Q2 2022 Northern Technologies International Corp Earnings Call

April 7, 2022

Speaker 2: 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 of the protections of the safe harbor for these statements.

Operator: Please be advised that the 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 reports on Form 10-K , subsequent quarterly reports on Form 10-q and recent press releases. Please read the reports and other future filings that NTIC will make with the SEC and tic disclaims any duty to update or revise as forward-looking statements. I would now like to turn the call over to MR Patrick Lynch. Sir, you may begin.

Speaker 3: Thank you, good morning. I'm Patrick Lynch, NTIC's CEO and I'm here with Matt Wolsfeld, NTIC's CFO .

Speaker 3: Please note that a press release regarding our second quarter of fiscal 2022 financial results was issued earlier this morning and is available at NTIC.com.

Speaker 3: During today's call, we will review various key aspects of our financial, of our fiscal 2022 second quarter financial results, provided brief business update and then conclude with a question-and-answer session.

Speaker 3: Strong demand across our product categories and many of our global markets contributed to strong sales results in the fiscal 2022 second quarter. In fact, total net sales in increased 13.6% when excluding incremental sales as a result of our recent acquisition of zero's India.

Speaker 3: The robust year-over-year expansion in consolidated net sales was primarily a result of sales growth across all the company's product categories due to higher global demand and the recovery from the COVID-19 pandemic, as well as the contribution from zeros India.

Speaker 3: As anticipated, we continue to encounter significant inflation, which has increased the cost of our raw materials and labor, as well as intense friction across our global supply chain, resulting from the impact of the continuing COVID-19 pandemic.

Speaker 3: This inflation reduced the gross margin and operating profit of not only NTIC but also our joint ventures as well throughout the first for half of the fiscal year. Consequently we have implemented to certain measures and pass these costs on as soon as possible to improve our profitability.

Speaker 3: Implemented to certain measures and pass these costs on as soon as possible to improve our profitability.

Speaker 3: As a result of these actions, profitability improved late in the second quarter and we anticipate very noticeable improvements in our operating profits during the second half of fiscal 2022.

Speaker 3: So, with this overview, let's examine the drivers for the second quarter in our detail and in more detail.

Speaker 3: For the second quarter ended February 28, 2022, our total consolidated net sales increased 31% to a second quarter record of $16.7 million, as compared to the second quarter ended February 28, 2021.

Speaker 3: Broken down by business units, this included a 60.1% increase in ZERUST oil and gas net sales, a 45.3% increase in nature tech net sales and a 24.1% increase in ZERUST industrial net sales.

Speaker 3: Total net sales for the fiscal 2022 second quarter by our joint ventures, which we do not consolidate in our financial statements, were $24.6 million. This is a decrease of 15.3% when compared to the same period last fiscal year, and was due primarily to reduced demand across our global joint ventures and the change in the accounting treatment for ZERUST India, which is now a consolidated subsidiary within NTIC's financial statements.

Speaker 3: Fiscal 2022 second quarter, net sales by our wholly owned NTIC China subsidiary decreased 6.3% to $4.1 million. Over the second quarter of fiscal 2021, NTIC China sales continued to be impacted by extended COVID-19 related lockdowns and the resulting of weaker economic conditions in China.

Speaker 3: Despite the near-term volatility within this market, we continue to believe in China will likely become our largest geographic market in the coming years. Moving on to our ZERUST oil and gas product group, I am encouraged by the continued progress we are making.

Speaker 3: Moving on to our zerost oil and gas product group. I am encouraged by the continued progress we are making.

Speaker 3: Second quarter, fiscal 2022 ZERUST: oil and gas sales increased 60.1% over the prior fiscal year period.

Speaker 3: We continue to see higher growth and market interest globally across our oil and gas solutions which includes applications to protect above-ground oil storage tanks, and pipeline casing from corrosion.

Speaker 3: Which includes applications to protect above-ground oil storage tanks, pipeline casings and pipeline casing from corrosion.

Speaker 3: In fact, our forecast of oil and gas sales for the remainder of the fiscal year is very strong with many repeat customers. Furthermore, several projects we had expected to implement in the first half of the fiscal year got postponed into the second half. Therefore, we expect oil and gas sales will be significantly higher in the second half of the fiscal year compared to the first half, which we anticipate will lead to higher full year oil and gas sales compared to the last fiscal year.

Speaker 3: Turning to our nature tech bioplastics business, Fiscal 22- second quarter. Nature tech sales were $3.6 million, a 45.3% increase over the prior fiscal year period.

Speaker 3: Sales trends within naturetech reflect a gradual return towards prepandemic demand patterns, especially in North America and India.

Speaker 3: In North America, we have seen a steady increase in demand as schools, universities, corporate campuses and large sporting venues reopened their facilities.

Speaker 3: For the time being however, we anticipate that there is an upper constraint on Natur tech sales growth due to a combination of supply chain and logistics challenges, as well as PLA supply shortages due to production problems and delays at several [inaudible] suppliers.

Speaker 3: Therefore we expect supply chain challenges and raw material shortages to continue to hamper Natur tech sales growth over the next several quarters.

Speaker 3: We believe demand for Natur Tech products has rebounded from the impacts of the COVID-19 pandemic.

Speaker 3: As a result, we believe we are well positioned for long-term sustainable growth within our Natur tech bioplastics business, as we benefit from global demand for our leading compostable plastic products and residents.

Speaker 3: Before I turn the call over to Matt, I want to share the expected impacts on our business from the current Ukraine conflict.

Speaker 3: As a result of this senseless war and subsequent punitive sanctions recently applied on Russia, we saw no other option than to discontinue our Russian joint venture, which we believe will result in a total write-down.

Speaker 3: Of approximately $50,000 for the joint ventures' equity value and current accounts receivable balance during our third fiscal quarter.

Speaker 3: Last fiscal year, Russia contributed approximately $800,000 in joint venture sales that resulted in an insignificant level of income for NTIC.

Speaker 3: More importantly however, we believe the conflict will impact certain European economies in the coming quarters. Accordingly, we are working closely with our joint venture partners and watching demand trends carefully to adjust our business for any impacts to our European markets.

Speaker 3: Despite the potential impacts of the Ukraine/ Russia war and higher raw material costs at this time, we believe our sales and profitability will improve throughout the remainder of the fiscal year. As a result, we believe NTIC is on track for another strong year of sales growth and profitability in fiscal 2022.

Speaker 3: With this overview, let me now turn the call over to Matt Wolsfeld to summarize our fiscal financial results for the fiscal 2022 second quarter.

Speaker 4: Thanks Patrick. Compared to prior fiscal year period, NTIC's consolidated net sales increased 31% in the fiscal 2022 second quarter to a second quarter record. This growth was driven by the positive trends Patrick reviewed in prepared remarks and the incremental sales from ZERUST India.

Speaker 4: Compared to prior fiscal year period, nasc's consolidated net sales increased 31% in the fiscal 2022 second quarter to a second quarter record. This growth was driven by the positive trends Patrick reviewed in prepared remarks and the incremental sales from ze rest India.

Speaker 4: Second quarter joint venture operating income declined 35.6% compared to the prior fiscal year period. This decrease was primarily attributable to the acquisition of the remaining 50% of ZERUST India and lower profitability at the company's joint ventures. Total second quarter fiscal 2022 operating expenses were $6.7 million.

Speaker 4: Total second quarter fiscal 2022 operating expenses were $6.7 million.

Speaker 4: The 14.4% increase over the prior fiscal year period was due primarily to incremental expenses due to ZERUST India acquisition and increased selling expenses associated with the higher consolidated sales, as well as higher wages, travel expenses and R & D investments.

Speaker 4: Operating expenses as a percent of net sales were 40.1% compared to 45.9% to the same period last fiscal year. As illustrated in our second quarter results, the ZERUST India transaction increased our net sales and operating expenses, since it's now consolidated with our financial results and decreased our equity income from [inaudible] ventures in each case as compared to the same period last fiscal year. The acquisition will continue to have these effects on our financial results for the remainder of fiscal 2022.

Speaker 4: Gross profit as a percent of net sales was 29.8 % during the three months ended February 28, 2022, compared to 33.3% during the same period at last fiscal year, primarily as a result of the increased prices and raw materials and increased labor costs. As Patrick stated, we are pursuing certain actions to address inflationary pressures.

Speaker 4: As Patrick stated, we are pursuing certain actions to address inflationary pressures.

Speaker 4: While we expect gross margin to improve throughout the second half of fiscal 2022, we believe inflationary pressures may persist during the remainder of the fiscal year.

Speaker 4: NTIC reported net income of $183,000 or two cents per diluted share for the fiscal 2022 second quarter, compared to $1.3 million or 13 cents per diluted share for the fiscal 2021 second quarter.

Speaker 4: The fiscal 2022 second quarter, NTIC's non-GAAP net income, adjusted for expenses related to the NTIC India transaction and amortization expenses, was $392,000 or four cents per diluted share, compared to $1.3 million of 13 cents per diluted share for the fiscal 2021 second quarter. A reconciliation of GAAP to non-GAAP financial managers are available on our second quarter earnings press release that was issued this morning.

Speaker 4: As of February 28, 2022, working capital: $25.3 point three million, including $7.5 million in cash and cash equivalents, compared to $25.2 million, including $7.7 million in cash and cash equivalents as of aug 31, 2021. As of February 28, 2022, we have $4.2 million outstanding under a revolving line of credit. February 28, 2022, the company had $21.9 million in investments in joint ventures, of which approximately 52% or $11.3 million, was in cash, with the remaining balance primarily invested in other working capital.

Speaker 4: During the fiscal 2022 second quarter, the Board of Directors declared a quarterly cash dividend of seven cents per common share that was payable on February 16, 2022 to stockholders on record on February 2, 2022. To conclude our prepared remarks, we are focused on making the necessary adjustments to our business and navigate the near-term expense, raw material and supply chain challenges. We believe our results throughout the second half of the fiscal year will reflect these actions.

Speaker 4: We are focused on making the necessary adjustments to our business and navigate the near-term expense, raw material and supply chain challenges. We believe our results throughout the second half of the fiscal year will reflect these actions.

Speaker 4: While economic uncertainties continue, especially considering the recent emergence of new COVID variants and the Ukraine- Russian conflict, we believe the fiscal 2022 will be another good year of sales and profitability for NTIC. With this overview, Patrick, and I are happy to take your questions.

Speaker 5: As a reminder, to ask the questions you will to press Star, then one on your telephone. To withdraw your questions, press the pound key. Please stand while we compile the Q & A roster.

Speaker 2: And our question comes from Tim Clarkson of [inaudible], your line is open.

Speaker 6: Hi guys, I guess the results were kind of what we expected them to be. As far as increasing the prices to improve profitability, have you had resistance from your clients so far? Are the prices sticking?

Speaker 3: The prices are sticking. I mean, so far the results have been fairly good. It's taken us a little bit longer than we anticipated, but it's not very difficult to go to your customers and say: listen, raw material prices, which are well known throughout the world, have risen by a significant amount. It's time that we have to - we can't keep the prices as they were in the past. We have to increase them and they've agreed. So it's been going. It's just hasn't gone quite as quickly as we had hoped it would be.

Speaker 3: The prices as they were in the past. We have to increase them and they've agreed. So it's been going. It's just hasn't gone quite quickly as we had hoped it would be.

Speaker 6: Right. Now on the oil and gas segment, I mean potentially, how big could that market turn into? Is this a a market that's kind of maxing out, or are you still doing? [inaudible] potential.

Speaker 3: We're still doing about 3% of potential. If that, as we said in the past, we believe that the oil and gas market has potential to be bigger than what we're doing in the ZERUST industrial side. Right. Now, I know when you're selling these products, you're claiming that the tanks last 30 years versus 10 years, something like that. I mean is that what is actually is occurring in the field?

Speaker 3: We do inserts or installed probes in our installations to monitor the rate of corrosion, and so far we've seen that our installations are working as we thought they would, so they're doing very well. Right. So, that's a tremendous return on investment for the end use or if the tanks extend their lives threefold. That's exactly right. On the compostable end, and you know again, I always ask this question but I'll ask again - what would you say is, you know, who's your typical customer? I know that Costco is using, I think, some sort of form of compostable packaging. So I'm guessing that's not who would be your typical customer. Who would your typical customer with the compostable products?

Speaker 3: In the United States, our typical compostable customers include universities, schools, office parks, stadiums, sports arenas. Those kinds of large establishments that have well developed food waste diversion programs so that our products don't wind up in a landfill, but wind up in a managed composting site.

Speaker 6: Okay so what's the differentiator when you're competing against other people, I assume that have similar products? Why are they picking Northern Tech?

Speaker 3: Because through our patented technology, we can produce our products to have greater, higher mechanical strength at a lower cost than our competitive alternatives. Right. So, price, quality is always the two best things. Then last question. This is a question for Matt. I just noticed on the balance sheet there's suddenly about 10 million between goodwill and intangible assets. How is that going to affect the earnings on a forward basis?

Speaker 7: two Best things then last question. This is a question for Matt I just noticed on the balance sheet. There's suddenly about one million of between goodwill and.

Speaker 7: And intangible assets. How is that going to affect the the earnings on a forward basis?

Speaker 4: That's obviously the good only tangible assets that showed up in first quarter obviously will be there for sometime. At this point in time you'll see the queue that I'll put out tomorrow. We're going to have an ongoing of about 100 thousand dollars amortization expense associated with the transaction of acquiring the 50% of zero India, about one thousand U.S dollars of amortization expense per quarter going forward for 15 years.

Speaker 8: Associated with the transaction of acquiring the 50% of zero India, about one thousand U's dollars of amortization expense per quarter going forward for 15 years.

Speaker 7: Okay, now another question: if you added back the India joint venture back into the old joint venture structure. What would have that have impact? I see that the total joint ventures were down 15%. What would have been the total joint ventures down if you had added India back?

Speaker 4: It would have been - I'm looking at it, India in the second quarter had about $2.2 million in sales and had about $4.7 million in revenue for the full fiscal. So, if I'm looking at that 4.7 million total worldwide sales at the JVs through the second quarter was about 51 million. So India represented about 8%, 9% of the sales. So the total joint ventures in six months would have been down probably 4% to 5% from a revenue standpoint.

Speaker 8: Total worldwide sales at the JVs.

Speaker 8: Through the second quarter was about 51 million. So So India represented about eight 9% of of the sales. So the total drint vent-interes, t- the six months would have been down probably for to 5% from a revenized standpoint.

Speaker 7: Right. Okay, well good, I think I'm done. We knew that earnings would be down, but it looks like earnings will be up for the balance of the year. So, thanks, I'm done. Thank you.

Speaker 2: Again, ladies and gentlemen, if you do have a question please press Star then one. Our next question comes from Gus Richard of Northland. Your line is open.

Speaker 9: Yes, thanks for taking the question. Hey, real quick on PLA, you talked about supply disruptions. Can you add a little more color? Is that lack of raw materials? Is that somebody's facility went down?

Speaker 3: It's a lack of manufacturing at this point. There are several manufacturing sites being put online at this point, but due to various delays they haven't been able to start manufacturing at some of these PLA plants. So the global supply of PLA is shorter than the current market demand.

Speaker 9: Ok, so you're currently on allocation?

Speaker 3: Yes, I mean we've got a higher allocation than most based on our past history with PLA, but it's still not as high as we would like it to be. So, we are turning away certain opportunities at this time simply because we don't have the capacity to take these orders.

Speaker 9: Got it and then when do you think the supply will be? When will incremental supply come on so you can service more customers? In a couple of quarters, a year? We're thinking a couple of quarters, two or three quarters.

Speaker 10: Okay and you can sustain at this level? Yes.

Speaker 9: Got it, thank you. And then, turning to China: clearly being on lockdown in Shanghai that has been accelerating. A lot of the economy is shut down. How does that change your China business over the last 30 days?

Speaker 3: Hello, how much does has what changed?

Speaker 9: Your China business. All the lockdown? Has it slowdown, accelerated, or just been constant?

Speaker 3: The business has been slowing down because of lockdowns. Overall demand in China has been reduced for right now. Either people are required by Shanghai to either work and live at the office or they can't get to their offices. So, nobody's visiting customers, which is slowing down to various transactions, and also nobody is shopping with the lockdowns, which is reducing demand ultimately.

Speaker 10: Got it, and has that accelerated over the last 30 days, or were it just been a slow drip?

Speaker 3: I can answer that from a revenue standpoint. I can say that our March revenue with what we sold in March, was down about 30% compared to expectations that we had in January . So February numbers are always difficult in China, specifically because of the Chinese New year. And then basically the location that our office is in in Shanghai was shutdown, where everybody was essentially sent home for a portion of March. There's going to be some makeup revenue coming in April to make up for some of that revenue shortfall in March. What we're seeing is that there is still an awful lot of shutdowns that are occurring across China and so that's really impacting not just demand for our product, but all products that are out there our feeling is that looking.

Speaker 8: Looking forward for the next six months in China. We expect things that some point in time to kind of get back on track. Again, that's kind of one of the wild cards that we're dealing with. At the present through second quarter, we are down roughly 8% to 10% in China compared to prior years and obviously with the kind of growth in the size of the market we have in China, that's typically an area where we expect 20 plus percent year-over-year growth. So we feel like at some in time China is going to open back up and revenues will ramp up quickly, but at this point in time there's just so many spadic lockdowns that are occurring there that it's difficult to predict.

Speaker 9: Got it. No, I completely understand. I just wanted to get an idea of the color and I'm really sorry that the world has thrown so many jokers in the deck.

Speaker 10: Yes it's a tough environment. And then, shifting to Europe, what I'm seeing is contraction supply of metal and a hike in prices, and I suspect the German automakers are going to have some issues going forward. And in the sort of the same set of questions, sort of what on the margin, have you been seeing in the month of a March and early April in terms of your the JV customers in China and Europe? For example, we just had record sales reported from Poland and that's despite the refugee prices are facing. So it's kind of country by country bases. Yes Germany particularly being the engine of manufacturing in Europe is a bit worried at this point, what the future holds particularly in raw material price increases. But we'll see.

Speaker 3: When go to market. For example, we just had record sales reported from Poland, and that's despite the refugee prices are facing. So it's kind of country by country bases. Yes Germany, particularly being the engine of manufacturing in Europe , is a bit worried at this point what the future holds, particularly in raw material price increases. But we'll see.

Speaker 10: Okay got it. And okay, I appreciate it. That's it for me. Thank you so much. Thanks Gus.

Speaker 2: And I'm not showing any further questions at this time. I would now like to turn the conference back to Patrick Lynch for closing remarks.

Speaker 11: Thank you. I'd like to thank everyone for participating the day and for your interest in NTIC. Have a great day. Thank you.

Speaker 1: This concludes today's conference. Thank you for participating. You may now disconnect.

Speaker 12: The.

Q2 2022 Northern Technologies International Corp Earnings Call

Request a DemoDemo

NTIC

Northern Technologies International

Earnings