Q3 2020 Northern Technologies International Corp Earnings Call
[music] ladies and.
Gentlemen, thank you for standing by welcome to the third quarter 2020 earnings conference call and webcast.
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As part of the discussion today, the representatives from Npis see well be making certain forward looking statements regarding NCR sees future financial and operating results as well as their business plan objectives and expectations.
Please be advised that these forward looking statements are covered under the safe Harbor provisions other private Securities Litigation Litigation Reform Act of 90, 95, and that M.T. IC design, So we're well itself.
The protections on the Safe Harbor for these statements.
Please also be advised the actual results could differ materially from those stated or implied other forward looking statements due to certain risks and uncertainties, including those described in Insync I see 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 NCR see will make with the FCC.
And T I see disclaims any duty to update or revise its forward looking statements.
I would now like the hand, the compensated with it and T.I.C.C.O. Patrick Lynch. Please go ahead.
Good morning, I'm, Patrick Lynch anti seizure, CEO and I'm here with Matt Wolsfeld integrate sees CFO.
Please note that these financial results for our fiscal Twentytwenty third quarter were included in a press release issued earlier. This morning, a copy of which is available at and T.I.C. Dot com.
During this call will review various key aspects of these financial results provide a brief business update and then conclude with a question and answer session.
He cobas 19 pandemic had a material impact on our fiscal Twentytwenty third quarter.
Although our operations were deemed essential and remain open many of our global customers operated at significantly lower capacity.
Or were locked down altogether.
As a result global demand has declined for all of our products and services.
As to cope with 19 crisis continues to evolve global economies are reopening and orders have started increasing but at this time the pace of our recovery remains uncertain.
We're closely monitoring our markets and intend to continue providing uninterrupted order fulfillment and customer service, while simultaneously, ensuring the safety of our customers joint ventures and employee.
Our experienced management team compelling product portfolio strong balance sheet and business model are helping us navigate this challenging period, while providing us with significant flexibility to continue investing in our long term growth plans.
In addition, we are proactively managing expenses and intend to further adjust our cost structure when necessary and appropriate.
So with this overview, let's examine the drivers for the quarter.
For the third quarter ended may 31st.
Gtwenty, our total consolidated net sales decreased 30 core 34.6% to $9.7 million as compared to the third quarter ended may 31st 2019.
Broken down by business unit. This included a 51.9% decrease in Zerust oil and gas net sales a.
Hey, 50.4% decrease in nature Tecnonet sales.
Hey, 29.1% decrease in net sales from and T. I see two it's Zerust joint ventures, and a 24.1% decrease in Zerust industrial net sales.
Total net sales by our joint ventures, which we do not consolidate in our financial statements were $18.8 million for the fiscal Twentytwenty third quarter compared to $27.8 million for the same period last fiscal year.
This 32.4% decline in joint venture net sales was also due to global Kogas 19 pandemic.
Net sales by our wholly owned and T. I see China subsidiary decreased 16.3% to $3.1 million for the fiscal Twentytwenty third quarter compared to $3.7 million for the same period last fiscal year.
Despite this decrease management believes and Shacey, China sales are again close to pre pandemic levels.
It is important to note here that historically Chinese auto companies and suppliers have been him have been important franchisee China's customer.
I've been important and Tracy Chinese, China, and Turkey trying to customers.
However, since trends within the Chinese auto industry remain weak we believe the recent the recovery we've experienced NDRC, China is due to our successful expansion into non automotive market segments.
Overall, we remain optimistic about our long term potential in China as we intend to.
Further expand our presence within this large and growing market.
Zerust oil and gas net sales decreased 52% during the three months ended March 31st Twentytwenty compared to the same period last fiscal year, primarily as a result of the covert 19 pandemic.
The cobot 19, Pandemics impact on our Zerust oil and gas business was primarily due to significantly lower oil prices and travel restrictions, which inhibited inhibited our ability to travel to customer sites in order to install our solutions.
We expect oil and gas sales will continue to be impacted for the duration of the cobot 19 and.
However, as the industry has reduced its capacity we've experienced growing demand for our corrosion prevention solutions core idle oil and gas production assets.
Now turning to our nature Tech bio plastics business.
The cobot pandemic has also impacted demand for many large.
From from many large users or bioplastics, including college campuses stadiums arenas restaurants, and corporate office complexes.
We expect that these will be some of the last businesses to reopen and many of these institutions have not announced reopening plans.
Furthermore, production across the apparel industry has declined sharply because of the Kogas 19 pandemic further decreasing demand for our nature Tech bio plastic bags, which have become an important part of the sustainability initiatives within this industry.
We continue to expect market conditions for our bio plastics solutions to remained soft in the near term.
Long term as the world recovers from the Cobot 19 pandemic, we believe the bio plastics market will rebound.
For example, last quarter, we began supplying supplying our proprietary compostable resin compounds to one of the worlds largest manufacturers of plastic upgrade.
For the food service industry and expect this business to grow as hygiene consideration from the cobot 19 crisis.
On a sustained demand for compostable foodservice waste applications.
As a result, we are excited by nature text market potential, our leading market position and our opportunities to grow nature Tech sales over prior peak levels in the coming quarters.
To conclude my prepared remarks, we currently believe fourth quarter financial results will improve from third quarter results.
Net sales and earnings will likely be lower than they were during the same period last year.
In addition, we continued to benefit from our product and market diversification strategies in the third quarter and intend to continue to partially offset market weakness by gaining new customers developing a new applications.
For our corrosion prevention solutions and expanding into new markets segments.
While the timing and pace of the global economic recovery remains uncertain. We intend to proceed encores maintain a strong balance sheet and invest in our technologies people and global platform.
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 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 third quarter.
Thanks, Patrick.
Cases consolidated net sales decreased 34.6% in the fiscal 2023rd quarter because of the trends Patrick reviewed in his prepared remarks.
32.4% decline in sales across our joint ventures impacted joint venture operating income which decreased 49%.
For the fiscal 2023rd quarter compared to the prior fiscal year periods.
As expected total operating expenses improved during the third quarter and totaled $5.7 million compared to $3.6 million the same period last year.
The 10.2% year over year decrease was primarily due to lower.
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Operating expense.
1%.
Hasn't note, we incurred approximately $210000 a onetime expenses during the third quarter, which include impairments to certain assets in a write down associated with inventory obsolescence.
We experienced good collections during the quarter and our accounts receivable balance that May 30, Onest 2020 improved 22.9% over the past three months, we continue to closely watch receivables and work with customers who have been impacted by the crisis.
And she actually reported a net loss attributable attributed to.
And scarcity of $965000 or a loss of 10 cents per diluted share for the fiscal 2023rd quarter compared to net income of $1.5 million or 16% 16 cents per diluted share the fiscal 19 third quarter.
As of May 31st 2020, working capital was $28.1 million, including $5.1 million in cash and cash equivalents and $5.5 million in available for sale securities compared to nearly $25.5 million, including $5.9 million in cash and cash equivalent to $3.6 million innovate.
Well first of all securities as of August 31st 2018.
On May 31st Twentytwenty company had $21.9 million of investments from joint ventures of which $10.8 million in cash, but the remaining balance primarily invested in other working capital.
But this overview Patrick and are happy to take your questions.
[noise]. Thank you as a reminder to ask a question you need the press Star then one on your telephone to withdraw your question. Please press the pound key again that is star then one if he would like to ask the question.
Please standby, while we composite Q and a roster.
[noise] I first question comes on the line of Joe.
First I would first associates. Your line is now open.
Good morning, gentlemen.
Hi, just curious about what segments of your business do you think will be the first to recover and this environment.
The Zerust industrial read the press to recover.
Okay. Good thank you.
Thank you.
Our next question comes on the line of Tim Clarkson.
Van Clemens your line is now open.
Thanks.
Good morning, Patrick Good morning morning.
Hey, so I thought the Clos was pretty good considering that everything they could have gone wrong kind of went wrong. So.
Good job there are two questions one.
In the some of these new industrial applications. What are some of these new industrial applications that are selling wall.
Keep my if we pass on that question goes.
Don't want to share the best opportunities out there.
Okay. So that's that's a that's fair.
And in terms of.
The this new all compostable product that you mentioned that the.
The one where the you have the I guess the machine with spitting out the Fourq cyanides.
Why don't you explain a little bit more about how you ended up getting that contract and why they chose to do business would you guys.
Well we were.
We were approached by.
As you mentioned a very large.
Classic Huckleberry manufacturing company.
He had core several years tried to develop their own.
Compostable.
Not really solution.
They were not successful and then came to us and particularly we manage to.
Had some technology that improve the cycle time for manufacturing, which also resulted in a.
Stronger finished product.
Mechanically, meaning the mechanical strength, so we've been able to provide have.
We were able to manufacture the product they needed.
At a lower cost with a better product performance.
I assume that they're pleased with how it's working.
They are very pleased with how to working and have suggested that they will be increasing.
Their order levels at sometime in the future when this economy recovers.
Right Okay.
Okay. Thanks.
Thank you. Our next question comes from the line of Gus Richard with Northland. Your line is now open.
Yes, thanks for taking my questions.
When you look at sea rust industrial.
More roughly split between auto and other applications.
Oh, we we guessing that or actually I mean based on our internal.
Figures, we would say were about 50%.
25, 50% automotive and the rest is other applications.
And then in the recovery of the industrial business.
Which one is improving you know auto or the other the pile of other applications.
The automotive is a little bit slower something some other segments right now.
But.
As people are restarting the factories and getting back to work, we're seeing orders really from everybody.
Hey, just that very smaller levels than they used to be.
Got it.
Then.
The other category I'm, assuming that that is.
Use other category growing because of the addition of new customers or if it's other categories I'm, just saying non automotive applications.
Right so other categories other than.
Automotive is that.
Pocket of revenue rolling or is it recovering faster because of growing customers and applications or is it just recovering because those applications that you already have are improving faster.
It's a combination of.
And particularly in China, where right now our Chinese operation is operating we want to say about 90% of what they were preparing died.
But.
Some of that is a combination of.
New.
Customers and new applications.
Got it got it and I and then turning to nature Tech.
Sort of the same line of questioning what's the split between garment bags and cutlery and other applications in that in that product line.
I'm not to have those figures and.
Yeah.
So if you're looking at.
I would say.
How about 50% of the business that we have some nature tech and the majority of the need and the nature business that we sell in in North America is related to be trash bags that cutlery and resin.
Probably about 70% of the business that we have at major Tech India.
Which was one of the join the hardest hit areas because the shutdown.
Is related to be the garment industry, so probably 80% of these India logistic India business is government related.
And do you have those figures overall.
As far as the total 20% of business for each one.
Correct.
Yeah. If you look at so let's just look it might be easier to look at the pre co. Good Pico good numbers for each one.
So if you're looking at what nature Tech, India did last year about 8.1 million and nature Tech in North America did 7.8 million and nature to China did 1.6 million you're at about 17.6 million in in revenue so probably.
Millions of that 17 million is related to.
The garment industry.
Maybe six to probably six to 8 million of it.
Is related to the garment industry business and in Southeast Asia, which include first standpoint, India, Pakistan, Bangladesh, China, Sri Lanka.
Got it.
All right that's very helpful. Thank you.
Thank you.
As a reminder to ask a question you only need to press Star then one on your telephone.
Our next question comes on the line gel, which led Manalapan Oracle.
Your line is now open.
Yes. Good morning, Thanks for taking my question.
I wasn't quite sure if I heard you guys correctly, but it it sounds like you said you expect nature Tech sales.
To recap did you say for tech sales were good recover above.
Pre pandemic levels sometime in the next two quarters.
I would not specify the next two quarters.
Certainly.
Our domestic markets.
For nature Tech products, particularly stadiums University cafeterias office complexes and all that a lot of those we don't have an exact time period, yet as to when they were riocan.
So it might be passed two quarters for that really to take to returned to pre pandemic levels.
However, certainly within the next.
12 to 16 months.
We we certainly think that.
We will we will recover to pre pandemic levels and beyond.
Okay and.
What what percentage of U.S. business would be college campuses and large venues.
Hum almost all of it.
So you're talking you're talking about industrial users of.
Classic compostable plastic products.
In the form of.
Basically trash bags and been liners, and compostable cutlery and straws.
Right.
And then just I just had a question on your cash flows.
<unk>.
Could you.
You know tell us what what the cash flow for the for the quarter was.
With the cat they the cash will be put out with the with the Q.
Which we publish tomorrow morning.
But I mean in general what you're seeing is side.
There's a little bit of some of the bigger items.
Or kind of the standard items that we expected as far as we continue to cat, we continue to collect cash.
From the prior.
The prior quarter, so cash collections were strong we had.
A lot of nature DUC inventory that was in the kind of the production pipeline given the long term production cycle over an extent products is a little bit of a build up inventory that we saw during the third quarter and with the slowdown on sales and we still expect that product to be able to.
We won't have any issues with the sale of those products are there their products that we sell to multiple multiple.
Customers.
So all in all we've had a pretty healthy.
We've maintained our cash flow.
Pretty well.
You know obviously had a.
We expect to have.
A negative cash burn for a couple of mine.
As.
The.
The April May and June month, we're kind of the three worst month that we've seen from pandemic standpoint, we started now see kind of a come out of that.
What we hope or the is the bottom the trough certainly we expect that could be in the the May June timeframe.
We've seen a kind of come out of those levels.
Okay, that's great.
Appreciate it.
Obviously, we view the Q.
That's all I got thing thank you very much.
Thank you if we would like to ask the question at this time. Please press Star then one on your telephone.
For questions.
We do have a question on the line of Tim Clarkson with Van Clemens.
Let's now open.
Yeah. One last question I know that you initially thought about.
Getting some of the government money and and then.
I forget the exact technical phrase for all that stuff PPL I guess, and then you decided to wall.
Send it back and I'm just want to confirm that.
We originally were going to apply for a P.P. loan and then we decided not to do that because of the you know kind of where we were from a cash position standpoint, and so we've never officially applied for a P.P.P. longed, they're gonna be other there are other.
Theres employee retention credits because the decline that we saw in in our sales during the second calendar quarter that we should be available to to get their employee retention credits, which will be somewhere between three to $400000 is what im expecting.
But I don't we did not going to PPP alone.
Uh-huh, how about in terms of a stock buyback or is that it consideration.
At some point, certainly I would kind of want to wait and see how the stock how the stack recovers and kind of where we are from a cash position similarly from a dividend.
We want to kind of see where things are going to be from you know looking forward to want to see where we operate recovery standpoint over the next few months to determine what we want to do from a dividend standpoint, if the stock buyback standpoint.
But those are certainly actions that are going to be that's certainly things around the table that we're said that the company in the board is a is considered.
Great. Thank you I'm done.
Thanks Kim.
Thank you and we have no further questions in the queue at this time.
All right.
And I'd like to thank everyone for participating today and thank you very interested in having great week.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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