Northern Technologies International Corp (NTIC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Northern Technologies International Corp. fourth-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 with instructions following at that time. (Operator Instructions). As a reminder, this conference call is being recorded. And now I'd like to turn the conference over to Patrick Lynch, President and CEO.

Good morning, and thank you for participating. I am Patrick Lynch, NTIC's Chief Executive Officer, and I am here together with the 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 results in a press release earlier this morning, and a copy of that press release is now available on our website at www.NTIC.com. Therefore, I would like to take this opportunity to review certain highlights of these 2011 financial results, add a brief business update, and then conclude with a short question-and-answer session.

As part of our discussion, we will be making certain forward-looking statements regarding NTIC's 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. We suggest that you read this report and other future filings that we will make with the SEC. We disclaim any duty to update or revise our forward-looking statements.

Overall, we are very pleased with our fiscal 2011 sales and earnings, especially in comparison to our results for fiscal 2010. NTIC achieved significant growth in both our North American sales, as well as the sales made by our various joint ventures.

In addition, we increased our pretax net income in fiscal 2011 by over 50% compared to fiscal 2010, in part due to our increased sales in North America and a dramatic increase in the profitability of our joint ventures.

NTIC's consolidated net sales increased 36% to $19.5 million during fiscal 2011 compared to $14.4 million during fiscal 2010, which was already a 68% increase over the $8.6 million in sales we had in fiscal 2009. This tremendous sales growth was primarily due to increased demand from the domestic industrial sector for both established and new ZERUST-brand products, as well as the addition of a number of new customers in new market segments.

Our international joint ventures saw a similar trend with their combined sales increasing over 40% to $119 million in fiscal 2011 compared to $85 million in fiscal 2010. Please remember here that the sales by our joint ventures are not included in NTIC's consolidated net sales and are not combined with NTIC's sales in our consolidated financial statements or in any description of NTIC sales.

Rather, the 40% fiscal year increase in sales of our joint ventures is reflected in the 35% fiscal-year 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 will result in an increase in the amount of cash dividends we will receive from our joint ventures during fiscal 2012 as compared to fiscal 2011.

For fiscal 2011, we earned $0.89 per diluted share, which is a significant increase from the $0.61 per diluted share earned during fiscal 2010. This strong profitability was driven primarily by NTIC's solid top-line revenue growth, as noted previously, and the 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 and gas industry during fiscal 2011.

As noted in our prior webcast and public disclosures, we hit some key milestones in our oil and gas business during fiscal 2011. Our Brazilian majority owned subsidiary won an expanded Phase 2 contract with Petrobras to supply an additional $2.6 million in ZERUST products to Petrobras's offshore oil production platforms. It is anticipated that the majority of this particular contract will be fulfilled and invoiced during fiscal 2012 as Petrobras rolls the implementation of these products out to more of its offshore platforms.

Keep in mind that the sales to Petrobras, while contractual, tend to be rather volatile, as we saw with the Phase 1 contract in fiscal 2011. Specifically, although we delivered product in our fourth quarter of fiscal 2011, we do not anticipate delivering significant additional shipments to Petrobras prior to our second quarter of fiscal 2012.

NTIC continues to progress with oil and gas industry clients in Russia, Mexico, Nigeria, Singapore, and the Middle East. These efforts have already produced a number of trial orders and smaller implementations. Larger scale orders that involve the adoption of new technologies by large oil and gas institutions, however, continue to take considerably more time than we see in our other industrial sectors.

Consequently, as we have stated before, growth and the expansion into the oil and gas market will continue. However, 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 the next 18 to 24 months.

Now, returning to our Natur-Tec bio plastics business, sales of our Natur-Tec products increased 71% to $984,000 during fiscal 2011 compared to 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 bio plastic products, and therefore, we continue to strengthen and expand our North American distribution network for finished Natur-Tec bio plastic products.

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

In fiscal 2011, NTIC and Harita-NTI, our joint venture in India, 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 biopolymer resin compounds are being manufactured by Harita-NTI for integration with paper that is manufactured by ITC's paper boards and specialty papers division.

The two companies are jointly developing solutions in the Indian market toward providing biodegradable compostable products such as food service-ware, food packaging, personal care product packaging, and other fast-moving consumer goods packaging. We also anticipate marketing these bio-based packaging solutions to customers in the US and Europe.

In addition, during fiscal 2011, NTIC entered into an agreement with Italy-based Naturfuels SRL to distribute our Natur-Tec bio plastic materials and products in the Italian and Swiss markets. Under the terms of the distribution agreement, NTIC has started supplying Naturfuels with NTIC's patented high-strength Natur-Tec compostable film-grade resin compounds, to be used for the production of bio plastic shopping and garbage bags on conventional plastic film production equipment in fiscal 2012.

Before turning it over to Matt to provide further detail on our financial results, I wanted to point out that as indicated in our prior releases, NTIC was recently awarded a National Science Foundation Small Business Technology Transfer Phase 2 grant of $500,000 for the development of Advanced Polylactide materials for bio-based and biodegradable plastic products, and more recently, a Department of Defense Small Business Innovation Research Phase 2 grant of $500,000 for the development of bio-based and marine biodegradable non-plastic bags.

The research and technology development for both of these projects will be conducted in collaboration with Michigan State University. These grants are the results of a successful project Phase 1 evaluation by the NSF and the DOD, respectively, and are further validation of NTIC's technology roadmap in the bio plastics area. We expect this funding to accelerate our efforts to commercialize and bring to market the next generation of high-performance bio-based resins.

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

Starting with ZERUST, net sales of NTIC's ZERUST products increased 34.2% to $18.5 million during fiscal 2011 compared to $13.8 million during fiscal 2010. This sales growth was primarily due to increased demand from the domestic industrial sector and the addition of a number of new customers in a range of market sectors.

Net sales of Natur-Tec products increased 72% to $984,000 during fiscal 2011 compared to $572,000 in fiscal 2010. Cost of goods sold as a percentage of net sales increased slightly to 65.4% in fiscal 2011 compared to 65.2% in fiscal 2010, primarily as a result of a slight increase in shipping cost, production overhead, raw material prices, and a higher percentage of sales of Natur-Tec products which generally carry smaller margins than ZERUST products and services.

As previously mentioned, our international joint ventures continued their revenue growth in fiscal 2011. We had equity and income of joint ventures of $5.5 million during fiscal 2011 compared to equity and income of joint ventures of $3.9 million during fiscal 2010. This increase was due to increased profitability of our joint ventures, primarily resulting from the 40% 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 over $6.1 million during fiscal 2011 compared to $4.7 million during fiscal 2010, representing an increase of 31%. This increase was due primarily to the same 40% increase in net sales of our joint ventures. Our total operating expenses increased 23% during fiscal 2011 compared to fiscal 2010, primarily as a result of increases in personnel and other expenses incurred to support the increased sales efforts with respect to both our ZERUST corrosion inhibiting products and our Natur-Tec products, as well as our research and development expense.

Net income was up 51% to $3.9 million or $0.89 per diluted common share for fiscal 2011 compared to $2.6 million or $0.61 per diluted common share for fiscal 2010. Pretax net income was up 98% for fiscal 2011 compared to 2010.

As of August 31, 2011, our working capital was $9.1 million, including $3.3 million in cash and cash equivalents compared to working capital of $5.9 million, including $1.1 million in cash and cash equivalents as of August 31, 2010.

As of August 31, 2011 and August 31, 2010, we had no borrowings outstanding under our $3 million line of credit.

As detailed in our press release, for the current fiscal year ending August 31, 2012, we expect net sales to range between $23 million and $24.5 million, inclusive of sales made by our Brazilian majority owned subsidiary. And we expect net income of between $4.7 million and $5 million, or between $1.08 and $1.14 per diluted share. We anticipate both sales and profits to ramp up slightly from quarter to quarter for fiscal 2012. However, we anticipate and historically there have 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 our ZERUST oil and gas business and our Natur-Tec bio plastics business, which seems to fluctuate more on a quarterly basis than our established ZERUST business.

This is primarily why we intend to provide only annual financial guidance. As we grow, we anticipate some of this volatility to dissipate and our earnings per share to be more predictable.

Please also remember that a very high percentage of our earnings are derived from our joint ventures in Europe. Given the current European sovereign debt crisis and the related political and economic issues facing Europe and the ultimate impact that could result on the rest of the world, we would anticipate decreasing our guidance in the event of a slowdown or a recession in Europe, and/or other parts of the world in which our joint ventures operate.

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

(Operator Instructions). Nick Halen, Sidoti.

So the first question I had is, in the press release, you guys said that you currently have 24 joint ventures and at the end of last quarter was 26. I guess, can you kind of give us an update on what happened there and I guess what are your expectations going forward in terms of joint ventures?

Well, in one case, we reclassified an operation, specifically Brazil. Since we have a majority ownership in Brazil of 85%, and consolidated now in our financial statements, we no longer classify Brazil as a joint venture rather than a majority owned subsidiary. So that's reason one why you have the change.

Oh, and also, there was a -- we are in a joint venture, a second joint venture in Thailand for various environmental products, and we are no longer operating in that sector.

Okay. And going forward, I mean, do you --

(multiple speakers) business. Pardon me?

And just going forward, are you guys actively looking to expand the amount of joint ventures you guys have out there?

Well, at this point, we have most of the industrial nations of the world covered in one form or another, either through joint ventures or distribution. We are always looking for additional opportunities. And as the right partners present themselves, we will certainly always be open to additional joint ventures, yes.

Okay. And then, just in terms of where you guys are seeing some pretty good demand, I know domestically you said it was mostly industrial, but can you kind of give us I guess with the joint ventures and internationally where you guys are seeing demand for the ZERUST products?

I'm sorry, I'm not quite sure I understood your question.

I guess where is the demand for the ZERUST products coming from outside of the US, I guess excluding oil and gas. Because I know domestically you said you're seeing some good demand on the industrial side, so --.

The demand for our core ZERUST products has been very strong, just pretty much universally across the board in all the countries we operate in.

One of the key things I have mentioned in previous webcasts and conference calls like this is the increase in the industrial sector is referred to now as parts tourism. As parts are partially manufactured in one country, shipped to another one for additional operations, then shipped to a third country for subassembly and then shipped to another country for final assembly, there are increased opportunities for us to provide protection at each step of that value chain.

So, yes, there are increases in sales from the countries you would naturally expect like China and India, but we also saw tremendous sales growth from every country in Europe and every country in Southeast Asia and South America. So, as I said, we have seen strong demand from every industrialized country that we do business in.

Great. Thank you.

Tim Clarkson, Van Clemens.

Great quarter, great year. Just a couple questions -- in terms of -- I know that you have talked about how you are more excited now, even you're still excited about the [any] applications of the environmental compostable product, but you're even more excited about selling the resin directly. Can you just give us some more background why you think that potentially is a better business?

It dramatically increases our reach in the market. Specifically in Italy, we would be or already have started to supply certain established extrusion companies. Those extrusion companies already have their own distribution networks in place for the finished products, so they can get a much broader entry into the Italian market than we could if we were trying to do this independently and start selling finished products in Italy ourselves.

We were a little bit delayed in getting started in Italy primarily because one of our key material suppliers, BASF, was having production problems earlier this calendar year. They have now informed us they have made repairs to their plant. They're in full production, and we are now delivering to Italy and expect those deliveries to Italy to increase quite significantly in the coming months.

So in a way, the way you are selling your resins is kind of similar to the way you sell your other proprietary product, the ZERUST product. So you send big bags of the secret sauce over there and you let other people handle the details.

It's slightly different because in the case of our ZERUST products, we wind up, through the joint ventures, being the primary marketers ourselves of those particular because they require a lot of on-site technical support with the end-users.

In the case of the bio plastic products, that end-user technical support isn't necessary, which makes it a significantly different sales and support model. And in this case, we think we will be much better served, and obviously our investors will be much better served if we wind up selling as much of these resin compounds as possible.

Okay, great. One other question, just in terms of the scuttlebutt you are hearing in terms of, for example, Petrobras and their use of this rust-inhibiting technology on flanges and so on, what are you hearing in the field as to the impact of this product? Is this product being well-received in the field? Are the people using it? Are they seeing the benefits of it and so on?

Well, I would like to say that Petrobras is definitely seeing the benefit. And that's I think evidenced by giving us a much more sizable Phase 2 contract for further implementation.

We're also seeing some very nice results in various trials we have around the world, and are seeing orders for derivative products of the Flange Saver product you asked, you just mentioned, in both Russia and in Southeast Asia.

Okay. Good. Well, thanks. I appreciate your responses. I'm done.

Brian Yurinich, Craig-Hallum.

I just had a couple of quick questions for you. As we look to 2012 on the ZERUST, kind of the oil and gas products, how much growth could we see in kind of the non-Petrobras? Could that become a more material portion of that total revenue in 2012? Could we see $500,000 in that? Or do we have an idea of what could come?

First of all, the easy answer to that question is most definitely we can see significant growth. And as I mentioned earlier, as these things come to fruition, we will expect to see choppy spikes, so I can't give you a clear answer of exactly when in the coming year we expect to see that or how much and in what quarter.

So, what I'm trying to say is yes, we expect nice growth in the oil and gas sector, but it's still too early for us to tell you exactly how high that's going to be. You'll probably most likely see that coming in the second half of this year, fiscal year.

Okay. And then, on the Natur-Tec, can you remind us what kind of Natur-Tec products you guys have going on that would flow through the top line and which ones we would see kind of going through the JV's?

Okay, great question. The way we have these things set up at this point, any sales that we make in North America would flow to our top line in North America. The same thing with the sales going to other countries like Italy will also come to our top line.

What will not show up on our top line are the domestic sales made by Harita-NTI in India. So anything we sell to ITC in India will not be reflected in our top line. That will come in through joint venture earnings.

Okay. Thanks. And you guys have spent quite a bit of money on the Natur-Tec. Do you think as we get to 2012, we can kind of achieve a breakeven level on that?

By what we have seen in the demand both in the United States, India, and now Italy, yes, we definitely expect to be breaking even this fiscal year.

Okay. And then just one last question -- it looked like the equity income from JV's was just down quarter over quarter. Does that just fluctuate or is there -- can you just explain how that works?

This is Matt. Yes, it does fluctuate. One of the interesting things is if you look at our quarterly earnings per share after-tax EPS numbers, you will see what looks like a very steady growth. However, if you go up into the income statement, you will see that for quarter one, between quarter one and quarter two, JV earnings was down $600,000; from quarter two to quarter three it was up $800,000; and into quarter four, it was down almost $700,000. So obviously there's some pretty big fluctuations in earnings at the JV level.

It just tends to -- it's difficult when you have that much -- that high -- of a sales number coming from the joint ventures that isn't necessarily consistent and tends to fluctuate a little bit -- has a very material impact on our financials.

I don't -- I can look on a JV by JV basis to see why it was essentially down from Q3 to Q4. I certainly don't anticipate the equity income of JVs to be down at that level going forward. We certainly tend to see the volatility.

Perfect. Thank you.

Joe Furst, Furst Associates.

Good morning, gentlemen. Again congratulations on great year. You've done a great job. And the outlook for next year that you presented shows roughly a 20% sales increase or revenue increase and 25% profit increase, which is great. One question, you mentioned about -- a little bit the concern about Europe. Do you currently see any signs of a slowdown in your joint ventures in Europe? Or is it just something you're obviously concerned about because of what's going on?

Well we saw in looking at our quarter-by-quarter sales to Europe and our JV sales in general, the JV sales were relatively flat going from third quarter to fourth quarter. We didn't really see a decrease. However, we certainly are concerned about what's going on.

If there is -- obviously if there is a European recession, that's something that is going to flow to the rest of the world. And given that 60% of our joint venture sales are European-based sales, it's certainly something that we are watching very closely, and certainly a concern that we have.

I mean I can confirm that the company is obviously -- given our structure and our -- the fact that we don't have manufacturing equipment and how we sell our product and manufacture our product, we are able to respond to, call it recessions and things like that, relatively quickly, so that we are able to put procedures in place and put cost-cutting operations in place to have a very quick impact for the company.

So, we don't see any long-term issues with the company as far as if there is a second recession. We do have a pretty hefty cash balance at present. So we are kind of comfortable with where things are. However, we're certainly monitoring everything very closely.

And obviously, as in the past, your projections are very conservative with keeping this kind of thing in mind, I would assume. Is that correct?

We always like to over impress you with the results we've actually achieved rather than our projections of what we're wanting to do.

I appreciate that, and that's great. Thank you, again. Great job. Appreciate it.

Aaron Martin, AIGH Investment Partners.

I want to follow up on one of the original -- on one of the earlier questions on Natur-Tec. Obviously, as we're growing the business for now, the drag on the earnings. Is there any way of quantifying how much of a drag on earnings it was in 2011?

In 2011, I would, in rough numbers, I would say that Natur-Tec cost the company somewhere between $1.4 million to $1.6 million.

Okay. And if I'm understanding, if on -- gross margin in the Natur-Tec business are roughly --?

The margins in the Natur-Tec business are roughly -- I would say probably 20% to 23%.

Okay. So I mean if we're talking about being break-even in 2012, that would take an extra $5 million, $6 million in revenue in Natur-Tec alone. Is that thinking along the right lines?

Correct. I don't think it would take exactly that much. As we start to increase volume and with some of these additional sales that we are having, I think the margins could be a little bit better than 20% to 25%. But you're right, we would need to hit somewhere between $4 million and $5 million in sales to break even with Natur-Tec.

Okay. And then essentially really most of the revenue growth for next year is really going to come from Natur-Tec the way you see it right now?

We're certainly expecting a significant amount of growth to come from Natur-Tec.

As I mentioned before, we're expecting to see it break even this year at a minimum.

Okay. Great. Thanks, guys.

(Operator Instructions). Charlie [Pine], Van Clemens.

Good morning and congratulations for a great year. I just have a couple questions, a couple pertaining to the ZERUST oil and gas area to begin with and then one on the automotive sector.

Have you been expanding the amount of trials with oil and gas customers in Flange Savers recently, over the last say 90 to 120 days? And/or is your outlook for expanding the amount of -- what is your outlook for trial expansion over the near term?

Yes, we have expanded our trials in that time period in a number of regions throughout the world. We are also anticipating doing some trial installations in the first two months of next year in the Middle East, and, have also started, as I mentioned before, doing some initial sales in Russia. So, we are expanding.

And, can you give us any further color about where things stand regarding the status of your oil and gas initiative with Pemex?

Good question. I don't have any firm information for you at this time. We are going through the process.

Right. And finally, in your -- in the JV area, in ZERUST for the automotive sector, have you been seeing any knock-on effects at all recently in the auto sector in Southeast Asia from any of your Asian JVs due to impacts of flooding in Thailand?

A great question. So far, in contact with our operations in Thailand, yes, the flooding has put some stress on the business, but they are continuing to deliver to customers without interruption, primarily because we are -- although our own manufacturing in Thailand is currently stalled, we are delivering product from both Malaysia and Korea into Thailand, so our deliveries are uninterrupted. And actually, when you have lots of flooding and business interruptions, that tends to cause corrosion. So we actually anticipated this might ultimately be a sales opportunity for us, both for our corrosion inhibiting products as well as the rust-removing products we are also marketing in that country.

Oh, well that's encouraging. Okay. Thank you very much.

Thank you. This in the Q&A portion of today's conference. I'd like to turn the call over to management for any closing remarks.

I would like to thank everyone for participating today.

In closing, we expect to continue NTIC's growth in both our net sales and earnings moving forward into fiscal 2012. Specifically, we are dedicated to achieving revenue growth with our established ZERUST business while expanding the market for both our oil and gas products and our Natur-Tec bio plastics business.

Thank you for listening today and for your interest in NTIC.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.