Good day, and welcome to the Third Quarter 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call 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 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 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 these forward-looking statements. I will now turn the call over to Patrick Lynch. Please go ahead.

Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. A press release regarding our fiscal 2024 third quarter financial results was issued earlier this morning, and is available at ntic.com. During today's call, we will review various key aspects of our fiscal 2024 third quarter financial results, provide a brief business update and then conclude with a question-and-answer session. Please note that, when we discuss year-over-year performance, we are referring to the third quarter from our current fiscal year in comparison to the third quarter from our previous fiscal year. Our third quarter results reflect the progress we're making, navigating a fluid macroenvironment, while capitalizing on growing demand within our Natur-Tec and ZERUST Oil & Gas markets. We achieved record quarterly Natur-Tec sales driven by continued growth in North America and India for our compostable plastic products and specialty resins. While shipping delays caused the timing of approximately $600,000 in orders to be moved from the third quarter to the fourth quarter negatively impacting our third quarter results, demand for our oil and gas solutions is expanding. As a result, we expect a significant rebound in oil and gas sales in the fourth quarter. Furthermore, I'm particularly encouraged by the continued year-over-year improvement in our gross margin demonstrating that our initiatives aimed at offsetting supply chain and raw material challenges are working as intended. We anticipate that profitability will continue to improve and that we will continue to generate positive operating cash flow throughout the remainder of fiscal 2024. Year-over-year cash from operating activities improved by 116% to $7.6 million primarily due to higher net income for the nine months ended May 31, 2024 and positive changes in working capital. We intend to continue allocating capital to support our growth initiatives and quarterly dividend…

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 1.4% for the fiscal 2024 third quarter because of the trends that Patrick reviewed in his prepared remarks. Sales across our global joint ventures declined 2.7% in the fiscal 2024 third quarter. Joint venture operating income was down 3.6% compared to the prior fiscal year period. The year-over-year reduction in joint venture operating income was primarily due to lower sales and the resulting lower net income of our German joint venture, partially offset by improved profitability across many of our joint ventures. Total operating expenses for fiscal 2024 third quarter increased 7.1% to $9 million compared to $8.4 million for the same period last fiscal year. Higher operating expenses were primarily due to increased personnel costs. As a percentage of net sales, operating expenses were 43.4% for the fiscal 2024 third quarter compared to 40% for the prior fiscal year period. Gross profit as a percentage of net sales was 38.2% during the three months ended May 31, 2024, compared to 36.1% during the prior fiscal year period. The 210 basis point improvement was primarily a result of successful actions taken by the company to offset supply chain disruptions and raw material challenges, including insourcing of various production. Net income attributable to NTIC was $977,000 or $0.10 per diluted share for the fiscal 2024 third quarter compared to $1.1 million or $0.11 per diluted share for the fiscal 2023 third quarter. As of May 31, 2024, working capital was $23.2 million, including $5.8 million in cash and cash equivalents compared to $23 million including $5.4 million in cash and cash equivalents as of August 31, 2023. As of May 31, 2024, we had outstanding debt of $4.8 million. This included $2 million in borrowings under our…

[Operator Instructions] And our first question comes from Timothy Clarkson with Van Clemens & Co. Your line is open.

Hi, guys. Decent quarter. Just wondering about, I saw that, obviously your fixed expenses were up a little bit. What, I mean - what was the typical increase in salaries at Northern Tech for this year?

We changed salaries, in September 1 of this year with the fiscal year. Last year, I want to say the average increase was probably 3% to 4%.

Okay. And in terms of looking at the two big growth areas, the compostable and the oil and gas, any significant changes in the players who are buying, say, compostables? Is that still about the same people? Are there any new positives that you're seeing out there?

They're certainly the similar people. It's really a matter of expanding the distributors that we have across North America and then getting it a new market, whether they're in Europe or other opportunities that we're seeing throughout Southeast Asia. So they're the same types of players, but we're just seeing that the market is continuing to increase due to various municipal legislation, state legislation or even national legislations that we're seeing around the world related to the use of conventional plastics and the ability to use compostable plastics instead. So it's just a lot more people getting into the industry and getting into the space from a consumption standpoint.

Right. Now, typically on the compostables, are you selling a finished product or are you selling the goop that makes the finished product?

We're selling both. We certainly started out selling the finished products to various customers where we're selling bin liners or trash bags, cutlery. And now we're working towards a lot of the newer opportunities and sales that we've had are with the selling of specialty blended resins so that companies can make their own products out of the proprietary resins that we have. So we're taking the base resins and modifying them to make a specialty resin so that companies have the ability to essentially make anything that they're currently making out of conventional plastics, a compostable plastic.

Which is more profitable?

They're pretty close from a gross margin standpoint. We just feel like the specialty resin market of being able to sell container load quantities of resin appears to be long term probably the bigger market as far as kind of how things are transitioning. So it's not as much a matter of which gross margin is better. It's just a matter of being able to kind of value the size of the opportunities. So in some of the opportunities where we're selling resins, you're talking about selling containers of - containers of resin compared to when you're selling the finished products, you're ultimately selling caseloads or pallet loads of product. So it's just a matter of the opportunity. But we're certainly going after both areas.

How about on the oil and gas? Any changes in the kinds of people buying the product or is it pretty much the same guys you've been seeing?

Certainly it's a similar customer base. What we're seeing is we're seeing more adoption of the technology of using the VCI solution compared to the alternative solutions. And so when we're going to Trade Shows, when we are presenting to customers, when we are kind of moving forward and looking at the opportunities, more people understand the solution and what the value added proposition that it brings. So it's more a matter of seeing this get pushed out to companies after they've been able to try it and kind of review the results. This is why we're starting to see kind of the expansion of the oil and gas group now. I know that third quarter was a little disappointing from an oil and gas standpoint, but we've always kind of highlighted the volatility of the numbers. And I can say that the actual POs that we have in hand right now, not just opportunities or things in the pipeline, but actual POs that we have are really significant. It'll make our fourth quarter from an oil and gas standpoint a pretty strong fourth quarter. I know that in the last earnings call we had, we talked about the second half of the year being stronger than the first half of the year from an oil and gas standpoint. Obviously with the third quarter results, it doesn't look like that's the case, but I can tell you that based on actual POs and expected delivery dates at this point in time, it still will be a significantly stronger second half to the year from an oil and gas standpoint.

Great. Okay, I'm done. Thanks, guys.

Thanks, Tim.

[Operator Instructions] Our next question comes from Gus Richard with Northland. Your line is open.

Yes, thanks for taking the questions. Just on ZERUST Industrial, that was down year-over-year. Is that a function of the weakness in Germany, or is there an end market exposure that's causing that to be down year-over-year?

As we mentioned, we were down in Germany because we had lost a significant customer, but also our European joint ventures overall are feeling a bit of economic pressure based on the ongoing war with Ukraine and the externalities that's causing, for example, higher energy prices in Europe.

Okay, got it. And then just looking at ZERUST Oil & Gas, in the first half you did $3.7 million round numbers. You had a soft Q2. Is it sort of reasonable to assume that you're on roughly a $2.25 million run rate? I know it's volatile. Going into Q3, if I just take the 600,000 that got delayed in Q3 and add it to that run rate, am I coming up with roughly the right number for Q4?

It could be even stronger than that. But as far as a $2 million run rate for oil and gas, if I look at that, I think that's a pretty fair baseline to look at. But as I said, it is volatile. I mean, that's just one of the things that we run into with oil and gas, is some of the size of the opportunities.

Right. And then thinking about 2025 and oil and gas, is it reasonable to assume that the base run rate is going to increment up a little bit, maybe $2.5 million, $3 million a quarter, plus volatility? Or do you think you remain at that $2.25 run rate?

I think that as we exit the fiscal '25 in the third and fourth quarter, you're going to continue to see the increase. I mean, I think it's just a matter of looking at the moving average rather than the quarter by quarter. But I think that's certainly what we're targeting, is that kind of growth or more.

Got it. That's very helpful. And then just going back to industrial, and thinking about that business, Europe has been a big portion of your revenue. Is that business going to stabilize? What do you think the growth rate is over the next couple of years for ZERUST Industrial?

Well, there's two different ways that we kind of look at it. One is if you look at, obviously, the largest individual player is the German joint venture that we have. From a positive standpoint, we have seen increases. The German joint venture kind of bottomed out from a revenue standpoint in our first quarter at about €7.8 million. And we've seen increases in each of the last two quarters to kind of get back out to revenue of about €9.2 million. With the expectation that we're going to kind of continue to see growth coming out of that entity. And if we're able to put three or four quarters in a row together from a German standpoint, that will help. Similarly, if I look at the similar trend, if I look at kind of all the joint ventures, that they're kind of seeing a little bit of a - call it a bottoming out or a trough, kind of around Q4 or Q1 of this year with kind of growth coming from beyond that. So, we are starting to see a little bit of a rebound coming out of Europe, which is helping from a joint venture operating income contribution standpoint. Now, the other thing that I'll point out when you talked about the industrial sales is that our third quarter of fiscal '23. So the last - I know that when we were comparing numbers earlier on in the call, and we talked about the industrial business being down compared to Q3 of last year. Q3 of last year was probably the strongest industrial quarter that we've had. Specifically in North America, it was well above average and a very strong third quarter. So the comparative - from a comparative quarter standpoint, that's one of the reasons why industrial is down. When I look at it just on a kind of a trailing three or four quarter standpoint, it's kind of an average quarter. From Q4 of last year until Q2 of this year, we've averaged about 4.4 million, 4.5 million. In Q3 of this year, we're at 4.6 million - I'm sorry, we've averaged 5.4 million in North America, and we're at about 5.6 million in Q3. And that's kind of why we're looking at this and still feel like that's kind of down compared to where we expect revenues in North America industrial to be. So certainly the hope is that we're going to see kind of a rebound in the industrial sales in North America. But I think part of the reason why it looks so poor in Q3 is just because Q3 of last year was so high, if that makes sense.

Okay. And then just, your thoughts on growth rates for that business going forward, and seasonality for the fourth quarter.

Well, typically third and fourth quarter are stronger quarters for us just because of the - we do have some - we do have some seasonality given the kind of the rough season that happens during the summer. But typically the industrial - the ZERUST Industrial sales will outpace GDP by 3% or 4%. So we typically target 10%, 11% of growth across the industrial market, whether it's in North America or Brazil or other areas. There's some subsidiaries that we have like India and China that historically have shown a higher growth rate than what we see in the more, call it, mature markets like North America and Germany. But typically from an industrial standpoint we kind of target that, 10%, 11%, 12% number.

Got it. Thanks. Very helpful.

Yes. Thanks, Gus.

Thank you. I'm showing no further questions. Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.