Northern Technologies International Corp (NTIC) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to Northern Technologies International Corporation fourth-quarter 2014 earnings conference call and webcast. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, President and Chief Executive Officer Mr. Patrick Lynch.

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

Please note that our fiscal 2014 full-year financial results were included in a press release issued earlier this morning, a copy of which is now available at NTIC.com.

During this call, we will review various key aspects of our fiscal 2014 financial results, give a brief business update, provide fiscal 2015 annual guidance 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 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 NTSC 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 have update or revise our forward-looking statements.

During fiscal 2014, which ended on August 31, 2014, our total net sales and earnings per share continued to show strong year-over-year increases. At the same time, we achieved significant objectives in all three of our market segments that NTIC serves. All the while, our competitive position, operations and balance sheet grew even stronger.

NTIC's total net sales increased over 19% in fiscal 2014 to over $23.8 million compared to fiscal 2013. Most of this sales growth came from Zerust products to new and existing industrial customers in North America as well as customers in the oil and gas market.

While we are certainly pleased to see this healthy sales growth in North America, we are also very encouraged to see an increase of 5% in the total net sales by NTIC's joint ventures to $118.8 million for fiscal 2014, along with a corresponding 12% increase in our income from our joint venture operations. All said, NTIC's earned $0.90 per diluted common share during fiscal 2014 compared to $0.75 per diluted share during fiscal 2013, which is more than a 19% increase.

During fiscal 2014, our oil and gas team focused at sales efforts on our proprietary corrosion solutions for protecting the bottom plates of oil storage tanks which are highly susceptible to aggressive rust and leaks. In this effort, our team has been systematically targeting oil terminal operators and refineries in North America, resulting in around 50 successful implementations. Having seen the need for acceptance of our innovative solutions, we expect this growth to continue into fiscal 2015 and beyond.

These continued successes with both existing and new clients bolster our confidence in the oil and gas market, and we are confident that our expansion into the oil and gas market will continue. However, as we have repeatedly mentioned, this is still a relatively new market for us. So we expect any associated benefits to our financial results will be choppy, with spikes in sales when opportunities are converted and revenue is recognized over the next few years.

Now, turning to our Natur-Tec bioplastics business, net sales of Natur-Tec products increased by almost 46% during fiscal 2014 compared to fiscal 2013. This increase was primarily due to finished product sales through NTIC's newly formed majority-owned subsidiary in India which is now operating profitably.

All future sales of Natur-Tec in this region will be made through this new entity, and we expect more manufacturers to implement Natur-Tec compostable packaging across their supply chains. We expect this application segment to continue to be an area of strong growth as we continue to target and convert additional manufacturers to the use of Natur-Tec's sustainable packaging solutions.

I will now turn the call over to Matt Wolsfeld to summarize in more detail our financial results for fiscal 2014.

Thanks, Patrick. Sales of NTIC's Zerust products increased across all market segments during fiscal 2014. Sales of individual Zerust corrosion inhibiting products increased over 16% as we saw demand increase at both existing customers and new customers.

Sales of Zerust oil and gas solutions increased over 71% in fiscal 2014 as we completed many implementations and multiple new customer sites North America. Additionally, we experienced an increase in oil and gas sales in the Brazilian market.

It's also important to note that our gross margins improved over 2% during fiscal 2014 compared to fiscal 2013.

Sales of Zerust corrosion-inhibiting products to our joint ventures increased over 16% in fiscal 2014. This increase was mostly a function of the overall increase in joint venture sales of 5% during the period, as Patrick noted earlier. Additionally, income provided by our joint venture operations increased almost 12%, to almost $14.1 million during fiscal 2014 compared to fiscal 2013.

Lastly, sales of Natur-Tec products increased over 45% to almost $3 million during fiscal 2014 compared to fiscal 2013.

Our total operating expenses increased almost 12% to $16.4 million for fiscal 2014, primarily due to an increase in selling expenses, general and administrative expenses, and research and development expenses, and overall reflected our efforts to support our new business efforts.

Overall, net income attributable to NTIC increased 22% to over $4.1 million or $0.90 per diluted common share for fiscal 2014, compared to $0.75 during fiscal 2013. As of August 31, 2014, our working capital increased to $17.8 million, including $2.5 million in cash and cash equivalents and $5.5 million in available-for-sale securities, compared to $13.3 million in cash and cash equivalents at August 31, 2013.

Regarding NTIC's annual guidance, for fiscal year ending August 31, 2015 NTIC expects its net sales to range between $32 million and $34 million, inclusive of sales made by NTIC's majority-owned subsidiary in Brazil, and expect net income of between $5.4 million and $5.7 million, or between $1.20 and $1.26 per diluted share.

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

(Operator Instructions) Dick Feldman, Axiom Capital.

Good morning and congratulations on a solid quarter. I have a couple of questions. The first relates to Natur-Tec. In North America I've read about certain legislative initiatives to ban plastic bags and things of this nature. And I wonder how you see that impacting your business opportunities?

Good question. Let me put it in this perspective. Right now a significant portion of our North American sales comes from the Bay Area in California. Now, this new legislation I think you are talking about is specifically the general ban across California, which should open significant new markets like Los Angeles, San Diego and other parts of the states to us. So this should present a significant opportunity for us to significantly expand our sales in North America.

How would your sales break down today between your North American sales and what you're getting through the Indian operation?

The majority of sales at this point in time are still North American based. I believe it's broken out a little bit in the 10-K that will come out, but I want to say that the total sales in India are probably -- during the last fiscal year, which since we started the joint venture up in December.

Subsidiary.

The subsidiary in India, sorry, we started up in December of 2013 was probably around a $0.5 million in sales. So the majority of the Natur-Tec sales are still US-based sales.

And so, I guess, based upon your earlier comments about India and the comment in answer to my question about what's going on in California, it would appear that the outlook for Natur-Tec potentially is for a year of healthy volume gains.

That's certainly what we are attempting to do. And there's certainly -- it looks like there's certainly opportunity for us to do that.

Turning to Zerust in the oil and gas space, you made some reference to gains in Brazil in the recent fiscal year. What type of backlog do you -- remains in Brazil and how do you see the outlook there in general?

We still think the outlook in Brazil is healthy. We certainly still have a growing relationship with Petrobras and the sales from Brazil liquid that did grow from fiscal 2013 to fiscal 2014. We have -- still have a remaining balance on that existing Flange Saver contract that we received a year or two ago, and we expect to continue to have Petrobras pull off of that contract. At the same time, there's other opportunities outside of just Flange Savers that we are working on with Petrobras that we hope to see the results from in fiscal 2015.

Would it be fair to say that the major opportunity you see ahead of you near term is on the tank side of the business around the world?

Certainly that's where we are seeing the greatest immediate growth. We certainly still see customers who are very interested in our Flange Savers. But in terms of converting things into sales, it's easier to implement the tanks than certain other solutions we've offered. It's just a timing question.

And with regard to the tanks, what type of repeat business are you getting? I think you said you did -- have done a total of 50 implementations.

Yes. When you say repeat business, obviously, we're not working on the same tanks. We are getting orders from the same customers to do additional tanks in either the same facility or different facilities as they are coming down for maintenance.

So, in terms of repeat business where we work on the same tank again, we're expecting to see that happening in a five-year cycle. Any tanks we worked on in this past year, we certainly expect to have additional business coming from those in five years from now; well, four years from now at this point.

So again, just like the Flange Savers, this is a repeat business; a different cycle maybe.

Yes, (multiple speakers) a different cycle and you're talking about having to basically recharge or refill the dispenser systems on the tanks on a five-year cycle.

In terms of quote activity, and availability of labor to do the installation, I wonder if you could give us any update there as far as the tanks are concerned.

Our teams are very busy in preparing quotes and proposals on a full-time basis. In terms of labor, as I mentioned before, we are not really faced with a direct labor constraint because a lot of the actual installation work is subcontracted to service companies that are licensed and bonded to work in refineries and oil terminals.

In terms of supervision, we have a supervisory team and are currently looking to hire and expand that team.

Okay, given the -- I'll let other people get in if there are other people on the call. So, I'll go in the queue.

Okay, thanks.

Tim Clarkson, Van Clemens.

Hey guys, really good quarter; really good year. Just getting back to the tank business here, so let's just throw out a number. If you guys had to do 100 tanks in a given year, that would be no problem in terms of being able to do that.

Correct.

Right, would there be a problem if you had to do 200 tanks or would that be doable too?

It depends on how many locations you are talking about. Given our existing supervisory capacity, if you're talking about a whole bunch of tanks in one location, then no problem whatsoever. If you're trying to do multiple concurrent installations, then that's when we'd run into having to hire additional service -- supervisors for the installations.

So far, we haven't run into that problem. But certainly as we continue to expand that area, that might be something we would run into most likely a year from now, but probably not in 2015.

Okay. In terms of -- I know your major customers are typically refiners. How far away from getting ten tanks from one customer? Is that a possibility this year to get that many tanks from one customer?

Absolutely.

Okay, and in terms of how far away from some of these companies seeing this is kind of a standard solution, where if we're going to have new tanks we're just going to do this automatically. Are we to that point yet? Or are we heading to that point, or how far are we from that point?

I always hesitate to give you a specific answer, because we've been surprised a few times the oil and gas industry. But certainly in the companies we've been talking to, that is a prominent thought in the discussions. So I would not, at this point, expect that to be too far into the future.

Okay.

I'm only saying that it could happen soon as this year. It might be another year or two after that before they actually get it all papered up.

Right, right. And in terms of your competitor, how would you differentiate yourselves from your one competitor?

Well, I think we have very innovative solutions and really the technical expertise and marketing breadth to really capitalize on this at this point.

Okay, good. Good. All right, I'm good, thanks.

Walter Ramsley, Walrus Partners.

Thank you. Congratulations, good quarter. A couple of questions; the stock option expense for the quarter, do you have a figure for that or for the year, either one?

It's all -- it's also going to be in the K. Relatively, we traditionally are very -- have few or very low amount of option expense. But as far as stock-based comp, the total expense was $454,000. You'd see it in the cash flow statement.

Okay, well, I didn't see that on the press release, so anyway, okay. The dollar impact on the joint venture revenues, can you quantify that? Was that an issue?

I'm sorry; I don't understand your question.

The US dollar went up over the last three months or six months. Did that have an effect on the joint venture revenue number that you reported?

It wouldn't have a significant impact on the revenue number. What we traditionally see is 70% of our joint ventures are euro-based. The other 30% are Asian based. What you can find is that if you're looking on the balance sheet, you can see what the impact was by looking at the foreign currency, the accumulative comprehensive income, which is basically showing the foreign currency translation adjustment.

Okay, just wondering if that 5% figure represents the unit volume or if that's distorted due to the translation that's taken place.

No, we've traditionally seen that there's a unit volume increase that we've seen around the world.

Okay. Then in the first quarter that's currently underway, has there been a slowdown in business due to the apparent demise in Europe, and to a lesser extent, China?

Not that we've seen.

Okay, the gross margins; do you see any changes in them over the upcoming year?

In general, we hope to either be consistent or increase the gross margin based on volume, based on selling price, based on negotiations with suppliers. That's something that we have -- took a very -- we take a very special interest in making sure that we are able to keep our margins in a comfortable place.

Okay, the tax rate; do you see any changes in that?

No. Everything is pretty consistent with prior effective rates.

Okay, and just one last thing on the balance sheet. The value that's reported for the investment in the joint ventures, that declined $1.8 million year to year. Can you explain what happened there?

Sure. We received -- the biggest impact from that is that we received $7.5 million in dividends from our joint ventures. So if you back out or if you were to take the dividend and put that back onto the investment balance, you'd see that the investment in joint venture grew significantly from one year to the following year. The biggest impact that we have is the -- in year to year is that we had a large dividend come out on top of the equity income at each of the (multiple speakers)

I see that. Okay, well, anyway, I don't have that schedule in front of me. So now I understand, so basically I've got more dividends than you reported as earnings.

No (multiple speakers)

Anyway, that looks good, so thank you very much.

Charlie Pine, Van Clemens.

Just a couple questions; one or two of them were asked. But in your prepared remarks and I think also, Patrick, in your oral remarks, you talk about efforts to move ahead with regulations in the United States in the above ground tank area to get sort of the standardized coverage, and as far as being something that these would be standardized as far as maintenance going forward. Now, you talk about that there's a greater acceptance amongst companies on their own to look at this as sort of a standard maintenance process. But how would you characterize industrywide what the efforts are as far as getting this -- getting it industrywide and premature, so to speak.

Well, in addition to our direct sales efforts and successes in that direction, obviously we are also presenting a lot at various technical conferences and industry conferences. And we are getting very warm reception by the various technical experts to focus on these areas. So you are getting the technical experts who are embracing this is a solution. And in terms of legislative support, that continues. I think somehow these most recent midterm elections in various -- slow down a few things, but we're certainly expecting some good things to come through this year.

What -- when you refer to legislative initiatives, what type of legislative of initiatives are you referencing? Are these on a national -- are these regulations or would these be state -- are these focused on individual states?

Right now, they are focused on individual states, but ultimately we hope to translate that into a national recommendation.

All right. Do you have any -- is there any sort of stance at this point time on -- or is the American Petroleum Institute taking any sort of stance right now on your solution?

No. Not that I'm aware of.

All right. Also along the other lines of the tank business, how would you -- it sounds like things are just going great in the United States. Are you devoting any resources to any sort of targets an opportunity outside the US at this point in the above ground tank solution area?

Well, yes. First of all, while -- our prepared statements, I'll talk about North America because we've done installations in Canada and the Caribbean. And we are -- also have ongoing proposals and discussions in a number of other countries outside of the United States including the Middle East, India, Southeast Asia and parts of Europe.

Okay. Have you done anything in any of those regions yet, or is it still just in the discussion stage?

Well, we've gotten to the proposal stage. Right now it's a question of budgets and implementation schedules.

Okay and --

I think we are reasonably close, in that where we would expect to do a few installations outside of North and South America in the next 12 months.

All right. And how do you feel about -- you've obviously had some really wonderful rates of growth as far as the amount of tanks that you did in the United States over the last 12 months. How would you characterize just the addition to -- the nominal additional tank customers that you've added?

You mean the number of tanks we are trying to do, or the number of customers we are looking at?

No, the number of individuals, the number of individual companies that are doing the installs. And what sort of your feel is when you are -- it sounds like you're pretty enthusiastic about where you're standing and looking ahead for the next 12 months. And I'm kind of curious if the number of companies that -- the increase in the number of companies over the last year and kind of your line of sight for the amount of additional companies or new customers that you think you might be successful in getting.

I think we certainly expect to get more business from the customers we already have. We are -- I would not be surprised at all of the number of total individual customers wouldn't double in the next year.

Okay, well, that would be wonderful. And finally, my last thing I was interested in, I think it was about a year and a half ago you started to introduce new industrial Zerust solutions into the market. And I guess I'm curious now, since they've been in the marketplace for a while, what sort of acceptance have you been getting to some of those new solutions? And what -- where do you see those sort of products heading over the course of the next year or so?

Well, those products have enabled us to win some very nice business opportunities as a complement to our broader offering. We are also seeing some opportunities for the -- what we originally targeted as just the general industrial market is getting a lot of interest and acceptance also in the oil and gas sector. And we hope to see some significant sales in the next 12 months for those.

Okay, all right, well, that's all I have. Thanks a lot and congrats on a great year.

Thank you.

Dick Feldman, Axiom Capital.

If I take the midpoint of your revenue guidance, it implies like a mid-20% -- I think 23% gain in revenue. Your Zerust business, industrial Zerust business is, in more likelihood, not a generator of a gain of that magnitude. So I wonder how much are you depending on the rapid growth in the oil and gas and plastics business, and what would be the impact of this on margins, in that the plastic business has considerably lower margins than the oil and gas business.

I certainly wouldn't say that the majority of our growth, as far as the sales projections, comes from the heavier reliance on the Natur-Tec product line. (multiple speakers)

Okay.

While we certainly are anticipating that Natur-Tec would continue to have growth in line with what it's done in the past year, we certainly still see significant growth coming out of the industrial products, the oil and gas products as being the big contributor. There's also opportunities in -- as far as growth coming out of Brazil that we anticipate having in 2015.

So, all in all, I think the growth is proportional to the breakout that we currently have. But obviously if Natur-Tec does have a sizable increase, they do operate a smaller profit margins. But also the oil and gas tends to operate at higher profit margins than traditional Zerust industrial products. So, all in all, I think the weighted average margin will stay pretty consistent.

Okay, thank you. I guess that covers the one question I had.

Tim Clarkson, Van Clemens.

This is kind of a curious question. You (technical difficulty) potential to convert some of your partially owned subsidiaries into wholly owned subsidiaries like you did with Brazil. Are any opportunities like that in the foreseeable future this year?

We are -- that's more on a long-term consideration list. There's nothing really that we have on the short-term horizon at this point.

Okay, all right. Thanks, I'm done.

At this time I'm showing no further questions in queue. I'd like to turn it back over to Mr. Lynch for any closing remarks.

I'd like to thank everyone for participating today. In closing I would like to thank all of the members of NTIC's global family of employees, joint ventures, friends and colleagues from across our worldwide joint venture network for their hard work and dedication in making fiscal 2014's achievements possible. We believe our strong international presence will continue to serve as a key competitive advantage to us in our increasingly interconnected marketplace, and with our technical strengthen market reach, we are well-positioned to pursue continued profitable growth.

Thank you for listening and for your interest in NTIC.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.