Northern Technologies International Corporation

Good day, and thank you for standing by. Welcome to the Northern Technologies International Corporation's second quarter 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 11 on your telephone. You will then hear an automated message advising your hand is raised. Please note that today's conference is being recorded. As part of the discussions 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 Security Litigation and 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 forelooking 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 will now hand the conference over to your speaker for today, Mr. Patrick Lynch, NTIC Chief Executive Officer. Please go ahead, sir.

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 2025 financial results was issued earlier this morning. and is available at ntsc.com. During today's call, we will review various key aspects of our second quarter fiscal 2025 financial results, provide a brief business update, and then conclude with the question and answer session. Please note that when we discuss year over year performance, we are referring to the second quarter of our fiscal 2025 in comparison to the second quarter of the last fiscal year. Our fiscal 2025 second quarter performance demonstrates the increasing intensity of the headwinds we are currently facing, including recent unprecedented changes in U.S. trade and economic policies, the seasonality of our industrial and oil and gas business, and the timing of certain NatureTech orders. Furthermore, regardless of this considerable uncertainty, we believe we are poised for a rebound in NatureTech and its U.S. oil and gas sales in the second half of the fiscal year. These expectations are supported by our current sales pipeline and demand from new and existing customers within our nature tech and zero-square-the-gas segments. NTSC and our joint venture partners have successfully navigated difficult economic cycles before, and we believe we entered this period from a position of strength as a result of our acid-light and profitable business model, experienced leadership team, and size, scale, and diversity of our business. In addition, it is also important to note that we continue to have a solid cash position with over $5 million in cash and cash equivalents and available for sale securities in the US, as well as $13 million of additional cash at our international joint ventures. Our disciplined approach to managing cash, including adjustments to our quarterly dividend and prioritizing debt reduction, are intended to position us to seize future growth opportunities in our oil and gas and compostable plastics businesses. We believe that our strategic growth priorities and financial discipline will drive sustainable growth and long-term shareholder value. So with this overview, let's examine the drivers for the second quarter in more detail. For the second quarter ended February 28th, 2025, our total consolidated net sales decreased 8.5%. to $19.1 million, as compared to the second quarter ended February 29, 2024. Broken down by business unit, this included a 28.5% decrease in Xero's oil and gas net sales, an 11.8% decrease in NatureTech net sales, and a 3.7% decrease in Xero's industrial net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. After a year-over-year increase in the fiscal 2025 first quarter, total net sales for the fiscal 2025 second quarter by our joint ventures decreased year-over-year by 15.7% to $19.8 million. We believe this year-over-year decline in joint venture sales reflects the continued impacts of high energy prices and regional economic pressures in the European economy, as well as increased uncertainty related to U.S. trade and economic policies and the potential disruptive impacts these will have on global supply chains. I am encouraged by the continued improvement of sales trends at our wholly owned NTIC China subsidiary. Fiscal 2025 second quarter net sales at NTSC China increased by 8.1% to $3.7 million. The slight decline compared to first quarter sales levels was due to the seasonal impacts of this Chinese New Year. Overall, sales in this geography continue to stabilize and are approaching quarterly sales levels that we last experienced in fiscal 2021 and 2022. The majority of NTSC China's production and sales are for local consumption, and therefore we believe NTSC China's exposure to tariffs, including those recently imposed by the U.S., is limited. We expect demand in China will continue to improve in fiscal 2025, helping to support higher incremental sales and profitability in this market. In addition, we are committed to the long-term opportunities the Chinese market provides for industrial and bioplastic segments. and we continue to take steps to enhance our operation 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 Xerox oil and gas. Xerox oil and gas sales were $1.5 million in the second quarter of fiscal 2025, compared to $2.2 million in the same period last year. Please remember, however, that last fiscal year's second quarter benefited from certain oil and gas customers shifting deliveries from the first quarter to the second quarter. Seasonality and the timing of orders can impact quarterly comparisons, which is why we encourage investors to look at Xeris oil and gas sales on a trailing 12-month basis. On a trailing 12-month basis, Xeris oil and gas sales were $8.6 million, a 7.2% increase from $8 million for the trailing 12-month period at February 29, 2024. Our sales pipeline continues to grow among both new and existing customers for our Xeris oil and gas solutions, which 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 on prior calls, we made strategic investments to expand our oil and gas sales infrastructure during the first quarter to support accelerated zero oil and gas sales that we expect to start occurring in the second half of fiscal 2025. Turning to our NatureTech bioplastics business. NatureTech sales were $5 million in the second quarter of fiscal 2025, compared to $5.6 million in the same period a year ago. We believe the 11.8% year-over-year decline in NatureTech sales was due to a couple of factors, including order timing and seasonal variation. While we are assessing the near-term impact tariffs recently imposed by the U.S., and those that may be imposed by other countries in response may have on nature tech sales, we believe our long-term market opportunities remain strong. In addition, the U.S. organic waste diversion mandates and waste management rules are created at the local municipality and state levels. So we don't expect changes to federal priorities to impact local U.S. demand for our compostable solutions. We are also working on several large opportunities for our nature tech solutions that we believe could help to re-accelerate our growth in the coming quarters. As we navigate dynamic global and economic uncertainty, please consider that NTSC's longstanding leadership team has previously navigated several challenging economic periods, including the Great Recession, 2008 and 2009, and more recently, the COVID-19 pandemic. Since then, the size, scale, and diversity of our business has increased. Finally, the strength of our balance sheet and benefits of our asset-light business model provide us with significant flexibility and resources to navigate this type of economic and business uncertainty. We remain confident in the direction we are headed and that our strategic growth priorities and financial discipline will create sustainable growth and long-term value for our shareholders. 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 success and our ability to navigate more complex economic periods 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 second quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 8.5% in the second quarter of fiscal 2025 to $19.1 million because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures decreased 15.7% in the second quarter compared to the prior fiscal year period. Joint venture operating income decreased 31.8% compared to the prior fiscal year period, primarily due to a decrease in equity income from joint ventures and fees for services provided to joint ventures, both of which were primarily driven by lower sales at many of NTIC's joint ventures. Total operating expenses for the fiscal 2025 second quarter increased 2.4% compared to the prior fiscal year period to $8.8 million. primarily due to strategic investments we're making to support expected growth in the second half of the year within our oil and gas business, and to a lesser extent, increased personnel costs across the company. On a sequential basis, second quarter operating expenses were down 6.9% from the first quarter. As a percentage of net sales, operating expenses were 46.2% for the second quarter, compared to 41.3% for the prior fiscal year period. Gross profit as a percentage of net sales was 35.6% during the three months ended February 28, 2025, compared to 40.0% during the prior fiscal year period. The 440 basis point decline was primarily a result of a less profitable mix of sales. NTIC reported net income of $434,000. or $0.04 per diluted share for the fiscal 2025 second quarter compares to $1.7 million, or $0.17 per diluted share, for the fiscal 2024 second quarter. NTIC recognized other income of $1.1 million during the three and six months ended February 28, 2025, due to the receipt of the employee retention credit payment. For the fiscal 2025 second quarter, NTIC's non-GAAP adjusted income was a loss of $300,000 per $0.03 per diluted share compared to non-GAAP-adjusted income of $1.8 million, $0.19 per diluted share for the fiscal second quarter of 2024. For reconciliation of GAAP to non-GAAP financial measures as available in our second quarter fiscal year 2025, earnings press release was issued this morning. As of February 28th, 2025 working capital was $21.4 million, including $5.1 million in cash and cash equivalents, compared to $23.7 million, including $5.0 million cash and cash equivalents, as of August 31, 2024. As of February 28, 2025, we had outstanding debt of $8.1 million. This included $5.4 million in borrowings under our existing revolving line of credit, compared to $4.3 million as of August 31, 2024. Reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus in the remainder of fiscal 2025. We generated $3.2 million in operating cash flows for the six months ended February 28, 2025. At quarter end, The company had $25.0 million in investments in joint ventures, of which 52% or $13 million was in cash, with the remaining balance primarily invested in working capital. During fiscal 2025 second quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable on February 12, 2025 to stockholders of record on January 29, 2025. As Patrick commented earlier in the call, To manage our cash position, reduce debt, and enhance flexibility, we're taking a disciplined approach to capital allocation and temporarily adjusting our quarterly dividend to one cent per share, effective with our next quarterly dividend. To conclude our prepared remarks, we're committed to our long-term growth opportunities. We're confident that our strategic priorities and financial discipline will drive sustainable growth and create value for our shareholders. With this overview, Patrick and I are happy to take your questions.