Northern Technologies International Corporation (NASDAQ:NTIC) Q1 2023 Earnings Call Transcript

Northern Technologies International Corporation (NASDAQ:NTIC) Q1 2023 Earnings Call Transcript January 12, 2023

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Northern Technologies International Corporation First Quarter 2023 Earnings Conference Call and Webcast. . As part of today’s 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. This call also may include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles, or GAAP, which are generally referred to as non-GAAP financial measures. Reconciliations of the historical non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release NTIC issued this morning on the Investor Relations portion of its corporate website at ntic.com. At this time, I would like to turn the conference over to Mr. Patrick Lynch, CEO.

Sir, you may begin.

Patrick Lynch: Good morning. I am Patrick Lynch, NTIC’s CEO. And I’m here with Matt Wolsfeld, NTIC’s CFO. I want to begin this morning’s call by wishing everyone a happy, healthy, and prosperous new year 2023. Please note that a press release regarding our fiscal 2023 first quarter was issued earlier this morning and is available at ntic.com. During today’s call, we will review various key aspects of our fiscal 2023 first quarter financial results, provide a brief business update, and then conclude with a question-and-answer session. Stable demand for our Zerust industrial products and services in North America, coupled with growing interest in our Natur-Tec and Zerust Oil & Gas products both in the U.S. and abroad provided record sales again in this first quarter.

This is particularly encouraging considering the prevailing complex business environment. NTIC has continued to navigate supply chain and shipping issues, persistent inflation, raw material cost increases, geopolitical conflicts in Europe, and the lingering effects of the COVID-19 pandemic in Asia, with the intent of minimizing the impact of these challenges on our business. Price adjustments made during the last fiscal year helped improve net sales and profitability in North America. While we expect some inflationary pressures and supply chain issues to persist throughout the second quarter, we continue to see improvements, most notably, being the increased availability of raw materials for our Natur-Tec bioplastics business during the quarter.

Overall, momentum has remained positive, and we expect that NTIC will continue to offset near-term uncertainty within our European and Asian markets. In addition, we expect annual profitability to improve in fiscal 2023 as we continue to focus on rebuilding our margins. So with this overview, let’s examine the drivers for the first quarter in more detail. For the first quarter ended November 30, 2022, our total consolidated net sales increased 9.7% to a first quarter record of nearly $20 million as compared to the first quarter ended November 30, 2021. Broken down by the business units, this includes a 66.9% increase in Zerust Oil & Gas net sales, a 21.6% increase in Natur-Tec net sales, and a 4% increase in Zerust industrial net sales. Total net sales for the fiscal 2023 first quarter by our joint ventures, which we do not consolidate in our financial statements, decreased 8.5% to $24.7 million.

This decrease was due primarily to slower demand across the territories serviced by our global joint ventures due to certain geopolitical conflicts and their impact on higher energy costs and availability. Fiscal 2023 first quarter net sales by our wholly-owned NTIC China subsidiary decreased by 7.7% to $3.7 million due to the negative impact of severe COVID-19 related lockdowns across much of that country during the quarter and the weaker economic conditions as a result thereof. We continue to closely watch market conditions in China, and we are hopeful the recent suspension of that country’s Zero-COVID policy will help to improve demand in China later this fiscal year. Overall, we remain committed to the Chinese market and the long-term opportunities it represents for NTIC.

We have taken steps to enhance and protect our Chinese operations, and we continue to believe China will likely become our largest geographic market in the future. Now moving on to Zerust Oil & Gas. The fiscal 2023 first quarter was one of the strongest quarters we have ever had for Zerust Oil & Gas as sales increased 66.9% to $1.6 million. The first quarter of fiscal 2023 is also the third consecutive quarter of Zerust Oil & Gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business. We believe interest is growing for our Zerust Oil & Gas solutions, which include applications to protect above-ground oil storage tanks and pipeline casings from corrosion. And we believe the second quarter of fiscal 2023 will be another good quarter of oil and gas sales and growth.

The expanding adoption of our Zerust Oil & Gas solutions within the oil and gas industry is supporting bigger opportunities for our Zerust Oil & Gas products and technologies. As a result, we believe fiscal 2023 will be a transformative year for Zerust Oil & Gas as this business scales and begins to contribute to profitability. Turning to our Natur-Tec bioplastics business. Fiscal 2023 first quarter Natur-Tec sales were $4.6 million, a 21.6% increase over the prior fiscal year period. Sales trends within the Natur-Tec have been encouraging and show that demand patterns have begun to return to pre-pandemic levels, especially in North America and India. Furthermore, the supply chain and logistics challenges that impacted Natur-Tec’s results last fiscal year continued to ease during the first quarter and contributed to the strong year-over-year growth we experienced.

We believe this is a testament to our strong position within the bioplastics industry and close relationships with important raw material suppliers. We’ve continued 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. While prevailing geopolitical and economic uncertainty continues to impact our outlook on the overall economy in recent months, especially in Europe and China, we believe we can continue to grow sales and improve profitability as we benefit from favorable North American demand trends, higher sales into the oil and gas industry, and higher Natur-Tec sales.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2023 first quarter.

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Matt Wolsfeld: Thanks, Patrick. Compared to the prior fiscal year period, NTIC’s consolidated net sales increased 9.7% to a first quarter record because of the positive trends Patrick reviewed in his prepared remarks. An 8.5% decrease in first quarter sales across our joint ventures drove a 10% decrease in first quarter joint venture operating income compared to the prior fiscal year period. Total operating expenses for the fiscal 2023 first quarter were $7.9 million, 11.7% increase over the prior fiscal year period. It was primarily due to increased personnel expenses and expenses incurred during the current fiscal year period in connection with the startup of a new indirect majority-owned subsidiary formed to assume the operations of a former joint venture in Taiwan.

Operating expenses, as a percentage of net sales, were 39.6% compared to 38.9% for the prior fiscal year period. Gross profit as a percentage of net sales improved to 31.8% during the three months ended November 30, 2022, compared to 31.3% during the prior fiscal period, primarily a result of improved pricing to offset inflationary pressures and increase sales to customers in the oil and gas industry as products within this end market carry higher margins that our Zerust industrial products. NTIC reported net income of $502,000, or $0.05 per diluted share, for the fiscal 2023 first quarter compared to $4.5 million, or $0.46 per diluted share, for the fiscal 2022 first quarter. Recall that first quarter of fiscal 2022 net income reflected a gain of over $3.9 million related to our acquisition of the remaining ownership interest of Zerust India.

For fiscal 2023 first quarter, NTIC’s non-GAAP adjusted net income was $608,000, or $0.06 per diluted share, compared to non-GAAP net income of $781,000, or $0.08 per diluted share, for fiscal 2022. NTIC’s non-GAAP adjusted net income excludes the gain of over $3.9 million relating to our acquisition of the remaining ownership interest of Zerust India and other adjustments as set forth in the GAAP and non-GAAP reconciliation at the end of our first quarter earnings press release that was issued this morning. As of November 30, 2022, working capital was $25.4 million, including $6 million in cash and cash equivalents compared to $23.2 million, including $5.3 million in cash and cash equivalents as of August 31, 2022. As of November 30, 2022, we had $5.5 million outstanding under our revolving line of credit compared to $5.9 million at August 31, 2022.

On November 30, 2022, the company had $20.3 million in investments in joint ventures, of which approximately 48% are just over $9.7 million was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2023 first quarter NTIC’s board of directors declared a quarterly cash dividend of $0.07 per common share that was payable on November 16, 2022, to stockholders of record on November 3, 2022. So, to conclude our prepared remarks, our established product, end market, and geographic diversification strategies are helping the company navigate a complex and fluid business environment. We are seeing stable North American demand trends and accelerating growth across our global oil and gas and bioplastics markets.

While the economic environment remains uncertain, we continue to believe fiscal 2023 will be another good year of sales and profitability for NTIC, and we’re excited by our prospects. With this overview, Patrick and I are happy to take your questions.

Q&A Session

Operator: Our first question or comment comes from the line of Tim Clarkson from Vanclemens.com. Mr. Clarkson, your line is now open.

Tim Clarkson: Hi, Patrick and Matt. Another good quarter. I just wanted to ask exactly how much expenses were tied to the Taiwan deal.

Patrick Lynch: Well, the Taiwan deal, in general, just to give a little bit of color on it, Taiwan is an entity that was owned under one of our other subsidiaries in prior years it had about somewhere just under $1 million in revenue. We had a situation where the former partner in Taiwan passed away, and because of that we decided to liquidate the entity and start up a new subsidiary that is owned under NTI Asean. So NTIC owns 60% of NTI Asean, thereby through passthrough, NTIC now owns 60% of the Taiwan entity. There were simply some liquidation costs associated with the old entity to basically write down the investment that we had to zero, and also some expenses associated with starting up the new entity. Total impact from the transaction in first quarter was probably around $300,000 as far as comparing what — the net amount that we had previously to what we did in the first quarter was about $300 million — a little over $300,000.

The expectation is that going forward that will obviously stabilize, and it will just be a consolidated entity similar to our other subs. So it’s a one-time charge. Also part of the reason why our total operating expenses for the quarter were slightly up compared to expectations and last year total operating expenses were up a little over 11%, I would expect that operating expense increase for the full year to be back in the middle single digits from a operating expense growth standpoint.

Tim Clarkson: Great, great. And in terms of the oil and gas deal, it’s at $1.5 million a quarter, $6 million annual pace. How big can this division potentially get? Is this a potential division that can be $10 million or $20 million annually?

Patrick Lynch: Yes, can be, eventually.

Tim Clarkson: Right. And in terms of suddenly now we’re starting to see this consistent high growth, again, what are the drivers that are getting people to want to buy these products?

Patrick Lynch: I think that we’ve just been pushing this now for long enough that we have a reputation in the industry, and people are coming to us now.

Tim Clarkson: Yes.

MattWolsfeld: I think one important thing to remember is also that the reason why we got into the oil and gas space originally years and years ago, as we’ve obviously been developing it for some time, is because of the size of the opportunity and that opportunity being significantly bigger than the opportunity with the core Zerust products. It’s certainly taken longer than any of us expected to develop, but we’re happy that we’re finally starting to see some of these larger opportunities and what I’ve always referred to as the base level of oil and gas business establishing itself. And so the fact we’ve now been able to put several quarters in a row where we’re not seeing as much volatility as we were over the past few years and really starting to build on that business.

Specifically, if you look at the expectations that we have for second quarter and the remainder of the year, the expectations that the oil and gas is going to perform better — significantly better in second quarter because of some orders we have coming in. We announced before the BP contract. We have some business from that contract that will be coming in the second quarter and some other additional business that will be coming in in the last three quarters of the year that give us a lot more optimism with the oil and gas business overall.