Northern Technologies International Corporation

Good day and thank you for standing by. Welcome to the Northern Technologies International Corporation third quarter 2022 earnings conference call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being 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 in 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 ECC. NTIC disclaims any duty to update or revise its forward-looking statements. I would now like to hand the conference over to your speaker today, Patrick Lynch, President and CEO. Please go ahead.

Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolffeld, NTIC's CFO. Please note that a press release regarding our third quarter fiscal 2022 financial results was issued earlier this month and is available at NTIC.com. During today's call, we will review various key aspects of our fiscal 2022 third quarter financial results provide a brief business update, and then conclude with a question and answer session. Strong demand across all product categories and the majority of our global markets, along with the contributions made by the newly acquired Zeroth India, drove quarterly sales to a new record, just short of $19 million. If we exclude the Zeroth India contributions in order to ease comparison between fiscal 2021 and fiscal 2022 third quarter, total net sales increased 6.3%. Furthermore, it is important to also highlight that the harsh COVID-19 lockdowns imposed by the Chinese government across broad regions of that country severely impaired the third quarter sales efforts and profitability of our NTIC China subsidiary. NTIC's core profitability continues to rebound from the pressures imposed by inflation and supply chain constraints. Consequently, Our gross margin for the third quarter was 32.9%, the highest this fiscal year. In addition, total operating expenses as a percent of third quarter sales were 37.5% compared to 40.1% in this year's second quarter and 40.9% for the prior year fiscal period. Third quarter profitability also improved at our joint ventures. despite it taking longer to implement price increases in some countries. We believe profitability will continue to improve during the fourth quarter as price increases take full effect and the volume of product sales continues to increase into fiscal 2023. So with this overview, let's examine the drivers for the third quarter in more detail. For the third quarter ended May 31st, 2022, our total consolidated net sales increased 23% to a quarterly record of nearly $19 million, as compared to the third quarter ended May 31st, 2021. Broken down by business unit, this included a 48.6% increase in the NatureTech net sales, a 47% increase in Xerus oil and gas net sales, and a 22.9% increase in Xerus industrial net sales. Total net sales for the fiscal 2022 third quarter by our joint ventures, which we do not consolidate in our financial statements, decreased 16.8% to $26.6 million. This decrease was due primarily to slower demand across the territories serviced by our global joint ventures due to concerns over geopolitical uncertainties and the change in the accounting treatment of Xeros India, which is now a consolidated subsidiary within NTIC's financial statements. Fiscal 2022 third quarter net sales by our wholly owned NTIC China subsidiary decreased 10.2% to $3.6 million due to the negative impact of severe COVID-19 related lockdowns across much of that country and the ensuing weaker economic conditions. We are closely watching market conditions in China, as we believe recent government actions to ease COVID-19 restrictions will benefit sales in the short term, and that China will likely become our largest geographic market in the future. Now, moving on to Xerox oil and gas, as expected, sales from this product category accelerated during the third quarter, increasing 47% over the prior fiscal year period. driven by higher sales to new and existing customers. Activity continues to grow stronger for our oil and gas solutions, which includes applications to protect above-ground oil storage tanks and pipeline casings from corrosion. And we are confident that the fourth quarter will be a good one. Turning to our NatureTech bioplastics business, fiscal 2022 third quarter NatureTech sales were $4.5 million. a 48.6% increase over the prior fiscal year period. Sales trends within NatureTech appear to show that demand patterns have returned to pre-pandemic levels, especially in North America and India. Furthermore, the supply chain and logistics challenges that impacted NatureTech's second quarter results eased during the third quarter, contributing to the strong year-over-year and quarter-over-quarter growth we experienced. We believe this is a testament to our strong position within the bioplastics industry and close relationships with important raw materials suppliers. We continue to see growing market demand for new applications of certified compostable plastic products and resins, as well as increasing interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics. As a result, we believe we are well positioned for long-term sustainable growth within our NatureTech bioplastic business. While prevailing geopolitical uncertainty has impacted the outlook on the overall economy in recent months, we believe we are well positioned for further growth and improving profitability in the fourth quarter, and we are currently optimistic that trends in our target markets will remain positive throughout fiscal 2023. With this overview, let me now turn the call over to Matt Wolfsfeld to summarize our financial results for the fiscal 2022 third quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTSC's consolidated net sales increased 23% for the fiscal 2022 third quarter to a quarterly record of nearly $19 million. This growth was driven by the positive trends Patrick reviewed in his prepared remarks and the incremental sales from Xerox India. Third quarter joint venture operating income declined 25.6% compared to the prior fiscal year period. This decrease is primarily attributable to the acquisition of the remaining 50% of ZRS India and lower profitability of the company's joint ventures. Total operating expenses for fiscal 2022 third quarter were $7.1 million. The 12.7% increase over the prior fiscal year period was due primarily to incremental expenses due to the ZRest 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 decreased to 37.5% compared to 40.9% the prior fiscal year period. As illustrated in our third quarter results, 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 prior fiscal year period. 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 32.9% during the three months ended May 31st, 2022 compared to 34.2% during the prior fiscal period, primarily as a result of price increases on raw materials and increased labor costs. As Patrick stated, we're successfully pursuing actions to address inflationary pressures. As a result, we expect our gross margin will improve further in the fourth quarter of fiscal 2022, and we intend to continue to pursue actions to address inflationary pressures in the future. NTIC reported net income of $1 million or $0.11 per diluted share for the fiscal 2022 third quarter compared to $2.1 million or $0.21 per share for the fiscal 2021 third quarter. For the fiscal 2022 third quarter, NTIC's non-GAAP net income adjusted for expenses related to the NTIC India transaction and amortization expenses was $1.1 million, or $0.12 per diluted share, compared to $2.1 million, or $0.21 per share, for the fiscal 2021 third quarter. A reconciliation of GAAP to non-GAAP financial measures are available in our third quarter earnings press release that was issued this morning. As of May 31, 2022, working capital is $24.7 million, including $6.1 million in cash and cash equivalents, compared to $25.2 million, including $7.7 million in cash cash and cash equivalents as of August 31st, 2021. As of May 31st, 2022, we had a $4.7 million outstanding under our revolving line of credit. On May 31st, 2022, the company had $22.2 million in investments in joint ventures, of which approximately 53.5% or $11.9 million was in cash with the remaining balance primarily invested in other working capital. During the fiscal 2022 third quarter, NTSC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable May 18, 2022 to stockholders of record on May 4, 2022. So to conclude our prepared remarks, we're encouraged by the progress we are making to grow sales globally and navigate near-term expenses, raw materials, and supply chain challenges. While economic uncertainty has increased in recent months, we believe fiscal 2022 will be another good year for sales and profitability for NTIC, and we're excited about the prospects in fiscal 2023 and beyond. With this overview, Patrick and I are happy to take your questions.