Northern Technologies International Corporation

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.

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.

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.