Q1 2022 Northern Technologies International Corp Earnings Call

January 6, 2022

Good day and thank you for standing by welcome to the NTIC Conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session. You May press star one on your telephone please be advised today's conference maybe recorded.

If you require any further assistance. Please press star then zero as part of the discussion today. The representatives from NTIC will be making certain forward looking statements regarding ntic's future financial and operating results.

As well as their business plans objectives and expectations. Please be advised that these forward looking statements are covered under the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, and that NTIC desires to avail itself to the protections of the Safe Harbor for these statements. 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 the including those described in Ntic's. Most recent annual report on Form 10-K subsequent quarterly reports on Form 10-Q, and recent press releases. Please read these reports and other future filings that NTIC will make with the SEC NTIC disclaims any duty to update or.

Revised its forward looking statements I would now like to hand, the conference over to your host today 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 regarding our first quarter fiscal 2022 financial results was issued earlier this morning and is available at NTIC Dot com.

Let me begin by wishing everyone, a healthy and prosperous 2022 new year.

I'd also like to remind everyone of our upcoming annual meeting of stockholders on January 21.

Please note however that although the meeting will be held in person due to the COVID-19 pandemic. We are strongly encouraging all stockholders to vote by proxy in advance the safety and wellbeing of our stockholders as well as our employees is extremely important and we believe that we'll be able to better comply with it.

CDC and state safety guidelines, if attendance is kept to an absolute minimum and the meeting itself is kept as short as possible by only reporting the election results and not making any business presentation. This year.

Now for the remainder of this call we will review various key aspects of our fiscal 2020 to first quarter.

Financial results provide a brief business update and then conclude with a question and answer session.

Overall fiscal 2022 sales are off to a record start as we experienced strong demand during the first quarter across many of our global markets, which is very encouraging.

We are also excited about our first quarter announcement that we acquired the remaining 50% ownership interest and how did the N P. I R. Xeros joint venture in India, which we referred to as theorists India.

The financial results of Zeros, India are now included in our consolidated financial statements effective as of September 1st and therefore for the entire first quarter of fiscal 2022 as a result sales from zero, India are consolidated within our income statement and are no longer accounted for through joint venture.

<unk> income.

This transaction also resulted in several one time financial charges and accounting adjustments that Matt will review in more detail in his prepared remarks.

The strong demand we experienced during first quarter led to a 42, 4% increase in our total consolidated net sales as compared to the first quarter ended November 32020.

To a quarterly record of $18 $2 million.

The year over year increase in consolidated sales was primarily a result of sales growth across all of the company's product categories due to higher global demand and the recovery from the COVID-19 pandemic as well as contribution from <unk> India.

For first quarter of fiscal 2022 zero, India contributed two point.

It can be $2 million and 453000 in sales to NTIC has consolidated net sales.

Even excluding the incremental sales from zeros, India, India, we still experienced strong organic growth.

That being said NTIC has not been immune to significant inflationary pressures, which has affected the cost of our raw materials and labor as well as intense friction across our global supply chain and the impact it will be continuing COVID-19 pandemic. Unfortunately, our profitability lagged during the first quarter due to several of Covid.

Several one time items associated with these zeros in your transaction as well as higher raw material freight and labor expenses.

We plan to implement certain measures to address these inflationary pressures we anticipate these measures taking effect during the second half of our fiscal 2022.

So with this overview, let's begin to examine the drivers for the first quarter in more detail.

For the first quarter ended November 32021.

Our total consolidated net sales increased 42, 4% to a quarterly record of $18 $2 million as compared to the first quarter ended November 32020.

Broken down by business units. This included a 72, 7% increase in the <unk> oil and gas net sales a 47.3% increase in nature Tech net sales and a 30 to 38, 9% increase in <unk> industrial net sales.

Net sales for the fiscal 2022 first quarter by our joint ventures, which we do not consolidate in our financial statements were $26 $8 million. This is an increase of 1% when compared to the same period last fiscal year and demonstrating continued strength in the global demand for our products for both.

Existing and new from both existing and new customers.

Fiscal 2022 first quarter net sales by our wholly owned NTIC, China subsidiary decreased 10, 7% to $4 $1 million over the first quarter of fiscal 2021, we believe the year over year decline in NTIC, China sales was primarily due to COVID-19 related Lockdowns and.

Weaker economic conditions in China.

Despite the near term volatility within this market. We continue to believe China will likely become our largest geographic market in the coming years.

To support the significant opportunity our new facility in Shanghai, China is expected to open soon and support our R&D product production sales and marketing and training efforts throughout the region.

Moving onto ours U S oil and gas product group.

I'm encouraged by the continued progress we are making within this large and compelling market first quarter fiscal 2022 zero oil and gas sales increased 72, 7% over the prior fiscal year period, we continue to see higher growth in end market interest globally across our oil and gas solutions, which.

Includes applications to protect above ground oil storage tanks and pipeline casings from corrosion.

We expect oil and gas to track above the fiscal 2021 sales throughout the remainder of fiscal 2022.

Turning to our nature Tec Bioplastics business fiscal 2022 first quarter nature Tech sales were $3 8 million, a 47, 3% increase over the prior fiscal year period. This is the highest level of quarterly NTIA quarterly nature Tech sales since the COVID-19 pandemic began two years ago.

However, we expect quarterly volatility will remain over the near term.

As the COVID-19 pandemic continues and large users are composed of all plastics cycle in and out of Lockdowns.

Our or we're operating.

At limited capacities.

Our long term prospects within the worldwide Compostable plastics Margaret are exciting we continue to focus our efforts on developing custom solutions for specific customer product needs that aren't available elsewhere.

And we remain optimistic about <unk> strong position within this large and compelling compostable plastics market.

So to conclude my prepared remarks, we are encouraged by the record sales growth we experienced during the first quarter and are diligently working to improve our profitability.

Our first quarter sales growth continued to benefit from our geographic end market and product diversification strategies, which is supported by our robust balance sheet experienced management team and asset light business model.

While considerable growth.

Well global Botox, alright, well considerable global uncertainty remains.

We believe NTIC is on track for another strong year of sales growth and profitability in fiscal 2022.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2020 to first quarter.

Thanks, Patrick.

The quarter ended November 32021 represents the first quarter since we completed the acquisition of the remaining 50% ownership interest in our Indian joint venture, which we refer to as zero, India for $6 $25 million.

We funded the purchase price with a combination of cash on hand, and borrowings under our revolving line of credit which was also increased in connection with the transaction of $5 million as a result of the acquisition zero India's financial results are now reflected in our consolidated financial statements effective September one.

Our first quarter of fiscal 2022. In addition, during the fiscal 2022 first quarter, we accounted for a gain on the acquisition of $395 million during the quarter.

And this is reflected in a line item remeasurement gain on acquisition of equity method investment on our consolidated statement of operations.

Looking at our consolidated results in more detail comparative prior fiscal year period Ntic's consolidated net sales increased 42, 4% in the fiscal 2022 first quarter to a quarterly record because of the positive trends Patrick reviewed in his prepared remarks, and the incremental sales from <unk> India.

While we expect these positive trends to continue throughout fiscal 2022, we anticipate some softness in our sales during the short term primarily a result of the continued COVID-19 pandemic and its variants.

A 1% increase in first quarter sales across our global joint ventures first quarter joint venture operating income declined 12, 3% compared to the prior fiscal year period.

This decrease was primarily attributable to the acquisition of the remaining 50% of the U S, India and lower profitability at the Companys joint ventures.

Total first quarter fiscal 2022 operating expenses were $7 1 million.

The 19, 9% increase over the prior fiscal year period was due primarily to the incremental expense due to the zero, India acquisition and increased selling expenses associated with higher consolidated sales as well as higher wages travel expenses and R&D investments operating expenses as a percentage of net sales were 39%.

<unk> compared to 46, 3% for the same period last fiscal year.

As illustrated in our first quarter results. The rest India does the rest of new transaction increased our net sales and operating expenses. Since it is now consolidated with our financial results and decreased our equity income from joint ventures in which in each case as compared to the same period last fiscal year, and we anticipate that the acquisition.

We will continue to have these effects on our financial results during the remainder of fiscal 2022.

Cost of goods sold as a percentage of net sales increased to 69%. During the three months ended November 32021, compared to 65%. During the same period last fiscal year, primarily a result of the price increases on raw materials and increased labor costs.

Although Patrick although as Patrick said, we intend to take certain actions to address inflationary pressures, we expect inflationary pressures to persist into at least the second quarter of fiscal 2022, and don't expect to realize benefits from these actions until the second half of the fiscal 2022.

NTIC reported net income of $4 7 million or <unk> 48 per diluted share for the fiscal 2022 first quarter compared to $1 $3 million 13 per share for the fiscal 2021 first quarter.

Excluding the one time gain of $3 $9 million related to the acquisition of the remaining 50%, 50% ownership interest in the U S. India and other related adjustments NTIC non-GAAP adjusted net income was $780000 or <unk> <unk> per diluted share for the fiscal 2022 first quarter compared to $1 3 million or 13.

I appreciate it per diluted share the same quarter last year.

A reconciliation of GAAP to non-GAAP financial measures is available in our first quarter earnings press release that was issued this morning.

As of November 32021, working capital was $25 $8 million, including $8 million in cash and cash equivalents and $5000 in available for sale securities compared to $25 2 million, including $7 7 million in cash and cash equivalents and $5000 in available for sale securities as of August <unk>.

31 2021.

On November 32021, the company had nearly $22 million and investments in joint ventures of which approximately 54% or nearly $11 6 million within cash with the remaining balance primarily invested in other working capital.

During the fiscal 2022 first quarter Ntic's Board of directors increased our regular quarterly cash dividend by seven 7% to seven per share that was payable on November 17th 2021 to shareholders of record on November three 2021.

So to conclude our prepared remarks, we're focused on making the necessary adjustments to our business to navigate the near term expense.

Material and supply chain challenges. In addition, we continue to invest across our global operations to support our significant long term growth opportunities.

While near term uncertainty appears to have picked up recently, especially in light of the Covid variance. We believe overall fiscal 2022 will be another good year for sales and profitability for NTIC.

With this overview, Patrick and I are happy to take any questions.

Thank you if you have a question at this time. Please 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.

And if you have a question at this time. Please press Star then one.

Yeah.

And we do have a question from the line of Tim Clarkson with Van Clemens. Your line is open. Please go ahead.

Hey, guys.

Great Great quarter, just wanted to ask so.

It's a little confusing to me because it looks like you know when I look at the operational profits.

They were much higher but you are saying with the gap.

non-GAAP results that the profitability was lower I mean, what are what were the onetime expenses.

That were.

Occurred or are they added into the onetime gain how did you how did you do that on an accounting basis.

Well the onetime expenses that we had for the transaction are included in the.

We broke that out in the non-GAAP calculation thats in the back of the press release. So there is some expenses associated with the transaction. There is new amortization expense that we had in the quarter as far as the amortization of the new intangibles that are on our balance sheet. There is a tax impact from the items, we talked about <unk> add back.

So those are items that are included in the <unk> to get to the non-GAAP numbers that are included in our normal operating expenses, if youre looking at our income statement.

Right. So I mean, just looking at it from a far it looks like you are solidly profitable and had.

No more intrinsic profitability this quarter than last quarter, but you know you've got all these numbers bouncing back, reflecting GAAP and non-GAAP earnings.

Yes, I mean, the income statement comparing.

Each of the three months ended.

Fiscal 2022 in prior years.

It's sometimes difficult to reconcile some because of the transaction because of the transaction that took place in the quarter and also because you're switching from the equity consolidation.

India to the full consolidation of the U S. India, So youre essentially adding.

500, plus thousand dollars of expenses to the operating expense line that are there.

It related to India, Youre, adding the sales and cost of goods sold to be to the top line.

And then ultimately you are pulling.

You are pulling.

Income out of the joint venture operating line from what previously would have been there related to the consolidation.

So it's a little it's a little difficult going quarter to quarter because of the adjustments, but overall the main the main issue. We had this quarter is.

Sales were up in sales were solid.

Sales of comparing to fourth quarter last year.

<unk>.

Income from the sales and income from our oil and gas was pretty significant in the fourth quarter and so there is a bit of a falloff to first quarter with the with the revenue that we recognized and obviously theres different gross margins that are associated with with that BR.

Beyond that across the U S industrial market.

<unk> gross margins throughout.

Through our first quarter and we're seeing kind of in the second quarter is that with the increase in the cost of the resins. The main materials. The range. The main raw materials that go into our product.

It was pretty volatile during the last six months of the last fiscal year and through the first.

Through the first three months of this year. So we're at a point, where we're making adjustments to.

To account for that and to increase our profitability.

But it is going to take a little bit of time for that to kind of flow through our inventory and get pushed out. So the expectations are that we're going to be able to increase our gross margins throughout the.

From kind of now our February an increase from our gross margin through the industrial products and also the expectations are that we're going to have more sales in the second half of the fiscal 2022 related to oil and gas similar to what we did last year and obviously the gross margins on the oil and gas business are.

Our better and stronger than the industrial business, so that should bring back some profitability as well. So okay. So I would expect that our first and second quarters, there's going to be some.

We call it.

Gross margin pressures that we're dealing with because of supply chain issues because of raw material issues and raw material pricing, but we would expect a lot of that to be ironed out in the second half of the year. So we still think we're going to have a very strong year.

From a profitability standpoint, certainly from a sales standpoint, even if you pull out the $2 $5 million of revenue that zero, India contributed during the first three months of the year, we still saw significant increases.

Across the board from a from a sales standpoint, and so that's something that we're pretty excited.

Cited about.

Specifically, if you look at the revenue from.

Comparing.

Comparing fourth quarter to first quarter.

The major tech sales were up close to 50% and is it going from fourth quarter to first quarter not.

Not.

First quarter, the first quarter sorry.

Alright, and I spoke that nature Tech total sales are up 30% comparing fourth quarter to first quarter and almost 50% comparing first quarter to first quarter.

Similarly, although sales in oil and gas were down from fourth quarter to first quarter. They were up 72% comparing the first quarter to first quarter. So we're pretty optimistic given where sales are headed and given the measures that we've put in place to kind of deal with some of the profitability issues.

But we're pretty confident with kind of how we are going forward for the rest of the year sure.

On the <unk>.

<unk> business I noticed when I was in Costco that theyre, starting to switch to compulsory packaging I think they're using somebody else.

What would you say is the differentiator for the for nature texts compostable products.

And the key different differentiator, we've always had is that when we use or take the compostable resins that are available on the market produced by some very major chemical companies.

But they and other themselves do not have certain mechanical properties that make them easy to manufacturer process.

And also the finished products tend to be weaker if theyre just those resin systems used by themselves. So we take their resin systems, we add our chemistries to it which make them easier to process and therefore reduce the cost while increasing the quality and also the finished products have greater mechanical strength.

And that's how we differentiate ourselves in the market.

And we also don't go after all of the commodity.

Applications.

As always seeking to get to find specialty applications, where our technology really differentiates ourselves differentiates us from the competition because we can produce certain products that nobody else can.

Sure sure.

Okay Fine and then one last question just on the oil and gas I know that you are making some progress with.

Using that technology on specifically on pipelines as anything develop further as far as that goes or is that just kind of an ongoing thing.

That's an ongoing thing theres not theres nothing developed recently is that augments that.

Okay, Okay, alright, well good I thought it was a good quarter and let somebody else ask some questions. Thank you.

Thank you and our next question comes from the line of Scott Group.

With Paul <unk> Partners. Your line is open. Please go ahead.

Oh, hi, guys. Thanks.

Couple of my questions were.

Yes, but.

On a go forward basis, just as you know when you.

Deals such as the India deal, so everything kind of moves above above the line.

Was there any difference in kind of what operating profits at India versus.

Similarly.

Other joint ventures are or is it kind of in line with what.

With others is based on scale or whatever else you plan on doing there.

Well in general I would say that a lot of our joint venture has experienced some similar.

Some similar issues with the price of the resin.

Some joint ventures have been better at enable to enable to push the.

The cost of raw materials in dealing with those onto the.

Onto the customers other have others have have not.

When you specifically look at.

So that's just from the JV standpoint, and pull back and address your India comment.

In.

Last year the.

<unk> of income from zero, India in first quarter was about $280000 that was up 50% contribution this year with the 100% contribution we had about $420000. So kind of looking at looking at that.

Zero, India was slightly less profitable than first quarter.

This year than they were last year and again dealing with kind of some of the same issues that everybody is dealing with.

Great.

Good.

I guess just the.

Outlook for them on the oil and gas.

Side is there much visibility pipeline versus tank bottom do you got any any spread is that something that you guys can you give us a little view on them.

The pipeline is a little newer but.

Any any breakdown there at all.

Okay.

Yes, I was going to say I mean, what we saw last year with kind of how things rebounded in the second half of the European oil and gas standpoint that there is a significant contribution from the.

Pipeline business and I would say that that's looking forward kind of through the remainder of our fiscal year and a lot of the projects that obviously, we have some visibility to the projects that are going to be happening.

And the next calendar year and the next really eight months of this fiscal year.

It's a pretty even split between the tank bottom opportunities in the pipeline opportunities that were that were working on which is which is good and if I look at the kind of the opportunities we have going beyond that with.

Kind of the interest from interest that we have seen after the API.

Technical report that came out and things like that.

We're pretty excited about what the opportunity is for oil and gas I would say over the next 12 months to 18 months.

Great. Thanks, guys I appreciate it.

Yes sure.

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.

Matt just so I'm clear what is the incremental opex from India and <unk> in the first quarter is that would you expect going forward.

Yes, the incremental operating expenses that hit our <unk>.

Operating expense line I want to say it was about $520000 and I would expect that to be pretty flat at least for the next three quarters.

Got it and then.

It was notable to weakness in China and is that.

Tough comp is that.

The auto industry, having supply chain issues, you know Pete add a little bit of color on the weakness.

In that region.

Right now the.

An exemplary of the Chinese market and they are having ongoing problems with COVID-19 and.

In other softness is in their markets. So we expect that to be temporary as the pandemic recovers.

That's that's what we're facing basically in China.

Okay, Okay that makes sense and then in Europe.

I noted that car sales were rather weak and I was wondering if the jv's there and your operations there were impacted by that.

Okay.

At this time.

I can speak to I can speak to <unk>, which is kind of the main if you will.

Looking at the sales that we have in Europe that certainly dominate.

I can say is that and this will be out in our in our Q as well that export Germany had.

Sales increases in first quarter compared to last first quarter about 20%, but their overall.

Income contribution decreased by about 9%. So again, we're seeing some similar similar issues, where we're seeing the opportunities out there and we're going after a lot of the opportunities even with the.

Even with some of the supply constraints, it's just a matter of how to.

How to account for the bulk of the increase in operating expenses that were seeing.

And also the gross margin pressure.

Got it and then and then the last one is you've got some.

Cost reduction efforts in place.

<unk> is also one part of the plan.

To help gross margins passing on your incremental increase in cost onto your customers.

Yes, we're doing.

We're certainly right in the middle of kind of a more comprehensive analysis of what we can do from from a gross margin standpoint, and thats going to include ever.

Everything from shipping cost to internal labor issues too.

Prices they were paying for products to potentially look at in sourcing certain.

Certain products to increase gross margin similar things that we're going to be able to do to give us more control over our product, especially given some of the uncertainties out there in the market.

Some of the big things that we've seen that's been really volatile has been lead time changes with utilizing some of our some of our subcontractors.

And what should what you'd typically have as well.

It may not be the main ingredient goes new product, but it's kind of one small ingredient or <unk> when youre outsourcing certain things one small component that is difficult to to get or the pricing that component is.

Is has increased and so there's just a lot more emphasis from our standpoint that has been placed on the procurement cycle on the.

Perhaps a further procurement process to mix you have everything you need in a timely manner, and then be able to turn it around and delivered to the customers and so I would say we have spent so much more time over the past six months.

Dealing with supply issues compared to anything that we previously had to had to do and so yes. We're certainly very very much aware of what's going on from a from a from a gross margin standpoint, and addressing every different aspect of it that we can.

Got it that makes a lot of sense so.

Would it be fair to assume you're going to have to carry a little bit more inventory going forward just to make sure that you don't get hit with these disruptions.

In certain in certain places, yes for certain products, yes.

But similar to what Youre seeing when you look at the car lot.

We're building it as quickly as we can as quickly as we can at this point in time and with sales being up where they are.

Hi.

We're replenishing as quick as quick as we can so theres certain products, where we're trying to bring in inventory, but it's going out the door is.

As fast as it's coming in.

Yes.

Okay got it very good thanks, so much.

Thank you and our next question comes from the line of Jim <unk> with Jefferies. Your line is open. Please go ahead.

Yes, two questions related to major tech.

The increase in sales.

You reported.

Is any of that from new customers obtained in the last three to six months and the second question is can you give us a sense geographically on the sales strength nature of tech.

Youre looking at I mean, yes, we are constantly acquiring new customers I wouldn't say that we've required any significantly significant.

Significant new customers, but.

Our sales increase reflects obviously recovery of certain customers that had dropped off during the COVID-19 pandemic, but also certain new applications as well.

In terms of geographic locations right now our primary geographic markets are North America.

And Southeast Asia, particularly India, Pakistan, Sri Lanka and Bangladesh.

With some increasing business in China, although China tends to be a little bit slower right now because.

Their push towards.

Regulation, particularly in regards to accomplished bowls as not as hasn't that hasn't happened as fast as we had expected originally.

We're also gaining customers in Europe as well.

So.

We are diversifying across geographically.

And growing in that respect.

What is the breakdown between North American revenues in the rest of the world.

<unk>, yes.

And first quarter.

2022, which we just finished sales in nature tuck in North America were about $1 4 million.

Sales in Asia, India, we're a little over $2 million.

And.

China sales were about.

About 300, plus thousand dollars, so youre looking at total.

For total nature Tech revenue.

<unk>.

Little under $3 8 million.

Thank you.

Thank you and we have a follow up question from the line of Scott can we do with <unk> partners. Your line is open. Please go ahead.

Thanks.

Just wondering as you try to do.

Either cost cutting or sourcing.

How does that play out across the Jv's do you have to do a JV by JV.

Or is there hey, there's common there's some common chemical that you buy for all maybe give us a little sense for what kind of process does that take.

As you go across JV by JV.

It's mostly done on JV by JV basis.

The.

The majority of our raw materials are best locally sourced.

Yep.

And also a manufacturer.

Our primary business is packaging and it doesn't make a lot of sense to ship empty packaging around the world.

So that's why we try to manufacturer is closer to the customer and user as possible.

Got it so.

<unk>.

I assume there is some.

Best practices, you can share, but it is very much a local a local decision.

Yes.

Great. Thanks.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Patrick Lynch for any further or closing remarks.

I just wanted to just wanted to thank everyone for participating today and your interest in NTIC.

Have a great day and.

Look forward to seeing you again next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day and thank you for standing by welcome to the N T. I C conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you only press star one on your telephone please be advised today's conference maybe recorded.

You require any further assistance. Please press star then zero as part of the discussion today. The representatives from NTIC will be making certain forward looking statements regarding ntic's future financial and operating results.

As well as their business plans objectives and expectations. Please be advised that these forward looking statements are covered under the safe Harbor provisions of the private Security Litigation Reform Act of 1995 and that NTIC desires to have them itself to the protections of the safe Harbor for these statements.

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.

Its forward looking statements I would now like to hand, the conference over to your host today Patrick Lynch. Please go ahead.

Good morning, Patrick Lynch, Ntic's, CEO, and I'm here with Matt Wolsfeld Ntic's CFO.

Please note that a press release regarding our first quarter fiscal 2022 financial results was issued earlier this morning and is available at NTIC Dot com.

Let me begin by wishing everyone, a healthy and prosperous 2022 new year.

I'd also like to remind everyone of our upcoming annual meeting of stockholders on January 21.

Please note however that although the meeting will be held in person due to the COVID-19.

COVID-19 pandemic, we are strongly encouraging all stockholders to vote by proxy in advance.

Safety and wellbeing of our stockholders as well as our employees is extremely important and we believe that we'll be able to better comply with the CDC and state safety guidelines. If attendance is kept to an absolute minimum and the meeting itself is kept as short as possible by only reporting the election result, and not making any business presentation. This year.

Year.

Now for the remainder of this call we will review various key aspects of our fiscal 2022 first quarter.

Financial results provide a brief business update and then conclude with a question and answer session.

Overall fiscal 2022 sales are off to a record start as we experienced strong demand during the first quarter across many of our global markets, which is very encouraging.

We are also excited about our first quarter announcement that we acquired the remaining 50% ownership interest and how did the ntis are zeros joint venture in India, which we refer to as <unk> India.

The financial results in India are now included in our consolidated financial statements effective as of September 1st and therefore for the entire first quarter of fiscal 2022 as a result sales from zero, India are consolidated within our income statement and are no longer accounted for through joint venture.

<unk> income.

This transaction also resulted in several one time financial charges and accounting adjustments that Matt will review in more detail in his prepared remarks.

The strong demand we experienced during first quarter led to a 42, 4% increase in our total consolidated net sales as compared to the first quarter ended November 32020.

To a quarterly record of $18 $2 million.

For first quarter of fiscal 2022 U S. India contributed two point.

It can be $2 million 453000 in sales.

Consolidated net sales.

Even excluding the incremental sales from the U S India, India, we still experienced strong organic growth.

And you said NTIC has not been immune to significant inflationary pressures, which has affected the cost of our raw materials and labor as well as intense friction across our global supply chain and the impact of the continuing COVID-19 pandemic. Unfortunately arent getting profitability lagged during the first quarter due to several of them to do two separate one.

Time items associated with these U S, India transaction as well as higher raw material freight and labor expenses.

While we plan to implement certain measures to address these inflationary pressures. We anticipate these measures taking effect during the second half of our fiscal 2022.

So with this overview, let's begin to examine the drivers for the first quarter in more detail.

For the first quarter ended November 32021.

Our total consolidated net sales increased 42, 4% to a quarterly record of $18 2 million as compared to the first quarter ended November 32020.

Broken down by business units. This included a 72, 7% increase in the U S oil and gas net sales a 47, 3% increase in nature Tech net sales and a 30 to 38, 9% increase in serious industrial net sales.

Total net sales for the fiscal 2022 first quarter by our joint ventures, which we do not consolidate in our financial statements were $26 $8 million. This is an increase of 1% when compared to the same period last fiscal year and demonstrating continued strength in the global demand for our products for growth.

Existing and new cut.

From both existing and new customers.

Economic conditions in China.

Despite the near term volatility within this market. We continue to believe China will likely become our largest geographic market in the coming years.

To support the significant opportunity in our new facility in Shanghai, China is expected to open soon and support our R&D product production sales and marketing and training efforts throughout the region.

Moving onto ours U S oil and gas product group.

Encouraged by the continued progress we are making within this large and compelling market first quarter fiscal 2022 zeros to oil and gas sales increased 72, 7% over the prior fiscal year period.

We continue to see higher growth and market interest globally across our oil and gas solutions, which includes applications to protect the above ground oil storage tanks and pipeline casings from corrosion.

We expect oil and gas to track above the fiscal 2021 sales throughout the remainder of fiscal 2022.

Turning to our nature Tec Bioplastics business fiscal 2022 first quarter nature Tech skills, whereas $3 8 million, a 47, 3% increase over the prior fiscal year period.

Is the highest level of quarterly NTIA, Oh go quarterly nature Tech sales since the COVID-19 pandemic began two years ago. However, we expect quarterly volatility will remain over the near term.

As the COVID-19, pandemic continues and large users of compostable plastics cycle in and out of Lockdowns.

Our or operate at limited capacities.

Our long term prospects within the worldwide Compostable plastics Margaret are exciting we continue to focus our efforts on developing custom solutions for specific customer and product news that aren't available elsewhere.

And we remain optimistic about <unk> strong position within this large and compelling and compostable plastics market.

So to conclude my prepared remarks, we are encouraged by the record sales growth we experienced during the first quarter and are diligently working to improve our profitability are.

While considerable growth in civil global Botox, alright, well considerable global uncertainty remains.

We believe NTIC is on track for another strong year of sales growth and profitability in fiscal 2022.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2020 to first quarter.

Thanks, Patrick.

We funded the purchase price with a combination of cash on hand, and borrowings under our revolving line of credit, which would also increase in connection with the transaction of $5 million as a result of the acquisition and the financial results are now reflected in our consolidated financial statements effective September one at the beginning of our first quarter of fiscal.

2022. In addition, during the fiscal 2022 first quarter, we accounted for a gain on the acquisition of $395 million during the quarter.

And this is reflected in the line item Remeasurement gain on acquisition of equity method Investees on our consolidated statement of operations.

Looking at our consolidated results in more detail compared to prior fiscal year period Ntic's consolidated net sales increased 42, 4% in the fiscal 2022 first quarter to a quarterly record because of the positive trends Patrick reviewed in his prepared remarks, and the incremental sales from the U S to India.

While we expect these positive trends to continue throughout fiscal 2022, we anticipate some softness in our sales during the short term primarily result of the continued COVID-19 pandemic and its variance despite.

Despite a 1% increase in first quarter sales across our global joint ventures first quarter joint venture operating income declined 12, 3% compared to the prior fiscal year period.

The decrease was primarily attributable to the acquisition of the remaining 50% of the rest, India and lower profitability at the company's joint ventures.

Total first quarter fiscal 2022 operating expenses were $7 1 million.

Operating expenses as a percentage of net sales were 39% compared to 46, 3% for the same period last fiscal year as.

As illustrated in our first quarter results. The rest India does the rest of the year transaction increased our net sales and operating expenses sensitive now consolidated with our financial results and decreased our equity income from joint ventures in which in each case as compared to the same period last fiscal year, and we anticipate that the acquisition.

We will continue to have these effects on our financial results during the remainder of fiscal 2022.

NTIC reported net income of $4 7 million or <unk> 48 per diluted share for the fiscal 2022 first quarter compared to $1 $3 million 13 per share for the fiscal 2021 first quarter <unk>.

Excluding the one time gain of $3 9 million led to the acquisition of the remaining 50%, 50% ownership interest in <unk>, India and other related adjustments and tissue non-GAAP. Adjusted net income was $780000 or <unk> <unk> per diluted share for the fiscal 2022 first quarter compared to $1 3 million or 30.

I appreciate your per diluted share for the same quarter last year, a reconciliation of GAAP to non-GAAP financial measures is available in our first quarter earnings press release that was issued this morning.

As of November 32021, working capital was $25 $8 million, including $8 million in cash and cash equivalents and $5000 in available for sale securities compared to $25 2 million <unk>.

Including $7 $7 million in cash and cash equivalents and $5000 in available for sale Securities as of August 31, 2021.

On November 32021, the company had nearly $22 million of investments in joint ventures of which approximately 54% or nearly $11 6 million within cash with the remaining balance primarily invested in other working capital.

So to conclude our prepared remarks, we're focused on making the necessary adjustments to our business to navigate the near term expense raw material and supply chain challenges. In addition, we continue to invest across our global operations to support our significant long term growth opportunities while near term uncertainty appears to have picked up recently, especially in light of.

The Covid variance, we believe overall fiscal 2022 will be another good year for sales and profitability for NTIC.

With this overview, Patrick and I are happy to take any questions.

Yeah.

And we do have a question from the line of Tim Clarkson with Van Clemens. Your line is open. Please go ahead.

Hey, guys.

Great Great quarter, just wanted to ask so.

It's a little confusing to me because it looks like when I look at the operational profits.

They were much higher, but you're saying with the gap.

non-GAAP results that the profitability was lower I mean.

What are what were the onetime expenses.

We're occurred or are they added into the one time gain of how did you. How did you do that on an accounting basis.

Well the one time expenses that we had for the transaction are included in the <unk>, we broke that out in the non-GAAP calculation thats in the back of the press release. So there is some expenses associated with the transaction. There is new amortization expense that we had in the quarter as far as the amortization of the new intangibles that are on our balance sheet.

There is a tax impact from the items, we've talked about <unk> add back.

So those are items that are included in the to get to the non-GAAP numbers that are included in our normal operating expenses, if youre looking at our income statement.

Right. So I mean, just looking at it from a far it looks like Youre solidly profitable and had.

More intrinsic profitability this quarter than last quarter, but you know you got all these numbers bouncing back, reflecting GAAP and non-GAAP earnings, Yes, I mean, the income statement comparing.

The three months ended.

In fiscal 2022 in prior years.

It's sometimes difficult to reconcile them because of the transaction because of the transaction that took place in the quarter and also because you're switching from the equity consolidation of <unk>.

India to the full consolidation of <unk>, India, So youre essentially adding.

500, plus thousand dollars.

<unk> expenses for the operating expense line that are.

Is it related to India, youre, adding the sales and cost of goods sold to be to the top line.

And then ultimately you are pulling.

You are pulling.

Income out of the joint venture operating line from what previously would have been there related to the consolidations.

So it's a little it's a little difficult going quarter to quarter because of the adjustments, but overall the main the main issue. We had this quarter is.

Sales were up in sales were solid.

Sales of comparing to fourth quarter last year.

<unk>.

Income from the sales and income from our oil and gas was pretty significant in the fourth quarter and so theres a bit of a falloff to first quarter would be with the revenue that we recognized and obviously theres different gross margins that are associated with that.

Beyond that across the <unk> industrial market.

<unk> gross margins throughout.

Through our first quarter and we're seeing kind of in the second quarter is that with the increase in the cost of the resins. The main materials the rain and the main raw materials that go into our product.

It was pretty volatile during the last six months of the last fiscal year and through the first.

Through the first three months of this year. So we're at a point, where we're making adjustments to.

To account for that and to increase our profitability.

But it's going to take a little bit of time for that to kind of flow through our inventory and get pushed out. So the expectations are that we're going to be able to increase our gross margins throughout the.

Kind of now our February an increase from our gross margin through the industrial products and then also the expectation that we're going to have more sales in the second half of the fiscal 2022 related to oil and gas similar to what we did last year and obviously the gross margins on the oil and gas business.

Our better and stronger than the industrial business, so that should bring back some profitability as well. So okay. So I would expect that our first and second quarters, there's going to be some.

Call it.

So we still think we're going to a very strong year.

From a profitability standpoint, certainly from a sales standpoint, even if you pull out the $2 $5 million of revenue that <unk>, India contributed during the first three months of the year, we still saw significant increases.

Across the board from a from a sales standpoint, and so that's something that we're pretty excited.

Cited about.

Specifically, if you look at the revenue from.

Comparing.

Comparing fourth quarter to first quarter.

The nature of <unk> sales were up close to 50% and this is going from fourth quarter to first quarter not.

Net.

First quarter to first quarter.

Sorry, I misspoke that nature Tech total sales are up 30% comparing fourth quarter to first quarter and almost 50% comparing first quarter to first quarter.

Similarly, although sales in oil and gas were down going from fourth quarter to first quarter. They were up 72% comparing the first quarter. The first quarter. So we're pretty optimistic given where sales are headed and given the the measures that we've put in place to kind of deal with some of the profitability issues, but.

We're pretty confident with kind of how we are going forward for the rest of the year.

Sure so.

On the.

<unk> business I noticed when I was in Costco that theyre, starting to switch to compulsory packaging I think they're using somebody else.

What would you say is the differentiator for the for nature tax composed of oil products.

And the key differentiator, we've always had is that when we use or take the compostable resins that are available on the market produced by some very major chemical companies.

But they and other themselves do not have certain mechanical properties that make them easy to manufacturing process.

And also the finished products tend to be weaker if theyre just those resin systems used by themselves. So we take their resin systems, we add our chemistries towards which make them easier to process and therefore reduce the cost while increasing the quality and also the finished products have greater mechanical strength.

And that's how we differentiate ourselves in the market.

And we also don't go after all of the commodity.

Applications.

Sure sure.

Okay Fine and then one last question just on the oil and gas I know that you are making some progress with.

Using that technology on specifically on pipelines as anything develop further as far as that goes or is that just kind of an ongoing thing.

That's an ongoing thing.

We've been developing recently that augments that okay.

Okay, Okay, alright, well good I thought it was good quarter and ill, let somebody else ask some questions. Thank you.

Thank you and our next question comes from the line of Scott Group.

With Paul <unk> Partners. Your line is open. Please go ahead.

Oh, hi, guys. Thanks.

Couple of my questions were.

Asked but.

On a go forward basis just as.

When you.

Deals such as the India deal, so everything kind of moves above above the line.

Was there any difference in kind of what operating profits at India versus.

Silver.

There are other joint ventures are or is it kind of in line with what.

With others is based on scale or whatever else you plan on doing there.

Well in general I would say that a lot of our joint venture has experienced some similar.

Some similar issues with the price of the resin.

Some joint ventures have been better at enable to enable to push the.

The cost of raw materials in dealing with those onto be.

Onto the customers other have others have not.

Yes.

When you specifically look at the.

So thats just from the JV standpoint, and pull back and address your India comment.

And last year.

Contribution of income from zero, India in first quarter was about $280000 that was our 50% contribution this year with the 100% contribution we had about $420000. So kind of looking at looking at that.

Zero, India was slightly less profitable than first quarter.

This year than they were last year and again dealing with kind of some of the same issues that everybody is dealing with.

Great.

Good.

I guess just the.

Outlook for them on the oil and gas.

Side is there much visibility pipeline versus tank bottom do you got any any spread is that something that you guys can you give us a little view on them.

The pipeline is a little newer but.

Any any breakdown there at all.

Yes.

Yes, I was going to say I mean, what we saw last year was kind of how things rebounded in the second half of the European oil and gas standpoint is there is there is a significant contribution from the <unk>.

Pipeline business and I would say that that's looking forward kind of through the remainder of our fiscal year and a lot of the projects that obviously, we have some visibility into the projects that are going to be happening.

And the next calendar year and the next really eight months of this fiscal year.

Kind of the interest from interest that we have seen after the API.

Technical report that came out and things like that.

We're pretty excited about what the opportunity is for oil and gas I think over the next 12 months to 18 months.

Great. Thanks, guys I appreciate it.

Yes sure.

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.

Matt just so I'm clear what is the incremental opex from India and <unk> in the first quarter is that would you expect going forward.

Yes, the incremental operating expenses that hit our <unk>.

Operating expense line.

It was about $520000 and I would expect that to be pretty flat at least for the next three quarters.

Got it and then.

It was notable the weakness in China and you use that.

Tough comp is that.

The auto industry, having supply chain issues.

Add a little bit of color on the weakness.

That's right in that region.

That's right now the.

Yeah.

Exemplary of the Chinese market and they're having ongoing problems with COVID-19.

There is softness in their markets. So we expect that to be temporary as the pandemic recovers but.

That's that's what we're facing.

Excluding China.

Okay, Okay that makes sense and then in Europe.

Did that car sales were rather weak and I was wondering if the jv's there and your operations there were impacted by that.

Okay.

That in time.

I can speak to I can speak to X score, which is kind of the main if youre looking at the sales that we have in Europe that certainly dominate and said what I can say is that and this will be out in our in our Q as well that export Germany had.

Sales increases in first quarter compared to last first quarter about 20%, but their overall.

Even with some of the supply constraints, it's just a matter of how to.

How to account for the bulk of the increase in operating expenses that were seeing.

And also the gross margin pressure.

Got it and then and then the last one is you've got some.

<unk>.

Cost reduction efforts in place.

It is also part of the plan.

To help gross margins passing on your incremental increase in cost onto your customers.

Yes, we're doing.

We're certainly right in the middle of kind of a more comprehensive analysis of what we can do from from a gross margin standpoint, and thats going to include.

Everything from shipping cost to internal labor issues too.

Prices they were paying for products to potentially look at in sourcing certain.

Some of the big things that we've seen that's been really volatile has been lead time changes with utilizing some of our some of our subcontractors.

And what's your what you typically have is.

It may not be the main ingredient goes new product, but it is kind of one small ingredients or <unk> when youre outsourcing certain things one small component that is difficult to to get or the pricing that component is.

Is has increased and so there's just a lot more.

From our standpoint that has been placed on the procurement cycle.

Dealing with supply issues compared to anything that we've previously had to had to do and so yes. We're certainly very very much aware of what's going on from a from a from a gross margin standpoint, and addressing every different aspect of it that we can.

Got it that makes a lot of sense so.

Would it be fair to assume you're going to have to carry a little bit more inventory going forward just to make sure that you don't get hit with these disruptions.

And third in certain places, yes, I mean for certain products yes.

But similar to what Youre seeing when you look at a car lot.

We're building it as quick as we can as quickly as we can at this point in time and with sales being up where they are.

Hi.

We are replenishing as quick as quick as we can so there are certain product, where we're trying to bring in inventory, but it's going out the door is.

As fast as it's coming in.

Yes.

Okay got it very good thanks, so much.

Thank you and our next question comes from the line of Jim <unk> with Jefferies. Your line is open. Please go ahead.

Yes, two questions related to nature Tech.

The increase in sales.

You reported.

Is any of that from new customers obtained in the last three to six months and the second question is can you give us a sense geographically on the sales strength nature Tech.

Youre looking at yes, we are constantly acquiring new customers I wouldn't say that we've acquired any significantly.

Significant new customers, but.

Our sales increase reflects obviously recovery of certain customers that had dropped off during the COVID-19 pandemic, but also certain new applications as well.

In terms of geographic locations right now our primary geographic markets are North America.

And Southeast Asia, particularly India, Pakistan, Sri Lanka and Bangladesh.

With some increasing business in China, although China tends to be a little bit slower right now because.

Their push towards.

Regulation, particularly in regards to <unk> is not is it hasn't it hasn't happened as fast as we had expected. So originally but we're also now gaining customers in Europe as well.

So I.

I mean, we are diversifying.

Geographically.

And growing in that respect.

What is the breakdown between North American revenues and the rest of the world.

Much of the heavy yes.

<unk> first quarter.

2022, which we just finished sales in nature Tech in North America were about $1 4 million.

Sales in Asia, India, we're a little over $2 million.

And.

China sales were.

About 300, plus thousand dollars, so youre looking at total.

Total nature Tech revenue.

<unk>.

A little under $3 8 million.

Thank you.

Thank you and we have a follow up question from the line of Scott can we do with <unk> partners. Your line is open. Please go ahead.

Thanks.

Just wondering.

As you try to do.

Either cost cutting or sourcing.

Does that play out across the Jv's do you have to do a JV by JV.

Or is there hey, there's common there is some common chemical that you buy for all maybe give us a little sense for what kind of process does that take.

As you go across JV by JV.

It's mostly done on JV by JV basis, because the.

As the majority of our raw materials are best locally sourced.

Yep.

And also manufacturer.

Our primary business is packaging and it doesn't make a lot of sense to ship empty packaging around the world.

So that's why we tried to manufacturer is closer to the customer and user as possible.

Got it so.

I assume there is some.

Best practices, you can share, but it is very much a local a local decision.

Yes.

Thanks.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Patrick Lynch for any further or closing remarks.

I just wanted to just want to thank everyone for participating today and your interest in NTIC.

Have a great day and.

Look forward to seeing you again next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Northern Technologies International Corp Earnings Call

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