Q4 2020 Northern Technologies International Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Northern Technologies International Corporation fourth quarter 2020 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 to ask a question. During the session you will need to press star one on your.
Your telephone.
If you require any further assistance. Please press star then zero as part of the discussion today. The representatives from into I see will be making certain forward looking statements regarding anti fees 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 the NT IC desires to avail itself of the protections of the Safe Harbor for these statements. Please.
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 the anti fees. 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 NT IC will make with the FCC anti <unk>.
He disclaims any duty to update or revise its forward looking statements I would now like to hand, the conference over to one of your speakers today Mr., Patrick Lynch <unk> private President and CEO. Sir. Please go ahead.
Good morning, Hi, Patrick Lynch, and she sees the Oh and I'm here with Matt Wolsfeld <unk> CFO.
It's about the financial results for our fourth quarter and full year fiscal Twentytwenty were included in the press release issued earlier. This morning, a copy of which is available at Npis Si Dot com.
During this call we will review various key aspects of these financial results as well as provide a brief business update before.
No, including with a question and answer session.
The COVID-19 pandemic pad immaterial impact on our business or a significant portion of fiscal 2020 since.
Since the crisis began we have focused on safely providing uninterrupted service to our worldwide customers and I'm proud of our team's efforts and accomplishments during this trying period.
Overall, our fourth quarter and full year financial results reflect our ability to navigate the challenging COVID-19 market conditions.
Our experienced management team, which has successfully.
Steered npis see through multiple market cycles, including the great recession of 2008 2009.
Okay.
Has been key to our ability to operate in current market conditions you're.
Your lessons learned during prior periods of unrest combined with our larger scale and market diversification and strong balance sheet have provided entry I see with the flexibility to confront current macroeconomic challenges.
Naturally.
We also have continued to invest in research and development initiatives that will support our long term growth and product strategies.
Over the near term however, the pace of our recovery remains uncertain as the waves of the COVID-19 pandemic continue to rock the global economy with several significant European markets Reimposing Lockdowns This month.
As of today's call and see I see as well as all of its subsidiaries joint ventures, and suppliers and customers are deemed essential businesses and continue to operate.
Furthermore to date, we have not seen any negative impacts to our recent sales trends as a result of recent increases in COVID-19 cases, where new pandemic counter.
Interim measures and I am encouraged by the sequential quarterly improvement in sales, we experienced in the fourth quarter of fiscal 2020 as well as the started fiscal Twentytwenty one.
We are actively watching all our end markets engaging with our customers and supporting our joint venture partners. We believe we are well positioned.
To prevail in the current macro economic environment.
So with this overview, let's examine the drivers for the fourth quarter.
For the fourth quarter ended August 30, Onest Twentytwenty, our total consolidated net sales decreased 25.4% to $10 million.
Compared to the fourth quarter ended August 30, Onest 2019.
Come down by business unit. This included a 58.5% decrease in nature Tech net sales and a 13.1% decrease in Zerust industrial net sales, partially offset by a 53.5% increase in Zerust oil.
Net sales and a slight increase in net sales from Mt. I see two its zerust joint ventures.
Total net sales by our joint ventures, which we do not consolidate in our financial statements were $18.5 million for the fiscal Twentytwenty fourth quarter compared to $28.6 million.
And get to the same period last fiscal year.
This 35.4% decline in joint venture net sales was due primarily to the global COVID-19 pandemic.
Fiscal Twentytwenty net sales by our wholly owned and KFC, China subsidiary increased to.
<unk>, 0.9% to a record $13.4 million, despite having endured COVID-19 shutdowns during the fiscal year.
And do you guys see China sales for the fiscal Twentytwenty fourth quarter increased to 2.7% over the prior fiscal year period to $3.4 million and were up 11 point.
2% from the fiscal 2023rd quarter.
We believe that this encouraging sequential quarterly improvement in KFC, China sales is due to new customer development efforts and our successful expansion into non automotive markets.
We remain optimistic about our long term potential within this law.
Large and growing market.
[music].
For fiscal Twentytwenty, Zerust oil and gas net sales increased 2% compared to last fiscal year.
For the fourth quarter, Zerust oil and gas net sales were $770000 an increase of 53.5% over the prior fiscal year period and were up.
Up 81.4% from the fiscal Twentytwenty third quarter.
Fourth quarter fiscal 2020 oil and gas sales benefited from a market decrease in travel restrictions.
Which allowed us to deliver and install our solutions at our customers' job sites. In addition, we have successfully grown sales of.
Our zerust oil and gas pipeline and storage tank solutions to new and existing customers and we believe we are well positioned for additional opportunities within the oil and gas market in fiscal 2001 21 and beyond.
Now turning to our Natur Tec Bioplastics business.
He cobot pandemic has continued to.
Sort of material negative impact on our call on college campuses stadiums arenas restaurants, and corporate office complexes, which were all large users of bio plastics.
These are also expected to be some of the last businesses to reopen and many of these institutions have still not announced reopening plans.
Furthermore, production across the apparel industry has declined sharply further decreasing demand for our Natur Tec bio plastic bags, which had become an important part of numerous sustainability initiatives within this industry.
As a result fourth quarter fiscal Twentytwenty Natur Tec sales were $1.9 million.
Hello.
A 58.5% decline over the prior period, the prior year period, and a decline of 21.4% from the fiscal Twentytwenty third quarter.
We expect market conditions for our bio plastics solutions will remain soft in the near term however, as the world.
Dealers covers from the COVID-19 pandemic, we believe the bio plastics market will rebound in the coming quarters and long term trends within this market are extremely encouraging.
Now moving forward into fiscal Twentytwenty. One we currently believe that while our first quarter financial results will noticeably improved.
<unk> from fourth quarter levels, we expect our net sales and earnings will still likely come in below what they were during the same period last fiscal year.
Furthermore, since we continue to benefit from our product and end market diversification strategies in the fourth quarter.
We intend to continue to partially offset market weakness by gaining new customers.
First developing new applications of our corrosion prevention solutions and expanding into new market segments.
Well, the timing and pace of the global economic recovery remain uncertain. We continue to follow our our long term operating strategy, maintaining a strong balance sheet and invest in our technology people and global platform.
Finally on behalf of the entire leadership team I'd like to use this opportunity to thank all of our global employees and joint venture partners for their 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 fourth quarter and full year fiscal 2020.
Thanks, Patrick.
Compared to prior fiscal year compared to the prior fiscal year period entities consolidated net sales decreased 14.5% in fiscal 2020 and declined 25.4% in the fiscal 2024th quarter because of the trends Patrick reviewed in his prepared remarks.
The 35.
4.4% decline in fourth quarter sales across our global joint ventures impacted joint venture operating income, which decreased 37% for the fiscal 2024th quarter compared to the prior year period for fiscal 2020 sales across our global joint ventures declined 31.4% and.
It impacted joint venture operating income, which decreased by 31.4% or about $4.1 million compared to the prior fiscal year period.
As expected total operating expenses improved during the fourth quarter and totaled $5.3 million compared to $6.3 million for the same period last year and five.
$5.7 million for the fiscal 2023rd quarter.
The 15.3% fourth quarter year over year Dear to decrease was primarily due to lower selling general administrative expenses incurred during the quarter we.
We remain focused on proactively controlling expenses and total operating expenses declined three point.
Slide 4% in fiscal 2020 compared to the prior fiscal year period.
During the fiscal 2024th quarter net income was impacted by a one time $1.6 million noncash adjustment to the company's deferred tax asset which.
Which was required to remove the net us deferred tax assets from.
Point EPS is balance sheet as.
As a result, and Ted see reported a net loss attributable to Ntsc of $1.8 million or a loss of 19 cents per diluted share for the fiscal 2024th quarter compared to a net income of $829000 or nine cents per diluted share for the fiscal 2019 fourth call.
Thanks.
For the year, and Casey reported a loss of $1.3 million or 15 cents per diluted share compared to last year's net income of $5.2 million or 55 cents per diluted share.
As of August 31, 2020, working capital was $27.1 million, including $6.4 million in cash and cash equivalents.
Americans and $5.5 million of available for sale securities compared to $25.5 million, including $5.9 million in cash and cash equivalents and $3.6 million and available for sale Securities as of August 31, 2019.
As of August 31, 2020, the company had 24.
$2.1 million of investments in joint ventures of which nearly 59% or $14 million in cash with the remaining balance primarily invested in working capital.
With this overview, Patrick and are happy to take your questions.
Thank you ladies.
Ladies and gentlemen, if you have a question at this time.
What's press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Please please please place your line on mute once your question has been stated to prevent any background noise.
It looks like our first question is going to come from the line of Tim Clarkson with van Clemens.
Your line is open. Please go ahead.
Hey, guys good quarter in comparison to where we've done so I'm just a couple of questions first one for Matt can you kind of explain and.
In plain English what what the.
Catalyst was for this write down of the of the text.
Deferral.
Sure.
I mean, it's kind of important to point out because without without the write off of that 1.6 without recording the $1.6 million valuation allowance our fourth quarter would have been very close to breakeven, which would have been almost a 10% improvement over third quarter. So it kind of.
It certainly skewed things as far as people being able to see.
The positive trend that we're seeing going from third quarter to fourth quarter now into first quarter, but basically what we had as how you when we evaluate our AR.
Deferred tax asset we need to look back at.
Our profitability in North America, specifically over the past three years, because we had losses in North America and to keep in mind that the income that we show in North America is doesn't include the equity income from joint ventures, which is a significant portion of our of our income. So basically when you look at that when you look back over three years.
It shows losses, and the inability to use that deferred tax asset it's pure accounting it's.
Following accounting rules and so when we had to go in at the at year end and evaluate the ability to utilize that deferred tax asset that was on our books. When you follow the accounting rules.
We showed that we had to set up a full valuation allowance on that $1.6 million. So it doesn't mean that any of the things that made up that $1.6 million nothing nothing expired.
You know that include included research and development costs that have been previously capitalized net operating loss carry forwards and stock based comp that we're all.
Previously a component of that deferred tax asset. So what were looking is that.
As we monitor our future North American operations as well as any changes us tax law and things like that.
It's altogether likely that in the future all or a portion of that valuation.
I'll answer will be removed and subsequent fiscal years as things turned around so while we don't like to take.
Onetime charges of certainly that in fourth quarter, and now they're kind of skew things and then potentially several years down the road reverse them because of the accounting rules, we are required to do that but keep in mind it.
Allowance noncash there's there are.
We didn't have to pay anything it's simply just a creating a valuation allowance on our balance sheet.
We obviously have to take the expense for it in fourth quarter. So there is certainly much more explanation of that and exactly what makes up.
Everything in one.
And our taxes, that's going to be in the 10-K, which we filed tomorrow. So encourage everybody to read the the tax footnote in the 10-K, they want more explanation on the valuation allowance.
Okay in terms of new new applications, you talked about.
In the quarterly report Patrick can you just give us an idea.
Moving to have whereas some of the successes are coming coming from and.
You mean, which market or application, yet well applications in both the United States and China without.
Giving away any corporate secrets.
Well then you make a tricky for me I would say that.
The majority of the new applications right now we're finding in China.
Some of the United States, but I think there could be a little bit imprudent to talk about them right now in this context, if you don't know.
Oh I got it and then lastly, just.
Just again it all on this compostable stuff I know it was.
Rotten quarter for compostable, but.
No just you know one of the reasons I mean I'm in northern Tech is because of the socially.
Conscious investing potential here and there is no question from my Vantage point I know Mcdonalds has stated that they are.
Committed to converting to tow compostable packaging in the next two to three years.
You like you guys already have a relationship with Mcdonald's I mean, we actually have a waste basket here at van Clemens sets has a compostable items and and we use it every day and a you know and then lastly, just the point I know that.
You know you're compostable materials.
Really our proprietary I know that you've had some even in this cold it environment, you've had some luck with salt and you might want to comment about a customer that's using the resin.
The machine and it knocks out plastic forks on plastic niacin and they came.
Came to northern tech because of the effect.
Your.
Your compostable resins were the only ones accurate enough to not come up the machines.
Well, yes, that's true.
We we we are currently supplying and weve they've increased their orders to us.
For the resin compounds that they use to make compostable plastic covering.
Really because our.
Our resin compounds allow the finished products to be produced faster in that you can knock out of molds easier and harden quick quicker, while they're curing any any other ones. So we managed to help them make a product that they had tried to do themselves, but we're on.
Successful and after.
Trying to do it on their own for a number of years. So we're very happy with that relationship and it is growing.
Overtime.
So we have great expectations for this going forward.
Thanks, Kevin I guess also Tim.
Tim I think it's also to point out specifically with Natur Tec that although we are seeing.
Take a significant decline obviously after March 2020.
Although sales are down 50 plus percent at this point in time, we've continued to add significant customers distributors and what have you around the around the country and in different areas around the around the world. So we're still continuing.
Thing to see.
The rate of customer and the rate of customers that we're adding to the portfolio increasing although the size are down because of what we are seeing the volumes that are going on orders from existing customers. We're still seeing a net increase in customers. So that as we hopefully come out of the the covance situation.
I think there is going to be a pretty.
Pretty significant tailwind that we're going to feel from a nature Tech standpoint, great.
Great anyone currently we're also finding we're also finding new applications during this crisis.
That.
For the for the Accomplishable plastics, particularly in southeast Asia.
So we are seeing some very nice opportunities.
We didnt have before that are currently developing.
Great. Thanks, I am done thanks, Thanks, guys.
Thank you and our next question comes from the line of Jim Cowan with Jefferies Capital. Your line is open. Please go ahead.
Yes, good morning could you give us more color on.
On the trends in all the segments in September and October and what you're seeing so far in November.
Yes, I mean, I can comment I mean, I can I can roughly comment without giving you sales obviously given that its mid November we're pretty well into our first quarter.
And we have a pretty good idea, obviously aware things ended up from a revenue standpoint in September and October.
What I, what I can say is that across the group across the divisions as far as Zerust industrial we've seen a significant pickup in.
Revenue from September October November.
To where we were in fourth quarter.
One of the thing that's things that skews our numbers a little bit is that our third quarter numbers had a very very good margin, which was actually oddly enough March.
And then it was just starting it was actually one of our strongest month of the year that skewed our third quarter revenue numbers, a little bit higher.
Other than where they were a.
If you just look at the trends going from April and continuing through today, but what we're seeing is that order levels and are starting to rebound back up in September October November back to being very close to pre coveted pre cobot numbers in North America, So were single digit percentages.
As behind where we were at least we're trending right now with single digit percentages behind where we were in in first quarter last year.
Nature Techs still remains.
Further behind as we talked about their their revenues looks like they are improving from where they were in fourth quarter, but theyre not backup close to where they were from.
Recall that level as we kind of talked about.
Recently in the call.
They are going to be one of the slower groups that we have as far as how they how they rebound and that's going to be the next product line in North America and in India and in China, It's just going to be slower to rebound in what we're seeing from an industrial standpoint, given the use of the products.
Emily.
Away from oil and gas standpoint.
Oil and gas has had a strong compared to first quarter last year.
A strong showing in the first couple months of the year. So all in all if you look at the growth that we saw from third quarter to fourth quarter. The total company. It was only up about 2% expectations are there.
Going forward from fourth quarter to first quarter, youre going to see closer to 20% sequential growth from from quarters.
Just one follow up question.
Is is it are you able to forecast that the oil and gas sector for you.
He will be less lumpy.
[laughter] I would love I would love to be able to forecast as Leslie less lumpy.
The problem that we run into is that the size of the projects that we work on for oil and gas are significantly bigger than the average order size.
Results that we see for nature Tech or four zero test and so we tend to have.
Orders come in that one order comes in at $80000. Another order comes in at a $125000. It just lends itself to being more lumpy I think that what it was I think what you're going to end up seeing is that as the oil and gas business.
<unk> gross mean 18 to 24 months from now as we establish a base of business with customers and repeat orders.
That's when things are going to be less less lumpy. So I think everybody from an oil and gas standpoint is more interested in.
When when is the when are we going to see a significant increase.
Recent contribution coming from oil and gas it's not when are you going to go from total sales of 3 million to $4 million. It's more when are we going to see some significant contribution to the overall total company total company sales. So I think when we see that and when oil and gas becomes a significant contributor that's what it's going to be less lumpy.
Okay.
Thanks.
Yes.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
And our next question comes from the line of Gus Richard with Northland. Your line is open. Please go ahead.
Yes, thanks for taking the question.
In terms of the nature Tech can you just talk.
A little bit about the declines in the garment bags versus cutlery and through which ones have been more impactful to the revenue line.
Well, you're talking about different markets.
Yes, the the the.
The commentary is more important to our sales in North America while.
Now the.
Packaging for that.
Garment industry is all in southeast Asia.
And certainly since depend demographic closure of shopping malls et cetera.
The consumption of new apparel has gone down significantly obviously once we once the markets recover or once.
Once we are opening up our economies, we expect those sales to increase again significantly.
The same thing with.
The cutlery and the waste liners as I mentioned earlier in my.
My prepared remarks.
The primary sales there were two sports a written sports arenas.
Stadiums.
Our college cafeterias and large corporates.
Materials include service centers.
And since a lot of these.
Arenas and sporting.
Menus and college campuses will close or some of them remain closed.
That's what's holding back our recovery.
Every of those particular sales.
In the meantime, we are as I mentioned also finding new applications that are in this pandemic, which are showing great promise, but it's going to take us some time to develop those.
To ramp up and significantly expand into those new applications.
Got it.
Is there any opportunity in say E commerce and taking those best.
Best packaging more sustainable.
Oh, you mean like.
The Amazon Amazon.
Amazon.
Yes.
Yes, we're in conversations with those with.
With packaging companies, who are looking into doing something like that.
But it's a little bit early in terms of.
Particularly regulation is an issue for us there.
Because at least in that industry, they haven't quite come to terms as to what they want in terms of.
Sustainable packaging.
If you I mean, if your experience with Amazon for example, the packaging varies every day when you get your packaged on them and so they haven't come but this is a sustained aim.
Looking forward a.
A standard of any time, yes.
Got it and then are you.
Seeing any any competition from PHH versus pls.
Yeah.
At this time, we're not I mean at this point in time.
The the base resins that NCC are utilizing we're not using tha.
No.
Natur Tec is.
Base resin agnostic at some point in time, we could potentially utilize utilize tha and it's something that we're considering but at this point in time were not seen either competition from it or and we're not currently utilizing it.
Is is that a.
Basically a cost cost.
Decision or product quality decision.
I think given kind of that at least for us as far as me hearing about achieving relatively new I know that we've been utilizing play for a long time, so to change resins I'm guessing would take.
[music].
Certain amount of research certain amount of development to get.
Yet there I believe the price points on tha or higher at this point in time than PL lanes as.
As wildcatters got.
Got it okay. That's it for me. Thank you so much.
Thank you and our next question comes from the line of Joe finish with Nanoclean Oracle advance. Your line is open. Please go.
Go ahead.
Yes, good morning, guys and thanks for taking my question.
I was wondering.
You guys had ramped up your expenses in India and.
I was just wondering what the status of your operation are there.
As far as the ramping up of expenses in India. One of them one of the main things that we've done in India is we're trying to make that more of a.
Senator for Asia to be able to provide goods for that region and so during the past year, we invested in certain uncertainty.
In certain equipment certain extrusion equipment.
Certain general expenses too.
To make that a key base of operations, especially given the issues that we were seeing with the Chinese tariffs and what have you. So we have a we have a we see that market in southeast Asia.
Whether it's India, Pakistan, Sri Lanka, Bangladesh, China.
As being pretty key to the.
Overall nature Tech growth I mean, I can say that when I look at the increased revenues that we are seeing at nature Tech in China.
Pretty clear that the overall.
Markets and applicability of our products to be able to solve some of these.
Larger sustainability initiatives.
And add to that what these companies are doing that's.
Thats, a very big market for us. So that's why we're investing in in India and in that region.
Okay Thats all I got thanks, thanks very much.
Okay. Thank you.
Im showing no further questions at this time.
I would like to turn the conference back over to Patrick Lynch for any further remarks.
I'd like to thank everyone for participating today and for your interest in Intuity have a great day. Thank you very much.
Ladies and gentlemen, this does conclude todays program you may all disconnect everyone have a great day.
Thank you.
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