Northern Technologies International Corp (NTIC) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to Northern Technologies International Corporation first-quarter 2012 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 will turn the call over to Patrick Lynch, President and CEO. Please begin.

Good morning, and thank you for participating in this call. I am Patrick Lynch, NTIC's Chief Executive Officer, and I'm here together Matt Wolsfeld, NTIC's Chief Financial Officer. To start, I would like to note that NTIC's fiscal 2012 first-quarter results were included in a press release issued earlier this morning, a copy of which is now available on our website at NTIC.com. During this call, we will review various highlights of these first-quarter 2012 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.

Now, as to an overview of our financial results. We are encouraged by the continued growth of our net sales, which increased 18% to $4.8 million, during the first quarter of fiscal 2012, compared to $4.1 million during the first quarter of fiscal 2011. This growth was primarily due to increased demand from our existing customer base in the domestic industrial sector, for both established and new ZERUST brand products, as well as the addition of new customers in new market sectors.

Despite a devaluation of the Euro and other currencies compared to the US Dollar, as well as general economic concerns in Europe, sales at our joint ventures still increased 6% to $28.8 million in the first quarter of fiscal 2012, compared to $27.1 million in the first quarter of fiscal 2011. Although this growth percentage is smaller than in the past, we are still encouraged by the results, given the macro circumstances. Based on discussions with our joint ventures, each of them is still optimistic that growth will be consistent with past years. This is a situation that we will continue to monitor very closely. Please note 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's sales. Rather, the sales, and ultimately our portion of profits by our joint ventures is reflected in the 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.

For first quarter of fiscal 2012, we earned $0.22 per diluted share, which is a slight increase from the $0.21 per diluted share earned during the first quarter of fiscal 2011. With respect to expanding our ZERUST corrosion prevention technologies into the oil and gas industries during the first quarter of fiscal 2012, as we anticipated and as we alluded to in our November earnings call, we did not have significant sales by our Brazilian majority-owned subsidiary to Petrobras during the first quarter of fiscal 2012. The majority of the Phase 2 contract to supply $2.6 million in ZERUST products to Petrobras' optional oil production platforms is likely to be exhausted in the second and third quarters of fiscal 2012, as Petrobras rolls the implementation of these products out to more of its off-shore platforms. Please note that as evidenced in the past six quarters, the sales to Petrobras, while contractual, tend to be rather volatile. We anticipate that this volatility will dissipate eventually in future periods, as our ZERUST products are further rolled out by Petrobras.

NTIC continues to progress with oil and gas industry clients with additional, new product trials at both Petrobras as well as its other large prospective customers in various countries around the world. Larger-scale orders, that involve the adoption of these new technologies by large oil and gas institutions, however, continue to take considerably more time than we see in other industrial sectors. Consequently, as we have stated before, growth and expansion into the oil and gas market will continue. However, we believe the effects 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, turning to our Natur-Tec bioplastic business. Sales of our Natur-Tec products increased 70% to $379,000 during the first quarter of fiscal 2012, compared to $223,000 during the first quarter of fiscal 2011. Natur-Tec represented roughly 8% of NTIC's consolidated net sales during the most recent period. This sales growth was due to increased customer demand for Natur-Tec compostable products, driven primarily by legislative mandates in northern California, the Pacific Northwest, and states such as Minnesota, that require the diversion of organic waste from landfills to centralized composting facilities, in order to significantly reduce the amount of greenhouse gases emitted to the environment.

We continue to see tremendous opportunities for finished bioplastic products and therefore, we continue to strengthen and expand our North American distribution network for finished Natur-Tec bioplastic products. We recently signed up Boulder, Colorado-based Eco-Products, as a distributor for our finished products. We expect this alliance to expand and enhance our market reach into the large food service segment, where Eco-Products has a strong presence. We also continue to believe that there is a great opportunity to sell our patented Natur-Tec bioplastic resin compounds to manufacturers of plastic products around the world.

In the first quarter of fiscal 2012, we initiated shipments of film-grade resin compounds to our distributor in Italy, Naturfuels. We expect these shipments to ramp up significantly in the third and fourth quarter of this fiscal year. Through our joint venture, Harita-NTI, we foresee tremendous opportunities for bioplastic resin compounds and finished products, due to recent legislation in India, banning the use of non-biodegradable plastics in certain high-volume packaging applications. We also expect our alliance with ITC Paper to translate into new opportunities in the consumer goods packaging market in India, during the remainder of fiscal 2012 and beyond.

Finally, in the first quarter of fiscal 2012, NTIC was awarded two research grants. The first one, 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, the second grant, 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, both over a two-year period. The research and technology for both of these projects will be conducted in collaboration with Michigan State University. These grants are the result of successful project Phase 1 evaluations by the NSF and the DOD, respectively, and are further validation of NTIC's technology road map in the bioplastics area. We expect this funding to accelerate our efforts to commercialize and bring to market a new generation of high-performance bio-based resins. I will now turn the call over to Matt Wolsfeld, to summarize our fiscal 2012 first-quarter financial results.

Thank you, Patrick. Starting with ZERUST, net sales of NTIC's ZERUST products increased 15% to $4.5 million during fiscal 2012's first quarter compared to $3.9 million during the first quarter of fiscal 2011. 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 70% to $379,000 during the first quarter of fiscal 2012, compared to $223,000 in the first quarter of fiscal 2011.

Cost of goods sold as a percentage of net sales increased slightly, to 66.4% in the first quarter of fiscal 2012, compared to 65.7% in the first quarter of fiscal 2011, primarily as the result of a slight increase in production overhead and a higher percentage of Natur-Tec product sales, which generally carries smaller margins than ZERUST products. As previously mentioned, our joint ventures continued their revenue growth in the first quarter of fiscal 2012. However, equity and income with joint ventures was $1.4 million during the first quarter of fiscal 2012, compared to equity income of $1.7 million during the first quarter of fiscal 2011. This decrease was anticipated due to the unusually high profitability of our joint ventures during the first quarter of fiscal 2011.

The equity and income of joint ventures of $1.4 million during the first quarter of fiscal 2012, is consistent with the average equity income of the previous four quarters. We also recognized consistent fee income for services provided to our joint ventures, which amounted to $1.45 million during the first quarter of fiscal 2012 and 2011. This was expected, given the devaluation of the Euro and other currencies, compared to the US Dollar, partially offset by the 6.3% increase in total net sales of NTIC's joint ventures. Our total operating expenses decreased 4% during the first quarter of fiscal 2012, compared to the first quarter of fiscal 2011, primarily as a result of efforts to hold expenses stable given the uncertainties in the global economy.

Overall, net income was up 5% to $935,000, or $0.22 per diluted common share for the first order of fiscal 2012, compared to $895,000 or $0.21 per diluted common share for the first quarter of fiscal 2011. As of November 30, 2011, our working capital was $11.4 million, with $3.4 million in cash and cash equivalents, compared to a working capital of $9.1 million, including $2.3 million in cash and cash equivalents as of August 31, 2011. As of November 30, 2011 and August 30, 2011, we had no borrowings outstanding under our $3 million line of credit. We just extended the maturity date of our line of credit an additional one year, until January 9, 2013.

With respect to our financial guidance, for the current fiscal year ending August 31, 2012, we expect net sales to continue to range between $23 million and $24.5 million, inclusive of sales made by our Brazilian majority-owned subsidiary, and we continue to expect net income of between $4.7 million and $5 million, or between $1.08 and $1.14 per diluted share. Additionally, we continue to anticipate both sales and profits will ramp up slightly from quarter-to-quarter of fiscal 2012. However, we anticipate, and historically there has been, a significant amount of volatility in our quarterly earnings per share. This is largely due to the financial performance of our joint ventures, and the financial performance of our newer businesses. Including ZERUST oil and gas businesses and our Natur-Tec bioplastic businesses, which fluctuate more on a quarterly basis than our established ZERUST industrial business.

This is primarily why we intend to provide only annual financial guidance. As we grow, we anticipate some of this volatility will dissipate eventually in future periods, and our earnings per share will 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 still anticipate decreasing our guidance in the event of a slowdown, or if a recession occurs in Europe, or any 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.

Thank you. (Operator Instructions). We will hold for questions. We have a question from Tim Clarkson of Van Clemens. Your line is open.

Hi, nice quarter. I just wondered if you have any color on the process of when you are working with countries or businesses like Petrobras, or some of the other companies I know that you are in investigation with, with your new application of your core technology in the oil service industry. What is the process? It is sort of mysterious on our end in terms of understanding, testing, and what are these decision-makers looking forward in terms of giving you meaningful business?

Thanks, Tim. Let me address that really quickly. First of all, the various -- it's on a case-by-case basis and to color that for example, some of the work we did with Petrobras was originally done in storage tank tops, which was on the refinery side of the business. It was a completely different decision-making body from what we are doing with the offshore rig protection. Now, each of those have different decision-making bodies, different technical evaluators, and in each case, generally speaking, it takes us a while to talk to the right people before they initiate the trials.

The trials in general can run anywhere from two to four years and then you wind up in the business cycle where you wind up, A, negotiating prices and delivery cycles, and then, ultimately you wind up going to the legal department to hammer all that out with a contract. And, that means it can take quite a long period of time, especially when you're dealing with very large organizations, such as Petrobras. Now, what is encouraging to us, specifically in the case of Petrobras of course is, that we continue to get the new contracts for the offshore business and that they are still very eager to get new trials or try new products that we bring to them, which is an ongoing project with them as well.

Can you comment on any new applications you are looking at with Petrobras?

It is a little bit premature. I can tell you that there are a few things in progress but, I think it's too early without Petrobras's permission to speak on any of the other areas we are working with them on.

Okay, thanks.

Thank you. Our next question is from Brian Yurinich of Craig-Hallum Capital. Your line is open.

Good morning, guys. Good quarter. I just was wondering, you talked about some new sectors for traditional ZERUST products outside of industrial. Can we get some clarity on what those might be, or what the opportunity there could be?

Well, I would say that -- I have mentioned some of this before, specifically in the agricultural sector. On some of the other areas where we are getting traction, I would rather not mention it on an open line, simply to keep our competitors guessing as to where we are getting some of this new business from.

All right. That's fair. Let me get back in the queue.

(Operator Instructions). Our next question is from [Jerry Wells], a private investor. Your line is open.

Say, listen, I was wondering if you could give some clarity relating to your joint ventures? Primarily ZERUST, as far as rights and restrictions that Northern Technologies has. In other words, if you want to terminate somebody, is there cancellation rights? And, is there a buyout at book value? I am just kind of curious on all the joint ventures, what your rights and restrictions are?

That's a fairly long and complicated question. If it is specific to you, I would actually recommend that you might call Matt Wolsfeld after this call, and he can walk you through all that. As a brief answer, the general rights that the joint ventures have is to specific geographic territories, to which we license our technology. And, then, those joint ventures are responsible for local marketing, sales and in certain cases, the subcontracting of the finished product that we sell.

Okay, I will follow up with Matt on it. Thanks.

Yes.

Thank you. Our next question is from Charlie Pine of Van Clemens. Your line is open.

Hi, good morning, folks. Good quarter. I was late getting on the call, though. I was just curious, did you discuss in your prepared remarks anything regarding the status of ongoing progress with any other installs or negotiations with any company -- other companies in the ZERUST oil and gas sector?

I didn't get specific on the call. I can say that we will be doing certain installs just this month, at least two new clients. These would be in the Middle East.

All right. Can you expand a little bit on what the scope of these installs would be that you are doing?

No. That is all confidential.

What I was just kind of curious about is, these would be -- I gather this would be for Flange Savers for offshore platforms?

No. Actually, this is on-shore protection of infrastructure. In both cases.

All right. And, the specific application is not something that you are prepared to talk about yet?

No. We don't have the clearance from the client.

And you said these are two separate Middle Eastern -- are they state-run oil and gas companies?

I believe one of them is state-affiliated, the other is private.

All right. And anything else that's upcoming on the near-term horizon? In the past, you have mentioned that there is 12 or so potential trials or installs that were sort of in-stream or on the bubble and I'm just kind of curious to where you might be with -- is there anything else that has transpired since the last call?

As I tried to mention earlier, when Tim Clarkson was asking, some of these trials can last quite a long period of time. Somewhere between two and four years is an evaluation period. Which, I admit is frustrating for both of us, but that is unfortunately the nature of this particular industry.

Okay. All right, thank you.

Thank you. Our next question is from Brian Yurinich of Craig-Hallum Capital. Your line is open.

Thanks, guys. Just a follow-up. Can you remind us how much revenue of the $2.6 million on the Phase 2 you guys have recognized so far?

So far, we have recognized about $200,000 of the $2.6 million.

Okay. And then is there any way we could get kind of a walk-through on where you stand with certain clients and kind of how long you have been in trials with them? Is that information you guys can share?

We prefer not to.

Okay. That is all I have.

Thank you. Our next question is from Joe Furst, of Furst Associates. Your line is open.

Good morning, gentlemen. Nice quarter. Good work. Are you making any progress on ruse of the oil storage tank business? That was one of the first things that you were testing, but I've not seen too much progress in that?

Actually, that's a good question. Right now, specifically with Petrobras, their efforts in terms of corrosion protection are almost entirely focused on their offshore infrastructure. As I believe I mentioned on the previous call, the strategic plan for Petrobras is, as their current production capacity is 2.5 billion barrels of oil per year, and their internal plan is to double that production by 2020. So, over the next eight years, they have to double their production, offshore production capacity, and therefore, they are sending their best and brightest as well as their money to invest.

And right now, if you have been following the news, you may have even heard about the increase in production orders for a lot of oil service-providing companies, both in Brazil as well as elsewhere in the world. I don't think there is a shipyard in the world right now, any major shipyard in the world right now that isn't working in some form on a Petrobras-related order. Consequently, we expect that in the next year or two for sure, that Petrobras is focusing all of its efforts, again, on offshore corrosion protection, rather than onshore corrosion protection, and as I also mentioned earlier in the call, in addition to the contracts we already have in place, Petrobras has other product trials ongoing with us, specifically focused on offshore corrosion protection opportunities.

Thank you. I'll get back in the queue. Thanks.

Thank you. We have a follow-up from Charlie Pine of Van Clemens. Your line is open.

Just a quick follow-up and two things. First one, do you have anything that you can tell us at all about the status of your ongoing negotiations with PEMEX?

Nothing new at this time unfortunately. To the best of our understanding, we are stuck in bureaucratic gridlock.

So, you haven't had -- would you characterize that as basically being no progress since the last call? Or, has there been some -- have you moved the ball forward at all?

No. Quite frankly, as we mentioned previously, we did the technical evaluations on an accelerated basis. They came back, they approved every product we tried, from a technical basis and since then, we have been in discussions of going to a commercial phase, but so far, that has not moved forward.

What's behind the nature of this so-called bureaucratic gridlock?

If I knew that, we probably wouldn't be having that bureaucratic gridlock.

Okay. And, the other thing I would just like to get some clarity on, because I just connected during your prepared remarks, can you talk a bit more about the Natur-Tec projects with those -- I believe it is either one or two companies that you have right now within India?

Sure. First of all, let me clarify what I was saying during my scripted remarks. The joint venture with NTI in India is called Harita-NTI. They are the joint venture company that also acts as our manufacturing arm for the resin compounds that we sell under the Natur-Tec brand. Now, Harita-NTI sells finished products as well as resin compounds to a number of customers in India. One of those customers, is ITC. ITC stands for India Tobacco Company and they are a large conglomerate of -- I think it has $5.5 billion to $6 billion in annual revenues for tobacco products, packaged goods, foods, they also own hotels and a few other business interests.

The specific application with ITC is they have also a paper division, and they are buying our resin products to extrusion coat the paper on one side with bio polymers to give the finished packaging product greater strength and moisture resistance, which they are then using in their own divisions to package their finished products. Given the size and market clout they have in India, we have great expectations for the volume they can generate, not just in India but in certain cases, also for finished products that they are selling outside of India.

The other opportunity that I mentioned specifically with Naturfuels in Italy, Naturfuels is a distributor that is selling our finished resin compounds to various plastic extrusion companies in Italy. They are using our resin compounds, and then producing their own finished products with those. Given the ban on retail supermarket plastic bags in Italy at this point, we expect, fortunately for conventional plastic, non-biodegradable plastic retail bags in Italy, we expect that the demand for our resin compounds will continue to ramp up nicely in the next 12 to 18 months.

Regarding ITC and their use of your Natur-Tec coated paper products, are those being offered on ITC's commercial products currently? Or, is it still a work in progress? And, if they are not, when you perceive that those will be generating the revenue?

In my understanding, they have moved that into commercial phase. They are buying truckload quantities of resin compounds from us. And, slowly rolling it out as they are changing the packaging on various finished products that they produce.

Okay, great. That's very encouraging. Thank you.

Thank you. We have a follow-up from Joe Furst of Furst Associates. Your line is open.

Yes. On the Natur-Tec products, last year you had a substantial loss in that area, and I believe in a previous call you said you thought that this year, your new business in the area would wipe out that loss. Is that still the case? Or do you think that still the case?

I don't believe we said we would wipe out the loss. What we did say is that we expect to be break-even as of this fiscal year. Now, that is our current plan. There are certain potential projects that we have in the works that could significantly increase our sales of Natur-Tec over the next 12 to 18 months. But right now our plan internally is to have Natur-Tec at least breakeven by fiscal year-end.

Got you. Okay. Thank you.

Thank you, and I am showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

I'd 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. 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.