Northern Technologies International Corporation (NTIC) Q3 2021 Results - Earnings Call
Northern Technologies International Corporation (NASDAQ:NTIC) Q3 2021 Earnings Conference Call July 8, 2021 9:00 AM ET
Company Participants
Patrick Lynch - Chief Executive Officer
Matt Wolsfeld - Chief Financial Officer
Conference Call Participants
Tim Clarkson - Van Clemens
Gus Richard - Northland
Jim Dowling - Jefferies
Operator
Good day and thank you for standing by. Welcome to the Northern Technologies International Corporation Third Quarter 2021 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. [Operator Instructions] After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference may be 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 SEC. NTIC disclaims any duty to update or revise its forward-looking statements.
I’d now like to hand the conference over to your host today, Mr. Patrick Lynch. Please go ahead.
Patrick Lynch
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 was issued earlier this morning regarding the financial results for our fiscal 2021 third quarter and is also available at ntic.com. During this call, we will review various key aspects of our fiscal 2021 third quarter financial results, provide a brief business update, and then conclude with a question-and-answer session.
Sales for the fiscal 2021 third quarter accelerated past second quarter levels and set a new quarterly record as momentum continued to build across our global product categories. Consolidated sales increased 58.2% year-over-year and were up to 20.6% from the second quarter, while sales at NTIC’s joint ventures increased 10% from the fiscal 2021 second quarter and are up 70.2% year-over-year.
Looking at sales growth on a two-year basis, it’s especially encouraging, as this shows strong underlying demand despite last year's COVID-19 pandemic related challenges. Comparing the third quarter of fiscal 2021 to third quarter of fiscal 2019 results, consolidated sales are up 3.5% and ZERUST industrial net sales are up 22.5%, while net income has increased to 38.6%.
Throughout the COVID-19 pandemic, we maintained our operations, staffing levels and services to our customers, while investing in new product development and pursuing new sales opportunities. This kept us ready to benefit from the significant resurgence currently underway in industrial production. And we are seeing robust and improving demand across many of our product categories and global end markets.
We believe demand trends will remain strong throughout the remainder of this fiscal year and into fiscal 2022 as more sectors of the global economy reopen and industrial production continues to improve. So, with this overview, let's examine the drivers for the third quarter in more detail. For the third quarter ended May 31, 2021 our total consolidated net sales increased 58.2% to a quarterly record of $15.4 million as compared to the third quarter ended May 31, 2020.
Broken down by business unit this included a 141% increase in ZERUST oil and gas net sales and 86.1% increase in ZERUST net sales to our joint ventures, and a 61.4% increase in ZERUST industrial net sales, and a 27.3% increase in the Natur-Tec net sales. Total net sales for the fiscal 2021 third quarter by our joint ventures, which we do not consolidate in our financial statements were nearly $32 million. This is an increase over 70.2% when compared to the same period last fiscal year, and an increase of 10% when compared to the second quarter of the current fiscal year.
In addition, when compared to May 31, 2019, net sales from our joint ventures have increased 15.1% demonstrating strong global demand for our products from both existing and new customers. Fiscal 2021 second quarter net sales by our wholly-owned NTIC China subsidiary increased to 30.7% to a third quarter record of $4 million. Strong performance at NTIC China is primarily due to higher sales to new and existing customers for both our ZERUST and the Natur-Tec product categories.
We continue to believe that Chinese market represents a significant opportunity for NTIC, and given our recent growth, we expect China will likely become our largest geographic market in the coming years. This week, we invested $6.2 million to buy a new facility in China, which reflects our commitments to the Chinese market and supports the expected growth within this geography.
The new facility will support our R&D, production, sales and marketing and training efforts in China. We closed the transaction on July 6, 2021, and we expect to move into the new facility in the early fiscal 2022. As COVID-19 quarantines and travel restrictions have eased and market dynamics improved oil and gas projects installations have started to rebound. As a result, ZERUST oil and gas sales for the quarter were strong, increasing 141% over the prior fiscal year period. While we expect oil and gas sales will remain volatile on a quarterly basis, we are seeing growing interest in our ZERUST oil and gas solutions.
Please also note that the American Petroleum Institute, API, finally released its technical reports detailing how vapor corrosion inhibitor based technologies like the ones offered by ZERUST oil and gas can provide effective corrosion protection for the bottoms above ground storage tanks. We believe this API technical report validates our technology and will help NTIC’s long-term sales growth efforts within the oil and gas market. As a result, we believe there are substantial opportunities to drive growth throughout the remainder of fiscal 2021 and into fiscal 2022.
Turning to our Natur-Tec bioplastics business, fiscal 2021 third quarter, Natur-Tec sales were $3 million, a 27.3% increase over the prior year period. Thank you. Sorry. And a 21.7% increase from the fiscal 2021 second quarter. As you can see, Natur-Tec sales continue to recover and we’re at the highest sales levels in over 12 months, as large users of compostable plastics began reopening their facilities after prolonged COVID-19 shutdowns. We anticipate that demand for our Natur-Tec’s compostable solutions will continue to increase further as the pace of re-openings accelerates.
So to conclude my prepared remarks, I'm pleased with the strong sales and profitability performance we experienced in the fiscal 2021 third quarter. Trends across our markets are encouraging and we expect to see continued year-over-year sales and earnings growth during the fourth quarter of fiscal 2021 and into fiscal 2022. On behalf of the entire NTIC leadership team, I would also like to use this opportunity to thank all of our global employees and joint venture partners for their continued hard work and dedication.
With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2021 third quarter.
Matt Wolsfeld
Thanks Patrick. NTIC’s consolidated net sales for fiscal 2021 third quarter increased 58.2% when compared to the prior fiscal year period and were up 20.6% from fiscal 2021 second quarter sales as a result of the trends Patrick reviewed in his prepared remarks. Third quarter sales across our global joint ventures increased 70.2% over the prior year period, significantly benefiting joint venture operating income, which increased 114.6% for the fiscal 2021 third quarter compared to the prior fiscal year period.
Total operating expenses were $6.3 million, an 11.6% increase over the prior year period, primarily due to an increase in selling expenses associated with the 58.2% year-over-year increase we experienced in third quarter consolidated sales. Demonstrating the operating leverage of NTIC’s business model, operating expenses as a percentage of net sales were 40.9%, compared to 58.0% for the same period last fiscal year, and 45.9% for the fiscal 2021 second quarter.
NTIC’s reported net income of $2.1 million or net income of $0.21 per diluted share for the fiscal 2021 third quarter, compared to a net loss of nearly $1 million or a loss of $0.11 per diluted share for the fiscal 2020 third quarter. As of May 31, 2021, working capital was $26.9 million, including $5.9 million in cash and cash equivalents and $5.1 million in available for sale securities, compared to $27.1 million, including $6.4 million in cash and cash equivalents, and $5.5 million in available for sale securities as of August 31, 2020.
On May 31, 2021, the company had $26.9 million of investments in joint ventures, which were approximately 54.8%, or nearly $14.8 million was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2021 third quarter NTIC’s Board of Directors declared a quarterly cash dividend of $0.065 per common share that was payable on May 19, 2021 to shareholders of record on May 5, 2021.
So, to conclude our prepared remarks, our year-to-date financial results demonstrate that we have successfully navigated the COVID-19 pandemic. This is a result of our strong balance sheet, [asset light] business model, and commitment to providing leading corrosion inhibiting products and services, as well as bio-based and biodegradable polymer resin compounds to our global customers.
In addition, trends remain strong across all our product categories during the third quarter, which led to a record consolidated sales and strong third quarter profitability. We're excited about the direction in which we are headed and look forward to ending fiscal 2021 with a continued year-over-year sales and earnings growth.
With this overview, Patrick and I are happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] We have a question from the line of Tim Clarkson with Van Clemens.
Tim Clarkson
Hey Patrick, hey Matt. Obviously, a wonderful quarter across the board. So, hardly anything to complain about. Just a couple background questions. You know, this is a major investment $6 million in China, can you kind of explain the logic of why you needed to spend that kind of money on a new facility?
Patrick Lynch
Matt, you want to take that one.
Matt Wolsfeld
Sure. When we were looking at – the opportunity that we had in China to buy this building, you know, it was very, when we model it out, it looks like a very good investment. We had the available cash to do this. We looked at the real estate opportunities, specifically in the area that we were in. And it provided us a great opportunity to stay close to the Shanghai market where we currently are located. The existing facility that we were in, we're having difficulties as far as the lease was ending, and the zoning that that building was interchanged.
So, we – ultimately we were going to be forced to likely move several hours outside of Shanghai. So, we found this building, which allowed us to have a permit to have a lab, an R&D facility inside of it, which is something that's difficult to get inside of the Shanghai region today. So, we were able to get that environmental permit to do the R&D work that we need to do.
Additionally, it provides a better location for us to meet with customers, bring customers in into the facility to show them the R&D work we're working on, to meet with customers that are located in that area. So, ultimately, it just seemed like a very good opportunity. Additionally, from what we've seen in the past is the real estate in Shanghai is growing very quickly. So, from a stability standpoint, it seemed like a very solid investment.
Tim Clarkson
Sure. Now, I know some companies have had trouble doing business in China, what's been your experience in terms of dealing with the, kind of the odd politics of China?
Matt Wolsfeld
We haven't really – well, you can take it Patrick.
Patrick Lynch
No. Go ahead. [Indiscernible]
Matt Wolsfeld
No, as I say, we haven't really seen any of the political issues that really, you know other companies have experienced. I mean, obviously, we had some problems in the past, going back to 2014 and 2015, but that had more to do with the joint venture partner than anything, you know, with the government or any of the politics of China. So, so far, you know, we have been able to navigate that, you know the Chinese market really well. Patrick, do you have anything to add?
Tim Clarkson
Sure. So, one other question on China. Now, what's your composition in China in terms of percentage of business that's automobile related, percentage of business that's compostable related, and I guess the balance would be other industrial applications?
Patrick Lynch
Sure, I'm taking a look – as far as talking about the automotive business, I would say that the Chinese market is probably close to, you know, between 65% and 70% automotive business. As far as the Natur-Tec component of it, you know, they had, if I look at year-to-date sales, the Natur-Tec component makes up probably close to 15% of the total Chinese – the total Chinese sales that we have. You know, but that seems to be a market that is growing faster than the ZERUST industrial sales in China.
Tim Clarkson
Okay. One last question on this compostable issue, I saw that Kentucky Fried Chicken in Canada is committed to converting to compostable within a couple of years. What's the thinking out there in terms of these fast food places really accelerating the compostable part of their packaging?
Matt Wolsfeld
In our experience, the fast food chains tend to play with this, but have not made any significant commitment. And certainly, up until now, beyond some cutlery, which we sell on to – passing the chain in – on the West Coast, specifically, but not on the nationwide market or even in global market basis. And that's partly because of local mandates. So, the fast food industry is still lagging in terms of implementing real significant – making significant efforts in the compostable packaging market.
Tim Clarkson
Right. Right. Well, we'll have to see. It's – what would be your guess, what would be the incremental cost of compostable packaging, factoring, you know, you do it with more volume, how more expensive with compostable packaging be than conventional packaging?
Patrick Lynch
By now, it's not that significant. We can get fairly close. So, you're looking at maybe 10% higher cost, now doing is compostable.
Tim Clarkson
Yeah. Yeah. So, I guess probably the back end is just getting these municipalities. So they have, you know, composting facilities to take all this stuff and turning into [indiscernible].
Matt Wolsfeld
You’re also looking at an industry that is very cost driven, and if you're talking about a 10% to 15% price increase over what they're currently paying, they're not eager to do that unless it's absolutely necessary, or they have a change of heart and realize that they want to preserve the environment just because it's the right thing to do.
Tim Clarkson
Yeah. Well, the socially conscious thing is now a multi-trillion dollar industry and it's getting really emphasized with the publicly traded companies. So, it's common, it's you’re – but you're right, it's taken longer than it should have. Well, with that I’ll pass. Great quarter as always and we'll stay with you guys. Thanks. Bye.
Patrick Lynch
Thanks, Tim.
Operator
[Operator Instructions] Our next question comes from Gus Richard with Northland.
Gus Richard
Yes. Thanks for taking the questions. Nice quarter guys. Just on the [cutlery customer] that you have, you know, is there any update on you know how they're coming along in terms of ramping?
Patrick Lynch
I think the ramping slowed down a bit, particularly during because of COVID-19, and a lot of venues, particularly United States, you’re talking about University cafeterias, company cafeterias, and sports arenas being shut down for a period of time, sales slowed significantly. But now our expectations are that certainly by the end of the summer, as we wrap into the fall that as Universities reopen, people are going back to work and offices to some extent, and the sporting arenas are going to open up again, those sales would increase nicely going forward.
Gus Richard
Okay, got it. And then the gross margin performance in the quarter is a little bit better than actually about 120 basis points better than I was expecting, is that volume or mix?
Matt Wolsfeld
I can take that. It's more seen from a gross margin standpoint. I think it just has to do with the mix of the products that were being sold. We're not seeing any significant changes in the gross margin on a business unit by business unit basis. But you know, obviously, we had more sales coming through in this quarter from oil and gas than we had in prior quarters, which skews the gross margin percent a little bit.
Gus Richard
Got it. And then moving to the API technical report, it was a strong quarter and oil and gas correlated with that report coming out, and, you know, how has that sales funnel changed since the report has been published?
Patrick Lynch
I'd say no, there was no direct correlation between the two. And the impact of that on our sales funnel will not be immediate. We certainly expect this to help because like we said, it validates our technology and its applications. But I would say that it will take – it will probably ramp up slowly over the next three to five years really, before that will really go industry-wide.
Gus Richard
Okay, then is the strong performance in oil and gas just the fact that, you know, restrictions have been lifted somewhat, and you could get, you know, the customer could get in and do the maintenance, that was [indiscernible]?
Patrick Lynch
We could deliver on orders and do the implementations because of the travel restrictions have been easing.
Gus Richard
Okay, that makes sense. And then last one for me. You know, there's been a lot of supply chain issues, are you guys experiencing any, you know, perturbations in ability to get material to deliver any cost variances that are, you know, positive or negative going forward or in the quarter?
Patrick Lynch
Like everybody else, we are experiencing certain delays in raw materials and finished goods. So far, we've been able to manage and not had any significant impacts or delays for our customers or inconvenience in our customers. But we're obviously monitoring that on an ongoing basis to make sure that nothing gets out of hand.
Gus Richard
Got it. Okay, that's it from me. Thank you so much.
Patrick Lynch
Sure.
Operator
Our next question comes from Jim Dowling with Jefferies.
Jim Dowling
Yes. My question was just answered. Thank you.
Operator
[Operator Instructions] I'm not showing any further questions at this time.
Patrick Lynch
All right, then. I'd like to thank everyone for participating today and for your interest in NTIC. Have a great day.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
