Northern Technologies International Corp (NTIC) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Northern Technologies International Conference Call. (Operator Instructions)

As a reminder, this conference 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 these stated and 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 turn the call over to Mr. Patrick Lynch, CEO.

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 second quarter were included in the press release issued earlier this morning, that is also available at ntic.com.

During this call, we will review various key aspects of our fiscal 2018 second quarter financial results, give a brief business update, comment on our net sales and earnings guidance for the 2018 fiscal year and then conclude with a question-and-answer session.

NTIC's earnings release and today's discussion will include certain non-GAAP financial measures. So please refer to the earnings reconciliation, which appears in the tables of today's press release.

NTIC achieved extremely favorable financial results during the second quarter. Sales increased nearly 40%, while net income soared over 220%, even after including a $700,000 one-time impact due to recent U.S. tax law reform.

Our core ZERUST industrial solutions continued to gain market share, as many of our joint venture partners around the world experienced record selling -- record second quarter results.

Our emerging Natur-Tec business segment completed its fourth consecutive profitable quarter, just as NTIC China closed the quarter with significant sales growth, and its third consecutive profitable quarter.

We are encouraged by these successes and expect fiscal 2018 to set a record for the company.

So with these highlights, let's examine the drivers for the second quarter. Global demand remained strong for our core ZERUST industrial products and our Natur-Tec products continued to perform well.

For the second quarter ended February 28, 2018, total consolidated net sales increased 39.7% to a quarterly record of $12.2 million as compared to the 3 months ended February 28, 2017.

Growth was realized across all business segments, specifically, ZERUST industrial net sales increased 33.5%. Net sales from NTIC to its ZERUST joint ventures increased 87.9%, oil and gas net sales increased 181.2%, and Natur-Tec net sales increased 33.5%.

Total sales by our joint ventures, which we do not consolidate in our financial statements grew to $30.2 million for the fiscal 2018 second quarter compared to nearly $23.0 million for the same period last fiscal year. This 32% 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 towards improving performance.

The growth in ZERUST industrial sales during the fiscal 2018 second quarter was due to higher sales of new and existing products to our core customer base as well as increased demand across a range of market sectors. Favorable trends within these market segments have continued thus far into fiscal 2018 third 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 82.6% to $3.2 million during the second quarter of 2018 compared to $1.7 million for the same period last fiscal year.

Despite the impact from the lengthy Chinese New Year holiday period in February, NTIC China sales were still up, approximately 10% from the fiscal 2018 first quarter.

NTIC China's growth is a result of both converting customers from our former JV as well as aggressively obtaining new customers across market sectors.

We are extremely pleased with the very positive performance at our wholly owned Chinese subsidiary. We remain confident that we can continue expanding our sales opportunities as we expand our reach across China.

As expected, oil and gas net sales improved over the past 3 months. And for the second quarter of fiscal 2018, we're up 181.2% compared to the same period last fiscal year.

We continue to believe our oil and gas products provide compelling solutions within this large and growing industry. Sales trends within this category are expected to continue to improve in the coming quarters as a result of our growing pipeline of potential contracts.

Now, turning to our Natur-Tec bioplastics business. For the fiscal 2018 second quarter, Natur-Tec net sales were $2.0 million, an increase of 33.5% over the same period last fiscal year.

Natur-Tec continued to achieve significant double-digit growth rates as a result of strong demand in North America, through our expanding domestic distribution network as well as higher sales of finished products by NTIC's majority-owned subsidiary in India.

Two years ago, NTIC's management team set ambitious financial targets that had us increasing net sales to $60 million and growing net income attributable to NTIC to $2 per diluted share by fiscal 2019.

While it took time for NTIC China and Natur-Tec to ramp up, we were confident that we'd emerge from these near-term headwinds as a stronger company, and our second quarter financial results reflect this.

We expect our momentum to remain strong, and I'm excited about the remainder of the fiscal year and beyond.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2018 second quarter.

Thanks, Patrick. NTIC's net sales increased 39.7% in the fiscal 2018 second quarter as a result of higher sales across all of NTIC's segments.

ZERUST industrial corrosion inhibiting products sales grew 33.5% or $2.2 million, which includes the contribution of NTIC China.

Fiscal 2018 second quarter sales also benefited from an 87.9% increase in ZERUST joint-venture sales and a 181.2% increase in oil and gas sales, also a 33.5% increase in Natur-Tec sales.

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 33% for the fiscal 2018 second quarter compared to the corresponding period last year.

Our total operating expenses increased 11.1% to $5.4 million during the second quarter of fiscal 2018 but decreased as a percentage of net sales to 44% compared to 55.3% for the same period last fiscal year.

The increase is primarily a result of higher selling and research and development expenses and the decrease as a percentage of net sales was primarily due to the higher net sales and lower G&A expenses, partially offset by the higher selling and research and development expenses.

Net income attributable to NTIC for the second quarter of fiscal 2018 increased 244% to $1.3 million or $0.29 per diluted share, up from $387,000 or $0.09 per diluted share for the same period last fiscal year.

Excluding the $700,000 or $0.15 per share, one-time provisional impact of the U.S. tax reform, second quarter fiscal 2018 net income attributable to NTIC was $2 million or $0.44 per diluted share.

As of February 28, 2018, working capital is $22.2 million, including $5.1 million in cash and cash equivalents and $3.3 million in available-for-sale securities, compared to $21.2 million, including $6.4 million in cash and cash equivalents and $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 flows.

On February 28, 2018, the company had $22.3 million of investment in joint venture, of which 56% or $12.4 million is in cash, with the remaining balance invested in working capital.

During fiscal 2018 second quarter, NTIC's Board of Directors declared a cash dividend of $0.10 per common share that was payable on February 21, 2018, to shareholders of record on February 8, 2018.

Turning now to NTIC's annual guidance for the fiscal year ending August 31, 2018. We're increasing our expected annual net sales for the current fiscal year from between $46 million to $47 million, to between $48 million and $49 million. We're also increasing our expectations for our annual net income attributable to NTIC.

We now expect net income to be in the range of $6.5 million to $6.8 million, or $1.40 to $1.45 per diluted share.

This includes the $0.15 per diluted share one-time charge associated with U.S. tax reform. This compared to previous earnings guidance of $5 million to $5.3 million, or $1.10 to $1.15 per diluted share, which should not take into consideration any impact from the U.S. tax reform.

These estimates are subject to significant risks and uncertainties, including those described in our forward-looking statements.

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 any of your questions.

(Operator Instructions) And we do have a question from the line of Joe Vidich with Manalapan Oracle.

I guess I just have one question and that is, it seems you said that your business model really doesn't require a lot of capital. So my question is, as your business starts to generate extra capital, what do you see doing with it?

In general, part of the problem -- not part of the problem but one of the things we've always had is that the joint venture is -- the joint venture system we have set up does generate a significant amount of cash. And we've always been in a position of reinvesting a lot of that cash back into the business. That's really how we came to develop the Natur-Tec product line, the oil and gas product line. Now if those are becoming more -- Natur-Tec becoming cash positive and oil and gas looking like it's going to be at some point in time soon. Obviously, the cash is going to start increasing, and hopefully, rapidly. I would expect that we're going to increase the dividends as we go forward. I think the company is looking for -- we're certainly looking for ways to reinvest the cash in the business. But at this point in time, that -- it's certainly a good problem to have, but it's something that the company is considering as we do our strategic planning and are looking to the future.

Okay. That's great. I mean, I take it also -- would you consider -- I mean are there places around the world where you can expand your presence in Natur-Tec? Or other joint ventures or ...

Well at this point, we don't anticipate creating any additional joint ventures in the near term. The ones that we have in place seem to adequately cover those industrialized areas of the world where our ZERUST industrial solutions make sense. But we might be investing in expanded capabilities or presence in China, for example, to increase our sales there even further and maybe in certain other sectors around the world.

Our next question is from the line of Tim Clarkson of Van Clemens Capital.

I'm speechless, I don't know what to ask about, everything is going great. So I guess just keep it up. What can you say, everything is going wonderfully. I guess, why don't you talk a little bit about currency, whether the -- what impact that you also had on your earnings?

Yes, Thanks Tim. From a currency standpoint, I went back and looked at what joint venture income would have been with currencies that were in place from -- in the last fiscal 2017. And we got a bump of about $325,000 in comparing the euro last year to comparing the euro list this year for the 6-month period. So while there is certainly a tailwind coming from the change in the euro, the main reason for the significant increase in the joint venture income is due to a lot of our joint ventures being at record sales levels, and still, showing significant year-over-year growth in their local currency. We're certainly happy with the quarter, and kind of where we are for the 6-month period. But it's also important to -- when we put our guidance together for where we want to be at the -- how we increased guidance for this year -- for the end of the year, it took into account achieving a similar result in third and fourth quarter to what we had in second quarter. And traditionally, our second quarter is a slower quarter than what we tend to see in third and fourth quarter. So our expectations are that, even the increase in guidance that we did for this year is still relatively conservative. We put in place a few years ago a plan of how to get to $60 million in sales and $2 per share in earnings by fiscal '19. And we certainly hope that by looking at the tax adjusted number of $0.44 per share in this quarter. And then hopefully, that's really going to give people a clear picture of how we get to and then eventually surpass that $2 per share going forward.

Our next question is from the line of Jerry Well, a private investor.

So my question is related to all this rhetoric about tariffs in China and so forth. So just kind of give us your thoughts and part of that is, are you manufacturing actually in China? Or the product you're selling there, are you manufacturing that in the U.S. and shipping it there?

Okay. Good question. First of all, we do not sell products to protect steel coils. So one of the key elements of these tariffs in question should not affect us because we are just not in that business. Yes, to answer your question, we do manufacture in China most of the products. We ship some things from United States, but I don't think that will be materially affected. It's also interesting to say that our U.S. customers do not export heavily to China and our Chinese customers do not export heavily to the United States. So even if things don't get resolved, there might be some impact, but it's not going to really kick us in the shins. And we don't expect it will kick us in the shins in the Chinese business as far as ZERUST industrial business. There was a question of the Natur-Tec, since some of the base resin systems we used for the Natur-Tec products are manufactured in the United States, but those also do not seem to be -- have been affected by the tariffs at this time. So at this point, we're still anticipating that if the tariffs actually are put in place that the impact to us will be minimal if not none at all, we'll have to see.

Okay. And the second question relates more to the longer-term, what you're seeing in the ZERUST oil and -- the tank business for ZERUST. I know it's been taking a lot longer to get into that market and that's understandable. But what are you seeing in that market? Are you still committed to the longer term and give us kind of a high-level picture of any updates there?

There is -- it's frustrating for us just as it's frustrating for you. It certainly helps that the other product lines are -- the other divisions of the company are doing well. But I can tell you from an internal standpoint of looking at all the opportunities that we have, we do still expect to finish the year with kind of a strong push from oil and gas with what we currently have in the pipeline. I think your question is more along the lines of when do we see a significant year-over-year large buildup of going from $1.6 million to $2.5 million to $5 million and the real rollout. And I think that we're starting to see a lot of market acceptance for the products. We're working internally with a lot of different companies to get this pushed out. But it's taking a long time. But as I've kind of said before, it's -- we're very patient with our approach. We think we are headed in the right direction. We think that we're going to see market acceptance over the next several years. And it's certainly our goal to get oil and gas to be a profitable contributor in the shortest amount of time. But it's certainly cause for a lot of patients to get there.

Our next question is from the line of [Luis Moser] of Mayfax(inaudible) Investors.

I was wondering if there's any possibility of trying to get some analysts to cover your company, now that your growth is becoming apparent and as the stock is going to the lower multiples and the average market multiple buy quite a lot. I know the company doesn't trade a lot of shares each day. However, there are a number of other companies, and we only follow companies such as yours with go caps that do have analyst coverage. So is there any attempt being made in that direction? Or in terms of any conferences within the industry that you could participate in?

Sure. Let me address that. The difficulty we have from an analyst standpoint is, yes, we are actively talking to different firms. Yes, we are attempting to get analyst coverage. The difficulty we have is that the company is not going to pay for analyst coverage. It's just not part of our philosophy. We don't really see that as a contributor. Our general feeling is that, as the earnings are going to grow, the liquidity and the trading volumes are going to increase. Certainly, as the stock continues to rise, and we get included in things like the Russell Index, and other indexes, that's going to drive a fair amount of liquidity in the stock. From that same standpoint, we do -- and I specifically do a lot of non-deal meetings -- non-deal investor meetings in various cities. This -- we do investor conferences. We'll be at investor conference, the Idea's Investor Conference in Boston in a month or two. So we certainly get out there to try and increase our visibility from a shareholder standpoint. That's certainly something that we are -- we're attempting to do. But the problem from an analyst standpoint, like an analyst coverage is that, while at this point in time, we don't have a tremendous amount of trading volume. We also don't have a tremendous amount of need to raise capital. And generally, what we hear from various companies that potentially provide analyst coverage is, they like to have the opportunity to do investment banking as well as cover -- as well as provide some analyst coverage. And so, we're not the most attractive company from a potential investment banking standpoint. So that's some of the difficulties that we deal with. I can say that we -- certainly as our stock is starting to rise and our earnings are trending in the right direction, meeting with investors, having investor calls and things like is happening, and the calls are going well. I mean our goal is to get on as many people's radar screens as we can. So as the company does well and performs and does what we say we're going to do, there's more -- a lot of people and investors that understand the potential of the company.

That's an excellent answer, and I appreciate it. From the volume standpoint in terms of the stock having called these similar companies for years, you can get future volume starting today as people recognize the earnings report and so forth and the progress you've made.

Our next question is from the line of Kevin Clark of Heartland Advisors.

Following your company for years it's -- as your previous caller suggested extremely thin and difficult to trade in, so my question was the same as his in terms of coverage and I appreciate your answer and I agree that I would never pay for coverage. And I recognize the difficulty to get someone to cover you, if you're not an investment banking candidate. But trading volume is a big consideration for them as well. And I guess my question is, why have you not split the stock or would you consider splitting the stock? I mean, I think, a $3 for $2 right here was just a no-brainer and probably even a $2 for $1 perhaps or $3 for $2 now and $3 for $2 later as trading volume picks up. That's one of the biggest inhibiting factors that I think for people buying your stock is the trading volumes. And as you get towards $200 million in market cap, which I think will happen. Probably, if you hit your numbers, your trading volume will certainly pick up. And as you alluded to, you will get into the indexes and this trend towards indexation is huge and that will certainly be helpful. But in the near term, I guess the question is, would you consider splitting the stock? And what would it take for you to consider that?

Thanks for question. Yes, we would consider splitting the stock. As you probably noticed, if you can kind of read between the lines with the increase in authorized number of shares that we requested or voted on in with the annual meeting and the proxy, we increased the authorized number of shares to 15 million from 10 million. So that it would be able to handle a stock split. So I would and -- it's certainly something that company is looking at doing in the near term. But at this point in time, if you look at the 8-K, there is an issue with the increased number of authorized shares and there were some questions about, if it was done in a proper manner. It was an 8-K that we put out in -- I want to say in February on the topic. So that's one thing that we're kind of wrestling with as far as the stock split goes.

Your next question is from the line of Charlie Pine of Van Clemens.

Just wanted to reprise the acclaim you gotten from everybody, we waited a long time, but this is great to see. I'm going to circle back to one of kind of a topic that was broached by somebody else about what you could potentially do with some of the additional cash that's being generated in the business. And one of the things you talked about is, besides increasing the dividend, would be reinvesting it more into other parts of the business. Would one of the areas that you would be looking at doing that being oil and gas because of the -- these things have taken slower to take hold in that area? But I guess I'm wondering if more dollars were to be invested into the oil and gas segment, whether you could see the quicker -- begin to start to see a quicker payoff, if more marketing money et cetera, was being devoted to that segment?

The quick and easy answer on that is, probably not for the reason that when we have, obviously, extensive marketing efforts. We have a lot of industry awareness. We have a lot of initial orders and installations, which were being done on a trial basis where customers are looking to see how the product performs over a period of time of maybe a 2, 3, 5 years or longer depending on the client. So until we get through this, getting to know you phase and having validated everything, we've been saying about how well our products work. We can't make that process go any faster by having more people, knocking on doors and saying, "Hey, are you done with your evaluation yet?"

I would add to that Charlie. And also say that as we certainly see the projects rise, the projects inside of oil and gas increase, and as you see the business start to grow, I think that's the point in time when we would start to invest more in the oil and gas department. At this point in time, I think putting extra money into oil and gas would probably have the effect of just ending up bringing our earnings down. I think when we start to see the momentum shift and start to see the sales come in, that's when we would end up ramping up a little bit more with the oil and gas.

Okay. Fair enough, I follow that. How about you did sort of indicate that you're seeing, I thought I heard you say that you're seeing a slightly increased pipeline in oil and gas. How would you characterize the difference in the scope of the pipeline that you have now versus where it was, say 6 or 9 months ago?

I would say that, we're getting encouraging projects for the basic solutions that we've been talking about, and on a broader scale in more countries. I mean, we just did our first installation in Thailand just last month, for example. At the same time, we are in the trial marketing of some new solutions as well, which we can't really talk about. But these -- the -- they seem promising in terms of market acceptance so far.

Pat when you say new solutions, are you referring to something other than tank bottoms?

Yes.

Okay. All right. I guess, I would chime in on one last thing. And I know that there has been discussion of splitting this potentially, speculating on the event of having a stock split. My counsel would be, I think you folks should hold off for a while. I don't think this -- the market will come to accept this based on your growth and your earnings. And I think at these levels, I just let things stay as they are for the time being. That's my $0.02.

Okay, noted. Thank you.

(Operator Instructions) Our next question is from the line of Greg Weaver of Invicta Capital.

I apologize, I have done late in Mr. Patrick's opening comments. But just following up to the oil and gas questions. The $579,000 you did this last quarter and the growth you're foreseeing that's off this number, right, for the second half?

The -- correct. I mean -- it's -- we're currently -- if I'm just looking at North American oil and gas, we slightly -- I want to say we're just over $600,000 plus in revenue. Our expectations are that second quarter -- sorry third and fourth quarter are going to certainly be have higher sales numbers than what we saw in first and second quarter. We're also starting to see a slight increase in the -- in some revenues from oil and gas from Brazil but nothing significant. But from a guidance standpoint, there's nothing that we have built into the guidance for anything significant happening in oil and gas. But certainly, there are things that we're working on that we expect to happen in third and fourth quarter.

Great. Okay. That was one of my follow-up was, I've been hearing some rumblings that Petrobras is kind of picking up steam again. It sounds like you're seeing a little activity but not much.

There is -- with Petrobras, they have a -- there's a larger plant saver contract. And when I say larger, I mean $600,000, $700,000 in plant saver contract that we received probably 6 months ago or so. They took delivery on about 1/3 of that contract with the expectations that throughout the rest of our calendar year '18, the remainder of that $600,000 contract will be sold to them. So that's certainly better than what they did last year from an oil and gas standpoint, but it's not to the levels of where we expect the plant saver sales to be a few years ago with Petrobras. But these are new transparent plant saver that we're seeing a little more market acceptance with not just the Petrobras but in other markets.

Okay. That's helpful. Any partner leverage on oil and gas, is anybody helping you there?

There are certain countries where we are utilizing the joint ventures, specifically in the subsidiaries, obviously in Brazil, in France, we're utilizing the joint venture partners there, a couple other areas. But again, the majority of our joint ventures are more industrial ZERUST focused.

Got you. And how about hoping over to Natur-Tec. Did you reference at all by bulk resin sales and any traction there?

We didn't comment on that. There is some additional bulk resin sales that are occurring, not a huge amount. The majority of the increase in revenue that we're seeing is still at the distributor level of the bags, not of the resin. We're also seeing an increase in the business in India for the -- for that market. So that's an area that we expect to have to kind of be one of the key growth areas for Natur-Tec is with selling the resins. But it didn't contribute in the first 6 months of the year anything significant.

Okay. But there's still opportunity. And nice gross margin in the quarter, what should we think about that going forward? Obviously, oil and gas will help that situation but this [34 4] you just put up?

It is pretty -- at this point in time, the gross margin -- it improved from a percentage standpoint a little bit. Again, it's difficult from the standpoint of we've got 4 different businesses with different business -- with different gross margins being balanced, so it usually fluctuates a little bit just due to weighted average of actual sales that were contributed. But we are certainly focusing on that and a lot of our internal efforts at this point in time are towards bringing down our cost of goods so that our gross margin percentage either remain stable or is improving. That's certainly been a key focus of the company over the past 12 plus months to make sure that that's where we're focusing. Similarly from an expense standpoint, our goal is to keep the expenses as flat as possible and improve our cost being from a purchasing standpoint as much as possible. One of the nice things when I was looking at it, one of the nice things that I saw from the quarter and the six months was the percent of expenses -- the percent of expenses is a percentage of total sales dropping. That's something that is going to certainly help when every dollar that's contributed from a gross margin standpoint is going down to our operating income line and it hasn't been eaten up by increased expenses along the way.

Yes. So it's going to give you kudos on the expense control. I guess just on that note, anything on the legal expense front on a go-forward basis of unusual level?

No, we had -- during the first 6 months, we had about $350,000, $370,000 that majority of which was in Q1. We haven't had any significant legal issues that impacted Q2. At this point in time, we don't have any, I'll say, material legal issues or anything that we're looking at right now and certainly we'd like to keep that -- keep it that way as much as possible. So that's one of the things that kind of fall off from an expense standpoint. If you look at the anticipated expenses in fiscal '19.

And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Patrick Lynch, CEO for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.