaging products for food serviceware, food, personal care products and other fast-growing consumer goods.

I will now turn the call over to Matt Wolsfeld to summarize our third quarter of fiscal 2011 financial results.

Thank you. Starting with Zerust, sales of our Zerust products and services increased 57% to $13.3 million during the first 9 months of fiscal 2011, compared to $8.5 million during the first 9 months of fiscal 2010. This sales growth is primarily linked to the increase in demand from the domestic automotive sector, the addition of a number of new customers in the new non automotive market sectors, and the consolidation of $2.4 million in sales from our Brazilian subsidiary on our consolidated financial statements. Net sales of our Natur-Tec products increased 97% to $670,000 during the first 9 months of 2011 compared to $340,000 during the first 9 months of fiscal 2010. Cost of goods sold as a percentage of net sales increased slightly to 65.5% in the first 9 months of 2011, compared to 65.4% in the first 9 months of fiscal 2010. As previously mentioned, our international joint ventures continued their revenue growth into the third quarter of fiscal 2011. We had equity and income of joint ventures of $4.5 million during the first 9 months of fiscal 2011, compared to equity and income from joint ventures of $2.9 million during the first 9 months of 2010. This increase was due to increased profitability of our joint ventures, primarily resulting from the 39% increase in net sales of our worldwide joint ventures.

We also recognized increased fee income for services provided to our joint ventures which amounted to just under $4.5 million during the first 9 months of fiscal 2011, compared to $3.4 million during the first 9 months of fiscal 2010. Representing a 30% increase. This increase was due primarily to the same 39% increase in our net sales of our joint venture. Our total operating expenses increased 33% for the first 9 months of fiscal 2011 compared to the first 9 months of fiscal 2010, primarily as a result of the consolidation of the selling, general and administrative expenses of Zerust Brazil on our consolidated financial statements. And, increased personnel and other expenses to support the increased sales effort with respect to both our traditional Zerust corrosion-inhibiting packaging products and our Natur-Tec products.

Net income was up 66% to just under $2.9 million, or $0.66 per diluted common share for the first 9 months of fiscal 2011. Compared to $1.7 million or $0.41 per share per diluted common share for the first 9 months of fiscal 2010. Pretax net income was up 124% for the first 9 months of fiscal 2011, compared to the first 9 months of fiscal 2010. As of May 31, 2011 our working capital was $8.9 million, including $2.7 million in cash and cash equivalents, compared to working capital of $5.9 million including $1.8 million in cash and cash equivalents as of August 31, 2010. As of May 31, 2011 and August 31, 2010 we had no borrowings outstanding under our $3 million line of credit.

With respect to our financial guidance, we are increasing our annual fiscal 2011 guidance that was provided in November of 2010 and then subsequently increased in April of 2011. For the fiscal year ending August 31, 2011, we now expect net sales to be in the range of $19 million to $20 million, inclusive of sales made by NTIC's subsidiary in Brazil. And net income to be in the range of $3.9 million to $4.1 million, or $0.88 to $0.92 per diluted share. As we've discussed previously, 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, an historically there has been a significant amount of volatility in our quarterly earnings per shares numbers, and this is why we provide only annual financial guidance. The volatility in our quarterly numbers are primarily due to the financial performance of our joint ventures and the financial performance of our newer businesses, including the Zerust oil & gas business and our Natur-Tec bioplastics business, which seem to fluctuate more on a quarterly basis than our traditional business. As we grow, we anticipate some of this volatility to dissipate, and our quarterly EPS to become more predictable.

With that update, Patrick and I will now answer any questions you may have.

(Operator Instructions). Nick Halen of Sidoti & Company.

Hello, good morning. First question I had is just regarding the margins. I was just wondering why it seems that in the third fiscal quarter margins seem to be significantly lower than the other quarters. I was wondering if there's anything in particular that causes that. And then, just in general, what are your expectations and what do you think will drive the margins going forward?

Margins are a tricky question for us, as far as specifically for going forward. There are significantly different margins for us for our oil & gas products, compared to our Natur-Tec products, compared to our traditional Zerust products. One of the issues is that in prior quarters we had more sales of our oil & gas products, specifically from the sales to Petrobras. If you're comparing second quarter to third quarter, you're going to have a significantly better margin in Q2 than in Q3 because the margin in the FlangeSaver is significantly higher than the margin with our traditional products. So going forward, if we significantly ramp up sales in our Natur-Tec products, you could see an overall decrease in our blended gross margin. However, if we see a large ramp-up of sales in the oil & gas products, you could see an increase in the gross margin overall.

Okay, great. Thanks. And just in terms of the agreement you have with ITC Limited, can you give us a little more clarity on when you expect to start generating revenue from that agreement? And any idea on how big of an opportunity that is?

Certainly. First of all, for those of you who are not familiar with ITC, they're fairly easy to find on the Internet. ITC stands for India Tobacco Company, originally now gone to ITC because it's a conglomerate with several billion dollars in revenues. Specifically, in our relationship with them, we have already begun shipping product to ITC and you will see that those revenues when we report for fourth quarter. It won't be on our top line because the sales to ITC come through our Indian joint venture, Harita-NTI. But we will certainly make a note of those sales when we report.

Also, in terms of what the total value is, that's still undetermined for us. What ITC is obviously doing is they're using our technology now in conjunction with their own for certain specific initial target projects. If those do well, as well as we expect, then we certainly anticipate that they're going to roll us out to a much broader range of their products. So the upside, the potential upside, obviously, is quite significant.

Joe First of First Associates.

Good morning, gentlemen. Congratulations on such a good quarter. How about the Natur-Tec outlook in the United States? I know that's been costing you a lot of money and you picked up some, but what's the outlook for the Natur-Tec here?

Two-fold. Obviously, we are continuing to supply finished Natur-Tec products, primarily as we expand our market reach on the West Coast. We are also in advanced negotiations to sell our resin compounds to certain large American corporations. I can't get too specific on this because we are in the final evaluation phase. But certainly we've passed all the technical hurdles at this point, so we are now in final negotiations from more of a financial perspective. If those go through, we should start seeing a significant increase in revenues also in sales in North America over the next 6 months or so.

Good. So that division should end up, hopefully will turn profitable and you'll start making some money from that too. That's great. One other question. In your oil & gas business, you had developed a product to apply to the roofs of storage tanks and so on to lengthen the life of the roofs. That was apparently extremely cost effective and you thought that you would be getting considerable business from that. What's going on in that area?

As far as we understand it, actually we had a representative of Petrobras who joined us for our most recent Board meeting, explain the future strategy for Petrobras. If you've been looking at Petrobras's financial statements and plans, they currently have an annual oil production of about 2.5 billion barrels, and their intention is to expand that to 5 billion barrels by 2020. So right now, Petrobras is investing all of its time, effort and money on the offshore business, basically building rigs, ships and anything else to get the oil out of the ocean bottom. And putting much less attention on their infrastructure in terms of the refineries and onshore installations. So for right now, we anticipate a much faster and easier increase in sales for not only the FlangeSavers but certain other products we're introducing to Petrobras, as we speak, for offshore work. But don't anticipate a lot of attention out of Petrobras in the near term for the tank tops.

Okay. How about other companies for the tank tops?

We've got a few in trial but it's more likely that we would get revenues out of tank bottom protection, which we also have in trial.

And one other question. You mentioned a series of oil companies that you're negotiating with for flange protectors and so on but I didn't hear of any local American companies. Are you having any luck getting into Texas yet?

We're having discussions but don't really have anything specific to talk about at this point.

Tim Clarkson of Van Clemens & Co.

Hello. Great quarter. In terms of the oil & gas business, which 2 countries after Brazil do you think are most likely to buy meaningful amounts of, say, the FlangeSavers?

Right now we're starting to get more and more attention out of Singapore. And in terms of general sales, we're also in some trials right now in the UAE.

(Operator Instructions). Brian Yurinich of Craig-Hallum Capital.

Hi. Congratulations on the quarter. I was just curious, in the press release you talk about some new products that you expect to roll out, both in the traditional and oil & gas industry. What kind of products would those be?

I would prefer not to talk about it at this point because we're still rolling it out and trying to keep our competitors in the dark for as long as possible.

All right. I don't know if you can talk about it, but we expect most of this new Petrobras contract to come in 2012. Do we have an idea, is that front half or back half loaded? Or is it more linear?

First half of the year, last half of the year?

Again, it's difficult to say because there's such large fluctuations where it's just spikier. It's difficult for us to say right now.

We have a contract but we don't have a timetable from Petrobras yet in terms of exactly when they're going to start taking product off of that contract.

Dick Feldman of Axiom Capital.

Thanks for taking my question and good quarter. I have 2 questions. One, you mentioned that in the United States, at Natur-Tec, you may start selling resin. What would the margin implications be compared to selling finished products of that shift?

For us, we would anticipate getting similar margins out of our resins as we would with distributing final product. So for us, it makes much more sense to go upstream and be a resin provider than it does a finished good provider. We certainly want to play in both markets because it's difficult to have resin opportunities without having the finished product sales as well, but the margins are similar.

The margins are similar?

Correct.

Okay. And the other question I have relates to the Petrobras order that you announced, whenever it was, at 2-point-something million. Those are for FlangeSavers. And as I understand it, FlangeSavers are potentially recurring revenue in that they have to be replaced. Are any of the orders, follow-on orders that you received, dedicated towards replacement or is it still new installations?

It's still new installations. We anticipate that the initial FlangeSavers will last anywhere between 1 and 2 years. So probably at the end of the second contract it will start becoming time to begin exchanging some of the initial ones. Hopefully, that will be the Phase 3 contract but right now the Phase 2 is really just expanding the implementation on a broader number of offshore oil rigs.

Could you estimate what percentage of the potential at Petrobras in the FlangeSaver line that those two contracts represent? What type of market penetration?

I believe the first contract was a partial implementation on 6 rigs, and Petrobras has somewhere in the range of 100. I don't know exactly what percentage of the flanges, total flanges on those first 6 rigs were covered by that contract. It was still, let's say, an initial roll-out implementation. And I'm assuming that, let's say we got maybe 10% of the potential flanges on those 6 rigs during the first roll-out. And you're going to get 10% of maybe 18 rigs on the second one going out.

It's a very small penetration of the overall just Petrobras market.

So you have potential growth here from 2 sources, protecting more of the flanges and also protecting more of their platforms and rigs.

Yes. And obviously the expansion of the FlangeSavers is also allowing us to introduce other products for protecting of other articles on offshore oil rigs. So as the sales of FlangeSavers increase, we also expect to see increases in sales of some of our other products, as well.

Richard Dearnley of Longport Partners.

Good morning. You mention every quarter price competition in Zerust. Would you discuss the trends there? Is it better? Worse? And its effect.

The margin pressure in our basic business, you're talking about?

Yes.

There are 2 impacts that would hit us. First of all, our margins are not consistent on a worldwide basis. It's partially impacted on a joint venture by joint venture basis, depending on the countries that they're operating in. Also, one of the key impacts to us, which will intermittently affect our margins are raw material pricing. The key raw material that we use predominantly in our basic products is polyethylene. And if you've noticed or have been following the trend over the last 6 months, there have been significant spikes in polyethylene prices, which have impacted our margins, because we can't always pass on part or all of those price increases to our customers. Now, as those commodity prices rise and fall, we should see a change in our margins, as well. Hopefully over the next 6 months we'll see those resin prices coming back down and we'll have a slight increase in our margins at that point.

Michael Ross of Van Clemens & Co.

Hi. Thanks for the great results. Just one question. Could you expand on the ITC initial business? You mentioned a product or something and they have several --

Sure. What the product is specifically, ITC, one of their divisions is a paper company. They're a very large paper manufacturer. And what they had done traditionally was they were extrusion-coating their paper product with a conventional plastic, a polypropylene, polyethylene combination. And if you put a conventional plastic on a paper, the combination there is no longer biodegradable because that plastic sticks to the paper and that plastic will be there forever. So, what they wanted to do is the Indian government is starting to implement legislation, demanding more compostable, environmentally responsible packaging. So by using our biopolymer coating on that paper, they've now managed to produce a packaging material that is entirely compostable. And what they've done is they've produced now the packaging for chewing tobacco which in India is, unlike the tin cans and some of the other things you see in the US, they package chewing tobacco in India in these small plastic, extrusion-coated paper saches. And that's the initial target application for this packaging product. Assuming that the market response is going to be very positive to this, then ITC would be looking to use that same basic packaging materials on a much broader line of the products they either produce themselves or sell or the packaging they sell to other manufacturers in India.

Thank you. That sounds like a huge opportunity.

We're hoping.

Charlie Pine, Van Clemens & Co.

Hi, good morning. I would just like to follow up briefly. In the last couple calls you had commented a little bit more about your discussions with PEMEX. Could you give us a little bit more color about the characterization of how you would describe where you're at with your discussions with PEMEX?

PEMEX -- I'm assuming, the Petroleum of Mexico?

Yes.

Yes. Those discussions are ongoing and I can't give you a definitive time line as to when and if those are going to conclude. It's a bit of a slow process. And just to manage your expectations, as I mentioned earlier on the call, when we had our nice visitor from Petrobras in May for our Board meeting, he pointed out that we started the relationship and initial technical trials with Petrobras in the year 2000. But we didn't get our first commercial order from Petrobras until 2007. We're obviously anticipating that everything moves faster through the approval process at PEMEX than it did at Petrobras, but we're not exactly sure what that time line is. We started approaching PEMEX I think 18 months ago. And for a new product, to a new customer, in a very conservative industry, everybody tells us we're moving at a blazing pace. But a blazing pace to some people is moving at the speed of continental drift to others.

Wasn't it the case, though, my understanding was that you had already passed with flying colors their qualification parameters?

Yes. And so we passed the technical trials. Now we're in ongoing negotiations of where would we implement this and how much and how much money can we allocate, and on and on and on.

Last follow-up. You alluded to that there's some other new products or derivations and such that you believe you'll be able to, or current products that you have, that you'll be able to sell into Petrobras.

Yes.

For their offshore uses. What would those be?

As I mentioned on the phone call earlier, I'm not going to talk about that today.

Joe First of First associates.

In your news release you made a comment about decreased pricing due to increased competition. What area is that coming from?

That's mostly in the traditional Zerust.

Can you expand on that potential problem a little bit?

I wouldn't necessarily say it's a -- it is basically that our target market in the traditional Zerust business happens to be the automotive industry. And anybody who is a supplier to the automotive industry is subject to a relentless drive to drive prices down every year. And we are just facing that same pressure.

Brian Yurinich, Craig-Hallum Capital.

My question has been answered. Thanks.

Aaron Martin of AIGH Investment Partners.

This is actually Oren Hirschman from AIGH. Can you just review again the base seasonality on the Zerust, the regular Zerust business?

The seasonality? Generally speaking, corrosion tends to spike when you have higher temperatures and greater humidity. So certainly when you're not exactly on the equator or living in a tropical country where it's perennial, you're talking about rust season generally hitting in the Northern hemisphere somewhere between May and September, when you find increased incidences of rust and corrosion, simply because the weather outside is a little bit more aggressive. Therefore, our North American sales generally second quarter tends to be a little bit lighter than you see third and fourth quarter.

And if I factor in the whole world view on the base of the US business because of the different geographies, how does that affect typically the seasonality on the base Zerust?

You won't see that seasonality in India, for example, where you're talking about it being pretty much hot and humid all year round. Certainly, in the Southern parts of India. Not so much maybe in the Northern. But generally speaking, if you're looking at the financial statements, generally speaking our sales, and those sales, the consolidated sales are limited to what we find in North America and Brazil at this point. So everything else is coming in through the joint ventures. And since we are currently doing business in approximately 55 countries around the world, we've basically hit every -- when it's winter here, it's summer someplace else, and in certain cases it's summer all year long. I don't know if that helps.

Dick Feldman of Axiom Capital.

Two questions. First, your core business, which is a largely industrial business, has been growing far more rapidly than industrial output around the world. How much longer can you keep something like this up in terms of being able to penetrate new markets and introduce new products?

Please understand that, to a certain degree, there has been, due do globalization, a dramatic shift in the size of the available markets to us just in our core business. And that's due to, what the term the industry uses is parts tourism. 20 years ago the US automotive industry had a Tier 1 supplier in Michigan, shipping metal parts 3 miles down the road to an assembly plant. And in that interim of that little trip down the road, there wasn't much of a need for corrosion protection because their exposure to the elements before being implemented was maybe a few hours, maybe a few days. Now that you're forging parts in one country, shipping them to another country to be machined, and then shipping them to a third country to be assembled, partially assembled, before shipping them to a fourth country for final assembly into a vehicle, for example, you've got much, much longer supply chains. And, therefore, greater exposure to potential corrosion problems. And with this parts tourism, you've seen a significant spike in the demand for our products. So as long as we continue to see manufacturing companies shipping from country to country to country to keep chasing, let's say, the low cost manufacturing labor costs, you're going to see a continued expansion of sales opportunities, just in automotive, without expanding into any other industry. At the same time, we've been finding applications in a broader range of industries that are also, starting with globalization, shipping their products into new markets around the world. So we certainly feel that there is quite a lot of additional markets still to be captured in our core business for the foreseeable future.

Great. Shifting gears to the oil & gas type products, at various times you have mentioned potential for that type of product that you're selling into the oil & gas industry but perhaps to chemical industries or pipelines and things of that nature. Could you give us any updates on the status of that?

It depends on the product, because in certain cases we are selling specifically engineered products, but right now we're targeting those primarily at the oil & gas industry. We haven't had the time or the resources to cast that net broader, yet. At the same time, some of the products that we are selling into our traditional markets, like the automotive industry, also have applications in the oil & gas and chemical industries. And we are already selling those products into those industries, either directly or through distribution -- or, excuse me, we're starting to sell those products to those industries either directly or through distribution. So it really depends on the complexity of the product and the application. For some of the consumable items, it's very easy to transition from one industry to another. For the more engineered solutions, like the protection of the tops and bottoms of oil storage tanks, or more pipeline protection, those are very specific. And because of the value of the underlying infrastructure that you're trying to protect, the customers are much more conservative and slow in terms of running extended trials and going through their decision process.

So to some extent, it's necessary. It's both good business process as well as because probably you're resource constrained to focus your efforts.

Yes. And that's why right now we are focused more on the oil & gas industry, rather than other chemical process industries, et cetera, that could use some of these solutions, as well. If we have sales into some of these other industries, it's mostly through distribution, just to expand our reach from our own sales force.

And one last question. Could you give us guidance on the tax rate for the fourth quarter and then again anything for the new fiscal year?

It should be pretty consistent with third quarter.

Okay. What is the impact on your consolidated tax rate when you start receiving the dividends from your joint ventures?

I would say dividends are taxed as they come into the US. So we take that into account with anticipated dividends that we're going to pay on current earnings based on past, say, historical dividends. So that's currently being factored into the current effective tax rate.

So you're accruing for it on an ongoing basis?

Yes. We're already accruing for anticipated dividends for next year based on earnings for this year.

And I'm showing no further questions at this time and would like to turn the call back over to management for any closing remarks.

Great, thank you. I'd like to thank everyone for participating today. In closing, we are continuing to make significant headway towards our fiscal 2011 goals and look to continue this growth in both our net sales and earnings moving forward into fiscal 2012. Specifically, we are dedicated to achieving revenue growth in our core Zerust business while expanding our market penetration for both our oil & gas products and our Natur-Tec bioplastics business. Thanks 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.