Northern Technologies International Corporation (NASDAQ:NTIC) Q2 2024 Earnings Call Transcript

Northern Technologies International Corporation (NASDAQ:NTIC) Q2 2024 Earnings Call Transcript April 11, 2024

Northern Technologies International Corporation beats earnings expectations. Reported EPS is $0.18, expectations were $0.17. NTIC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 protection of the safe harbor from these statements. Please also be advised that the 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 these forward-looking statements. I will now turn the call over to NTIC management.

Patrick Lynch: Good morning. I’m 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 second 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 second quarter financial results, provide a brief business update and then conclude with a question-and-answer session. When we discuss year-over-year performance, we are referring to our fiscal 2024 second quarter as compared to our fiscal 2023 second quarter. NTIC set a series of new records in the second quarter driven by robust demand across many parts of our business. Most notable among these were record second quarter ZERUST Oil & Gas sales and record quarterly Natur-Tec sales.

I’m also particularly encouraged by the continued year-over-year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended. We anticipate that profitability will continue to improve and that we will continue to generate positive operating cash flow throughout the second half of fiscal 2024. Year-over-year cash from operating activities improved by nearly 156% to $5.6 million primarily due to higher net income and positive changes in working capital. 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 on 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 the Natur-Tec product categories.

We also remain focused on the performance and profitability of our joint ventures across Europe and Asia. 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 profitability. So with this overview, let’s examine the drivers for the second quarter ended February 29, 2024 in more detail. For the quarter, our total consolidated net sales increased 14.1% to a second quarter record of $20.8 million as compared to the second quarter ended February 28, 2023. Broken down by business unit, this included a 47.5% increase in Natur-Tec net sales, a 20.1% increase in ZERUST Oil & Gas net sales, and a 3.1% increase in ZERUST Industrial net sales.

Total net sales for the second quarter by our joint ventures, which we do not consolidate in our financial statements, decreased year-over-year by 7.9% to $23.5 million. EXCOR Germany, our largest joint venture, experienced a 5.6% decrease in net sales compared to the prior fiscal year period due primarily to a previously disclosed loss of a customer and softer demand within the region related to higher energy prices and other externalities linked to the ongoing war between Ukraine and Russia. Fiscal 2024 second quarter net sales by our wholly owned NTIC China subsidiary increased on a year-over-year basis by 20.3% to $3.5 million. Most notably, this was the first year-over-year increase in quarterly sales in over two years as sales during this period have been impacted by prolonged COVID-related lockdowns and overall weakness in the Chinese economy.

We remain cautiously optimistic that demand in China will continue to improve throughout the second half of fiscal 2024, helping to support higher incremental sales and profitability in this market. While near-term economic conditions in China remain uncertain, we are committed to the long-term opportunities the Chinese market provides, our industrial and bioplastics segments, and we continue to take steps to enhance our operations in this geography. As a result, 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 second quarter of fiscal 2024 was the eighth consecutive quarter of ZERUST Oil & Gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business.

For the fiscal 2024 second quarter, ZERUST Oil & Gas sales were $2.2 million compared to $1.8 million for the same period last year. The 20.1% year-over-year increase in ZERUST Oil & Gas sales was primarily due to the shift of certain oil and gas projects from the first quarter to the second quarter and positive overall demand for our oil and gas solutions. Our ZERUST Oil & Gas solutions are still focused primarily on protecting aboveground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another good year of growth for ZERUST Oil & Gas as this business further scales and continues to contribute to our overall profitability. Turning to our Natur-Tec bioplastics business. Natur-Tec sales were strong during the second quarter and increased 47.5% year-over-year to a quarterly record of $5.6 million.

Natur-Tec’s growth during the second quarter was a result of recent new customer wins in North America and India. We expect Natur-Tec sales growth will continue throughout the second half of fiscal 2024. Globally, we continue to see robust 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 second quarter financial results reflect the progress we are making towards growing our business and improving profitability.

We believe fiscal 2024 will be a strong year of sales growth and improved profitability. We are excited by the positive momentum underway and the direction NTIC is heading. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2024 second quarter.

Matt Wolsfeld: Thanks, Patrick. Compared to the prior fiscal year period, NTIC’s consolidated net sales increased 14.1% for the fiscal 2024 second quarter to a second quarter record because of the trends Patrick reviewed in his prepared remarks. While sales across our global joint ventures declined 7.9% in the fiscal 2024 second quarter, joint venture operating income increased 4.2% compared to the prior fiscal year period. The year-over-year increase in joint venture operating income was primarily due to the efforts underway to enhance profitability at the company’s joint ventures, partially offset by lower joint venture sales. Total operating expenses for fiscal 2024 second quarter increased 9.4% to $8.6 million compared to $7.9 million for 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 41.3% for the fiscal 2024 second quarter compared to 43.1% for the prior fiscal year period. Gross profit as a percentage of net sales was 40% during the three months ended February 29, 2024 compared to 34.5% during the prior fiscal year period. The 551 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures and in-sourcing of various production. Net income attributable to NTIC was $1.7 million or $0.17 per diluted share for the fiscal 2024 second quarter compared to $411,000 or $0.04 per diluted share for the fiscal 2023 second quarter. As of February 29, 2024, working capital was $24 million, including $4.8 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 February 29, 2024 we had outstanding debt of $4 million. This included $1.2 million in borrowings under our existing revolving line of credit compared to $3.6 million as of August 31, 2023. We generated $5.6 million in operating cash flows for the 6 months ended February 29, 2024 compared to $2.2 million for the 6 months ended February 28, 2023. The 156% year-over-year improvement in operating cash flow was driven primarily by higher net income and positive changes in working capital. Throughout the second half of fiscal 2024, we expect to generate continued operating cash flows, which we plan to invest in the growth of our business, support our quarterly cash dividend and pay down the remaining balance on our existing revolving line of credit.

On February 29, 2024, the company had $23.5 million of investments in joint ventures, of which 55.7% or $13.1 million was in cash with the remaining balance primarily invested in other working capital. During the fiscal 2024 second quarter, NTIC’s Board of Directors declared a quarterly cash dividend of $0.07 per share that was payable on February 14, 2024 to stockholders of record on January 31, 2024. To conclude our prepared remarks, our second quarter financial results reflect the progress we are making, navigating a fluid business environment while successfully pursuing our product, end market and geographical diversification strategies. We’re seeing stable North American demand trends, had robust growth across our global oil and gas and bioplastic markets.

And we expect these trends to continue throughout the remainder of our fiscal year. As a result, we believe our fiscal 2024 will be another good year of sales and higher profitability for NTIC, and we’re excited about our long-term prospects. With this overview, Patrick and I are happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Gus Richard with Northland.

Gus Richard: Congratulations on strong results. I was just wondering if you could talk a little bit about the pipeline for ZERUST and Natur-Tec. You had to pull in, in the quarter for oil and gas. Wondering if that growth is sustainable sequentially and just sort of your outlook on those 2 product lines moving forward.

Matt Wolsfeld: I guess my question, Gus, just kind of asking the question back. So your question is about what is the pipeline for ZERUST’s Industrial business and the growth that we expect to see there or oil and gas?

Gus Richard: Yes, oil and gas.

Matt Wolsfeld: I think oil and gas was a pretty strong — had a relatively strong Q2. I think expectations are that we’re going to see Q3 and Q4, they’re going to surpass Q1 and Q2 expectations. There’s just a lot of projects that are — that we’ve been working on for some time coming online and should likely be coming to fruition where we expect to see it in the current fiscal year. And hopefully, that’s going to build a base level of oil and gas revenue on a quarterly basis that we can see as stepping stone. During the call, I know Patrick talked about the number of times we have exceeded $1.5 million in revenue. My expectations and my hopes are that we’re raising that number and saying the number of times we’ve been over $2 million and then a number of times over $2.5 million.

So we see it as more of a step function in growth. And what’s exciting for us is the repeat business that we’re getting with existing customers. That’s really showing that the products are working and then we’re starting to see the penetration into the market. And so we’re certainly working to continue the investment in bringing new people on from a technical service position to help with installations and also from a sales standpoint to drive more top line oil and gas business around the world.

Gus Richard: And then sort of the same question for Natur-Tec. Very strong quarter. Is that new OEMs starting new projects? Or is it resin sales? Can you put some arms and legs around what’s going on in terms of the growth trajectory of Natur-Tec?

Matt Wolsfeld: Yes. It was obviously a strong second quarter, certainly when you’re comparing Q2 to Q2. Part of that is because our second quarter last year was not as strong. I mean, if you look at the quarterly numbers last year, second quarter was certainly off a little bit compared to the other 3 quarters. However, it still was $5.6 million in revenue, which is significantly above any previous quarters that we’ve had. There are new opportunities, selling, bin liners and cutlery, some traditional opportunities that we have been selling to for many years that are continuing to expand in North America as far as the opportunity that we have. There’s also new projects coming online as far as increasing the amount of resin that we’re selling as well.

At any time, there’s a lot of projects in the pipeline from a Natur-Tec standpoint that we’re working on, and those are starting to kind of come to fruition as well. Similar to the stuff that we’re working on from an oil and gas standpoint, there’s a lot of projects we’re working on in Natur-Tec that are going to set themselves up as recurring monthly, recurring quarterly revenues that are going to continue to build on the total Natur-Tec sales. And so, I expect from what I look at as far as kind of the base level of business, the base level Natur-Tec business is simply growing on a month-to-month basis. And we’re starting to see those results. So my expectations are that Natur-Tec is going to have a very strong second half to the year. I expect oil and gas to have a strong second half to the year.

And typically, our industrial business has a much stronger Q3 and Q4 than in Q1 and Q2. So we’re pretty excited about the prospects right now.

Gus Richard: And then just do you have a target for gross margins going forward? It’s significantly above the run rate over the last 5 or 6 years. Is 40 sort of a long-term target? Or do you think — how much higher do you think those can go as your revenue ramps and given the expected mix?

Matt Wolsfeld: Well, I certainly think that there we’ve achieved some economies of scale as far as being able to harvest more of the gross margin dollars. And obviously, our goal is to keep our fixed expenses as stable as possible, and the variable cost components, the cost of goods sold is going to go up based on a function of revenues. And so I think the gross margin we achieved in the quarter was obviously very good. It certainly is a target. I don’t know if it’s completely that sustainable that I would target that number or a higher number going forward. But I can say that one of the objectives that we have at the company is to continue to work on improving gross margin for all the product lines. And that’s one of the reasons why we invested in the building that we have right next door to our Circle Pines facility that basically came online a few months ago where we’ve been able to in-source certain production and certain — the manufacturing of certain small light manufacturing items that we were previously outsourcing.