Northern Technologies International Corporation

And thank you for standing by. Welcome to the Northern Technologies second quarter 2022 earnings 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 the question during the session, you will need to press star 1 on your telephone. If you require any assistance, please press star, then zero. As part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding the 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 be advised that the 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 the reports and other future filings that NTIC will make with the FDC. NTIC disclaims any duty to update or revise its forward-looking statements. I would now like to turn the call over to Mr. Patrick Lynch. Sir, you may begin.

Thank you. Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our second quarter fiscal 2022 financial results was issued earlier this morning and is available at NTIC.com. During today's call, we will review various key aspects of our fiscal 2022 second quarter financial results, provide a brief business update, and then conclude with a question and answer session. Strong demand across our product categories and many of our global markets contributed to strong sales results in the fiscal 2022 second quarter. In fact, total net sales increased 13.6% when excluding incremental sales as a result of our recent acquisition of Xeras India. The robust year-over-year expansion in consolidated net sales was primarily a result of sales growth across all of the company's product categories due to higher global demand and the recovery from the COVID-19 pandemic, as well as the contribution from Xeras India. As anticipated, we continue to encounter significant inflation which has increased the cost of our raw materials and labor as well as intense friction across our global supply chain resulting from the impact of the continuing COVID-19 pandemic. This inflation reduced the gross margin and operating profit of not only NTIC but also our joint ventures as well throughout the first half of the fiscal year. Consequently, we have implemented certain measures and passed these costs on as soon as possible to improve our profitability. As a result of these actions, profitability improved late in the second quarter, and we anticipate very noticeable improvements in our operating profits during the second half of fiscal 2022. So, with this overview, let's examine the drivers for the second quarter in more detail. For the second quarter, ended February 28, 2022, our total consolidated net sales increased 31% to a second quarter record of $16.7 million, as compared to the second quarter ended February 28, 2021. Broken down by business units, this included a 60.1% increase in Xerus oil and gas net sales, a 45.3% increase in NatureTech net sales, and a 24.1% increase in Xerus industrial net sales. Total net sales for the fiscal 2022 second quarter by our joint ventures, which we do not consolidate in our financial statements, were $24.6 million. This is a decrease of 15.3% when compared to the same period last fiscal year and was due primarily to reduced demand across our global joint ventures and the change in the accounting treatment for Xeros India, which is now a consolidated subsidiary within NTIC's financial statements. Fiscal 2022 second quarter net sales by our wholly owned NTIC China subsidiary decreased 6.3% to $4.1 million over the second quarter of fiscal 2021. NTIC China sales continue to be impacted by extended COVID-19 related lockdowns and the resulting 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. Moving on to our Xerost oil and gas product group, I am encouraged by the continued progress we are making. Second quarter fiscal 2022 Xerost oil and gas sales increased 60.1% 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, pipeline casings, and pipeline casings from corrosion. In fact, our forecast of oil and gas sales for the remainder of the fiscal year is very strong with many repeat customers. Furthermore, several projects we had expected to implement in the first half of the fiscal year got postponed into the second half. Therefore, we expect oil and gas sales will be significantly higher in the second half of this fiscal year compared to the first half, which we anticipate will lead to higher full-year oil and gas sales compared to the last fiscal year. Turning to our NatureTech bioplastics business, fiscal 22 second quarter NatureTech sales were $3.6 million, a 45.3% increase over the prior fiscal year period. Sales trends within nature tech reflect a gradual return towards pre-pandemic demand patterns, especially in North America and India. In North America, we have seen a steady increase in demand as schools, universities, corporate campuses, and large sporting venues reopen their facilities. For the time being, however, we anticipate that there is an upper constraint on nature tech sales growth due to a combination of supply chain and logistics challenges as well as PLA supply shortages due to production problems and delays at several of our suppliers. Therefore, we expect supply chain challenges and raw material shortages to continue to hamper NatureTech sales growth over the next several quarters. We believe demand for NatureTech products has rebounded from the impacts of the COVID-19 pandemic. As a result, we believe we are well positioned for long-term sustainable growth within our NatureTech bioplastics business as we benefit from global demand for our leading compostable plastic products and resins. Before I turn the call over to Matt, I want to share the expected impacts on our business from the current Ukraine conflict. As a result of this senseless war and subsequent punitive sanctions recently applied on Russia, we saw no other option than to discontinue our Russian joint venture. which we believe will result in a total write-down of approximately $50,000 for the joint venture's equity value and current accounts receivable balance during our third fiscal quarter. Last fiscal year, Russia contributed approximately $800,000 in joint venture sales that resulted in an insignificant level of income for NTIC. More importantly, however, we believe the conflict will impact certain European economies in the coming quarters, Accordingly, we are working closely with our joint venture partners and watching demand trends carefully to adjust our business for any impacts to our European markets. Despite the potential impacts of the Ukraine-Russia war and higher raw material costs at this time, we believe our sales and profitability will improve throughout the remainder of the fiscal year. As a result, 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 second quarter.

Thanks, Patrick. Compared to prior fiscal year period, NTSC's consolidated net sales increased 31% in the fiscal 2022 second quarter to a second quarter record. This growth was driven by the positive trends Patrick reviewed in his prepared remarks and the incremental sales from ZRest India. Second quarter joint venture operating income declined 35.6% compared to the prior fiscal year period. This decrease was primarily attributable to the acquisition of the remaining 50% of ZRest India and lower profitability at the company's joint ventures. Total second quarter fiscal 2022 operating expenses were $6.7 million. The 14.4% increase over the prior fiscal year period was due primarily to incremental expenses due to ZRest India acquisition, and increased selling expenses associated with the higher consolidated sales, as well as higher wages, travel expenses, and R&D investments. Operating expenses as a percentage of net sales were 40.1% compared to 45.9% for the same period last fiscal year. As illustrated in our second quarter results, the ZRest India transaction increased our net sales and operating expenses since it's now consolidated with our financial results and decreased our equity and income from joint ventures, in each case as compared to the same period last fiscal year. The acquisition will continue to have these effects on our financial results for the remainder of fiscal 2022. Gross profit as a percentage of net sales was 29.8% during the three months ended February 28, 2022, compared to 33.3% during the same period last fiscal year, primarily as a result of the increased prices on raw materials, and increased labor costs. As Patrick stated, we are pursuing certain actions to address inflationary pressures. While we expect gross margin to improve throughout the second half of fiscal 2022, we believe inflationary pressures may persist during the remainder of the fiscal year. NTIC reported net income of $183,000, or two cents per diluted share of for the fiscal 2022 second quarter, compared to $1.3 million, or 13 cents per diluted share, for the fiscal 2021 second quarter. For the fiscal 2022 second quarter, NTIC's non-GAAP net income, adjusted for expenses related to the NTIC India transaction and amortization expenses, was $392,000, or 4 cents per diluted share, compared to $1.3 million, or 13 cents per diluted share, for the fiscal 2021 second quarter. A reconciliation of GAAP to non-GAAP financial measures are available on our second quarter earnings press release that was issued this morning. As of February 28, 2022, working capital is $25.3 million, including $7.5 million in cash and cash equivalents, compared to $25.2 million, including $7.7 million in cash and cash equivalents, as of August 31, 2021. As of February 28, 2022, we had $4.2 million outstanding under our revolving line of credit. On February 28, 2022, the company had $21.9 million of investments in joint ventures, of which approximately 52%, or $11.3 million, was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2022 second quarter, the Board of Directors declared a quarterly cash dividend of $0.07 per common share of that was payable on February 16, 2022 to stockholders on record on February 2, 2022. To conclude our prepared remarks, we are focused on making the necessary adjustments to our business to navigate the near-term expense, raw material, and supply chain challenges. We believe our results throughout the second half of the fiscal year will reflect these actions. While economic uncertainties continue, especially considering the recent emergence of new COVID variants and the Ukraine-Russian conflict, We believe the fiscal 2022 will be another good year of sales and profitability for NTIC. With this overview, Patrick and I are happy to take your questions.