Northern Technologies International Corp (NTIC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern Technologies International Corp. second-quarter 2017 earnings conference call and webcast. (Operator Instructions)

As a part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding NTIC's future financial and operating results as well as their 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 the NTIC deserves 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 the forward-looking statements due to certain risk and uncertainties, including those described in NTIC's most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q, and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward-looking statements.

I would now like to introduce your host for today's conference, Mr. Matthew Wolsfeld, CFO. Sir, you may begin.

Good morning. I am Matt Wolsfeld, NTIC's CFO. Patrick Lynch, NTIC's CEO, is currently traveling internationally, so he asked me to lead this conference call.

Please note that our financial results for fiscal 2017's second quarter were included in a press release issued earlier this morning, a copy of which is available at NTIC.com. During this call, we will review various key aspects of our fiscal 2017 second-quarter financial results, give a brief business update, comment on our net sales and earnings guidance for fiscal 2017, and then conclude with a question-and-answer session.

Global demand has remained strong for our core ZERUST industrial products. For our second quarter ended February 28, 2017, total consolidated net sales increased 13.5% to $8.7 million compared to the three months ended February 29, 2016. Broken down by business unit, this included a 23.6% growth in ZERUST industrial net sales, a 36% decline in net sales of NTIC -- sales from NTIC to our ZERUST joint ventures, a 45% decline in Oil and Gas net sales, and a 14.8% growth in Natur-Tec sales.

Total sales by our joint ventures, which we do not consolidate in our financial statements, grew to nearly $23 million for fiscal 2017 second quarter compared to $20.1 million for the same period last fiscal year. The 14.1% increase in JV sales was a result of improved global demand with good execution across our global joint ventures to increase market share. We continue to closely monitor our international markets and proactively work with our joint venture partners to strengthen market share and improve global performance.

The 23.6% increase in ZERUST industrial sales during fiscal 2017's second quarter was due to higher sales to existing customers for new and existing products and increased demand across many of our end-markets, including automotive, agriculture, and mining sectors. Sales by our wholly-owned subsidiary in China increased 94.1% to $1.7 million during second quarter of 2017 compared to $756,000 for the same period last fiscal year as our strong China team has continued to convert customers from our former joint venture partner, as well as aggressively expand into new market sectors.

During the second quarter of fiscal 2017 our China subsidiary approached breakeven and reported a small operating loss of $23,000 compared to a $327,000 operating loss incurred in the same period last fiscal year and a $293,000 operating loss in fiscal 2017 first quarter. Demand in China is strong and sales at NTIC China increased 13.1% from the fiscal 2017 first quarter to second quarter, despite slower demand in the second quarter as a result of the long Chinese New Year holiday period. NTIC's market share has grown in China and we expect profitability at our China subsidiary in the third quarter of fiscal 2017.

Our litigation against Cortec Corporation in the United States recently faced a setback. On February 16 the court dismissed our complaint without prejudice based on a non-executive forum clause contained in a prior settlement agreement between the parties. Consequently, we are working with our legal team to develop a legal strategy to continue to protect NTIC's business interests and global trademarks while maximizing shareholder value.

Year-to-date NTIC has incurred legal expenses of $477,000, or approximately $0.10 per diluted share, compared to $221,000, or approximately $0.05 per diluted share, during the six months ended February 29, 2016. It's still too early to determine what impact any new actions by NTIC will have on our legal expenses going forward.

Oil and Gas sales in the second quarter of fiscal 2017 declined 45% compared to the same period in the prior fiscal year. We are confident in our Oil and Gas product offerings, especially in our tank bottom corrosion prohibiting solutions, but it's taking us longer than anticipated to penetrate the market. And the sales cycle has gotten longer as a result of volatility in oil prices and high turnover in personnel at many customers.

With this said, we have a pipeline of projects from both new and existing customers for our solutions and we expect to invoice approximately $1.2 million in orders in the third and fourth quarters of fiscal 2017.

Turning to our Natur-Tec bioplastics business. For the fiscal 2017 second quarter Natur-Tec sales were $1.5 million, a nearly 15% increase over the same period last fiscal year. This growth in sales was due to increased demand in North America through our domestic distribution network as well as higher sales of finished products by NTIC's majority-owned subsidiary in India. Global demand for our compostable bioplastics has continued to be strong.

Historically, we've experienced favorable market acceptance for our Natur-Tec products from janitorial and sanitorial distributors, as well as foodservice companies. More recently, Natur-Tec had experienced increased demand from the garment and apparel industries for biodegradable packaging bags. We are working with large multinational apparel brands and expect to increase our customer base in this sector over the next several quarters.

At this point, let me quickly summarize our financial results for the fiscal 2017 second quarter.

As I mentioned earlier, net sales of NTIC's ZERUST products increased 13.2% in fiscal 2017's second quarter as a result of a 23.6% increase in sales of ZERUST industrial corrosion-inhibiting products and growth at NTIC China, partially offset by a 45% decrease in sales of our Oil and Gas market segment and a 36% decline in sales to our joint ventures. The decline in sales to our joint ventures largely resulted from the variability in timing of shipments, the result of which is a larger amount of joint venture sales that fell into March of 2017. Lastly, sales of Natur-Tec products increased 14.8% to $1.5 million during fiscal 2017's second quarter compared to the same period last fiscal year.

Income from joint venture operations increased 33.4% to $2.6 million during fiscal 2017's second quarter compared to the same quarter in the prior fiscal year. This increase was primarily a result of higher sales and profitability at our joint ventures.

Our total operating expenses increased 10% to $4.8 million during the fiscal 2017 second quarter compared to the same period last fiscal year. This increase was primarily due to increased legal expenses related to litigation in North America and the accrual of employee bonuses, as no bonuses were accrued for last year during the same period.

As we previously mentioned, the transitioned expenses that were formerly treated as research and development expenses to selling and generally administrative expenses, specifically as they relate to Natur-Tec and ZERUST Oil and Gas business. Many of the expenses associated with these business units have transitioned from development-stage expenses to regular operating expenses and we expect to invest between $2.2 million and $2.8 million in the remainder of fiscal 2017 on R&D activities. Year-to-date we have invested $1.4 million in R&D activities.

NTIC reported net income of $387,000, or $0.09 per diluted share, for the fiscal 2017 second quarter compared to a net loss of $108,000, or $0.02 per common share, for fiscal 2016 second quarter. As of February 28, 2017, our working capital was almost $15.4 million including $3 million in cash and cash equivalents, $748,000 in available-for-sale securities, compared to $16.9 million including $3.4 million in cash and cash equivalents and $2.2 million in available-for-sale securities as of August 31, 2016.

Capital requirements are typically the highest in the second quarter as we have experienced historically. We expect our cash balance will build throughout the remainder of the fiscal year.

At February 28, 2017, the Company had nearly $21 million of investment in joint ventures, of which approximately 64%, or $13.5 million, is in cash with the remaining balance invested in working capital. This balance does not include a dividend payment from certain joint ventures of $4.5 million that NTI received during the first week of the third quarter of fiscal 2017.

Turning now to NTIC's annual guidance. Net sales and profitability in both North America and other joint ventures have traditionally increased in the second half of our fiscal year compared to the first half. And we expect this trend to continue in fiscal 2017 as well.

As a result, we are reconfirming our guidance for the fiscal year ending August 31, 2017, and expect net sales to be in the range of $37.5 million and $39 million. The Company also anticipates net income attributable to NTIC to be in the range of $3.4 million to $3.9 million, or between $0.75 and $0.85 per diluted share, for fiscal 2017.

These wide guidance ranges are due to the significant risks and uncertainties facing our business including, without limitation, the risks and uncertainties related to the change in our China operations, pending litigation and our legal strategy relating to such litigation, and other such risks and uncertainties.

Our second-quarter results demonstrated the solid foundation of our business plan. We have successfully grown ZERUST's global market share, while expanding into new large and growing market segments. NTIC China and Natur-Tec have continued to scale their businesses and we expect both business units to begin producing operating profits in the short term -- in the near short term, which will fundamentally enhance our financial model going forward.

Oil and Gas sales have taken longer than expected to develop, but the continued increase in interest we are seeing from an expanding number of countries and customers leaves us confident in our long-term growth potential for this market. Based on the high number of new requests for proposals and implementation planning meetings, we expect to see an increase in Oil and Gas purchases and installations throughout calendar year 2017.

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

(Operator Instructions) Tim Clarkson, Van Clemens.

Very good results. Just a couple of questions; one a technical question. I understand most of the items here; but this ZERUST joint venture net sales, what does that represent?

The joint venture, what that's showing -- I'm assuming what you are looking at is the sales that we make to our joint ventures; masterbatch, other products that we manufacture that we sell to our joint ventures. That is traditionally a product that we sell at very little margin, margins simply to cover our operating costs and moving the product and the processing it internally.

However, there was a large number of orders that were -- that went out in February. However, because of the amount of time it sits in the ocean and how we kind of slow-boat the product to these other joint ventures, the sales were recorded in March, so it looks like there is a very large decrease in sales to joint ventures in second quarter.

But what I can tell you is, if you look at the overall sales by joint venture as a total and see that the sales at the joint ventures are growing. That's something that just kind of fluctuates a little bit because our joint ventures tend to make very large purchases only a few times a year and so the timing of those gets shifted from quarter to quarter and make one quarter look better and one quarter look worse. But because it's at lower margin, it doesn't have as much of an impact from quarter to quarter on gross profit compared to how it visibly looks from a sales standpoint, if that makes sense.

Is that a new revenue item on the income statement or has it been there before?

That's traditionally been there so that's not a new revenue number. And you can see for the six months -- if you look at the six-month numbers, you see that it's much more consistent with a slight increase. There's just a little bit of volatility from a quarter-to-quarter standpoint.

Okay, that's a little question, a detail question. The big question: I know that you've guided in previous disclosures that you think there's the potential of the Company earning up to $2 a share within a couple years out. What are the dynamics that allow you to be confident that that can occur?

As we've always talked about and I've talked with many of our different shareholders about the four key prongs of the Company as far as joint venture operations, the North American operations, the Oil and Gas sector, and the Natur-Tec sector. I get these individual strategic plans for each group, and we are right in the middle of our annual strategic planning process right now. It's pretty easy to see where the growth is coming from as far as how we think that -- I think the number you were talking about before is hitting $60 million in sales with a target of $2 of earnings per share in our fiscal 2019.

The one thing I can tell you is that each of the four different units that we are looking at is experiencing -- in a period where they are experiencing growth in sales. And what I tell you is that the majority of those -- of the expenses that we have are pretty stable expenses. What we are seeing now is we are seeing that we are able to increase Natur-Tec sales, increase Oil and Gas sales; the joint ventures are coming around a little bit, as you can see from the sales results, and our North American numbers are coming around from the sales results.

Similarly, with China we are seeing a significant ramp up in sales with very little change in operating expenses. So over the next two years what you are really going to see is a leveraging of kind of a fixed base of expenses that is going to allow us to, we think, dramatically increase the earnings per share on a quarter-by-quarter basis with adding another -- what we think is going to be another $17 million, $18 million, $19 million in sales over the next two or three fiscal years.

I'm looking at it and I look at these different groups and I don't see our operating expenses increasing significantly over the next two or three years. There's a very solid fixed base of expense that we have. There are going to be some additional salespeople in different areas and things like that.

But I look at what we are spending in China; they are all adding sales, but not having expenses as we are going because of how much we've had to spend to get those operations up and running. Same thing with Natur-Tec; same thing with Oil and Gas; same thing with our North American operations. So I think that's really what you are going to see as far as how we get to those numbers that we are projecting two years out.

Great. Well, there's some evidence now, based on this quarter and your forward projections, that that can happen. So thanks; I'm done.

Joe Furst, Furst Associates.

Good morning. Congratulations, you're doing a great job; we appreciate it. Can you expand a little bit more on the reason behind the dismissal of the lawsuit? I didn't quite understand what was behind that.

I can't provide -- one, I'm not an attorney and, two, I don't want to necessarily lay out exactly what our strategy is going forward. But to kind of make a long story short from a simple standpoint, a large portion of the lawsuit that we have against Cortec relates to a settlement agreement in 2005 and that settlement agreement was based in Ohio.

When we -- and I think that's just because of Philip Lynch and having the office there and everything else it was -- we used Ohio attorneys at the time and it was based in the jurisdiction of Ohio. For various reasons -- us being in in Minnesota, Cortec being in Minnesota -- we filed in Minnesota, which we thought was certainly on solid legal standing with past precedent to do so.

After two years of going through this or initiating litigation and going through the discovery process and depositions and everything like that, we essentially got a one-page document from our judge that said that he was dismissing the case without prejudice, meaning it's not a won or loss, it's simply -- what he is saying is it's out of my hands.

So our options are basically to appeal in Minnesota, to refile in Minnesota, to refile in Ohio, or to accept the dismissal and not do anything going forward with the case. I don't see that last option as something that is likely that we would continue with. What I would say is, at this point in time, we are meeting -- weighing the advantages and drawbacks of each of the other scenarios to figure out what we're going to do going forward.

I can say that regardless of how we move forward, the majority of the work in the case has been done. At this point in time, as you know from before, we were really eagerly waiting to get into court and to get in front of a jury to explain the case. This is certainly going to add a delay to it, but we are looking at various ways as far as what's the best way going forward for the Company, long term, to protect our trademarks and protect the Company. But also from a shareholder standpoint of what makes the most sense as far as a business decision.

We will probably have -- I don't want to -- I certainly don't want to project right now what we are going to do going forward because I don't really want to give any kind of a -- how we are leaning to the opposition, but we will certainly have a pretty good idea and most likely have acted in the coming months.

Thank you, I appreciate it. Basically, what you are saying is that after two years the judge said you filed in the wrong state?

That is -- to make a long story short, yes. And for a whole bunch of reasons we don't feel that that's the right -- we don't feel that that was the right decision, based on a whole bunch of reasons, but we are not the judge and we have to deal with what was handed down.

Sure. You'd think they would've told you that in the beginning, not after two years of work.

I would agree 100%.

Thank you very much. Appreciate it.

(Operator Instructions) Joe Furst, Furst Associates.

Another question would be you've got quite a bit of cash; are you doing anything in the way of looking for any accretive acquisitions?

I would say that we are certainly not aggressively looking for anything to acquire to use the cash on. I don't know that we do have -- we certainly do have cash, as we traditionally have had, and certainly with getting the $4.5 million dividend in in March we are certainly flush with cash.

I think we want to kind of get everything stable. At this point in time, I would still say the Company's main focus is getting everything stable and growing in China, as far as making sure all those working capital needs are taken care of. And similarly for Natur-Tec. I think we would have a better idea of what we are going to do, either from a dividend standpoint or from an acquisition standpoint, probably in November of this year, where we would be able to explain hopefully what we are going to do with the cash that we have.

Great, thank you so much.

Thank you. Sir, I'm showing no further questions in the queue. I'd like to turn it back to you.

All right. I would just like to thank everybody for calling in today and participating in the call and for your interest in NTIC. I hope everybody has a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may now disconnect. Everyone, have a wonderful day.