Good day ladies and gentlemen and welcome to the Northern Technologies International Corporation second quarter 2016 warnings conference call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [indiscernible]. As a reminder, today's conference may be recorded. As part of the discussion today, the representatives from NTIC will be making forward-looking statements regarding NTIC's future financial and operating results as well as their business plan, 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 the NTIC desires to avail itself from the protections of the Safe Harbor for these statements. Please also be advised that the actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks or uncertainties, including these described by 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 call over to Patrick Lynch, Chief Executive Officer of NTIC. You may begin.

Good morning. I am Patrick Lynch, NTIC's Chief Executive Officer and I am here with Matt Wolsfeld, NTIC's Chief Financial Officer. Please note that our financial results for the second quarter of fiscal 2016 were included in a press release issued earlier this morning, a copy of which is now available at NTIC.com. During this call, we will review various key aspects of our fiscal 2016 second quarter financial results, give a brief business update, comment on our net sales and earnings guidance for the full fiscal year and then conclude with a question-and-answer session. We experienced net sales growth of 14.5% for the fiscal 2016 second quarter, driven by strong sales in North America as well as record quarterly sales for Natur-Tec. The impact of this favorable demand in North America for Zerust industrial products as well as global demand for Natur-Tec products more than offset the impact of slightly lower sales through our joint venture network. Total JV sales were $19.4 million for the fiscal 2016 second quarter compared to $23.1 million for the same period last fiscal year. JV sales were negatively impacted by $1.2 million in part as a result of a stronger U.S. dollar in comparison to a number of key currencies, including the Euro. Additionally, we believe that JV sales were also affected by weaker trends in the overall economy, specifically in Europe. We are closely monitoring our European markets and proactively working with our European joint ventures to improve performance in the face of a more challenging economy in this region. After a sluggish first quarter, sales of Zerust products in North America rebounded in the second quarter. We experienced improvements among some of our largest customers, including customers in the automotive industry. Sales of new liquid and powder-based corrosion preventive products enhanced…

Thanks Patrick. Net sales of NTIC Zerust products increased 10.4% across our industrial market and oil and gas market segments during the second quarter fiscal 2016 compared to the same period in fiscal 2015. This increase was due to higher demand in North America by existing customers and improved sales at NTIC China. Net sales of Zerust oil and gas solutions were flat in second quarter of fiscal 2016 and up 11% from our fiscal 2016 first quarter. Oil and gas net sales were $377,000 during the second quarter of fiscal 2016 compared to $376,000 in the three months ended February 28, 2015. When evaluating this result, it is important to remember that current global oil prices coupled with a local turmoil and a deep recession in Brazil as well as a management restructuring at Brazil's state-owned oil company, Petrobras, resulted in NTIC recognizing only $116,000 Zerust oil and gas solution sales in Brazil during second quarter of fiscal 2016 and only $118,000 during the fiscal year-to-date. The majority of oil and gas sales during the current fiscal year quarter and expected sales for the rest of the current fiscal year are anticipated to be for our tank bottom products. Net sales of Zerust corrosion inhibiting products through our joint ventures increased over 7% during the second quarter of fiscal 2016 compared to the same quarter in fiscal 2015. Income provided by our joint venture operations decreased 28% to $1.9 million during the second quarter of fiscal 2016 compared to the nearly $2.5 million in the prior fiscal year quarter. This decline was mostly attributable to the decrease in equity income from joint ventures that resulted from a general weakness of the economy as well as, to a lesser extent, the weakening of various foreign currencies, including the Euro, compared…

[Operator Instructions]. And our first question comes from Tim Clarkson from Van Clemens. Your line is open.

Hi guys. Just a couple of questions here. One a detail question, one a more of a big picture question. The detail question, it says here that you had $2 million of cash that was provided by operating activities for the three months. Could you just explain how that occurred even though you guys lost money during the quarter, during the first six months?

Yes. That occurs because of the dividends that are coming in from the joint venture. Regardless of profitability or net income, we still receive a significant amount of dividends from Germany and from other joint ventures that flow through our operating section of our cash flow.

Okay. Obviously balance sheet is not an issue at this point. On the bigger picture, now that the tank business seems like its getting a little bit of follow through here, do you have any sense of what percentage of the market you guys have penetrated so far? You have got one competitor in that business. Have you guys done less than 1% of tanks? What's the size of the opportunity out there?

I would say that we have not even managed to get to 1% market penetration. Not even close.

Okay. And so far, what's the response? I How many customers are you guys working with now? 15 customers that you would say that are kind of established customers?

I would say that 15 is probably good number. What's interesting to us is certainly and if you look at the number of tanks we did in this year so far, probably 60% of the number of tanks was done through our primary distribution partner in North America. So we were certainly getting a lot of support. So very aggressively helping us market in North America and internationally our business is growing as well. We did couple in just the last month in India, which had been quite well for us.

And what's the scuttlebutt? Is there kind of a better realization that this technology is real and its working? Or is it starting to get an acceptance that this should be the way things should go?

It's getting a lot of attention by the various tank farm operators and while they are still somewhat cautious in certain respects, they are certainly taking a very hard look at broadening that implementation on a much wider scale over the next few years.

Okay. One last question. With the increases on the compostable side, are we getting close to an operational breakeven on that now?

Yes. We definitely are very close.

And there is no expectation that's going to slow down?

No. Certainly everything right now with Natur-Tec, given some of the opportunities we are looking at over the next six months specifically, I don't see any reason why it wouldn't be operating at a -- we basically had a breakeven point right now, what we are doing on a monthly basis and we would expect to see it actually generating profit in the fourth quarter.

Okay. And one last question. What would you say is the price quality advantage you have on that product versus, I know there's other competitive products out there?

Could you be a little more specific in your question?

Well, why are people buying your product versus some of the other starch-based products or other compostables? Why would someone want to use your product versus somebody else's? Is it cheaper? Or is it better? What are the advantages?

This is a very broad question. On the one hand, when you say like starch-based products, generally starch-based products have a bio base component to them, but they are not biodegradable or compostable. So they have a bio component but they are not entering the same waste stream as our products can. So the disposable issue is one aspect that we can do that those kinds of products can't. For those products that claim to be compostable such as ours, we generally believe that we have a stronger, mechanical strength to our product and easier processibility. So we can make better products more cheaply than our competitors can.

One last question. I apologize for hogging with you, but one of my clients is convinced that this should be sold off to a bigger company that could really market it. Has that ever been in consideration?

We are not averse to considering any offer in that respect but so far, quite frankly nobody has come calling and basically before we reach a certain level profitability there is no sense really in considering those kinds of overtures.

Right. You want to create something where you can get an attractive price for it.

Exactly.

Right. Okay. I am done. Thanks.

Thank you. Our next question comes from Jerry Well, a private investor. Your line is open.

Good morning guys. Say, this whole bit we are in China, do you have any, with the legal system there plus U.S, do you any key court dates or anything in the U.S. or in China? That's one question relating to China on the legal side. And the second part is, it sounds like from an operational, forget about the legal costs and all that, operationally you are ways off than on a breakeven in China, so that's the second question related to that.

Well, let me address the first question. In the United States, I would say, we been told that discovery in the U.S. case will not be concluded until August of this year. That puts you in any perspective of the timeline. Regarding China, I would have to say I have very little transparency into their legal process. It goes for a while and then we hear something and then we provide some more information and then it goes a while until we hear again. But quite frankly I have no feeling whatsoever in terms of how close we are to any specific resolution at this point. And as far as the other question --

As far as the breakeven point in China, you said you don't feel like we are close to breakeven there. I would disagree with that. Looking at the monthly sales, looking at the monthly expenses and looking at where we are, I can comfortably say that based on the projections that we have for third and fourth quarter with where they are coming out of from a sales standpoint and an expense standpoint that they would be at a breakeven or better level within the next two months. So I think you are going to see a continued increase in sales in China during the third and fourth quarter.

Okay. Thank you. And then your attorneys are advising you relating to China to continue to press on with them. I mean obviously you have hired some attorneys of experience or whatever that is in Chinese law. So at this point, it's still worth your money to keep pursuing it, if you will and not take an impairment, et cetera. So just give me your thoughts on that and I am done.

Well, our legal expenses in China are essentially lower than our legal expenses in the United States and certainly one of the key aspects that we are suing for in China is the liquidation of our previous joint venture company. We can't just leave that sitting out there especially when we own half of it. So something has to be done about it. And certainly it is my understanding that in terms of timelines that one way or another that liquidation will start within the next 12 months.

Okay. Thanks guys.

Thank you. Our next question comes from Charlie Pine from Van Clemens & Co. Your line is open.

Hello. Good morning, everyone.

Good morning.

Actually, most of my questions have been answered, but I just would like to re-circle back on a question regarding the legal process and costs in China.

Okay.

You just stated a moment ago that you are spending less in China in legal expenses than you are in the United States. Over the course of the next six to 12 months, the sort of guidance that you are seeing from your legal team, how do you think those expenses are going to track?

It all depends on what stage of the lawsuit we are in, Charlie. There are certain months where we get exceptionally large legal bills and then in the next month it will be very minimal. It all depends on the process.

Let me color this way. Generally speaking, some of the larger legal expenses are associated with discovery. So certainly are expenses in the U.S. until August, I would expect to be reasonably high. They do not have a similar discovery process in China, so we won't see a similar trending expense over there at all. So China will be essentially the same or less going forward while in the U.S., I am expecting it to be about the same or may be slightly higher until August is over.

Okay. Let me see if I can just break it down a little bit more. So of the $1.4 million hit that you had in the first half of the year due to China, how much of it was due to the legal expenses and that aspect of it and how much would have been just startup costs and ongoing operational issues because you are just not profitable with your new venture?

I would say, the legal expenses associated with the $1.4 million equate to probably $250,000 to $300,000.

Okay. All right. I will get back in queue. I might have another question, but thanks a lot.

Okay.

Thank you. Our next question comes from Dick Feldman from Axiom Capital. Your line is open.

Good morning. Thanks for taking my call. Getting back to China, you have talked about how revenues are rising. I wonder if you could give us a breakdown between how much of that increase was customers you never dealt with at the joint venture and old joint venture customers?

I don't have that breakdown immediately in front of me. I would say that certainly the majority so far, let's just for right now say that at least 80% of the business right now is from the old joint venture and that 20% is new business. Generally speaking, in our industry, conversion of a customer, it's a fairly long sales cycle. So it takes about six months from approach. So as we have been building our distribution network in China, by the time China salespeople who then in turn train the distributors who then in turn visit the customers and then wind up with trials and implementations. You will start to see a shift going more to new customers probably within the next 12 to 18 months. But for at least for the first year or so the majority will be prior customers of the JV that we are assuming.

The gross margins in China, in order to obtain business as a "startup company", have you had to give price concessions?

Yes. And also there is a shift in the business model where our prior JV was doing sales mostly direct and we are working now primarily through distribution. So we had certainly needed to give up some of the margins to allow the distributor to make some money.

So for purposes of guidance, as Chinese sales rise, what type of gross margin should we think of?

At this point I don't know that I can give you an exact amount, because right now it's fluctuating for us. It's fluctuating significantly. And it's almost customer-by-customer basis. So I think we need to get a -- it's going to be pretty dependent on what happens in third and fourth quarters as far as the sales increases go. I think I would have a better answer for you in a few months. I would say, it's certainly not going to be, as you said, at the same range of where we were, where the former joint venture partner was. But I would expect it to be close or little bit lower than what we see in for the Zerust business in North America. But I would have a better answer for in a few months.

So what you are saying is margin should be healthy but not as good as they were in the past in both China and North American Zerust.

Correct.

While we are on margins, as Natur-Tec ramps up, obviously you are getting to cover your fixed cost. Has there been any change in the gross margin percentage with increases in volume?

Yes, there has. We are seeing slightly better margins with Natur-Tec than we have in the past, specifically as volumes go up, specifically as we are buying larger amounts of the raw materials and also as we are, let's say, developing better relationships with the key suppliers and we start working with them more on specific deals. You will remember the agreement we put in place and how we started working with NatureWorks. That's worked very well for us from the standpoint of getting the slight discount on the base raw material that we use in the majority of our products and also it helped us get into various new opportunities to develop new customer relationships that NatureWorks has really instigated. So it helps from both sides. So yes, the margins are getting, they are not going up to the Zerust level of margins, but they are getting better than what they were a year or two ago.

Are we talking a couple of points of gross margins?

Yes. I want to say, in the past we were at 22%, 23% and now we are getting up into the 25%, 26%.

Okay. That does it for my question.

Thanks, Dick.

[Operator Instructions]. And our next question is from Jerry Well, a private investor. Your line is open.

Hi guys. A follow-up call on the tank business. Two questions. One is, how seasonal are you seeing that business as primarily North America, obviously relating to the weather? And then the second part of it is capacity. Have you been able to meet the demands? I know you have been using this partner in North America to help you sell it and install it. So if can kind of give me a little feedback on that, it would be appreciated?

Sure. Second quarter, for us obviously, November, December, January, especially in North America, especially now over the last few years a bit of a slowdown during those times for installations simply because of weather-related issues. It's harder to get people to work outside and dig in the ground if necessary. In terms of capacity, we are not really hitting any capacity constraints at this point. We have sufficient number of installations supervisors and we are recruiting or we are using the installation labor of our distribution partner as needed. So technically we have the ability to definitely leverage that going forward before we need to really increase our staffing requirements.

Okay. Thanks a lot, guys. Keep up the good work.

Thanks Jerry.

Thank you. Our next question comes from Charlie Pine from Van Clemens & Co. Your line is open.

I just wanted to circle back and ask, I guess, a couple questions on the oil and gas segment. Out of the roughly 15 total customers that you have now, that sounded to me like kind of close to what you had six months ago or have you actually added any new with the relationship with your new partner, have you added new customers in the first half of the year, even though things have been slow in the oil path?

I thought I mentioned earlier, I don't have an exact number of customers. So I am kind of guessing at this point. So I holding to that specific number. But yes, our distribution partner is bringing us new customers. At the same time, we are doing repeat business with a number of clients. The installations we just did in India, for example, was follow-on business through a project we had done a year ago. That customer specifically was so pleased with the results, they actually published a technical paper and presented it at a corrosion conference just recently touting how well the product had worked for them and that also encouraged them to do this repeat installation just last month.

I think Charlie, it's also important to consider the amount of opportunity just inside of the clients and customers that we have relationships with now is significant. Just being able to -- it would make much more sense as a company standpoint from an ease of selling and increase in revenue and what not associated with oil and gas to put much more effort on further penetrating the customers that we have given the huge opportunities that exist inside of them, rather than signing up new customers. Not that we are not aggressively going after new customers, but we are very aggressively going after repeat business with the existing customers, if that makes sense.

Yes. That's understood and judging by some of the names that we have been provided in the past, these are very, very large enterprises that would have very expansive installed bases of tanks, so I can understand that. Just to kind of take it one step further on that, of those that you have, have there been a few that have really kind of embraced it where you have more concentration of tank installs out of those 15-odd customers?

Certainly, yes. As I mentioned, just as an example, the repeat business while it hasn't been in the number of tanks has not been that large yet it India, but certainly the financial value has been significant. As I just mentioned, they were so pleased with the performance results that they were willing to publish papers in an industry conference touting the results that they were getting. Likewise in the United States, we are getting repeat business. We have got certain number repeat business in the Caribbean. We have got a number of repeat business in Canada as well as in the United States. So I would venture to say that those customers who have worked with us and used our technology and have seen the results are sufficiently pleased with it that they are coming back to us as opportunities arise within their installations to further expand their implementation of this technology.

Okay. Let me ask one last thing. You had mentioned in the past about getting an industry certification. I can't remember if it was from the American Petroleum Institute or what it was, but you had talked about efforts for certification. Do you have anything more that you can provide as far as how that process is working?

Nothing officially from the American Petroleum Institute as of yet but certainly there are a number of U.S. states that have recognize this technology as acceptable forms of protection.

Yes, I guess that's what I, now that you bring it up, that you had mentioned before. I think one of them had been Florida. Wasn't that correct?

Yes.

And Florida was supposed to be, if I recall, a bit of a thought leader in bringing a lot of other states along with them. Have you been seeing some of that over the last six months at all?

I am not current on the various efforts in that regards. So quite frankly, we have been focusing more of our efforts on selling rather than doing the legislative change. I would have to get more up to speed on what's going on there right now.

Okay. All right. Well, thank you very much, Patrick and Matt.

Sure.

Thank you. Our next question comes from Walter Ramsley from Southwest Capital. Your line is open.

Thank you. Congratulations, Patrick, Matthew. Got a couple of final questions. The expected tax rate for the year, assuming the company hits that $0.40 to $0.70, you have an idea of what that might be?

I think it would be pretty consistent with before. I want to say it's right around, harboring around 20%.

Okay. And for the last quarter, do you have a number for what the stock option expense was?

Yes. I want to say it was $200,000, $220,000, right around there. I can send you an exact number also when the cash flow is published in the Q on Monday, obviously the stock option expense is a component of the cash listed in there. But I want to say, for the year it was at about $450,000 for the year, $425,000 by quarter.

Okay. That sounds good. Now the business in Europe in the second quarter, did that really take a nosedive? Can you spend a minute or two and kind of explain what happened there and what the prognosis is in Europe?

I don't really claim to have a prognosis. I can only say that we were seeing consistently a slowdown in turnover in a number of key countries in Europe, including Germany, France, Sweden and Finland. And generally they are just seeing less volume from their existing customers. So that's the extent of the information I have.

Walt, just to give you a little more flavor on the impact, because obviously overall we saw a nice rebound in North America from a gross margin standpoint. Operating expenses were slamming. When you look at it to what happened with the joint ventures, a key component of that, if I look at, take Germany, for example, which is our largest joint venture and largest contributor, for the six months in fiscal 2016, we took in about $480,000 less equity income than we did last year during the first six months, or $271,000 over the last than we did in the three months. We saw a lot of volatility in the sales and income of our German joint venture in second quarter which is something we hadn't seen in the past. Overall, the sales at the German joint venture are down in Euros. They are down by about 4.6% for the six months ending compared to prior year. We have had in-depth conversations with the individuals that runs the German joint venture and Patrick also just over at a European partners meeting to get the flavor for what's going on through all of Europe. A lot of them are down roughly anywhere from 4% to 8% on the six months numbers compared to prior year, which obviously has a pretty big impact on our financials. We are watching it very closely. We are working on ways to fix that. But that's certainly a concern. We are not seeing 15%, 20%, huge percentages that these companies are off, but we are certainly closely monitoring it because even being a couple percent down compared to previous year has a dramatic impact on our operating income. I can say, based on conversations that we that we have had with the foreign partners that nobody is panicking at this time. Some of it appears to be normal volatility and the indications that we have from the majority of them are that they are still on track of where they expect to be at year-end. They don't see any reason why there wouldn't be a bounce back in third and fourth quarter from what they were doing before. So we expect to similarly to how we had a little bit of a hiccup in the first quarter. I think a lot of the joint ventures felt that in first and second quarter, but it looks like things should be hopefully back on track or at least be in any kind of you continued downwards pressure in third and fourth quarter.

Okay. Well, thanks. That's very helpful. And just one last thing. Earlier in the call, you mentioned that there were a couple of new products that apparently have gained pretty good acceptance coming out of the gate. Can you describe them a little further? And maybe talk about what the potential is over the next year or two for them to really contribute?

The product themselves are giving us entry to new applications. At least right now, I would prefer not to publicly announce what those are, just for competitive purposes. The sale of the individual products we are talking about themselves are not that large, but they add certain a aspect to our product portfolio, allowing us to capture additional business with our existing product. So it's the combined solution that we are now able to provide that's helping us grow our sales.

Okay. Well, that sounds good. It sounds like that has a lot of opportunity. Thanks for taking the questions.

Thanks Walter.

Thank you. Our next question comes from Dick Feldman from Axiom Capital. Your line is open.

Today you released some patent information. The product, a tank patent. How does that compare with what you are currently introducing? And will that patent be something you will actively market? Or what's the status in that?

I am sorry. Could you repeat that question, please?

You had a press release about patents issued, let me pull it up. Where was it?

I am pretty sure we did not mention any patents in the quarterly earnings press release.

Here it is. I am not crazy. It may be a new service, patent number -- the patent covers system for corrosion detection of storage tanks soil side bottoms. The patent number was 9,303,380 and it was issued to you on April 5.

Okay. That is one of the patents that covers the technology we are currently implementing to protect the tank bottoms.

Okay. So it's already use.

Yes.

Okay. That's all I have. Thank you.

That just means that the patent was issued, but we have been operating under patent pending for quite some time with that one.

I understand.

Our next question comes from Jerry Well, a private investor. Your line is open.

Sorry guys. I promise this is the last one. Relating to, I know you have announced in the past, allocating so much capital for stock repurchase. Give us an update on what your plans are there, if you would? And by the way, nice to see additional cash coming in from your partners from overseas.

At this point in time, we have repurchased several thousand shares. As you know, there certainly is a tremendous on liquidity in the stock. And what we have done over the past two quarters is we put a repurchase plan in place during the times when we are not blacked out from repurchasing stock. When we do stock purchases we operate under the same blackout periods that we would have from an insider trading standpoint. So we did stock repurchase a few quarters ago, just below $15. Last quarter we had a stock repurchase in place, that was, I want to say, just under right around $10. We were able to by certain shares, usually during the first few weeks of when we open trading and then we saw a slight rebound in the stock price. We certainly have the ability to repurchase stock where it is and we tend to adjust that on a quarterly basis, as we are not in a blackout period. I want to say, in total it's been probably $100,000 worth of working capital spent on stock repurchase. We haven't had any large block volumes or anything like that come to our attention that came in as an offer. So it's something that we put in place to kind of support the stock, if you will, given what we think is a very low stock price given what the company it looking at for future potential, future earning, current evaluation of the company. So that's where we are. I would anticipate continuing to do that going forward until we see a rebound in the stock price, which obviously we anticipate happening once we see an increase in the earnings and show some trends of sales and earnings going up, which is certainly the focus of the company. But it's going to take a couple of quarters of consistency, I think, for people to see how we should start trending going forward.

All right. Thanks for the update, guys. I am done.

Okay. I am showing no further questions. I would now like to turn the call back to Patrick Lynch for any further remarks.

I would just like to thank everyone for participating today and for your interest in NTIC. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.