Northern Technologies International Corp (NTIC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Northern Technologies third-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.

I will turn the conference over to Patrick Lynch, Chief Executive Officer. Please begin, sir.

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

To start, I would like to note that NTIC's fiscal 2012 third-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 third-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 and subsequent quarterly reports on Form 10-Q. We suggest that you read these reports and other future filings that we will make with the SEC. We disclaim any duty to update or revise our forward-looking statements.

NTIC achieved record sales and earnings in the third quarter of fiscal 2012. Net sales increased 53% to $7.8 million and net income increased 42% to $0.33 per share compared to the third quarter of fiscal 2011. Net sales increased 26% to $17.6 million during the first nine months of fiscal 2012 compared to $14 million during the first nine months of fiscal 2011. These increases were the result of higher sales of Zerust products in North and South America along with higher sales of Natur-Tec bio-plastic products along the US West Coast.

Income provided by our joint venture operations decreased 24% and 13% for the three and nine months ended May 31, 2012, respectively, corresponding somewhat to a decrease in total net sales by our joint ventures of 13% to $29 million during the three-month period and a decrease of 4% to $84 million during the nine-month period ended May 31, 2012. These decreases in total net sales by our joint ventures were due in part to the adverse effect of the European sovereign debt crises on the net sales of our European joint ventures, as well as certain of our other non-European joint ventures and the effect of the weakening of the euro and other currencies compared to the US dollar.

We believe strong sales and earnings growth of Zerust products outside of North and South America likely will continue to be quite difficult to achieve while the sovereign debt crises in various European countries adversely affect the economies and currency values of Europe, as well as key supplier countries like China and India. We are being exceptionally cautious as we watch for firm signs of industrial recovery in Europe and other regions.

For the first nine months of fiscal 2012, we earned $0.68 per diluted share, which is an increase from the $0.66 per diluted share earned during the first nine months of fiscal 2011. This increase is mostly attributable to increases in sales of Zerust products in North and South America, as well as increases in sales of Natur-Tec products, partially offset by decreases in total income from our joint venture operations.

As we discussed in our April earnings call, our $2.4 million Phase 2 contract with Petrobras was expanded by $657,000, bringing the total Phase 2 contract value to $3.1 million. Furthermore, during third quarter, Zerust Brazil delivered the entire remaining balance of this Phase 2 contract to Petrobras, which represented sales of $2.5 million. Because of this recent significant product delivery to Petrobras, we do not anticipate any significant sales to Petrobras during the fourth quarter of fiscal 2012.

Please note that, as evidenced during the past two fiscal years, our sales to Petrobras, while contractual, tend to be rather volatile. We anticipate that this volatility will continue in future periods as our Zerust products are utilized by Petrobras.

We continue to remain heavily focused on selling our Zerust pollution prevention solutions and products into the oil and gas industry, since we continue to believe this market sector represents a much greater growth potential than our core but mature industrial Zerust market.

We continue to make progress with not only Petrobras, but also other oil and gas industry clients. We have a number of new products in trial at Petrobras, as well as trials of existing products at other large clients in various countries around the world. In addition, we have received small initial orders from new customers in the US, UAE and India. Large-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, although we believe growth and expansion into the oil and gas market will continue, we believe the effect on our financial results 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 bio-plastic business. Sales of our Natur-Tec product increased 104% to $1.4 million during the first nine months of fiscal 2012 compared to the $670,000 during the first nine months of fiscal 2011. Natur-Tec represented roughly 8% of NTIC's consolidated net sales during the most recent period. Customer demand for Natur-Tec compostable products has continued to grow quickly, 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.

The demand has also increased for finished bio-plastic products and, therefore, we continue to focus on strengthening and expanding our North American distribution network for finished Natur-Tec bio-plastic products.

We also continue to market our patented Natur-Tec bio-plastic resin compounds to manufacturers of plastic products around the world, especially in the key markets of North America, Italy and India. As we have discussed on prior calls, during fiscal 2011, NTIC entered into an agreement with Italy-based Naturfuels to distribute our Natur-Tec bio-plastic materials and products in the Italian market. This relationship was driven by the Italian legislation banning the use of non-biodegradable plastic shopping bags.

In March 2012, however, it was announced that broader enforcement of this law will be delayed until late 2012 to allow Italian bag manufacturers to exhaust their current supply of conventional plastic resins before switching over completely to certified compostable resins. We are still optimistic that we will see a ramp-up of resin sales to Italy after October 2012.

As a reminder, any Natur-Tec sales to Italy would be recognized by NTIC directly, as opposed to being run through our joint venture operations.

In 2011, the Indian government enacted legislation banning the use of certain non-biodegradable plastics for laminate packaging for tobacco and food products. As a result, Harita-NTI, our joint venture in India, has already seen significant growth in demand for Natur-Tec's compostable resins in this potentially large market for laminate packaging.

We also expect our alliance with ITC Paper to translate into new opportunities in the consumer goods packaging market in India and for certain export market segments in Australia and North America. In May 2012, Harita-NTI also began initial supplies of finished Natur-Tec products to an iconic US brand that is in the process of implementing Natur-Tec bags into their supply chain as they source finished products from India and other countries.

I will now turn the call over to Matt Wolsfeld to summarize in more detail our financial results for the three and nine months ended May 31, 2012.

Thanks, Patrick. Starting with Zerust, net sales of NTIC's Zerust products increased 49% to $7.2 million during third quarter of fiscal 2012 compared to third quarter of fiscal 2011, and 22% to $16.2 million during the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011. This sales growth was primarily due to increased demand for our Zerust products and services in North and South America.

Net sales of Natur-Tec products increased over 138% to $600,000 during the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011, and 104% to $1.4 million during the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011.

As previously mentioned, income provided by our joint venture operations decreased 24% and 13% for the three and nine months ended May 31, 2012, respectively, compared to the same respective prior fiscal year periods. These decreases were primarily a result of decreases in total net sales of NTIC's joint ventures and the effect of the weakening of the euro and other currencies compared to the US dollar.

As discussed in our earnings release, during the three months ended May 31, 2012, the shareholders of our joint venture in India waived past-due fees for services from both fiscal 2011 and fiscal 2012 in the aggregate amount of $985,000. Since the waiver of fees was taken by all shareholders mutually, this action did not directly impact the earnings of either Harita-NTI or NTIC. However, as a result of the action, NTIC recognized a reversal of fees for services provided to joint ventures of $493,000 and a corresponding increase in equity and income of joint ventures during the three months ended May 31, 2012. The primary purpose of the waiver of fees was to strengthen Harita's working capital going forward.

In addition, in fiscal 2012, Harita experienced write-downs of an aggregate of $605,000 related to the write-down to market value of a polymer energy unit that Harita was previously attempting to sell. As a result, during the nine months ended May 31, 2012, NTIC absorbed 50% of this loss and accordingly recognized a decrease in equity and income of $303,000 during the nine months ended May 31, 2012 related to this write-down.

With respect to our joint venture operations and how they reflected on our consolidated statement of cash flows, keep in mind that dividends received from our joint ventures are reflected in our cash flows from investing activities and not our cash flows from operating activities. Accordingly, our cash flows from investing activities are typically positive, while our cash flows from operating activities are typically negative.

For the nine months ended May 31, 2012, net cash used in operating activities was $1.2 million, whereas the net cash provided by investing activities was $2.5 million, $3 million of which were from dividends received from our joint ventures. Accordingly, if dividends received from our joint ventures were reflected in our cash flows from operating activities for the nine months ended May 31, 2012, our cash flows from operating activities would have been $1.9 million.

Our total operating expenses increased slightly to $10.5 million during the first nine months of 2012 compared to the first nine months of fiscal 2011, primarily as a result of the increases in selling expense, general and administrative expenses and expenses incurred in support of joint ventures, partially offset by decreases in research and development, and reflected our efforts to hold expenses stable given the uncertainties in the global economy.

Overall, net income attributable to NTIC increased 42% to $1,454,000, or $0.33 per diluted common share for the three months ended May 31, 2012, and increased 5.1% to just over $3 million, or $0.68 per diluted common share, for the nine months ended May 31, 2012, in each case, compared to the same respective prior period.

As of May 31, 2012, our working capital was $1.4 million, including $4.5 million in cash and cash equivalents, compared to working capital of $9.1 million, including $3.3 million of cash and cash equivalents as of August 31, 2011. As of May 31, 2012, we continue to have no borrowings outstanding under our $3 million revolving line of credit.

With respect to our financial guidance, for the current fiscal year ending August 31, 2012, we continue to expect net sales to range between $23 million and $24.5 million, inclusive of sales made by our Brazilian majority-owned subsidiary. However, due to an anticipated decrease in income from our joint venture operations, we expect net income attributable to NTIC to range between $3.8 million and $4.1 million, or between $0.87 and $0.93 per diluted common share, for the fiscal year ended August 31, 2012.

Additionally, we continue to anticipate both sales and profits to remain volatile from quarter to quarter during the remainder of fiscal 2012 and 2013. This is largely due to the financial performance of our joint ventures and the financial performance of our Zerust Oil & Gas business and our Natur-Tec bio-plastics business, which fluctuate more on a quarterly basis than our established U.S. industrial business. This is primarily why we continue to provide only annual financial guidance. As we grow, we anticipate some of this volatility to dissipate eventually in future periods and our earnings per share to be more predictable on a quarterly basis.

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

(Operator Instructions) Michael Ross, Van Clemens & Company.

This is Tim Clarkson on Mike Ross's phone here. Just wanted to ask -- it seems like you are getting some more intense interest out of this Indian application for -- is it cigarettes? And what is it about that particular application that makes the potential for the recyclable bio-plastics a good application?

It is not cigarettes. It is actually chewing tobacco. And I guess India is a fairly high consumer of chewing tobacco, which they sell in small sachets. The existing small sachets are not biodegradable, and when they get tossed out onto the side of the street, they tend to build up in large waste piles. That is why the Indian government changed the regulations to make their future packaging more environmentally friendly. And given the size of that particular market, we anticipate if we get a decent share, especially of the higher end section of the market, that it would mean significant sales to our Indian joint venture.

How big is the market?

In terms of the dollar value potential to HNTI, or as far as the chewing tobacco market in India goes?

The dollar potential to NTCI.

It is still fairly early to say, but that application alone we anticipate could easily keep Natur-Tec in breakeven status.

In terms of -- you mentioned some new applications in the oil and gas industry. I'm guessing that you don't want to get into the specifics, but what is -- any early indication of what the potential of those new applications would be?

Are you talking about the new clients, or the new technologies that we have in trial?

Well, both, but especially the new technologies.

The one in particular is quite significant, which would, in our expectations, potentially be in line with what we've seen with the products we are currently supplying to Petrobras.

We are also seeing significant interest now in various trials, not just at Petrobras, but also at other oil and gas companies, for the protection of storage tank bottoms. We now have oil storage tank bottoms installed in the US, in Brazil and in the UAE, and we certainly expect that, assuming that all the things go well, we will see more of that.

How long do you think the trials will go?

In general, it has been very diverse from company to company. Petrobras tends to run its trials for two years, at least in our experience. Some of these other companies, however, have been promising us shorter times, but I don't have the exact numbers in front of me.

Okay. Thanks, Pat.

One more question, Pat. This is Mike Ross. Could you elaborate a little bit on the Pemex situation? Are you doing anything more with them, or where are you at?

Right now, Pemex seems to be stalled in bureaucratic negotiations and budget issues. So right now, our marketing efforts are focused more north of the border, particularly in the United States, in Houston, where we are seeing some significant increases in sales, particularly even of products into the US oil and gas market.

Okay, thank you.

Joe Furst, Furst Associates.

Good quarter. Can you explain a little bit more on the potential market for the Flange Savers on the oil rigs in the different oil companies and what kind of progress you are making with that product line?

Well, that particular product line represents the majority of our sales to Petrobras. So as we tried [to evidence] from our Phase 1, Phase 2 contracts, we have already started negotiations with Petrobras for a Phase 3 follow-on contract, which we anticipate to be in line with certain increases over the previous ones; remains to be seen.

We have now started selling Flange Savers also in Southeast Asia, India and also in the UAE. Those are still smaller orders, but we expect to see those expanding in the future. I can't tell you accurately how quickly that might happen.

Okay, thank you.

Brian Yurinich, Craig-Hallum Capital.

Just a quick question. Can you quantify at all as a percentage of your kind of Zerust revenue what these new oil and gas opportunities contributed in the May quarter? I mean, how small are we talking right now?

You are talking under a couple hundred thousand dollars.

Should we kind of continue to see -- will that gradually increase, or is this just we are going to get a lumpy, big contract?

No, I think it would be more of a gradual. The majority of the companies we deal with don't act like Petrobras, where you would have a Phase 1/Phase 2/Phase 3 contract. It would be more along the lines of just traditional business, where you get a purchase order and then hopefully follow-on purchase orders.

Part of what we have here is also that we are starting to sell some of our traditional industrial applications to certain oil and gas customers, and so that is also part of the increase that we are seeing.

All right. Thank you.

(Operator Instructions) Charles Bellows, White Pine Capital.

Could you just clarify, on the chewing tobacco piece in India, is that a breakeven for Natur-Tec in India or overall?

Our anticipation is overall. Right now, the Natur-Tec operations in India, to my understanding, are already breakeven.

Okay. And then on the iconic brand, using it in the supply chain, is it -- are the bags going to be some sort of a label of Natur-Tec, or how are we going to know the brand and that they are there?

Actually, you won't. This particular company is using the bags in their supply chain, and the end user actually will never see the packaging. It is being packaged from their suppliers and being removed before the product ever gets into the hands of the end user. And they are not printing their name on it either. So it is going to be somewhat invisible to be general market, but certainly we expect this may lead to other opportunities in that industry.

Are you going to be able at some point to announce who is using it as part of -- or are they going to as part of their green effort, whatever you want to call it?

That is a potential, yes. We are certainly going to be in negotiations. We expect this ramp-up first to come with products being sourced in India, and then also when they are sourcing products from other countries. And ultimately, I would expect that there would be some sort of announcement and that we will get permission to use the name.

Okay, thanks a lot.

Joe Furst, Furst Associates.

I would like to ask you how would you categorize the state of your Company now as opposed to a year ago as far as its future is concerned, how much better or worse than a year ago. What would you -- how would you characterize that?

Well, given that in North and South America we are enjoying record sales, on the whole, I would say we are doing fine. Even across our joint venture operations, the decrease in sales we saw in Europe has been, let's say, moderate, just a slight downtick to, I would say, about 2010 levels, based on certain -- given some of the uncertainties with the sovereign debt crises.

Once those issues resolve themselves over the next 12 to 18 months, the market is still strong in Europe and we expect it to grow. So overall, I think, in our core markets, things are still -- still have significant potential for growth. And certainly we are very optimistic, based on some of the new things we've seen happening in the oil and gas and the Natur-Tec markets.

Okay, thank you.

Thank you. There are no further questions at this time. I would like to turn the call over to management for any closing remarks.

I'd like to thank everyone for participating today. In closing, we continue to expect growth in both our net sales and earnings in fiscal 2012 compared to fiscal 2011. Specifically, we are dedicated to achieving revenue growth with our established Zerust business, while expanding the market for both our Zerust oil and gas products and our Natur-Tec bio-plastic business. Thank you for listening today and your interest in NTIC.

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