NTIC - NASDAQ

Good day, and thank you for standing by, and welcome to the NTIC Third Quarter twenty twenty five 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. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press 11 again. 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 the 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 Northern Technologies International Corporation's most recent and annual report on Form 10-Ks, subsequent quarterly reports on Form 10-Q, and recent press releases. Please read these reports and other future filings that Northern Technologies International Corporation will make with the SEC. Northern Technologies International Corporation disclaims any duty to update or revise its forward-looking statements. I would now like to hand the conference call over to your speaker today, Patrick Lynch. Please go ahead.

Good morning. I'm Patrick Lynch, Northern Technologies International Corporation's CEO, and I'm here with Matthew Wolsfeld, Northern Technologies International Corporation's CFO. Please note that a press release regarding our third quarter 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 third quarter fiscal 2025 financial results, provide a brief business update, and then conclude with the question and answer session. Please note that when we discuss year-over-year performance, we are referring to the third quarter of our fiscal 2025 in comparison to the third quarter of last fiscal year. For the third quarter of fiscal 2025, we delivered both sequential and year-over-year growth in consolidated net sales, reflecting strength across many aspects of our business despite ongoing global economic uncertainty. This performance underscores the dedication of our team and our continued focus on supporting existing customers, expanding global relationships, and scaling in high-growth end markets. Gross margin was a particular highlight in the quarter, reaching 38.4%, an increase on both a sequential and year-over-year basis, which reflects the differentiated value we provide our global customer base. At the same time, macroeconomic pressures, especially in Europe, continue to weigh on the profitability of many of our joint ventures. Additionally, as part of our long-term growth strategy, we continue to make planned investments in our oil and gas business, which contributed to higher operating expenses. While macroeconomic pressures and higher operating expenses have impacted third quarter and year-to-date profitability, we expect improvements in the fourth quarter and continued progress in fiscal 2026. So with this overview, let's examine the drivers for the third quarter in more detail. For the third quarter ended 05/31/2025, our total consolidated net sales increased 4% to $21,500,000 as compared to the third quarter ended May 2024. Broken down by business unit, this included a 7.1% increase in Xero's Industrial's net sales, partially offset by a 5.3% decrease in

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 4% in the third quarter of fiscal 2025 to $21,500,000 because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures decreased 9.3% in the third quarter. Joint venture operating income decreased 12.9% compared to the prior fiscal year period, primarily due to a decrease in equity income from joint ventures, which was primarily driven by lower sales at most of NTIC's joint ventures. Total operating expenses for fiscal 2025 third quarter increased 7.6% compared to the prior fiscal year period, to $9,700,000, primarily due to increased personnel costs and strategic investments we are making to support expected growth in the second half of the year within our oil and gas business. As a percentage of net sales, operating expenses were 44.9% for the third quarter compared to 43.4% for the prior fiscal year period. Gross profit as a percentage of net sales was 38.4% during the three months ended 05/31/2025 compared to 38.2% during the prior fiscal year period. The 20 basis point increase was primarily a result of a more profitable mix of sales and our ongoing efforts to improve gross margin. NTIC reported net income of $122,000 or 1¢ per diluted share for the fiscal 2025 third quarter compared to $977,000 or $0.10 per diluted share for the fiscal 2024 third quarter. For the fiscal 2025 third quarter, NTIC's non-GAAP adjusted net income was $228,000 or $0.02 per diluted share, compared to the non-GAAP adjusted income of $1,100,000 or $0.11 per diluted share for the fiscal 2024 third quarter. A reconciliation of GAAP to non-GAAP financial measures is available in our third quarter fiscal year 2025 earnings press release that was issued this morning. As of 05/31/2025, working capital is $21,700,000, including $6,800,000 in cash and cash equivalents compared to $23,700,000 including $5,000,000 in cash and cash equivalents as of 08/31/2024. As of 05/31/2025, we had outstanding debt of $10,100,000. This included $7,400,000 in borrowings under our existing revolving line of credit, compared to $4,300,000 as of 08/31/2024. Despite the recent increase in our revolving line of credit from $8,000,000 to $10,000,000 to allow for future flexibility, reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus for the remainder of fiscal 2025 and into fiscal 2026. We generated $3,800,000 in operating cash flow for the nine months ended 05/31/2025. At quarter end, the company had $27,100,000 of investments in joint ventures, of which 49.7% or $13,500,000 was in cash, with the remaining balance primarily invested in other working capital. During the fiscal 2025 third quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on 05/14/2025 to stockholders of record on 04/30/2025. Recall, we temporarily adjusted our quarterly dividend to 1¢ per share as a part of our disciplined approach to managing our cash and navigating through this dynamic global environment. To conclude our prepared remarks, we remain committed to our long-term growth opportunities. We are confident that our strategic priorities and financial discipline will drive sustainable growth, improving profitability, and value for our shareholders. With this overview, Patrick and I are happy to take your questions.

To withdraw your question, please press 11 again. Please. And one moment for our first question. Our first question will be coming from Timothy Clarkson of Van Clemens. Your line is open, Timothy.

Hey, guys. Improved quarter. You know, it's sometimes hard to tell when you're focused just on net earnings. So I was looking at

You know, the pretax or operational

Profits from the previous quarter versus this, and, you know, there's a significant improvement from the second quarter, obviously.

Yes. No. It certainly was better, and I certainly think we're trending now and headed in the right direction. I mean, looking across kind of all the different business units,

Good. Hey. So, you know, just on a big picture basis, when you look at this

Just about every business unit took a step forward going from Q2 to Q3.

Oil and gas thing, you know, when you're trying to get one of these guys to switch from the older technologies to your newer technology, now on the front end, is your technology cheaper on the front end?

Compared to traditional methods, yes.

Yep. Yep.

You know, the electrolysis stuff.

I'm sorry. I didn't understand what you were saying. Yeah. So, I mean, if it you know, let's say that you're a customer and you're looking

To switch, you know, from the older technology, which uses the, you know, the electricity deal. Okay. And yeah. Yeah. Or and you're gonna switch to this new technology. I mean, on just on the front end, is it cheaper or more expensive or about the same on the front end when you're trying to treat the tank?

It's much easier installation than the it's it's much easier installation. And, basically, you're spending a lot less money, and it's getting the protection, and you're getting and ours works better for a longer period of time.

Oh, sure. I mean, there's no question about the long term, but you're dealing with humans who have a tendency to be kind of insect-like. And then, you know, if the benefits are in ten years for all these people, you know, that's just an eternity. But at least if on the front end, it's easier you save money, you know, that's a benefit immediately that they can justify the switch. And then, of course, you know, the longer-term benefits are way more significant, but that's important. Now what's the in general, on a quarter-to-quarter basis, what's the additional spending that you're doing on sales this year versus last year? What's the additional amount of money you guys are spending per quarter on the sales effort for the oil and gas?

You're talking primarily about personnel, really, in terms of that. Gas in various Yeah. Regions around the world. That have experience in the oil and gas industry and in the kinds of areas that we like. And that should basically make a cluster conversion happen faster.

Right. But what would be the total incremental cost of that we're paying up front, the investments we're making right now? Per quarter versus what we're doing, you know, a year ago before we started making this big rollout with the sales expense.

Well, Timothy, if you look at it if you look back to, like, our fiscal 2023, fiscal 2024 from an oil and gas standpoint, Yeah. In North America, we averaged about $4,000,000. In the current year, we're projected to spend about $5.3 million. So we've got about $1,300,000 of additional investment in personnel that we've done over the past twelve plus months.

So but that $1,300,000, that's over a twelve-month period, not over a quarterly period? Correct. Right. So it'd be $3,400,000 maybe per quarter is the additional expenses on the oil and gas.

Yeah.

Right. Right. And then, of course, the other issue is there's a you know, it's a business that's clumpy so that you, you know, you'll see a lot of the results on one quarter versus another quarter.

Yeah. And I think I think you'll certainly see a step up in revenue kind of going from Q3 to Q4 as well from an oil and gas standpoint given given kind of where we are in the quarter so far. And expectations of backlogs and things like that. Certainly would expect Q4 to be stronger than Q3 from an oil and gas standpoint.

Right. Now switching to China, that was a strong quarter for those guys. I mean, is China now profitable?

China is profitable. China has been

Profitable for for some time. What's nice is that we're seeing, you know, China as a standalone. You know, if I look back over the past, you know, three years, it certainly is a nice trend line from a revenue standpoint. I mean, if I look back to kind of the lows that we saw kind of coming out of COVID in in our fiscal 2023, you know, first quarter, second quarter, third quarter, where we're at, like, you know, $2.6 million to $2.8 million in revenue per quarter, you know, now putting forth a quarter of $4,200,000, you know, shows significant growth in that region. So it is profitable. It is contributing. And it looks like what the Chinese are doing from a, you know, stimulating their economy standpoint, that we are, you know, kind of also increasing our revenues accordingly. Yes. Remember that Right. Primarily domestic consumption in China, not for export.

Right. Right. Now the electric cars, I mean, do they still need some of the technology you have to prevent rust and corrosion? Yes. Just less of it than the traditional

Combustion engine.

Yeah. Last, but they're making a hell of a lot of electric cars. So Well, on a on a basis, yeah, there's less

If they're making a hell of a lot of cars, you're gonna use a lot more material, obviously.

Yeah.

Yep. Okay. Well, good. I'm good. I'm oh, one last question on the compostable

Stuff. Is it what what's new there? Is it is business pretty much as usual, or are there any exciting new areas you're seeing on the compostable side?

Well, there's one project we're working on. It's a little too early to talk about revenues. But, I mean, historically, one of these problems you had with the compostable packaging is the water vapor transmission rate is pretty high. I mean, pretty permeable, so there's limits to what you can actually package in it on a convenient basis. Now say that we, at least in the laboratory, have managed to fix that problem. There is a possibility of scaling that up and finding significant applications in food packaging with that way. We're right now looking to do some soon start some scale-up production of that in that area. And we probably will see revenues if it all works out in the next two years or so.

Great. Okay. Thanks. I'm done. Thank you.

And one moment for our next question. Our next question will be coming from Gus Richard of Northland Capital Markets. Your line is open.

Hey. Good morning. I had a couple of questions. I just want to walk through the strength in the gross margin. When I look at it on a sequential basis, mix really doesn't imply gross margin should be up as much year on year.

It's right in the right ballpark. And I'm just wondering, was this Q2 a weak

Gross margin quarter? Or what were the drivers sequentially in the improvement?

Yeah. I think I think you certainly saw

Q2 as being a weak quarter. I think you also see kind of the continued, you know, kind of continued improvement that we're making in trying to, you know, be as efficient and effective as we can with the products that we're selling. So, you know, it's kind of a combination of it's it's kind of a combination of both, Gus. Got it. And then you were looks like you're hiring heavily for oil and gas, I just wondering

You know, are this to harvest new customers? Is it to service new regions?

You could explain sort of where you're going there, that'd be helpful.

It's a combination of things. We're looking to cover broader geographies and also go after new applications.

Geographies and applications? Yes. I mean, we're now building up our

Presence in The Middle East specifically, but we're also getting, I mean, new opportunities in South America and in Africa.

Got it. And then the last one for me,

You know, you talked about Nature Tech, some large opportunities, and I was just wondering if you could kind of

Give us a sense on, you know,

Relative size and timing of those opportunities.

I was just mentioning with with Tim a second ago. The project that we're working on right now is trying to find applications in compostable plastics. In food in in food packaging. And what historically has been the problem is that we compostable plastics are too permeable so it can't contain gases and liquids. You know? And still still be compostable. We think we've found a way of solving that problem. And now we're trying to figure out, can you seal it up? And if if so, what food applications can you be going after? But we have some significant interest in that area, so we're we're we're we're we're very confident that we we should be able to develop something interesting over the next year or two.

Got it.

Got it. Helpful. Thank you very much.

And I would now like to turn the conference back to Patrick for closing remarks.

Thank you very much for calling today. Hope you have a nice week.