Northern Technologies International Corporation

2025 Earnings Conference Call and Webcast. At this time, all participants are in a 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 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 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 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, NTIC's CEO. Please go ahead.

Good morning. I'm Patrick Lynch. NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. A press release regarding our first quarter fiscal 2025 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 first quarter financial results, provide a brief business update, and then conclude with a question and answer session. Please note that when we discuss year-over-year performance, we are referring to the first quarter of our fiscal 2025 in comparison to the first quarter of our last fiscal year. NTIC's record first quarter consolidated sales were driven by NatureTech all-time record quarterly sales, as well as stable Xerox oil and gas and Xerox industrial sales. Furthermore, NTIC China enjoyed its highest quarterly sales in nearly three years, while we also saw improved sales trends across several important geographies and at NTIC's joint ventures. I believe these top-line results demonstrate the efficacy of our strategic planning, the value we bring to our global customers, and NTIC's resilience amidst ongoing economic complexities. Thanks to the continued successful execution of certain quality system improvement initiatives, NTIC was able to achieve another quarter of gross margin growth on a year-over-year basis. We have also been investing in expanding our oil and gas sales infrastructure due to increased customer activity, which in turn should accelerate Xerox oil and gas sales in the second half of fiscal 2025. Overall, our first quarter was an encouraging start to fiscal 2025. Although 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 first quarter in more detail. For the first quarter ended November 30, 2024, our total consolidated net sales increased 5.7% to a first quarter record of $21.3 million as compared to the first quarter ended November 30, 2023. Broken down by business unit, this included a 22.8% increase in NatureTech net sales, a 0.7% increase in Xerost oil and gas net sales, and a 0.4% increase in Xerost industrial net sales. Total net sales for the fiscal 2025 first quarter by Arduin Ventures which we do not consolidate in our financial statements, increased year-over-year by 1.2% to $23.8 million. Stabilizing sales trends at our joint ventures are encouraging since we have been navigating challenging market conditions for the past several years at our European joint ventures due to higher energy prices as well as regional, political, and economic uncertainties. I am also encouraged by improving sales trends at our wholly owned NTIC China subsidiary. Fiscal 2025 first quarter net sales at NTIC China increased by 8.6% year-over-year to nearly $4 million. Sales in this geography continue to stabilize and are approaching quarterly sales levels that we last experienced in fiscal 2021 and 2022. We remain cautiously optimistic that demand in China will continue to 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. Xerost Oil and Gas had a solid first quarter with sales reaching $1.5 million. As anticipated, first quarter sales were below fourth quarter levels because the previous quarter had benefited from the timing on several large orders and seasonality. Looking at Xerost Oil and Gas on a trailing 12-month basis, sales were $9.2 million a 20.3% increase over $7.7 million for the trailing 12-month period ended November 30, 2023. 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 continue to expect seasonal ordering patterns to drive fluctuations in Xeris oil and gas sales, we believe we are well positioned for compelling growth in this sector through fiscal 2025 and beyond. As I mentioned earlier, we made strategic investments to expand our oil and gas sales infrastructure during the first quarter to support accelerated Xeris oil and gas sales that we expect to occur in the second half of fiscal 2025. Turning to our NatureTech Bioplastics business, NatureTech sales remained strong during the first quarter and increased 22.8% year-over-year to a quarterly record of $5.9 million. NatureTech's growth during the quarter was a result of continued new customer wins in North America and India, as well as expanding relationships with 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 plastics 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 you can see, fiscal 2025 is off to a solid start. 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 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 the fiscal 2025 first quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTAC's consolidated net sales increased 5.7% in the first quarter of fiscal 2025 to a quarterly record of $21.3 million because of the positive trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 1.2% in the first quarter compared to the prior fiscal year period. Joint venture operating income increased 2.7% primarily due to higher sales and an increase in net income at NTIC's joint ventures. Total operating expenses for the fiscal 2025 first quarter increased 14% compared to the prior fiscal year period to $9.5 million, primarily due to increased personnel costs and strategic investments we're making to support expected growth in the second half of the year within our oil and gas business. On a sequential basis, first quarter operating expenses were in line with fourth quarter. As a percentage of net sales, operating expenses were 44.4% for the first quarter compared to 41.2% for the prior fiscal year period. Gross profit as a percentage of net sales was 38.3% during the three months ended November 30, 2024, compared to 36.3% during the prior fiscal year period. The 200 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures. Net income attributable to NTIC was $561,000 or $0.06 per diluted share for the first quarter compared to $896,000 or $0.09 per diluted share for the first quarter of fiscal 2024. The first quarter NTSC's non-GAAP adjusted net income was $667,000 or $0.07 per diluted share compared to the non-GAAP adjusted net income of $1 million or $0.10 per diluted share for the first quarter of last year. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings press release that was issued this morning. As of November 30, 2024, working capital was $22.2 million, including $5.6 million in cash and cash equivalents compared to $23.7 million, which included $5 million in cash and cash equivalents as of August 31st, 2024. As of November 30th, 2024, we had outstanding debt of $7.3 million. This included $4.5 million in borrowings under our existing revolving line of credit compared to $4.3 million as of August 31st, 2024. Reducing debt through positive operating cash flows and improving working capital efficiencies will be a strategic focus in fiscal 25. We generated $1.4 million in operating cash flow for the three months ended November 30, 2024. On November 30, 2024, the company had $25.5 million in investments in joint ventures, of which 54.6% or $13.9 million was in cash, with the remaining balance primarily invested in other working capital. During fiscal 2025 first quarter, NTC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable on November 13, 2024, to stockholders of record on October 30, 2024. To conclude our prepared remarks, our first quarter fiscal 2025 financial results are off to a solid start, reflecting records consolidating sales, consolidated sales, expanding gross margin, and planned investments to support expected growth in the second half of the year. We're seeing stable North American trends and robust growth across our global oil and gas and bioplastic markets. We expect these trends to continue. As a result, we believe our fiscal 2025 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.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tim Clarkson from Van Clemens, Inc.

Hey, guys. Good quarter. We've got a few more questions. I missed the last one. Sorry. So at this point, what percentage of the new tanks that have a potential to, best potential to use this Xerox treatment, what percentage of those tanks are being treated, uh, with, uh, Northern technology technology.

I'm not sure I understand your call or your, uh, your, your question, Tim.

Well, you know, there's a, you know, you got an, you know, the, the total number of tanks out there. Okay. And, and, uh, uh, your best opportunity to use your treatment, of course, is when, when they're putting up new tanks, right? So, uh, I don't know how much of the total tanks out there, what percentage turn over per year where they have to be replaced. So I guess I'm looking at that of the replacement market, the ones that are being replaced because they are rusted out or you're putting up new tanks because they're putting up new capacity. Those are probably your best opportunities to use your treatment. So of those best opportunities, the new tanks and the replacement tanks, what percentage of that market do we have right now?

I would say it's not even 1%. I mean, at this point in time, if you look at the amount of tanks that are out there and what's traditionally used as the solution to protect the infrastructure, we're not even a rounding area yet. Even the revenues that we have, the tanks that are out there, the available markets, we're not at a point where it's even measurable.

Right.

The expectation is that you get to a point where it's, you know, obviously you're – you're taking over market, you know, you're essentially hoping to take over an existing technology.

Right. What's the cost of the existing technology versus your option?

Our option is roughly a third of the cost of the traditional solution, which is the cathodic protection.

Okay. So, and, you know, when you do your treatments, how much of it, let's say that it costs, what would be a typical cost on the front end for our treatment? So half a million, quarter of a million?

I mean, if you're talking about a standard tank, we might charge, you know, the chemistry portion that we charge maybe anywhere from $25,000 to $50,000 for a standard size tank. It can be upwards of several hundred thousand dollars if it's a tank that's, you know, one of the larger tanks, one that is, you know, the size of football fields. You know, but there's also smaller 15 meter tanks that where the revenue generated from it is very small. So it obviously depends on the square footage or protection that you're providing.

Sure. Now, what percentage, once you do an installation, is there ongoing revenues that flow from that installation?

There's ongoing revenues typically five-plus years after you recharge the tank or recharge the infrastructure.

Okay, okay. And are they, I mean, would it be 10% of the original treatment or... Or is it more than that or less than that or about that?

Yeah. I mean, that's kind of what we're seeing. We're getting to a point now where we're starting to do some of the recharge work. And, you know, we're starting to kind of gather more data on that to figure out what percentage we should expect going forward, what the timelines are, how that fits into their schedules, and what the requirements are for them to, you know, to inspect their tanks. There's kind of a lot of coordination involved. Right.

Right. And I'm guessing those are good opportunities to continue to sell and market for additional installations at that point when you're out there.

Certainly.

Certainly. Okay. And on the compostable end, what's new that's going on there? I mean, it's really good growth, 20% plus. What's going on there that's exciting?

I'd say the biggest, you know, the excitement from the compostable space, I think, continues to be the companies that we're kind of working with and coordinating with to, you know, develop, let's call them specialized resins to manufacture their products. You know, there's some nice opportunities that we're working on that we, you know, should see success from, you know, over the next 6, 12, 18 months, you know, that I think will continue to accelerate the growth from nature tech. You certainly still have the existing growth kind of from the normal distribution sales of the bin liners, of cutlery, of things like that. But there's also kind of things going on in the background of selling resin to companies to manufacture their own products. you know, which we're certainly working on. So I think that's probably the most exciting thing that we're going to see over the next, you know, six to 18 months and what's certainly going to drive the nature tech revenue going forward.

Sure. You know, going back, just one last question on the tank steel. I mean, is there a potential for you guys to have a three to $4 million quarter this year? Or is that, is that too ambitious?

Inside of nature tech?

No, inside of the, I'm flipping back to the, to the oil tank business.

Yeah, I certainly hope so. I mean, if you look at it from a revenue standpoint, in fourth quarter of last year, we did $4.2 million. You know, there are some sizable opportunities that we're working on in oil and gas. One of the, you know, part of the expectations we have is that, you know, some of the oil and gas work is a bit seasonal because you get the, you know, a lot of the work we're doing and stuff like that with some of the pipe casings and pipeline protection and things like that doesn't happen in the winter. But certainly some of the expectations and some of the larger projects that we saw in our third and fourth quarter of last year, we expect to kind of repeat and grow in the third and fourth quarter of this year. So, you know, I don't expect, you know, typically company-wide, our second quarter has historically, if you go back, you know, 10, 15 years, our second quarter is historically not the strongest quarter. And typically the third and fourth quarter is kind of where things accelerate. I would expect that to be kind of a similar trend for the current year, certainly based on what I'm seeing as far as the backlog in projects from an industrial standpoint, an oil and gas standpoint, and a nature tech standpoint, that's when I would expect to see kind of the acceleration in sales. So I do think that the growth, the $4 million plus quarter is certainly doable. The other thing I'll say is that over the past 12, 16 months, we have dramatically accelerated the investments that we have made into the oil and gas space specifically to develop a global sales team. And for us hiring the 10 plus people that we've hired in that space to go after that market, it takes a little time for the, let's say the traction, the opportunities to develop. But that's something that we expect to see the results on, you know, in the back half of our fiscal 24. I'm sorry, the back half of our fiscal 25, meaning third and fourth quarter and then beyond. So, you know, we're kind of gearing up for bigger and better things and kind of developing the internal infrastructure to be able to handle the increase in revenue from from those groups. And so, you know, that's really what gets me excited from a company standpoint.

Sure, sure. Switching to China, how come China's doing better?

I wish I could answer all the questions on what's going on in China. I can tell you that there's, you know, just in general from a Chinese standpoint, we saw, you know, a slight recovery. The, you know, if you look at kind of what's going on in China, we thought, you know, we're not selling a huge amount in China compared to kind of where we were or where we expected to be. I mean, so you're talking about $4 million in revenue in our Q1 period. compared to $3.6 million of revenue in our Q4. So there is, that's almost a 10% increase in sales. I think there's certain things that are starting to kind of accelerate and recover a little bit there. I think there's also, our team there is also working on some domestic sales in China and protecting things in China compared to being solely focused on exports before. So I think there's markets that we're going after that we haven't gone after before, and there's a bit of a recovery starting to happen in China. Some of it might be temporary. There's obviously a lot going on from a geopolitical standpoint between the countries. I know that right now there's a huge increase in activity in China specifically because of the changing of presidents and the uncertainty of what's going to happen with tariffs and things like that. So we'll kind of see how things change in China going forward. But our expectations are that we're going to see a decline in Q2 in China regardless, just because that's when Chinese New Year is mid-January. And so we're going to see a slowdown that we always see in second quarter from China. But then our expectations are that Q3 and Q4 will be similar or slightly better than Q1. So all in all, our expectations are that China is going to grow from last year doing $14.2 million to $15-plus million and beyond this year.

Great. One last question. Is there anything in your R&D that's particularly exciting that you can talk about?

No. I think from an R&D standpoint, the The blocking and tackling and the work we're doing in nature tech is what's exciting from my standpoint. The additional, let's say, the rollout of and seeing kind of the adoption of the technologies in oil and gas and seeing the projects that we're working on there starting to get put into companies' budgets. We look at our planning for our third and fourth quarter and beyond is what kind of gets me excited from an oil and gas standpoint.

Great. Great. All right. Good. Good, Carter. Thanks. Thanks for answering my questions. I'm done.

Thank you. One moment for our next question. Our next question comes from the line of Gus Richard from Northland Capital Markets.

Good morning. Thanks for taking the questions. Just on ZRust, you know, it looks like that business is stabilized. And I was just wondering if you could give a little bit of color on that market. Do you expect it to remain stable going forward, or could there be some growth?

Right now, we're looking at more of a stability in the market. Right now, we're still trying to see what's going to happen with the German economy. Like I said, they're feeling some pain with their automotive industry right now.

Got it. And I was going to follow up with Europe and the JVs, sort of a similar question. Do you expect, you know, Europe, given what's going on in Germany, you know, can you hold that JV revenue flat or is there going to continue to be pressure?

Well, it really depends on which country you're talking about. I mean, for example, in Finland we're having a fantastic quarter versus in Germany where they're feeling more pain because of the Volkswagen-Audi situation. So I think for the most part, aside from Germany, the joint ventures in Europe are doing fairly well. It's just Germany that we're worried about.

Got it. And then I know that the oil and gas business is still pretty lumpy. You know, can you sort of give a sense to, you know, first half, second half, you know, relative seasonality? Is it like 50-50, not 50-50, but maybe one-third first half, two-thirds second half for oil and gas in terms of how that would weight? second half over first half?

Yeah, I mean, if I look at it, I mean, I think you're looking at something close to 60-40 or one-third, two-thirds as far as first half, second half.

Got it. Got it. Super helpful. And the last one for me, do you feel like at this point MatrixCheck can sort of sustain roughly 20% growth this year? Overall, as a total company, 20% growth?

No, no, no, just NatureTech. If I look at, from an expectation standpoint, it's right around that number as far as expectations for NatureTech, yes.

Got it. All right. Very helpful. Thank you so much. Yep. Thanks, guys.

Thank you. One moment for our next question. Our next question comes from the line of Joe Vettage from Manalapan Oracle Capital Management LLC.

Yes, good morning, Patrick and Matt. Great to see the progress and the outlook. I was wondering if you could just, you know, regarding nature tech, you know, whether you consider the sales to be recurring once you've started with a customer, whether that's something we could look forward to as basically building a pond.

That is exactly how NatureTech has worked. in the past and the expectations kind of going forward. It's a matter of signing up distributors, starting to sell product, and then typically what you have is repeat business that you keep on, you know, on a step function adding to that revenue. So it's nature tech lends itself to typical, you know, kind of forecastable month by month growth. which is what we've seen in the past if you discount out what happened during COVID, which obviously had a major impact on nature tech given the nature of how that impacted everybody's daily life. But that's typically what we see is you work on a project or you sign up a distributor, you get them working on projects, and you ramp up from there with consistent growth.

Right, right. Great, great, great. And then just with regard to the oil and gas business, I was wondering if you talked about the timeframe in terms of getting a new salesperson up and running. I was wondering if you could also talk about just what the sales cycle is and then also talk about your sales pipeline and how that's progressed over time.

Could you repeat that question, please? Hello?

Hello? Could you repeat your question, please? Oh, yeah, sure. Yeah, so with regard to the oil and gas business, Xerox Oil and Gas, I was wondering if you could talk about your sales pipeline and how the sales pipeline has progressed over time, and then also regarding the... the new salespeople, roughly over what period of time do you see them becoming, really adding to the sales?

With any salesperson we've ever hired in the history of the company, it generally takes them about six months to a year to really learn the business. and start to be effective. So we'll start to see a pickup from the 10 people we hired. We'll start to see some pickup probably by the end of this fiscal year, but you're really not going to see the major impact until the next fiscal year.

Right. And in terms of just your sales pipeline, I'm just wondering if you could talk a little bit about it. Are you, you know, are you seeing repeat customers? Is that where the... Or are you seeing customers come who are new and the potential size of orders? And also maybe globally, too, talk about where you're seeing the sales.

In North America, primarily we're now seeing repeat sales from existing customers. But obviously we're also adding new customers as they're coming along. But, yes, we're getting some steady repeat business. Internationally, we're still building that up over time. We'll know more how that's going to pan out once we have these 10 people fully up to speed.

And the 10 people, is that 10 new people on top of whatever existing sales staff you have?

Yes, that's right. I'm not saying it's 10 salespeople. There's probably six salespeople and for technical or other people that are associated with oil and gas.

Right, right, right. My final question is, you know, in terms of the Chinese sales, I was just wondering, could you break that down between NatureTech and Xerox and Xerox oil and gas? Do you break it down at all like that?

Sure.

So if I'm looking at the historical, you know, China sales, I would say that we are at roughly, you know, you're at about 10% sales. 10% of the China sales number is nature tech and the rest being commercial. you know, the North American, you know, outside of China. I mean, it's the business in North America, the business in India and other parts of Southeast Asia.

Right, right, right, right. Okay. Anyway, that's all I got, guys. I appreciate your taking my questions.

Yep, thanks, Joe.

Thank you. One moment for our next question. Our next question comes from the line of Don Hall.

Good morning, gentlemen. Just one simple question. Excuse me. Your expenses increased in the last quarter, and the reason was, as I'm quoting, because you expanded your sales infrastructure. And I wanted to elaborate on that a little more, although I've been listening to all of the previous conversation. So you're hiring a number of salespeople and sales support people. Can you say where or how or are these brand new territories? Can you describe that a little more, please?

Southeast Asia and the Middle East. I'm sorry? Southeast Asia and the Middle East.

I missed, I'm sorry, I didn't pick up your comment.

Oh, sorry. Southeast Asia and the Middle East is primarily where these people are located.

Southeast Asia and Middle East, and these are brand new territories, are they?

Yes.

I see. Southeast Asia and Middle East. Well, I hope it's got great promise. I assume it does.

We think so.

Yeah. All right. Thank you very much.

Sure. Thank you. At this time, I would now like to turn the conference back to Patrick Lynch for closing remarks.

I'd like to thank everybody for participating in the call today and wish you a nice day.

This concludes today's conference call. Thank you for participating. You may now disconnect.