Northern Technologies International Corporation

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 protection of the Safe Harbor from these statements. Please also be advised that the actual results could differ materially from those stated or implied by the forward-looking statements due to certain risk and uncertainties, including those described in NTIC's most-read annual report on Form 10-K, subsequent quarterly reports on Form 10-Q, and recent press releases. Please read these reports and other future followings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward-looking statements. I will now turn the call over to NTIC management.

Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolfsfeld, NTIC's CFO. Please note that a press release regarding our fiscal 2024 second quarter 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 2024 second quarter financial results, provide a brief business update, and then conclude with a question and answer session. When we discuss year-over-year performance, we are referring to our fiscal 2024 second quarter as compared to our fiscal 2023 second quarter. Thank you. NTSC set a series of new records in the second quarter, driven by robust demand across many parts of our business. Most notable among these were record second quarter zeroest oil and gas sales and record quarterly nature tech sales. I'm also particularly encouraged by the continued year-over-year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended. We anticipate that profitability will continue to improve and that we will continue to generate positive operating cash flow throughout the second half of fiscal 2024. Year over year cash from operating activities improved by nearly 156% to $5.6 million, primarily due to higher net income and positive changes in working capital. We intend to continue to allocate capital to support our growth initiatives and quarterly dividend payment by using excess cash flow to pay down the balance on our existing line of credit. As we look to the remainder of fiscal 2024, we believe we are well positioned for top line growth across our Xeris Industrial, Xeris Oil and Gas, and NatureTech product categories. We also remain focused on the performance and profitability of our joint ventures across Europe and Asia. As our team continues to navigate a fluid global economic environment, I am pleased with NTIC's improving performance and believe fiscal 2024 will be another good year of growth and profitability. So with this overview, let's examine the drivers for the second quarter ended February 29th, 2024 in more detail. For the quarter, our total consolidated net sales increased 14.1% to a second quarter record of $20.8 million, as compared to the second quarter ended February 28, 2023. Broken down by business unit, this included a 47.5% increase in NatureTech net sales, a 20.1% increase in Xeris oil and gas net sales, and a 3.1% increase in Xeris industrial net sales. Total net sales for the second quarter by our joint ventures, which we do not consolidate in our financial statements, decreased year-over-year by 7.9% to $23.5 million. Excore Germany, our largest joint venture, experienced a 5.6% decrease in net sales compared to the prior fiscal year period, due primarily to a previously disclosed loss of a customer and softer demand within the region, related to higher energy prices and other externalities linked to the ongoing war between Ukraine and Russia. Fiscal 2024 second quarter net sales by our wholly owned NTIC China subsidiary increased on a year-over-year basis by 20.3% to $3.5 million. Most notably, this was the first year-over-year increase in quarterly sales in over two years, as sales during this period have been impacted by prolonged COVID-related lockdowns and overall weakness in the Chinese economy. We remain cautiously optimistic that demand in China will continue to improve throughout the second half of fiscal 2024, helping to support higher incremental sales and profitability in this market. While near-term economic conditions in China remain uncertain, we are committed to the long-term opportunities the Chinese market provides, our industrial and bioplastic segments, and we continue to take steps to enhance our operations in this geography. As a result, we continue to believe China will likely become a significant geographic market for us in the future. Now, moving on to Xerost Oil and Gas. The second quarter of fiscal 2024 was the eighth consecutive quarter of Xerost Oil and Gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business. For the fiscal 2024 second quarter, Xerest oil and gas sales were $2.2 million compared to $1.8 million for the same period last year. The 20.1% year-over-year increase in Xerest oil and gas sales was primarily due to the shift of certain oil and gas projects from the first quarter to the second quarter and positive overall demand for our oil and gas solutions. Our Xerost oil and gas solutions are still focused primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another good year of growth for Xerost oil and gas as this business further scales and continues to contribute to our overall profitability. Turning to our NatureTech bioplastics business, NatureTech sales were strong during the second quarter and increased 47.5% year-over-year to a quarterly record of $5.6 million. Naturex growth during the second quarter was a result of recent new customer wins in North America and India. We expect NatureTech sales growth will continue throughout the second half of fiscal 2024. Globally, we continue to see robust market demand for new applications of certified compostable plastic products and resin compounds, as well as increased 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 bioplastics business. As you can see, our fiscal 2024 second quarter financial results reflect the progress we are making towards growing our business and improving profitability. We believe fiscal 2024 will be a strong year of sales growth and improved profitability. We are excited by the positive momentum underway and the direction NTIC is heading. With this overview, let me now turn the call over to Matt Wolfsfeld to summarize our financial results for the fiscal 2024 second quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 14.1% for the fiscal 2024 second quarter to a second quarter record because of the trends Patrick reviewed in his prepared remarks. While sales across our global joint ventures declined 7.9% in the fiscal 2024 second quarter, joint venture operating income increased 4.2% compared to the prior fiscal year period. The year-over-year increase in joint venture operating income was primarily due to the efforts underway to enhance profitability at the company's joint ventures, partially offset by lower joint venture sales. Total operating expenses for fiscal 2024 second quarter increased 9.4% to $8.6 million compared to $7.9 million for the same period last fiscal year. Higher operating expenses were primarily due to increased personnel costs. As a percentage of net sales, operating expenses were 41.3% for the fiscal 2024 second quarter compared to 43.1% for the prior fiscal year period. Gross profit as a percentage of net sales was 40% during the three months ended February 29, 2024, compared to 34.5% during the prior fiscal year period. The 551 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures and insourcing of various production. Net income attributable to NTIC was $1.7 million. or $0.17 per diluted share for the fiscal 2024 second quarter, compared to $411,000, or $0.04 per diluted share for the fiscal 2023 second quarter. As of February 29, 2024, working capital was $24 million, including $4.8 million in cash and cash equivalents, compared to $23 million, including $5.4 million in cash and cash equivalents as of August 31, 2023. As of February 29, 2024, we had outstanding debt of $4 million. This included $1.2 million in borrowings under our existing revolving line of credit compared to $3.6 million as of August 31, 2023. We generated $5.6 million in operating cash flows for the six months ended February 29, 2024 compared to $2.2 million for the six months ended February 28, 2023. The 156% year-over-year improvement in operating cash flow was driven primarily by higher net income and positive changes in working capital. Throughout the second half of fiscal 2024, we expect to generate continued operating cash flows, which we plan to invest in the growth of our business, support our quarterly cash dividend, and pay down the remaining balance on our existing revolving line of credit. On February 29, 2024, the company had $23.5 million of investments in joint ventures, of which 55.7% or $13.1 million was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2024 second quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per share that was payable on February 14, 2024 to stockholders of record on January 31, 2024. To conclude our prepared remarks, our second quarter financial results reflect the progress we're making navigating a fluid business environment while successfully pursuing our product and market and geographical diversification strategies. seeing stable North American demand trends and robust growth across our global oil and gas and bioplastic markets. And we expect these trends to continue throughout the remainder of our fiscal year. As a result, we believe our fiscal 2024 will be another good year of sales and higher profitability for NTIC, and we're excited by our long-term prospects. With this overview, Patrick and I are happy to take your questions.