Northern Technologies International Corporation (NTIC) CEO Patrick Lynch on Q4 2021 Results - Earnings Call Transcript

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Northern Technologies International Corporation (NASDAQ:NTIC) Q4 2021 Results Earnings Conference Call November 17, 2021 9:00 AM ET

Company Participants

Patrick Lynch - President, Chief Executive Officer

Matt Wolsfeld - Chief Financial Officer, Corporate Secretary

Conference Call Participants

Tim Clarkson - Van Clemens

Charles Bellows - White Pine Capital

Gus Richard - Northland

Operator

[ABRUPT START]

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 provision 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 SEC. NTIC disclaims any duty to update or revise its forward-looking statements.

Good day and thank you for standing by. Welcome to fourth quarter 2021 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].

I would now like to hand the conference over to your speaker today, Mr. Patrick Lynch. Please go ahead.

Patrick Lynch

Good morning. I am Patrick Lynch, NTIC's CEO and I am here with Matt Wolsfeld, NTIC's CFO. Please note that the financial results for our fourth quarter and full year fiscal 2021 were included in a press release issued earlier this morning and is also available at ntic.com. During this call, we will review various key aspects of our fiscal 2021 fourth quarter financial results, provide a brief business update and then conclude with a question-and-answer session.

I am pleased to report that we ended fiscal 2021 with a robust operating performance, record quarterly and annual sales and strong profitability. In addition, favorable demand trends across most of our global markets combined with our strategies to diversify sales across our product categories, end markets and geographies drove the fourth quarter sales to a new quarterly record. For the year, consolidated sales increased 18.6% over the prior fiscal year and were up 54.7% during the fourth quarter compared to fourth quarter of the prior fiscal year. In addition fiscal 2021 sales at NTIC's joint ventures increased 39.0% from the prior fiscal year and were up 79.3% during the fourth quarter 2021, compared to the fourth quarter of fiscal 2020.

Looking at annual and fourth quarter sales growth on a two-year basis is especially encouraging, as this shows strong underlying demand despite last year's COVID-19 pandemic-related challenges. Notably, comparing fourth quarter of fiscal 2021 to fourth quarter of fiscal 2019 results, consolidated sales are up 15.4% and ZERUST industrial net sales are up 42.0%. while net income increased 131.5%/ As you can see, we are exiting the COVID-19 pandemic in a stronger competitive position and with a higher level of profitability. I believe this can be attributed to the strong value we provide our global customer base, our asset light business model and our focus on managing our cost structure.

In addition, throughout the COVID-19 pandemic, we improved our operations, increased staffing levels and service to our customers, while pursuing new product developments, making strategic investments across our businesses and targeting new sales opportunities. As a result, we have continued to benefit from the significant resurgence currently underway in industrial production and we believe the demand trends will remain strong into fiscal 2022 as more sectors of the global economy reopen and industrial production continues to improve.

More recently, I am proud of our team's efforts alongside our customers, suppliers and vendors to work through global supply chain challenges, including the availability of raw materials, labor and inflation. While many of these challenges are expected to remain throughout our fiscal 2022, I believe NTIC's asset light business model and global presence in over 65 countries provides the company with an advantage navigating these macro-related headwinds.

So with this overview, let's examine the drivers for the fourth quarter in more detail. For the fourth quarter ended August 31, 2021, our total consolidated net sales increased 54.7% to a quarterly record of $15.5 million as compared to the fourth quarter ended August 31, 2020. Broken down by business unit, this included a 139.6% increase in ZERUST oil and gas net sales, a 51.4% increase in Natur-Tec net sales and a 47.0% increase in ZERUST industrial net sales.

Total net sales for the fiscal 2021 fourth quarter by our joint ventures, which we do not consolidate in our financial statements, were $33.2 million. This is an increase of the 79.3% when compared to the same period last fiscal year and an increase of nearly 4% when compared to the third quarter of fiscal year 2021. In addition, when compared to the fourth quarter of fiscal year 2019, net sales from our joint ventures increased 15.8%, demonstrating strong global demand for our products from both existing and new customers.

Fiscal 2021 fourth quarter net sales by our wholly-owned NTIC China subsidiary increased 25.7% to $4.3 million over fourth quarter of fiscal 2020. 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 in the coming years.

As we announced on our last conference call, during the fourth quarter, we invested $6.2 million to buy a new facility in China, which reflects our commitment to the Chinese market and supports our expected growth within this geography. The new facility will support our R&D, production, sales, marketing and training efforts in China. We closed the transaction on July 6, 2021 and we expect to move into the facility in February 2022.

In addition, on September 22, 2021, we announce that NTIC acquired the remaining 50% ownership interest in our Indian joint venture, Harita-NTI Ltd, also known as ZERUST India for $6.25 million in cash. We funded this purchase mostly with cash on hand and some borrowings under our revolving line of credit which was increased in connection with the transaction to $5.0 million. ZERUST India is now a wholly-owned subsidiary of NTIC and will be fully consolidated on NTIC's financial statements beginning in fiscal year 2022. As a result, ZERUST India is expected to contribute approximately $10 million in net sales, along with over $2.2 million in net income during fiscal year 2022 amounting to an expected additional $0.10 per diluted share. Many of our multinational customers either have their own operations in India or have suppliers based there, making it one of our strongest international markets. As a result, we are excited to be further enhancing our presence in India.

Moving on to our ZERUST oil and gas products group. I am encouraged by the progress we are making within this large and compelling market. Fourth quarter fiscal 2021 ZERUST oil and gas sales increased 139.6% over the prior fiscal year period and for the first time in our history we have had two consecutive quarters of oil and gas revenues over $1 million. We are getting noticed globally for our growing base of successful installations on oil and gas assets. In addition, COVID-19 quarantines and travel restrictions have continued to ease allowing us to enter more job sites each month. Finally, we remain optimistic that the recent American Petroleum Institute's Technical Report validating our technology will help NTIC's long term sales efforts within the oil and gas market. As a result, we believe there are substantial opportunities to drive growth throughout the fiscal 2022 and beyond.

Turning to our Natur-Tec bioplastics business. Fiscal 2021 fourth quarter Natur-Tec sales were $2.8 million, a 51.4% increase over the prior fiscal year. While Natur-Tec sales continued to recover on a year-over-year basis, we expect quarterly volatility will remain over the near term at it takes time for our large users of compostable plastics to reopen their facilities after prolonged COVID-19 shutdowns. However, we remain optimistic about our long term prospects and strong market position within this large and compelling global market.

So, to conclude my prepared remarks. I am proud of the progress we made throughout fiscal 2021 and expect the positive momentum to continue into the new fiscal year. This includes the recently announced expansion of our Chinese operation and the purchase of the remaining 50% ownership interest of our Indian joint venture. In addition, we continue investing in our Natur-Tec and ZERUST oil and gas business units to take advantage of long term trends within the markets. As a result, we expect fiscal 2022 to be another strong year of sales growth and higher profitability. On behalf of the entire NTIC leadership team, I would also like to use this opportunity to thank all of our global employees and joint venture partners for their continued hard work and dedication.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fourth quarter and full fiscal year 2021.

Matt Wolsfeld

Thanks Patrick. Compared to the prior fiscal year period, NTI's consolidated net sales increased 18.6% in fiscal 2021 to an annual record and grew 54.7% in the fiscal 2021 fourth quarter because of the positive trends Patrick reviewed in his prepared remarks. A 79.3% increase in fourth quarter sales across our global joint ventures drove a 69.4% increase in fourth quarter joint venture operating income, compared to the prior fiscal year period. For fiscal 2021, sales across our global joint ventures increased 39% contributing a 51.2% increase in joint venture operating income, compared to the prior fiscal year.

Total fourth quarter fiscal 2021 operating expenses were $6.6 million, a 24.1% increase over the prior fiscal year period, due primarily to an increase in selling expenses associated with the 54 7% increase year-over-year that we experienced in our fourth quarter consolidated sales. Demonstrating the operating leverage of NTIC's business model, operating expenses as a percentage of net sales were 42.5% compared to 53.0% for the same period last fiscal year. We remain focused on proactively controlling expenses and total operating expenses increased by only 53.8%V in fiscal 2021, compared to the prior fiscal year.

NTIC reported net income of $1.7 million or $0.17 per diluted share for the fiscal 2021 fourth quarter compared to a net loss of nearly $1.8 million or a loss of $0.19 per diluted share for the fiscal 2020 fourth quarter. For the full year, NTIC reported net income of $6.3 million or $0.64 per diluted share, compared to last year's net loss of $1.3 million or a loss of $0.15 per diluted share. Net income attributable NTIC for the 2020 fourth quarter and fiscal year included a one-time $1.6 million non-cash adjustment to the company's U.S. deferred tax asset, which was required to remove the U.S. deferred tax asset from NTIC's balance sheet.

As of August 31, 2021, working capital was $25.2 million, including $7.9 million in cash and cash equivalents and $5,000 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. Our cash position was impacted by the $6.2 million investment we made during the fiscal 2021 fourth quarter to buy a new facility in China. As Patrick mentioned, this reflects our commitment to the Chinese market and supports our expected growth within this geography. On August 31, 2021, the company had $27.6 million in investment in joint ventures, of which approximately 57.6% or nearly $15.9 million was in cash with the remaining balance primarily invested in other working capital.

During the fiscal 2021 fourth quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.065 cents per common share that was payable on August 18, 2021 to shareholders of record on August 4, 2021. On October 20, 2021, NTIC's Board of Directors increased our regular quarterly cash dividend y 7.7% to $0.07 per share.

So, to conclude our fiscal 2021 fiscal results demonstrated that we have thus far successfully navigated the COVID-19 pandemic. In addition, we continue investing across our businesses support the meaningful growth opportunities that we have globally. Trends remain strong across all our product categories during the fourth quarter, which led to a record consolidated sales and strong fourth quarter profitability. We are excited about the direction in which we are headed and look forward to the another strong year of year-over-year sales and earnings growth.

With this overview, Patrick and I are happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tim Clarkson from Van Clemens.

Tim Clarkson

Hi guys. Great numbers. Your guys always do good. Really good. I have five questions, four easy ones, one a little more challenging, but we will do the challenging one last. I am just warning you. So first easy question. Why is China doing so well?

Patrick Lynch

China is doing well for a variety of reasons. I mean, obviously, we have got both domestic demand and international demand. And certainly, as the domestic demand increases, it's carrying things where even if you have a slight drop in Chinese exports, our sales are going to continue.

Tim Clarkson

And I know a few of my investors are concerned about investing in China because it's such a different kind of a place. What's your philosophy on China in terms of the safety of investing there?

Patrick Lynch

Well, I am sure you recall our past experience with our previous joint venture partner, which kind of didn't go so well in 2014. So we are working with an abundance of caution in China being very careful, obviously, with who we work with and always especially very cautious in our approach to the market and in everything we do in our business there.

Tim Clarkson

Sure. Okay. In terms of India, you mentioned that it's about $10 million. How fast has it been growing?

Tim Clarkson

Matt, you have the exact figures on the growth in India?

Matt Wolsfeld

Yes. We have seen pretty significant year-over-year growth in India. India was actually one of our newest joint ventures that we started. I want to say, in 1999. We have seen some pretty significant growth where it's gone from, obviously, when it started, the smallest joint venture to this past year, it was our second most profitable joint venture that we have. And so they have seen significant growth.

If I look back over the past 10 years, some pretty significant growth to get up to $9 million to $10 million of anticipated revenue. So when we look at it, the India market is a sizable market that we think could still have significant room for growth and expansion, not just in the industrial business but also in the oil and gas space. So we had the opportunity to purchase the remaining 50% ownership in it. So we were excited to move ahead with that opportunity.

The other benefit that we have in India is that the Indian joint venture was being run with somewhat of a passive other investor who own the 50%. So when we were able to purchase his ownership in it, we have an existing management team that has been in place for years. So the continuity of existing business and relationships was an easier transition.

Tim Clarkson

Great. Just a general question. What's new on the compostable space?

Patrick Lynch

In terms of?

Tim Clarkson

Well, what new opportunities? Or how are things developing in terms of anything new that's happening there?

Patrick Lynch

We are certainly getting some new orders for some new applications, which I am not going to talk about openly today. But I mean the demand continues to be there in the compostable space. The biggest problem we face, as I mentioned before, is we are waiting for certain facilities to reopen for the very large users of compostable plastics, including corporate campuses and sort of sports facilities to come back into full usage. And there is also a bit of a problem with our long supply chain. We have an exceptionally long supply chain globally and that basically the current shipping issues are certainly impacting or slowing down our ability to deliver product to our customers.

Tim Clarkson

Sure. One last question. This is a little more challenging. But I know you don't like to talk about what you are doing currently in R&D, but can you talk a little bit about historically how your R&D investments have developed valuable new products for Northern Technologies? At least historically, the whole thing is kind of mysterious to me. And maybe you can enlighten us, say, as to some of the successes you have had previously that are publicly known already.

Patrick Lynch

Well, I would say, certainly, all of the major tech developments are a result of our R&D and continue to be because we are continuing to develop custom solutions for a specific product or customer needs. So these are resin compounds that simply haven't been available anywhere else. And so customers who have challenging needs with bioplastics come to us first.

Same thing we can say about the investments we have made in terms of R&D for the oil and gas applications. I mean we keep on telling you that it's a very large potential market that has needs that can be met best by the products we have been developing. So there is another reason for heavy investment in that sector.

And in terms of what we are doing just in the ZERUST industrial space, we have developed a number of products over the last few years, particularly in our diffusers section and in our liquids that are growing sales quite handsomely at this point. It's going to take a while for them to grow up to the full sales level, but they are certainly doing very well on their own and contributing significantly to our bottomline.

Tim Clarkson

Right. One last comment I actually saw ZERUST sticker on my kids' fishing tackle. So that was kind of cool to see.

Patrick Lynch

Did you buy a tackle box?

Tim Clarkson

Yes. We bought the box. I didn't even know it was there until I noticed it a couple of weeks later. So no, it's really kind of a cool application. So well, thanks, everyone. A great quarter, obviously.

Patrick Lynch

Thanks Tim.

Operator

Your next question comes from the line of Charles Bellows from White Pine Capital. Your line is now open.

Charles Bellows

Hi guys. Nice numbers. Two quick questions. One, did I understand you are now approved or you are included in the API guidelines?

Patrick Lynch

Yes.

Charles Bellows

Okay. What does that mean for timing? And as you look at it to get the next really big one, which is from the hazardous materials administration, the PHMSA?

Patrick Lynch

Matt, do you want to talk about that one?

Matt Wolsfeld

Sure. I mean, Charlie, what was approved during the last fiscal year, what took place with the API was the technical report that was issued, which basically validates the tank technology using the VCI for storage bottom protection. And the expectations from a time line standpoint is that that technical report that was written will, at some point in time, transition to recommended usage, which will then transmit to guidelines being issued at some point as far as being able to utilize the technology, which is a significant step given how widely followed the API guidelines are. And so that's something that we certainly expect to move forward.

From a PHMSA standpoint, PHMSA is a big government body that basically regulates a lot of how the oil flow and how the oil is required to be stored by any tanks or pipelines that are used in the U.S. infrastructure. They also review the API guidelines. And now that that's been moved forward, we can move forward with certain PHMSA requirements where they will be evaluating using the technology. So at some point in time, we are also looking for PHMSA approval and PHMSA wording that validates and encourages people to use the technology.

We have got certain situations where some customers have applied to PHMSA to be able to utilize our technology. And so we are seeing really a nice acceptance of the technology, knowledge of the technology, all these things are really starting to take off, which is great news for the oil and gas division.

Charles Bellows

But are we really looking at some time in the next, it's really probably 12 to 18 months out before all the pieces come together and it's open road?

Matt Wolsfeld

Well, again, there's a lot of different moving pieces when it comes to the API and PHMSA and there are guidelines and things like that. It's something that's going to be a continual discussion for years and years for all the different guidelines and applications they have for their infrastructure. What I can say is that expectations as far as how long it would take from a technical report to become a recognized practice would be somewhere between, like you said, 12 to 18 months kind of depending on time lines. There's other items that we are working on inside of the API for other uses and things like that. So it's not just one application with one approval. There's many different things that we are working on as far as changing the specs.

Charles Bellows

Okay. Great. And the other question which came from a comment that struck me from that Patrick just made about the long supply chain and then opening, seeing demand when the big facilities open up for the compostable pieces. What is that? Do you have the materials and ability to meet a surge in demand? And what is it going to do to your pricing? And can you pass it on?

Matt Wolsfeld

We have seen some increase in pricing from some of our base raw materials that we use inside of Natur-Tec but not significant amounts. And we have been able to adjust pricing somewhat accordingly. The issue that we have with Natur-Tec is that there's, with everything that's going on from a supply standpoint we obviously move the Natur-Tec with it being compounded either India and China, being shipped to other places to be manufactured and shipping back here to potentially be sold, we are running into certain backlog situations.

The benefit that we have is we are running into the backlog situation because now we are starting to see the revenue and demand for Natur-Tec to get back up to normal levels. Specifically, going from fourth quarter to now first quarter, we have seen a significant ramp up with, I would say if you look at our first quarter, that is September, October, November, with colleges going back, K-12 schools going back, sports stadiums, obviously, a lot of them coming back to full capacity, we are seeing a lot of that growth continue and getting back to solid numbers.

We saw this coming. We started placing orders to ramp up the manufacturing of the product. And we expect to have the inventory catch up to the demand quickly so that our expectation is that we will be certainly back to pre-COVID demand levels sometime in the middle of fiscal 2022 from a Natur-Tec standpoint. If we do that, you are looking at a significant growth from fiscal 2021 to fiscal 2022 total Natur-Tec sales. Obviously, it's going to be a significant increase and improvement in total sales.

So we are experiencing some of the same pressure points that all companies are experiencing with the containers that are sitting on the water and taking months to get product across the ocean rather than the weeks to get product across the ocean that other people are experiencing. But the benefit is that we are seeing that the demand is coming back.

Charles Bellows

And you feel you can meet the demand given the timing you have got on those products?

Matt Wolsfeld

Yes. We do. And I think that will be reflected in sales that you will see in 2022.

Charles Bellows

Okay.

Matt Wolsfeld

I mean there is the possibility that the demand continues to increase and we continue to have a large backlog and things like that as we get caught up. But I certainly think that the amount of inventory that we have on order, the amount of products that we are bringing in and the ability to meet the customers' demand, you will certainly be able to see that in increased sales of Natur-Tec during the current fiscal year.

Charles Bellows

Okay. Great. Thanks. And good luck on this next year.

Matt Wolsfeld

Thanks.

Patrick Lynch

Thanks Charlie.

Operator

[Operator Instructions]. Your next question comes from the line of Gus Richard from Northland. Your line is now open.

Gus Richard

Yes. Thanks for taking the questions. Great quarter. Just on the ZERUST oil and gas, I was wondering if you could just talk a little bit about the pipeline. And should we expect the revenue level to be over $1 million going forward? I know the business is lumpy. Just any color there would be helpful.

Matt Wolsfeld

Your question is, what do we expect the pipeline for oil and gas to be? Or you are asking about actual pipelines in oil and gas?

Gus Richard

I am asking what your sales pipeline looks like, sorry. Sales pipeline looks forward, could we expect the revenue to stay above $1 million? Historically, that business has been lumpy

Patrick Lynch

I think it's going to continue to be lumpy. I mean I can tell you, looking at, we have pretty good visibility going forward because of the time line of the sales opportunities. So we have a pretty good visibility into what we will see over our full fiscal 2022 year. So from our expectations, we expect sales to certainly grow up to levels where the entire division is profitable. But I mean I can tell you just from looking at revenues that we have from September, October of this year compared to what we had in the fourth quarter, obviously, what we did in fourth quarter this year, just in North America, we had revenues of $1.5 million just in North America, which was significant. I can tell you the team worked very hard to meet that fourth quarter number and hit their objectives for the year. I would expect first quarter, like you said, to be a little bit down. I expect second quarter and third quarter and fourth quarter to bounce back. But total revenue, I would expect to see some nice growth comparing fiscal 2021 to fiscal 2022.

Gus Richard

Got it. Very helpful. And then in the quarter, gross margins were quite strong. I imagine that was due primarily to a favorable mix. But I did want to talk about or get some color on your input costs, particularly the higher petroleum prices on the ZERUST industrial. Are you seeing any cost pressure there? And how might that impact gross margins over the next couple of quarters?

Matt Wolsfeld

Well, we saw very favorable gross margins across as a gross. Gross margin was very strong. Obviously, that was driven by significant oil and gas revenues that we saw in fourth quarter, which is terrific. Obviously, there are significant raw material price increases that we are seeing. If you just follow the LDPE index for the virgin polyethylene resin, which is the main raw material that goes into the ZERUST products, it's up significantly. If you look at over the past eight to 10 months, you can see it's up significantly.

We have been able to pass a lot of that cost increase on to customers, given that we can show them the commodity index pricing of the main component that goes into their products. However, we do have some stock pricing and some other items, contract blanket agreements, what have you, where the margins on those sales were lower than they historically have been. And so if you look at just the industrial products, the gross margin as a weighted average of what we are selling is down compared to where it was, let's say, in first and second quarter of the past fiscal year.

Our expectation when talking to resin suppliers are, the resin suppliers and also our suppliers that are manufacturing our product, the expectation is that the price of LDPE is going to come down in the coming months. That's what the indications are that they are giving us based on talking to the large LDPE manufacturers. That's what they are starting to see when they are buying trainload capacities of resin for their inventory. But if we don't see that index, if we don't see that price come down, we are going to obviously take a hard look at our stock pricing levels to get back up to the kind of margins that we previously have been able to achieve.

Gus Richard

Got it. Very helpful. And then the last one for me, as you fold in ZERUST India, what sort of impact will that have on OpEx and gross margins? And just a little bit of color on the numbers going forward.

Matt Wolsfeld

The gross margins in India are going to be pretty consistent with what we see across the other ZERUST industrial subsidiaries that we consolidate. The overall bottomline profitability of the Indian entity is they generate basically, let's say, close to 20% after-tax profit. So previously, off of the, they did $9 million to $10 million of revenue last year, expectations that they should do somewhat close to that this year. The expectation is that that entity will generate close to $2 million of income for fiscal 2022.

Previously, we would have received through equity income and royalties and things like that, $1 million of that $2 million of profit. Now that we purchased the entity, the expectations are that we should take in probably close to $2 million, depending on how the year goes for them, close to $2 million of overall income, after-tax income, from that entity. So the incremental gain that we would see is about $1 million of income or close to $0.10 per share.

Gus Richard

Got it. All right. That’s it for me. Thanks so much.

Patrick Lynch

Thanks Gus.

Operator

[Operator Instructions]. And speakers, we don't have any questions over the phone. Please continue.

Patrick Lynch

Okay. Then I would like to thank everyone for participating today and for your interest in NTIC. Have a nice day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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