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spk00: 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.
spk06: 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.
spk05: 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.
spk00: As a reminder, to ask a question, you'll need to press star 1 on your telephone. Please stand by while we compile the Q&A roster.
spk07: Again, that is star then one to ask a question.
spk00: Our first question comes from Gus Richard with Northland.
spk04: Yes, thanks for taking the questions. On the oil and natural gas business, You mentioned, Patrick, that you thought you were going to have a strong fourth quarter. Could you elaborate a little bit and give us a little color on what's going on in that product line?
spk06: Just more demand and greater installations than previously. So, I mean, everything that's going on trend, we're getting more orders, repeat orders from existing customers and new orders. So business looks very good for us right now.
spk04: Okay, got it. And then in terms of the lockdowns in China, it appears to be opening up again. Have those headwinds diminished or are they remaining the same, you know, any color there?
spk06: Well, those lockdowns were lifted fairly recently. I mean, everything is going back to, we had about 70% of the country was not in lockdown, about 30% was. And now we're basically picking up that last 30% and hopefully we'll see an increase from there. But it's going to take a while for the overall Chinese economy to pick up again. So we expect basically things to be back to normal maybe in six months or so.
spk05: Just to further kind of address that, our China sales during third quarter were off by probably what we expected them to be by about a million dollars. They're about a million dollars short of what the expected sales were. So just looking at total China sales for third quarter, they were about $400,000 to $500,000 less than what Q3 was last year. And the expectations were that we would have seen a larger increase in Q3. You know, just looking, we obviously don't have visibility into July, but just looking at the, you know, results we've seen since the opening, you know, just from the June month, you know, June was their, you know, obviously their best, obviously significantly better than any month that we saw during their lockdown. So it looks like things are starting to open up and there's going to be some, you know, time to catch up and back up, you know, the various customers in China during fourth quarter.
spk04: Got it. Thank you. And then just there's been a couple of fans of plastic. I think last Friday, India. Is banning the use of single use plastic and. California last week passed a, you know, a plastic bill addressing plastic pollution. I was wondering. You know, if you it's really early in these in this new legislation, I understand, but. Are you seeing any movement from your customers in terms of compostable? How do you think this will impact you over the next quarters and years?
spk06: Well, we certainly hope that it will lead to increased sales. One of the concerns we have in India, of course, is always actual implementation of the law and enforcement. So we certainly expect to see increases in India, but I don't know if we're going to get the total amount that would be available if the law was properly enforced. In California, of course, we're expecting that to have a nice impact on our sales there in the long term. And certainly we expect things to be changing in other parts of the country as well in the future.
spk05: Just to add to that, as Patrick said, certainly the impact of California 54 going into effect is positive for nature tech. The law requires that packaging sold in the state be recyclable or certified compostable by 2032. That certainly is something that we like to see and hope that other states follow. Got it. Got it.
spk04: Okay. That's it for me.
spk07: Thank you so much. Thank you.
spk00: Our next question comes from Joseph Vittich with Manalapan Oracle Capital Management. Thank you.
spk02: Yes, good morning, guys. Thanks a lot for taking my question, and congratulations on the progress being made. It looks really great. I was just wondering if you could talk a little bit about maybe your competitive position for nature tech and what you're seeing out there in the markets and what makes your product either more competitive or less.
spk06: Well, if you're familiar with our product line in any detail, you would know that what we do is we basically take the commonly available compostable resins available in the market, and we take them and modify them to improve them in a number of different ways. First of all, we make them more easy to process, so you can produce more faster in extrusion and injection molding processes. And the finished product will have stronger mechanical properties than our competitive alternatives. So that's how we've been distinguishing ourselves in the market. And this has brought to us a number of customers, very large multinationals, for example, in injection molding, that try, for example, developed their own technology over a long period of time and failed, and then came to us instead. We've seen that to be the case with one large multinational in the United States, and we've just started supplying a large injection holder in Europe, which we expect to grow nicely in the near future. I think in Europe, the expectation for the first year with this one large customer is on the order of magnitude of maybe $700,000 to $1 million, and that's just the start when we expect that to to grow dynamically in the future.
spk02: That's great. That's great. Does Europe have legislation in place that mandates compostable or recyclable materials?
spk06: I think it might be different from country to country, so it's not a Europe-wide situation. But I think the legislation there is changing, and certainly Europe is very conscious about the waste production So, and waste reduction. So, we're seeing a growing demand from that sector.
spk02: That's great. I appreciate the answers. Thanks very much. Sure. Thank you.
spk00: Our next question comes from Jim Dowling with Jefferies.
spk03: Good morning. In your attempt to get pricing increases, are you able to put into the contracts an automatic inflation peg so that you don't have to keep going back to the client and ask for more money?
spk06: It depends on a case-by-case basis. Certainly, things have been adjusting dynamically over the last year given the rise of inflation. In some cases, it's You can negotiate, and in some cases you can't as easily with certain multinationals. But on the whole, we've been able to get our price increases put through in a reasonable, timely basis, and right now we're pretty much on pace with being up to where we need to be.
spk05: Just to add to that, Jim, About 70% of our business in North America, and I would also say through the joint ventures and most of our subsidiaries, tends to be based on spot pricing, you know, based on the price that we pay to produce a product. So it would move in perfect correlation with the price of resin. Where we typically run into issues are with our stock product pricing or with blanket orders, you know, orders where we have, you know, put a price in place based on resin at that time. And so those are the situations where we've been looking to increase our pricing to catch up with the commodity pricing of the resin market. And so we've certainly moved to address that. And we've seen some stabilization of the resin prices over the past three or four months, but still given the kind of the economic uncertainty we're seeing around the world, it's been difficult to catch up. But we feel like the changes that we made during second quarter and third quarter to our pricing was certainly reflected in the gross margin we saw in third quarter. And we'll be further, you know, we'll see 50-50 again in fourth quarter. I would say that our Gross margin specifically for May was the highest gross margin for traditional ZRest industrial products we've had in the past nine months. And so we're finally getting to the point where we're seeing the benefits of the change that we made to deal with the resin price changes.
spk07: Thanks. Thank you.
spk00: Our next question comes from Gregory Weaver with Invicta Capital Management.
spk01: Good morning, gentlemen. That pricing was one of my questions. So am I to understand you're increasing prices again in the fourth quarter, or it's just now you're getting a full quarter of the prior ones? It's both.
spk05: One of the things we're looking at and kind of watching closely right now is if there's going to be an additional resin increase in the coming months. We're kind of waiting to see how that plays out. But with the idea that if the price changes, we're going to move much more quickly than we had in the past to mirror the price changes that we're paying. And so rather than holding our stock product pricing more constant with the expectation that we could deal with the rises and falls that we've typically seen over the past 10, 15 years, we're going to more frequently change our stock pricing to reflect those changes in the resin market.
spk01: Gotcha. Okay. That makes sense. And just on the NatureTech side of things, good to hear about the supply chain constraints easing, but could you have sold more product in the quarter? Were you still constrained in terms of output due to the supply chain?
spk05: There was some constraints in third quarter with NatureTech sales. We had certain backlogs that were in place just given the Just given the inventory cycle and the time that it takes to get product, you know, through the entire supply chain process, there is certainly some backlog and expectations are that, you know, fourth quarter is going to be a strong nature tech product, I'm sorry, nature tech sales quarter as well. And we, you know, see the increased demand, but also see the, you know, the catch up and essentially the stocking of our shelves to be able to supply, you know, all the products that our customers are certainly, you know, looking for. So, you know, what we feel that kind of going forward from, you know, really from May on, we have adequate inventory in place and adequate raw materials in place to be able to fill all customer demands.
spk01: Okay. All right. That's helpful. And I'll take another shot at the oil and gas here, Patrick, after Gus tried. Okay. Is there any particular geographic areas that you're seeing strength in and, you know, with a pipeline or offshore platforms, tanks, any color there?
spk06: Well, it's a little bit of everything everywhere. We're getting some good orders out of India at this point, getting more activity in the Middle East. We're getting some activity in Europe, Africa, South America. in North America, in the U.S. and Canada. So it's really taking off in a number of – pretty much all over the world at this point.
spk05: No pun intended, but the pipeline of opportunities that we're seeing and customers that we're dealing with is really the largest that we've had in the history of kind of the oil and gas business.
spk06: We've got one customer who's sending 15 people to visit us next week just to get more familiar with our technologies to where they can implement them across their entire system.
spk01: All right. That sounds real good because it's great to see broad-based demand, but if it's all onesie-twosie type, so you've got a couple of potential whale clients in there, but they're not pulling really yet. Correct. Right. Okay. Very good. Well, I've been waiting. We're getting close, hopefully. So good luck. Thank you.
spk00: Thank you. That concludes our question and answer session. I'd now like to turn the conference back to Patrick Lynch for closing remarks.
spk06: I'd just like to thank everybody for joining us this morning and your interest in NTID. I hope you have a great day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly.
spk04: To raise your hand during Q&A, you can dial star 1.
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