Northern Technologies International Corp (NTIC) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Northern Technologies International Corporation's First Quarter 2019 Earnings Call and Webcast. (Operator Instructions). As a reminder, this conference is being recorded.

As part of the discussion today, the representatives from NTIC will make forward-looking statements regarding NTIC's future financial and operating results as well as their business plans, objectives and expectations. Please be advised 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 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 Form 10-K, subsequent quarterly reports, Form 10-Q and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims duty -- any duty to update or revise its forward-looking statements.

I would now like to introduce your host, Patrick Lynch, Chief Executive Officer. Please begin, sir.

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 2019 first quarter were included in the 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 2019 first quarter financial results, give a brief business update, comment on our net sales and earnings guidance for fiscal 2019 and then conclude with a question-and-answer session.

Fiscal 2019 is off to a record start as our growth initiatives in Natur-Tec and Zerust Oil & Gas continued during the first quarter to favorably drive sales and earnings. Meanwhile, although many of our joint venture partners around the world experienced record first quarter sales, North American ZERUST industrial as well as NTIC China sales were softer than anticipated due to ongoing concerns regarding the trade dispute between the U.S. and China. Nevertheless, we remain encouraged by the strong start to the year and are cautiously optimistic that fiscal 2019 will be another good year for the company.

So with these highlights, let's examine the drivers for the first quarter. For the first quarter ended November 30, 2018, total consolidated net sales increased 22.1% to a quarterly record of $14.1 million as compared to the 3 months ended November 30, 2017. Broken down by business units, this includes a 100% increase in Natur-Tec sales and nearly a 250% increase in oil and gas net sales, partially offset by a 1.6% decline in ZERUST industrial net sales and a 4.8% decline in net sales from NTIC to its ZERUST joint ventures.

Total sales by our joint ventures, which we do not consolidate in our financial statements, grew to $30.5 million for the fiscal 2019 first quarter compared to $28.5 million for the same period last fiscal year. This 7% increase in JV net sales was the result of improved global demand and increased market share. We've continued to proactively work with our JV partners. And I'm pleased with the progress we've made over the past year to improve performance.

We believe the slight decline in North America's ZERUST industrial sales during the first -- during fiscal 2019 first quarter was due to the impact of macro-related concerns and uncertainties are having on the supply chain as well as purchasing decisions at certain major customers. Currently, we still do not believe this is indicative of a deeper slowdown, but we are actively monitoring global market trends and will adjust accordingly if demand deteriorates.

Net sales by our wholly-owned NTIC China subsidiary increased 8.8% to $3.2 million during the first quarter of fiscal 2019 compared to $2.9 million for the same period last fiscal year. This growth is mostly a result of aggressively expanding into new market sectors. In addition, we have started selling Natur-Tec products through our NTIC China subsidiary, which has added incremental sales to the subsidiary.

There is a strong market for compostable bioplastics in China and we anticipate sales momentum to accelerate in the coming quarters. As we have stated in previous years, it is important to note that NTIC China -- China's second quarter net sales may be slightly lower than the first quarter sales as a result of the long Chinese New Year holiday period. For fiscal 2019, we expect to expand our China sales opportunities across the country and we remain encouraged by the positive trends underway at NTIC China.

As expected, oil and gas sales for the first quarter of fiscal 2019 were up 247.4% compared to the same period last fiscal year. This growth was primarily due to higher recurring sales of tank bottom solutions as well as increased project-based sales associated with protecting other types of oil and gas industry infrastructure assets. We've continued to gain more repeat orders for our tank bottom solutions from existing large companies. In addition, we've continued to add new global markets for our tank bottom solutions and believe we are well positioned to grow oil and gas sales in fiscal 2019. As a reminder, oil and gas sales tend to be a bit choppy due to potential shifts in the timing of purchase orders for bigger projects.

Now turning to our Natur-Tec bioplastic business. For the fiscal 2019 first quarter, Natur-Tec's net sales were $4.0 million, an increase of nearly 100% over the same period last fiscal year and have increased 400% since the fiscal 2016 first quarter. Natur-Tec continued to achieve significant 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.

The use of conventional polyethylene and polypropylene plastic bags are facing ever-increasing societal and political criticism due to the environmental and waste disposal concerns and this correlates with the increasing global interest for Natur-Tec products and solutions that we've experienced.

Our fiscal 2019 financial results demonstrate the strength of the platform we have created and the success of our growth initiatives. NTIC has developed a compelling portfolio of corrosion prevention and bioplastic solutions, and we have many opportunities to capitalize on large and growing global markets.

Our global footprint and diverse product offerings provide NTIC with significant flexibility to withstand evolving market dynamics. And despite the macro level concerns throughout some of our markets, we remain on track to achieve our fiscal 2019 goals of over $60 million in net sales and over $2 per diluted share in net income.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2019 first quarter.

Thanks, Patrick. NTIC's net sales increased 22.1% in the fiscal 2019 first quarter, a result of the trends Patrick reviewed in his prepared remarks. Higher sales and profitability across many of our joint ventures continue to drive compelling growth in joint venture operating income. Income from joint venture operations increased 5.7% for the fiscal 2019 first quarter compared to the corresponding period last year. Our total operating expenses increased 10% to $6.2 million during fiscal 2019 first quarter. This increase was primarily a result of additional personnel and an increase in general and administrative and research and development expenses as well as expenses associated with NTIC's annual financial audit primarily due to our requirement this year for an auditor attestation of our internal control over financial reporting.

Net income attributable to NTIC was $1.5 million or $0.32 per diluted share for the fiscal 2019 first quarter compared to net income attributable to NTIC of $1.1 million or $0.24 per diluted share for the fiscal 2018 first quarter.

As of November 30, 2018, working capital was $24.2 million, including $4.5 million in cash and cash equivalents and $1.7 million in available-for-sale securities compared to $22.8 million, including $4.2 million in cash and cash equivalents and $3.3 million in available-for-sale securities as of August 31, 2018.

NTIC's business model does not require significant additional capital, and we expect our financial model will continue to produce strong operating cash flows. As we have experienced in prior years, our cash balance is typically at the lowest level in November. We expect our cash balance will increase as the year progresses as a result of seasonal benefits we typically experience in earnings from operating activities and anticipate a continued business growth and improved overall profitability.

On November 30, 2018, the company had $23.1 million of investments in joint ventures, of which approximately 57% or $13 million was in cash with the remaining balance invested in working capital.

During the fiscal 2019 first quarter, NTIC's Board of Directors declared a cash dividend of $0.12 per common share that was payable on November 21, 2018, to shareholders of record on November 7, 2018. The first quarter dividend is a 20% increase over the first quarter dividend payment last fiscal year, which reflects continued strength in our financial performance.

Now turning to NTIC's annual guidance for the fiscal year ending August 31, 2019. We continue to expect the annual net sales to range between $60 million and $61.5 million, which represents a 16.7% to 19.6% increase over our fiscal 2018 net sales. We estimate our net income attributable to NTIC will range between $9.4 million and $9.8 million or between $2 and $2.10 per diluted share for fiscal 2019.

Our guidance per diluted earnings per share represents a year-over-year increase of approximately 40% to 47%. I'm pleased that our annual guidance for fiscal '19 remains in line with long-term vision we created approximately 3 years ago. These estimates are subject to significant risks and uncertainties, including those described in our forward-looking statements disclosure in our earnings release.

As you can see, we're encouraged by our first quarter results. We've built a strong platform to drive sustainable and profitable growth. And we're excited about the direction that we're headed.

With this, Patrick and I are happy to take your questions.

(Operator Instructions) Our first question comes from Greg Weaver from Invicta.

Question on the oil and gas outlook. Patrick, you mentioned it's choppy, but you usually say that because that's just general business. But nice sales again this quarter and you've mentioned about the tank bottom recurring. Any additional color there in terms of getting more sustainable traction?

On the whole, things are looking pretty good. Not necessarily in the second quarter, but certainly in the third and fourth quarter as projects are worked upon.

Okay. And how about in terms of the gross margin outlook, what should we think about there? It was down a little bit sequentially, but I assume some of that's oil and gas mix?

Yes. It's just kind of -- it's going to fluctuate a little bit with all the different -- the weighted average from all the different business units having some pretty different gross margins tends to lead to a little bit of volatility in the overall gross margin. But we haven't seen any of the businesses experience any significant declines in gross margin or changes in gross margin. It usually just has to do with the product mix.

And input costs? I mean with oil down, I don't know how much that's influencing things?

So far, it hasn't really impacted us yet. We just have to see how that goes.

Okay. And your inventories are up quite a bit sequentially. Any color there?

Nothing significant other than there's a little bit of volatility in the overall commodity prices and things like that. So we've increased inventory a little bit just to deal with some demand. But nothing specific as far as inventory goes. A lot of it probably is just a -- is more of just a timing as far as inventory that we had specifically at the end of November.

Okay. Yes, I was just looking at the cash numbers and trying to figure where it was. Last question is on the tax rate. What should we expect there for fiscal '19?

I think somewhere between probably 10% and 13% for an effective tax rate.

For the full year? Okay.

Yes.

Our next question comes from Tim Clarkson of Van Clemens & Company.

Just want to focus a little bit on this compostable part of your business. That's part of your business that I think is the least understood. The first piece of it is, how much of the demand is coming from some of the new initiatives in California and how much of it is just overall acceptance of compostable products?

I would -- we would say it's a combination of the two.

Now how much of this is business going to fast food places?

Not so much. It's mostly going to the larger institutional cafeteria services.

How about in terms of China, what -- that's a new market for you guys. What's the typical application in China?

I honestly don't know.

And how about...

Actually, I take that back, it's to the garment industry in China.

Okay. Sure. How about in terms of the initiative on the straws, are we getting closer to shipping and manufacturing and shipping straws in the United States?

Well, as I've mentioned in the past, we are not going to be manufacturing straws at all and not selling straws, but we are already selling resin compounds to straw manufacturers. So there are certain straws on the market already with our product in it.

Okay. And being sold in the United States?

I believe so.

Okay. All right. Otherwise, I was impressed with the fact that despite the softness in China, you're still able to show some growth there.

Well, that's also partially due to the Natur-Tec sales in China that -- that's a nice new avenue of revenue for us in that market.

(Operator Instructions) Our next question comes from Charlie Pine of Van Clemens & Company.

Just wanted to ask quickly, it's been a little bit addressed by a prior caller already on oil and gas -- Zerust Oil & Gas space. With the big drop in crude prices over the last few months, have you seen any of these of your end-use customers for tank bottoms pull-in their order streams currently and their delaying maintenance or has that not been an issue as of yet?

No. We're seeing everything going on schedule as before.

And our next question comes from Joe Zicherman of Stadium Capital.

Quick question. Any thoughts on splitting the stocks, making the trading more -- somewhat more efficient?

Yes. It's something that the board is considering. You noticed in the proxy that's out there right now in preparation for the annual meeting in January that we are looking to increase the authorized number of shares, which would allow the company flexibility and the ability to then make the determination if we want to move forward and do something like splitting the stock. But it's certainly something that we're considering.

Our next question comes from Jerry Wells, a private investor.

Just had a question relating to what you're seeing, if anything, in the automotive-related to the world that you serve as far as slowness or so forth. Not only in the U.S. but with your partners?

Well, I can say that certainly in Germany, for example, is doing very well despite everything else going on in the world markets. What we're seeing here in the United States and in China is that sales are slightly slower than what we would have anticipated under normal circumstances. So the various manufacturers are being cautious in their purchasing requirements. Just -- but nothing really dramatic, just a slight -- a very slight downturn. And we're probably expecting that as soon as any kind of trade issues get resolved that that can pick up for the rest of the year and would probably wind up being even or slightly above what we were last year.

Okay. And then relating to China, do you see much -- a pushback, if you will, the fact that you're a U.S. company based in China, political pushback in addition to any other economic factors over there?

Fortunately, so far, that has not seemed to be an issue.

Okay. And then feedback from the big project you did up in Canada on the pipeline. You got any feedback or any other potential bids relating to that particular type of work?

The project went well. And we now have got a good case study as we're approaching other customers with that solution.

At this time, I have no other questions in the queue. I'd like to turn the call back over to Mr. Patrick Lynch for any closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.