Northern Technologies International Corporation

Q1 2022 Earnings Conference Call

1/6/2022

spk08: Good day and thank you for standing by. Welcome to the NTIC conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you only press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then 0. 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 Security Litigation Reform Act of 1995, and that NTIC desires to avail itself to 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 would now like to hand the conference over to your host today, Patrick Lynch. Please go ahead.
spk14: Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Walsfeld, NTIC's CFO. Please note that a press release regarding our first quarter fiscal 2022 financial results was issued earlier this morning and is available at NTIC.com. Let me begin by wishing everyone a healthy and prosperous 2022 new year. I'd also like to remind everyone of our upcoming annual meeting of stockholders on January 21. Please note, however, that although the meeting will be held in person due to the COVID-19 pandemic, we are strongly encouraging all stockholders to vote by proxy in advance. The safety and well-being of our stockholders as well as our employees is extremely important, and we believe that we'll be able to better comply with the CDC and state safety guidelines if attendance is kept to an absolute minimum and the meeting itself is kept as short as possible by only reporting the election results and not making any business presentation this year. Now, for the remainder of this call, we will review various key aspects of our fiscal 2022 first quarter financial results, provide a brief business update, and then conclude with a question and answer session. Overall, fiscal 2022 sales are off to a record start as we experienced strong demand during first quarter across many of our global markets, which is very encouraging. We are also excited about our first quarter announcement that we acquired the remaining 50% ownership interest in Harita NTI, our Xerox joint venture in India. which we refer to as Xerox India. The financial results of Xerox India are now included in our consolidated financial statements effective as of September 1st and therefore for the entire first quarter of fiscal 2022. As a result, sales from Xerox India are consolidated within our income statement and are no longer accounted for through joint venture operating income. This transaction also resulted in several one-time financial charges and accounting adjustments that Matt will review in more detail in his prepared remarks. The strong demand we experienced during the first quarter led to a 42.4 percent increase in our total consolidated net sales as compared to the first quarter ended November 30, 2020, to a quarterly record of $18.2 million. The year-over-year increase in consolidated sales was primarily a result of sales growth across all the company's product categories due to higher global demand and the recovery from the COVID-19 pandemic, as well as contribution from Xerox India. For first quarter of fiscal 2022, Xerox India contributed 2,453,000 in sales to NTIC's consolidated net sales, Even excluding the incremental sales from Xerox India, we still experience strong organic growth. That being said, NTIC has not been immune to significant inflationary pressures, which have affected the cost of our raw materials and labor, as well as intense friction across our global supply chain and the impact of the continuing COVID-19 pandemic. Unfortunately, our profitability lagged during the first quarter due to several one-time items associated with the Zeros India transaction, as well as higher raw material, freight, and labor expenses. While we plan to implement certain measures to address these inflationary pressures, we anticipate these measures taking effect during the second half of our fiscal 2022. So, with this overview, let's begin to examine the drivers for the first quarter in more detail. For the first quarter, ended November 30th, 2021, Our total consolidated net sales increased 42.4% to a quarterly record of $18.2 million, as compared to the first quarter ended November 30, 2020. Broken down by business units, this included a 72.7% increase in Xeris oil and gas net sales, a 47.3% increase in NatureTech net sales, and a 38.9% increase in Xeris industrial net sales. Total net sales for the fiscal 2022 first quarter by our joint ventures, which we do not consolidate in our financial statements, were $26.8 million. This is an increase of 1% when compared to the same period last fiscal year and demonstrating continued strength in the global demand for our products from both existing and new customers. Fiscal 2022 first quarter net sales by our wholly owned NTIC China subsidiary decreased 10.7% to $4.1 million over the first quarter of fiscal 2021. We believe the year-over-year decline in NTIC China sales was primarily due to COVID-19 related lockdowns and weaker economic conditions in China. Despite the near-term volatility within this market, we continue to believe China will likely become our largest geographic market in the coming years. To support this significant opportunity, our new facility in Shanghai, China, is expected to open soon and support our R&D production, sales and marketing, and training efforts throughout the region. Moving on to our Xerox oil and gas product group, I am encouraged by the continued progress we are making within this large and compelling market. first quarter fiscal 2022 zeroes to oil and gas sales increased 72.7% over the prior fiscal year period. We continue to see higher growth and market interest globally across our oil and gas solutions, which includes applications to protect above ground oil storage tanks and pipeline casings from corrosion. We expect oil and gas to track above fiscal 2021 sales throughout the remainder of fiscal 2022. Turning to our NatureTech bioplastics business, fiscal 2022 first quarter NatureTech sales were $3.8 million, a 47.3% increase over the prior fiscal year period. This is the highest level of quarterly NatureTech sales since the COVID-19 pandemic began two years ago. However, we expect quarterly volatility will remain over the near term, As the COVID-19 pandemic continues and large users of compostable plastics cycle in and out of lockdowns or operate at limited capacities. Our long-term prospects within the worldwide compostable plastics market are exciting. We continue to focus our efforts on developing custom solutions for specific customer product needs that aren't available elsewhere. and we remain optimistic about NatureTech's strong position within this large and compelling compostable plastics market. So to conclude my prepared remarks, we are encouraged by the record sales growth we experienced during the first quarter and are diligently working to improve our profitability. Our first quarter sales growth continued to benefit from our geographic end market and product diversification strategies, which is supported by our robust balance sheet, experienced management team, and asset light business model. While considerable global uncertainty remains, we believe NTIC is on track for another strong year of sales growth and profitability in fiscal 2022. With this overview, let me now turn the call over to Matt Wolfsfeld to summarize our financial results for the fiscal 2022 first quarter.
spk12: Thanks, Patrick. The quarter ended November 30, 2021, represents the first quarter since we completed the acquisition of the remaining 50% ownership interest in our Indian joint venture, which we refer to as ZREST India, for $6.25 million. We funded the purchase price with a combination of cash on hand and borrowings under our evolving line of credit, which was also increased in connection with the transaction to $5 million. As a result of the acquisition, ZREST India's financial results are now reflected in our consolidated financial statements effective September 1st, the beginning of our first quarter of fiscal 2022. In addition, during the fiscal 2022 first quarter, we accounted for a gain on the acquisition of $3.95 million during the quarter, And this is reflected in the line item, Remeasurement Gain on Acquisition of Equity Method Investee on our Consolidated Statement of Operations. Looking at our consolidated results in more detail, compared to prior fiscal year period, NTIC's consolidated net sales increased 42.4% in the fiscal 2022 first quarter to a quarterly record because of the positive trends Patrick reviewed in his prepared remarks and the incremental sales from ZRest India. While we expect these positive trends to continue throughout fiscal 2022, we anticipate some softness in our sales during the short term, primarily a result of the continued COVID-19 pandemic and its variants. Despite a 1% increase in first quarter sales across our global joint ventures, first quarter joint venture operating income declined 12.3% compared to the prior fiscal year period. This decrease was primarily attributable to the acquisition of the remaining 50% of ZRust India and lower profitability at the company's joint ventures. Total first quarter fiscal 2022 operating expenses were $7.1 million. The 19.9% increase over the prior fiscal year period was due primarily to the incremental expense due to the ZRust India acquisition and increased selling expenses associated with higher consolidated sales, as well as higher wages, travel expenses, and R&D investments. Operating expenses as a percentage of net sales were 39%, compared to 46.3% for the same period last fiscal year. As illustrated in our first quarter results, the ZREST India transaction increased our net sales and operating expenses, since it has now consolidated with our financial results and decreased our equity in income from joint ventures, in each case as compared to the same period last fiscal year. and we anticipate that the acquisition will continue to have these effects on our financial results during the remainder of fiscal 2022. Cost of goods sold as a percentage of net sales increased to 69% during the three months ended November 30th, 2021, compared to 65% during the same period last fiscal year, primarily a result of the price increases on raw materials and increased labor costs. Although, as Patrick said, we intend to take certain actions to address inflationary pressures, We expect these inflationary pressures to persist into at least the second quarter of fiscal 2022 and don't expect to realize benefits from these actions until the second half of the fiscal 2022. NTIC reported net income of $4.7 million, or 48 cents per diluted share, for the fiscal 2022 first quarter, compared to $1.3 million, or 13 cents per share, for the fiscal 2021 first quarter. Excluding the one-time gain of $3.9 million related to the acquisition, Of the remaining 50% ownership interest in Xeris India and other related adjustments, NTIC's non-GAAP adjusted net income was $780,000, or $0.08 per diluted share, for the fiscal 2022 first quarter, compared to $1.3 million, or $0.13 per diluted share, for the same quarter last year. A reconciliation of GAAP to non-GAAP financial measures is available in our first quarter earnings press release that was issued this morning. As of November 30, 2021, working capital was $25.8 million, including $8 million in cash and cash equivalents and $5,000 in available for sale securities, compared to $25.2 million, including $7.7 million in cash and cash equivalents and $5,000 in available for sale securities as of August 31, 2021. On November 30, 2021, the company had nearly $22 million in investments in joint ventures. of which approximately 54%, or nearly $11.6 million, was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2022 first quarter, NTIC's Board of Directors increased our regular quarterly cash dividend by 7.7% to $0.07 per share that was payable on November 17, 2021. The shareholder is a record on November 3, 2021. So, to conclude our prepared remarks, we're focused on making the necessary adjustments to our business to navigate the near-term expense, raw material, and supply chain challenges. In addition, we continue to invest across our global operations to support our significant long-term growth opportunities. While near-term uncertainty appears to have picked up recently, especially in light of the COVID variants, we believe overall fiscal 2022 will be another good year for sales and profitability for NTIC. With this overview, Patrick and I are happy to take any questions.
spk08: Thank you. If you have a question at this time, please press star then 1 on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question at this time, please press star then 1. And we do have a question from the line of Tim Clarkson with Van Clemens. Your line is open. Please go ahead.
spk03: Hey, guys. Great quarter. Just wanted to ask, so it's a little confusing to me because it looks like, you know, when I look at the operational profits, they were much higher, but you're saying with the gap, non-gap results, that the profitability was lower. I mean, what were the one-time expenses that occurred, or are they... added into the one-time gain. How did you do that on an accounting basis?
spk12: Well, the one-time expenses that we had for the transaction are included in the, you know, we broke that out in the non-GAAP calculation that's in the back of the press release. So there's some expenses associated with the transaction. There's new amortization expense that we had in the quarter as far as the amortization of the new intangibles that are in our balance sheet. There's a tax impact. from the items we talked about to add back. So those are items that are included to get to the non-GAAP numbers that are included in our normal operating expenses if you're looking at our income statement.
spk03: Right. So, I mean, just looking at it from afar, it looks like you're solidly profitable and had more intrinsic profitability this quarter than last quarter, but You know, you get all these numbers bouncing back, reflecting gap and non-gap earnings.
spk12: Yeah, I mean, the income statement comparing, you know, the three months ended, you know, fiscal 2022 and prior years, it's sometimes difficult to reconcile, you know, because of the transaction, because of the transaction that took place in the quarter, and also because you're switching from the equity consolidation of ZRS India to the full consolidation of ZRS India. So you're essentially adding, you know, $500,000 plus of expenses to the operating expense line that are related to India. You're adding the sales and cost of goods sold to the top line. You know, then ultimately you're pulling income out of the joint venture operating line from what previously would have been there related to the consolidations. So it's a little difficult going quarter to quarter because of the adjustments. But, you know, overall, the main issue we had this quarter is, you know, sales were up and sales were solid. Sales, comparing to fourth quarter last year, the income from, you know, the sales and income from our oil and gas was pretty significant in fourth quarter. And so there's a bit of a fall off to first quarter with the revenue that we recognized. and obviously there's different gross margins that are associated with that. Beyond that, across the ZRust industrial market, the gross margins throughout first quarter and what we're seeing kind of in the second quarter is that with the increase in the cost of the resins, the main raw materials that go into our product, it was pretty volatile during the last six months of the last fiscal year and through the first three months of this year. So we're at a point where we're making adjustments to account for that and to increase our profitability, but it's going to take a little bit of time for that to kind of flow through our inventory and get pushed out. So the expectations are that we're going to be able to increase our gross margins throughout the, you know, from kind of now or, you know, February on, increased gross margins through the industrial products. And also the expectations are that we're going to have more sales in the second half of the fiscal 2022 related to oil and gas, similar to what we did last year. And obviously the gross margins on the oil and gas business are better and stronger than the industrial business. So that should bring back some profitability as well. So... So I would expect that our first and second quarters, there's going to be some, call it gross margin pressures that we're dealing with because of supply chain issues, because of raw material issues and raw material pricing. But we'd expect a lot of that to be ironed out in the second half of the year. So we still think we're going to have a very strong year from a profitability standpoint. Certainly from a sales standpoint, even if you pull out the $2.5 million of revenue that ZREST India contributed during the first three months of the year, we still saw significant increases across the board from a sales standpoint. And so that's something that we're pretty excited about. Specifically, if you look at the revenue from comparing fourth quarter to first quarter, You know, the NatureTech sales were up close to 50%, and this is going from fourth quarter to first quarter, not first quarter to first quarter. Sorry, I misspoke. The NatureTech total sales are up 30% comparing fourth quarter to first quarter, and almost 50% comparing first quarter to first quarter. You know, similarly, all those sales in oil and gas were down going from fourth quarter to first quarter. They were up 72% comparing the first quarter to first quarter. So, you know, we're pretty optimistic given where sales are headed and given the, you know, the measures that we put in place to kind of deal with some of the profitability issues. But, you know, we're pretty confident with kind of how we're going forward for the rest of the year. Sure.
spk03: So on the compostable business, I noticed when I was in Costco that they're starting to switch to compostable packaging. I think they're using somebody else. I mean, what would you say is the differentiator for for NatureTech's compostable products.
spk14: And the key differentiator we've always had is that when we use or take the compostable resins that are available on the market produced by some very major chemical companies, but they in and of themselves do not have certain mechanical properties that make them easy to manufacture, process, And also the finished products tend to be weaker if they're just those resin systems used by themselves. So we take their resin systems, we add our chemistries to it, which make them easier to process and therefore reduce the cost while increasing the quality. And also the finished products have greater mechanical strength. And that's how we differentiate ourselves in the market. And we also don't go after all of the commodity applications. We are always seeking to get to find specialty applications where our technology really differentiates us from the competition because we can produce certain products that nobody else can.
spk03: Sure, sure. Okay, fine. And then, you know, one last question just on the oil and gas. I know that you're making some progress with using that technology specifically on pipelines. Has anything developed further as far as that goes, or is that just kind of an ongoing thing?
spk14: That's an ongoing thing. There's nothing we've developed recently that augments that.
spk03: Okay, okay. All right, well, good. I thought it was a good quarter, and I'll let somebody else ask some questions. Thank you.
spk08: Thank you. And our next question comes from the line of Scott Billingdue with Bulvers Partners. Your line is open. Please go ahead.
spk05: Oh, hi, guys. Thanks. A couple of my questions were, were asked, but on a go-forward basis, just as when you have a deal such as the India deal, so everything kind of moves above the line, was there any difference in kind of what operating profits at India versus several other joint ventures are, or is it kind of in line with what with others is, you know, based on scale or whatever else you plan on doing there?
spk12: Well, in general, I would say that a lot of our joint ventures experience some similar, you know, some similar issues with the price of the resin. Some joint ventures have been better at able to and able to push the, you know, the cost of raw materials and dealing with those onto the customers. Others have not. When you specifically look at the, you know, so that's just from the JV standpoint. And pull back and address your India comment. In last year, the contribution of income from Xeroth India in first quarter was about $280,000. That was our 50% contribution. This year, with the 100% contribution, we had about $420,000. So kind of looking at that, You know, Xeris India was slightly less profitable in first quarter this year than they were last year. Again, dealing with kind of some of the same issues that everybody is dealing with. Great.
spk05: Good. And I guess just, you know, outlook for on the oil and gas side. Is there much visibility, pipeline versus tank bottom? Have you got any spread? Is that something that you guys can give us a little view on? I know the pipeline is a little newer, but any breakdown there at all?
spk12: Yeah, I was going to say, I mean, What we saw last year with kind of how things rebounded in the second half of the year from an oil and gas standpoint is there was a significant contribution from the pipeline business. And I would say that that's looking forward kind of through the remainder of our fiscal year and a lot of the projects that obviously we have some visibility of the projects that are going to be happening in the next calendar year and in the next really eight months of this fiscal year. And I would say it's a pretty even split between the tank bottom opportunities and the pipeline opportunities that we're working on, which is, you know, which is good. And if I look at the, you know, kind of the opportunities we have going beyond that with, you know, kind of the interest from, you know, interest that we have seen after the API technical report that came out and things like that, You know, we're pretty kind of excited about what the opportunity is for oil and gas, you know, I'd say over the next 12 to 18 months.
spk07: Great. Thanks, guys. I appreciate it. Yeah, sure.
spk08: Thank you. And again, ladies and gentlemen, if you have a question at this time, please press star then 1. And our next question comes from the line of Gus Richards with Northland. Your line is open. Please go ahead.
spk06: Yes, thanks for taking the question. Matt, just so I'm clear, what is the incremental op-ex from India in the first quarter, and is that what you expect going forward?
spk12: Yeah, the incremental operating expenses that hit our operating expense line, I want to say it was about $520,000. And I would expect that to be pretty flat, at least for the next three quarters.
spk06: Got it. And then it was notable the weakness in China. And is that a tough comp? Is that, you know, the auto industry having supply chain issues? You know, can you add a little bit of color on the weakness, you know, in that region?
spk14: That's right now the exemplary of the Chinese market. I think they're having ongoing problems with COVID and other softnesses in their market. So we expect that to be temporary as the pandemic recovers.
spk15: But that's what we're facing basically in China.
spk06: Okay. Okay. That makes sense. And then in Europe, I noted that car sales were rather weak, and I was wondering if the JVs there and your operations there were impacted by that.
spk15: Well, I can – oh, sorry. Go ahead, Matt. It's fine.
spk12: I was going to say, I can speak to XCOR, which is kind of the main, if you're looking at the sales that we have in Europe, that certainly dominates it. What I can say is that, and this will be out in our queue as well, that XCOR Germany had sales increases in first quarter compared to last first quarter about 20%, but their overall income contribution decreased by about 9%. So, again, we're seeing some similar issues where we're seeing the opportunities out there, and we're going after a lot of the opportunities, even with some of the supply constraints. It's just a matter of how to account for both the increase in operating expenses that we're seeing and also the gross margin pressure.
spk06: Got it. And then the last one is you've got some – cost reduction efforts, you know, in place. Is also part of the plan, you know, to help gross margins passing on your incremental increase in costs on to your customers?
spk12: Yeah, we're doing, we're certainly right in the middle of kind of a more comprehensive analysis of what we can do from a gross margin standpoint. And that's going to include everything from shipping costs to internal labor issues to you know, prices that we're paying for products, to potentially look at insourcing certain products to increase gross margin, you know, similar things that we're going to be able to do to give us more control over our product, especially given some of the uncertainties out there in the market. You know, some of the big things that we've seen that's been really volatile has been lead time changes with utilizing some of our subcontractors. And what you typically have is It may not be the main ingredient goes into a product, but it's kind of one small ingredient or when you're outsourcing certain things, one small component that is difficult to get or the price in that component has increased. And so there's just a lot more emphasis. from our standpoint, that has been placed on the procurement cycle, you know, on the procurement process to make sure you have everything that you need in a timely manner and then be able to turn it around and deliver it to the customers. And so I would say we have spent so much more time over the past six months dealing with supply issues compared to anything that we previously had to do. And so, yes, we're certainly – very much aware of what's going on from a gross margin standpoint and addressing every different aspect of it that we can.
spk06: Got it. That makes a lot of sense. So would it be fair to assume you're going to have to carry a little bit more inventory going forward just to make sure that you don't get hit with these disruptions?
spk12: In certain places, yes. I mean, for certain products, yes. You know, but similar to what you're seeing when you look at a cart lot, we're building it as quick as we can at this point in time. And with sales being up, you know, where they are, it's, you know, we're replenishing as quick as we can. So there are certain products where we're trying to bring in inventory, but it's going out the door as fast as it's coming in. Okay, got it. Very good. Thanks so much.
spk08: Thanks. Thank you. And our next question comes from the line of Jim Dowling with Jefferies. Your line is open. Please go ahead.
spk02: I have two questions related to NatureTech. The increase in sales that you reported, is any of that from new customers obtained in the last three to six months? And the second question is, Can you give us a sense geographically on the sales strength of NatureTech?
spk14: You're looking at, I mean, yes, we are constantly acquiring new customers. I wouldn't say that we've acquired any significantly new customers, but our sales increase reflects, obviously, recovery of certain customers that had dropped off during the COVID pandemic, but also certain new applications as well. In terms of geographic locations right now, our primary geographic markets are North America and Southeast Asia, particularly India, Pakistan, Sri Lanka, and Bangladesh, with some increasing business in China, although China tends to be a little bit slower right now because their push towards regulation, particularly in regards to compost bowls, hasn't happened as fast as we had expected to originally. but we're also now gaining customers in Europe as well. So, I mean, we are diversifying geographically and growing in that respect.
spk02: What is the breakdown between North American revenues and the rest of the world?
spk14: Matt, do you have that handy?
spk12: Yeah, in the first quarter of 2022, which we just finished, sales of NatureTech in North America were about $1.4 million. Sales at NatureTech India were a little over $2 million, and China sales were about $300,000 plus. So you're looking at total, you know, for total NatureTech revenue of a little under $3.8 million.
spk00: Thank you.
spk08: Thank you. And we have a follow-up question from the line of Scott Billingdew with Walworth Partners. Your line is open. Please go ahead.
spk05: Thanks. I was just wondering, as you try to do either cost-cutting or sourcing, how does that play out across the JVs? Do you have to do it JV by JV, or is there, hey, there's common – There's some common chemicals that you buy for all. Maybe give us a little sense for what kind of process does that take as you go across JV by JV.
spk14: It's mostly done on a JV by JV basis because the majority of our raw materials are best locally sourced and also manufactured. Our primary business is packaging, and it doesn't make a lot of sense to ship empty packaging around the world So that's why we try to manufacture as close to the customer and user as possible.
spk05: Got it. And I assume there is some best practices you can share, but it is very much a local decision.
spk15: Yes.
spk05: Great. Thanks.
spk08: Thank you, and I'm showing no further questions at this time, and I would like to turn the conference back over to Patrick Lynch for any further or closing remarks.
spk14: I just want to thank everyone for participating today and your interest in NTIC. Have a great day and look forward to seeing you again next quarter.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Music. Bye. Thank you. Good day, and thank you for standing by. Welcome to the NTIC conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you only press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then 0. 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 Security Litigation Reform Act of 1995, and that NTIC desires to avail itself to 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 would now like to hand the conference over to your host today, Patrick Lynch. Please go ahead.
spk14: Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolfsfeld, NTIC's CFO. Please note that a press release regarding our first quarter fiscal 2022 financial results was issued earlier this morning and is available at NTIC.com. Let me begin by wishing everyone a healthy and prosperous 2022 new year. I'd also like to remind everyone of our upcoming annual meeting of stockholders on January 21. Please note, however, that although the meeting will be held in person due to the COVID-19 pandemic, we are strongly encouraging all stockholders to vote by proxy in advance. The safety and well-being of our stockholders as well as our employees is extremely important, and we believe that we'll be able to better comply with the CDC and state safety guidelines if attendance is kept to an absolute minimum and the meeting itself is kept as short as possible by only reporting the election results and not making any business presentation this year. Now, for the remainder of this call, we will review various key aspects of our fiscal 2022 first quarter financial results, provide a brief business update, and then conclude with a question and answer session. Overall, fiscal 2022 sales are off to a record start as we experienced strong demand during first quarter across many of our global markets, which is very encouraging. We are also excited about our first quarter announcement that we acquired the remaining 50% ownership interest in Harita NTI, our Xerast joint venture in India. which we refer to as Xerox India. The financial results of Xerox India are now included in our consolidated financial statements effective as of September 1st and therefore for the entire first quarter of fiscal 2022. As a result, sales from Xerox India are consolidated within our income statement and are no longer accounted for through joint venture operating income. This transaction also resulted in several one-time financial charges and accounting adjustments that Matt will review in more detail in his prepared remarks. The strong demand we experienced during first quarter led to a 42.4% increase in our total consolidated net sales as compared to the first quarter ended November 30th, 2020, to a quarterly record of $18.2 million. The year-over-year increase in consolidated sales was primarily a result of sales growth across all the company's product categories due to higher global demand and the recovery from the COVID-19 pandemic, as well as contribution from Xerox India. For first quarter of fiscal 2022, Xerox India contributed $2,453,000 in sales to NTIC's consolidated net sales, even excluding the incremental sales from Xerox India, we still experience strong organic growth. That being said, NTIC has not been immune to significant inflationary pressures, which have affected the cost of our raw materials and labor, as well as intense friction across our global supply chain and the impact of the continuing COVID-19 pandemic. Unfortunately, our profitability lagged during the first quarter due to several one-time items associated with the Zeros India transaction, as well as higher raw material, freight, and labor expenses. While we plan to implement certain measures to address these inflationary pressures, we anticipate these measures taking effect during the second half of our fiscal 2022. So with this overview, let's begin to examine the drivers for the first quarter in more detail. For the first quarter, ended November 30th, 2021, our total consolidated net sales increased 42.4% to a quarterly record of $18.2 million, as compared to the first quarter ended November 30th, 2020. Broken down by business units, this included a 72.7% increase in Xeris oil and gas net sales, a 47.3% increase in NatureTech net sales, and a 38.9% increase in Xeris industrial net sales. Total net sales for the fiscal 2022 first quarter by our joint ventures, which we do not consolidate in our financial statements, were $26.8 million. This is an increase of 1% when compared to the same period last fiscal year and demonstrating continued strength in the global demand for our products from both existing and new customers. Fiscal 2022 first quarter net sales by our wholly owned NTIC China subsidiary decreased 10.7% to $4.1 million over the first quarter of fiscal 2021. We believe the year over year decline in NTIC China sales was primarily due to COVID-19 related lockdowns and weaker economic conditions in China. Despite the near term volatility within this market, we continue to believe China will likely become our largest geographic market in the coming years. To support this significant opportunity, our new facility in Shanghai, China, is expected to open soon and support our R&D production, sales and marketing, and training efforts throughout the region. Moving on to our Xerox oil and gas product group, I am encouraged by the continued progress we are making within this large and compelling market. first quarter fiscal 2022 zeroes to oil and gas sales increased 72.7% over the prior fiscal year period. We continue to see higher growth and market interest globally across our oil and gas solutions, which includes applications to protect above ground oil storage tanks and pipeline casings from corrosion. We expect oil and gas to track above fiscal 2021 sales throughout the remainder of fiscal 2022. Turning to our NatureTech bioplastics business, fiscal 2022 first quarter NatureTech sales were $3.8 million, a 47.3% increase over the prior fiscal year period. This is the highest level of quarterly NatureTech sales since the COVID-19 pandemic began two years ago. However, we expect quarterly volatility will remain over the near term, As the COVID-19 pandemic continues and large users of compostable plastics cycle in and out of lockdowns or operate at limited capacities. Our long-term prospects within the worldwide compostable plastics market are exciting. We continue to focus our efforts on developing custom solutions for specific customer product needs that aren't available elsewhere. and we remain optimistic about NatureTech's strong position within this large and compelling compostable plastics market. So to conclude my prepared remarks, we are encouraged by the record sales growth we experienced during the first quarter and are diligently working to improve our profitability. Our first quarter sales growth continued to benefit from our geographic end market and product diversification strategies, which is supported by our robust balance sheet, experienced management team, and assets light business model. While considerable global uncertainty remains, we believe NTIC is on track for another strong year of sales growth and profitability in fiscal 2022. With this overview, let me now turn the call over to Matt Wolfsfeld to summarize our financial results for the fiscal 2022 first quarter.
spk12: Thanks, Patrick. The quarter ended November 30, 2021, represents the first quarter since we completed the acquisition of the remaining 50% ownership interest in our Indian joint venture, which we refer to as ZREST India, for $6.25 million. We funded the purchase price with a combination of cash on hand and borrowings under our evolving line of credit, which was also increased in connection with the transaction to $5 million. As a result of the acquisition, ZREST India's financial results are now reflected in our consolidated financial statements effective September 1st, the beginning of our first quarter of fiscal 2022. In addition, during the fiscal 2022 first quarter, we accounted for a gain on the acquisition of $3.95 million during the quarter, and this is reflected in the line item, Remeasurement Gain on Acquisition of Equity Method Investee. on our Consolidated Statement of Operations. Looking at our consolidated results in more detail, compared to prior fiscal year period, NTIC's consolidated net sales increased 42.4% in the fiscal 2022 first quarter to a quarterly record because of the positive trends Patrick reviewed in his prepared remarks and the incremental sales from ZRest India. While we expect these positive trends to continue throughout fiscal 2022, we anticipate some softness in our sales during the short term, primarily a result of the continued COVID-19 pandemic and its variants. Despite a 1% increase in first quarter sales across our global joint ventures, first quarter joint venture operating income declined 12.3% compared to the prior fiscal year period. This decrease was primarily attributable to the acquisition of the remaining 50% of ZRust India and lower profitability at the company's joint ventures. Total first quarter fiscal 2022 operating expenses were $7.1 million. The 19.9% increase over the prior fiscal year period was due primarily to the incremental expense due to the ZRust India acquisition and increased selling expenses associated with higher consolidated sales, as well as higher wages, travel expenses, and R&D investments. Operating expenses as a percentage of net sales were 39%, compared to 46.3% for the same period last fiscal year. As illustrated in our first quarter results, the ZREST India transaction increased our net sales and operating expenses, since it has now consolidated with our financial results and decreased our equity in income from joint ventures, in each case as compared to the same period last fiscal year. and we anticipate that the acquisition will continue to have these effects on our financial results during the remainder of fiscal 2022. Cost of goods sold as a percentage of net sales increased to 69 percent during the three months ended November 30th, 2021, compared to 65 percent during the same period last fiscal year, primarily a result of the price increases on raw materials and increased labor costs. Although, as Patrick said, we intend to take certain actions to address inflationary pressures, We expect these inflationary pressures to persist into at least the second quarter of fiscal 2022, and don't expect to realize benefits from these actions until the second half of the fiscal 2022. NTIC reported net income of $4.7 million, or 48 cents per diluted share, for the fiscal 2022 first quarter, compared to $1.3 million, or 13 cents per share, for the fiscal 2021 first quarter. Excluding the one-time gain of $3.9 million related to the acquisition of Of the remaining 50% ownership interest in Xeris India and other related adjustments, NTIC's non-GAAP adjusted net income was $780,000, or $0.08 per diluted share, for the fiscal 2022 first quarter, compared to $1.3 million, or $0.13 per diluted share, for the same quarter last year. A reconciliation of GAAP to non-GAAP financial measures is available in our first quarter earnings press release that was issued this morning. As of November 30, 2021, working capital was $25.8 million, including $8 million in cash and cash equivalents and $5,000 in available-for-sale securities, compared to $25.2 million, including $7.7 million in cash and cash equivalents and $5,000 in available-for-sale securities as of August 31, 2021. On November 30, 2021, the company had nearly $22 million in investments in joint ventures. of which approximately 54%, or nearly $11.6 million, was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2022 first quarter, NTIC's Board of Directors increased our regular quarterly cash dividend by 7.7% to $0.07 per share that was payable on November 17, 2021. The shareholder is a record on November 3, 2021. So, to conclude our prepared remarks... we're focused on making the necessary adjustments to our business to navigate the near-term expense, raw material, and supply chain challenges. In addition, we continue to invest across our global operations to support our significant long-term growth opportunities. While near-term uncertainty appears to have picked up recently, especially in light of the COVID variants, we believe overall fiscal 2022 will be another good year for sales and profitability for NTIC. With this overview, Patrick and I are happy to take any questions.
spk08: Thank you. If you have a question at this time, please press star then 1 on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question at this time, please press star then 1. And we do have a question from the line of Tim Clarkson with Van Clemens. Your line is open. Please go ahead.
spk03: Hey, guys. Great quarter. Just wanted to ask, so it's a little confusing to me because it looks like, you know, when I look at the operational profits, they were much higher, but you're saying with the gap, non-gap results, that the profitability was lower. I mean, what were the one-time expenses that occurred, or are they... added into the one-time gain. How did you do that on an accounting basis?
spk12: Well, the one-time expenses that we had for the transaction are included in the, you know, we broke that out in the non-GAAP calculation that's in the back of the press release. So there's some expenses associated with the transaction. There's new amortization expense that we had in the quarter as far as the amortization of the new intangibles that are on our balance sheet. There's a tax impact. from the items we talked about to add back. So those are items that are included to get to the non-GAAP numbers that are included in our normal operating expenses if you're looking at our income statement.
spk03: Right. So, I mean, just looking at it from afar, it looks like you're solidly profitable and had more intrinsic profitability this quarter than last quarter, but You know, you get all these numbers bouncing back, reflecting gap and non-gap earnings.
spk12: Yeah, I mean, the income statement comparing, you know, the three months ended, you know, fiscal 2022 and prior years, it's sometimes difficult to reconcile, you know, because of the transaction, because of the transaction that took place in the quarter, and also because you're switching from the equity consolidation of ZRS India to the full consolidation of ZRS India. So you're essentially adding $500,000 plus of expenses to the operating expense line that are related to India. You're adding the sales and cost of goods sold to the top line. Then ultimately you're pulling income out of the joint venture operating line from what previously would have been there related to the consolidations. So it's a little difficult going quarter to quarter because of the adjustments. But, you know, overall, the main issue we had this quarter is, you know, sales were up and sales were solid. Sales, comparing to fourth quarter last year, the income from, you know, the sales and income from our oil and gas was pretty significant in fourth quarter. And so there's a bit of a fall off to first quarter with the revenue that we recognized. and obviously there's different gross margins that are associated with that. Beyond that, across the ZRust industrial market, the gross margins throughout first quarter and what we're seeing kind of in the second quarter is that with the increase in the cost of the resins, the main raw materials that go into our product, it was pretty volatile during the last six months of the last fiscal year and through the first three months of this year. So we're at a point where we're making adjustments to account for that and to increase our profitability, but it's going to take a little bit of time for that to kind of flow through our inventory and get pushed out. So the expectations are that we're going to be able to increase our gross margins throughout the, you know, from kind of now or, you know, February on, increased gross margins through the industrial products. And also the expectations are that we're going to have more sales in the second half of the fiscal 2022 related to oil and gas, similar to what we did last year. And obviously the gross margins on the oil and gas business are better and stronger than the industrial business. So that should bring back some profitability as well. So... So I would expect that our first and second quarters, there's going to be some, call it gross margin pressures that we're dealing with because of supply chain issues, because of raw material issues and raw material pricing. But we'd expect a lot of that to be ironed out in the second half of the year. So we still think we're going to have a very strong year from a profitability standpoint. Certainly from a sales standpoint, even if you pull out the $2.5 million of revenue that ZREST India contributed during the first three months of the year, we still saw significant increases across the board from a sales standpoint. And so that's something that we're pretty excited about. Specifically, if you look at the revenue from comparing fourth quarter to first quarter, the nature tech sales were up close to 50%, and this is going from fourth quarter to first quarter, not first quarter to first quarter. Sorry, I misspoke. The nature tech total sales are up 30% comparing fourth quarter to first quarter, and almost 50% comparing first quarter to first quarter. Similarly, all those sales in oil and gas were down going from fourth quarter to first quarter. They were up 72% comparing the first quarter to first quarter. So, We're pretty optimistic given where sales are headed and given the measures that we put in place to kind of deal with some of the profitability issues. But we're pretty confident with kind of how we're going forward for the rest of the year. Sure.
spk03: So on the compostable business, I noticed when I was in Costco that they're starting to switch to compostable packaging. I think they're using somebody else. I mean, what would you say is the differentiator for – for NatureTech's compostable products.
spk14: And the key differentiator we've always had is that when we use or take the compostable resins that are available on the market produced by some very major chemical companies, but they in and of themselves do not have certain mechanical properties that make them easy to manufacture, process, And also the finished products tend to be weaker if they're just those resin systems used by themselves. So we take their resin systems, we add our chemistries to it, which make them easier to process and therefore reduce the cost while increasing the quality. And also the finished products have greater mechanical strength. And that's how we differentiate ourselves in the market. And we also don't go after all of the commodity applications. We are always seeking to get to find specialty applications where our technology really differentiates us from the competition because we can produce certain products that nobody else can.
spk03: Sure, sure. Okay, fine. And then, you know, one last question just on the oil and gas. I know that you're making some progress with using that technology specifically on pipelines. Has anything developed further as far as that goes, or is that just kind of an ongoing thing?
spk14: That's an ongoing thing. There's nothing we've developed recently that augments that.
spk03: Okay, okay. All right, well, good. I thought it was a good quarter, and I'll let somebody else ask some questions. Thank you.
spk08: Thank you. And our next question comes from the line of Scott Billingdue with Walrus Partners. Your line is open. Please go ahead.
spk05: Oh, hi, guys. Thanks. A couple of my questions were, were asked, but on a go-forward basis, just as when you have a deal such as the India deal, so everything kind of moves above the line, was there any difference in kind of what operating profits at India versus several other joint ventures are, or is it kind of in line with what with others is, you know, based on scale or whatever else you plan on doing there?
spk12: Well, in general, I would say that a lot of our joint ventures experience some similar, you know, some similar issues with the price of the resin. Some joint ventures have been better at able to and able to push the, you know, the cost of raw materials and dealing with those onto the customers. Others have not. When you specifically look at the, you know, so that's just from the JV standpoint. And pull back and address your India comment. In last year, the contribution of income from ZRF India in first quarter was about $280,000. That was our 50% contribution. This year, with the 100% contribution, we had about $420,000. So kind of looking at that, you know, Xeris India was slightly less profitable in first quarter this year than they were last year. Again, dealing with kind of some of the same issues that everybody is dealing with. Great.
spk05: Good. And I guess just, you know, outlook for on the oil and gas side, Is there much visibility, pipeline versus tank bottom? Have you got any spread? Is that something that you guys can give us a little view on? I know the pipeline is a little newer, but any breakdown there at all?
spk12: Yeah, I was going to say, I mean, What we saw last year with kind of how things rebounded in the second half of the year from an oil and gas standpoint is there was a significant contribution from the pipeline business. And I would say that that's looking forward kind of through the remainder of our fiscal year and a lot of the projects that obviously we have some visibility of the projects that are going to be happening in the next calendar year and in the next really eight months of this fiscal year. And I would say it's a pretty even split between the tank bottom opportunities and the pipeline opportunities that we're working on, which is, you know, which is good. And if I look at the, you know, kind of the opportunities we have going beyond that with, you know, kind of the interest from, you know, interest that we have seen after the API technical report that came out and things like that, You know, we're pretty kind of excited about what the opportunity is for oil and gas, you know, I'd say over the next 12 to 18 months.
spk07: Great. Thanks, guys. I appreciate it. Yeah, sure.
spk08: Thank you. And again, ladies and gentlemen, if you have a question at this time, please press star then 1. And our next question comes from the line of Gus Richards with Northland. Your line is open. Please go ahead.
spk06: Yes, thanks for taking the question. Matt, just so I'm clear, what is the incremental op-ex from India in the first quarter, and is that what you expect going forward?
spk12: Yeah, the incremental operating expenses that hit our operating expense line, I want to say it was about $520,000. And I would expect that to be pretty flat, at least for the next three quarters.
spk06: Got it. And then it was notable the weakness in China. And is that a tough comp? Is that, you know, the auto industry having supply chain issues? You know, can you add a little bit of color on the weakness, you know, in that region?
spk14: That's right now the exemplary of the Chinese market. I think they're having ongoing problems with COVID and other softnesses in their market. So we expect that to be temporary as the pandemic recovers.
spk15: But that's what we're facing basically in China.
spk06: Okay. Okay. That makes sense. And then in Europe, I noted that car sales were rather weak, and I was wondering if the JVs there and your operations there were impacted by that.
spk15: Well, I can – oh, sorry. Go ahead, Matt. It's fine.
spk12: I can speak to X-Core, which is kind of the main, if you're looking at the sales that we have in Europe, that certainly dominates it. What I can say is that, and this will be out in our queue as well, that X-Core Germany had sales increases in first quarter compared to last first quarter about 20%, but their overall income contribution decreased by about 9%. So, again, we're seeing some similar issues where we're seeing the opportunities out there, and we're going after a lot of the opportunities, even with some of the supply constraints. It's just a matter of how to account for both the increase in operating expenses that we're seeing and also the gross margin pressure.
spk06: Got it. And then the last one is you've got some – cost reduction efforts, you know, in place, is also part of the plan, you know, to help gross margins passing on your incremental increase in costs on to your customers?
spk12: Yeah, we're doing – we're certainly right in the middle of kind of a more comprehensive analysis of what we can do from a gross margin standpoint. And that's going to include everything from shipping costs to internal labor issues to you know, prices that we're paying for products, to potentially look at insourcing certain products to increase gross margin, you know, similar things that we're going to be able to do to give us more control over our product, especially given some of the uncertainties out there in the market. You know, some of the big things that we've seen that's been really volatile has been lead time changes with utilizing some of our subcontractors. You know, and what you typically have is, It may not be the main ingredient goes to a product, but it's kind of one small ingredient. Or when you're outsourcing certain things, one small component that is difficult to get or the price in that component has increased. And so there's just a lot more emphasis. from our standpoint, that has been placed on the procurement cycle, you know, on the procurement process to make sure you have everything you need in a timely manner and then be able to turn it around and deliver it to the customers. And so I would say we have spent so much more time over the past six months dealing with supply issues compared to anything that we've previously had to do. And so, yes, we're certainly – very much aware of what's going on from a gross margin standpoint and addressing every different aspect of it that we can.
spk06: Got it. That makes a lot of sense. So would it be fair to assume you're going to have to carry a little bit more inventory going forward just to make sure that you don't get hit with these disruptions?
spk12: In certain places, yes. I mean, for certain products, yes. You know, but similar to what you're seeing when you look at a cart lot, We're building it as quick as we can at this point in time, and with sales being up where they are, we're replenishing as quick as we can. So there are certain products where we're trying to bring in inventory, but it's going out the door as fast as it's coming in. Okay, got it. Very good. Thanks so much.
spk08: Thanks. Thank you. And our next question comes from the line of Jim Dowling with Jefferies. Your line is open. Please go ahead.
spk02: Yeah, I have two questions related to nature tech. The increase in sales that you reported, is any of that from new customers obtained in the last three to six months? And the second question is, Can you give us a sense geographically on the sales strength of NatureTech?
spk14: You're looking at, I mean, yes, we are constantly acquiring new customers. I wouldn't say that we've acquired any significantly new customers, but our sales increase reflects, obviously, recovery of certain customers that had dropped off during the COVID pandemic, but also certain new applications as well. In terms of geographic locations right now, our primary geographic markets are North America and Southeast Asia, particularly India, Pakistan, Sri Lanka, and Bangladesh, with some increasing business in China, although China tends to be a little bit slower right now because their push towards regulation, particularly in regards to compost bowls, hasn't happened as fast as we had expected to originally. but we're also now gaining customers in Europe as well. So, I mean, we are diversifying geographically and growing in that respect.
spk02: What is the breakdown between North American revenues and the rest of the world?
spk14: Matt, do you have a handy?
spk12: Yeah, in the first quarter of 2022, which we just finished, sales of NatureTech in North America were about $1.4 million. Sales at NatureTech India were a little over $2 million, and China sales were about $300,000 plus. So you're looking at total, you know, for total NatureTech revenue of a little under $3.8 million.
spk00: Thank you.
spk08: Thank you. And we have a follow-up question from the line of Scott Billingdew with Walrus Partners. Your line is open. Please go ahead.
spk05: Thanks. I was just wondering, as you try to do either cost-cutting or sourcing, how does that play out across the JVs? Do you have to do it JV by JV, or is there, hey, there's common – There's some common chemicals that you buy for all. Maybe give us a little sense for what kind of process does that take as you go across JV by JV.
spk14: It's mostly done on a JV by JV basis because the majority of our raw materials are best locally sourced and also manufactured. Our primary business is packaging, and it doesn't make a lot of sense to ship empty packaging around the world So that's why we try to manufacture as close to the customer and user as possible.
spk05: Got it. And I assume there is some best practices you can share, but it is very much a local decision.
spk15: Yes.
spk05: Great. Thanks.
spk08: Thank you, and I'm showing no further questions at this time, and I would like to turn the conference back over to Patrick Lynch for any further or closing remarks.
spk14: I just want to thank everyone for participating today and your interest in NTIC. Have a great day and look forward to seeing you again next quarter.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-