Northern Technologies International Corp (NTIC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Northern Technologies International Corporation's fourth-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). Now I'll turn the conference over to President and CEO, Patrick Lynch. Please begin.

Good morning. I'm Patrick Lynch, NTIC's Chief Executive Officer, and I'm here together with Matt Wolsfeld, NTIC's Chief Financial Officer. Please note that our fiscal 2012 results were included in a press release issued earlier this morning, a copy of which is now available online NTIC.com.

During this call we will review of various key aspects of our fiscal 2012 financial results, provide 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 in 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 again achieved record sales in fiscal 2012. Net sales increased 17% to $22.8 million during fiscal 2012, compared to $19.5 million during fiscal 2011. This increase was the result of higher sales of ZERUST products in North America and South America, along with higher sales of Natur-Tec bioplastic products.

While we are pleased with the healthy sales growth of the ZERUST products in North America, strong sales and earnings growth of industrial ZERUST products from other regions has eluded as the ongoing sovereign debt crises in various European countries have adversely affected these economies and the value of the euro, as well as the economies and currency values of 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.

Income provided by our joint venture operations decreased 13% during fiscal 2012, corresponding partially to a decrease in total net sales by our joint ventures of 6% to $112 million, as well as a $493,000 write-off of Polymer Energy equipment. We attribute the decrease in sales by our joint ventures to the recent economic declines in Europe and elsewhere, compounded by the weakening of the euro and other currencies compared to the US dollar. We believe strong sales and earnings growth of the ZERUST product outside of North and South America likely will continue to be quite difficult to achieve until several European economies and currencies recover.

During fiscal 2012, we earned $0.78 per diluted share, which is a decrease from the $0.89 per diluted share earned during fiscal 2011. This decrease is directly attributable to the $1.5 million decrease in total income from our joint venture operations, as noted previously. As we stated in our previous earnings calls, during fiscal 2012, Petrobras expanded its Phase 2 contract by $657,000, bringing the total Phase 2 contract's value to $3.1 million and ZERUST Brazil delivered the entire remaining balance of this contract to Petrobras in fiscal 2012.

During early fiscal 2013, ZERUST Brazil signed a Phase 3 contract with Petrobras to supply $3.7 million in ZERUST products. Given this contract, along with the other sponsored research and development projects we are working on, we are confident of the expanded use of ZERUST technologies at Petrobras going forward. Please note that, as evidenced during the past two fiscal years, our sales to Petrobras, while contractual, do not occur at regular, predictable intervals. We anticipate that this volatility will continue in future periods as our ZERUST products are utilized by Petrobras.

Also, please note that, after winning two technology innovation awards from the National Association of Corrosion Engineers earlier this year, we are seeing increased interest in the United States for our storage tank protection and long-term preservation solutions. Additionally, we continue to receive small but increasing orders from new oil and gas industry customers in the United States, Russia, the UAE and India.

Consequently, as we have stated before, although we believe growth and expansion in 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 during the next two years or so.

Now, turning to our Natur-Tec bioplastics business. Sales of our Natur-Tec products increased 84% to $1.8 million during fiscal 2012, compared to the $980,000 during fiscal 2011. Natur-Tec represented roughly 8% of NTIC's consolidated net sales during the most recent period. Customer demand has continued to grow quickly as we expand our North American distribution network for finished Natur-Tec bioplastic products.

As we stated on previous calls, during fiscal 2011, NTIC entered into an agreement with Italy-based Naturefuels to distribute our Natur-Tec bioplastic materials and this end products in the Italian market. This relationship was driven by the Italian legislation banning the use of non-biodegradable plastic shopping bags, and is scheduled to be fully implemented on January 1, 2013. We received our first commercial order for the resin to be shipped to Italy and expect that we will see a ramp up of these resin sales as this legislation becomes fully implemented.

In May of 2012, Harita-NTI, our joint venture in India, 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. We expect these sales by Harita to have a material impact on the profitability of Natur-Tec in fiscal 2013 and years to come.

I will now turn the call over to Matt Wolsfeld to summarize in more detail our financial results for fiscal 2012.

Thank you, Patrick. Starting with ZERUST, net sales of NTIC's ZERUST product increased 13% to $21 million during fiscal 2012, compared to fiscal 2011. This sales growth is primarily due to increased demand for our ZERUST products and service in North and South America. Net sales of Natur-Tec products increased over 84% to $1.8 million during fiscal 2012, compared to fiscal 2011.

As previously mentioned, income provided by our joint venture operations decreased 13% for fiscal 2012. This decrease was primarily a result of the decrease in total net sales of NTIC's joint ventures and the effect of the weakening of the euro and other countries compared to the US dollar. As discussed in our earnings release, during fiscal 2012, the shareholders of our joint venture in India, Harita, waved 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 NTIC or Harita. 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 fiscal 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 $905,000 related to the write-down to market value of a Polymer Energy unit that Harita was previously attempting to sell. As a result, NTIC absorbed 50% of this loss and, accordingly, recognized a decrease in equity and income of $452,000 during fiscal 2012 related to this write-down.

With respect to our joint venture operations and how they are reflected on our consolidated statements of cash flow, keep in mind that dividends received from 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 fiscal 2012, net cash used in operating activities was $1.4 million, whereas net cash provided by investing activities was $1.4 million, $3.1 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 fiscal 2012, our cash flows from operating activities would have been $1.7 million.

Our total operating expenses remained stable at $13.8 million for fiscal 2012, which reflects our efforts to hold expenses stable, given the uncertainties in the global economy. Overall, net income attributable to NTIC decreased 12% to $3.4 million, or $0.78 per diluted common share, compared to the same respective prior fiscal period.

As of August 31, 2012, our working capital was $10.1 million, including $4.1 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 August 31, 2012, we continue to have no borrowings outstanding under our $3 million revolving line of credit.

As detailed in our press release, for the current fiscal year ending August 31, 2013, we expect net sales to range between $27 million and $28.5 million, inclusive of sales made by our Brazilian majority-owned subsidiary. And we expect net income of between $4.4 million to $4.7 million or between $1.00 and $1.05 per diluted share.

We anticipate both sales and profits to ramp up slightly from quarter to quarter during fiscal 2013. 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 our ZERUST oil and gas business and our Natur-Tec bioplastics business, which fluctuates more on a quarterly basis than our established ZERUST industrial businesses.

This is primarily why we intend to continue 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 based in Europe, and the ultimate impact that could result in the rest of the world, we would anticipate decreasing our guidance in the event of a slowdown or if a recession occurs in Europe or any other part of the world in which our joint ventures operate.

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

(Operator Instructions). Tim Clarkson, Van Clemens.

Hey. Decent quarter. Just a couple of questions. One, in terms of your industrial applications, separate from the oil, separate from your traditional automobile, without specifying, because I know you don't want to tip off the competition, what percentage of your regular ZERUST is not in automobile packaging and not in oil? And is that growing faster than the traditional automobile applications?

I would say, first of all, the share of our total sales that are non-automotive continues to increase, and that's where a significant portion of our sales increase in North America in this past year occurred.

Okay. And in terms of the additional business now in your compostable plastics business, are you approaching now profitability in that business if you hit some of your goals, say, with the new Italian business?

Both with the new Italian business and with the sales we expect to come through our joint venture in India to this US-branded company. And in combination with our North American sales, yes, we anticipate that, if everything remains on track as it is, that we will be breakeven or profitable with Natur-Tec this year.

Okay. Great. One last question. In terms of -- it sounds like you're getting some additional positive feedback in terms of the corrosion application on the actual wells -- or, not the wells, the --

Storage tanks.

Tanks, exactly. Is that coming just from Petrobras or from other big oil companies?

Actually, the work we are doing with Petrobras is primarily focused on offshore rigs. The storage tank work we're seeing mostly in other countries, including the United States and the Middle East.

Are you still -- and you are still getting good positive feedback in terms of the works?

Absolutely.

Okay. Great. Thanks, I'm done.

(Operator Instructions). Brian Yurinich, Craig-Hallum.

Hi, guys. When we look at the ZERUST oil and gas business in FY13, what percentage of that $3.7 million does your guidance assumed being recognized for Petrobras?

We would assume that the majority of that $3.7 million would be recognized as revenue in our fiscal '13.

And how much incremental oil and gas can we get from things other than Petrobras, do you think, this year?

It's hard for us to make a prediction at this point. We have a number of very large projects that have been put into works and are in the budget process. It now depends on various prospective clients, as to whether they pull the trigger this year or delay it into the next year. So, we are being cautiously optimistic.

When you say very large, is that bigger then a current Petrobras contract or what do we mean by very large, if you could give us a little range?

I would not anticipate that these projects will -- that any one of these projects will eclipse the Petrobras contract. We would anticipate that these projects individually would be in the, at best, in the hundreds of thousands of dollars, not in the millions like Petrobras.

Okay.

But we have a number of those in progress right now so, collectively, there's a big upside, but also we have to be cautious as to how many of those we will close in a timely manner.

All right. We have guidance for revenue growth again this year. Given the environment, should we expect OpEx to stay relatively flat again?

Yes.

Okay. That's all I have to ask. Thanks.

Thank you. There are no further questions at this time. I'd like to turn the conference over to Mr. Lynch 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 2013, compared to fiscal 2012. 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 bioplastics 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. Have a wonderful day.