Northern Technologies International Corp (NTIC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern Technologies International Corp's first-quarter 2013 earnings conference call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would now like to introduce your host for this conference call, Mr. Patrick Lynch, CEO. You may begin, sir.

Good morning. I am Patrick Lynch, NTIC's Chief Executive Officer, and I am here together with Matt Wolsfeld, NTIC's Chief Financial Officer.

Please note that our fiscal 2013 first quarter results were included in a press release issued earlier this morning, a copy of which is now available online at ntic.com.

During this call, we will review various aspects of our fiscal 2013 first-quarter 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 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 filings 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 a strong increase in sales during the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012 and compared to the fourth quarter of fiscal 2012. Net sales increased almost 10% to $5.3 million during the first quarter of 2013 compared to $4.8 million during the first quarter of fiscal 2012.

This increase was primarily the result of cultivating new customers for Industrial ZERUST and Natur-Tec bioplastic products. In direct correlation to this sales growth, however, we also incurred greater than anticipated startup costs as we were compelled to ramp up production on an exceptionally broad range of new products simultaneously. Consequently, we experienced temporary lower margins during the first quarter of fiscal 2013. We expect margins to begin returning to normal levels on these new business opportunities starting this February.

While we are pleased with the healthy sales growth of ZERUST products in North America, strong sales and earnings growth of Industrial ZERUST products from other regions eluded us as the financial crises in a number of European countries have adversely affected not only the leading economies of that region, but also those of key supplier countries including Brazil, China, and India. The Euro zone of GDP is still shrinking, and leading economic experts feel this recession has not bottomed out yet.

Consequently, NTIC showed a 4.4% decrease in total net sales of NTIC joint ventures to $27.5 million during the first quarter of fiscal 2013 compared to $28.8 million for the first quarter of fiscal 2012. We attribute this decrease in sales by our joint ventures primarily to the recent economic declines in Europe and elsewhere. We believe strong sales in earnings growth of ZERUST products to industrial customers outside of North America will likely continue to be quite difficult to achieve until the overall European economy begins to recover.

During the first quarter of fiscal 2013, we earned $0.09 per diluted share which is a decrease from the $0.22 per diluted share earned during the first quarter of fiscal 2012.

In September 2012, our majority-owned subsidiary, ZERUST Brazil, signed a Phase 3 contract with Petrobras to supply $3.7 million in ZERUST products. We anticipate converting this contract into sales before the end of this fiscal year. Furthermore, given other ongoing joint new product rows as well as research and development projects, we are confident of the expanded use of ZERUST technologies at Petrobras going forward.

Please remember 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.

In addition to our work at Petrobras, the ZERUST oil and gas team is currently pursuing projects in other countries and regions including, but not limited to Canada, the United States, Russia, the Middle East and Asia. However we expect sales to these new clients to build slowly as technical evaluations and implementation rollout plans are finalized. Consequently, as we have stated before, although we believe growth and expansion into the oil and gas market will continue, we believe the effects of this on our financial results will not be immediate and may be choppy with spikes in sales when opportunities are converted and revenue is recognized.

Now, turning to our Natur-Tec bioplastics business. Sales of our Natur-Tec products increased 31% to $500,000 during the first quarter of fiscal 2013 compared to $380,000 during the first quarter of fiscal 2012. Natur-Tec represented roughly 9% of NTIC's consolidated net sales during the first -- I'm sorry, the most recent period. Customer demand has continued to grow quickly as we expanded our North American distribution network for finished Natur-Tec bioplastics products.

As we stated on previous calls, during fiscal 2012, NTIC entered into an agreement with Italy-based Natur-Tec SRL to distribute our Natur-Tec bioplastics resin compound and finished products in the Italian market. This relationship was driven by the Italian legislation banning the use of nonbiodegradable plastic shopping bags, which was fully implemented on January 1 of 2013. We delivered our first commercial order for resin compound to Italy in January of 2013 and expect that we will see a ramp-up of these resin compound sales as this legislation becomes broadly enforced during the current year.

In May 2012, Harita-NTI began initial supplies of Natur-Tec products to an iconic US apparel 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 during the remainder of fiscal year 2013 and years to come.

I will now turn the call over to Matt Wolsfeld to summarize in more detail our financial results for the first quarter of fiscal 2013.

Thanks, Patrick. Starting with ZERUST, net sales of NTIC's ZERUST products increased 8% to $4.8 million during the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. This sales growth was primarily due to the increased demand in North America from new customers. However, it is important to note that we also incurred significant one-time startup costs as we ramped up production on a range of new products for delivery to these new customers. NTIC anticipates seeing our growth margin increasing through the remainder of the fiscal year to traditional levels on this new business.

Net sales of Natur-Tec products increased over 31% to $500,000 during the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. Income provided by our joint venture operations showed an increase of 7% during the first quarter of fiscal 2013. Moreover, it is important to highlight here that NTIC's consolidated results for the first quarter of fiscal 2013 now also consolidates the results of NTI Asean, which is a holding company for investments in eight entities that operate in the Association of Southeast Asian Nations, commonly referred to as the ASEAN region.

NTIC started consolidating these results due to an increase in our ownership percentage of NTI Asean from 50% to 60%. On September 1, 2012, NTIC contributed certain exclusive license rights and other intellectual property to NTI Asean in exchange for an additional 10% ownership interest in NTI Asean and, as a result of such transactions, NTIC now holds 60% of the equity and 60% of the voting rights of NTI Asean. As a result of consolidating the financial results of NTI Asean in the current quarter, but not in the first quarter of fiscal 2012, the results are not perfectly comparable. When comparing the two quarters, it is important to consider the minority interest income.

Additionally, the fee income for services provided joint ventures was not previously consolidated. In the past, NTIC recognized our 50% portion of this fee income for services provided to joint ventures from the Asean joint ventures as equity income. Overall, NTIC showed a 4.4% decrease in total net sales of NTIC's joint ventures to $27.5 million during the three months ended November 30, 2012, compared to $28.8 million for the three months ended November 30, 2011.

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 flow from investing activities and not our cash flows from operating activities. Accordingly, our cash flows from investment activity is typically positive while cash flows from operating activities are typically negative.

For the first quarter of fiscal 2013, net cash used in operating activities was $1.5 million whereas net cash provided by investment activities was $4.1 million, $2.7 million of which were from dividends received in joint ventures. Accordingly, as dividends received from our joint ventures were reflected in our cash flow from operating activities for the first quarter of fiscal 2013, our cash flow from operating activities would have been $1.2 million.

Our total operating expenses increased $330,000 to $3.7 million for the first quarter of fiscal 2013, primarily as a result of our increase in expenses incurred in supported joint ventures and research and development expenses, which NTIC considers critical to pursuing new business opportunities around the world.

Overall net income attributable to NTIC decreased 59% to $400,000 or $0.09 per diluted common share compared to the same respective prior fiscal year period. As of August 31, 2012, our working capital was $15.3 million including $6.8 million in cash and cash equivalents compared to working capital of $10 million including $4.1 million in cash and cash equivalents as of August 31, 2012.

As of November 30, 2012, we continue to have no borrowings outstanding under our $3 million revolving line of credit, the maturity date of which has been extended an additional year.

As detailed in our press release, for the current fiscal year ending August 31, 2013, we are maintaining our expectations for net sales to range between $27 million and $28.5 million and we expect 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 from quarter to quarter in fiscal 2013. However, we anticipate and historically there has been significant volatility in our quarterly earnings per share. This is largely due to the financial performance of our joint ventures and the financial formats of our newer businesses including our ZERUST oil and gas business and our Natur-Tec bioplastics business which fluctuate more on a quarterly basis than our established ZERUST Industrial business.

This is also a key reason 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 economic issues facing Europe and the ultimate impact this is having on other parts of the world, we would anticipate decreasing our guidance in the event if a more severe slowdown or recession occurs in Europe or any other parts 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). Aaron Martin, AIGH Investment.

Good morning. Aaron Martin from AIGH. Can you give us an update on the plastic ban in Italy? Obviously we are technically into when it was supposed to be implemented. Has it -- is it practically being implemented and what is going on there?

It is our understanding that it is now being practically implemented, although I would say that enforcement, broadly, is still spotty. So we are seeing significant interest and expansion by, I guess, the higher end retailers who are more eager to implement this. And we expect to see a broader implementation across more the mom-and-pop and smaller businesses in Italy during the course of this year.

Is it going to take the bag manufacturers to get serious about it? Or is it going to be coming from retailers?

We believe it will be both sides.

And I guess it has always been a question when this is going to happen, but now that we are seeing the interest, is there any way to translating it or we have still got to wait some more time for that?

Well, as we mentioned, we did our first delivery of resin compounds just this month which was -- I mean we are talking one container. We expect that to start ramping up as orders grow. We probably won't see this becoming a major issue until -- well, let's see, a major sales thing until this coming summer.

And in Natur-Tec itself, any other -- obviously, everything else is progressing. Any other ramps that are expected to happen?

Well, the ramp-up with the American Apparel Company continues to progress swiftly. They have now expanded that. They were originally doing it just to a certain segment of ladies' apparel products that they were protecting. Now they have put it to a much broader portion of their line. And this is still within certain countries. So we expect that to ramp up also during this current year.

Any hazard to guess in terms of Natur-Tec itself what the ramp is going to be like, what kind of growth we can see in Natur-Tec as to the rest of the business? The year?

I'm not quite sure I understand your question.

Looking at just Natur-Tec itself, can you give us any sort of annual guidance what this fiscal year can look like?

We would anticipate similar growth rates to what we have seen so far.

Okay, so that means we can hope to get very close to profitability on that subsidiary?

Well, our plan is that it will be breakeven or profitable by the end of this fiscal year.

On a run rate or for the year?

On a run rate.

On a run rate. Got it. Switching back to Petrobras, did I hear you correctly during the call saying that at Petrobras you are looking at other uses or applications as well in the Flanges? Or do you mind go --?

No. They are currently testing a number of different products in field trials of each one of those applications, if our products prove out positively, could be significant.

Okay. So, got it. And in terms of update on when we can start seeing shipments from the announced phase 3 order [out of the same so] you don't have a -- completely up to you. Any thoughts there? And what (multiple speakers)?

I would be reading the tea leaves along with you. Generally, Petrobras is not very transparent in that regard. So we don't -- but we internally don't really anticipate seeing that before third or fourth quarter.

Got it. And then in terms of them finishing up on the phase 1 and phase 2 contracts and having to re -- you re -- you know replace some of the original flanges that were put in, what is the status there?

We expect those conversations to start with Petrobras next quarter.

Thank you very much.

Gregg Hillman, First Wilshire Securities.

Pat, can you talk first about the guidance to -- is another Petrobras win included in the guidance or just what you have right now?

Just what we have right now.

Okay, so it is not unreasonable to expect additional contract from Petrobras this year? Is that correct?

I would say that if we get an additional contract with Petrobras this year, whether for some of these new products or even additional products, I would not necessarily anticipate that we would be delivering within this fiscal year. It may be, it might be a smaller volume, but we certainly don't anticipate -- for example, even if we got another contract for replacements or new products to the same value of the existing contract, I would be surprised if we deliver the entire amount this year. This whole year.

Okay. And then, Matt, the R&D or at the expense incurred in support of in joint ventures. You mentioned that was ramping up. Could you go into greater detail about that and just what the R&D is and the expense in support of joint ventures in general?

As far as the R&D expense goes, we put forth a pretty significant effort to speed up some of the processes to get these new products in Natur-Tec and in oil and gas to market. And so that's involved additional expense from an R&D standpoint. I mean, I can't go into too much more detail on it, but it is basically more people to speed up because of the opportunities that we are looking at. The same thing from a standpoint of the expense incurred in support of joint ventures.

There are some additional people that we have brought in to help coordinate some of our international business activities to make sure that all the joint ventures are working well to capitalize on opportunities around the world. And so, these are people that we thought were critical to the growth of the business. They are -- some of these people are expensive people we brought in. We certainly see that they will -- although they are expensive now, we certainly see that they will be contributing significantly to sales and profits going forward.

Is there a separate person head of Asian now? Since you control the whole thing?

No. What we have done is put in regional managers that -- as Matt just mentioned, to help us promote some of these new technologies in the regions. So we have certain people now in Asia and in Europe focusing on that. But it is not a separate Asian manager to -- as you would say based on the Asean transaction.

Previously with the Asean joint ventures, we owned through this holding company ultimately 25% of each of the joint ventures. When we increased our ownership percentage in this holding company from 50% to 60%, that took our ownership interest in these joint ventures from 25% to 30%. So what we are doing is getting the Asian joint ventures up to a percentage that is closer to what our traditional joint ventures throughout Europe and the rest of the world look like.

And just backing up, going back to the R&D area, I take it this is not R&D for totally new product lines or anything. It basically -- it's kind of just expansion of your existing technology for existing applications. Is that correct? Particularly in ZERUST. ZERUST for the oil and gas industry. It is not anything --.

It depends on what you need. It continues to be nothing -- how do I put this? They are new products and new technologies in certain cases using very novel chemistry that we have not used in the past for applications we have not necessarily been touching in the past. (multiple speakers). Please go ahead.

And this applies to reducing corrosion or for some new application that you are not currently -- for a totally new application as opposed to reducing corrosion or for the Natur-Tec?

In ZERUST, we are always looking to mitigate corrosion in one form or another. So it is all related to ultimately reducing corrosion in the supply chain along people's infrastructure. With respect to some R&D projects in Natur-Tec, those also are relatively diverse and some -- and some of the research and development grants, for, example that we have from the NSF and from the DOD are not what I would say directly linked to some of the products we are currently marketing.

Okay, so you could go into some totally new area like energy or some other area with Natur-Tec than it is currently in other than compostable bags?

I wouldn't go that far afield, but it certainly would be opening up a new market segment that we currently do not access.

Okay. And, Pat, remember before the Flange Savers became the main deal for Petrobras, you were emphasizing a mechanism to put the gas in oil storage tanks. Is that getting any traction, that particular application?

They are still planning on expanding that at Petrobras. We don't know how soon or how broadly, but it's -- they, over the last couple of years, have been focusing their energies more on their offshore rather than onshore investments. So they are also -- we are working with them -- the initial implementation you are talking about was looking for the protection of storage tank roofs. We are not working with them and other companies on protecting the bottoms of oil storage tanks where we are seeing broader implementation much faster.

And can you just talk about the bottom exactly? Is that going on the outside of the tank or is it on the inside of the tank?

It's going underneath the bottoms of the tanks. One of the difference -- what you have if you have holes in the roof of a storage tank, they will continue operations of those tanks without necessarily shutting them down because you are not leaking liquid. However if you have corrosion issues that are causing leakages to the bottom of a storage tank, that is a much, much bigger and more immediate problem for an oil company and they will shut down operation of that tank immediately to try and repair if they have a known leak. So corrosion on the bottom is a much hotter issue than the rooftops are.

So we are getting a lot more interest and speed to market in that area than we did on the rooftops.

Okay. So I take it there -- at some refineries and whatnot there's actually leaking. It is a common problem for tanks to corrode to the point that they leak oil from the bottom. Is that correct?

It's a very common problem.

And heretofore, the -- and then have you been able to get a distributor? You know the people that like builds the -- or the servicers that like -- I don't know, like Matrix Oil Company, like some of the companies that service these big refineries? Are you being able to get into them as a distribution partner? Because it is kind of a service type thing. It sounds like you need a partner to do this and you can't do it by yourself.

Well, ultimately to provide some of the implementation services, yes, we do contract out to third-party companies.

Okay, but do you have a third-party company that you are aligned with that will actually do marketing for you to the oil companies to convince them to go with this solution?

We have certain agents and partners depending on the country we are doing business in, yes.

Sounds good. Well, so it is not unreasonable to expect another press release in this fiscal year with some non-Petrobras oil company. Would you agree with that?

That is our anticipation, yes.

Okay, fine. Thanks very much.

Mike Ross, Van Clemens.

Good morning, everyone. This is actually Charlie Pine. Just a couple of other things. I was a little late getting on the call. One of the questions I wanted to toss out was did you talk about anything at all about in the Natur-Tec segment, what has been going on with your progress regarding your relationship with the Indian packaging company?

Well, what we mentioned regarding India is that our joint venture in India, Harita-NTI, is continuing to ramp up its production and sales to these subcontractors of this American apparel company. So we are seeing increases in sales in India regarding -- in that respect, yes.

I guess I was asking more about that other company, I can't remember the name of it right now, that was --

Are you talking about ITC?

Yes I guess that's it.

It would be the paper coated products.

The paper products company.

There are some sales to that company, but we haven't seen the growth we had anticipated. Certain -- if you're following -- if you follow Indian politics on a regular basis, right now, the country is focused on a range of other problems. And so, broader implementation of certain green initiatives have not taken off as quickly as we anticipated.

Yet, do you have any idea at this juncture when you might begin to start to see more meaningful revenues or do you think that is going to just be pretty quiet over the course of the current year?

It is hard for me to say until the next Indian elections are over.

And when is that?

I can't tell you exactly, but it is in the next few months, I believe.

The other thing I wanted to touch on because I think everybody has been otherwise have been pretty thorough. Can you talk at all about some of the new areas in verticals? I mean, we always seem to focus on, as far as ZERUST, on the oil and gas opportunities, but in the past the year you have also said that you have some other interesting avenues that you wanted -- that you had been exploring in your more traditional industrial area. And I would like to know if you could just talk for a minute about what some of those opportunities are and what some of the applications are that -- and where you see that going over the next several quarters.

Well, I am going to answer your question maybe a little bit cautiously. And what I mean by that is, for example, you saw our increase in sales in the first quarter. A significant portion of that was to an industry segment that we have not serviced as well in the past and to meet the demand of this new industry segment, we increased our stock keeping units here by over 80 different new products that we manufacture. Hence, we also had the concurrent startup costs in getting all of those products into production.

So, this is of in part traditional products to a new market segment. At the same time we are ramping up different products specifically more, not traditionally packaging, but more liquid applications which we are supplying to our existing customer base and seeing sales increases in that area as well.

So are you saying that you're basically you've introduced 80 new SKUs for this particular -- these particular applications?

We have introduced 80 new SKUs for one set of new customers in a market segment. In actually in two new market segments that we've worked on. And at the same time we have also added a number of other products which -- for new applications in our existing market segments.

Are you able to part the curtain at all just to give us an indication of what those -- at least broadly, not who the particular customers might be, but just what the segments are?

I don't think that is in either of our best interests. Sometimes it is best not to let our competition know where we are going.

Okay. Fair enough. Thanks a lot, Pat and Matt, and good luck as always.

Always a pleasure. Thank you.

Gregg Hillman.

Could you talk about the regulatory environment for Natur-Tec, whether anything is happening in new regulations or what is even proposed or pending in not only the United States, but around the world?

I am not qualified to answer that question per se. If you would like to have greater detail on that, why don't you talk to Matt afterwards and he will put you in contact with our Natur-Tec manager?

Okay. And just in terms of the competition, are you gaining share? I know that you have one competitor, significant competitor in the United States, but are you in general gaining share for ZERUST type applications vis-a-vis your competitors? Or you're losing share?

In the United States?

Yes. Or elsewhere.

We see ourselves as gaining market share both in the United States and not losing market share anywhere else in the world.

For ZERUST applications. But I take it the oil and gas you pretty much you are developing that by yourself. You are forging in new grounds or is there another competitor that has arisen in the oil and gas area?

Not that I would see as head to head competition for what we are trying to do.

Okay.

There are other comp -- plenty of other companies that are trying to mitigate corrosion issues in the oil and cast sector, but those are not the applications or business areas that we are pursuing.

Okay, it sounds very promising. Thank you.

And I am not showing any further questions at this time. I would like to turn the conference back over to our hosts for closing remarks.

I would 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, this does conclude today's presentation. You may now disconnect and have a wonderful day.