Northern Technologies International Corporation

Good day, and thank you for standing by. Welcome to the Northern Technologies International Corporation second quarter 2023 earnings conference call. 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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 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 also be advised that actual results could differ materially from those stated or implied by the forward-looking statements due to certain risk 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 speaker today, Patrick Lynch, Chief Executive Officer. Please go ahead.

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 2023 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 2023 second quarter financial results, provide a brief business update, and then conclude with a question and answer session. For almost 20 years now, NTIC has been singularly focused on building a solid foundation comprised an experienced and committed leadership team, as well as a constantly growing portfolio of solutions to answer the diverse and evolving needs of our global customer base. We have continually invested in our business by adding capabilities, enhancing our operations, and opportunistically buying out select joint venture partners. This in turn has enabled us to pursue long-term growth strategies aimed at diversifying our end markets, product categories, and geographic footprint. Our second quarter financial performance reflects the success of these initiatives and the resilience of our platform as stable demand for our Xerost industrial products and services in North America, coupled with growing interest in our NatureTech and Xerost oil and gas products both in the US and abroad, provided yet another new sales record in the second quarter. Even as we continue to navigate an extremely complex operating environment comprised of, but not limited to, persistent inflation, raw material cost increases, geopolitical conflicts in Europe, and the lingering effects of the COVID-19 pandemic in Asia. I'm also pleased to report that we are making considerable progress rebuilding our gross margins and controlling operating expenses. In fact, our second quarter gross margin of 35% marks a significant improvement on both a sequential and year-over-year basis, reflecting the growing contributions made by a profitable Xerost oil and gas business, as well as the benefits of other measures we've implemented successfully so far this fiscal year. Overall, momentum remains positive, and we expect NPIC China sales will improve in the third quarter and beyond, as the Chinese economy finally has the opportunity to start rebounding from its exceptionally long self-imposed pandemic freeze. In addition, nature tech sales are expected to benefit in the third quarter from new customer relationships and incremental orders. Consequently, we believe we are well positioned for a strong finish to fiscal 2023. So with this overview, let's examine the drivers for the second quarter in more detail. For the second quarter ended February 28, 2023, our total consolidated net sales increased 9.1% to a second quarter record of $18.3 million, as compared to the second quarter ended February 28, 2022. Broken down by business unit, this included a 212.4% increase in Xerost oil and gas net sales a 5% increase in NatureTech net sales, and a 3.7% increase in Xeros industrial net sales. Total net sales for the fiscal 2023 second quarter by our joint ventures, which we do not consolidate in our financial statements, increased 3.6% to $25.5 million. This increase was due primarily to a rebound in demand across the territories serviced by our global joint ventures after several quarters of lower demand due to certain geopolitical conflicts and their impact on raising the cost of energy while simultaneously reducing its availability. Fiscal 2023 second quarter net sales by our wholly owned NTIC China subsidiary decreased by 31% to $2.9 million due to the negative impact of severe COVID-19 related lockdowns across much of that country during the quarter and the resulting weaker economic conditions, as well as the impact of Chinese New Year. We continue to closely watch market conditions in China. Now that the Chinese government has terminated the PRC's zero COVID policy, we expect demand to improve throughout the remainder of this fiscal year. We remain committed to the Chinese market and the long-term opportunities it represents for NTIC. We continue to take steps to enhance and protect our Chinese operations, and we continue to believe China will likely become our largest geographic market in the future. Now, moving on to Xeris Oil and Gas. The fiscal 2023 second quarter was one of the strongest quarters we have ever had for Xeris Oil and Gas, as sales increased 212.4% to $1.8 million. The second quarter of fiscal 2023 is also the fourth consecutive quarter of Xeris Oil and Gas sales over $1.5 million, and on a trailing 12-month basis, we have reported nearly $6.5 million of oil and gas sales. We believe these positive trends reflect accelerating momentum within our oil and gas business. Interest is growing for our Xerost oil and gas solutions, which include applications to protect above ground oil storage tanks and pipeline casings from corrosion. We believe the third quarter of fiscal 2023 will be another good quarter of oil and gas sales and growth. The expanding adoption of our Xerost oil and gas solutions within the oil and gas industry is supporting bigger opportunities for our Xerost oil and gas products and technologies. As a result, we believe fiscal 2023 will be a transformative year for Xeros Oil and Gas as this business scales and continues to contribute to profitability.