Northern Technologies International Corp (NTIC) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern Technology Corporation First Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call is being recorded. As 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 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 the forward-looking statements due to certain risks 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, President and CEO, Mr. Patrick Lynch. Sir, you may begin.

Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that the financial results for our fiscal 2018 first 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 2018 first quarter financial results. Give a brief business update, comment on our net sales and earnings guidance for fiscal 2018 and then conclude with a question-and-answer session.

Our positive momentum allowed NTIC to achieve both record sales and our most profitable first quarter ever. NTIC's global and ZERUST and Natur-Tec quarterly sales including all joint venture sales exceeded $40 million for the first time in the history of the company. Our core ZERUST solutions continue to gain market share and many of our joint venture partners around the world experienced record first quarter sales. Our emerging Natur-Tec business segment finished its third consecutive quarter of operating profits, while NTIC China closed the quarter with significant sales growth and its second quarter consecutive quarter of profitability. We are encouraged by the strong start to the year and we expect fiscal 2018 to be a good year for the company.

So with these highlights, let's examine the drivers for the first quarter. Global demand remained strong for our core ZERUST industrial products and Natur-Tec products continue to perform well. For the first quarter ended November 30, 2017, total consolidated net sales increased 17.8% to a quarterly record of $11.5 million as compared to the 3 months ended November 30, 2016. Broken down by business units, this included 34% growth in ZERUST industrial net sales and a 24.6% increase in Natur-Tec net sales, partially offset by a 38% decline in net sales from NTIC to its joint ventures and a 62% decline in oil and gas sales. Total sales by our joint ventures, which we do not consolidate in our financial statements, grew to $28.5 million for the first-- for the fiscal 2018 first quarter compared to $24.2 million for the same period last fiscal year. This 17.8% increase in JV net sales was the result of improved global demand, increased market share and a stronger euro. We continue to proactively work with our JV partners and I'm pleased with the progress we've made over the last 12 months to improve performance.

The growth in ZERUST industrial sales during fiscal 2018 first quarter was due to higher sales of new and existing products to our core customer base as well as increased demand across the industrial, agricultural and mining sectors. Favorable trends within these markets have continued thus far in fiscal 2018 second quarter and we are optimistic these sectors will remain stable throughout the current fiscal year.

Net sales by our wholly owned NTIC China subsidiary increased 88.2% to $2.9 million during the first quarter of 2018, compared to $1.5 million for the same period last fiscal year. And we're up 30.3% for the fiscal 2017 fourth quarter. This growth is as a result of both converting customers from our former JV as well as aggressively expanding into new market sectors. We are extremely pleased with the positive trends underway at NTIC China. It is important to note that NTIC China's second quarter net sales may be slightly lower than first quarter levels as a result of the long Chinese New Year holiday period. We remain confident that we can continue converting customers from our former JV while expanding our China sales across the country.

NTIC incurred legal expenses related to the litigation against Cortec Corporation of $350,000 during the fiscal 2018 first quarter, compared to $320,000 for the same period last fiscal year. As a reminder, in September 2017, the United States District Court of North -- for the Northern District of Ohio dismissed with prejudice all claims asserted by NTIC's litigation against Cortec Corporation. As a result, we will not have any additional legal expenses related to this court case for the remainder of fiscal 2018 compared to incurring nearly $850,000 of legal expenses for all of fiscal 2017.

Oil and gas net sales for the first quarter of fiscal 2018 were down 62%, compared to the same period last fiscal year. To put this in the proper context, it is important to remember that last year's first quarter benefited from a large $400,000 order for our tank bottom solutions that was shifted from the fiscal 2016 fourth quarter to the fiscal 2017 first quarter. Regardless, first quarter oil and gas sales results remain disappointing given the global potential for our solutions. But so far, although still early, second quarter oil and gas sales have improved from first quarter levels and we remain encouraged by this improvement.

Now, turning to our Natur-Tec bioplastics business. For the fiscal 2018 first quarter, Natur-Tec sales were $2.0 million, an increase of 24.6% over the same period

(technical difficulty)

in the previous fiscal year. And almost double the net sales achieved in the fiscal 2016 first quarter. Natur-Tec continued to achieve significant double-digit growth rates as a result of strong 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. While oil and gas net sales were down in the first quarter, we expect oil and gas sales to improve during second quarter. The anticipated higher oil and gas sales should further increase profitability in the second quarter, despite the slight impact of anticipated lower NTIC China sales due to the Chinese New Year. In addition, profitability in the second half of the fiscal year should be better than the first half of the fiscal year as NTIC historically experiences higher seasonal sales in the later part of the fiscal year.

Fiscal 2018 is off to an excellent start and our first quarter financial results demonstrate the continued strength of NTIC's business model. We are committed to creating long-term value for our shareholders and we believe we have a sustainable platform to drive sales and earnings growth in fiscal 2018 and beyond. With this overview, let me now turn the call over to Matt Wolsfeld, to summarize our financial results for fiscal 2018 first quarter.

Thanks, Patrick. NTIC's net sales increased 19% in the fiscal 2018 first quarter as a result of 17.8% or $1.4 million increase in sales of ZERUST industrial corrosion inhibiting products, which includes the contribution of NTIC China and a $400,000 or 24.6% increase in Natur-Tec. Higher sales and profitability across many of our joint ventures drove strong double-digit growth in joint venture operating income. Income from joint venture operations increased 25.4% for the fiscal 2018 first quarter, compared to the corresponding period last year. Our total operating expenses increased 9% to $5.6 million during the first-- or during the fiscal 2018 first quarter. The increase was primarily the result of higher personnel and research and development expenses as well as expense associated with NTIC's annual financial audit, which were partially offset by lower G&A expenses. NTIC reported net income of nearly $1.1 million or $0.24 per diluted share for the fiscal 2018 first quarter compared to net income of $300,000 or $0.07 per diluted share for the fiscal 2017 first quarter.

NTIC is still assessing the impact of the Tax Cuts and Jobs Act that was signed into law in late December 2017. However, it's important to note that NTIC is expected to take a one-time non-cash charge to write down its deferred tax asset. There are also many other provisions that need to be evaluated to understand the full impact of the new tax laws. These will be implemented in the second quarter of our fiscal 2018 and disclosed with our second quarter fiscal 2018 financial results.

As of November 2017, working capital was almost $20.4 million including $4.6 million in cash and cash equivalents and $3.8 million in available-for-sale-securities, compared to $21.2 million including $6.4 million in cash and cash equivalents to $3.8 million in available-for-sale-securities as of August 31, 2017. NTIC's business model does not require significant additional capital and we expect our financial model will continue to produce strong operating cash flow. On November 30, 2017, the company had $21.7 million of investments in joint ventures, of which approximately 61% or $13.3 million was in cash, with the remaining balance invested in working capital. During the fiscal 2018 first quarter, NTIC's Board of Directors declared a cash dividend of $0.10 per common share that was payable on December 21, 2017, to shareholders of record on December 8, 2017. Based on NTIC's current capital requirement and business outlook, the Board of Directors intend to declare regular quarterly cash dividends going forward.

Turning now to NTIC's annual guidance for the fiscal year ending August 31, 2018. We continue to expect our annual sales will range between $46 million and $47 million, which represents an annual increase of 16% to 18.5%. We estimate our net income attributable to NTIC will range between $5 million and $5.3 million or between $1.10 and $1.15 per diluted share for fiscal 2018. Our guidance for diluted earnings per share represents an annual year-over-year increase of 46% to 53%. Annual net income guidance does not take into consideration the anticipated non-cash write down of our deferred tax asset that we expect will occur in fiscal 2018's second quarter. These wide guidance ranges are due to significant risks and uncertainties facing our business including without limitation, the risks and uncertainties related to the change in our China operations and other risks and uncertainties.

So as you can see, we're encouraged by our continued strong results, we've built a compelling platform to drive sustainable and profitable growth and we're excited about the direction we're headed. With this, Patrick and I are happy to take your questions.

(Operator Instructions) And our first question comes from Tim Clarkson with Van Clemens.

Just 2 questions. First of all, I noticed that your net margin in the first quarter is about 10%. I'm guessing that as your revenues continue to go up this year or next year that, that net margin can increase may be to potentially 12% or even 15% net.

That's certainly what the company is aiming for. We had an awful lot of expenses in Q1 that we don't anticipate having the rest of the year. And not just the $350,000 related to the Cortec case, but also our first quarter has an awful -- all of our audit expenses go into first quarter, there's some tax expenses that go into first quarter. So it tends to be a relatively expensive quarter for us. At least, that's what we've historically found. So certainly, the goal of the company is to see the overall operating expenses for the remainder to come down.

Great. Just in general, what do you think the new tax reform act will -- how do you think that is going to affect you?

Well, there's a couple of provisions in the tax reform act that will impact NTIC specifically. The main -- there's 2 main areas that we're looking at. For most multinational U.S. companies, the big issue is the deemed repatriation of foreign dividends. And for NTIC, we would traditionally -- if we didn't have a foreign tax credit carry forwards, the tax expense that we would see related to these deemed repatriation of foreign dividends would be about $500,000. However, we have foreign tax credit carryforwards which are almost $3 million, so there won't be any tax impact from the deemed repatriation of foreign dividends, which is good news. The bigger issue or the one area that other companies that are in our situation face is that we have about $1.75 million in deferred tax assets. And those deferred tax assets are on our balance sheet at 35%, which is the -- which was the tax rate that we had previously. In 2018, if the tax rate goes down to 21%, we need to revalue those deferred tax assets down to 21%. So there will be a one-time non-cash charge of the impact related to that change, which if -- I'm doing a rough calculation, it's going to be probably somewhere between $675,000 to, $700-plus thousand. So it's going to be a non-cash one-time adjustment of the asset, which I think a lot of companies are going to face that obviously have these deferred tax assets. But we'll do that in second quarter and we'll see how that impacts -- kind of impacts things going forward. But we're still kind of evaluating any other provisions that are part of the tax, the tax act that got pushed forward. But kind of keep that in mind with second quarter, that there's going to be a really big spike, kind of one-time, non-cash spike in our earnings. Thanks for the question.

(Operator Instructions) And our next question comes from Joe Vidich with Manalapan Advisors.

I just wanted to find out a little bit about what you think your opportunity is in the oil and gas sector? That's my first question.

Well, it's a very significant market. It's a very -- it's a market with very significant potential and good margins. The problem we've been facing most recently are the relatively low oil prices. The news out is that oil prices are expected to rise now from $50 a barrel to $80 a barrel, or something and to that effect, if that comes to pass, that will dramatically increase the amount of money that the oil companies have for their maintenance budgets, which would allow them to more dramatically expand the implementation of our solutions for their infrastructure protection.

Can I ask you what types of products in the oil and gas markets do you guys actually target?

I would suggest that maybe we have that conversation separately. You're free to call Matt Wolsfeld at any time and he'll go into great detail as to what the products are. This is probably not the best forum to go over that, given that, most people on the call, especially the previous caller are well acquainted with the products of the company.

Okay. That's fine. I'll do that. The other question I had is just, with regards to your revenues from the China division. How do those flow through in your income statement? Are they part of the industrial net sales or where would they actually...

Yes. They are part of the top line. Whenever we talk about the ZERUST industrial sales, the sales that we have in China will be included in that number.

And our next question comes from Jerry Well, a private investor.

My questions relate to the investor deck that you prepared. You updated investor presentation that's posted on your website. Two questions here, guys, you've shown in your financial targets, we'll call them targets, I believe that that's how you call them, is for significant revenue growth and earnings growth. So if you could give me some thoughts, high-level thoughts on where you see most of that revenue growth coming between now and fiscal year '19 and then the same with the earnings. And then the second part of the question is based on those earnings that you're kind of shooting for target. Do you have anything built in there from the oil and gas division?

Sure. The -- I mean, if you look at the overall total net sales the company has, it's -- you can break it down into probably 6 different categories. So if you look at kind of the Northern -- what our traditional normal ZERUST sales, which are kind of the North American ZERUST sales. In last fiscal year, we did about $18.4 million of ZERUST sales. We've traditionally seen a -- anywhere from a 10% to 15% growth in our traditional ZERUST sales. So looking at that, we would expect that to continue. We certainly saw that in first quarter, our traditional ZERUST sales were up actually about 17%, even though we traditionally see about a 10% increase. So kind of looking at that, having that number grow, that'll be a big piece of growth coming from that area. As far as Natur-Tec, we expect Natur-Tec to continue the trajectory that it has with the 25% to what we've seen of about 25% to 40% year-over-year growth. Last year they had $6.8 million of sales. So as you continue that growth, we would expect it to -- if you have 30-plus percent growth year-over-year, you would see that double in 2 years, or come close to doubling in 2 years. JV sales, which are sales that we make to the joint ventures, we'd expect it to remain relatively flat. The main item that we're providing them are in Masterbatch, so there might be some increase in JV sales but not what we see in the other sales areas. The 2 other key items are the Brazil industrial sales, which we're seeing some growth out of Brazil. But right now the sales in Brazil are only $2 million. So if they were to continue at 15% growth you get a small increase there. We expect China to show a pretty significant growth. You can see that, last year in China we did about $7.2 million. This year, if you just take the first quarter, sales in first quarter with a run rate of almost $1 million. So just looking at that growth of going from $7.2 million to let's just looking at first quarter, say $12 million, that's pretty significant growth. And then if you look at on top of that, I don't think you're going to continue with 88% growth year-over-year. But certainly, we expect significant growth coming out of China. So that's where we really expect to see the key growth areas from a top line revenue standpoint. As far as oil and gas, last year we had sales of about $1.8 million in oil and gas. The expectations for this year, we did not build into our guidance or our sales numbers any significant -- just being conservative, any significant revenue growth from any material revenue growth from oil and gas on top of the $1.7 million. So our expectations is that sales from oil and gas are going to be somewhere between $2 million and $3 million this year. If they did that, terrific. Similarly, if you look at our earnings per share guidance, we did not build really any more contributions from the oil and gas division than what was contributed last year. So we're not counting for fiscal '18 for hitting our expected results. We're not counting on any kind of big results coming from oil and gas. If those do come in and those do start to materialize, obviously at the higher gross margin level, they could have a very significant increase in what we -- how we expect our numbers for fiscal '18 to how we expect them to go. And also going forward, that certainly could speed things up as far as growth. But we don't have a significant amount of revenue or earnings coming in from oil and gas this year in what are our published expected results. Is that too long winded for you or...

No. That's perfect. Exactly looking for, well spoken. The last question and then I will get off is, I can't remember what's the breakeven, annual breakeven roughly in the oil and gas side again?

What would we need for sales to be in order for the oil and gas to be breakeven, that's your question?

Yes.

We would need sales of between $3 million and $4 million to be profitable in oil and gas. Probably the lower side of that.

(Operator Instructions) And our next question comes from Walter Ramsley with Walrus Partners.

I've got a couple of kind of detailed questions. On the last conference call, you indicated that the tax rate for the current year should be about the same as fiscal '17, which was 15%. And this quarter it was about 8%. Do you expect the full year number to go to 15%? Or is it going to be lower than you think?

I think the full year number is going to have a very material impact by what we do in second quarter. That's the key driver in what's going to be the key driver in the overall tax rate. So it's difficult for me to say it right now what the full year's tax rate, effective rate is going to be. Obviously, NTIC, with all of our foreign business, we haven't paid -- we don't pay U.S. taxes because we pay so many foreign taxes and foreign taxes end up coming in an offset all of our North American profits. And so that tends to lead to a little bit of a volatile tax rate because it depends on how much -- how many dividends come back from Germany and dividends from other countries and royalties from other countries as far as the -- as far as what we see. I think the -- if you were to discount, what I talked about earlier with the deferred tax asset impact of second quarter, I think you would see the overall effective rate for the company come down in fiscal '18. Specifically, because we're going to have fewer dividends this year than we did last year. Specifically, from our German joint venture. But again, it's going to be -- the big question is what is the non-cash one-time charge going to be in second quarter. But obviously, if that's close to a $,000 one-time charge, that's going to dramatically increase the effective tax rate for the year. That's...

Right. Now I see what you're driving at there. Now I was just more interested in trying to figure out what tax rates you're using for that $1.10 to $1.15 guidance?

Right, for the current guidance that we have out there, we're using the traditional effective tax rate of around 15%.

Okay. I mean, that's pretty much really where I'm interested. I mean if it changes for the better, that's great. Okay.

Yes.

Okay, and the other one I had is the stock option, the non-cash expense for the first quarter. Was that about $100,000 or is that starting to change?

No, that will be pretty consistent from year-to-year. And I want to say that was, let me tell you exactly, that was -- yes, $100,000. And so that will be pretty consistent -- from a quarter-to-quarter basis, at least for the remainder of fiscal '18. Unless any options are granted, which we generally don't grant any options after September 1. There shouldn't be any change in the quarterly amount of $103,000.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Patrick Lynch for any further remarks.

I'd like to thank everyone for participating today and your interest in NTIC. Have a great day.

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