Q1 2023 Northern Technologies International Corp Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the Northern Technologies International Corporation first quarter 2023 earnings 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 will need to press star one one on your telephone keypad.
As part of today's 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 empty I see 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 fourth looking statements due to certain risks and uncertainties, including those described in Ntic's. Most recent annual report on Form 10-K subsequent quarterly reports on Form 10-Q, and recent press releases.
Please read these reports and other future filings that NTIC will make with the S. E C.
NTIC disclaims any duty to update.
Or revise its forward looking statements.
This call also may include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP, which are generally referred to as non-GAAP financial measures.
Conciliation of the historical non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release NTIC issued this morning on the Investor Relations portion of its corporate website at M. T I C dot com.
At this time I would like to turn the conference over to Mr. Patrick Lynch CEO , Sir you may begin.
Good morning, I'm, Patrick Lynch Ntic's CEO .
And I'm here with Matt Wolsfeld Ntic's CFO .
I want to begin this morning's call by wishing everyone, a happy healthy and prosperous new year 2023.
Please note that the press release regarding our fiscal 2023 first quarter 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 2023 first quarter financial results.
I had a brief business update and then conclude with a question and answer session.
Stable demand for our industrial products and services in North America, coupled with growing interest in our nature Tech and as U S oil and gas products.
In the U S and abroad.
Provided record sales again this first quarter.
This is particularly encouraging considering the prevailing complex business environment.
She has continued to navigate the supply chain and shipping issues persistent inflation raw material cost increases geopolitical conflicts in Europe, and the lingering effects of the COVID-19 pandemic in Asia with the intent of minimizing the impact of these challenges on our business.
Price adjustments made during the last fiscal year helped improve net sales and profitability in North America.
While we expect some inflationary pressures and supply chain issues to persist throughout the second quarter.
We continue to see improvements.
Most notably being the increased availability of raw materials for our nature Tec Bioplastics business during the quarter.
Overall momentum has remained positive and we expect that NTIC will continue to offset near term uncertainty within our European and Asian markets.
In addition, we expect the 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 first quarter in more detail.
For the first quarter ended November 32022.
Our total consolidated net sales increased nine 7% to a first quarter record of nearly $20 million as compared to the first quarter ended November 32021.
Broken down by business units. This includes a 66, 9% increase in the U S oil and gas net sales of.
A 21, 6% increase in nature Tech net sales and a 4% increase in <unk> industrial net sales.
Total net sales for the fiscal 2023 first quarter by our joint ventures, which we do not consolidate in our financial statements decreased eight 5% to $24 $7 million.
This decrease was due primarily to slower demand across the territories serviced by our global joint ventures, due to certain geopolitical conflicts and their impact on higher energy costs and availability.
Fiscal 2023 first quarter net sales by our wholly owned NTIC China subsidiary.
Decreased by seven 7% to.
$3 $7 million.
Due to the negative impact of severe COVID-19 related lockdowns.
As much of that country during the quarter and the weaker economic conditions as a result thereof.
We continue to closely watch market conditions in China, and we are hopeful the recent suspension of that country's zero Covid policy.
To improve demand in China later this fiscal year.
Overall, we remain committed to the Chinese market and the long term opportunities it represents for NTIC.
We have taken steps to enhance and protect our Chinese operations and we continue to believe China will likely become our largest geographic market in the future.
Now moving onto zeros to oil and gas.
For fiscal 2023 first quarter was one of the strongest quarters, we've ever had for oil and gas.
Sales increased 66, 9% to $1 $6 million.
The first quarter of fiscal 'twenty to 'twenty. Three is also the third consecutive quarter of just oil and gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business.
We believe interest is growing for our U S oil and gas solutions.
Which include applications to protect above ground oil storage tanks and pipeline casings from corrosion.
And we believe the second quarter of fiscal 2023 will be another good quarter of oil and gas sales and growth.
The expanding adoption of our U S oil and gas solutions within the oil and gas industry.
Appointing bigger opportunities for our U S oil and gas products and technologies.
As a result, we believe fiscal 2023 will be a transformative year for U S oil and gas as this business scales and begins to contribute to profitability.
Turning to our nature Tec Bioplastics business.
Fiscal 2023 first quarter nature Tech sales were $4 $6 million.
A 21, 6% increase over the prior fiscal year period.
Sales trends within the nature Tech has been encouraging and show that demand patterns have begun to return to pre pandemic levels, especially in North America and India.
Furthermore, the supply chain and logistics challenges that impacted <unk> results last fiscal year continued to ease during the first quarter.
And contributed to the strong year over year growth we experienced.
We believe this is a testament to our strong position within the bioplastics industry and close relationships with important raw material suppliers.
We've continued to see growing market demand for new applications are certified compostable plastic products and resin compounds.
As well as increased 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 <unk> Tec Bioplastics business.
While prevailing geopolitical and economic uncertainty continues to impact our outlook on the overall economy in recent months.
Especially in Europe and China.
We believe 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 2023 first quarter.
Thanks, Patrick compared to the prior fiscal year period, NTIC consolidated net sales increased nine 7% to a first quarter record because of the positive trends Patrick reviewed in his prepared remarks, and eight 5% decrease in first quarter sales across our joint ventures drove a <unk>.
10% decrease in first quarter Gen joint venture operating income compared to the prior fiscal year period.
Total operating expenses for the fiscal 2023 first quarter were $7 $9 million 11, 7% increase over the prior fiscal year period was primarily due to increased personnel expenses and expenses incurred during the current fiscal year period in connection with the startup of a new indirect majority owned subsidiary formed.
Assume the operations of our former joint venture in Taiwan.
Operating expenses as a percentage of net sales.
With 39, 6% compared to 38, 9% for the prior fiscal year period.
Gross profit as a percentage of net sales improved to 31, 8%. During the three months ended November 32022, compared to 31, 3% during the prior fiscal period, primarily a result of improved pricing to offset inflationary pressures and increased sales to customers in the oil and gas industry.
As products within this end market carry higher.
Margin that are industrial products.
NTIC reported net income of $502000 or <unk> <unk> per diluted share for the fiscal 2023 first quarter compared to $4 5 million or <unk> 46 per diluted share for the fiscal 2022 first quarter recall that first quarter of fiscal 2022 net income reflected a gain of over $3 nine.
Million dollars relating to our acquisition of the remaining ownership interest of the rest India.
For fiscal 2023 first quarter Ntic's non-GAAP adjusted net income was $608000 or six cents per diluted share compared to non-GAAP net income of $781000 or <unk> <unk> per diluted share for fiscal 2022.
<unk> non-GAAP adjusted net income excludes the gain of over $3 9 million relating to our acquisition of the remaining ownership interest in <unk>, India and other adjustments as set forth in the GAAP and non-GAAP reconciliation at the end of our first quarter earnings press release that was issued this morning.
As of November 32022, working capital was $25 $4 million, including $6 million in cash and cash equivalents compared to $23 2 million, including $5 $3 million in cash and cash equivalents.
As of August 31, 2022.
As of November 32022, we had $5 $5 million outstanding under our revolving line of credit compared to $5 9 million at August 31 2022.
On November 32022, the company had $23 million and investment in joint ventures of which approximately 48% or just over $9 $7 million within cash with the remaining balance primarily invested in other working capital.
During the fiscal 2020 through first quarter Ntic's Board of directors declared a quarterly cash dividend of seven <unk>.
Common share payable on November 16, 2020 to the stockholders of record on November three 2022.
So to conclude our prepared remarks, our established product end market and geographic diversification strategies are helping the company navigate a complex and fluid business environment.
We are seeing stable north American demand trends and accelerating growth across our global oil and gas and bioplastics market, while the economic environment remains uncertain. We continue to believe fiscal 2023 will be another good year of sales and profitability of NTIC and we're excited by our prospects with this.
Overview, Patrick and I are happy to take your questions.
Ladies and gentlemen at this time, if you have a question or comment. Please press star one one on your telephone keypad.
Again, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Standby, while we compile the Q&A roster.
Our first question or comment comes from the line of Tim Clarkson from Van Clemens Dot Com. Mr. Clarkson. Your line is now hi, Patrick and Matt another good.
Quarter I, just wanted to I wonder ask exactly how much.
Deal.
Well, the Taiwan deal in general just to kind of give a little bit of color on it.
Taiwan is an entity was there was owned under one of our other subsidiaries in prior years it had about.
Somewhere just under $1 million in revenue.
In Taiwan passed away and because of that we decided to liquidate the entity and start up a new subsidiary that is owned under Ntis CN. So NTIC owns 60% of NTIC and thereby through pass through NTIC now own 60% of the Taiwan entity.
Our total operating expenses for the quarter were slightly up compared to expectations and last year total operating expenses were up a little over 11% I would expect that operating expense increase for the full year to be back in the middle.
Single digits from a operating expense growth standpoint.
Great great.
In terms of the oil and gas deal.
$1 million of half a quarter $6 million annual pace I mean.
How big can this division and potentially get I mean is this a potential.
Old division that can be.
10 or $20 million annually, yes.
Yes, it can be.
Okay.
Right.
In terms of.
Of suddenly now we're starting to see this consistent high high growth again.
Again, what are the what are the drivers that are our.
Getting people to want to buy these products.
We've just been pushing this now for a long enough that we have reputation.
We have a reputation in our industry.
People are coming to us now.
Yes.
One important thing to remember is also the reason why we got into the oil and gas space originally years and years and years ago is we've obviously been developing it for some time is because of the size of the opportunity.
And that opportunity being significantly bigger than the opportunity with the core is the risk products.
Certainly taken longer than any of us expected to develop but we're happy that we're finally, starting to see some of these larger opportunities and what I've always referred to as kind of a base level of oil and gas business.
Kind of establishing itself and so the fact, we've now been able to put.
Several quarters in a row, where we're not seen as much volatility as we were over the past few years.
And we're really starting to build on that business. Specifically, if you look at the expectations that we have for kind of second quarter and the remainder of the year.
And the expectation that the oil and gas is going to perform better significantly better than second quarter because of some orders we are coming in.
Announced before the BP Contra.
Contract, we have some business from that contract that will be coming in the second quarter and some other additional business.
That'll be coming in in the in the last three quarters of the year.
Give us a lot more optimism with the oil and gas business overall.
In terms of people I mean is there a limit to how much volume you can do in terms of how many people you have in that division I know, it's a relatively small division in terms of how many people are working there now, but it's scalable because.
We primarily have just supervisory supervisor engineers that.
Work with cruise and the various geographic locations that are already embedded train bonded what have you.
So we don't really have an issue in terms of scalability.
Right right and really.
It's a little unconventional, but certainly the technology.
Collusion in a couple ways, one by obviously, not allowing the oil and gas to weaken the groundwater, which is really bad but also in terms of.
Not having these.
Huge metal tanks have to be replaced.
Every 30 years.
Instead of the 10 year deal which is.
Obviously scale is an extremely polluting.
This is to create so I mean this is also a technology that really enhances.
Environment, as we transition away from oil and gas eventually towards.
100% non fossil fuels, but in the meantime, they are there and we want to mitigate pollution obviously.
Thank you.
Alright I'm done.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Our next question or comment comes from the line of Gregory Weaver from the Invictus. Mr. Weafer. Your line is now open.
Hi, good morning, guys.
Good morning, happy new year.
The new year.
Nice to see the oil and gas.
Have been patiently waiting and hopefully this is ed.
Good stuff if you can get that mixed in with the rest of your business.
When Patrick when you say that.
Income will be up profitability will be up in fiscal 'twenty three is that including joint venture income or is this just a corporate level.
It's kind of across the across the board I mean, the expectation is from a joint venture standpoint, we are seeing yogurt, we're continuing to see.
Let's say the biggest influence to the decreased profitability at the joint ventures was the raw material prices of <unk>.
Polyethylene and we are starting to see polyethylene decline the price of the raw material declined slightly on a global level and so all the different subsidiaries and joint ventures are starting to experience that benefit.
Well they were starting to get a little bit of a tailwind from a from a currency standpoint as far as the change in the euro to U S. Dollar.
Those two those two factors will impact profitability at the at the joint venture level with the expectation that.
We're also going to start to see some sales some sales growth. So that's one factor. Additionally.
Additionally, in North America kind of the continued growth that we're seeing in nature Tac will benefit the growth, we're seeing in oil and gas at the.
At the very positive margins that we have there will also benefit so.
It's kind of across the board the expectations of finally, having some of these headwinds turn into a tailwind the biggest.
I don't know if that headwind, we still face, but obviously still a headwind that we face is in China.
It is an entity that we have that previously was contributing with.
It was profitable moments contributing cash there right now is in a bit of a.
A state of flux right now given what's going on in the.
In China, specifically with Covid.
However, with talking to various people separately about what's going on in China.
It appears that there should be a nice rebound once once they've kind of dealt with COVID-19 issues and things start to normalize there that there'll be a rebound on the ground level. The expectations are that our salespeople and travel restrictions things like that will.
We'll free up certainly in the second half of the year and so that leads us to believe there is going to be.
A nicer rebound in China from a profitability standpoint, as well so certainly our expectations are that.
We will see some nice growth going from first quarter to second quarter, and then into what is traditionally the rush season third and fourth quarter that it should be.
It should be a solid year from a profitability standpoint.
Okay, great. Thanks, Matt that helps and you hit hit My next question on China. So just in the current Q2 fiscal Q2 here.
Or getting worse or it's about the same as what you saw in the just reported quarter well in the just reported quarter our Q1.
It was.
China in our first quarter was in a loss position given everything was going on was going on there compared to.
First quarter last year, China made a couple of hundred thousand dollars of profit.
Which is still down compared to where it was a couple of years ago as far as the amount of income that it was contributing.
First quarter. This year is actually at a loss position.
The second quarter I don't know if second quarter is going to be significantly better you're also dealing in second quarter with Chinese new year's.
Alright, Chinese new year, I think from my expectation it is kind of after Chinese new year.
Into our third and fourth quarter is when we're going to see a rebound in in China.
Okay.
Fair enough.
Alright.
And the Taiwanese thing so I guess, how long does it take to get back those sales that you had before and we've got them all basically the window of the former partners sold the business to us.
Just until.
The company, we just took the book of business.
Okay, and now that it's under your direct control.
What are you thinking about growth prospects, there may be a little more robust than they had been historically just I don't know how the guy was running I think there will be a pickup yes.
Okay. Good.
Alright.
Pretty much does it for me and I appreciate the.
Hard work and maybe get some I would call one time here to tell us about all the good stuff going on in oil and gas. So thanks.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
I'm showing no additional questions in the queue at this time gentlemen, I would like to turn the conference back over to you for any closing remarks.
Hi, Thanks for listening in today and hope you have a great week. Thanks.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day speakers standby.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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