Northern Technologies International Corp

NASDAQ:NTIC

Earnings Call Analysis

Increased Profits Despite Sales Dips

NTIC achieved a 78% surge in net income and a 1.1% rise in total net sales, reaching $20.2 million, with notable growth in the Natur-Tec and ZERUST Industrial segments. Despite decreased sales by joint ventures, primarily EXCOR Germany, due to external economic factors, NTIC reports a substantial rise in gross margin by 450 basis points, suggesting effective management of inflationary pressures. The company also reported robust operating cash flow, which is expected to persist throughout fiscal 2024. Gross profit as a percentage of net sales improved from 31.8% to 36.3%, and net income attributable to NTIC increased to $896,000.

A Robust Start to Fiscal 2024 with Product and Regional Expansion

The company's fiscal year 2024 has kicked off with a strong performance, marked by a stable demand in the ZERUST industrial and the Natur-Tec markets. Despite a slight setback in the ZERUST Oil & Gas sales attributed to the timing of orders, consolidated sales saw an increase, along with an impressive 78% boost in first quarter net income compared to the prior year. The gross margin also experienced a year-over-year improvement, showcasing the efficacy of the initiatives targeting enhanced profitability.

Strategic Investments Augmenting Sales and Support Infrastructure

Strategic investments have been made, especially in the oil and gas and Natur-Tec businesses, to lay the groundwork for long-term expansion. These investments are aimed at enhancing sales and support capabilities to not only meet the current demand but also to capitalize on expected market opportunities throughout fiscal 2024 and beyond. The company has successfully maintained its operating expenses in proportion to net sales, and expects higher profitability and strong operating cash flow to persist during this fiscal year.

Optimizing for Growth: Consolidated Net Sales and Joint Ventures

The company posted a 1.1% increment in consolidated net sales, reaching $20.2 million, which includes increases in both the Natur-Tec and ZERUST Industrial net sales. Joint venture sales, not consolidated within the company's financial statements, dipped slightly by 4.7% to $23.6 million. The largest joint venture, EXCOR Germany, faced a 17% sales drop due to losing a customer amidst heightened energy prices and geopolitical tensions in Europe. The NTIC China subsidiary also saw a slight decrease in sales, but with recent positive growth trends, there is cautious optimism for an upturn in China's market demand over the fiscal year.

Natur-Tec Bioplastics Business Poised for Sustainable Growth

The Natur-Tec segment has shown a robust 4.2% growth in sales, with expectations of continued expansion supported by strong demand in North America and India. The outlook for certified compostable plastic products appears promising due to new customer engagements and growing interest in eco-friendly alternatives to conventional plastics. This positions the Natur-Tec Bioplastics business for sustainable long-term growth.

Positive Cash Flow and Dividend Declarations Reflecting Strong Performance

Net income for the first quarter stood at $896,000, a substantial rise from $502,000 in the same quarter of the previous year. Improved profitability helped to generate a significant 53.6% increase in operating cash flow, with $3.1 million recorded for the period. This financial strength supports the company’s investment in growth strategies, the maintenance of a quarterly cash dividend, and an ongoing effort to reduce existing debts. A testament to the company's solid financial health was the declaration of a quarterly cash dividend of $0.07 per common share.

Outlook: A Balance of Cautious Optimism and Assertive Financial Management

Despite prevailing economic uncertainties, the company anticipates another fruitful year of sales and profitability for fiscal 2024. The focus remains on navigating the challenging economic landscape while continuing to invest in growth opportunities across various markets. The management's strategy also involves managing operating expenses in light of inflationary pressures and supporting shareholder value through consistent dividends.

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to NTIC First Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] 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, subsequently 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 these forward-looking statements. I would now like to hand the conference over to your speaker today, Patrick Lynch. Please go ahead.

[G. Lynch, executive]

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 fiscal 2024 first quarter 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 first quarter financial results, provide a brief business update and then conclude with a question-and-answer session.

I'm pleased with the strong start to fiscal 2024, highlighting stable demand across our ZERUST industrial and in Natur-Tec markets. While the timing of certain orders did hold back ZERUST Oil & Gas sales, we experienced higher consolidated sales and a 78% increase in first quarter net income over the prior year's first quarter net income. I am particularly encouraged by the year-over-year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended.

As we mentioned in the last quarter, we are also making strategic investments to bolster our infrastructure and support our long-term expansion needs, particularly in our oil and gas and in Natur-Tec businesses. These investments are primarily focused on adding sales and support capabilities to enable us to take greater advantage of both current demand as well as what we anticipate unfolding during the course of fiscal 2024 and beyond.

We are striving to improve our operational efficiencies across our business as evidenced by our operating expenses as a percent of net sales holding relatively stable over the past 3 months. We expect higher profitability and strong operating cash flow to continue throughout fiscal 2024. During the first quarter, cash from operating activities improved year-over-year by nearly 54%. We intend to continue to allocate capital to support our growth initiatives and quarterly dividend payment while using excess cash flow to pay down the balance on our existing line of credit.

As we look to the remainder of fiscal 2024, we believe we are well positioned for top line growth across our ZERUST industrial, ZERUST Oil & Gas and Natur-Tec product categories. We also plan to improve the performance and profitability of our joint ventures across our European and Asian markets. As our team continues to navigate a fluid global economic environment, I am pleased with NTIC's improving performance and believe fiscal 2024 will be another good year of growth and improved profitability.

So with this overview, let's examine the drivers for the first quarter ended November 30, 2023, in more detail. For the quarter, our total consolidated net sales increased 1.1% to a first quarter record of $20.2 million as compared to the first quarter ended November 30, 2022. Broken down by business unit, this included a 4.2% increase in Natur-Tec net sales and a 1.1% increase in ZERUST Industrial net sales.

These increases were partially offset by a 7.4% decline in ZERUST Oil & Gas net sales. Total net sales for first quarter by our joint ventures, which we do not consolidate in our financial statements, decreased year-over-year by 4.7% to $23.6 million. EXCOR Germany, our largest joint venture, experienced a 17% decrease in net sales compared to the prior fiscal year period due primarily to the loss of a customer and the softer demand within Europe related to higher energy prices and other externalities linked to the war between Ukraine and Russia.

Fiscal 2024 first quarter net sales by our wholly owned NTIC China subsidiary decreased on a year-over-year basis by 1.8% to $3.7 million due to weaker economic conditions in that country. On a sequential basis, NTIC China sales increased by 4.1%, which was the third consecutive quarter of higher sales sequentially after we recorded a small annual net loss at NTIC China last fiscal year, we remain cautiously optimistic that demand in China will improve throughout fiscal 2024, helping to support higher incremental sales and profitability in this market.

While near-term economic conditions in China continue to remain uncertain, we are committed to the Chinese market and continue to take steps to enhance our Chinese operations. We continue to believe China will likely become a significant geographic market for us in the future. Now moving on to ZERUST Oil & Gas. The first quarter of fiscal 2024 was the seventh consecutive quarter of ZERUST Oil & Gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business.

For the fiscal 2024 first quarter, ZERUST Oil & Gas sales were $1.5 million compared to $1.6 million for the same period last year. A 7.4% year-over-year decline in ZERUST Oil & Gas sales was primarily due to the timing of certain oil and gas projects which pushed the associated revenue to the second quarter. As a result, we expect ZERUST Oil & Gas sales will have a stronger fiscal 2024 second quarter than first quarter.

Demand remained strong and growing among both new and existing customers for our ZERUST Oil & Gas solutions, which today is still focused primarily on protecting aboveground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another good year for ZERUST Oil & Gas as this business further scales and continues to contribute to our overall profitability.

Turning to our Natur-Tec bioplastics business. As expected, Natur-Tec sales remained robust during the first quarter and increased 4.2% year-over-year to a first quarter record of $4.8 million. We expect Natur-Tec sales growth will continue throughout fiscal 2024, supported by favorable demand in North America and India and significant new customer wins and orders in these geographies.

Globally, we continue to see growing 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. As a result, we believe we are well positioned for long-term sustainable growth within our Natur-Tec Bioplastics business.

As you can see, our fiscal 2024 first quarter financial results reflect the progress we are making towards growing our business and improving profitability. 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 for our shareholders in the future is a direct result of their efforts. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2024 first quarter.

[Matthew Wolsfeld, executive]

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 1.1% for the fiscal 2024 first quarter to a first quarter record because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures declined 4.7% in fiscal 2024 first quarter.

Joint venture operating income was down 0.8% compared to the prior fiscal year period. The year-over-year reduction in joint venture operating income was primarily due to lower sales and the resulting lower net income at our German joint venture, partially offset by improved profitability across many of our other joint ventures. Total operating expenses for fiscal 2024 first quarter increased 5.2% to $8.3 million compared to $7.9 million for the same period last fiscal year.

Higher operating expenses were primarily due to increased personnel costs. As a percentage of net sales, operating expenses were 41.2% for the fiscal 2024 first quarter compared to 39.6% for the prior fiscal year period. Gross profit as a percentage of net sales was 36.3% during the 3 months ended November 30, 2023, compared to 31.8% during the prior fiscal year period. The 450 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures.

Net income attributable to NTIC was $896,000 or $0.09 per diluted share for the fiscal 2024 first quarter compared to $502,000 or $0.05 per share for the fiscal 2023 first quarter. For the fiscal 2024 first quarter, NTIC's non-GAAP adjusted net income was $1 million or $0.10 per diluted share compared to non-GAAP net income of $608,000 or $0.06 per diluted share for the same period last year. A reconciliation of GAAP to non-GAAP financial measures is available on our 2024 first quarter earnings press release that was issued this morning.

As of November 30, 2023, working capital was $22.4 million including $6.1 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 November 30, 2023, we had outstanding debt of $5.8 million. This included $3 million in borrowings under our existing revolving line of credit compared to $3.6 million as of August 31, 2023.

We generated $3.1 million in operating cash flows for the 3 months ended November 30, 2023 compared to $2 million for the 3 months ended November 30, 2022. This 53.6% year-over-year improvement in operating cash flow was driven primarily by stronger core profitability and positive changes in current assets and liabilities. Throughout fiscal 2024, we expect to generate continued operating cash flow which we plan to invest in the growth of our business to support our quarterly cash dividend and pay down the balance on our existing revolving line of credit.

On November 30, 2023, the company had $24.6 million of investments in joint ventures, of which 61.8% or $15.2 million was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2024, first quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable on November 15, 2023, to stockholders of record on November 1, 2023. So with this overview and to conclude our prepared remarks, we continue navigating a fluid business environment while pursuing our product, end 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. While the economic environment remains uncertain, we believe fiscal 2024 will be another good year of sales and profitability for NTIC and we're excited about our long-term prospects. With this overview, Patrick and I are happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Tim Clarkson from Van Clemens & Co Inc.

[Timothy Clarkson, analyst]

Patrick. Matt. So just -- I always dreaming a little bit. I mean is there a scenario where I know you guys are doing about $1.5 million in the oil tank business. I mean, is there a potential this year to have a $2.5 million or $3 million quarter?

[G. Lynch, executive]

Absolutely. That's what -- waiting for.

[Timothy Clarkson, analyst]

Yes. And the gross margins on that business are higher than the rest of the business, right?

[G. Lynch, executive]

Yes, that's correct.

[Timothy Clarkson, analyst]

Right. Good. My other dream is -- but I'll get to that -- second, just on the compostable again, what would be the typical applications for your compostable plastics?

[G. Lynch, executive]

You're talking Cutlery, for example, is a major one. It's for injection-molded plastic articles and also bags are major application that we're servicing in the United States.

[Timothy Clarkson, analyst]

Right. And one of the major advantages of that stuff, is it stronger than a lot of the competition.

[G. Lynch, executive]

Yes, and cheaper.

[Timothy Clarkson, analyst]

Right, and cheaper. And there's no problem with -- I know a couple of years ago, you had a problem with getting the material to make that.

[G. Lynch, executive]

No. They've added capacity on a worldwide basis. So there's no shortage right now of raw materials for us.

[Timothy Clarkson, analyst]

Right, right. Now is there a scenario where you could link up with another company either on a marketing basis or on a manufacturing basis or on a technology basis? Or would it make sense to if you could add a piece to the compostable thing and separate and bringing public. I mean is that -- is there a potentiality of that? Or is it still too early?

[Matthew Wolsfeld, executive]

Well, I think it's going to -- there's 2 different questions there, Tim. One is ultimately, what do we think would happen with Natur-Tec when it hits a level of revenue or a level of profitability where it makes more sense to be a stand-alone entity. I think we've always said that, that's certainly a possibility. But right now, when you look at the total revenues of Natur-Tec, although they're growing, they're not really at a level where I think it's sustainable to be a stand-alone entity where it will be properly valued.

The other part of your question where you talk about partnering with other companies that's the main -- one of the main ways that we are growing Natur-Tec are by developing specialty applications for larger companies that are using container-load quantities of resin. And so a lot of the growth that we're expecting to see over the next 12 months, 24 months, 36 months comes from working with companies that are looking to use large container-load quantities of our specialty resin to -- for them to make their own compostable products. So I think both of those kind of in combination are really what's going to help the overall Natur-Tec as a company and as a brand grow. But there's certainly significant opportunities in the United States, in Europe, in parts of Asia, where we're seeing these applications sell well.

[Timothy Clarkson, analyst]

Sure, sure. Now I know that on a foreign basis, Germany was kind of a weak quarter for them, for a variety of reasons. Is that starting to come back? Or is that still pretty weak?

[G. Lynch, executive]

I don't see it coming back immediately. There are 2 reasons. One, I mean they lost a very large customer that they had for a very long time, and that's not that easy to replace. Also as long as the Ukraine and Russia conflict continues, you're going to have higher energy prices and raw material prices in Europe, which is also putting a bit downward pressure on sales.

[Timothy Clarkson, analyst]

Right, right. And -- in terms of just overall inflation, are you guys seeing better costs across the board with the lower oil prices now and some of the claim that inflation has been moderating?

[G. Lynch, executive]

I think and certainly in the United States, So -- I think we've got inflation well under control. So that's not an issue. Like I said, it continues to be an issue in all of Europe because of -- in Europe, they get most of their energy, gas and oil from Russia or used to. And until that conflict is settled, it's going to continue to be an issue in that region. But elsewhere, we're fine in that regard.

[Timothy Clarkson, analyst]

Right, right. Got it. I am done. Thank you.

[Operator]

[Operator Instructions] At this time, I would now like to turn the conference back over to Patrick Lynch for closing remarks.

[G. Lynch, executive]

Well, thank you very much for attending this morning, and wish you a nice day. Thank you.

[Operator]

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