Northern Technologies International Corporation

Good day and thank you for standing by. Welcome to the Northern Technologies International Corporation 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. To ask a question during the session, you will need to press star one on your telephone. If you require further assistance, please press star zero. 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 forelooking 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 forelooking 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. 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. And I would now like to introduce Patrick Lynch, NTIC's CEO.

Good morning. I'm Patrick Lynch, and I'm here with Matt Wolfsfeld, 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 the 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 Xerus industrial sales, as well as robust Xerus sales growth at NTIC China and across our global joint ventures. While the COVID-19 pandemic continues to impact our nature tech 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 NatureTech's net sales and a 66.2% decrease in Xerost oil and gas net sales. partially offset by a 114.5% increase in Xerox net sales to our joint ventures and a 22% increase in Xerox 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 dollars. 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 strong performance at NTIC China is primarily due to higher sales to new and existing customers for both our Xerost and the NatureTech 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. COVID-19 quarantines and travel restrictions caused a number of global oil and gas project installations to be postponed, resulting in zero oil and gas sales of $361,000 for the fiscal 2021 second quarter, a decrease of 66.2% over the prior fiscal year period. While we expect the oil and gas sales to remain volatile over the short term, We also anticipate significantly stronger sales during the second half of calendar 2021 as COVID-19 restrictions are lifted, and we believe there are substantial opportunities to drive growth in fiscal 2022 and beyond. Turning to our NatureTech bioplastics business. the COVID-19 pandemic has continued to have a material negative impact on the largest existing consumers of compostable plastics in the United States. In addition, production across the global apparel industry remains a fraction of what it was in fiscal 2019, further decreasing demand for our NatureTech compostable bioplastic bags, which had become an important part of numerous sustainability initiatives within that industry. As a result, second quarter fiscal 2021 Nature Tech sales were $2.5 million, a 40.8% decline over the prior year period. We believe that Nature Tech sales are stabilizing and that we are starting to see signs of increased activity as more large users of compostable plastics begins to reopen as COVID-19 restrictions are lifted. With the strong support of the major bioplastic base resin suppliers, NatureTech continues to develop and expand a market-leading series of innovative and certified compostable resin compounds that are engineered to increase the mechanical performance of base resin blends while reducing costs and enabling easy processing by converters, producing finished products using conventional plastic manufacturing processes and equipment. Furthermore, the finished products manufactured with these NatureTech resin compounds are targeted to meet or exceed the mechanical performance properties of conventional plastic single-use products while remaining fully compostable in accordance with all major international standards. As more and more people around the world reemerge from COVID-19 isolation, we look forward to updating our investors on our return to double-digit NatureTech sales growth in the coming quarters. So to conclude my prepared remarks, recent market and sales trends are encouraging. Furthermore, our performance demonstrates the strength of our leading Xerox industrial products, as well as the benefits of our geographic and product diversification strategies. As a result, we currently expect to return to year-over-year sales growth and improving profitability for the remainder of fiscal 2021. On behalf of the entire NTIC leadership team, I'd 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 fiscal 2021 second quarter.

Thanks, Patrick. NTIC's consolidated net sales. The fiscal 2021 second quarter decreased 3.4% when compared to the prior fiscal year period, but we're 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. We 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. NTSC reported net income of $1.3 million, or net income of $0.13 per diluted share, for the fiscal 2021 second quarter, compared to a 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 was in cash with the remaining balance primarily invested in other working capital. During fiscal 2021 second quarter, NTSC's board of directors reinstituted the company's quarterly cash dividend of 6.5 cents per common share that was payable on February 17th, 2021 to shareholders of record on February 3rd, 2021. To conclude our prepared remarks, second quarter results demonstrated improving global trends with our core Xerox industrial business. And we continue to believe ZRust oil and gas and nature tech 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're headed. With this overview, Patrick and I are happy to take your questions.