Northern Technologies International Corporation

Good day and welcome to NTIC's third quarter 2026 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. Instructions will be given at that time. 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 decides 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 will now hand the 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 Wolsfeld, NTIC's CFO. Please note that a press release regarding our third quarter fiscal 2026 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 2026 third 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 third quarter of our fiscal year 2026 in comparison to the third quarter of last fiscal year. Strong global demand and increasing adoptions of our Xeros corrosion prevention and NatureTech bioplastic solutions drove quarterly consolidated sales to new record highs. Disruptions to shipping through the Strait of Hormuz during the quarter caused by recent increased conflict levels in the Middle East contributed to a significant increase in our raw material costs. Higher input costs reduced our gross margin by approximately 477 basis points year over year, and we estimate that gross profit was negatively affected by approximately $1 million based on gross margin levels prior to the increase in U.S.-Iran hostilities. We believe that the third quarter cost pressure was temporary. and we are pursuing pricing and procurement initiatives that we expect will improve gross margin and profitability in the fourth quarter. Since reaching the profitability levels we plan for is taking longer than expected, we believe NTSC must remain focused on the initiatives within our control to drive more profitable growth, including expanding sales of our higher margin xeros oil and gas solutions and broadening nature tech applications globally. Our liquidity and financial flexibility remains solid, supported by a significant capital within our joint venture network and anticipated proceeds of more than $1 million from the pending sale of our Beachwood, Ohio facility, which is expected to close in fiscal 2027. The resilience of our business model, continued demand for our technologies, and our focus on execution give us confidence in stronger, more profitable fourth quarter results. So, with this overview, let's examine the drivers for the third quarter in more detail. For the third quarter ended May 31st, 2026, our total consolidated net sales increased 12.6% to $24.2 million as compared to the third quarter ended May 31st, 2025. Broken down by business unit, this included a 72.3% increase in Missouri's oil and gas net sales a 10.3% increase in Xerox industrial net sales and a 5% increase in nature tech sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2026 third quarter by our joint ventures increased year over year by 15.1% to $26.7 million. reflecting improved year-over-year demand across many of our joint ventures. We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement targeted 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. Stable sales trends continued at our wholly owned NTIC China subsidiary. Fiscal 2026 third quarter net sales at NTIC China decreased by less than 1% to $4.5 million. As I've stated before, 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 the market. On a trailing 12-month basis, NTIC China sales have increased 12.8% to $17.8 million, comparing to $15.8 million for the same corresponding period last fiscal year. We 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 Xeris Oil & Gas. Xeris Oil & Gas sales worth $2.2 million, a third quarter record and increase of 72.3% from the same period last year. This growth reflects the investments we have made in our global sales infrastructure and the increasing adoption of our VCI solutions within the global oil and gas industry. The third quarter reflects the fourth consecutive quarter that Xeris oil and gas sales have been over $2 million, and on a trailing 12-month basis, sales are now over $10 million for the first time in our history. We are encouraged by these trends as adoptions increase and we develop new applications for our corrosion prevention solutions across the global oil and gas market. During the third quarter, we experienced higher year-over-year oil and gas sales in the Middle East, North America, India, and China from both new and existing customers, reflecting the contribution of recent investments we have made 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 has expanded. 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 Xerost oil and gas sales. Nevertheless, we still expect to see Xerost oil and gas sales and profitability to improve significantly in fiscal 2026 as we leverage these investments and rein in operating expense growth. Turning to our NatureTech bioplastic business. Third quarter NatureTech sales were a quarterly record $6.1 million, representing a 5% year-over-year increase. We continue to pursue several larger opportunities in North America and India that we believe can further benefit NatureTech sales in the coming quarters. In North America, NatureTech was recently selected for the International Fresh Produce Association's Packaging Innovation Program. where we are advancing commercialization of compostable barrier laminate solutions for food packaging applications. In India, we announced a collaboration with Bayer to develop biodegradable and compostable seedling cups for nursery applications. This initiative is expected to begin with pilot trials in vegetable and fruit nurseries and, subject to successful validation, could create a meaningful new application for our compostable materials platform. These initiatives build on new food packaging opportunities we have discussed on prior calls and demonstrate the expanding range of markets in which NatureTech can provide a practical alternative to conventional plastics. Overall, we believe NatureTech is a best-in-class compostable plastics business that is well positioned for further growth in the U.S. and internationally as we expect sales to continue to expand over time. 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 over the call to Matt Wolsfeld to summarize our financial results for the fiscal 2026 third quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 12.6% in the fiscal 2026 third quarter, the second consecutive quarter of year-over-year double-digit growth. Sales across our global joint ventures increased 15.1% in the third quarter. Joint venture operating income in the third quarter increased 12.2% compared to the prior fiscal year period, primarily due to higher sales at our joint ventures. Total operating expenses for the fiscal year 2026 third quarter increased 5.3% to $10.2 million, primarily due to higher year-over-year selling, general administrative, as well as research and development expenses. Operating expenses as a percentage of third quarter sales were 42% compared to 44.9% for the prior fiscal year period. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations. Gross profit as a percentage of net sales was 33.6% during the three months ended May 31, 2026, compared to 38.4% during the prior fiscal year period. As Patrick discussed, gross margin for the third quarter was impacted primarily by higher raw material costs as a result of the conflict in the Middle East and Disruption of Shipping through the Straits of Hormuz. We expect gross margin to improve sequentially for the fourth quarter of fiscal 2026. NTIC reported a net loss of $263,000 or $0.03 per share for the fiscal 2026 third quarter compared to net income of $122,000 or $0.01 per dilute share for the fiscal 2025 third quarter. for fiscal 2026 third quarter NTIC's non-GAAP adjusted net loss was $158,000 or two cents per diluted share compared to a non-GAAP adjusted net income of $228,000 or two cents per diluted share for the fiscal 2025 third quarter. A reconciliation of GAAP to non-GAAP financial measures is available on our third quarter fiscal 2026 earnings press release that was issued this morning. As of May 31, 2026, working capital is $20 million, including $7.3 million in cash and cash equivalents, compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025. As of May 31, 2026, we had outstanding debt of $14.8 million. This included $11.8 million in borrowings under our existing revolving line of credit, compared to $9.3 million as of August 31, 2025. Reducing debt through positive operating cash flow and improving working capital efficiencies is a strategic near-term focus. During the third quarter of fiscal 2026, we committed to a plan to sell our Beachwood, Ohio facility, which has historically been used for our ZRust segment. As a result, we reclassified the carrying value of the property. by $869,000 from property planning equipment to assets held for sale on the consolidated balance sheet as of May 31st, 2026. On May 31st, 2026, we received a non-binding letter of intent to purchase the property for $1.15 million in cash subject to a customary diligence period and execution of a definitive purchase and sale agreement. We expect the sale of the property to close during fiscal 2027. On May 31, 2026, the company had $30.4 million in investments in joint ventures, of which 54.4%, or $16.5 million, was in cash, with the remaining balance primarily invested in other working capital. To conclude our prepared remarks, we believe our third quarter results demonstrate the Canadian strength and resilience of our business, highlighted by record quarterly consolidated sales and growth that cost our core corrosion prevention and bioplastics platforms. While profitability during the quarter was affected by a sharp increase in raw material costs associated with geopolitical disruption in the Middle East, we believe this pressure was temporary and does not change our view of the long-term earnings potential of the business. As we move through the fourth quarter of fiscal 2026, we expect continued sales growth and improved profitability supported by pricing actions and disciplined expense management. We also remain focused to advancing higher margin zero soil and gas opportunities and expanding nature tech applications globally. We believe these factors position NTIC to deliver stronger financial performance and cash flow generation in the coming quarters. With this overview, Patrick and I are happy to take your questions.