Northern Technologies International Corporation

Good day and welcome to NTIC's fourth quarter 2024 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. Instructions will be given at that time. As a reminder, this call may be 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 advise that actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties, including described in NCIC's most recent annual Form 10-K, subsequently quarterly reports on Form 10-Q and recent press releases. Please read these reports and other future filings that NCIC will make with the SEC. NCIC declaims any duty to update and revise its forward-looking statements. I would now like to turn the call over to Patrick Lynch, CEO. 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 fourth quarter and full year fiscal 2024 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 fourth quarter and full year financial results, provide a brief business update, and then conclude with a question and answer session. We closed fiscal 2024 with robust sales growth in both our Xeris Oil and Gas and NatureTech businesses. Furthermore, thanks to the continued successful execution of various margin improvement initiatives, NTIC was also able to achieve another year of significantly improved profitability. Our fiscal 2024 results continue to demonstrate the value we bring to our global customers, as well as our resilience amidst ongoing economic challenges. Higher sales of Xeris oil and gas and NatureTech products, along with improved gross profits, contributed to a nearly $6 million, or 21.5% year-over-year increase in gross profit for fiscal 2024. This expanded gross profit allowed NTIC to offset a $2.2 million reduction in joint venture operating income, primarily resulting from a one-time gain of nearly $2 million last fiscal year tied to the liquidation of our former joint venture in China, as well as challenging market conditions, including higher energy prices and other regional economic pressures that affected sales and profitability across various European joint ventures. We are actively focused on our European joint ventures and remain cautiously optimistic that demand and profitability in Europe will begin to improve in fiscal 2025. As we enter fiscal 2025, demand within our North American Xeris industrial market remains stable, and we believe we are well positioned to capitalize on opportunities within our Xeris oil and gas and nature tech businesses. The strategic investments we made in our workforce and infrastructure in fiscal 2024 are set to support growth opportunities across our global markets. While the economic environment remains fluid, we anticipate fiscal 2025 will bring further sales growth and improved profitability. So with this overview, let's examine the drivers for the fourth quarter in more detail. For the fourth quarter, ended August 31, 2024, our total consolidated net sales increased 12.7% to a fourth quarter record of $23.3 million, as compared to the fourth quarter ended August 31, 2023. Broken down by business unit, this included a 76.6% increase in Xerost oil and gas net sales, a 16.4% increase in NatureTech net sales, and a 0.1% increase in Xerost industrial net sales. Total net sales for the fiscal 2024 fourth quarter by our joint ventures, which we do not consolidate in our financial statements, decreased 3.6% over the prior fiscal year period to $23.3 million. Excore Germany, our largest joint venture, experienced a 15% decrease in net sales during that period. This decline was due primarily to softer demand across the territories serviced by our global joint ventures, as I explained previously. Fiscal 2024 fourth quarter net sales by our wholly owned NTIC China subsidiary increased by 1.1% to $3.6 million. Sales trends in this geography have stabilized, and NTIC China has experienced Three consecutive quarters of sales growth has compared to the respective fiscal prior year periods. We remain cautiously optimistic that demand in China will improve in fiscal 2025, helping to support higher incremental sales and profitability in this market. 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. As anticipated, Xerost Oil and Gas had a record-breaking fourth quarter, with revenues reaching $4.2 million. This was supported by approximately $600,000 in sales that shifted from the third quarter due to timing, as well as increased orders from both new and existing customers. The significant growth in Xeris Oil & Gas during the fourth quarter highlights a transformative year for this business unit, as full-year oil and gas sales increased 18.3% to an annual record of $9.2 million. Overall, demand continues to grow among both new and existing customers of our Xerost oil and gas solutions, which today still focus primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion. While we expect seasonal ordering patterns to drive fluctuations in Xerost oil and gas sales, we believe we are well-positioned for compelling growth in this sector through fiscal 2025 and beyond. Turning to our NatureTech bioplastics business, NatureTech sales remained strong during the fourth quarter and increased 16.4% over the prior fiscal year period to a quarterly record of $5.7 million. NatureTech's growth during the quarter was a result of increased global demand arising primarily from new customer wins in North America and India, as well as expanding relationships with our existing customers. we expect NatureTech sales growth to remain strong in fiscal 2025. 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. Throughout fiscal 2024, we made a number of strategic investments across several parts of our business in order to capitalize on current and expected future growth opportunities. In India, we are in the process of consolidating three separate NatureTech warehouses into a single larger facility and also are adding manufacturing capacity to support NatureTech sales growth in the region. Sales in Brazil have nearly doubled since fiscal 2019, so we are adding a facility to support growth opportunities in both that country as well as the broader region. We also continue to invest in our domestic operations, as demonstrated by the new Circle Pines, Minnesota facility that came online earlier this year. At this location, we've been able to insource certain manufacturing processes that were previously outsourced as part of our effort to improve gross margin. We expect these strategic investments to support growth and enhance profitability in fiscal 2025 and beyond. As you can see, Fiscal 2024 was a transformative year of growth, profitability, and strategic investments for NTIC. We are excited by the positive momentum underway and the direction NTIC is headed. Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our recent success and the opportunities we are pursuing to drive value in the future are a direct result of their efforts. With this overview, let me now turn the call over to Matt Wolfsfeld to summarize our financial results for fourth quarter and full fiscal year 2024. Thanks.

For your periods, NTIC's consolidated net sales increased 6.5% in fiscal 2024 to an annual record and grew 12.7% in fiscal 2024 fourth quarter because of the positive trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures declined 3.6% in the fourth quarter. Joint venture operating income decreased 51.4% compared to the prior fiscal year period primarily due to a one-time $2 million gain that was recorded during the fourth quarter of fiscal 2023 associated with the liquidation of the company's joint venture in China, as well as a decrease in net income at NTSC's joint venture in Germany, partially offset by increases in net income at other joint ventures. For fiscal 2024, sales across our global joint ventures decreased 4.7%, while joint venture operating income decreased 18.6% compared to the prior fiscal period. Total operating expenses for fiscal 2024 fourth quarter increased 2.3% to $9.5 million, and for fiscal 2024 increased 5.9% to $35.4 million. Higher operating expenses for both the fiscal 2024 fourth quarter and full year were primarily due to increased personnel costs and other inflationary increases in expenses. As a percentage of net sales, operating expenses were 40.7% for the fourth quarter compared to 44.8% for the prior fiscal year period. For fiscal 2024, operating expenses as a percentage of net sales were 41.6% compared to 41.8% for the prior fiscal year. Gross profit as a percentage of net sales was 43.8% during the three months ended August 31, 2024, compared to 36.5% during the prior fiscal year period. The 730 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures and the increased sales of higher gross margin ZREST oil and gas solutions. Gross profit as a percentage of our net sales was 39.7% for the fiscal year ended August 31st, 2024 compared to 34.8% for the prior fiscal year. NTIC reported net income of $1.8 million or 19 cents per diluted share for the fiscal 2024 fourth quarter compared to $939,000 or 10 cents per diluted share for the fiscal 2023 fourth quarter. For the full year, NTIC reported net income of $5.4 million, or 55 cents per diluted share, compared to $2.9 million, or 30 cents per diluted share, for the fiscal 2023 full year. For the fiscal 2024 fourth quarter, NTIC's non-GAAP adjusted net income was $1.9 million, or $0.20 per diluted share, compared to the non-GAAP-adjusted net income of $280,000, or $0.03 per diluted share, for the fiscal 2023 fourth quarter, which included a one-time gain related to the liquidation of Tingen's arrest. For fiscal 2024, non-GAAP adjusted net income was $5.8 million, or 59 cents per diluted share, compared to $2.6 million, or 27 cents per diluted share for fiscal 2023. A reconciliation of GAAP to non-GAAP financial measures is available in our fourth quarter and full-year earnings press release that was issued this morning. As of August 31, 2024, working capital was $23.7 million, including $5 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 August 31, 2024, we had outstanding debt of $7.1 million. This included $4.3 million in borrowings under our existing revolving line of credit, compared to $3.6 million as of August 31, 2023. Reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus in fiscal 2025. We generated $5.9 million in operating cash flows for the 12 months ended August 31, 2024. On August 31, 2024, the company had $25.4 million of investments in joint ventures. of which $55.3 or $14.1 million was the cash with the remaining balance primarily invested in other working capital. During the fiscal 2024 fourth quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable on August 14, 2024 to stockholders of record on July 31, 2024. To conclude our prepared remarks, Our fourth quarter and fiscal 2024 financial results reflect the progress that we've been making navigating a fluid business environment while securely pursuing, successfully pursuing our product and market and geographical diversification strategies. We're 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. As a result, we believe in fiscal 2025 that it 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.