Northern Technologies International Corporation (NTIC) Q2 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Second Quarter 2018 Northern Technologies International Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. As part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding NTIC’s future financial and operating results, as well as their business plans, objectives and expectations. Please be advised that these forward-looking statements are covered 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 for these statements. Please also be advised that actual results could differ materially from these 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 Mr. Patrick Lynch, CEO.

Good morning. I'm Patrick Lynch, NTIC's CEO and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that the financial results for our fiscal 2018 second quarter were included in the press release issued earlier this morning that is also available at ntic.com. During this call we will review various key aspects of our fiscal 2018 second quarter financial results, give a brief business update, comment on our net sales and earnings guidance for the 2018 fiscal year, and then conclude with the question-and-answer session. NTIC's earnings release and today's discussion will include certain non-GAAP financial measures, so please refer to the earnings reconciliation which appears in the tables of today's press release. NTIC achieved extremely favorable financial results during the second quarter. Sales increased nearly 40%, while net income soared over 220% even after including a $700,000 one-time impact due to recent U.S. tax law reform. Our core ZERUST industrial solutions continued to gain market share as many of our joint venture partners around the world experienced record second quarter results. Our emerging Natur-Tec business segment completed its fourth consecutive profitable quarter just as NTIC China closed the quarter with significant sales growth and its third consecutive profitable quarter. We are encouraged by these successes and expect fiscal 2018 to set a record for the company. So with these highlights, let's examine the drivers for the second quarter. Global demand remained strong for our core ZERUST industrial products and our Natur-Tec products continued to perform well. For the second quarter ended February 28, 2018, total consolidated net sales increased 39.7% to a quarterly record of $12.2 million as compared to the three months ended February 28, 2017. Growth was realized across all business segments specifically ZERUST industrial net sales increased 33.5%, net sales from NTIC to its ZERUST joint ventures increased 87.9%, oil and gas net sales increased 181.2%, and the Natur-Tec net sales increased 33.5%. Total sales by our joint ventures which we do not consolidate in our financial statements grew to $30.2 million for the fiscal 2018 second quarter compared to nearly $23.0 million for the same period last fiscal year. This 32% increase in JV net sales was the result of improved global demand, increased market share, and a stronger Euro. We continue to proactively work with our JV partners and I'm pleased with the progress we've made towards improving performance. The growth in ZERUST industrial sales during the fiscal 2018 second quarter was due to higher sales of new and existing products to our core customer base, as well as increased demand across a range of market sectors. Favorable trends within these market segments have continued thus far into fiscal 2018 third quarter and we are optimistic these sectors will remain stable throughout the current fiscal year. Net sales by our wholly-owned NTIC China subsidiary increased 82.6% to $3.2 million during the second quarter of 2018 compared to $1.7 million for the same period last fiscal year. Despite the impacts from the lengthy Chinese New Year holiday period in February, NTIC China sales were still up approximately 10% from the fiscal 2018 first quarter. NTIC China's growth is a result of both converting customers from our former JV, as well as aggressively obtaining new customers across market sectors. We are extremely pleased with the very positive performance at our wholly-owned Chinese subsidiary. We remain confident that we can continue expanding our sales opportunities as we expand our reach across China. As expected, oil and gas net sales improved over the past three months and for the second quarter of fiscal 2018 were up 181.2% compared to the same period last fiscal year. We continue to believe our oil and gas products provide compelling solutions within this large and growing industry. Sales trends within this category are expected to continue to improve in the coming quarters as a result of our growing pipeline of potential contracts. Now turning to our Natur-Tec bioplastic's business. For the fiscal 2018 second quarter, Natur-Tec net sales were $2.0 million, an increase of 33.5% over the same period last fiscal year. Nature-Tec continued to achieve significant double-digit growth rates as a result of strong demand in North America through our expanding domestic network, as well as higher sales of finished products by NTIC's majority-owned subsidiary in India. Two years ago, NTIC's management team set ambitious financial targets that had us increasing net sales to $60 million and growing net income attributable to NTIC to $2 per diluted share by fiscal 2019. While it took time for NTIC China and Natur-Tec to ramp up, we were confident that we would emerge from these near-term headwinds as a stronger company and our second quarter financial results reflect this. We expect our momentum to remain strong and I'm excited about the remainder of the fiscal year and beyond. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2018 second quarter.

Thanks Patrick. NTIC's net sales increased 39.7% in the fiscal 2018 second quarter as a result of higher sales across all of NTIC segments. ZERUST industrial corrosion inhibiting products sales grew 33.5%, a $2.2 million which includes the contribution of NTIC China. Fiscal 2018 second quarter sales also benefited from an 87.9% increase in ZERUST joint venture sales and 181.2% increase in oil and gas sales, also a 33.5% increase in Natur-Tec sales. Higher sales and profitability across many of our joint ventures drove strong double-digit growth in joint venture operating income. Income from joint venture operations increased 33% for the fiscal 2018 second quarter compared to the corresponding period last year. Our total operating expenses increased 11.1% to $5.4 million during the second quarter of fiscal 2018 but decreased as a percentage of net sales to 44% compared to 55.3% for the same period last year. The increase was primarily result of higher selling and research and development expenses and the decrease of a percentage of net sales was primarily due to the higher net sales and lower G&A expenses partially offset by the higher selling and research and development expenses. Net income attributable to NTIC for the second quarter at 2018 increased 244% to $1.3 million or $0.29 per diluted share up from $387,000 or $0.09 per diluted share for the same period last fiscal year. Excluding the $700,000 or $0.15 per share, one-time provisional impact of the U.S. tax reform second quarter fiscal 2018 net income attributable to NTIC was $2 million or $0.44 per diluted share. As of February 28, 2018 working capital was $22.2 million including $5.1 million in cash and cash equivalents and $3.3 million in available for sale securities compared to $21.2 million including $6.4 million in cash and cash equivalents and $3.8 million in available for sale securities as of August 31, 2017. NTIC's business model does not require significant additional capital and we expect our financial model will continue to produce strong operating cash flows. On February 28, 2018 the company had $22.3 million of investment in joint venture of which 56% or $12.4 million is in cash with the remaining balance invested in working capital. During fiscal 2018 second quarter, NTIC's Board of Directors declared a cash dividend of $0.10 per common share that was payable on February 21, 2018 to shareholders of record on February 8, 2018. Turning now to NTIC's annual guidance for the fiscal year ending August 31, 2018. We're increasing our expected annual net sales for the current fiscal year from between $46 million to $47 million to between $48 million and $49 million. We're also increasing our expectations for our annual net income attributable to NTIC. We now expect net income to be in the range of $6.5 million to $6.8 million or a $1.40 to $1.45 per diluted share. This includes the $0.15 per diluted share of one-time charge associated with the U.S. tax reform. This compared to previous earnings guidance of $5 million to $5.3 million or a $0.10 to $0.15 per diluted share which did not take into consideration any impact from the U.S. tax reform. These estimates are subject to significant risks and uncertainties including those described in our forward-looking statements. So as you can see we’re encouraged by our continued strong results. We’ve built the compelling platform to drive sustainable and profitable growth and we're excited about the direction we're headed. With this Patrick and I are happy to take any of your questions.

[Operator Instructions] And we do have a question from the line of Joe Vidich of Manalapan Oracle. Your line is open.

I guess, I just have one question and that it seems you said that your business model really doesn't require a lot of capital. So my question is, you know as your business starts to generate extra capital what are you - what do you see doing with it?

In general part of the problem not part of the problem but one of things we’ve always had is that the joint venture system we have set up does generate a significant amount of cash and we’ve always been in a position of reinvesting a lot of that cash back into the business, that's really how we came to develop the Natur-Tec product line, the oil and gas product line. Now that those are becoming more Natur-Tec becoming cash positive and oil and gas looking like it's going to be at some point in time soon. Obviously the cash is going to start increasing and hopefully rapidly. I would expect that we’re going to increase the dividends as we go forward. I think the company is looking for - we're certainly looking for ways to reinvest the cash in the business, but at this point in time that it certainly a good problem to have but it's something that the company considering as we do our strategic planning and are looking to the future.

I take it also - would you consider I mean - are there places around the world where you can expand your presence in Natur-Tec or other joint ventures?

At this point we don't anticipate creating any additional joint ventures in the near-term. The ones that we have in place seem to adequately cover those industrialized areas of the world where our ZERUST industrial solutions make sense. But we might be investing in expanded capabilities or with presence in China for example to increase our sales there even further and maybe in certain other sectors around the world.

Our next question is from the line of Tim Clarkson of Van Clemens Capital. Your line is open.

Great quarter, I’m speechless, I don't know what they ask about everything is going great. So I guess just keep it up I mean what can you say everything is going wonderfully. I guess want to talk a little bit about currency whether the - what impact the euro had on your earnings?

From a currency standpoint, I went back and looked at what joint venture income would have been with currencies they were in place from - in the last fiscal 2017. And we got a bump of about $325,000 in comparing the euro last year to comparing the euro list this year for the six-month period. So while there is certainly a tailwind coming from the change in the euro, the main reason for the significant increase in the joint venture income is due to a lot of our joint ventures being at record sales levels and still showing significant year-over-year growth in the local currency. We’re certainly happy with the quarter and kind of where we are for the six-month period, but it’s also important to when we put our guidance together for where we want to be at the - how we increase guidance for this year for the end of the year, it took into account achieving a similar result in third and fourth quarter to what we had in second quarter. And traditionally our second quarter is a slower quarter than what we tend to see in third and fourth quarter. So our expectations are that even the increase in guidance that we did for this year is still relatively conservative. We put in place a few years ago a plan of how to get to $60 million in sales and $2 per share in earnings for fiscal 2019. And we certainly hope that by looking at the tax adjusted number of $0.44 per share in this quarter and then hopefully that's really going to give people a clear picture of how we get to and then eventually surpass that $2 per share going forward.

Our next question is from the line of Jerry Well, a Private Investor. Your line is open.

Good morning, guys. Congratulations and thank you for all your efforts I know it’s been a rough couple years with China and so forth. So my question is relating to all this rhetoric about tariffs in China and so forth so just kind of give us your thoughts and part of that is are you manufacturing actually in China or the product you are selling there, you’re manufacturing that in U.S. and shipping it there?

First of all, we do not sell products to protect steel coils. So one of the key elements of the tariffs in question should not affect us because we're just not in that business. Yes, to answer your question we do manufacture in China most of the products which we ship some things from United States, but I don't think that will be materially affected. It's also interesting to say that our U.S. customers do not export heavily to China and our Chinese customers do not export heavily to the United States. So even if things don't get resolved there might be some impact, but it’s not going to really kick us in the shins and we don't expect it will kick us in the shins in Chinese business for our ZERUST industrial business. There was a question of Natur-Tec since some of the base resin systems we use for the Natur-Tec products are manufactured in the United States, but those also do not seem to have been affected by the tariffs at this time. So at this point we're still anticipating that if the tariffs actually - are put in place that the impact to us will be minimal if none at all we’ll have to see.

And the second question relates more to the longer term which are seen in the ZERUST oil - the tank business for ZERUST and I know it’s been taken a lot longer to get into that market and that's understandable. But what do you seen in that market are you still committed to a longer-term and give us kind of a high level picture of any updates there?

It's frustrating for us just as it’s frustrating for you. It certainly helps that the other product lines are - and the divisions of the company are doing well. But I mean I can tell you from an internal standpoint of looking at all the opportunities that we have. We do still expect to finish the year with kind of strong push from oil and gas with what we currently have in the in the pipeline. But I think your question is more along the lines of when do we see a significant year-over-year large buildup of going from 1.6 million to 2.5 to 5 and the real rollout. And I think that we’re starting to see a lot of market acceptance for the product. We are working internally with the lot of different companies to get this pushed out, but it’s taking a long time. But as I’ve kind of said before, its - we’re very patience with our approach. We think we are headed in the right direction. We think that we’re going to see market acceptance over the next several years. And it’s certainly our goal to get oil and gas to be a profitable contributor in the shortest amount of time, but it certainly calls for a lot of patience to get there.

And it's nice to have all the other divisions hidden all cylinders while you wait for that to happen. So, again thank you for all your efforts. Great quarter, guys.

Our next question is from the line of Louis Moser of Mayfax Investors. Your line is open.

I was wondering if is there any possibility of trying to get some analysts to cover your company, now that your growth becoming apparent and as stock is flowing at the lower multiples and the average market multiple by quite a lot. I note, company doesn't trade a lot of shares each day. However there are a number of other companies and we only follow companies such as yours with low caps that do have analyst coverage. So, is there any attempt being made in that direction or in terms of any conferences within the industry that you could participate in?

The difficulty we have from an analyst standpoint is, yes, we are actively talking to different firms. Yes we are attempting to get analyst coverage. The difficulty we have is that the company is not going to pay for analyst coverage. It's just not part of our philosophy. We don’t really see that as a contributor. Our general feeling is that as the earnings are going to grow, the liquidity and the trading volumes are going to increase, certainly as the stock continues to rise and we get included things like the Russell index and other indexes, that’s going to drive a fair amount of liquidity in the stock. From that same stand point we do and I specifically do a lot of non-deal meetings - non-deal investor meetings in various cities. We do investor conferences. We will be at investor conference, the Idea's Investor Conference in Boston in a month or two. So we certainly get out there to try and increase our visibility from a shareholder standpoint that’s certainly something that we’re attempting to do. The problem from an analyst standpoint or getting analyst coverage is that while at this point in time we don’t have a tremendous amount of trading volume, we also don’t have a tremendous amount of need to raise capital. And generally what we hear from various companies that potentially to provide analyst coverage is they like to have the opportunity to do investment banking as well as cover - as well as provide some analyst coverage. And so we’re not the most attractive company from a potential investment banking standpoint. So that some of the difficulties that we do we deal with. I can say that we - certainly as our stock is starting to rise and our earnings are trending in the right direction, meeting with investors, having investor calls and things like that is happening and the calls are going well. I mean, our goal is get on as many people’s radar screen as we can, so as the company does well and performs and does what we say, we’re going to do, there’s more - there’s a lot of people and investors that understand the potential of the company.

That’s an excellent answer and I appreciate it. From the volume standpoint in terms of the stock having follow these similar companies years you can get future volume starting today as people recognize earnings report and so forth and progress you’ve made. So thank you very much and good luck.

Our next question is from the line of Kevin Clark of Heartland Advisors. Your line is open.

Follow this company for years as your previous caller suggested extremely thin and difficult to trade in. So my question was the same as his in terms of coverage and I appreciate your answer and I agree that I would never pay for coverage and I recognize the difficulty in getting someone to cover you if you are not investment banking candidate. But trading volume is a big consideration for them as well. And I guess my question is, why have you not split the stock? Or would you consider splitting the stock? I mean having a three for two right here is just a no-brainer and probably even that two for one perhaps or three for two now or three for two later as trading volume picks up. That's one of biggest inhibiting factor that I think people buying your stock is trading volume. And as you get towards $200 million in market cap which I think will happen probably if you hit your numbers your trading volume will certainly pickup and as you alluded to you will get into the indexes and this trend towards indexation is huge and that will certainly be helpful, but in the near-term I guess the question is, would you consider splitting the stock and what would it take for you to consider that?

I think to the question, yes, we would consider splitting the stock. As you can probably noticed, you kind of read between the lines with the increase in authorized number of shares that we requested or voted on in the - with the annual meeting and in the proxy. We increased the authorized number of shares to 15 million from 10 million, so that it would be able to handle a stock split. So I would end - it certainly something that company is looking at doing in the near-term. But at this point in time if you look at the 8-K, there’s an issue with the increased number authorized shares and there are some questions about if that was done in a proper manner, 8-K that we put out in, I want to say in February on the topic. So that's one thing that we’re kind of wrestling with as far as the stock split goes.

Our next question is from the line of Charlie Pine of Van Clemens. Your line is open.

And just wanted to reprise the acclaim you’ve gotten from implementing. We waited a long time, but this is great to see.

Thanks, Charlie.

I'm going to circle back to one kind of a topic that was broached by somebody else about what you could potentially do with some of the additional cash that’s being generated in the business. And one of the things you talked about is besides increasing its dividend would be reinvesting it more into other parts of the business. Would one of the areas that you would be looking at doing that being oil and gas because of the -- things have taken slower to take hold in that area, but I guess I'm wondering if more dollars were to be invested into the oil and gas segment whether you could see a quicker - begin to start to see a quicker payoff that’s more marketing money etcetera was being devoted to that segment?

The quick and easy answer on that is probably not. For the reason that, I mean, we have obviously extensive marketing efforts. We have a lot of industry awareness. We have a lot of initial orders and installations which were being done on a trial basis where customers are looking to see how the product performs over a period of time of be it two, three, five years or longer depending on the client. So, until we get through this, getting to know you phase and having validated everything we've been saying about how well our products work, we can’t make the process go any faster by having more people knocking on doors and saying hey, are you done with your evaluation yet.

I would add to that, Charlie and also say that, as we certainly see the project rise, the project inside of oil and gas increased and as we see the business start to grow, I think that’s the point in time when we would start to invest more in the oil and gas department. At this point in time, I think putting extra money into oil and gas would probably have the effect of just ending up bringing our earnings down. I think when we start to see the momentum shift and start to see the sales come in that’s when we would end up ramping up a little bit more with the oil and gas.

How about - you did sort of indicate that you're seeing - I thought I heard you say that you're seeing a slightly increased pipeline in oil and gas. How would you characterize the difference in the scope of the pipeline that you have now versus where it was, say, six or nine months ago?

I would say that we're getting encouraging projects for the basic solutions that we've been talking about and on a broader scale in more countries. We just did our first installation in Thailand just the last month for example. At the same time we are in the trial marketing of some new solutions as well which we can’t really talk about, but they seem promising in terms of market acceptance so far.

Pat, when you say new solutions are you referring to something other than tank bottoms?

Yes.

Well, once again congratulations, thanks and that sort of covers it all. I guess I would chime in on one last thing, and I know that there has been discussion of splitting the - potentially speculating on the event of having a stock split. My counsel would be, I think you folks should hold off for a while. I don't think this is - the market will come to accept this based on your growth and your earnings and I think at these levels I just let things stay as they are for the time being. That's my $0.02.

[Operator Instructions] Our next question is from the line of Greg Weaver of Invicta Capital. Your line is open.

I apologize I hopped on late and missed Patrick's opening comments, but just…

We are all good.

Yes. I’m sure. Just following on to the oil and gas questions, the 579, you did this last quarter and the growth here you’re foreseeing that’s off this number, right, for the second half?

Correct. I mean, we’re currently - if I’m just looking at North American oil and gas, we slightly, I want to say we’re just over $600,000 plus in revenue. Our expectations are that second quarter - sorry, third and fourth quarter are going to certainly be have higher sales number than what we saw in first and second quarter. We also starting to see a slight increase in the - in some revenues in oil and gas from Brazil but nothing significant. But from a guidance standpoint there's nothing that we have built in the guidance for anything significant happening in oil and gas. But certainly there are things that we’re working on that we expect to happen in third and fourth quarter.

Yes, but it was my follow-ups, so I been hearing some rumblings at Petrobras is kind of picking up steam again. It sounds like you're seeing a little activity but not much?

There is - with Petrobras they have a - there’s a larger Flange Savers contract and when I say larger I mean US$600,000, US$700,000 in Flange Savers contract that we received probably six months ago or so. They took delivery and about third of that contract with the expectations that throughout the rest of our calendar year 2018. The remainder of that $600,000 contract will be sold to them. So that’s certainly better than what they did last year from an oil and gas standpoint, but it's not to the levels of where we expected Flange Savers sales to be a few years ago with Petrobras. But these are new transparent Flange Savers that we’re seeing little more market acceptance with not just the Petrobras but in other markets.

Any partner leverage on oil and gas, does anybody helping you there?

There are certain countries where we are utilizing the joint venture, specifically in you know the subsidiaries obviously in Brazil and in France we’re utilizing the joint venture partners there a couple of the areas, but again the majority of our joint ventures are more industrial ZERUST focused.

And how about hopping over to Natur-Tec did you referenced at all about bulk resin sales and any traction there?

We didn't comment on that. There is some additional bulk resin sales that are occurring not a huge amount the majority of the increase in revenue that we’re seeing is still at the distributor level of the bags not of the resin. We're also seeing an increase in the business in India for that market. So that's an area that we expect to have to kind of be one of the key growth areas for Natur-Tec is with selling the resin, but it didn't contribute in the first six months of the year anything significant.

Okay but there is still opportunity.

Yes.

And nice gross margin in the quarter what should we think about that going forward obviously oil and gas held that situation but this 34, 40 just put up?

It’s pretty at this point in time the gross margin has been it improved from a percentage standpoint a little bit. Again it’s difficult from the standpoint we’ve got four different businesses with different business and with different gross margins being balance, it usually fluctuates a little bit just due to weighted average of actual sales that were contributed. But we are certainly focusing on that and a lot of our internal efforts at this point in time are towards bringing down our cost of goods so that our gross margin percentage either remains stable or is improving that certainly been a key focus of the company over the past 12 plus months to make sure that’s where we’re focusing. Similarly from an expense standpoint our goal is to keep the expenses as flat as possible and improve our cost in from a purchasing standpoint as much as possible. One of the nice things when I was looking at one of the nice things that I thought from the quarter and the six months was the percent of expenses, the percent of expenses is a percentage of total sales dropping. That's something that is going to certainly help when every dollar that’s contributed from a gross margin standpoint is going down to our operating income line and hasn’t been eaten up by increased expenses along the way.

So I was going to give kudos on the expense control, I guess just on that note anything on the legal expense front on a go forward basis so unusual level?

No, we had - during the first six months we had about probably $350,000/$370,000 that majority of which was in Q1. We haven't had any significant legal issues that impacted Q2. At this point in time, we don't have any material legal issues or anything that we’re looking at right now. And certainly, we’d like to keep it that way as much as possible. So that’s one of the things that kind of fall off from an expense standpoint if you look at the anticipated expenses in fiscal 2019.

Thank you. And I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Patrick Lynch, CEO for closing remarks.

I’d like to thank everyone for participating today and your interest in NTIC. Have a nice day.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.