Q4 2022 Northern Technologies International Corp Earnings Call

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Yeah.

Good day, and thank you for standing by and welcome to NTIC is fourth quarter 2022 earnings conference call.

At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone you wouldn't hear an automated message advisor in your hand, it's rice.

Please 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.

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 statements.

Please also be advised that actual results could differ materially from Doe 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 turn the call over to your first speaker today, Patrick Lynch Ntic's CEO . 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 our press release regarding our fiscal 2022 fourth quarter and full year financial results.

It was issued earlier this morning and is available at NTIC Dot com.

During today's call, we will review various key aspects of our fiscal 2022 fourth quarter and full year financial results provide a brief business update and then conclude with a question and answer session.

Fiscal 2022 produced record sales for NTIC, thanks to strong demand for our Xerox industrial products and services in North America, as well as for our nature Tech and U S oil and gas products, both in the U S and abroad.

Having said that it's also important to acknowledge the benefit NTIC received from buying out our former Indian joint venture partner at the start of fiscal 2022.

With this acquisition, we now have to consolidate U S. India's financials into NTIC is causing our net sales to show an increase of 31, 3% year over year.

If we had not acquired the other 50% of the U S. India in September 2021.

NTIC is fiscal 2022 sales would only show an increase of 13, 6% year over year.

And the five year period since fiscal 2017.

NTIC annual sales have increased over 87%.

At a compound annual growth rate of 13, 4%.

This is solid growth record is a direct result of the long term strategy that we continue to execute on well.

We remain focused on developing innovative solutions, which in turn our global distribution network sales to increasingly diverse worldwide markets with exceptional technical service everywhere our customers need it.

Our sales growth during fiscal 2022 is especially encouraging when considering the complex business environment, we faced during the year.

This includes supply chain and shipping issues persist in inflation significant raw material cost increases geopolitical conflicts in Europe, and the lingering effects of the COVID-19 pandemic in Asia.

The prudent adjustments, we made to our pricing during the first half of fiscal 2022 benefited North American sales.

Nevertheless, supply chain issues and raw material cost increases impacted our overall profitability for the year.

In particular, well most world economies have reopened and have somewhat recovered from the pandemic.

Chinese government still continues to impose harsh COVID-19, lockdowns, which severely impaired the sales efforts and profitability of our NTIC, China subsidiary during the third and fourth quarters of fiscal 2022.

Sales and profitability were also impacted across many of our European JV is during.

During the fourth quarter as extremely high energy costs and availability problems hindered Europe's manufacturing sector.

As we enter fiscal 2023 momentum remains strong across our North American <unk> industrial as well as our global oil and gas and nature Tech markets, which we expect will help NTIC continue to offset near term uncertainty within our European and Asian markets.

In addition, we expect annual profitability to improve in fiscal 2023, as we continue to focus on rebuilding our margins.

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

For the fourth quarter ended August 31, 2022, our total consolidated net sales increased 35% to a new quarterly record of over $20 million as compared to the fourth quarter ended August 31 2021.

Broken down by business unit. This includes a 68, 2% increase in nature Tech net sales.

And a 30% increase in <unk> industrial net sales, partially offset by a 16% decline in the U S oil and gas net sales.

Total net sales for the fiscal 2022 fourth quarter by our joint ventures, which.

Which we do not consolidated in our financial statements.

Greased, 22% to $25 $9 million.

This decrease was due primarily to slower demand across the territories serviced by our global joint ventures due to concerns over geopolitical conflicts and the change in the accounting treatment of India, which is now a consolidated subsidiary within Ntic's financial statements.

Fiscal 2022 fourth quarter net sales.

By our wholly owned NTIC, China subsidiary.

Decreased by nine 5%.

To $3 $9 million due to the negative impact of ongoing severe COVID-19 related lockdowns across much of that country and the ensuing weaker economic conditions.

For fiscal 2022.

NTIC, China sales declined nine 2%.

$215 $8 million.

We are closely watching market conditions in China, and we continue to believe China will likely become our largest geographic market in the future.

Now moving on to the U S oil and gas.

Although we experienced a 16% year over year decline in the three months ended August 31, 2022, primarily due to overlapping the record sales we achieved in the fourth quarter last fiscal year.

For fiscal 2022 annual zero oil and gas sales reached a new record increasing 21, 5% on a year over year basis, and we have achieved two consecutive quarters with sales over $1 $5 million.

Interest remains strong for our oil and gas solutions, which include applications to protect above ground oil storage tanks and pipeline casings from corrosion.

And we are confident that the first quarter will be another good quarter for oil and gas growth.

In September 2022, we announced a new contract with BP exploration Caspian Sea limited.

Under this initial agreement NTIC will be supplying chemical corrosion protection services for 12 BP storage tanks over the next three years.

This alone is expected to bring in over $2 $5 million in revenue over the next three years.

This new contract is the single largest we've ever received for our U S oil and gas storage tank solutions to date. We believe this is reflective of the increased acceptance of our technology among the major players in the oil and gas industry.

Turning to our nature take Bioplastics business.

Fiscal 2022 fourth quarter nature Tech sales were $4.8 million a.

A 68, 2% increase over the prior fiscal year period.

Sales trends within the nature Tech are encouraging and show that the demand patterns have returned to pre pandemic levels, especially in North America and India.

Furthermore, the supply chain and logistics challenges that impacted nature techs results earlier. This year continued to ease during the fourth quarter and contributed 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 our close relationships with important raw material suppliers.

We continue to see growing market demand for new applications of certified compostable plastic products and resin compounds.

As well as increasing interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics as.

As a result, we believe we are well positioned for long term sustainable growth within our niche Tec Bioplastics business.

While prevailing geopolitical and economic uncertainty continues to impact our outlook on the overall economy, especially in Europe and China.

We believe that we can continue to grow sales and improve profitability as we benefit from favorable north American demand trends higher sales into the oil and gas industry and higher nature Tech sales.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2022 fourth quarter and full year.

Thanks, Patrick compared to the prior fiscal year period, NTIC consolidated net sales increased 31, 3%.

2022 to an annual record and grew 35%.

2022 fourth quarter because of the positive trends Patrick Op unit prepared remarks, and the incremental sales from <unk> India.

82% decrease in fourth quarter sales across our global joint ventures drove an 8% decrease in fourth quarter joint venture operating income compared to the prior fiscal year period.

For fiscal 2022 sales across our global joint ventures.

Sales decreased 14% contributing to a 21, 9% decrease in joint venture operating income compared to the prior fiscal year.

Fiscal 2022 fourth quarter and full year decline in joint venture operating income were partially offset.

By $682.

And the recovery of previously written off fees for services related to the termination of our joint venture in China in fiscal 2015.

Total operating expenses for fiscal 2022 fourth quarter were $7 5 million to 14, 1% increase where prior fiscal year period was due primarily to incremental expenses because of the the rest India acquisition and increased selling expenses associated with higher consolidated sales as.

As well as higher wages travel expenses and slightly higher R&D investments.

Operating expenses as a percentage of net sales improved to 37, 1% compared to 42, 5% for the prior fiscal year period.

For the fall.

Fiscal 2022.

Operating expenses as a percentage of net sales improved to 38, 3% compared to 43, 7%.

The prior fiscal year.

Illustrating our fourth quarter results, the Derisked and via 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.

In each case as compared to the prior fiscal year period.

Gross profit as a percentage of net sales was 33% during the three months ended August 31, 2022 compared to 36% during the prior fiscal year period, primarily as a result of the price increases in raw materials increased labor and lower sales at our China subsidiary.

Gross profit as a percentage of our net sales.

Was 31, 1% for fiscal year ended August 31.

2022, compared to 34, 6% for the prior fiscal year.

We have pursued action that addresses inflationary pressure and intend to continue doing so in the future.

NTIC reported net income of $648000 or seven cents per diluted share for the fiscal 2020 to fourth quarter.

<unk> to one <unk>.

$65 million.

Our 17 cents per diluted share for the fiscal 2021 fourth quarter.

For the full year NTIC reported net income of $6 3 million or <unk> 66 cents per diluted share compared to $6 to $8 million or 64 cents per diluted share for fiscal 2021 full year.

For fiscal 2022 fourth quarter NTIC non-GAAP income adjusted for expenses related to the NTIC, India transaction and amortization expenses were $753000 or eight cents per diluted share compared to $165 million or <unk> 17 cents per diluted.

Sure So the fiscal 2021 fourth quarter.

For fiscal 2022, non-GAAP net income was.

$3.0 million to $3 million, alright, 32 cents per diluted share compared to $6 million to $8 million or <unk> 64 cents per diluted share for fiscal 2021.

A reconciliation of GAAP to non-GAAP financial measures are available in our fourth quarter and full year earnings press release that was issued this morning.

As of August 31, 2022, working capital was $23 $2 million, including $5 $3 million in cash and cash equivalents compared to $25 2 million, including $7 $7 million in cash and cash equivalents as of August 31 2021.

As of August 31, 2022, we had $5 $9 million outstanding under our revolving line of credit.

At August 31, 2022, the company had $21 $8 million and investments in joint ventures of which approximately 53% or nearly $11 million was in cash with the remaining balance primarily invested in other working capital.

During the fiscal 2022 fourth quarter Ntic's Board of directors declared a quarterly cash dividend of seven per common share payable on August 17, 2020 to stockholders of record.

Third 2022.

So to conclude our prepared remarks, we continue navigating a fluid business environment, while continuing to pursue our product end market and geographical diversification strategies.

We're seeing strong north American demand trends and robust growth across our global oil and gas and Bioplastics market.

While the economic environment remains uncertain, we believe fiscal 2023 will be another good year sales and profitability franchisee and we're excited by our prospects with this overview, Patrick and I are happy to take your questions.

Thank you Sir.

As a reminder to ask a question you will need to press star one one on your telephone.

Please standby, while we compile the Q&A roster.

Okay.

Okay.

Okay.

And I show our first question.

Comes from the line of Tim Clarkson from Van Clemens. Please go ahead.

Hey, guys good quarter.

Just wanted to get into a little bit more granular discussion of exactly some of the things you can do to improve profitability, obviously, you've got some pretty good sales growth.

Is it just raising prices or what else can you do.

We're looking at obviously you are lowering our costs as much as we can and in certain cases, we are.

We are meeting with customers to negotiate price increases on a case by case basis.

Okay.

In terms of the oil.

Oil and gas business applications.

What's changed is it is it just that the technology is now finally getting recognized or is it because you've got.

Some process issues resolved in terms of no longer considered exotic technology or is it just more money in the oil and gas industry with what what do you think are the reasons youre starting to get some traction in that area I think it's basically a recognition of our presence in the market.

I mean, we've been doing this now for quite some time and it's all basically coming together, we've seen some very significant interest now out of countries that have been.

More quiet.

Until now.

Some significant business out of Norway.

In the next two months.

As well as some other countries.

In terms of your competitive position there I know you have some competition in the traditional packaging areas.

Is this a is this a technology that is a little bit more unique and proprietary oil yes. So yes. It is uh-huh uh-huh I'm.

I'm guessing that there's a fair amount of nor haul involved with <unk>.

Making sure this technology works the way, it's supposed to right.

Absolutely.

And we do built in Milton monitors into our solutions. So that we can prove to the customer how well they are working in the theory.

They're always there once you get an order is there ongoing revenues beyond just the initial order.

Absolutely.

What about the oil and gas oil sourcing solutions.

Oil storage solution.

Yes of course, I mean after we do the initial installation you have to replenish the chemistry under the tanks. After a certain period of time. So we were looking at a repeat sales sales probably every five years to the same thing.

I see I see on the compulsive ball and I see that revenues are really coming back significantly.

You mentioned that you've come up with some new new applications are there things you can talk about in terms of new applications using the compostable technology.

Not that I can talk about at this time okay.

Okay.

Great well I'm done good quarter, and I will stay with it. Thank you.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone.

And I show. Our next question comes from the line of Gus Richardson from Northland Capital markets. Please go ahead.

Yes, thanks for taking the question.

Just wondering.

Sort of how lockdowns in China.

The business as you move into into your first quarter.

Well as you've probably been watching the news.

So every time there is a COVID-19 case.

They are locking down factories and entire cities and most recently you've probably heard of.

I guess it was Fox con that was shut down for the manufacturing the Apple iphones.

In the Guangzhou city around it so we're seeing these rolling Lockdowns, which are obviously.

Impeding people from coming to the office visiting customers et cetera, and so forth. So the current policy regarding COVID-19 in China is significantly impacting that.

That country's economy and until they change their policies, which I'm told I think.

They eased slightly about two or three days ago.

It's still take some time before we see how that rolls out into <unk>.

Into our business.

Okay got it so effectively no no changes.

The month of.

September and October .

Okay and then just.

Could you just characterize how much of your business at this point is.

Contracted versus spot.

As you adjust prices.

What do you see sort of as the net lag effect.

Matt you want to take that one.

It kind of depends on a country by country basis, what we're seeing is that in.

In North America.

Majority of the business or not.

Out of contract.

Not set up for a contract sorry long term pricing goes.

We're seeing it more a little more prevalent in Europe that they were put in place pricing for.

An annual period or a year period.

But not as much and in North America and so.

The result of that is that we have seen our margins in North America.

Rebound much quicker in terms of the margins in Europe were somehow.

369 months behind.

The deterioration of the deterioration in the margins in Europe were delayed lag.

A little bit too, while we saw in North America and so.

As we hopefully see some of the volatility with the raw materials in Europe come.

Come down and then as we see some of these annual contracts coming back up for a renewal.

We feel like we're going to see a rebound in the gross margin.

Across Europe , and other parts of Asia that we saw in North America, and third and fourth quarter.

Okay third and fourth quarter of fiscal 23 correct.

Now our third with our.

Our North American business saw rebounding that gross margin in the third and fourth quarter.

We expect to see a rebound in the gross margin from.

And parts of Asia.

Throw out that really throughout.

Second in the third quarter of this of this year.

Got it and then just yes.

With Europe for a second.

Clearly.

Hey, good morning, the winter natural gas oil or tight.

Sure.

How much is that impacting your customers.

Or are they finding ways to work through.

The energy issues.

That's still.

On a wait and see basis really at this point.

No that everybody is cautiously watching the both the energy.

Supply and cost of energy.

But how that is going to play out is still needs to be seen.

Alright, that's great for the European market of course.

Right right, Okay, I think thats it for me thanks, so much.

Thank you.

I'm showing no further questions in the queue at this time I'd like to turn the call back over to Mr. Lynch for any closing remarks.

Sure I'd like to thank everyone for participating today and your interest in NTIC have a great week. Thanks.

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

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Okay.