Northern Technologies International Corporation

Good day and thank you for standing by. Welcome to NTIC's fourth quarter 2025 earnings conference call and webcast. At this time, all participants are on a listen-only mode. After this 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. 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 Security 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 claims any duty to update or revise is for looking statements. I will now hand the conference call over to Mr. Patrick Lynch, NTIC's CEO. Please go ahead, sir.

Good morning. I'm Patrick Lynch, NTIC's CEO, and I'm here with Matt Wilsfeld, NTIC's CFO. Please note that a press release regarding our fourth quarter and full year 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 fiscal 2025 fourth quarter and full year 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 fourth quarter and full year of our fiscal 2025 in comparison to the fourth quarter and full year of last fiscal year. Fiscal 2025 was marked by order timing shifts and selective softness in our Xerox oil and gas and NatureTech markets. So NTIC used this period to strengthen its competitive position and to execute strategic initiatives that we believe will enhance our long-term growth potential. We accelerated product innovation within NatureTech advanced new zero solutions across global industrial markets, and pursued emerging opportunities in the South American offshore oil and gas sector. These actions have expanded our pipeline, sharpened our focus, and positioned NTIC to re-accelerate growth and improve profitability in fiscal 2026 and beyond. In fiscal 2026, we expect to start reaping the benefits gained from the strategic investments NTIC made over the past three years to upgrade our global operations and support future growth. We are also focused on flattening our operating expenses while expanding gross margins and driving sales in the higher margin parts of our business, which we expect will improve our profitability and strengthen our balance sheet in fiscal 2026. While we anticipate macroeconomic headwinds to persist, especially in Europe, we believe NTSC is positioned to deliver growth and improve profitability across many of our key markets in the coming fiscal year. So with this overview, let's examine the drivers of the fourth quarter in more detail. For the fourth quarter ended August 31st, 2025, our total consolidated net sales decreased 4.4% to $22.3 million as compared to the fourth quarter ended August 31st, 2024. Broken down by business unit, this includes a 29.4% decrease in Xeris oil and gas net sales and a 10% decrease in NHTECH net sales, partially offset by a 5.8% increase in Xeris industrial net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements, total net sales for the fiscal 2025 fourth quarter by our joint ventures increased year over year by 4.7% to $24.4 million. For fiscal 2025, joint venture sales declined 4.9%, reflecting the continued impact of high energy prices and regional political pressures on the European economy, as well as significantly increased uncertainty related to U.S. trade and economic policies and the potential impacts this will have on global supply chains. We continue to closely monitor trends across our European markets for signs of stabilization, following years of subdued demand as governments begin to implement target economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Improving sales trends at our wholly owned NTIC China subsidiary continue. Fiscal 2025 fourth quarter net sales at NTIC China increased by 12% to $4 million. For fiscal 2025, NTIC China sales increased 14% to $16.2 million, the second strongest year of sales we have experienced in this market. NTIC China sales for fiscal 2025 demonstrate that demand continues to grow in this geography. Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, We believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to improve in fiscal 2026, helping to support higher incremental sales and profitability in this market. We continue to believe that China will likely become a significant market for our industrial and bioplastic segments, so we'll continue to take steps to enhance our operations in this geography. Now, moving on to Xerox oil and gas. Fourth quarter of fiscal 2025, Xerox oil and gas sales were $3 million, compared to $4.2 million in the same period last year. As a reminder, Xerox oil and gas sales for the fourth quarter last year benefited from approximately $600,000 in sales that shifted from the third quarter due to timing. On an annual basis, Xeris oil and gas sales were $7.3 million, compared to $9.2 million for the prior full fiscal year. This decline was primarily due to timing of orders. We have continually invested in Xeris oil and gas to enhance our sales team and add resources to support future growth. This has improved our sales pipeline as the size and number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings, and offshore oil rigs from corrosion. The nature of this industry will always cause certain fluctuations in Xeris oil and gas sales. Nevertheless, we still expect to see Xeris oil and gas sales and profitability to improve significantly in fiscal 2026 as we leverage these investments and rein in operating expense growth. Earlier this month, we announced that our 85% owned subsidiary, Xerox Brazil, secured a new three-year contract for a major offshore project with a leading global EPC company. Under this agreement, Xerox Brazil will provide advanced corrosion protection solutions for floating production storage and offloading units, or FPSOs, an estimated total value of approximately 70 million Brazilian reais, which is equal to approximately 13 million US dollars based on current exchange rates. The project started in Q4 and is expected to ramp up during our fiscal 2026 and then continue through calendar 2028. This is a significant validation of our engineering capabilities, scalability of our zero oil and gas business, and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. Turning to our nature tech bioblastics business, fourth quarter nature tech sales were $5.1 million, representing a 10% year-over-year decline in nature tech sales, primarily due to pricing dynamics and the timing of orders. For example, during the past year, a large North American customer of our resin compounds delayed purchasing for nearly six months as they made tooling adjustments to increase the output of their manufacturing line. While this contributed to NatureTech's decline in sales for fiscal 2025, we've already received orders for the first and second quarters of the new fiscal year for the equivalent of what this customer purchased from us in all of fiscal 2025. It's also worth mentioning that in Q4 of fiscal 2025, we entered into a preferred supplier agreement with the nation's leading specialized distributor for Janssen, food service and industrial packaging. We expect this new relationship to translate into higher NatureTech sales growth in fiscal 2026. We are also working on several larger opportunities for our NatureTech solutions that we believe hold significant promise to benefit our sales in the coming quarters, including advancing the compostable food packaging solution we mentioned on our last call. Overall, we believe NatureTech is a best-in-class compostable plastic business that is well-positioned for significant further growth in the U.S. and abroad. While fiscal 2025 was more challenging than we expected at the beginning of the fiscal year, we remain steadfast on pursuing our strategic growth plan. We are confident in the direction we are headed. Before I turn the call over to Matt, I wanted to acknowledge the hard work and dedication for 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 fourth quarter and full fiscal year 2025.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 1.0% in fiscal 2025 and decreased 4.4% in fiscal 2025 fourth quarter because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 4.7% in the fourth quarter. Joint venture operating income in the fourth quarter increased 6.6% compared to the prior fiscal year period, primarily due to the corresponding increase in net sales. For fiscal 2025, sales across our global joint ventures decreased 4.9%, while joint venture operating income decreased 9.8% compared to the prior fiscal period. Total operating expenses for the fiscal 2025 fourth quarter increased 2.2% or $9.7 million for the fiscal 2025. Primarily due to strategic investments in ZRust oil and gas, sales infrastructure, and increased personnel expenses, including new hires, benefits, and higher travel and professional fees. As a percentage of net sales, operating expenses were 43.5% for the fourth quarter compared to 40.7% for the prior fiscal year period. For fiscal 2025, operating expenses as a percentage of net sales were 44.7% compared to 41.6% for the prior fiscal year. Gross profit as a percentage of net sales was 37.9% during the three months ended August 31, 2025, compared to 43.8% during the prior fiscal year period. Gross profit as a percentage of net sales was 37.6% for the fiscal year ended August 31, 2025, compared to 39.7% for the prior fiscal year. Lower gross margin for the fourth quarter and full year periods were primarily due to a less profitable mix of sales. There were a couple of one-time items that impacted profitability during the fiscal year, including a $1.1 million benefit to other income due to the receipt of cash from the employee retention credit that was payable in February of 2025. Secondly, NTSC recognized $387,000 in other expense during the fourth quarter of 2025 as NTSC's Chinese subsidiary was assessed penalties from Ningbo Customs, a customs authority in China, as a result of a technical classification matter. We have since updated our export documents and internal review procedures and believe this issue has now been fully resolved. We also experienced an increase in our effective tax rate for fiscal 2025, which was 67.5% for fiscal 2025 compared to 17.3% in the prior fiscal year. The changes primarily reflect increased income tax expense in our foreign subsidiaries and is primarily due to the increase in income tax expenses compared to reduced consolidated pre-book tax income. As a result, our effective tax rate was unusually high and volatile in fiscal 2025. We expect the effective rate to normalize in future periods when additional profits are recognized in our North American operations. NTIC reported net loss of $1.1 million or 11 cents per diluted share for the fiscal 2025 fourth quarter compared to net income of $1.8 million or 19 cents per diluted share for the fiscal 2024 fourth quarter. For the full year, NTIC reported net income of $18,000 or 0 cents per diluted share compared to $5.4 million or 55 cents per diluted share for the fiscal 2024 full year. For the fiscal 2025 fourth quarter, NTIC's non-GAAP adjusted net loss was $607,000 or 6 cents per diluted share compared to non-GAAP adjusted net income of $1.9 million or or $0.20 per diluted share for the fiscal 2024 fourth quarter. For the fiscal 2025 non-GAAP adjusted net loss was $12,000, or $0.00 per diluted share compared to net income of $5.8 million, or $0.59 per diluted share for fiscal 2024. A reconciliation of GAAP to non-GAAP financial measures is available in our fourth quarter fiscal year 2025 earnings press release that was issued this morning. As of August 31, 2025, working capital was $20.4 million, including $3.7 million in cash and cash equivalents, compared to $23.7 million, including $5 million in cash and cash equivalents as of August 31, 2024. As of August 31, 2025, we had outstanding debt of $12.2 million. This included $9.3 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 flow and improving working capital efficiencies will be a strategic focus for fiscal 2026. We generated $2.4 million in operating cash flows for the fiscal year ended August 31st, 2025. A year end, the company had $28.6 million of investment in joint ventures, of which 51.7% or $14.8 million was in cash, with the remaining balance primarily invested in other working capital. During fiscal 2025 fourth quarter, NTSU's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on August 13, 2025, to stockholders of record on July 30, 2025. To conclude our prepared remarks, we are optimistic NTIC's momentum is building across many parts of our business. We believe our multi-year strategies are working, our global markets are expanding, and our team is delivering results. With a clear vision and disciplined execution, we're confident that the foundation we've built will drive continued growth, stronger profitability, and meaningful value creation for our shareholders. With this overview, Patrick and I are happy to take your questions.