Q2 2020 Earnings Call
Future financial and operating results as well as their business plans objectives expectations.
Be advised that these forward looking statements are covered under the safe Harbor provisions on the private Securities Litigation Reform Act of 1995, and the M. T. I see desire so they'll itself, although protections of the safe Harbor for these statements.
He's also be advised the actual results could differ materially from those stated or implied by the forward looking statement, just turn risks and uncertainties, including those described it and T. I see his most recent annual report on form 10-K, subsequent quarterly reports on form 10-Q and read the press releases.
Please read these reports and other future filings the Ntsc will make with the S. E C and D. I see disclaims any duty to update or revise its forward looking statements.
Ladies and gentlemen, thank you for standing by welcome to the second quarter 2020 earnings Conference call. At this time all participants are in listen only mode. After the speakers presentations will be a question and answer session to ask a question. During the session. You wanted to press star one on your telephone. Please be advised that today's conference is being recorded if you're acquiring.
For their system. Please press star Zero I want I like to have the conference over to your speaker today, Patrick Lynch deal. Thank you. Please go ahead Sir.
Good morning, I, Patrick Lynch, Angie I see CEO and I'm here with Matt Wolsfeld anti <unk> CFO.
As well as beneath the low vice President and director.
Mobile market development for our nature Tech business.
Please note that the financial results for our fiscal Twentytwenty second quarter were included in the press release issued earlier this morning.
A copy of which is available at FDIC Dot com.
During this call we will review various key aspects of our fiscal Twentytwenty second quarter financial results.
Provides a brief business update.
And then conclude with a question and answer session.
Our fiscal Twentytwenty second quarter financial results were significantly influenced by the economic and business impact of the Cobot 19 Pandemics.
When compared to either the second quarter last fiscal year, where the first quarter fiscal twentytwenty.
Demand for Zerust industrial products slowed substantially in North America, China and across our joint venture network.
Demand for nature Tech Compostable bio plastics, however remain comparable to the prior fiscal year quarter.
And Zerust oil and gas sales increased significantly has several delayed projects from our first quarter were installed during the second quarter.
With many of our global customers currently running at a fraction of their regular capacity, we're locked down altogether.
Anticipate sales for our third quarter to be down considerably compared to the prior fiscal year corridor.
Furthermore, since the Cobot 19 crisis continues and is evolving we are withdrawing and suspending specific full year fiscal twentytwenty guidance.
On behalf of the entire leadership team and the board of directors of entry I see I thought your with anyone who has been affected by the cobot 19 pandemic.
While we have had to adjust our near term priorities, our long term market opportunities and growth strategies remain intact.
Our current intent is to continue providing on interrupted order fulfillment and customer service, while ensuring the safety of our customers joint ventures and employees.
Overall, we are entering this period of uncertainty come up for position of strength.
As a result of our asset light and highly profitable business model experienced leadership team and excellent capital structure.
We currently have over 12 million in cash and cash equivalents and available for sale securities. Additionally.
We are evaluating the availability of government support programs associated with the cares Act that was signed into law on March 27 2020.
So with this overview, let's examine the drivers for the second quarter.
Well the second quarter ended February 29, Twentytwenty total consolidated net sales decreased 0.6% to $13.2 million as compared to the second quarter ended February 28 2019.
Broken down by business unit. This included a 198.6% increase in Zerust oil and gas sales.
And is 0.3% increase in nature, Technet sales offset by a 4.2% decrease in Zerust industrial net sales and a 65.4% decrease in net sales from Angie I see two it's Zerust joint ventures.
Total net sales by our joint ventures, which we do not consolidate in our financial statements were $24.3 million for the fiscal Twentytwenty second quarter compared to $27.7 million for the same period last fiscal year.
This 12.5% decline in joint venture net sales was at first the result of already softening worldwide demand across many of the industrial markets. We serve and then later in the quarter was compounded by the effects of the Colgate 19 pandemic.
Net sales by our wholly owned enterprises need China subsidiary increased zero point, the 6% to $3 million.
The fiscal Twentytwenty second quarter compared to the same period last fiscal year.
And she I see China benefited from higher steel earlier in the second quarter prior to Chinese new year, and the impact of the coldest 19 pandemic.
And T I see China sales had returns to 75% of pre pandemic levels last month.
And we are cautiously optimistic that they will return to 100% of the sales of the fire sales level by the end of the third quarter as China has recently restarted this economy and Mr. business restrictions previously imposed to mitigate the spread of cobot 19.
Overall, we remain optimistic about the long term potential in China as we intend to further expand our presence within this large and growing market.
As expected Zerust oil and gas sales increased significantly during the second quarter as a result of several customers having viewed lead product shipments from our first quarter.
However, oil and gas sales remained volatile primarily due to long sales cycles overall challenging marketing market conditions, and the timing of orders and deliveries.
Do you, Russia, Saudi Arabia oil price war, and the Cobot 19 pandemic have had a significant impact on oil prices.
With the latter impacting our ability to travel to customer sites and two installed our solutions.
We expect that oil and gas fields will be materially impacted for the duration of the cobot 19 crisis.
We remain committed to the oil and gas market and believe we will this we will be successful overtime as more oil and gas customers adopt our solutions and replace other forms of corrosion protection.
Now, let me turn the call over to the need to review, our niche tech bio plastics business in more detail.
Thank you Patrick.
I'm happy to join produce called sort of view, our niche duck business in more detail.
I've been a member of and J.T. leadership team from nearly 16 years and for most of my time at the company focused on nature to it.
In addition to my nature DECT responsibilities I also said on the board of the biodegradable products Institute, a U.S. be organization that promotes the adoption that use of compostable plastics.
Maybe predictably become a leader in the bio plastics industry, President <unk> patented proprietary technologies.
Nature to it creates 100% compostable plastics alternatives with performance characteristics comparable to those of conventional single use last six at a price that is affordable and competitive.
Over the years you have also formed important partnerships with key feedstocks suppliers and develop strong relationships with key can workers and brands I don't control.
Over the past years, so cycle in political criticism.
Due to the environmental and waste disposal concerns of conventional single use plastics.
I've driven significant interest in and demand for alternatives.
Which has created a compelling global market environment for nature decks, Biobase and compostable product solutions.
We believe the industry dynamics for bio plastics is sustainable as more countries as well as state and local municipalities are putting in place sustainable waste management initiatives.
For the fiscal 2022nd quarter.
Nature take net sales were $4.2 million I'm going in line with sales last year.
Despite the headwinds treating neutrophilic associated with Chinese status, the Chinese new year shutdown and the impact the Golden 19 pandemic had on sales in China, and South Beach I during the quarter.
For the near term, we anticipate the covert 19 prices will continue to impact natured victims.
Because theatrical mandate truckloads college campuses stadiums arenas corporate office complexes and other large users of compostable plastics.
For the more production across the <unk> peddling industry has declined sharply as a result over 19 pandemic decreasing demand for nature that buyer plastic bags, which have become an important part of the sustainability initiatives within this industry.
Due to the impact of the Threed Seattle mandates in various countries around the world. We expect the apparel packaging business to be Socrates. The next two quarters.
However to date, we continue to see strong demand from existing and new customers.
And during the quarter began supplying a proprietary resident compounds to one of the world's largest manufacturers of cutlery within the food service industry.
We expect this business to be strong and go.
Hygiene considerations from the government banking crisis sustained demand for compostable foodservice applications.
As you can see we have built a strong bioplastics business that is supported by patented technologies.
As well as compelling industry dynamics and favorable environmental and regulatory bodies.
We are extremely excited to be a leader within the industry and I look forward to providing updates on our success in future calls.
Now I'll turn the call back over to Patrick.
Thank you need for the additional insights on nature Tech.
To conclude my prepared remarks, we all know that there is significant uncertainty due to the impacts of the cobot 19 pandemic.
However, and crises longstanding leadership team has successfully navigated a number of prior crises, including the great recession of 2008 in 2009.
Since then of course, we have greatly expanded our geographic and market and product diversity.
In addition, the size and scale of our business has increased.
Finally, the strength of our balance sheet and benefits of our asset light business model provides us with significant flexibility and resources to help us navigate this time of economic and business uncertainty.
I'd like to use this opportunity to thank all of our global employees and joint venture partners.
On behalf of the entire leadership team. Thank you for your hard work and dedication throughout this crisis.
With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal Twentytwenty second quarter.
[noise] Thanks, Patrick.
Entities net sales decreased less than 1% in fiscal 2022nd quarter.
As a result of the trend Patrick are viewed in his prepared remarks.
Lower sales across many of our joint ventures impacted joint venture operating income, which decreased 17% the fiscal 2022nd quarter compared to prior fiscal year.
As I alluded to in the first quarter earnings call total operating expenses increased during the second quarter and totaled $6.5 million compared to $5.4 million the same period last year.
19.7% year over year increase was primarily due to the timing of higher gionee expenses incurred during the quarter. We continue to proactively control expenses and year to date total operating expenses increased 6.8%, which is in line with both our budgets and expectations. In addition.
And we expect operating expenses to decline year over year in the fiscal 2023rd quarter.
Fiscal 2022nd quarter income tax expense increased 88.2% to $464000 and the result of foreign taxes paid on higher level of dividends and distributions. We received from our joint ventures during the quarter, we expect the effective rate to reduce greatly and our third and fourth quarters.
And just you reported net income of $180000 or two cents per diluted share for the fiscal 2022nd quarter compared to $1.4 million or 15 cents per diluted share the fiscal 2019 second quarter.
As of February 29, 2020, working capital was $29.4 million, including $5.6 billion in cash and cash equivalents and $6.5 million and available for sale securities.
Compared to $25.5 million.
The $5.9 million in cash cash equivalent to $3.6 million and available for sale securities as of August 31st 2019.
As a note. We're currently evaluating the opportunities afforded us by the cares Act was signed into law March 27 2020.
Well weeks, while the extent of the supported uncertain at this time to Cures Act includes sweeping set of financial relief measures in the form of federally guaranteed loans that can be forgiven based on payments made for payroll utilities health care benefits and other approved efforts to retain employees.
On February 29, 2020, the company had $21.3 million and investments in joint venture of which 48.7 or $10.4 million isn't cash with the remaining balance primarily invested in working capital.
During the fiscal 2022nd quarter and Chase She's board of directors declared a cash dividend of 16.5 cents per share.
It was payable on February 19, 2020 to shareholders of record on February 2020.
As Patrick commented earlier in this call given current circumstances, where suspending full fiscal year guidance.
With this overview, Patrick beneath and I are happy to take your questions.
As a reminder, Casco question, you will need to press star one on your telephone to withdraw your question press. The pound team. Please standby will be compiled the Q and a roster.
As a reminder to ask a question you wanting to press star one on your telephone.
Our first question comes on line of Tim Clarkson from Van Clemens Capital. Your line is now open.
Hi, guys hype I pad I man.
Just some questions I know that were.
You know, putting a little bit more emphasis on on the compostable part of the business and just what some basic questions.
I think critical to understanding this.
Can you explain the difference between.
Compostable products and bio degradable products.
Oh, Hi, Jim This is going to do I'll take that slope in <unk>.
Biodegradable products, our AR is a very general term.
There's a lot of.
Beauty as products in the market, which use conventional classics and they'll add additives do it no call them also degradable. Unfortunately.
These kinds of products are not.
So did biodegradable, especially in places like the state of California and that our roots.
Mitch prohibit the marketing of such a mislabeled products.
Our products of the products that nature to accelerate our certified to compostable and went back means.
Is that in accomplishing environment, 100% of the product gets converted to a it's going to June by the micro organisms in the disposal environment as the food sorts and got see what it does feel to Walker and biomass. So these are certified compostable by independent third Party labs.
Great what what are the characteristics that that make oh nature techs compostable products superior to the competitions.
HM we the the mean advantage really is our products are stronger we formally them you have a extremely good understanding of the chemistry behind these materials and be use that understanding to formulate products that are stronger cheaper and easier to process all unconventional plastics processing.
Equipment.
Right now can you explain I you know how that dynamic played into I know you mentioned this up significant new opportunity you have.
For the company. It makes a couple Laurie can you explain all that factored you're getting that contract.
So this is a large brand a they do so a lot of cutlery single use disposable category in the U.S. market.
They've been working but the poly like that got sort of PLM, which is one of the raw materials four or five years and they didn't have any success.
Came to us and we actually.
Had a compound that oh that resin solution that actually would work in this situation. So we worked closely with one of our conversion partners in Asia and develop the a solution that met the rigorous performance requirements for the spread.
And it's the unique understanding of the chemistry as well as the processing that allowed us to create a solution.
That that met the performance tolerances affords us the specific Brian.
I I heard that that the the competitions products, we could clocked in the machines.
Yeah, the well the compensations product.
You know they would get warped or they would do what didn't perform as well they didn't have the those huge resistance or the the strength are required for the obligation.
Right. Okay can you explain this that the concept of having a call system, you Wanna cafeteria, fast food and how that wouldn't work to divert a.
Commonly trashed organic waste into a compostable system.
So if you if you look at municipal solid waste stream, a pretty much in any city or see about 50, 55% of the municipal solid waste streams is what is called organic reach the school due east yard we used a compostable paper.
And typically a lot of abuse municipalities and states have das regulations, which prohibit.
The dumping of this organic refund to landfills do you have to be collected separately and send to industrial complex thing facilities and the reason for that is this organic we it's actually in a landfill will generate methane and readiness 25 times more dangerous as greenhouse gas as compared to seal too.
So what are impossible products do is the assist in the collection of this organically and if you look at universities or school districts, a large office campuses or do you have cafeterias on site and be able to use our compostable cutlery they'll use our compostable bags to collect the food waste as well as the back of the kitchen.
You know vegetable fields in other ways and they'll do word all of that organic we used to be from landfills to composting and so that's what is called Zito based systems closed loop systems, and that's where our compostable products really come in that help enable.
Implementation of these closed loop initiatives.
And would that work in fast food places too.
Yes, it it's starting to a lot of the if you look at the city's out on the West goes the our.
Now seeing that fast food up QSR restaurants have to comply with the organics diversion mandates in go cities. So.
[music].
Large QSR chains like Mcdonald's are now looking to implement.
Actually in the eat your EBIT eat in the restaurant options beyond looking to implement compostable products.
One last question I'll quit hugging.
This is to the I guess to demand pad I mean is there a consideration ever of spinning off the nature Tech to division and maybe raising some money separately.
We've talked about that but we don't have any specific plans for that in place at this time.
Oh, Yeah, I mean, just theoretically if you didn't do that what would be a potentially some of the advantages of doing that.
[noise] 91 time, I think I think they did a clear advantage that would be that nature tech as a standalone entity could potentially drive.
Yeah, It would be certainly would potentially drive.
Not necessarily a different investors sets, but certainly with the current environment from investing as far as a the opportunities with Green technologies I think it would potentially be valued I'm, a little differently and probably a little bit higher than the traditional northern technologies market that you know serves more evident up more industrial applications in oil and gas.
And.
I'm sorry, the Standalone I think it would.
You know who would potentially be a.
Very clear nice environmental investment.
Right, but I think ultimately were waiting you know we'd like to see revenue is grow significantly higher than where they are now.
In order to be able to do that.
Right and I think northern Texas, the only publicly traded company right now that has a compostable.
Packaging products like this.
Correct.
Right. Okay. Okay, I asked a lot of questions. So thanks, I really appreciate you well.
Really putting some additional a focus on on this the nature Tech division. So I'm done thank you.
Thanks, Tim.
Thank you. Our next question comes on the line nest Cam shuts hard from Maris investments. Your line is now open.
Good morning, just on the expenses.
There were a little bit higher in this quarter can you maybe help with what the year might look like in absolute dollars for expenses.
Sure.
As I take a look at one of things the company, though is not always but certainly over the past few years. This strive to do is have total operating expense growth in the you know in the mid single digits. So you know when it look at the year to date number total operating expenses grown by about 6.8% that's pretty.
It's pretty much inline with where we expected to be for the full year.
However, given what's going on right now with you know the covert 19, no travel or people working from home I would anticipate that you know for the next at least at least probably three or four months, we're going to see a dramatic decrease in our operating expenses.
You know so for the for the full year I.
I would probably anticipate that going down as far as the growth year over year going down to the low single digits.
Maybe two or 3% operating growth. So you know something something in the low 20 million a low 20 million number.
Okay.
Fine Thank you.
Yep.
Thank you. Our next question comes from a line of Gus Richard from Northland. Your line is now open.
Yes, thanks for taking my questions I'm, just real quick I'm trying to announced.
Early this year a ban on single use classic lot has changed since then could you talk a little bit about what you're seeing there its or and opportunity for you as they try to move to compostable or or eliminate its use.
You're talking about China right. Yeah. So this was announced right before the Chinese new year shut down and then you know the they have Corbin 19 crisis.
It's a positive development in our view, but there's still we still have to kind of figured out the exact details because you know the who is going to be the putting that there has been you know the implementation is going to be very critical the enforcement of that band is gonna be critical and so with all this uncertainty.
It's still remains to be seen how that's going to patent out, but yes, you know our.
In China is looking at that as the potential opportunity for us.
Got it thanks, and then can you talk a little bit about.
You know as the.
Travel restrictions et cetera went into place.
In China, what that trajectory look like and then now that it's coming out with that trajectory look like and then can you compare and contrast that to.
The U.S. in Europe, what you've seen so far as as these regions have.
Shifted to adopt to the reality of Cobot 19.
Sure.
When looking at China, basically, where we had as we had.
Sales that were really starting to rebound in our you know in in the first you know the with what we're starting to see coming out or first quarter into the second quarter. We're having some you know relatively strong a strong months is as we talked about during the prepared remarks, China year over year, including through the sale.
Six months is are you know it is basically flat and given what we saw I you know basically with the entire shutdown of everything in China, starting on January 15th pretty much through the ended the quarter.
To be flat was you know a little bit surprising to US you know, it's obviously, we had a strong December he strong Ah you know and strong first half of January to be able to to achieve that.
So you know coming out of the shutdown basically the entire month of March.
Things are starting to ramp back up the second half of March was significantly stronger than the first half and ultimately March finished a marked our China numbers from March finished where they were operating in the close to 80% of what the you call. It the.
Free January 15th run rate a run rate was.
And so with the discussions that we've had with that leadership team and looking at their anticipated product shipments kinda throughout April and then are you know the rest the quarter in rest of the year. They expect to be back up operating above 100% of what the run rate was pre.
Yet pre killed pandemic, they expect to be above that run rate.
Basically starting with the end of April and a in May So we're seeing a pretty quick rebound in the Chinese market, you know kind of coming out of the a the shutdown.
As far as how that's kind of flow through the rest of the world.
Seems like at least to us what kind of tuck in the various partners.
Obviously, what's going on in Europe, and what's going on in a in North America is you know.
Probably about three to five weeks behind you know three to six weeks behind where China was you know during that during that time period as we've seen thing spread and obviously if you look at the or the chart you can kind of see almost exactly the number of days everything is behind I don't know if the United States is going to be.
It is as capable as China was in shutting things down and then coming back or coming back out of it.
Similar to Europe, China, basically shut down from January 15th until let's say the into February. So basically 45 days I would guess that it's going to take you know the Europe in the United did Europe in United States. If you're on that same that same trajectory could potentially be two times that but still it looks.
You know if it follows that kind of that same path.
We're looking at a couple of months of things being.
Very slow we anticipate our sales to dropped dramatically in kind of April and May and then hopefully at that point in time, we can start seeing the you know this the sales rebound. So that's kind of what are what we're modeling internally as far as how we're keeping things unfold, how we're working through.
You know through sales.
I do know that.
Because of you know I would say, especially in North America, we could we have the most visibility into the can do our customers I think a lot of our customers had the ability to at least see what was going on in other parts of the world and so we saw a little bit of stacking up take place in a in March. So you know, even though things we're starting to slow.
I had a little bit in February and people are getting a little bit cautious there certainly worth some opportunities that we had where people were shutting down plants, where stocking or or when they were going to restart business.
That made March not as a pure March was stronger than we anticipated would be even though everybody on chassis was.
Basically working from home, except for the operations team and a you know the shipping teams and things like that so.
That's really what we're keeping our eye on is how quickly the United States would be able to kind of come out of that a kind of come out of one when will bottom out and then one will start to rebound from a on that.
And just one one follow up the peak to trough in China versus the peak to trough in U.S. in Europe or was that you know.
100%.
25, or whatever it was in China.
What did that look like he has has U.S. and Europe's shuttle as tightly.
You know at this point, we're not quite so much.
Well I don't think it certainly hasn't shut off I mean in China. What happened is everything was shut down and nothing shift I mean, I mean literally the when they did a shutdown it was.
There was not one order delivered placed.
During that 45 day period, maybe people. They just did not leave their home anybody and what we're seeing in Europe or seen in North America is people are still going to work people are still shipping products people are still a you know it's just everything from an industrial standpoint, as far as a car production and things like that.
What's still taking place now we know that the big three auto companies have sense put in place it or two or three week shutdown that they're in the middle of but what we saw in China was dramatically different than any of the responses that we've seen in there in Europe, where in North America.
Got it thank you very helpful.
Yep.
Thank you at this time showing no further questions I would like to turn the call back over to Patrick Lynch for closing remarks.
[noise] I'd like just like to thank everybody for participating today and for your interest in Casey I Hope you have a great week. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
[noise].