Good day and thank you for standing by. Welcome to the Northern Technologies International Corporation's Second Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question and answer session. 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 those 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 10-K. Subsequent quarterly reports on Form 10-Q and recent press releases.

Good morning. I'm Patrick Lynch, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release was issued earlier this morning regarding the financial results for our fiscal 2021 second quarter and is available at ntic.com. During this call, we will review various key aspects of these fiscal 2021 second quarter financial results, provide a brief business update and then conclude with a question-and-answer session. Our fiscal 2021 second quarter financial and operating results show record quarterly ZERUST industrial sales as well as robust ZERUST sales growth at NTIC China and across our global joint ventures. While the COVID-19 pandemic continues to impact our Natur-Tec and oil and gas efforts, we see our sales and earnings continuing to benefit as more sectors of the global economy reopen and as industrial demand continues to increase through the rest of this year. So with this overview, let's examine the drivers for the quarter. For the second quarter ended February 28, 2021, our total consolidated net sales decreased 3.4% to $12.8 million as compared to the second quarter ended February 29, 2020. Broken down by business unit, this included a 40.8% decrease in Natur-Tec's net sales and a 66.2% decrease in ZERUST oil and gas net sales, partially offset by a 114.5% increase in ZERUST net sales to our joint ventures and a 22% increase in ZERUST industrial net sales. Total net sales for the fiscal 2021 second quarter by our joint ventures, which we do not consolidate in our financial statements, were $29.1 million, which is an increase of 19.6% when compared to the same period last fiscal year and an increase of 8.5% when compared to the first quarter of the current fiscal year. Higher joint venture net sales were primarily due to increased sales to existing customers as a result of higher demand for our products. Fiscal 2021 second quarter net sales by our wholly-owned NTIC China subsidiary increased 46.9% to a second quarter record of $4.4 million and were in line with first quarter sales, despite February's Chinese New Year's holidays. Strong performance at NTIC's China -- excuse me, strong performance at NTIC China is primarily due to higher sales to new and existing customers for both our ZERUST and the Natur-Tec product categories. We continue to believe the Chinese market represents a significant opportunity for NTIC. And given our recent growth, we expect China will likely become our largest geographic market.

Thanks, Patrick. NTIC's consolidated net sales for the fiscal 2021 second quarter decreased 3.4% when compared to the prior fiscal year period, but were in line with fiscal 2021 first quarter sales as a result of the trends Patrick reviewed in his prepared remarks. Second quarter sales across our global joint ventures increased 19.6% over this prior year period, significantly benefiting joint venture operating income, which increased 29.3% for the fiscal 2021 second quarter compared to the prior fiscal year period. Total operating expenses were only $5.9 million, which we proactively managed to reduce expenses by 9.2% compared to the same period last fiscal year and came in slightly below total operating expenses in the first quarter. Selling expenses declined nearly 9% over the prior fiscal year period, primarily due to COVID-19 travel restrictions, which were partially offset by a slight increase in research and development expenses. NTIC reported net income of $1.3 million or net income of $0.13 per diluted share for the fiscal 2021 second quarter compared to net income of $180,000 or $0.02 per diluted share for the fiscal 2020 second quarter. As of February 28, 2021, working capital was $29.5 million, including $6.8 million in cash and cash equivalents and $5.9 million in available for sale securities compared to $27.1 million, including $6.4 million in cash and cash equivalents and $5.5 million in available for sale securities as of August 31, 2020. On February 28, 2021, the company had $24.9 million in investments in joint venture, of which approximately 53.3% or more than $13.3 million was in cash with the remaining balance primarily invested in other working capital. During fiscal 2021 second quarter, NTIC's Board of Directors reinstituted the company's quarterly cash dividend of $0.065 per common share that was payable on February 17, 2021, to shareholders of record on February 3, 2021. To conclude our prepared remarks, second quarter results demonstrated improving global trends with our core ZERUST industrial business, and we continue to believe the U.S. oil and gas and Natur-Tec sales are well positioned for long-term growth as more sectors of the global economy reopen. In addition, our product and geographic diversity continue to benefit our overall results. We remain well capitalized and well positioned to execute our long-term growth opportunities, and we're excited about the direction in which we are headed.

And our first question comes from Greg Hillman, a private investor. Your line is now open.

Yes. Could you talk about the compostable market a little bit about how the trend in government regulations on a state-wide basis, on a national basis and also on an international basis?

As you know, the regulations in the United States are primarily on the coasts and are slowly moving more towards the center. We haven't had any, I think, significant increases in compost for regulations since the pandemic started. So the market is kind of -- has been stable for the last 12 months. On an international basis, as you might be well aware, various countries are implementing further bans on various uses of conventional plastic products. China is one of those countries. And we certainly expect to see an increase in demand for our products because of that in that country. India also has a partial ban on plastics, and we expect our sales to increase in that country as well. And things are shifting slowly in various countries in Europe as well.

Okay. And Pat, also, could you comment about your thoughts for the overall strategy of the company going forward? For example, would you do a non-synergistic acquisition to become more of a diversified specialty chemical company? And also, what are you doing in terms of technologies with alliances with other universities to further your compostable technology?

I'm sorry, I couldn't quite hear the first part of your question.

It was about strategy, okay? And I was wondering whether -- number one, whether you would do a non-synergistic acquisition? And also whether, I guess, what you're doing to improve your technology in terms of alliances with other universities or acquiring additional technology property?

Okay. First of all, we have no current plans for any acquisitions. And certainly, I don't expect us to look into any non-synergistic business. We're not going to buy anything just for the sake of buying something. And with respect to bringing on new technologies, we continue to work with certain universities to provide us with new technology. And we will certainly -- we always keep our eyes open for new opportunities in that respect.

Okay. And then finally, your Natur-Tec division, what would you say the total addressable market is at this point?

The total addressable market on a worldwide basis for bioplastics, is that the question?

Yes, for compostable bioplastics?

I don't have a figure for you on the off the top of my head.

Our next question comes from Gus Richard with Northland. Your line is now open.

Just real quick. Gross margins were a little bit lower I was thinking. Can you just talk about that? It was a stronger mix in the quarter. And just wondering why they were a little light?

I can take that. Obviously, gross margin, when you're looking at it across the product line, it's -- as we've talked about before, you've got, typically, oil and gas margins are higher than the industrial ZERUST margins, which are then higher than the Natur-Tec margins. So it's kind of a question of a mix between the 3 with very, very low contributions from oil and gas, specifically during second quarter, and that ate into the margins a little bit. We also are starting to see an uptick in resin prices for the ZERUST industrial polyethylene resins that we use as the base material for the ZERUST market. Obviously, commodity prices of raw materials worldwide has gone up. We certainly have the goal of an objective to pass as much of that price increase on to customers as we can. But at that time, there certainly are products that we have already agreed to supply at a certain price that may have accounted for a couple of percent in the ZERUST industrial market to bring margins down slightly.

Got it. And then in ZERUST oil and gas, you're thinking in the second half, you see a recovery. Is that just a function of the restrictions lifting from COVID-19? Or is ZERUST oil and gas is going to sort of be adopted by the industry standards bodies and its use become more prolific?

Well, we are certainly expecting the standards to be adopted by the industry in the near term. We don't have an exact figure on that. Right now, our expectation is for the second half of the year is that it's simply going to be a factor of the current pandemic restrictions being lifted, that will increase our opportunities to install projects at customer sites. And we have not really baked in anything yet for changes in regulations or standards.

Got it. And then finally, just any commentary on if you have a large customer? How are they doing in terms of adoption? And is that really going to -- is when we reopen college campuses and large venues, is that when that really should begin to take off?

The relationship is already in place. And in that, they've placed several orders with us. But their demand has slowed down a little bit due to the pandemic, but we expect that to rise again once the restrictions are lifted and people are going back to school and going back to sporting events, et cetera.

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

Another outstanding quarter. I expect nothing but that from you guys, and you guys seem to always do it. So good job. Still a couple of questions on China. Just kind of on a historical basis, I guess, I was looking back when you had this big split up with your joint venture guy, and you had to take over the deal because there's noncompliance. Does that go back to what, 2016, something like that? Is that one when all at...

2014.

'14, okay. So are we finally to a point where we're -- for sure, we got more sales in China than we did then? And are we -- do we have more profits? Or is that something you haven't thought about?

Matt, do you have the numbers from back then?

Yes. From a pure sales standpoint, we've eclipsed the sales numbers. We've obviously eclipsed the quantity of products sold. And with the kind of growth that we're expecting to continue to see over the next -- the rest of this fiscal year in the coming 2 or 3 years, it's obviously playing out very well from the standpoint that it's going to be a significant financial contributor to us. From a total operating profit contribution, what we were receiving in 2000 -- let's say, our fiscal '14, which is the last full fiscal year coming in from China, we're still slightly below the contribution that we were getting just because the margins at that time were so high in the contribution that we were getting. So we're still slightly below from a profit standpoint, but I would certainly expect that we'll be eclipsing that very, very shortly.

Okay. And what percentage of your business in China is compostable now?

If I look back at -- I'm just pulling up some numbers. For the first 6 months of 2021, we got about $8 million in revenue in China for ZERUST industrial and a little over $1 million revenue for Natur-Tec. So you're sitting at roughly 12%, 13% of the business. I think, overall, the expectations are that over the coming years, that's going to start taking up a significantly larger portion of the total sales. I would hope that the Natur-Tec sales are going to get up closer to the 15%, 20% in the coming year or 2.

Okay. Another more basic question. You guys spend a lot of money in R&D. Have you ever really looked at what kind of return you get on that? I mean, how does it work? I mean you spend money year 1 and you get a return on year 5? Or is it -- you make 80%

With R&D, nothing's ever guaranteed. So I mean, you have to invest and with targeted projects, hoping that you're going to see that return. But certainly, we don't bat 1,000 on every one of our projects that we get into.

Right. But on a retrospective basis, you can look back 10 years and say, well, on balance, we've made a lot of money from the ones that have worked, I assume, right?

Well, I think what you can do is take Natur-Tec, for example. We started spending on Natur-Tec 10, 15 years ago. If you look at the total amount that we have spent on Natur-Tec over that time period, obviously, we are not back to breakeven on total amount invested versus total amount that has been paid back. But if you look at how people value NTIC as a company, they obviously see Natur-Tec is a huge future contributor as far as where I would say, the -- a portion of the market cap, if you will. And so from that standpoint, with how much, say, Natur-Tec value is baked into the market cap, I would say the total contribution that we have made and invested in R&D is less than what is a portion of that market cap. So it's kind of a different way of looking at it. I certainly see that over the next 5 to 10 years, you're going to have a point where the Natur-Tec contribution is going to go from the amount that we've invested in over the past 10 years to being in the black. And it's most likely going to make up a significant portion of the value of the company. And similarly, we've done the same thing with oil and gas. We've seen less success in oil and gas we held with Natur-Tec, but still the addressable market and the opportunity is one that, as it starts to pay back, it's going to make a significant contribution to the shareholders in likely future earnings potential that should impact the increase in the stock price. So that's kind of how we look at it. And similarly, with the ZERUST market, we're coming out with having new patents and new applications and new opportunities. Those are the kind of things that we need to keep building on to maintain kind of a strong leadership in the market. And so we're going to continue to invest in R&D because that's the future of the company.

Are there any new projects that you're working on right now that you're particularly excited about?

There's new projects in each of the 3 different groups that we're excited about. I mean, we've run issues in the past of introducing things. Too soon where then people start to ask over and over again, what's going on with it. But I think we're in a position where the company is a very bright future, both with the existing technologies that we've already introduced and new technologies that we hope to bring into market in the coming 2, 3 years.

Our next question comes from with Alpha. Your line is now open.

Congratulations. I've been an investor a long time, as you know, and appreciate your hard work and diligence. So it's considering what we went through the last year, great results. So I just had one question. Relating to the -- there's been discussion in the past about regulation related to pipelines in the U.S. and whether or not that might have an impact on your business in certain regulations and maybe standards within the engineering community. So any update you can give us on that?

The various regulations. I mean, one set of regulations, specifically regarding pipelines is already in place where they are officially already recognizing, I guess, the corrosion inhibitors as a recognized means for protecting pipelines. The only thing is that so far FEMSA is not regulating or auditing that compliance with those regulations yet. They've postponed that for a period of time. So that's pending. And the API NACE guidelines on tank -- storage tank bottoms, the draft -- the documents are basically all done. As far as I heard that the -- from the API, they've gone through the documents and made -- there was only one technical comment that was still needed to be clarified. But other than that, the document is pretty much ready to be voted up or down at a meeting, which we expect to happen this year.

Do you see that it has much potential upside for the company?

That the regulations change and you implemented that way?

Yes, it's get implemented.

Absolutely. I mean, that will definitely have a significant impact on our -- the market -- the addressable market in the oil and gas industry because then you're talking about fundamentally changing the regulations across the industry in terms of what they need to do for corrosion protection in certain -- in these specific applications.

Our next question comes from Joe Vidich with Manalapan Oracle Capital Management. Your line is now open.

I was just wondering, I'm sure you guys are familiar with the company Danimer and which just recently came public to I guess. And I was just wondering if you could talk about how your products either compete or don't compete with theirs and just a little bit about the bigger market out there? And what -- how you guys fit in?

Well, first of all, we are not a direct competitor of Danimer as I mentioned earlier during my prepared remarks, we use the resin systems that are produced by various large companies like and BASF and NatureWorks. And even Danimer could, at some point in the future, be a supplier to us. They are not currently. I mean, we have not had a chance to look at their materials to see if they would be a good fit for us, but we would have to evaluate Danimer independently. So I can't really comment on the technology at this point. But we could use them -- have them the potential supplier to us in the future. If that's -- did I address your question? Or did I miss something here?

Yes. I guess that answers my question. So they're basically a supplier to what you're basically saying is their supplier to of their resin to like -- I mean they have a deal with, I believe, Pepsi or some of the CPG companies. And just kind of curious.

I think, as far as I know or my understanding is, they are being evaluated by various large organizations right now. But I can't really speak to whether they have a commercially viable project at this point. Certainly, right now, as it stands, the cost of Danimer resin to us is a bit high. And we're not sure of how their characteristics would work within our existing resin systems. So -- but we certainly expect that, if they do well in the market, the pricing will come down, et cetera, and then that will change those various factors. But I think it's still too early to say for us, for example, if Danimer can be a useful material for us to be using in the future.

Our next question comes from Greg Hillman, a private investor. Your line is now open.

Yes, Matt. A couple of questions about human relations. Number one, do you ever hire a Chief Financial Officer? And could you just talk about any important changes in positions company-wide that you consider to be significant?

It’s a question for Matt. I'm not behalf -- I mean, he is the Chief Financial Officer. I was planning on keeping them for right now. I mean -- and I'm going that strategically.

Are you talking about in North America for NTIC? Are you talking to one of the subsidiaries?

I guess, North America, you were talking about hiring a Chief Financial Officer 2 years ago.

I don't remember talking about that. I mean I have to say on the line right now, Matt is great. I mean, he's been working with the company for 20 years. And I give him a wholehearted endorsement. So there are.

Okay. Well, then just -- well, maybe you could just talk a few things about human resources in general, whether what you're doing to improve retention, training and management development overall in the company?

Matt, do you want to answer?

Sure. I mean, if you look at the upper management of the company, it's mainly comprised of about 5 or 6 individuals that have a very long tenure. You're talking about an individual that runs the -- and is around the Natur-Tec group for a significant period of time, everybody in upper management has, I want to say, has been there at least 12 years. So each of those individuals has tasked with the training, the employee retention, the -- really the overall strategic plan of their units. We really haven't had any issues in the short term or the long term with employee retention or employee training or anything from that standpoint. We've been very lucky that we have some pathways that we've typically gone to hire different R&D and different lab people that have come from various universities through context that we have where we feel like we've been able to bring in some significant talent that's helped us to push a lot of the technologies forward. We feel like we treat employees very well, and we look out for our employees in every way that we can. So we have very little turnover from that standpoint. From a training standpoint, it's pretty standard as far as how we train different levels. People do obviously continue education and each of them are associated with different industry groups, different ways where they can make sure that they are constantly improving their skills and bringing their talent to the company. So we've never really had an issue with any kind of turnover, either at the upper levels or lower levels of the company. And I don't anticipate that being an issue in the future.

I'm not showing any further questions at this time. I would now like to turn the call back over to Patrick Lynch for closing remarks.

I'd like to thank everyone for participating today and for your interest in NTIC. Have a great rest of the week. Thank you.

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