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spk00: 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.
spk05: 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.
spk02: 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.
spk00: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Greg Hillman, a private investor. Your line is now open.
spk01: Yeah, hi. Could you talk about the Compossible market a little bit? about how the trend in government regulations on a statewide basis, on a national basis, and also on an international basis?
spk05: As you know, the regulations in the United States are primarily on the coast and are slowly moving more towards the center. We haven't had any, I think, significant increases in regulations compostable regulations since the pandemic started, so the market 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.
spk01: 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-energistic 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?
spk05: I'm sorry. I couldn't quite hear the first part of your question.
spk01: It was about strategy, okay? And I was wondering whether, number one, whether you would do a non-synergistic acquisition and also whether, you know, I guess what you're doing to improve your technology in terms of alliances with other universities or acquiring additional technology property.
spk05: Okay. First of all, we have no problem. 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 always keep our eyes open for new opportunities in that respect.
spk01: Okay. And then finally, your next nature tech division, what would you say the total addressable market is at this point?
spk05: The total addressable market on a worldwide basis for bioplastics? Is that the question? Yeah.
spk01: Yeah, for composable bioplastics.
spk05: I don't have a figure for you off the top of my head.
spk01: Okay. Okay, thanks. Thanks.
spk05: Yeah, sorry.
spk00: Thank you. Our next question comes from Gus Richard with Northland. Your line is now open.
spk04: Yes, thanks for taking my question. 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.
spk01: Sure. I can take that. I can take that.
spk02: Obviously, gross margin, when you're looking at it across the product line, as we've talked about before, you've got typically oil and gas margins are higher than the industrial zero margins, which are then higher than the nature tech margins. So it's kind of a question of a mix between the three. We had 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 Z-Rest industrial polyethylene resins that we use as the base material for the Z-Rest markets. Obviously, commodity prices of raw materials worldwide has gone up. We certainly have the goal and 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 you know, agreed to supply at a certain price that, you know, may have accounted for a couple percent in the Xerox industrial market to bring margins down slightly.
spk04: Got it. Got it. And then in Xerox oil and gas, you were thinking in the second half, do you see a recovery? Is that just a function of, you know, the restrictions lifting from COVID-19 or, you know, is Xerox oil and gas going to, you know, sort of be adopted by the industry standards bodies and its use become more prolific?
spk05: 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 expectations 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.
spk04: Got it. And then finally, just any commentary on if you have a large cutlery 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?
spk05: The relationship is already in place 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.
spk04: Got it. Well, that's it for me. Thank you.
spk00: Thank you. Our next question comes from Tim Clarkson with Ben Cummins. Your line is now open.
spk06: Hey, guys, another outstanding quarter. I expect nothing but that from you guys, and you guys seem to always do it, so good job. Just a couple of questions. Yeah, a couple of questions on China. Just kind of on a historical basis, I guess I was looking back at when you had this, you know, big split up with your joint venture guy and you had to take over the deal because there was noncompliance. Does that go back to what, 2016, something like that? Is that when all that... Okay, so are we finally to a point where we're for sure we got more sales in China than we did then, and do we have more profits, or is that something you haven't thought about?
spk05: Matt, do you have the numbers from back then?
spk02: Yeah, I know from a pure sales standpoint. Okay. 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, you know, the rest of this fiscal year and the coming two or three years, you know, 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 of what we were receiving in 2000, you 14, which is the last full fiscal year coming in from China. We're still slightly below the, the contribution that we were, uh, that we were getting just because the, the margins at that time were so high, um, you know, in the, in the contribution that we were, uh, 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.
spk06: Okay. And what percentage of your business in China is compostable now?
spk02: Um, If I look back at, let's see, I'm just pulling up some numbers. For the first six months of 2021, we had about $8 million in revenue in China for Xeris Industrial and a little over a million in revenue for NatureTech. So you're sitting at roughly 12%, 13% of the business. And I think overall the expectations are that, you know, over the coming years, that's going to start taking up a significantly larger portion of the total sales. You know, I would hope that the nature tech sales are going to get up closer to the 15%, 20% in the coming year or two.
spk06: Okay. Another more basic question. You know, 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? How does it work? You spend money year one and you get a return year five?
spk05: With R&D, nothing is ever guaranteed. You have to invest with targeted projects, hoping that you're going to see that return, but certainly we don't bat a thousand on every one of our projects that we get into.
spk06: Right, but on a retrospective basis, you can look back 10 years and say, well, On balance, you know, we've made a lot of money from the ones that have worked, I assume, right?
spk02: Well, I think what you can do is, you know, take nature tech for an example. You know, we started spending on nature tech, you know, 10, 15 years ago. If you look at the total amount that we have spent, you know, on nature tech over that time period, obviously we are not back to, you on total amount invested versus total amount that has been paid back. But if you look at how people value NCIC as a company, they obviously see NatureTech as a huge future contributor as far as where I would say the portion of the, you know, a portion of the market cap, you know, if you will. And so, you know, from that standpoint, you know, with how much, say, NatureTech value is baked into the market cap, you know, I would say it's the total contribution that we have made and invested in R&D. is less than what is, you know, a portion of that market cap. So it's kind of a different way of looking at it. I, you know, I certainly see that over the, over the next five to 10 years, you're going to have a point where the nature tech contribution is going to, you know, go from the amount that we've invested in over the past 10 years to, to being in the black. And, you know, it's most likely going to make up a significant portion of the value of the company. And similarly, you know, We've done the same thing with oil and gas. You know, we've seen less success in oil and gas than we have with nature tech, 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, you know, in likely future earnings potential that should impact the increase in the stock price. So, you know, that's kind of how we look at it. Right. Similarly with the zero-risk markets, you know, with coming out with, 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. So we're going to continue to invest in R&D because that's the future of the company.
spk06: Are there any new projects that you're working on right now that you're particularly excited about?
spk02: There's new projects in each of the three different groups that we're excited about. I mean, we've run into issues in the past of introducing things, you know, too soon where then people start to ask over and over again what's going on with it. But, you know, I think we're at a position where, you know, the company has a very bright future both with the existing technologies we've already introduced and, you know, new technologies that we hope to bring into market in the coming, you know, two or three years. Great. Okay, I'm done. Thanks, guys.
spk00: Thank you. Our next question comes from Jerry Welley with Alpha. Your line is now open.
spk03: Good morning, guys. Congratulations. Been an investor a long time, as you know, and appreciate your hard work and diligence. So considering where we've been through the last year, great results. So I just had one question relating to the – there's been this discussion in the past about regulation relating to pipelines in the U.S. and whether or not that might have an impact on your business, you know, and certain regulations and – maybe standards within the engineering community. So any update you can give us on that?
spk05: The various regulations, one set of regulations specifically regarding pipelines is already in place where they are officially already recognizing I guess the corrosion inhibitors as a as a recognized means for protecting pipelines. The only thing is that so far, PHMSA 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 NAICS guidelines on storage tank bottoms The drafts, the documents are basically all done. As far as I heard from the API, they've gone through the documents and made, there was only one technical comment that 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.
spk03: Do you see it that it has much potential upside for the company?
spk05: That the regulations change and get implemented that way? Yeah, it gets implemented. Absolutely. I mean, that will definitely have a significant impact on 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 these specific applications.
spk03: Okay. All right. Well, thanks, guys. Congratulations again. Thanks for all your hard efforts. I'm done.
spk00: Thank you. Our next question comes from Joe Vidich with Manalapin Oracle Capital Management. Your line is now open. Yes.
spk07: Good morning, guys. Congratulations on the quarter, and thanks for letting me ask a question here. I was just wondering, you know, I'm sure you guys are familiar with the company Danimer, and Danimer which just recently came public through a SPAC, 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 how you guys fit in.
spk05: Well, first of all, we are not a direct competitor of Danimo's. As I mentioned earlier during my prepared remarks, we use the resin systems that are produced by various large companies like BASF and NatureWorks, and even Dannemere 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 or have them be a potential supplier to us in the future. That's... Did I address your question or did I miss something here?
spk07: Yeah, I guess that answers my question. So they're basically a supplier to... What you're basically saying is they're a supplier 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... I mean, I think as far as I know...
spk05: 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 resident systems. 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 Dannemere can be a useful material for us to be using in the future.
spk07: Okay, great, great. That helps a lot. I appreciate it. That's all I have. Thanks very much.
spk00: Thank you. Our next question comes from Greg Hillman, a private investor. Your line is now open.
spk01: Yeah, Matt, a couple questions about human relations. Number one, did you ever hire a chief financial officer? And could you just talk about any – important, you know, changes in positions, you know, company-wide that you consider to be significant?
spk05: That's a question for Matt. I mean, he is the chief financial officer. I was planning on keeping him for right now. I mean, I'm saying that strategically.
spk02: Okay. Are you talking about in North America for NTIC, or are you talking about one of the subsidiaries?
spk01: I guess North America. You were talking about hiring a chief of natural officer two years ago.
spk05: I don't remember talking about that. I mean, I have to say, I'll say it on the line right now, Matt's great. I mean, he's been working with the company for 20 years, and I give him my wholehearted endorsement, so there.
spk01: Okay. Well, then, just, well, maybe you could just talk a few things about human resources in general, whether, you know, what you're doing to improve, you know, retention, training, and, you know, management development overall in the company.
spk05: Matt, do you want to answer the question?
spk02: Sure. Sure. I mean, if you look at the upper management of the company, it's mainly comprised of about five or six individuals that have a very long tenure. You're talking about an individual that has run the NatureTech 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 is tasked with the training, the employee retention, 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 to hire different R&D and different lab people that have come from various universities through contacts 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 at different levels. People do, obviously, continuing 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 talents 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.
spk01: Okay. Thanks, Matt.
spk00: Thank you. 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.
spk05: I'd like to thank everyone for participating today and for your interest in NJC. Have a great rest of the week. Thank you.
spk00: This concludes today's conference call. Thank you for participating. You may not disconnect.
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