Q2 2023 Northern Technologies International Corp Earnings Call

Yeah.

Yeah.

Good day.

Thank you for standing by.

Welcome to the Northern Technologies International Corporation's second quarter 2023 earnings Conference call.

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 this session you will need to press Star. One wondering your telephone you will then hear an automated message you're watching your hand is raised.

Your question. Please press star one again.

Please be advised that today's conference is being recorded.

That's 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 with 1995 and.

That NTIC 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 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 Chief Executive Officer.

Please go ahead.

Okay.

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 second quarter of fiscal 2023 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 2023 second quarter financial results provide a brief business update and then conclude with a question and answer session.

For almost 20 years now NTIC has been singularly focused on building a solid foundation.

Comprised of an experienced and committed leadership team.

As well as a constantly growing portfolio.

Solutions to answered that a diverse and evolving needs of our global customer base.

We have continually invested in our business by adding capabilities.

Enhancing our operations and Opportunistically buying out select joint venture partners.

This in turn has enabled us to pursue long term growth strategies.

Aimed at diversifying our end markets product categories and geographic footprint.

Our second quarter financial performance reflects the success of these initiatives and the resilience of our platform and stable demand for our industrial products and services in North America, coupled with growing interest in our niche tech and zeros to oil and gas products.

Both in the U S and abroad provided yet another new sales record in the second quarter.

Even as we continue to navigate an extremely complex operating environment comprised of but not limited to <unk>.

Persistent inflation raw material cost increases geopolitical conflicts in Europe .

And the lingering effects of the COVID-19 pandemic in Asia.

I'm also pleased to report that we are making considerable progress rebuilding our gross margins and controlling operating expenses in fact, our second quarter gross margin of 35% marks a significant improvement on both as big.

<unk> and year over year basis, reflecting the growing contributions made by a profitable U S oil and gas business as well as the benefits of other measures. We've implemented successfully so far this fiscal year.

Overall momentum remains positive and we expect NTIC, China sales will improve in the third quarter and beyond.

As the Chinese economy, finally has the opportunity to start rebounding from its exceptionally long self imposed pandemic freeze.

In addition, major tech sales are expected to benefit in the third quarter from new customer relationships and incremental orders.

Consequently, we believe we are well positioned for a strong finish to fiscal 2023.

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

For the second quarter ended February 28, 2023, our total consolidated net sales increased 9.1% to a second quarter record of $18 $3 million.

As compared to the second quarter ended February 28 2022.

Broken down by business unit. This included a 212, 4% increase in oil and gas net sales.

A 5% increase in nature Tech net sales and a three 7% increase in zero industrial net sales.

Total net sales for the fiscal 2023 second quarter by our joint ventures, which we do not consolidate in our financial statements.

Increased three 6% to $25 $5 million.

This increase was due primarily to a rebound in demand across the territories serviced by our global joint ventures. After several quarters of lower demand due to certain geopolitical conflicts and their impact on raising the cost of energy while simultaneously reducing its availability.

Fiscal 2023 second quarter net sales by our wholly owned NTIC China subsidiary.

Decreased by 31%.

Two $2 $9 million due to the negative impact of a severe COVID-19 related lockdowns across much of the country during the quarter.

And the resulting weaker economic conditions as well as the impact of Chinese new year.

We continue to closely watch market conditions in China.

Now that the Chinese government has terminated the Prc's zero Covid policy.

We expect demand to improve throughout the remainder of this fiscal year.

We remain committed to the Chinese market and the long term opportunities it represents for NTIC.

We continue to take 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 on to <unk> oil and gas.

For fiscal 2023 second quarter was one of the strongest quarters, we have ever had for <unk> oil and gas as sales increased 212, 4%.

Two $1.8 million.

The second quarter of fiscal 2023 is also the fourth consecutive quarter of its U S oil and gas sales over $1.5 million and on a trailing 12 month basis, we have reported nearly $6 $5 million of oil and gas sales we.

I believe these positive trends reflect accelerating momentum within our oil and gas business.

Interest is growing for our zero <unk> oil and gas solutions, which include applications to protect above ground oil storage tanks and pipeline casings from corrosion.

We believe the third quarter of fiscal 2023 will be another good quarter of oil and gas sales and growth.

The expanding adoption of our zero oil and gas solutions within the oil and gas industry and supporting bigger opportunities for our <unk> oil and gas products and technologies as.

As a result, we believe fiscal 2023 will be a transformative year for <unk> oil and gas as this business scales and continues to contribute to profitability.

Turning to our nature Tec Bioplastics business.

Fiscal 2023 second quarter nature Tech sales were $3.8 million.

A 5% increase over the prior fiscal year period.

While sales trends within the nature Tech remain positive.

Second quarter sales growth slowed due to seasonality and the timing of both shipments and orders.

We expect nature Tech sales growth to Reaccelerate in the third quarter supported by favorable demand in North America, and India, and significant new customer wins and orders in these geographies.

Globally, we continue to see growing market demand for new applications of certified compostable plastic products and resin compounds as.

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 niche Tec Bioplastics business.

While the global economic environment remains extremely complex.

Our results have continued to demonstrate a powerful platform we have created.

Every day, our team members and joint venture partners are working closely with our customers to provide leading solutions to help protect global supply chains, and oil and gas industry infrastructure from corrosion.

While also improving the environment by providing best in class Compostable Bioplastics.

I am proud of our team's strong performance during a very fluid business landscape.

And I'm extremely excited by the opportunities we have in the future to create lasting value for our shareholders.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for fiscal 2023 second quarter.

Thanks, Patrick compared to the prior fiscal year period NTIC is consolidated net sales increased nine 1% in fiscal 2023 second quarter to a second quarter record. This growth was driven by the positive trends Patrick reviewed in his prepared remarks, a three 6% increase in second quarter.

Sales across joint ventures, combined with the actions to improve gross margins.

At nine 8% increase in second quarter joint venture operating income compared to the prior fiscal year period.

Total operating expenses for the fiscal 2023 second quarter were $7 $5 million and 11, 8% increase over the prior fiscal year period, which was primarily due to increased personnel expenses and expenses incurred in the current fiscal year period in connection with the startup of a new indirect majority owned.

Theory for him to assume the operations of our former joint venture in Taiwan operating expenses as a percentage of net sales were 41% compared to 41% for the prior fiscal year period.

Gross profit as a percentage of net sales was 35% during the three months ended February 28, 2023 compared to 29, 8%. During the same period last fiscal year. The 520 basis point improvement was primarily result of successful actions taken by the company to address inflationary pressures.

And the increased sales of higher margin the rest of oil and gas solutions.

NTIC reported net income of $885000 or <unk> <unk> per diluted share for the fiscal 2023 second quarter compared to a $183000 or <unk>.

Per diluted share for the fiscal 2022 second quarter.

NTIC is non-GAAP net income adjusted for amortization expenses and expenses related to the NTIC, India transaction with $991000 or <unk> 11 per diluted share compared to $392000 or <unk> <unk> per diluted share.

<unk> 2022 second quarter.

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

As of February 28, 2023, working capital is $24 million, including $5 $5 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 February 28, 2023, we had $7 $1 million outstanding on our revolving line of credit.

During the second quarter, we purchased the 26000 square foot facility immediately adjacent to our headquarters in circle, pint, Minnesota or $1 $2 million. The building will be used for additional warehousing and production space to support our continued growth.

We generated $2 $2 million in operating cash flow for the six months ended February 28, 2023, including $202000 in the.

Quarter during.

During the second half of the fiscal year, we expect to use positive operating cash flow to reduce the outstanding balance of our revolving line of credit.

On February 28, 2023, the company had $21 $5 million and investments in joint venture of which approximately 52, 9% or 11.

$11 $4 million was in cash with the remaining balance primarily invested in other working capital.

During the fiscal 2023 second quarter Ntic's Board of directors declared a quarterly cash dividend of seven per common share that was payable on February 15, 2023 to stockholders of record on February one 2023.

To conclude our second quarter and year to date financial results demonstrate the progress we've made to increase sales across our diverse end markets and geographies.

And the success of our near term initiatives to improve profitability.

I'm encouraged by the direction, we're headed and while the economic environment remains extremely fluid. We continue to believe fiscal 2023 repeat will be another good year of sales and profitability of NTIC with this overview, Patrick and I are happy to take your questions.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.

Please standby were compelled Q&A roster.

Our first question comes from the line of Gus Richard with Northland Capital markets. Your line is now open.

Yes. Good morning, Thanks for taking my questions.

I was just wondering if you could talk a little bit about what youre seeing in China now.

Clearly the last quarter was.

Challenging and just wondering how quickly you see that.

<unk> coming back.

Okay.

That's still.

We're still in the wait and see mode really.

We are expecting now that China would flush out a little lumpy at times.

Some time for them to recover and get things going again.

Have a better picture of how quickly China will recover basically at the end of the third quarter.

Got it and then you mentioned.

A couple of new customers applications in nature Tech and I'm just.

Again any color around that in terms of geography.

And market et cetera.

One of those domestic we have one large customer we talked about come online we've already started production on that program.

Quarters, and we expect to start delivering this quarter.

Okay and then the last one for me.

Oil and natural gas.

No pun intended but what's the pipeline look like there.

Right now.

Okay. Good.

Any color.

Martin multinationals pipeline work above ground storage.

At the moment.

It's a combination of both.

Very.

Very unhealthy pipeline at this point.

Okay, Alright appreciate it thanks, so much.

Congrats I'll just add one comment that the.

The rest of the revenues in second quarter for oil and gas.

Did not include <unk>.

Any sale to British petroleum from the contracts that we received in.

In the first half of the year, that's something that we're starting to deliver on.

In the second half of the year.

Got it got it and just.

Just one follow on.

Sort of how many customers you have in a quarter or is it.

Our hand, Poland.

Any sense there.

From an oil and gas standpoint.

Yes.

A number of customers would be in the 10 to 20.

Sure.

Per quarter, and if I look at kind of.

An opportunity lifting its certainly not like the rest of the industrial lifting when you look at the backlog as far as the hundreds of customers that we're continually delivering too. It's obviously a product that we sell.

From a.

Our price per opportunity at much higher than the rest of the nature of tech traditional business. So yes. It is simply a handful of customers per month, and that's what adds to the volatility of the.

Revenue.

It is positive and a good note that we're finally, starting to see is somewhat of a baseline of revenue coming yet.

Patrick said in his prepared remarks.

The last four quarters, it's been over one $5 million in revenue.

Per quarter.

As we're looking forward, we're better able to kind of plan, where we are not just in third and fourth quarter coming up but also throughout our fiscal 2024, we can see the size of the opportunity we could see the growth that we're looking at and Thats one of the reasons why we're excited about <unk>.

Direct to the oil and gas is headed.

Okay.

Sorry, I keep on thinking of more questions.

How many customers roughly are in the pipeline.

I would say youre, probably not necessarily on new customers, but if you look at I'm looking at just the opportunities that we are in and deliver on in third quarter. You are likely looking at probably 30 or 40 different customers.

Okay got it got it very helpful. Thank you.

Thank you as a reminder to ask a question at this time. Please press star one one you touched on telephone.

Our next question comes from Tim Clarkson with Van Clemens <unk> Company. Your line is now open.

Hey, guys great quarter.

Anyhow, you got this new U R. L number to get onto the call. You thought you could shake me off knowing how bad I am more details, but I had angi to the rescue saw there anyhow.

On the oil and gas stuff I mean, what what are the typical gross margins on oil and gas versus your <unk>.

Traditional business.

There are certainly more positive.

We'll be putting out specific gross margins because it does vary.

Based on opportunity, but it's certainly at a higher gross margin than what we see in compared to the U S industrial and I would say zero industrial has historically been slightly better than that.

And then the nature of Tech gross margins.

Alright, what approximately is the breakeven in that division.

Breakeven in the oil and gas division.

We have if im looking at oil and gas.

We had.

Yes, it's great and between about four 2% to $4 $8 million in.

In revenue so given the trailing trailing four months trailing.

Barry you want to go back from when we kind of saw that step up in revenue.

Oil and gas group has been positive for the last the last few quarters, which was kind of a big milestone, which was which was a big milestone for that group.

And now it's.

Now we're looking at what are the additional opportunities what are the additional geographies that we can we can start going into.

There is additional hiring that's taking place in oil and gas service these opportunities.

And so.

Part of what gives us.

A lot of optimism with what's going on currently in oil and gas.

Right and so just on <unk>.

Big picture intuitive basis, I guess, what's finally happening, which Patrick predicted is no. After eight to 10 years people are actually seamless technology work dramatically better than the traditional technologies and they see the other people using it so between seeing other people using it and wanting to catch.

And actually seen the technology.

<unk>.

Prove out there finally, and believers and along with that.

Yes.

Our government variances that you have jumped through.

That's exactly right. Thanks.

Okay, well, great and then on the on the.

Composed of all stuff.

I guess that you know I've been here and again in Hennepin County here locally putting a push on the compulsory ball I guess, that's the other big picture that you know the there's starting to be some government movement requiring.

Organics to get pushed all the garbage stream and you need to have the packaging as part as part of that solution.

That's exactly right I mean, one of them one of the key drivers for the that market in general or the municipal and state mandates that were seen anyone country wide mandate that we're seeing in various in various markets. So.

And also with <unk>. We're also seeing positive movement with with some of the key raw materials that are going into the going into the product just prior to those price points coming down as well. So the expectation is that we're going to see continued recovery in the <unk>.

Industrial gross margin and also improvements in the in the nature of that gross margins compared to where we were in.

First and second quarters right.

Alright.

What are the considerations in terms of potentially spur.

Spinning this division out and having a trade separately.

Well I mean, we're certainly looking at it at that.

Opportunity just because it's prudent to do so but I mean at this point in time NTIC is such a small.

I always say, we aspire to be a microcap.

Company at this point in time nature, we don't feel has the.

The size the revenue and the profitability at this point to be.

Standalone certainly in the future thats something that were going to be going to be evaluating and looking at because it is something that could be valued differently.

Wasn't seen in conjunction with the rest of the industrial and oil and gas business.

Alright is there a potential to get a.

Jake partner that would help.

With that.

I mean like like a cargill or someone like that that would bring technology and maybe sales and marketing into the deal.

As possible.

Nothing Theres no external conversations that we've had with anybody from that.

That level of.

Of partnership.

As we as major Tech continues to grow and the market continues to grow.

Certainly there'll be a lot of different options out there for the for the business.

Now in your past the issue of there being a shortage of.

The key.

Element that you're using.

This stuff.

No restrictions at this time, but we've got plenty of raw material.

Available to us.

Right right, Okay, great good good quarter, and it sounds like quarters coming up are going to be even better. So I am done thanks, Tim.

Thank you and I'm currently showing no further questions at this time I would like to hand, the call back over to NTIC management team for closing remarks.

Just like to thank everybody for listening in today and I Hope you have a good week.

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

Okay.

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