Q3 2021 Northern Technologies International Corp Earnings Call
Good day and thank you for standing by welcome to the Northern Technologies International Corporation third quarter 2021 earnings Conference Yes.
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After the presentation, there will be a question and answer session.
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Please be advised the today's conference maybe recorded.
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 the these forward looking statements are covered under the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
And the NTIC desires to avail itself of the protections of the Safe Harbor for these statements.
It's also been the buys that actual results could differ materially from those stated or implied by the forward looking statements due to certain risks and uncertainties, including those described in Ntic's. Most recent annual report on form 10-K subsequent quarterly reports on form 10-Q.
And recent press releases.
Please read these reports and other future filings that NTIC will make with the S. E C.
NTIC disclaims any duty to update or revise its forward looking statements.
I'd now like to hand, the conference over to your host today, Mr. Patrick Lynch. Please go ahead.
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 was issued earlier this morning regarding the financial results for our fiscal 'twenty 'twenty, 1 third quarter and is also available at NTIC Dot com.
During this call we will review various key aspects of our fiscal 'twenty 'twenty, 1 third quarter financial results provide a brief business update and then conclude with a question and answer session.
Sales for the fiscal 'twenty 'twenty, 1 third quarter accelerated past <unk>.
Second quarter levels and set a new quarterly record as momentum continues to build across our global products categories.
<unk> sales increased 58 points of 2% year over year and were up at 20.6% from the second quarter, while sales of Ntic's joint ventures increased 10% from the fiscal 'twenty 'twenty, 1 second quarter and are up of 70 points, 2% year over year.
Looking at sales growth on a 2 year basis is especially encouraging as this shows the strong underlying demand. Despite last year's COVID-19 pandemic related challenges.
Comparing comparing the third quarter of fiscal 'twenty 'twenty, 1 to third quarter of.
The fiscal 2019 results consolidated sales are up 3.5% and zero of industrial net sales are off of 22.5% while net income has increased 38.6%.
Throughout the COVID-19, pandemic, we maintained our operations staffing levels and services to our customers, while investing in new product development and pursuing new sales opportunities.
This kept us ready to benefit from the significant resurgence currently underway in industrial production and we are seeing robust and improving demand across many of our product categories and global end markets.
We believe demand trends will remain strong throughout the remainder of this fiscal year and into fiscal 2022 as more sectors of the global economy, reopen and industrial production continues to improve.
So with this overview, let's examine the drivers of for the third quarter in more detail.
For the third quarter ended May 31, 2021.
Our total consolidated net sales increased 58 of points 2 percentage.
To a quarterly record of $15.4 million as compared to the third quarter ended May 31.2020.
Broken down by business unit. This included a 141% increase in <unk> oil and gas net sales and 86.1% increase in <unk> net sales to all the joint ventures, and a 61, 4% increase in U S industrial net.
Sales and a 27.3% increase in the major tech net sales.
Total net sales for the fiscal 'twenty 'twenty, 1 third quarter by all of the joint ventures, which we do not consolidate in our financial statements were nearly $32 million. This is an increase of over 70.2% when compared to the same period last fiscal year and an.
Greece of 10% when compared to the second quarter of the current of fiscal year.
In addition, when compared to May 31, 2019, net sales from our joint ventures had increased 15.1% demonstrating the strong global demand for our products from both existing and new customers.
Fiscal 'twenty 'twenty, 1 second quarter net sales by our wholly owned NTIC, China subsidiary increased 30 point of 7% to a third quarter record of $4 million.
Strong performance at NTIC, China is primarily due to higher sales to new and existing customers for both of our zeros and the nature of tech product categories.
We continue to believe the Chinese market represents a significant opportunity for NTIC and.
Given our recent growth, we expect China will likely become of our largest geographic market in the coming years.
This week, we invested $6.2 million U S dollars.
To buy a new facility in China, which reflects our commitment to the Chinese market and supports the expected growth within this geography.
The new facility will support our R&D production sales and marketing and training efforts in China.
We closed the transaction on July 6.2021, and we expect to move into the new facility in the early fiscal 'twenty 'twenty 2.
As COVID-19, quarantines and travel restrictions have you used and more.
And market dynamics improved oil and gas project installations have started to rebound.
As a result, <unk> oil and gas sales for the quarter was strong increasing 141% over the prior fiscal year period.
While we expect oil and gas sales will remain volatile on a quarterly basis, we are seeing growing interest in ours U S oil and gas solutions.
Please also note that the American Petroleum Institute a P. I finally released its technical report detailing how vapor corrosion inhibitor based technologies like the ones offered by zero oil and gas.
Can provide effective corrosion protection for the bottoms of above ground storage tanks.
We believe this API technical reward validates our technology and will help ntic's long term sales growth efforts within the oil and gas market.
As a result, we believe there are substantial opportunities to drive growth throughout the remainder of fiscal 2021 and into fiscal 2022.
Turning to our nature Tech Bioplastics business fiscal 'twenty 'twenty, 1 the third quarter major Tech sales were $3 million, a 27 point of 3% increase over the prior fiscal year period over the prior of this prior year period. Thank you sorry.
And a 21.7% increase from the fiscal 2020, 1 second quarter.
As you can see nature of tech sales continue to recover and we're at the highest sales levels in over 12 months as large users of compostable plastics began reopening their facilities after a prolonged COVID-19 shutdowns.
We anticipate the demand for our nature Tech Compostable solutions will continue to increase further as the pace of reopening of accelerates.
So to conclude my prepared remarks, I am pleased with the strong sales and profitability performance, we experienced in the fiscal 'twenty 'twenty, 1 third quarter.
Trends across our markets are encouraging and we expect to see continued year over year sales and earnings growth during the fourth quarter of fiscal 'twenty 'twenty, 1 and into fiscal 2022.
On behalf of the entire N. Jason the leadership team I would also like to use this opportunity to thank all of our global employees and joint venture partners, who are their continued hard work and dedication with this overview. Let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2021 third quarter.
Thanks, Patrick.
Consolidated net sales for fiscal 2021 third quarter increased 58, 2% when compared to the prior fiscal year period and were up 26% for fiscal 2021 second quarter sales as a result of the trend Patrick reviewed in his prepared remarks.
Third quarter sales across our global joint ventures increased 72% over the prior year period significantly benefiting joint venture operating income, which increased 114, 6% for the fiscal 2021 third quarter compared to the prior fiscal year period.
Total operating expenses were $6.3 million.
And of 11, 6% increase over the prior year period, primarily due to an increase in selling expenses associated with the 58, 2% year over year increase we experienced in the third quarter consolidated sales.
Demonstrating the operating leverage of Ntic's business model operating expenses as a percentage of net sales were 49% compared to 58 point.
Zero percent of the same period last fiscal year and 45, 9% for the fiscal 2021 second quarter.
In case, the as reported net income $2.1 million or net income of 21 cents per diluted share for the fiscal 2021 third quarter compared to a net loss of nearly $1 million or a loss of 11 cents per diluted share for the fiscal 2023rd quarter.
As of May 31, 2021, working capital was $26.9 million, including $5.9 million in cash and cash equivalents and $5.1 million in available for sale of securities.
Compared to $27.1 million.
Including $6.4 million on cash cash equivalents and $5.5 million in available for sale Securities as of August 31, 2020.
On May 31, 2021, the company had.
$26.9 million of investments in joint ventures of which approximately 54, 8% or nearly $14.8 million was in cash.
With the remaining balance primarily invested in other working capital.
During the fiscal 2021 third quarter Ntic's Board of directors declared a quarterly cash dividend of $6.05 per common share that was payable on may 19, 2021 to shareholders of record on May 5.2021.
So to the who arent conclude our prepared remarks, our year to date financial results demonstrate that we have successfully navigated the COVID-19 pandemic.
The result of our strong balance sheet.
Asset light business model and commitment to providing leading corrosion inhibiting products and services as well as bio based and biodegradable polymer resin compounds to our global customers. In addition.
Trends remained strong across all of our product category of during the third quarter, which led to a record consolidated sales and strong third quarter profitability. We're excited about the direction in which we're headed and look forward to ending fiscal 2021 with the continued year over year sales and earnings growth.
With this overview of Patrick and I are happy to take your questions.
If you'd like to ask a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone.
That is star then 1 if you'd like to ask a question at this time.
We have a question from the line of Kim Clarkson with Van Clemens.
Hey, Patrick came at the obviously a wonderful quarter.
Raj the board so hardly anything to complain about it just a couple of background questions. I. You know this is a major investment.
The $6 million on China can you kind of explain the logic of of why you needed the spend that kind of money on a new facility.
And I do want to take that 1.
Sure.
When we were looking at our operating.
The opportunity that we had in China divided by.
By the building.
It was very well.
When we model it out.
It looks like a very good investment we had the available cash to do that we look at the real estate opportunities specifically in the area that we're in.
And it provided us a great opportunity to stay close to be the Shanghai market, where we're currently are located the existing facility that we were in were having difficulties as far as the lease was ending and the zoning that that building was then it changed so we ultimately.
Lately, we were going to be forced to likely move.
Several hours outside of Shanghai. So we found this building which allowed us to.
We have a permit to have a lab in R&D facility inside of it which is something that's difficult to get inside of the Shanghai region.
Today, So we were able to get that.
The environmental permit to do the R&D work that we were the we need to do.
Additionally, it provides the better location for us to meet with customers bring customers into the facility to to show them. The.
The R&D work, we're working on to meet with customers that are located in that area. So ultimately it just seemed like a very good opportunity. Additionally, and from what we've seen in the past as the real estate in Shanghai is growing very quickly so from a from the stability standpoint, it seemed like a very solid investment.
Sure No I I know some companies have had trouble of doing business in China of what's been your experience in terms of the.
Dealing with the kind of the.
The politics of China.
We haven't really well you can take the Patrick.
No no go ahead.
Comparing the local players.
We haven't really seen the.
The any of the political issues that are really no.
Other of that other companies the experience I mean, obviously, we had some problems in the past going back to 2014 of 15, but that had more to do with the joint venture partner than anything.
The government or the any of the politics of of China. So so far.
We have been able to navigate that.
The.
The Chinese market really well.
But but just given the man.
Sure. So 1 other question on China now what what's what's your competition in China in terms of percentage of business. The automobile related percentage of business. That's composed of the bowl related and I guess the balance would be other industrial applications.
Sure.
I'm, taking the law.
As far as tech talking about the automotive business I would say that the Chinese market is probably close to between 65 to 70 per 70% automotive.
Automotive business.
As far as the nature of tech component of it.
They had if I look at year to date sales.
The.
The nature of Tech component makes up probably close to 15% of the total Chinese.
The total Chinese sales that we have but that seems to be of a market that is growing faster than the than the.
The rest of industrial sales in China.
Okay. Okay.
Okay..1 last question on this compostable.
The issue I saw that the Kentucky fried chicken in Canada is committed to converting to compulsion of ball within a couple of years.
What what's the thinking out there in terms of these fast food.
Places really are accelerating the compulsory ballpark of the packaging.
In our experience.
On.
The fast food chains tend to play with us.
I have not made any significant commitment.
And certainly up until now.
Beyond.
Some cutlery, which.
Which we sell on to.
The fast food chain and on the West coast, specifically, but not on the on the nationwide market or even the gold margin basis.
And that's partly because of a.
Local mandates.
So the fast food industry is still.
Lagging in terms of implementing the wheel.
Hum.
Significant.
Making significant efforts and the compostable packaging market.
Right right.
Well I have to say that it's on what what what would be your guess would be the incremental cost of compostable packaging factoring the.
You do it do it more volume, how how more expensive wood compulsive packaging be the unconventional packaging.
By now it's not that significant of we can we can get fairly close so youre looking at maybe 10% higher cost now of doing a compostable.
Yeah, Yeah, so I I guess, probably the the back and it's just getting these municipalities.
So they have accomplished and facilities to take all the stuff in and out of Turkey.
You're also looking at an industry that is very cost driven and if you're talking about a 10% to 15% price increase over what they're currently paying they're.
They are not eager to do that unless it's absolutely necessary on the.
Or they have a change of heart and realize that they want to preserve the environment just because of its the right thing to do.
Yeah, well, it's the the socially conscious thing is now mulch.
Multi trillion dollar industry, and it's getting really emphasized the.
With the publicly traded companies. So it's it's common it's your but you're right it's taken longer than it showed up well with the out of past great great quarter as all of this in all the states stay with you guys. Thanks Bye.
It's Tim.
As a reminder of that is star then 1 if you'd like to ask a question at this time.
Our next question comes from Gus Richard with Northland.
Yes, thanks for taking the questions nice quarter guys.
Just on the cutlery customer that you have.
Is there any update on how they're coming along in terms of ramping.
I think of.
The ramping slowed down a bit, particularly during because of the COVID-19, and a lot of the.
Venues, particularly United States.
Talking about University.
The areas company cap of areas and the sports arenas.
The shutdown flaw.
Period of time.
The sales slowed significantly, but now our expectations are that certainly by the end of the summer as we wrap into the fall on.
That's.
The universities reopen people are going back to work on offices to some extent.
And the sporting arenas are going to open up again that the sales would have increased nicely going forward.
Okay got it and then the gross margin performance of the quarters, a little bit better than actually about 120 basis points better than I was expecting debt volume or mix.
I can take that.
What we're seeing from a gross margin standpoint, I think it just has to do on the mix of the products that were being sold.
We're not seeing any significant.
Changes in the gross margin on a on a business unit by business unit basis, but you know obviously, we had more sales coming through in this quarter from oil and gas than.
And then we had in prior in prior quarters, which skewed the.
The gross margin percentage a little bit.
Got it and then moving to the API Technical report.
He was the strong quarter in oil and gas correlated with that report coming out and.
How is that.
Sales funnel.
Change since the reported it's been published.
I would say no there was no direct correlation between the 2.
And the impact of that on our sales funnel I will not be immediate.
We certainly expect it to help because like we said validates our technology.
And its application.
But I would say that it will take it will probably ramp up slowly over the next 3 to 5 years really.
Before that will really go industry wide.
Okay then the.
Is the the strong performance in the oil and gas just the fact that.
Restrictions have been lifted somewhat and you could get.
The customer can get in and do the maintenance 1 debt.
Okay.
We could deliver on orders.
And do the implementations because of the travel restrictions.
Okay. Okay that makes sense and then last 1 for me.
There's been a lot of supply chain issues.
Are you guys experiencing any.
Perturbations in the ability to get material to deliver any any cost variances that debt are.
The positive or negative going forward or in the quarter.
Like everybody else.
We are experiencing certain delays in raw materials and finished goods.
So far we've been able to manage and not had any significant impacts or the latest where our customers are in convincing our customers.
But we're obviously monitoring that on an ongoing basis to make sure that nothing gets out of hand.
Got it okay. That's it for me. Thank you so much.
Sure.
Our next question comes from Jim Dowling with Jefferies.
Yes. My question was just answered thank you.
Yes.
And so I can go on that.
Yes.
If you'd like to ask a question at this time that is star then 1.
I'm not showing any further questions at this time.
Okay.
Alright, then I'd like to thank everyone for participating today and for your interest in NTIC of a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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