Q3 2022 Northern Technologies International Corp Earnings Call
Yes.
Good day, and thank you for standing by and welcome to the Northern Technologies International Corporation third quarter 2022 earnings conference call and webcast.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
Can I ask a question during the session you will need to press star one on your telephone.
Be advised that today's conference is being 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 that these forward looking statements are covered in the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 and that N.
T I C desires to avail itself of 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 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 revise its forward looking statements.
I would now like to hand, the conference over to your Speaker today, Patrick Lynch, President and CEO . Please go ahead.
I'm, Patrick Lynch, Ntic's, CEO and I'm here with Matt Wolsfeld Ntic's CFO .
Please note that the press release regarding our third quarter fiscal 2022 financial results was issued earlier this morning.
Beautiful at NTIC Dot com.
During today's call we will review various key aspects of our fiscal 2022 third quarter financial results provide a brief business update and then conclude with a question and answer session.
Strong demand across all product categories, and the majority of our global markets along with the contributions made by the newly acquired India drove quarterly sales to a new record just short of $90 million.
If we excluded the India contribution in order to ease comparisons between fiscal 2021 and fiscal 2022 third quarter total net sales increased six 3%.
Furthermore, it is important to also highlight that the harsh COVID-19, lockdowns imposed by the Chinese governments across broad regions of the country severely impaired the third quarter sales efforts and profitability of our NTIC China subsidiary.
<unk> core profitability continues to rebound from the pressures imposed by inflation and supply chain constraints. Consequently, our gross margin for the third quarter was 32, 9% the highest this fiscal year <unk>.
In addition, total operating expenses as a percent of third quarter sales were 37, 5% compared to 41% in this year's second quarter and a 49% for the prior year fiscal period.
Third quarter profitability also improved at our joint ventures, despite it taking longer to implement price increases in some countries.
We believe profitability will continue to improve during the fourth quarter as price increases take full effect and the volume of product sales continue to increase into fiscal 2023.
So with this overview, let's examine the drivers for the third quarter in more detail.
For the third quarter ended May 31, 2022, our total consolidated net sales increased 23%.
To a quarterly record of nearly $19 million as compared to the third quarter ended may 31 2021.
Broken down by business unit. This included a 48, 6% increase in our major Texas net sales.
47% increase in oil and gas net sales and a 22, 9% increase in U S industrial net sales.
Total net sales for the fiscal 2022 third quarter by our joint ventures, which we do not consolidate in our financial statements decreased 16, 8% to $26 $6 million.
This decrease was due primarily to slower demand across the territories serviced by our global joint ventures due to concerns over geopolitical uncertainties and the change in the accounting treatment of India, which is now consolidated can subsidize aerie within Ntic's financial statements.
Fiscal 2022 third quarter net sales by our wholly owned NTIC, China subsidiary decreased 10, 2% to $3 $6 million.
Due to the negative impact of severe COVID-19 related lockdowns across much of the country and the ensuing weaker economic conditions.
We are closely watching market conditions in China as we believe recent government actions to ease COVID-19 restrictions will benefit sales in the short term and that China will likely become our largest geographic market in the future.
Now moving onto <unk> oil and gas as expected sales from this product category accelerated during the third quarter, increasing 47% over the prior fiscal year period.
Driven by higher sales to new and existing customers.
Activity continues to grow stronger for our oil and gas solutions, which includes applications to protect above ground wire storage tanks and pipeline casings from corrosion and we are confident that the fourth quarter will be a good one.
Turning to our nature Tec Bioplastics business.
2022 third quarter in Asia Pac sales were $4 $5 million.
At 48, 6% increase over the prior fiscal year period.
Sales trends within the major deck appeared to show their demand patterns have returned to pre pandemic levels, especially in North America and India.
Furthermore, the supply chain and logistics challenges that impacted nature tax second quarter's results east during the third quarter contributing to the strong year over year and quarter over quarter growth we experienced.
We believe this is a testament to our strong position within the Bioplastics industry and close relationships with important raw materials suppliers.
We continue to see growing market demand for new applications are certified compostable plastic products and resins as well as increasing interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics.
As a result, we believe we are well positioned for long term sustainable growth within our niche type Bioplastics business.
While prevailing geopolitical uncertainty has impacted the outlook on the overall economy in recent months. We believe we are well positioned for further growth and improving profitability in the fourth quarter and we are currently optimistic the trends in our target markets will remain positive throughout fiscal 2023.
With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 'twenty trade through the third quarter.
Thanks, Patrick.
Compared to the prior fiscal year period, and Cashiers consolidated net sales increased 23% for the fiscal 2022 third quarter to a quarterly record of nearly $19 million. This growth was driven by the positive trends Patrick reviewed in his prepared remarks, and the incremental sales from <unk> India.
Third quarter joint venture operating income declined 25, 6% compared to the prior fiscal year period. This decrease was primarily attributable to the acquisition of the remaining 50% of U S, India and lower profitability of the company's joint ventures.
Total operating expenses for fiscal 2022 third quarter were $7 $1 million.
12 point 12, 7% increase.
Over the prior fiscal year period was due primarily to incremental expenses due to the Derisking, India acquisition and increased selling expenses associated with higher consolidated sales as well as higher wages travel expenses and R&D investments.
<unk> expenses as a percentage of net sales decreased to 37, 5% compared to 49% the prior fiscal year period.
As illustrated in our third quarter results as Europe , India transaction increased our net sales and operating expenses since it's now consolidated with our fiscal <unk> with our financial results and decreased our equity income from joint ventures.
In each case as compared to the prior fiscal year period.
The acquisition will continue to have these effects on our financial results for the remainder of fiscal 2022.
Gross profit as a percentage of net sales was 32, 9%. During the three months ended May 31, 2022, compared to 34, 2% during the prior fiscal period, primarily as a result of price increases in raw materials and increased labor costs.
As Patrick stated, we're successfully pursuing actions to address inflationary pressures as a result, we expect our gross margin will improve further in the fourth quarter of fiscal 2022, and we intend to continue to pursue actions to address inflationary pressures in the future.
NTIC reported net income of $1 million or <unk> 11 per diluted share for the fiscal 2022 third quarter compared to $2 $1 million or 21 per share for the fiscal 2021 third quarter.
For the fiscal 2022 third quarter NTIC as non-GAAP net income adjusted for expenses related to the NTIC, India transaction and amortization expenses was $1 1 million or <unk> 12 per diluted share compared to $2 $1 million 21 per share for fiscal 2021 third quarter.
Reconciliation of GAAP to non-GAAP financial measures are available in our third quarter earnings press release that was issued this morning.
As of May 31, 2022, working capital was $24 $7 million, including $6 $1 million in cash and cash equivalents compared to $25 2 million, including $7 7 million.
Cash and cash equivalents as of August 31, 2021.
As of May 31, 2022, we had a $4 $7 million.
Dollars outstanding under our revolving line of credit.
On May 31, 2022, the company had $22 $2 million and investments in joint ventures of which approximately 53, 5% or $11 $9 million was in cash with the remaining balance primarily invested in other working capital.
During the fiscal 2022 third quarter Ntic's Board of directors declared a quarterly cash dividend of <unk> <unk> per common share that was payable may 18th 2020 to the stockholders of record on May four 2022.
So to conclude our prepared remarks, we are encouraged by the progress we are making to grow sales globally and navigate near term expenses raw materials and supply chain challenges, while economic uncertainty has increased in recent months. We believe fiscal 2022 will be another good year for sales and profitability for NTIC and we're excited about the prospects.
In fiscal 2023 and beyond with this overview, Patrick and I are happy to take your questions.
As a reminder to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Okay.
Again that is star then one to ask a question.
Our first question comes from Gus Richard with Northland.
Yes, thanks for taking the questions.
On the oil and natural gas.
Business.
You mentioned, Patrick that you thought youre going to have a strong fourth quarter could you elaborate a little bit and give us a little color on what's going on in that product line.
Just more demand and create.
Greater installations than previously so everything that's going on trend and we're getting more orders repeat orders from existing customers and new orders.
So business looks very good for us right now.
Okay got it and then in terms of the Lockdowns in China.
It appears to be opening up again.
Those headwinds diminished or are they remaining the same any any color there.
Well those lockdowns were lifted fairly recently I mean, everything is going back to them.
We had about.
About 70% of the country was not locked down about 30% was.
And now we're basically picking up that last 30%.
And hopefully we will see an increase from there.
And it's going to take a while for the overall Chinese economy pick up again, so we can expect basically things to be back to normal maybe six months or so.
And just to further kind of address that.
Our China sales during the third quarter were off by probably what we expected them to be by about a $1 million. So there are about $1 million short of what the expected sales work. So just looking at total China sales for third quarter. They were about four to $500000 less than what Q3 with <unk>.
Last year, the expectations were that we would have seen.
Larger increase.
In Q3.
Just looking we obviously don't have visibility into July , but just looking at the <unk>.
<unk> seen since the opening.
Just from the June month.
June was there obviously.
It's been in probably better than any month that we saw during their lockdowns. So it looks like things are starting to open up there's going to be some.
To catch up and stock up.
Various customers in China during the fourth quarter.
Got it thank you and then.
Just.
Spend a couple of.
Fans of classic I think last Friday, India is banning the use of single use plastic.
California last week passed a.
Yes.
Plastic belt.
And plastic pollution.
I was wondering.
If you it's really early and these and this new legislation I understand but.
Are you seeing any movement from your customers in terms of composed to bowl.
Are you is this.
Well.
How do you think this will impact you over the next quarters and years.
Well, we certainly hope that.
The increased sales one of the concerns that we have in India of course always ask.
Actual implementation of law enforcement.
So we shouldnt expect to see increases in India, but I don't know if were going to get the total amount that would be available at the lowest properly and for us.
In California of course, we're expecting that to have a nice impact on our sales there.
In the long term.
And certainly we expect things to be changing in other parts of the country as well in the future.
Just to add to that greatest patricks, but certainly the impact of California 54 going into effect is positive for nature Tac. The law requires that packaged and sold in the state you'll be recycled recyclable are certified compostable by 2032.
And so.
That certainly is something that we like to see in corporate other states other states follow.
Got it got it.
That's it for me. Thank you so much.
Thank you.
Our next.
Comes from Joseph <unk>, with Manalapan Oracle capital management.
Yeah.
Yes. Good morning, guys. Thanks for taking my question.
Congratulations on the progress being made it looks really great.
I was just wondering if you could.
Talk a little bit about maybe your competitive position.
Or nature tacking.
Youre seeing out there in the markets.
What makes your.
Product.
Either more competitive or less.
Well.
If you're familiar with our product line and any detail you would know that we do is we basically take the commonly available compostable resin available in the market and we take them and modify them to improve them.
As always first of all we make them more easily to process. So you can produce more faster.
<unk> and injection molding processes and the finished product that will be stronger mechanical properties than the competitive alternatives.
So that's how we've been distinguishing ourselves in the market and this has brought to US a number of customers with very large very large multinationals.
For example in injection molding.
Try it for example to <unk>.
Develop their own technology over a long period of time and Bill and then came to lessons that.
We've seen that to be the case and with one large multinational in the United States and we've just started supplying a large injection in boulder in Europe , which we expect to grow nicely in the near future I think in Europe .
The expectation for the first year with this one large customer is on the order of magnitude of maybe 700000 to $1 million and that's just the start when we expect that.
Gross dynamically in the future.
That's great that's great.
Europe have.
Legislation in place that mandate compostable recyclable.
Materials.
I think it might be different from country to country. So it's not a Europe wide situations.
But I think the legislation area is changing and certainly.
Europe is very conscious about waste production, so and waste reduction so we're seeing growing demand from that sector.
That's great.
Appreciate the answers thanks very much sure.
Thank you.
Our next question comes from Jim Dowling with Jefferies.
Good morning.
In your attempt to get pricing.
Increases are you able to put into the contracts and automatic.
Inflation peg so that you don't have to keep going back to the client and ask for more money.
It depends on a case by case basis.
Things have been adjusting dynamically over the last year.
The rise of inflation.
In some cases.
You can negotiate and in some cases, you can't as easily with certain multinationals.
So but on the whole we've been able to get our price increases put through in a reasonable reasonable timely basis and right now we're pretty much on pace towards being up to where we need to be.
Just to add to that Jim.
About 70% of our business in North America, and I would also say through the joint venture that most of our subsidiaries tends to be based on spot pricing based on the price that we paid to produce a product so it would move.
And perfect correlation with the price of RASM.
Where we typically run into issues are with our stock product pricing or with blanket orders or orders, where we have.
Put a price in place based on resin at that time and so those are the situations, where we've been looking to increase our pricing to catch up with the.
The commodity pricing out the of the resin market and so we've certainly moved to address that.
And we've seen some stabilization of the resin prices over the past.
Three or four months, but still given the kind of the economic uncertainty we're seeing around the world it's been very.
Difficult to catch up but we feel like the.
With the changes that we made during.
Second quarter and third quarter due to our pricing was certainly reflected in the gross margin. We saw in third quarter and will be further you'll see that again in fourth quarter I would say that our gross margin specifically for may was the.
The highest gross margin for traditional zero industrial products that we had in the past nine months and so we're finally getting to the point, where we're seeing the benefits of the changes that we made a deal with the resin price changes.
Okay. Thanks.
Thank you.
Our next question comes from Gregory Weaver with victory capital management.
Good morning, gentlemen.
Pricing was one of my questions, but so am I to understand you're increasing prices again in the fourth quarter is just you know you get a full quarter of the prior ones.
It's both.
One of the things, we're looking at and kind of watch it closely right now is if theres going to be an additional.
Revenue increase in the coming in the coming months.
We're kind of waiting to see how that plays out but with the idea that if the price changes were going to move much more quickly than we had in the past to mirror. The price changes that were that were paid and so rather than holding our stock product pricing more constant with the expectation that.
We could deal with horizon, rather than fault that we typically have seen over the past 15 years, we are going to mark we're going to more frequently change our stock pricing to reflect those changes in the resin market.
Got you, Okay that makes sense.
And just on the nature Tech side of things good to hear about the supply chain constraints easing, but could have sold more product in the quarter were you still constrained in terms of output due to the supply chain. There is there are some constraints in the third quarter with with nature of <unk> sales.
We had so we had certain backlogs that were in place just given the just given me the inventory cycle and the time that it takes to get product through the entire <unk>.
Supply chain process.
There are certainly some backlog and expectations are that fourth quarter is going to be a strong nature tech product I'm, sorry in Asia Pac sales quarter.
Well and we see the increased demand, but also see the the catch up and essentially the stocking of ourselves to be able to supply all the products that our customers are certainly looking for.
So we feel that kind of going forward from really from may on we have adequate.
Adequate inventory in place and adequate raw materials in place to be able to fill our customer demands.
Okay, Alright thats helpful.
I'll take another shot at the oil and gas here Patrick After just tried so is there any particular geographic areas that youre seeing strength and where the pipeline or offshore platforms tanks any any color there.
Well, it's a little bit of everything everywhere.
Okay.
Some good orders out of India at this point the more activity in the middle East.
We're getting some activity in Europe Africa, South America.
North America.
In the U S and Canada, So it's really taking off in a number of.
Pretty much all over the world at this point.
Okay.
No no pun intended but the pipeline of.
Opportunities that we're seeing.
And customers that we're dealing with is is really the largest that we've had in the history of kind of the oil and gas business. I mean, we've got one customer who are spending 15 people to visit US next week.
We will get more familiar with our power technologies for where they can implement them across their entire system.
Alright that sounds really good because it's great to see broad based demand, but if it's all onesie <unk> types. So you got a couple of potential <unk>.
Clients in there, but theyre not pulling early yet.
Correct right, Okay, very good well I've been waiting.
We're getting close.
Thank you.
Thank you.
That concludes our question and answer session I would now like to turn the conference back to Patrick Lynch for closing remarks.
I'd just like to thank everybody for joining us this morning, and your interest in NTIC. Okay. I Hope you have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
The conference will begin shortly.
Raise your hand during Q&A you can dial stolen.
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