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spk00: Good day, and thank you for standing by. Welcome to the Northern Technologies International Corporation Third Quarter 2021 Earnings Conference Podcast. At this time, all participants are in listen-only mode, so if you require operator assistance, please press star, then zero. After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one. Please be advised that today's conference may be 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 its forward-looking statements. I'd now like to hand the conference over to your host today, Mr. Patrick Lynch. Please go ahead. Good morning.
spk03: I'm Patrick Lynch, NTIC's CEO, 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 third quarter and is also available at NTIC.com. During this call, we will review various key aspects of our fiscal 2021 third quarter financial results, provide a brief business update, and then conclude with a question and answer session. Sales for the fiscal 2021 third quarter accelerated past second quarter levels and set a new quarterly record as momentum continued to build across our global product categories. Consolidated sales increased 58.2% year over year and were up 20.6% from the second quarter, while sales at NTIC's joint ventures increased 10% from the fiscal 2021 second quarter and are up 70.2% year over year. Looking at 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. Comparing the third quarter of fiscal 2021 to third quarter of fiscal 2019 results, consolidated sales are up 3.5%, and zero industrial net sales are up 22.5%, while net income has increased 38.6%. Throughout the COVID-19 pandemic, we maintained our operations, staffing levels, and services to our customers while investing in new product development and pursuing new sales opportunities. This kept us ready to benefit from the significant resurgence currently underway in industrial production, and we are seeing robust and improving demand across many of our product categories and global end markets. We believe demand trends will remain strong throughout the remainder of this fiscal year and into fiscal 2022 as more sectors of the global economy reopen and industrial production continues to improve. So with this overview, let's examine the drivers for the third quarter in more detail. For the third quarter ended May 31, 2021, our total consolidated net sales increased 58.2% to a quarterly record of $15.4 million as compared to the third quarter ended May 31, 2020. Broken down by business unit, this included a 141% increase in Xerost oil and gas net sales, an 86.1% increase in Xerost net sales to our joint ventures, and a 61.4% increase in GOS industrial net sales, and a 27.3% increase in nature tech net sales. Total net sales for the fiscal 2021 third quarter by our joint ventures, which we do not consolidate in our financial statements, were nearly $32 million. This is an increase of 70.2% when compared to the same period last fiscal year, and an increase of 10% when compared to the second quarter of the current fiscal year. In addition, when compared to May 31, 2019, net sales from our joint ventures have increased 15.1%, demonstrating strong global demand for our products from both existing and new customers. second quarter net sales by our wholly owned NTIC China subsidiary increased 30.7% to a third quarter record of $4 million. 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 in the coming years. This week, we invested $6.2 million to buy a new facility in China, which reflects our commitments to the Chinese market and supports the expected growth within this geography. The new facility will support our R&D, production, sales, and marketing and training efforts in China. We closed the transaction on July 6, 2021, and we expect to move into the new facility in the early fiscal 2022. As COVID-19 quarantines and travel restrictions have eased and market dynamics improved, oil and gas project installations have started to rebound. As a result, Xerost oil and gas sales for the quarter were strong, increasing 141% over the prior fiscal year period. While we expect oil and gas sales will remain volatile on a quarterly basis, we are seeing growing interest in our Xeris oil and gas solutions. Please also note that the American Petroleum Institute, API, finally released its technical report detailing how vapor corrosion inhibitor-based technologies, like the ones offered by Xeris oil and gas, can provide effective corrosion protection for the bottoms of above-ground storage tanks. We believe this API technical report validates our technology and will help NTIC's long-term sales growth efforts within the oil and gas market. As a result, we believe there are substantial opportunities to drive growth throughout the remainder of fiscal 2021 and into fiscal 2022. Turning to our NatureTech bioplastics business, fiscal 2021 third quarter, NatureTech sales were $3 million, a 27.3% increase over the prior fiscal year period. Thank you. Sorry. And a 21.7% increase from the fiscal 2021 second quarter. As you can see, NatureTech sales continue to recover and were at the highest sales levels in over 12 months. as large users of compostable plastics began reopening their facilities after prolonged COVID-19 shutdowns. We anticipate that demand for our NatureTech compostable solutions will continue to increase further as the pace of reopenings accelerates. So to conclude my prepared remarks, I am pleased with the strong sales and profitability performance we experienced in the fiscal 2021 third quarter. Trends across our markets are encouraging, and we expect to see continued year-over-year sales and earnings growth during the fourth quarter of fiscal 2021 and into fiscal 2022. 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 dedications. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2021 third quarter.
spk02: Thanks, Patrick. NTSC's consolidated net sales for fiscal 2021 third quarter increased 58.2% when compared to the prior fiscal year period and were up 20.6% from fiscal 2021 second quarter sales as a result of the trends Patrick reviewed in his prepared remarks. Third quarter sales across our global joint ventures increased 70.2% over the prior year period, significantly benefiting joint venture operating income, which increased 114.6% for the fiscal 2021 third quarter compared to the prior fiscal year period. Total operating expenses were $6.3 million, an 11.6% increase over the prior year period, primarily due to an increase in selling expenses associated with with the 58.2% year-over-year increase we experienced in third quarter consolidated sales. Demonstrating the operating leverage of NTIC's business model, operating expenses as a percentage of net sales were 40.9% compared to 58.0% for the same period last fiscal year, and 45.9% for the fiscal 2021 second quarter. NTIC's reported net income of $2.1 million, or net income of 21 cents per diluted share for the fiscal 2021 third quarter, compared to a net loss of nearly $1 million, or a loss of 11 cents per diluted share for the fiscal 2020 third quarter. As of May 31, 2021, working capital was $26.9 million, including $5.9 million in cash and cash equivalents, and $5.1 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 31st, 2020. On May 31st, 2021, the company had $26.9 million of investments in joint ventures, of which approximately 54.8% or nearly $14.8 million was in cash. with the remaining balance primarily invested in other working capital. During the fiscal 2021 third quarter, NTSC's Board of Directors declared a quarterly cash dividend of 6.5 cents per common share that was payable on May 19, 2021 to shareholders of record on May 5, 2021. So, to conclude our prepared remarks, our year-to-date financial results demonstrate that we have successfully navigated the COVID-19 pandemic. This is a result of our strong balance sheets asset-light business model, and commitment to providing leading corrosion-inhibiting products and services, as well as biobased and biodegradable polymer resin compounds to our global customers. In addition, trends remain strong across all our product categories during the third quarter, which led to a record consolidated sales and strong third quarter profitability. We're excited about the direction in which we are headed and look forward to ending fiscal 2021 with a continued year-over-year sales and earnings growth. With this overview, Patrick and I are happy to take your questions.
spk00: If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. Again, that is star, then one, if you'd like to ask a question at this time. We have a question from the line of Kim Clarkson with Van Clemmons.
spk04: Hey, Patrick. Hey, Matt. Obviously, a wonderful quarter across the board, so hardly anything to complain about. Just a couple background questions. You know, this is a major investment, $6 million in China. Can you kind of explain the logic of why you needed to spend that kind of money on a new facility?
spk03: Matt, do you want to take that one?
spk04: Sure.
spk02: When we were looking at our opportunity, The opportunity that we had in China to buy this building was very, when we modeled it out, it looked like a very good investment. We had the available cash to do this. We looked at the real estate opportunities, specifically in the area that we were in, and it provided us a great opportunity to stay close to the Shanghai market where we currently are located. The existing facility that we were in, we were having difficulties as far as the lease was ending and the zoning that that building was in had changed. So ultimately, we were going to be forced to likely move several hours outside of Shanghai. So we found this building, which allowed us to have a permit to have a lab and R&D facility inside of it. which is something that's difficult to get inside of the Shanghai region today. So we're able to get that environmental permit to do the R&D work that we need to do. Additionally, it provides a better location for us to meet with customers, bring customers into the facility to show them the R&D work we're working on, to meet with customers that are located in that area. So ultimately, it just seemed like a very good opportunity. Additionally, from what we've seen in the past, the real estate in Shanghai is growing very quickly. So from a stability standpoint, it seemed like a very solid investment. Sure.
spk04: Now, I know some companies have had trouble doing business in China. What's been your experience in terms of dealing with kind of the odd politics of China?
spk02: We haven't really – well, you can take it, Patrick.
spk03: No, no, go ahead. You jumped right in. You might as well complete it.
spk02: No, I was going to say, we haven't really seen any of the political issues that other companies have experienced. I mean, obviously, we've had some problems in the past going back to 2014 and 2015, but that had more to do with the joint venture partner than anything with the government or any of the politics of China. So, so far, we have been able to navigate that does the Chinese market really well.
spk04: Patrick, do you have anything to add? Sure. So one other question on China. Now, what's your composition in China in terms of percentage of business that's automobile-related, percentage of business that's compostable-related, and I guess the balance would be other industrial applications?
spk02: Sure. I'm taking a look. As far as talking about the automotive business, I would say that the Chinese market is probably close to, you know, between 65 and 70% automotive business. As far as the nature tech component of it, you know, they had, if I look at year-to-date sales, the nature tech component makes up probably close to 15% of the total Chinese sales that we have. But that seems to be a market that is growing faster than the zero industrial sales in China.
spk04: Okay. One last question on this compostable issue. I saw that Kentucky Fried Chicken in Canada is committed to converting to compostable within a couple years. What's the thinking out there in terms of these fast food markets? really accelerating the compostable part of their packaging.
spk03: In our experience, the fast food chains tend to play with this, but have not made any significant commitment. And certainly up until now, beyond some cutlery, which we sell on to fast food chain on the West Coast, but not on the nationwide market or even the global market basis. And that's partly because of local mandates. So the fast food industry is still lagging in terms of implementing real significant, making significant efforts in the compostable packaging market.
spk04: Right. Right. Well, we'll have to see. It's what, what, what would be your guess would be the incremental cost of compostable packaging? Factoring the, you know, you do it with more volume, how more expensive would compostable packaging be than conventional packaging?
spk03: By now, it's not that significant. We can get fairly close. So you're looking at maybe 10% higher cost now doing compostable?
spk04: Yeah, yeah. So I guess probably the... The back end is just getting these municipalities so they have composting facilities to take all this stuff and turn it into compost.
spk03: You're also looking at an industry that is very cost-driven. If you're talking about a 10%, 15% price increase over what they're currently paying, they're not eager to do that unless it's absolutely necessary. or they have a change of heart and realize that they want to preserve the environment just because it's the right thing to do.
spk04: Yeah, well, the socially conscious thing is now a multi-trillion dollar industry, and it's getting really emphasized with the publicly traded companies. So it's coming, but you're right, it's taking longer than it should have. Well, with that, a great quarter as always, and we'll stay with you guys. Thanks, bye.
spk03: Thanks, Tim.
spk00: As a reminder, that is star, then one, if you'd like to ask a question at this time. Our next question comes from Gus Richard with Northland.
spk01: Yes, thanks for taking the questions. Nice quarter, guys. Just on the cutlery customer that you have, you know, is there any update on, you know, how they're coming along in terms of ramping?
spk03: I think... The ramping slowed down a bit, particularly because of COVID-19 and a lot of venues, particularly in the United States. We're talking about university cafeterias, company cafeterias, and sports arenas being shut down for a period of time. Sales slowed significantly. But now our expectations are that certainly by the end of the summer as we wrap into the fall, that as universities reopen, people are going back to work in offices to some extent, and the sporting arenas are going to open up again, that those sales should increase nicely going forward.
spk01: Okay, got it. And then the gross margin performance in the quarter is a little bit better than actually about 120 basis points better than I was expecting. Is that volume or mix?
spk02: I can take that. What we're seeing from a gross margin standpoint, I think it just has to do with a mix of the products that were being sold. We're not seeing any significant changes in the gross margin on a business unit by business unit basis, but obviously we had more sales coming through in this quarter from oil and gas than we had in prior quarters, which skewed the gross margin percent a little bit.
spk01: Got it. And then Moving to the API technical report, was the strong quarter in oil and gas correlated with that report coming out? And, you know, how has that sales funnel changed since the report has been published?
spk03: I'd say no, there was no direct correlation between the two. And the impact of that on our sales funnel will not be immediate. We certainly expect it to help because, like we said, it validates our technology and its application. But I would say that it will probably ramp up slowly over the next three to five years, really, before that will really go industry-wide.
spk01: Okay, then is the strong performance in oil and gas just the fact that, you know, restrictions have been lifted somewhat and you could get, you know, the customer could get in and do the maintenance?
spk03: We could deliver on orders and do the implementations because the travel restrictions have been amusing.
spk01: Okay, that makes sense. And then last one for me. You know, there's been a lot of supply chain issues. Are you guys experiencing any, you know, perturbations in ability to get material to deliver? Any cost variances that are, you know, positive or negative going forward or in the quarter?
spk03: Like everybody else, we are experiencing certain delays in raw materials and finished goods. So far, we've been able to manage and not had any significant impacts or delays for our customers or NPDs in our customers. But we're obviously monitoring that on an ongoing basis to make sure that nothing gets out of hand.
spk01: Got it. Okay, that's it for me. Thank you so much.
spk00: Sure. Our next question comes from Jim Dowling with Jefferies.
spk04: Yes, my question was just answered. Thank you.
spk00: If you'd like to ask a question at this time, that is star, then one. I'm not showing any further questions at this time.
spk03: All right. Then I'd like to thank everyone for participating today and for your interest in NCIC. Have a great day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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