Northern Technologies International Corp (NTIC) 2024 Q1 法說會逐字稿

Good day, and thank you for standing by, welcome to NTIC first quarter 2024 earnings conference call and webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. (Operator Instructions)

Again, please be advised that today's 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 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 subsequently 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 forward-looking statements.

So I would now like to hand the conference over to your speaker today, Patrick Lynch. Please go ahead.

Good morning. I am Patrick Lynch, NTIC's CEO; and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our fiscal 2024 first quarter financial results was issued earlier this morning and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2024 first quarter financial results provide a brief business update and then conclude with a question and answer session.

I'm pleased with the strong start to fiscal 2024 for highlighting stable demand across our ZERUST industrial and Natur-Tec markets. While the timing of certain orders did hold back because ZERUST oil and gas sales we experienced higher consolidated sales and a 78% increase in first quarter net income over the prior year's first quarter net income. I'm particularly encouraged by the year over year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended.

As we mentioned last quarter, we are also making strategic investments to bolster our infrastructure and support our long-term expansion needs, particularly in our oil and gas and Natur-Tec businesses. These investments are primarily focused on adding sales and support capabilities to enable us to take greater advantage of both current demand as well as what we anticipate unfolding during the course of fiscal 2024 and beyond.

We are striving to improve our operational efficiencies across our business as evidenced by our operating expenses as a percent of net sales holding relatively stable over the past three months. We expect higher profitability and strong operating cash flow to continue throughout fiscal 2024.

During the first quarter, cash from operating activities improved year over year by nearly 54%. We intend to continue to allocate capital to support our growth initiatives and quarterly dividend payment while using excess cash flow to pay down the balance and our existing line of credit.

As we look to the remainder of fiscal 2024, we believe we are well positioned for top line growth across our ZERUST industrial ZERUST Oil & Gas and Natur-Tec product categories. We also plan to improve the performance and profitability of our joint ventures across our European and Asian markets.

As our team continues to navigate a fluid global economic environment, I am pleased with NTIC's improving performance and believe fiscal 2024 will be another good year of growth and improved profitability. So with this overview, let's examine the drivers for the first quarter ended November 30, 2023 in more detail.

For the quarter, our total consolidated net sales increased 1.1% to a first quarter record of $20.2 million as compared to the first quarter ended November 30, 2022. Broken down by business unit this included a 4.2% increase in Natur-Tec net sales and a 1.1% increase in ZERUST industrial net sales. These increases were partially offset by a 7.4% decline ZERUST oil gas net sales.

Total net sales for first quarter by our joint ventures, which we do not consolidate in our financial statements decreased year over year by 4.7% to $23.6 million. Excor Germany, our largest joint venture experienced a 17% decrease in net sales compared to the prior fiscal year period, due primarily to the loss of a customer and the softer demand within Europe related to higher energy prices and other externalities linked to the war between Ukraine and Russia.

Fiscal 2024, first quarter net sales by our wholly owned NTIC China subsidiary decreased on a year over year basis by 1.8% to $3.7 million due to weaker economic conditions in that country. On a sequential basis, NTIC China sales increased by 4.1%, which was the third consecutive quarter of higher sales sequentially.

After we recorded a small annual net loss at NTIC China last fiscal year, we remain cautiously optimistic that demand in China will improve throughout fiscal 2024, helping to support higher incremental sales and profitability in this market.

While near-term economic conditions in China continue to remain uncertain, we are committed to the Chinese market and continue to take steps to enhance our Chinese operations. We continue to believe China will likely become a significant geographic market for us in the future.

Now moving on to ZERUST oil & gas. The first quarter of fiscal 2024 was the seventh consecutive quarter of ZERUST oil and gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business. For the fiscal 2024, first quarter, ZERUST oil and gas sales were $1.5 million compared to $1.6 million for the same period last year.

The 7.4% year over year decline in ZERUST oil and gas sales was primarily due to the timing of certain oil and gas projects, which pushed the associated revenue to the second quarter. As a result, we expect ZERUST oil and gas sales will have a stronger fiscal 2024 second quarter and first quarter.

Demand remained strong and growing among both new and existing customers for our ZERUST oil and gas solutions, which today still focus primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another good year for ZERUST oil and gas as this business further scales and continues to contribute to our overall profitability.

Turning to our Natur-Tec bioplastics business as expected, Natur-Tec sales remained robust during the first quarter and increased 4.2% year over year to a first quarter record of $4.8 million. We expect Natur-Tec sales growth will continue throughout fiscal 2024, supported by favorable demand in North America and India and significant new customer wins and orders in these geographies.

Globally, we continue to see growing market demand for new applications of certified compostable plastic products and resin compounds, as well as increased interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics.

As a result, we believe we are well positioned for long-term sustainable growth within our Natur-Tec bioplastics business. As you can see our fiscal 2024 first quarter financial results reflect the progress we are making towards growing our business and improving profitability.

Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners, our recent success and the opportunities we are pursuing to drive value for our shareholders in the future is a direct result of their efforts.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2024 first quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 1.1% for the fiscal 2024 first quarter to a first quarter record because of the trends Patrick reviewed in his prepared remarks.

Sales across our global joint ventures declined 4.7% in fiscal 2024 first quarter. Joint venture operating income was down 0.8% compared to the prior fiscal year period. The year over year reduction in joint venture operating income was primarily due to lower sales and the resulting lower net income at our German joint venture, partially offset by improved profitability across many of our other joint ventures.

Total operating expenses for fiscal 2024, first quarter increased 5.2% to $8.3 million compared to $7.9 million to the same period last fiscal year. Higher operating expenses were primarily due to increased personnel costs. As a percentage of net sales, operating expenses were 41.2% for the fiscal 2024 first quarter compared to 39.6% for the prior fiscal year period.

Gross profit as a percentage of net sales was 36.3% during the three months ended November 30, 2023, compared to 31.8% during the prior fiscal year period. The 450 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures.

Net income attributable to NTIC $8,96,000 or $0.09 per diluted share for the fiscal 2024 first quarter compared to $5,02,000 or $0.05 per share for the fiscal 2023 first quarter. For the fiscal 2024 first quarter, NTIC's non-GAAP adjusted net income was $1 million or $0.10 per diluted share, compared to non-GAAP net income of $6,08,000, or $0.06 per diluted share for the same period last year.

For reconciliation of GAAP to non-GAAP financial measures is available in our 2024 first quarter earnings press release that was issued this morning. As of November 30, 2023, working capital was $22.4 million, including $6.1 million in cash and cash equivalents compared to $23 million including $5.4 million in cash and cash equivalents as of August 31, 2023.

As of November 30, 2023, we had outstanding debt of $5.8 million. This included $3 million in borrowings under our existing revolving line of credit compared to $3.6 million as of August 31, 2023. We generated $3.1 million in operating cash flows for the three months ended November 30, 2023 compared to $2 million for the three months ended November 30, 2022.

The 53.6% year over year improvement in operating cash flow was driven primarily by stronger core profitability and positive changes in current assets and liabilities. Throughout fiscal 2024, we expect to generate continued operating cash flow, which we plan to invest in the growth of our business and support our quarterly cash dividend and pay down the balance of our existing revolving line of credit.

On November 30, 2023, the company had $24.6 million of investments in joint ventures, of which 61.8% or $15.2 million was in cash, the remaining balance primarily invested in other working capital. During the fiscal 2024, first quarter NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per common share payable on November 15, 2023, just tackle as a record on November 1, 2023.

So with this overview and to conclude our prepared remarks, we continue navigating a fluid business environment while pursuing our product end market and geographical diversification strategies. We're seeing still stable North American demand trends and robust growth across our global oil and gas and bioplastic markets. While the economic environment remains uncertain, we believe fiscal 2024 will be another good year of sales and profitability franchisee and we're excited about our long-term prospects.

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

Thank you. (Operator Instructions)

Tim Clarkson, Van Clemens & Co, Inc.

Good morning, Patrick. Good morning, Matt, how are you guys?

Thanks Tim. Good to hear from you.

Yeah, anyhow, so just I was dreaming a little bit I mean, is there a scenario where I know you guys are doing about [$1.5 in the oil tank business I mean, is there a potential this year to have a $2.5 million or $3 million] a quarter?

Absolutely, that's what --

Yeah, and the gross margins on that business are higher than the rest of the business right?

Yes, that's correct.

Right, good. My other dream is but I'll get to that secondly, just on the compostable again, what would be the typical applications for your compostable plastics?

Are you talking cutlery for example, is a major one for -- injection molded plastic articles and also bags are major application versus servicing in the United States.

Right. And one of the major advantages of that stuff is it's stronger than a lot of the competition.

Yes and cheaper.

And cheaper and cheaper and there's no problem was I know a couple of years ago you had problem with getting the material to make that.

No, they've added capacity on a worldwide basis so there is no shortage right now of raw materials for us.

Right. Now, is there a scenario where you could link up with another company either on a marketing basis or on a manufacturing basis or a technology basis that would make sense to you could add a piece to the composable thing and separate and bring in public I mean, is that is there a potential of that por is it still too early?

Well, I think it's going to there's two different questions there, Tim. One is ultimately what do we think would happen with Natur-Tec when it hits a level of revenue or a level of profitability where it makes more sense to be a standalone entity.

I think we've always said that that's certainly a possibility, but right now, when you look at the total revenues of Natur-Tec, although they're growing, they're not really at a level where I think it's sustainable to be a standalone entity where it would be properly valued.

The other part of your question where you talk about partnering with other companies, that's the main one of the main ways that we are growing Natur-Tec are by developing specialty applications for larger companies that are using container load quantities of resin.

And so a lot of the growth that we're expecting to see over the next 12 months, 24 months, 36 months comes from working with companies that are looking to use large container, low quantities of our specialty resin to for them to make their own compostable products.

So I think both of those kind of in combination are really what's going to help the overall Natur-Tec as a company and as a brand grow. But there's certainly significant opportunities in the United States, in Europe, in parts of Asia where we're seeing these these applications sell well.

Sure. Now I know that on the foreign basis, the Germany was kind of a weak quarter for them for a variety of reasons. Is that starting to come back or is it still pretty weak?

I don't see it coming back immediately there are two reasons. One we've lost a very large customer that they've had for a very long time and that's not that easy to replace. Also as long as the Ukraine and Russia conflict continues, you're going to have higher energy prices and raw material prices in Europe, which is also putting a bit down pressure on sales.

Right, in terms of just overall inflation, are you guys seeing a better cost across the board with the lower oil prices now and some of the claim that inflation's been moderating.

I think and certainly in the United States, I think we've got inflation well under control so that's not an issue. Like I said, it continues to be an issue in all of Europe because of in Europe, they get most of their energy, gas and oil from Russia are used to. And until that conflict was settled is going to continue to be an issue in that region, but elsewhere, we're fine in that regard.

Right. Got it and then thank you.

Thank you. (Operator Instructions) At this time I would now like to turn the conference back over to Patrick Lynch for closing remarks.

Well, thank you very much for attending this morning and wishing you a nice day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.