Northern Technologies International Corp (NTIC) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Northern Technologies International Corporation first quarter 2015 earnings conference call and webcast. (Operator Instructions) As a reminder today's conference is being recorded. I would now like to turn the conference over to Matthew Wolsfeld, Chief Financial Officer. Sir, you may begin.

Thank you. Good morning. I'm Matt Wolsfeld, NTIC's Chief Financial Officer. I'll be conducting the call today as Patrick Lynch, NTIC's Chief Executive Officer, is currently in China on Company business.

Please note that our first quarter of fiscal 2015 financial results were included in a press release issued earlier this morning, a copy of which is now available at NTIC.com. In addition, last Friday afternoon we filed a Form 8-K with the SEC, and on this past Monday morning we issued a press release announcing the termination of our joint venture agreement with Tianjin-Zerust in China.

Additionally, as of July -- or as of January 1, all sales of Zerust product and services in China will flow through our newly formed wholly-owned Chinese subsidiary. A copy of this release is also available at our corporate website.

During this call I will review various key aspects of our first quarter of fiscal 2015 financial results, give a brief business update including our decision to go direct in China, comment on our annual sales and earnings guidance for fiscal 2015, and conclude with a short question-and-answer session. As part of the discussion today, I'll 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 provision of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself of these 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, our recent press releases and our Quarterly Report on Form 10-Q that will be filed during the next couple of days. Please 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.

During the first quarter of fiscal 2015 which ended on November 30, 2014 our total net sales continued to show consistent year-over-year growth in all three of the market segments that NTIC services. Furthermore, we believe that our competitive position, operations, and balance sheet are all stronger today than they were a year ago. NTIC's total net sales increased over 14% in the first quarter of fiscal 2015 to over $7.2 million compared to the first quarter of fiscal 2014. This sales growth came from increased sales of Zerust products, which increased over 8%, and Natur-Tec products which increased over 74%.

While we are certainly pleased to see this continued healthy sales growth, which was largely in North America, we are also encouraged to see a 6% increase in income from our joint venture operations. Although sales by our joint ventures showed a decrease of 1.8% to $29.1 million for the first quarter of fiscal 2015 compared to the same period last fiscal year, this decrease is primarily attributable to the weakening of the euro to the US dollar, and to a lesser extent, the sale of our remaining ownership interest in the German electronic instruments company Mutec.

This slight decrease in turn was partially offset by continued strong demand for our Zerust products. All said, NTIC earned $0.22 per diluted common share during the first quarter of fiscal 2015 compared to $0.19 per diluted share during the first quarter of fiscal 2014, which is a 15% increase.

As just announced in the last few days, effective December 31, NTIC terminated its joint venture agreement with Tianjin-Zerust in China. As of the beginning of calendar 2015, all Zerust EXCOR products and services will flow through NTIC Shanghai Company Limited, our newly formed wholly-owned subsidiary which we refer to as NTIC China. While the impetus for this action was a breach of contract by our former Chinese partner, we believe we will now have the opportunity to invest in and grow our business in this market much more aggressively than before.

NTIC China will focus its near-term efforts on transitioning customers from the previous joint venture to the new subsidiary, and then we'll dedicate its efforts towards aggressively expanding our market presence in China. Commencing with the second quarter of fiscal 2015, our consolidated financial statements will include the financial results of the new NTIC China subsidiary. During the first quarter of fiscal 2015, and prior to such time, we held our 30% indirect ownership interest in our former Chinese joint venture indirectly through our majority-owned holding company NTI Asean LLC.

Our Annual Report on Form 10-K each year breaks out certain financial information on our joint ventures including our former Chinese joint venture, and our Quarterly Reports on Form 10-Q also contain financial information on our former Chinese joint venture because of its significance to our financial results. As previously disclosed in our fiscal 2014 Form 10-K, our former Chinese joint venture had net sales of almost $16 million, and operating income before paying royalties to shareholders of over $5.5 million during fiscal 2014.

Our 30% portion of the Chinese joint venture's operating income was over $1.6 million during fiscal 2014, which means that assuming we are as successful in transitioning the sales of our former Chinese joint venture to NTIC China, our earnings should significantly increase, since we will fully consolidate 100% of the net sales and operating income earned from NTIC China beginning in the second quarter of fiscal 2015.

We also anticipate due to the consolidation of NTIC China our net sales, cost of goods sold and operating expenses will increase, and our equity and income from joint ventures and fee income for services provided to its joint ventures will decrease in future periods compared to the prior fiscal year periods. We recognize that it may take some time to transition the customers of our former previous Chinese joint venture to NTIC China, and that this may result in some volatility in our operating results during the next few quarters. This will be true especially with respect to our second quarter of fiscal 2015, during which we have incurred and will continue to incur significant startup expenses and expect to incur certain losses at NTIC China prior to recognizing any significant revenue.

During the first quarter of fiscal 2015 we incurred approximately $225,000 of direct expenses related to the termination of our former Chinese joint venture and the formation of NTIC China. These expenses consisted primarily of legal expenses and personal expenses associated with the establishment of the subsidiary, the hiring of a great new management and sales team and initial operations. These expenses are reflected in increased general and administrative expenses and increased expenses incurred in support of joint ventures during the first quarter.

The circumstances under which we decided to go direct in China were disappointing to NTIC and the entire Federation of NTIC's joint venture partners. However, we now view the situation as an opportunity, and everyone at NTIC and NTIC China are eager to move forward aggressively in this very important international market.

Moving on to our oil and gas business, in the first quarter of fiscal 2015 our oil and gas team continued to focus its sales efforts on our solutions for protecting the bottom plates of oil storage tanks from corrosion. In this effort our team has continued to systematically target oil terminal operators and refineries in North America with continued success. Having seen the need for and acceptance of our innovative solutions, we expect this growth opportunity to continue during the remainder of fiscal 2015 and beyond.

These continued successes with existing and new clients have bolstered 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 not be immediate, and may be choppy with spikes in sales when opportunities are converted and revenue is recognized over the next few years.

Now turning to Natur-Tec's bioplastics business, net sales of Natur-Tec products increased almost 74% during the first quarter of fiscal 2015 compared to the prior fiscal year period. This increase was partially due to finished product sales through NTIC's majority-owned subsidiary in India and also due to increased sales in North America through our traditional distributors. We continue to see strong demand for finished products such as compostable bags and cutlery in North America as a direct result of increased adoption of zero waste initiatives and favorable state and local level waste management regulation.

In the first quarter of fiscal 2015, we also entered into an agreement with NatureWorks LLC for joint marketing and sales of indigo-based packaging solutions to customers in India. With the recent Indian government mandates banning the use of nonbiodegradable plastics in certain types of foods and consumer packaging, we expect the market in India for bioplastic packaging solutions to grow substantially. We expect both of these segments to continue to be strong growth areas as we continue to target and convert additional manufacturers to the use of Natur-Tec sustainable packaging solutions in Asia and worldwide.

Now to summarize the financial results for the first quarter of 2015 compared to the prior fiscal year period. Sales of NTIC Zerust products increased across all market segments during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. Sales of industrial Zerust corrosion-inhibiting products increased over 7% as we experienced increases in demand for both existing and new customers.

Sales of Zerust oil and gas solutions increased over 28% in the first quarter of fiscal 2015 as we completed implementation in multiple new and existing customer sites in North America. Sales of Zerust corrosion-inhibiting products to our joint ventures increased over 4% in the first quarter of fiscal 2015 compared to the prior fiscal year period. Additionally, income provided by our joint venture operations increased almost 6% to over $3.7 million during the first quarter of fiscal 2015 compared to the prior fiscal year period.

Lastly, sales of Natur-Tec products increased over 74% to almost $1 million during the first quarter of fiscal 2015 compared to the same period in 2014. Our total operating expenses increased 8% to $4.5 million during the first quarter of fiscal 2015, primarily due to an increase in general and administrative expenses, and expenses incurred in support of joint ventures which was previously -- which as previously mentioned related primarily to the termination of our former joint venture in China and the formation and establishment of NTIC China.

Overall, net income attributable to NTIC increased 14.8% to over $1 million, or $0.22 per diluted common share for the first quarter compared to $0.19 for the first quarter of fiscal 2014. As of November 30, 2014 our working capital was $17.1 million, including $2.6 million in cash and cash equivalents, and $4 million in available for sale securities, compared to $17.8 million including $2.5 million in cash and cash equivalents and $5.5 million in available for sale securities as of August 31, 2014.

Now turning to NTIC's annual guidance. For the fiscal year ended August 31, 2015, NTIC currently expects its net sales to be higher than our previously estimated range of $32 million to $34 million due to the consolidation of NTIC China beginning in the second quarter. However, we are unable to provide specific guidance as to how much higher we expect net sales to grow at this time due to uncertainties regarding the actual anticipated transition of sales from our former Chinese joint venture to NTIC China. We believe we should be in a position to provide more specific updated sales guidance in April 2015 when we report our second quarter of fiscal 2015 financial results.

With respect to our earnings guidance, we continue to expect net income of between $5.4 million to $5.7 million or between $1.20 and $1.26 per diluted share. However, as with our sales guidance, we intend to update our earnings guidance at the end of second quarter after we have a better understanding of the financial impact of the termination of our former Chinese joint venture and the establishment of the new Chinese subsidiary. With that update, I will now answer any questions that you may have.

(Operator Instructions) Tim Clarkson, Van Clemens Capital.

Great quarter, just wanted to know where are we exactly in terms of the timing of this transition in China? When was he told that he was going to lose his deal and when did you guys start taking over?

He was notified just a few days ago. Patrick is actually in China right now meeting with the former partner to kind of coordinate the liquidation of the company and termination of the joint venture agreement.

However, the company started the process of hiring our new sales and management team in China, so that when we were -- so that as we notified the individual of the termination of the joint venture, the new company was ready to start selling product. So, the new company is on the ground, and once the new -- or once the old joint venture was terminated, the new sales team and new company was immediately out visiting customers and ready to start transitioning customers and sell product.

As far as you know, is the Chinese government okay with what you guys did?

Without question, we are -- everything -- all the joint venture agreements were previously -- we had very specific contracts in place, and the events that took place were very clearly a breach of those contracts.

And in terms of -- you mentioned before you thought there was a potential -- once you transition the current customers, that there's opportunities to other parts of China for other applications.

That's correct. We certainly -- the Chinese market should be the biggest market that NTIC and its joint ventures currently have. And we feel that in looking at different regions outside of what the former NTIC joint venture served, that there are significant opportunities for growth as we start to sell products, start to meet with customers, start to move into northern China and southern China, other areas that we are -- we view as being currently underrepresented.

One last question. What was Mutec? I haven't heard that name before.

Mutec was a company -- an unrelated non-Zerust company that sold various instruments that measured moisture content and in various products that we had been invested in for probably 12 years. We held a 30% ownership interest and we sold our ownership interest in that in second quarter of fiscal 2014. There was not a gain or loss associated with the sale of the business.

However, Mutec had sales in first quarter of last fiscal year. So they were about $500,000 in sales in first quarter of last fiscal year that we obviously did not have in the first quarter this fiscal year, and that's part of the change as far as showing a 1.8% decrease in joint venture sales. That's part of the reason why we were $0.5 million down.

Right. Okay, thanks.

Joe Furst, Furst Associates.

Good quarter, congratulations. Can you expand a little bit on the progress in the oil tank base business? You said it's growing, but can you give a few numbers that see what exactly what you're talking about in a little more depth?

Sure. I guess to get a little more in depth, last year we talked about completing, in its first year of operations, roughly 50 above-ground storage tank solutions. At this time, being three months into -- being one quarter into the fiscal year, we have delivered or have completed installations or are in the process of delivering on 40 tanks with the idea. And I think the goal is to at least double the amount of tanks that we did in our second full year of operation, and we feel that we are certainly on track to do that.

Generally the winter months tend to be a little bit slow when it comes to tank maintenance compared to what gets done in the other nine months. But we certainly feel like we are on track to double those sales. You know, there's other items inside of oil and gas as far as selling traditional packaging and other items that have increased and that are going well.

Thank you. And how about the flange business?

The flange business, again, the majority of the flange business still remains in Brazil. I'd say they had very low sales in Q1 of Flange Savers, specifically compared to what they did last year.

I can tell from talking to the individual that runs our Zerust Brazil operations that he anticipates several large orders during the next eight months, which would give us a nice chunk out of the remaining contract that remains with Petrobras. So Flange Savers we are not -- I certainly wouldn't say were robust in Q1, but we certainly anticipate selling a large amount of Flange Savers specifically to Petrobras over the next eight or nine months.

How about any progress with other companies using the same technology, since it worked so well with Petrobras?

I think we have mentioned on the call that we don't have anything significant to report yet. We're working on new tests with several large players in the Gulf that we've talked about, that are still in the testing and evaluation process. I can't tell you too much more than that.

Thank you. And just one quick question; I missed the point. Like you said, the Chinese operation, you mentioned $1.6 million. What did that represent again?

In 2014, the income that NTIC recognized -- our 30% interest (multiple speakers) in China was $1.6 million, meaning that the other 70% of China generated close to $4 million of income.

Right, sure.

So going forward, if we are able to convert that business at similar operating income percentages and what have you, our expectation is that we are going to be able to put that entire $5.5 million to our bottom-line once we are able to convert that business, and then grow it from there as we continue to expand into China.

Oh, that's great; great, okay. Thank you very much.

Jerry Diwali, private investor.

Two questions. One is last time Patrick had mentioned that there was a possibility some of the states were looking at some kind of requirements relating to tank protection. I wondered if you could give us an update on that. And then second, I'm curious how this relationship came together in NatureWorks. If that's primarily relating to your side, that they've got a strong salesforce and that was kind of the driving force or just give us a little more color on the relationship with NatureWorks.

Sure. Specifically with NatureWorks, Natur-Tec has worked with Cargill NatureWorks for some time in their PLA. And it really what happened is NatureWorks was looking to expand into the Chinese market because of specific legislation that was being put in place in India and other areas in Southeast Asia. We, with the new company, [Harida] -- sorry, with the new company that we had, Natur-Tec India, we were able to start partnering with Natur-Tec where we are acting as a distributor of the NatureWorks resin.

And so what we're doing is we are -- they are essentially utilizing our salesforce at Natur-Tec India. And they are bringing Natur-Tec India into new opportunities, where we will go into to sell various resins and various resin solutions and bioplastic resin solutions to these new customers. And we are able to sell -- either sell a modified resin or sell something through Natur-Tec India or directly distribute the NatureWorks product.

The other benefit that this relationship has is that we get more favorable pricing on one of our key base resins in manufacturing all of our Natur-Tec products. So, overall, associating with NatureWorks is a very positive thing for the Company and one of the things we certainly hope to -- will lead to some of the continued sales growth, both in India and also product that has sold throughout the rest of the world.

But you're driving -- as far as the salesforce, is primarily your salesforce.

Correct. It's our salesforce.

And any update on the state requirements? I know Patrick had mentioned (multiple speakers)

I don't have anything significant to update on any of the various requirements. It's certainly something we are still pushing forward. Potentially I could give an update most likely during second quarter, if there's been anything new that develops over the next couple of months.

Okay. Thanks.

Mike Ross, Van Clemens & Company.

Matt, this is Charlie Pine. I'm in Mike's office. Good morning. Nice quarter. I have a question for you just to clarify a little bit of something on the oil and gas tank business. Did I understand you right, that you did 40 more tank installs in Q1?

In Q1 and in the start of Q2, we have delivered and/or done the installation on 40 tanks or over 40 tanks.

Okay, over 40 tanks. Now I'm gathering that with a mix of customers, some that have probably done it on a handful of tanks and some that are new. Have any of these customers started to more significantly increase the quantities that they're -- and to spread it around into their infrastructure, say going from 2 to 3 tanks to 5 to 10 or more tanks at this point?

That's certainly what we're seeing. I mean the increase in tank sales that we've seen in Q1 compared to last year is related to both new customers, but also, as you said, the people -- the customers that are starting to roll this product out to additional tanks. Certainly our goal is to handle and to do the installation work on as many tanks as possible with a specific customer, because it's obviously easier to sell to an existing customer and it's easier for us to do a second tank all the way through a 10th or 20th tank with the same customer. Compared to converting a new customer, where you have to do a deal with a -- essentially a new installation team and new process.

So, those are definitely areas that we are -- it's definitely what we're seeing and definitely we hope to continue to capitalize on.

I noticed in the prepared remarks you mentioned that you haven't yet experienced any softness in the tank business due to the rapid decline in crude spot prices. And one would think that because you are dealing with more midstream and refineries and companies in that area, that you are not as exposed to the E&P environment. But do you -- at this point are primarily -- are -- do you have much of any exposure in the -- of any of your customers? Are they people that are using it for -- that would be really considered to be E&P type customers?

I would probably have to get back to you on that and really see where in the process the customers are. It's my understanding from talking to Gotham and from speaking to other people that it's not. And so I kind of need to confirm a little bit and look at exactly where the sales are going, which is information I don't have right at my fingertips right now.

But for the most part, with the number of tanks that we have done and how it's such a small number of tanks, and even with doubling it or even if we were to do significantly better than that, it's still such a small, small percentage of the total infrastructure that's out there that so far we haven't seen any pullback or any hesitation from any customers due to anything that has to do with oil prices.

Okay. Lastly on that, sort of on the same topic, is there any part -- is there any sort of specific geography in North America that has been -- that you would point to, where you are finding greater successes in the tank area? Are you doing more in the mid-part of the country or in the -- along the area -- along the Gulf, with Gulf refiners, Gulf area refiners, internal companies? How is it sort of located across North America?

It is honestly all across the -- it's all across North America. I mean everywhere from Alberta to the Bahamas to Oklahoma are places where we are doing the tank bottom installations.

And I guess lastly, what the heck, I might as well just ask this. Do you foresee that you might get into some form of foreign expansion with the above-ground tank solution in 2015? Or are you looking at waiting for a while on that?

I certainly hope so. I mean we have -- there is interest. It's a matter of timing and converting the business.

Okay. Well, great, Matt, thanks a lot and once again great results.

Dick Feldman, Axiom Capital.

Thanks for taking my call, and nice results. I have a couple of questions. First on the oil and gas sector, the non-tank business during the first quarter of the fiscal year, was that down from a year ago? You made this particular reference to doing very little in Brazil.

You're looking -- you're talking about just in Brazil? Or are you talking about --?

Or in general. Other words, if you had -- I mean if you spoke (multiple speakers)

I would say in looking at the numbers, Flange Saver sales, oil and gas sales in Brazil were up slightly from last year. But again, the total amount of revenue recognized in either Q1 of this year or Q1 of last year was very small compared to the total oil and gas sales last year and what we expect to do this year. So, neither one of them is that significant.

The majority of the revenue that came in for oil and gas in Q1 related to the tank bottom solution and some other projects that we are working on, whether it's the sale of powder-based products or the sale of traditional packaging products to oil and gas customers. But I would say that inside of oil and gas, there certainly isn't a decline in any kind of sales of any of the products at this point.

Okay. And given the -- at least the tank business, these tend to be somewhat long lead time in a sense, so that you have visibility going out into the year.

Correct. There is certainly some visibility for the next three or four months. But as I said, the spring and summer -- spring and summer months in the oil and gas, specifically in North America, tend to be much more active than the winter months. And we saw that -- we saw that last year and so we kind of build that into our expectations of sales.

I can also tell you that our expectations of the doubling of sales of tank bottom solutions has to do with our request that we have, where we have answered requests for proposals and have submitted bids and things like that to customers.

Okay, so that -- in quotes, do you think that's reasonably firm?

Yes.

Turning to the plastic side of the business you had a large increase in sales. What has been the impact of that on both gross margins, and is now the -- and then operating income? Are you now meaningfully profitable there?

When you talk the plastics business I'm assuming you are referring to Natur-Tec?

Yes.

Previously we have talked about Natur-Tec needing to be at $4 million to $6 million of revenue, given the gross margin that it operates at, in order to be profitable. And given that we hit close -- very, very close to $1 million in sales for the quarter with the expectation that sales are going to continue to ramp up during second quarter, third quarter and fourth quarter, we certainly feel like we are on pace and are putting our results together right now that would have us at breakeven or very close to breakeven during the current fiscal year.

Has there been any change in the Natur-Tec gross margin with the -- or is it -- go ahead.

I was going to say the gross margin has actually improved slightly in Natur-Tec. I think as we get -- as we become better at processing the resins, also the relationships that we have with our key suppliers as that improves, there are certain increases that we get in that gross margin. Plus it's also -- as we start to do more volume we are able to get a slightly better margin as well. We are certainly not at the Zerust gross margin levels, but we certainly are better off -- significantly better off than we were two years ago.

And it sounds, in the Natur-Tec side of the business, that you have got heightened interest in the application that gives you confidence that you will continue to experience good gains this year.

Yes. Natur-Tec is doing very well. And the interest that's coming because of the various -- in North America, the various legislative mandates that have taken place, specifically in California and on the West Coast, are driving the increase in business in North America. You know, there's other interests in other areas around the world, specifically in India, Southeast Asia, Europe where we are starting to see increased level of interest.

It's just -- as we kind of talked about over the past four or five years, this is -- the bioplastics and specifically compostable plastics, we knew it was a marker we wanted to get into because of the momentum that we saw specifically at the legislative mandated levels. And what we are really starting to see is what was being talked about and legislated before is now kind of at the point where the rubber meets the road, where people need to implement these solutions.

And so, this is what we saw a few years ago and this is the reason why we are now seeing these sales growth. And this is the main reason why we put so much effort over the past eight, nine years into the Natur-Tec business.

How do you see yourself competing against those so-called biodegradable plastics that really are not compostable?

Well, the positive thing is that it's not as much a matter of us competing against those. It's more a matter of those -- some of the biodegradable plastics, specifically like the oxy degradable products and other plastics that claim to be bioplastics because they mix in some of the compostable plastic content, a lot of those are -- a lot of those are leaving the market, because specifically they are not being accepted at various compost facilities, the large -- the large municipal compost facilities like a Cedar Grove in California. Those compost facilities are fining companies that deliver compostable waste to them that is in non-certified compostable packaging.

So, as various companies are beginning to implement composting, they are figuring out very quickly that they need to use ASTM-certified compostable plastic packaging, and there aren't that many companies out there that are selling in [ASTM D 6400] certified plastic packaging. And Natur-Tec is one of them, and that's going through a reputable distributor and reputable distributors that we do in North America is really -- what we're seeing is companies are really starting to figure out what is just -- what good products are.

How proprietary are your resins? Do you have exclusive use of them or can some other company use the same resins?

We'd be happy to sell resins to other companies. But there are certainly proprietary resins that we have patents on.

Okay, great; one more question, and that relates to China. You sort of indicated in your comments that there were certain regions in China that you did not think the prior distributor was doing a good job. And I guess the questions relates to if you were to -- it sounds as if you -- A, if you can just convert the existing customers there's a very big impact to the bottom line. But how much more additional growth is there from what you've been able to identify in those regions that you feel you are underrepresented?

I almost want to say we'll see. But I mean, I can tell you over the past few years, we have tried very -- we've been working to expand into other markets of -- in China, where we see there is obviously a tremendous amount of industrial customers and parts suppliers that are exporting ferrous metals. And we feel like we can build a very, very capable sales team that will be able to fully go after all the existing markets in China.

So, if you break up China into four or five key regions, we feel that there was one specific region where we were well represented, and we feel that there are probably three or four other key regions where we want to significantly increase our market presence. And these are areas that we are going to aggressively go after, once we are able to convert the existing business. So, our hope is that we put a plan in place to accomplish just that, so that going forward the increases that we see out of China are going to be one of the significant revenue drivers at NTIC.

So, in theory, this takes a moderate growth business and gives it maybe some near-term over the next three, four years substantial growth opportunities?

That's certainly how we are looking at it and that's certainly what we are going to very aggressively try and do.

Okay. Well, great. Good luck and once again a good quarter and thanks for taking my calls.

Walter Ramsley, Walrus Partners.

Congratulations Matthew. Everything is looking really good. I've got a couple of follow-ups. Do you have a summary of what the foreign currency impact was on the sales and earnings, either directly to the Company or to the joint venture or however you keep track?

I don't have it broken down into an exact earnings per share number. But I can certainly tell you that from going from the euro at August 31 compared to the euro at November, you are looking at a 6% to 8% decrease. You know, I mean the one thing specifically is looking at the sales in -- looking at the sales -- you know, one of our largest joint ventures, Germany, in Europe, their sales were up -- on a euro basis were up close to EUR350,000 to EUR400,000. However, from a US dollar standpoint we are only up $50,000, $60,000, $70,000.

Obviously if we look at the comprehensive income statement that we'll have in the Form 10-Q when it gets filed, hopefully tomorrow, you'll see that it had -- although temporary, there certainly was a -- an impact on the euro. Given that 70% of our joint venture business -- close to 70% of our joint venture business is euro-based, it's -- it had an impact.

And certainly on the royalties that we (multiple speakers) assuming the royalties that we collect from those European partners, even if the euro amount was up, the amount of dollars that we collected was down. So the fact that our joint venture operating income was up compared to Q1 of last year, it would've been up significantly more had there not been such a decline in the euro.

Okay. So the unit volume would be -- I mean the direct comparison was minus 2, I guess, you know, if you didn't make any adjustments. So based on what you're saying, it sounds like the unit volume was up maybe 4% to 6%, something like that.

I would probably say that it's in that area.

Okay. Good, thank you. As far as the new Chinese operation goes, will there be any currency repatriation problems getting the money out of there?

Well, even with the existing -- the joint venture that we just terminated, that joint venture had traditionally paid royalties and large dividends to NTI Asean, which is a US-based LLC. And we didn't have any issues making any kind of payments to that entity. I don't anticipate there being any significant difficulties with making dividend payments back to the United States. But also, we intend to invest very heavily in the Chinese market. So I don't necessarily see the need to bring any kind of cash back from that new subsidiary anytime in the near future.

Right. No, I understand. I'm just wondering in the future, once you turn it into a cash cow, whether you can actually get the money out. So good to see (multiple speakers)

I certainly feel like we have the right -- like we are working with the right people as far as the right banks, the right attorneys and what have you that it shouldn't be an issue to make a dividend payment.

Okay. And in the first quarter, the startup costs there were $225,000. Is that sort of the run rate you anticipate for the second quarter?

No, I would anticipate the run rate to be significantly higher in second quarter than it was the first quarter. I mean, in first quarter we had some legal expenses associated with the startup of the new subsidiary and also the hiring of a few people as far as the travel expenses of having them trained, flown over to the United States, trained and getting things up and running. The majority of the expenses associated with starting up the operations are going to be borne in second quarter. So I would anticipate a very volatile second quarter, you know, with a significant amount of expense, without offsetting revenues coming from China.

Okay. And one last thing, the tax rate was a little lower in the first quarter. Was that just a temporary blip or is there some actual change taking place?

There is no actual change taking place. I think it had more to do -- just more to do -- last year we anticipated and we received a very large dividend from our German joint venture. This year the dividend that we agreed on was less for various reasons that you can imagine, given the current state of the euro. And so that will slightly impact the effective tax rate that we have, but I don't anticipate it to be anything more than kind of a temporary difference. If you look at the effective tax rate that we've had over the past four or five years it's generally pretty consistent and I would expect that it would stay at that level.

Good. Okay. Thanks for taking the questions. Congratulations.

Jerry Diwali, private investor.

Thank you. Matt, just a follow-up on China. Obviously your former venture partner over there is going to try to maintain those clients, maybe with a competing product or whatever. I just want to get a flavor for what kind of relationship you have with the end customer in China. Do you do business with most of them in other parts of the world?

And just I guess trying to get a better feel for what you think the odds are of maintaining or actually establishing a new direct relationship with them. Maybe give a little flavor with who those customers are, not names, but if you did business with them elsewhere and etc., just give us a flavor on what the odds might be of retaining those.

Part of -- I'd say a lot of the growth that we've experienced in China over the past 10 years from when we really got things up and running was due to US and European-based automotive and industrial parts suppliers that left North America and left Europe and went to China. So, a lot of the -- a lot of the parts for export are going to the United States and going to Europe. They're going to large automotive companies, large industrial companies that you are very familiar with.

And in general the decision-making for the specs on how those parts need to be packaged are traditionally made in that home territory. So, if there is a large US automotive company that is spec'ing in the Zerust product, they are mandating that their Chinese supplier use the Zerust packaging. And in a lot of situations, that's what we are running into. And now, the new wholly-owned subsidiary that we have started is the only source for that spec'ed in part.

And so we expect a lot of situations where we present ourselves as really the only option as far as converting the business. And we are seeing the same thing with several European-based automotive companies where the Zerust EXCOR part is spec'd in. So that certainly helps with the transition where it doesn't allow for any kind of alternative VCI supplier to be used. And ultimately, we certainly don't know at this time and don't expect that the former joint venture partner will attempt or would even consider to continue to be in the VCI area.

Okay, thank you.

Dick Feldman, Axiom Capital.

Getting back to China, do you have any idea of how much inventory product your former joint venture partner has and it may be necessary to either -- would you potentially buy it back or would you just have to sell it through?

No. That's something that we'll deal with during the liquidation process. You know, those are kind of much more detailed specifics that we can give you a better idea of after we kind of start the process and probably at the end of second quarter when we talk about the impacts from the liquidation of the business. We have a pretty good handle on all the working capital, whether it's cash receivables, payables, key customers, things like that. We have a pretty good idea of where everything stands.

And at this point in time, the most important thing for us is the continuation of supplying the Zerust product to key customers, not necessarily the potential inventory, inventory sales or write-downs or utilization of existing inventory. Those are things that we'll kind of take care of as we are able to kind of negotiate and handle the entire liquidation.

So, the first focus is to maintain -- try to maintain the existing relationships. And then further on, once that hopefully is accomplished then focus on the growth opportunities.

That's correct.

Okay thank you.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Wolsfeld for closing comments.

All right. I'd like to thank everybody for participating today and for your interest in NTIC. I hope you guys all have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.