Northern Technologies International (NASDAQ:NTIC) Corporation (NASDAQ:NTIC) released its fourth quarter fiscal 2023 earnings, reporting consolidated net sales of $20.7 million, a 2.3% increase compared to the same period in the previous year. Despite a decrease in net sales from joint ventures and a small net loss in China, the company remains optimistic about fiscal 2024, focusing on strengthening their ZERUST Oil and Gas and Natur-Tec businesses.
Key takeaways from the call include:
- The increase in consolidated net sales was primarily driven by a 53.1% rise in ZERUST Oil and Gas net sales and a 2.7% increase in Natur-Tec net sales. However, ZERUST industrial net sales declined by 3.6%.
- NTIC's joint ventures experienced a decrease in net sales, attributed to inflation, raw material and energy cost increases, and geopolitical conflicts impacting market demand.
- NTIC China recorded a small net loss during fiscal 2023.
- The company reported net income of $939,000 or $0.10 per diluted share for the fourth quarter and $2.9 million or $0.30 per diluted share for the full year.
- The company restated their second and third quarter financial statements due to the accounting treatment of employee retention tax credits.
- The company had working capital of $23 million as of August 31, 2023, with $5.4 million in cash and cash equivalents. Outstanding debt was $6.4 million, including $3.6 million in borrowings under the existing revolving line of credit.
- The company generated $5.5 million of operating cash flows for the 12 months ended August 31, 2023. The company had $23.7 million of investments in joint ventures as of August 31, 2023.
- The company declared a quarterly cash dividend of $0.07 per common share payable on August 16, 2023.
During the earnings call, Patrick Lynch, a representative of the company, highlighted ongoing R&D projects in Europe, the United States, and India that could significantly impact the company's bottom line in the next 12 months. In response to the decline in the German joint venture's results, Lynch attributed it to factors such as increased energy prices due to the war in Ukraine and the loss of a significant customer. Matt Wolsfeld confirmed the company received $2 million from the government in the first quarter, with deductions for tax withholding, legal expenses, and other costs, resulting in a net impact of about $775,000 recognized in Q4. The cash is currently listed as a joint venture dividend receivable in the current asset on the balance sheet. Despite these challenges, NTIC remains optimistic about their long-term prospects.
Full transcript - Northern Technolo (NTIC) Q4 2023:
Operator: Good day and thank you for standing by. Welcome to Northern Technologies International Corporation Fourth Quarter Fiscal Year 2023 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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 decided 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 would now hand the conference over to your speaker host for today, Patrick Lynch, CEO. Please go ahead.
Patrick Lynch: Good morning. I am Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our fourth quarter and full year fiscal 2023 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 2023 fourth quarter and full year financial results, provide a brief business update, and then conclude with a question-and-answer session. Fiscal 2023 marked NTIC's third year of consecutive record sales, despite the economic challenges growing in both Europe and China as well as rising interest rates in the U.S. Our continued sales growth success demonstrates increasing value we provide our global customers as well as the efficacy of our strategic focus on diversifying our products end markets and geographies. I am particularly encouraged by our top-line results within the large oil and gas and compostable plastics markets. While fiscal 2023 proved to be highly successful with respect to diversifying our product mix and our end markets. At the same time, we also found sales conditions for our core ZERUST industrial solutions to be very challenging in both Europe and China. Throughout the fiscal year, our European joint ventures felt the direct pressures of persistent inflation, raw material and energy cost increases, as well as the indirect dampening effects of geopolitical conflicts on market demand. These trends impacted both top-line results and overall profitability during fiscal 2023. As we enter fiscal 2024, demand within our North American ZERUST industrial market demand stable, and we believe we are well positioned to develop additional strength within our ZERUST Oil and Gas and Natur-Tec businesses. We will continue to invest strategically in bolstering our infrastructure throughout fiscal 2024 to support our long-term expansion needs. We will also be focused on improving our cost structure and profitability by having additional operational efficiencies strengthen our gross margins. As a result we expect fiscal 2024 to be another good year of top line growth and improved bottom line profitability. So with this overview, let's examine the drivers for the fourth quarter in more detail. For the fourth quarter ended August 31, 2023, our total consolidated net sales increased 2.3% to a fourth quarter record of $20.7 million, as compared to the fourth quarter ended August 31, 2022. Broken down by business unit, this included a 53.1% increase in ZERUST Oil and Gas net sales and a 2.7% increase in Natur-Tec net sales. These increases were harshly offset by a 3.6% decline in ZERUST industrial net sales. Our total net sales for the fiscal 2023 fourth quarter by our joint ventures, which we do not consolidate in our financial statements, decreased year-over-year by 6.6% to $24.2 million. Excor Germany, our largest joint venture, experienced a 24% decrease in net sales during that period. The year-over-year decline was due primarily to softer demand across the territories serviced by our global joint ventures as I explained previously. Fiscal 2023 fourth quarter net sales by our wholly owned NTIC China subsidiary decrease by 9.6% to $3.5 million due to weaker economic conditions on a year-over-year basis. On a sequential basis, NTIC China sales increased by 6.4%, which was the second consecutive quarter of higher sales sequentially. Stabilizing demand trends are encouraging and we are cautiously optimistic as demand in China will improve throughout fiscal 2024. Despite challenging conditions in China during fiscal 2023, we remain committed to the Chinese market and therefore continue to take steps to enhance and protect our Chinese operations as we continue to believe China will likely become our largest geographic market in the future. However, it is important to note that NTIC China recorded a small net loss during fiscal 2023 compared to net income over $1 million in each of the 3 years before the COVID pandemic began. Now moving on to ZERUST Oil and Gas. Fiscal 2023 was a transformative year for ZERUST Oil and Gas as full year oil and gas sales increased 69.3% to an annual record of $7.8 million. For the fiscal 2023 fourth quarter, sales increased 53.1% to a quarterly record of $2.4 million. Demand continues to grow from both new and existing customers for our ZERUST Oil and Gas solutions, which today still focus primarily on protecting above ground oil storage tanks and pipeline casings from corrosion. As a result, we believe fiscal 2024 will be another strong year for ZERUST Oil and Gas as this business further scales and continues to contribute to profitability. Turning to our Natur-Tec bioplastics business. As expected, Natur-Tec sales remain strong during the fourth quarter and increased 2.7% year-over-year to a quarterly record of $4.9 million. We expect Natur-Tec sales growth will remain strong 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 full year and fourth quarter financial results reflect the progress we are making towards growing our business and creating significant value for our shareholders. While core profitability during the fourth quarter was below our plan, primarily due to the challenging conditions in Europe and China, we are working hard to improve our cost structure, maintain a strong gross margin, and leverage the investments we are making across our infrastructure by growing sales. Before I turn the call over to Matt, I want to acknowledge the commitment of our global team of both employees and joint venture partners. Our success throughout the fiscal year 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 2023 fourth quarter.
Matt Wolsfeld: Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 7.7% in fiscal 2023 to an annual record and grew 2.3% in fiscal 2023 fourth quarter, because of the positive trends Patrick reviewed in his prepared remarks. While sales across our global joint ventures declined 6.6% in the fourth quarter. Joint venture operating income increased 39.6%, compared to the prior fiscal year period as a result of a onetime gain on the liquidation of a previously written off investment in our former joint venture in China, Tianjin Zerust of nearly $2 million. For fiscal 2023, sales across our global joint ventures decreased 3.3%, while joint venture operating income increased nearly 11%, compared to the prior fiscal year. Total operating expenses for the fiscal 2023 fourth quarter increased 23.4% to $9.3 million and for the fiscal 2023 increased $17.6 million to $33.4 million. Higher operating expenses for both the fiscal 2023 fourth quarter and the full year were primarily due to increased personnel expense, other inflationary increases in expenses and expenses incurred in connection with our new indirect majority owned subsidiary formed to assume the operations of a former joint venture in Taiwan. Operating expenses as a percentage of net sales were to 44.8% for the fourth quarter, compared to 37.1% for the prior fiscal year period. For fiscal 2023, operating expenses as a percentage of net sales were 41.8%, compared to 38.3% for the prior fiscal year. Gross profit as a percentage of net sales was 36.5% during the 3 months ended August 31, 2023, compared to 30.3% during the prior fiscal year period. The 620 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures and the increased sales of higher gross margin ZERUST Oil and Gas Solutions. Gross profit as a percentage of our net sales was 34.8% for fiscal year ended August 31, 2023 compared to 31.1% for the prior fiscal year. NTIC reported net income of $939,000 or $0.10 per diluted share for the fiscal 2023 fourth quarter compared to $648,000 or $0.07 per diluted share for the fiscal 2022 fourth quarter. For the full year, NTIC reported net income of $2.9 million or $0.30 per diluted share, compared to $6.3 million or $0.66 per diluted share for the fiscal 2022 full year. For the fiscal 2023 fourth quarter, NTIC's non-GAAP adjusted income reduced primarily for the onetime gain related to the liquidation of Tianjin Zerust, which was $280,000 or $0.03 per diluted share compared to non-GAAP adjusted income of $753,000, or $0.08 per diluted share, for the fiscal 2022 fourth quarter. For fiscal 2023, non-GAAP adjusted income was $2.6 million or $0.27 per diluted share, compared to $3 million or $0.32 per diluted share for fiscal 2022. A reconciliation of GAAP to non-GAAP financial measures is available in our Q4 and full year earnings press release that was issued this morning. As of August 31, 2023, working capital was $23 million, including $5.4 million in cash and cash equivalents compared to $23.2 million including $5.3 million in cash and cash equivalents, as of August 31, 2022. As of August 31, 2023, we had outstanding debt of $6.4 million. This included $3.6 million in borrowings under our existing revolving line of credit compared to $5.9 million as of August 31, 2022. We generated $5.5 million of operating cash flows for the 12 months ended August 31, 2023, including $2 million in the fourth quarter, which was driven primarily by stronger core profitability, lower inventory levels, and the onetime gain from the liquidation of Tianjin Zerust. On August 31, 2023, the company had $23.7 million of investments in joint ventures, of which 53.6% or $13.8 million was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2023 fourth quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable on August 16, 2023 to stockholders of record on August 2, 2023. Before we turn the call over to questions, I want to address the 8-K filing we filed this morning and the amended 10-Q restating our second and third quarter financial statements. At the start of fiscal 2023, we engaged Deloitte, our tax advisors, to analyze NTIC's qualifications for employee retention tax credits under the CARES Act. They determined that we qualified for $1.1 million in credits and provided detailed support for that position. As a result, NTIC filed for the payroll credits with the IRS and recorded the credits in second and third quarter based on the application date. During the year-end closing process, the accounting for the credits was scrutinized and we determined that under U.S. GAAP Accounting, we did not allow for the recording of the credits. While we believe the employee retention credits that we applied for in fiscal Q2 and Q3 are more likely than not to be collected, we are unable to deem the receipt of the credits as probable under U.S. GAAP. As a result, we restated NTIC's previously issued Q2 and Q3 financial statements, reflecting a decrease in net income of $474,000 for Q2 and $466,000 for Q3. We filed with the SEC this morning amendments to our second and third quarter 10-Qs with the restated financials, as well as an 8-K dealing all the line item changes, and we plan to update investors on the progress we are making collecting the employee retention tax credits. So with this overview and to conclude our prepared remarks, we continue navigating a fluid business environment, while continuing to pursue our product, end market and geographical diversification strategies. We're seeing stable North American demand trends a robust growth across our global oil and gas and bioplastics markets. While the economic environment remains uncertain, we believe fiscal 2024 will be another good year of sales and increased profitability for NTIC. And we're excited by 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 & Company Inc.
Tim Clarkson: Looks like it was a solid quarter again. Yes, I was trying to figure out why it was only $0.30. I was adding up the other quarters and it didn't add up. So that's the answer is this accounting snafu. So there you go. I was just curious, how many, how much expenses did we have in Taiwan for the fourth quarter?
Patrick Lynch: If I'm, I don't have it right in front of me as far as exactly in fourth quarter, but I can tell you that for the full fiscal year, we had expenses of about 600 and let's see $660,000 of expenses in Taiwan that were included in operating expenses that were previously would be a part of the JV operations. So, they're just new expenses that are related to the fact that Taiwan is now consolidated rather than previously being a joint venture.
Tim Clarkson: Do you feel good about the decision to consolidated like that?
Patrick Lynch: Taiwan is doing well. It was a pretty smooth continuation of the business. I don't think Taiwan is going to be, I wouldn't call it a significant joint venture from the standpoint of the bottom-line income contribution. But it probably added and look at kind of the revenues that are generated from that entity, let's see probably contributed about 1 million to 1.2 million of income. So certainly, that level of expense that I talked about, a lot of that had to do with transactional expense of cleaning up the old entity and implementing kind of the new entities that run rate of expense will go down in the future.
Tim Clarkson: Right. On the Oil and Gas thing, on the deals that you've done so far, are customers pleased with what they're getting?
Patrick Lynch: Yes. I mean we've been very pleased. So we're getting recent business in all the geographies where we're doing business. And we also have some very large projects going that should they come to fruition in the coming year, will make a big significant difference.
Tim Clarkson: In terms of implementation, is it pretty elegant technology? I mean, you guys can do it without having to worry about scripts?
Patrick Lynch: Well, we haven't had any problems so far. So I think we've got a pretty good system going.
Tim Clarkson: On the compostable front, looks like you had some decent growth again. Would you say things are kind of wise on the restaurant end in terms of the COVID stuff?
Patrick Lynch: Yes.
Tim Clarkson: And in terms of, is there any more innovation that needs to occur on the technology and to try to make this compostable thing a bigger deal? Or is at this point more on the governmental and mandating use of the product?
Patrick Lynch: Oh, it's a combination, but we certainly think that we continue to innovate and make R&D advances. In fact, we're working on several large projects in Europe, United Stand and India at the moment. And again, if there's any of those coming fruition in the next 12 months, it would make significant difference to our bottom line.
Operator: [Operator Instructions] Our next question comes from the line of Walter Ramsley from Walrus Partners.
Walter Ramsley: Thanks for taking the call. Got a couple of questions. The German joint venture, the results there were down quite a bit. Is that primarily a timing issue where you're going to catch up in future quarters? Or has the business actually slowed down there? And if it has, what's going on?
Patrick Lynch: Well, in Germany, in particular, you're talking about several factors. One, because of the war in Ukraine and the sanctions that the West put on Russia, Russia in turn increased energy prices. So the cost of energy and plastics in Europe have gone up dramatically, which is putting a bit of a squeeze in our margins. In addition to that, Germany did lose one significant customer, and that's going to, it's going to be a few months or actually maybe a couple of quarters before they can recover from that. So the economy in Germany also is also being impacted again, by the war, that consumer optimism is not where it used to be so that the overall economy in Germany is facing down [indiscernible].
Walter Ramsley: And the other question I have has to do with liquidation of the old China joint venture, did your company actually collect the money out of that liquidation process? Or could you just explain what happened there actually? Is that just an accounting entry or did the company actually get some money from that?
Matt Wolsfeld: No, I'm glad to say that we actually did receive the cash out of China. The money had been sitting there in, the money had been sitting in a bank in China and was taken by the essentially being held by the government as part of the liquidation from the, from when we terminated the joint venture in 2015. And they've been sitting there and we're going through a liquidation process since then. The company, NTIC that owned Tianjin Zerust received $2 million from the, essentially from the tax authority and from the government, in first quarter, but we received an announcement in fourth quarter that everything was finalized. So, you have some deductions from the $2 million that we received, that you have tax withholding that came out of it, legal expenses that came out of it. It's obviously a minority, there's a minority interest from the standpoint that we own 60% of a CN. And then there was other expenses that kind of came out of it. The net impact to NTIC was about $775,000 recognized in Q4.
Walter Ramsley: And on the balance sheet as of August 31st, is the cash on there, or is that still showing as a receivable?
Matt Wolsfeld: The cash is not on there. The cash is sitting as a receivable. It's listed as a joint venture dividend receivable in the current asset.
Operator: I would now like to turn the conference back over to Patrick Lynch for closing remarks.
Patrick Lynch: Just wanted to thank everybody for joining us this morning and have a good week.
Operator: This concludes today's conference call. This year for participating. You may now disconnect.
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