Good day, ladies and gentlemen. And welcome to the Northern Technologies International Corporation’s First Quarter 2017 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

[Operator Instructions] As a reminder, today’s conference call 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, 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 like to introduce your host for today’s conference, Mr. Patrick Lynch, President and Chief Executive Officer. Sir, you may begin..

Good morning. I am Patrick Lynch, NTIC’s CEO and I’m here with Matt Wolsfeld, NTIC’s CFO. Please note that our financial results for fiscal 2017 first quarter were included in a press release issued earlier this morning, a copy of which is available at ntic.com.

During this call, we will review various key aspects of these fiscal 2017 first quarter financial results, give a brief business update, comment on our net sales and earnings guidance for the remainder of fiscal 2017, and then conclude with a question-and-answer session.

The 2017 fiscal year got off to a solid start with double digit net sales growth in our Zerust and Natur-Tec businesses. For the first quarter ended November 30, 2016, total net sales grew 38.1% to a record $9.7 million as compared to the three months ended November 30, 2015.

Broken down by business unit, this included 30% growth in Zerust industrial net sales, 35% growth in net sales from NTIC to our joint ventures, 119% growth in oil and gas net sales and 55% growth in Natur-Tec net sales.

Total sales by our joint ventures, which we do not consolidate on our income statement, increased 11% to $24.2 million for the fiscal 2017 first quarter, compared to $21.9 million for the same period last fiscal year. We believe that the increase in sales by our joint ventures comes as a result of what may be an improving global economy.

Nevertheless we continue to closely monitor our international markets and proactively work with our JV partners to strengthen market share and improve performance globally.

The 30% increase in Zerust industrial sales during the fiscal 2017 first quarter was due to higher sales to existing customers for new and existing products and increased demand from customers in the automotive, agriculture and mining sectors.

Sales by our wholly-owned NTIC China subsidiary increased nearly 130% to $1.5 million during the first quarter of 2017 compared to $680,000 for the same period last fiscal year as our strong China team continues to convert customers from our former JV partner as well as aggressively pursue new opportunities nationwide.

During the first quarter of our fiscal 2017, our China subsidiary still reported an operating loss of $275,000 in part due to the addition of essential personnel needed to take advantage of several compelling market opportunities.

This led to higher current expenses but we continue to believe our Chinese subsidiary will achieve breakeven this fiscal year in contrast to the $1.2 million operating loss incurred in fiscal 2016. Litigation against our former partner in China and Cortec Corporation in the United States continues.

Legal fees for the Cortec litigation exceeded the $320,000 during the first quarter of fiscal 2017 which included the completion of discovery, depositions and third-party expert reports.

We expect overall that the legal fees will be lower in the second quarter of fiscal 2017 compared to the first quarter but will increase again between May and August of 2017 as we prepare for and complete the trial against Cortec. We've budgeted approximately $600,000 in legal expenses for fiscal 2017 related to the Cortec matter.

During the three months ended November 30, 2016 and 2015, NTIC incurred expenses of approximately $636,000 and $486,000 respectively related to China either directly in the form of legal fees or indirectly in the form of operating losses at NTIC China.

Our oil and gas sales in the first quarter of fiscal 2017 benefitted from a $400,000 order that was postponed from the fourth quarter of fiscal 2016. As a result, sales in the quarter were up 119% compared to the same period for the prior fiscal year.

Overall volatility in oil prices and high turnover and personnel at many customers slowed our near term growth in this market during calendar 2016. We remain optimistic about our long term oil and gas market success. Turning to our Natur bioplastics business.

For the fiscal 2017 first quarter Natur-Tec sales were a record $1.6 million, a 55% increase over the same period last fiscal year. This increase was due to increased sales in North America to our domestic distribution network as well as higher sales of finished products by NTIC’s majority owned subsidiary in India.

During the first quarter of fiscal 2017 we continued to see strong demand for finished products, such as compostable bags and cutlery in North America as a direct result of increases in zero-waste initiatives as well as favorable local and state level waste management regulations.

We anticipate further adoption of our product lines by customers throughout Europe, Asia and North America during the remainder of fiscal 2017 and beyond as we plan to continue to target and convert additional customers globally to use our sustainable solution.

Overall I am pleased with our results for fiscal 2017 first quarter which were driven by strong global sales growth across all our businesses. We expect fiscal 2017 second quarter results will be better than last year's. However it is important to note that our second quarter is typically our weakest from a sales perspective.

This is primarily due to the long Chinese New Year period, the North American holiday season and overall less corrosion taking place at lower winter temperatures in the Northern Hemisphere. We remain focused on the execution of our business plan and expect current trends will continue to improve throughout the rest of the year.

At this point, let me turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2017 first quarter..

in the quarter income to support joint ventures which was previously broken out in our income statement is now included in general and administrative expenses. NTIC reported net income of $298,000 or $0.07 per diluted share for the fiscal 2017 first quarter compared to a loss of $234,000 or $0.05 per common share for the fiscal 2016 first quarter.

As of November 30, 2016, working capital was $15.9 million, including $2.5 million in cash and cash equivalents and $1.7 million in available for sale securities, compared to $16.9 million, including $3.4 million in cash and cash equivalents and $2.2 million in available for sale securities as of August 31, 2016.

At November 30, 2016 the company had $20 million of investments in joint ventures of which approximately 63% or $12.6 million is in cash with the remaining balance invested in working capital. Turning now to NTIC’s annual guidance.

We’re reconfirming our guidance for the fiscal year ending August 31, 2017 and expect net sales to be in the range of $37.5 million and $39 million. The company also anticipates net income attributable to NTIC to be in the range of $3.4 million to $3.9 million or between $0.75 and $0.85 per diluted share for fiscal ’17.

The range of guidance is due to the significant risks and uncertainties facing our business, including without limitation the risks and uncertainties related to the change in our China operations and in litigation and other risks and uncertainties. With that update, will now answer any questions you may have..

[Operator Instructions] And our first question comes from the line of Tim Clarkson with Van Clemens & Co..

Hey, great quarter guys. Just parenthetically, looking at those revenue numbers, with that kind of revenue growth, you would have normally even expected stronger profitability but obviously the legal costs and the start-up costs in China slowed that down a little bit. But great quarter and sounds like China is really starting to turn around for us..

We'd like to think so..

Now on the Chinese side of it, do you think you've gotten all the low hanging fruits from the business out there or is there more in terms of getting the business we lost to the joint venture or is there more to get?.

There's more to get and we continue to get additional customers in every month. Just the transition has taken us longer than we initially anticipated but we still see regular movement as customers that used to buy from our former JV switched over to NTIC China..

In terms of new applications in China, what are there -- are they any different than the ones here in the United States or are they pretty much the same?.

There are new applications outside of -- this JV in China was very focused on the automotive market. The new subsidiary is also expanding into other market segments and we are seeing growth in those other segments based on both existing products and new products that were introduced in China..

Okay, good.

On the Natur-Tec, could you just give a little color in terms of -- I know you announced a joint venture with Cargill, what’s that about, what's the -- why did Cargill come to Northern Technologies, Natur-Tec, and what's the potential there?.

It’s a partnership. Specifically we improved or let’s say, enhanced a Cargill product, specifically for injection molding resin that allows a better finished product to be injection molded. And so Cargill is very eager to help us sell more of our products, because it means they get to sell more of theirs..

Okay.

Is this a blended product and starch-based along with your oil piece of it, is that what you're doing there?.

It's not the starch based, we're talking PLA, so polylactic acid, plus our Masterbatch compound that we add in there, that in the end gives us a stronger product with better heat deflection and I guess mechanical strength..

Sure, sure.

And you didn't really get any revenues from that joint venture yet, that just started in the first quarter, right?.

It not a joint venture, it's just a partnership..

Well, from the partnership -- there's no real revenue yet from that partnership in the first quarter, right?.

Nothing significant to talk about yet..

Okay, good. Really good quarter and it sounds like we're certainly through the worst of it in terms of the China stuff and now we can look forward to some meaningful growth out of China. Thanks..

[Operator Instructions] And our next question is from the line of Charlie Pine with Van Clemens..

Hello, good morning gentlemen. Just a couple of questions. Regarding Natur-Tec, with the nice sales boost that you're seeing for last year’s comp, I can't quite recall I think you might have talked about it in the Q4 report.

But at what point on a quarterly run rate do you need to get to flip over and start making money in Natur-Tec? Are you close at now at this point or how much more additional revenue do you need on a quarterly basis to get there?.

No, out of $6 million run rate, Natur-Tec is basically a breakeven. I mean so we're seeing much now where it’s either plus a few dollars or minus a few dollars but certainly with the run rate we are now we're comfortable seeing that we are operating at breakeven..

Okay, great. That's good to hear now. And in the oil and gas segment, obviously you alluded to the fact that a lot of the sales were to the timing switch on that large order.

Are you seeing as far as what -- how things look in the second quarter and maybe going into the third quarter, with commodity prices firming up now and sort of stabilizing in the low $50 range, has quoting activity begun to pick up or are you actually starting to get -- beginning to see RFPs also starting to increase?.

We are getting a lot of increased activity from both the past and prospective customers as [indiscernible] quotes and new proposals.

We expect that in the next month or two budgets for our clients will be finalized and drilled down which shouldn't mean we see an uptick in our sales activities, or in our actual sales in the third and fourth quarter of this fiscal year..

So as those things kind of come in and the budgets are solidified, by the time it gets -- by the time it filters down to you, it should just -- the increased volumes should start showing up in increased revenues in the second half of the year..

Correct..

And as far as the numbers, did you add any new significant oil and gas customers or additional new customers at all in Q1 or are you at the same level that you were in Q4?.

We didn't have any new customers in Q1. If we add new customers it'll be as a result of the quoting and proposals we prepared in Q1 and Q2, that should come in Q3 and Q4..

Thank you. And our next question comes from the line of [Richard Mackey with First Associates] [ph]..

Good morning, thank you for taking my call. And I am just trying to understand how the earnings are sort of laid out for the rest of the year. If you annualize your revenue for the first quarter, you get approximately at the high end of your revenue range. And yet, if you annualize the first quarter earnings you only get $0.28.

So you must be expecting significant margin improvements going forward and yet you said the second quarter is traditionally your weakest, I guess all of that's going to be back end loaded. And I'm just wondering where are those margin improvements coming from? You are going to need some pretty big quarters..

Yeah, and one of the things -- one of the things that occurred in Q1 is that there were significant amount of expenses we kind of alluded to before. We had roughly $320,000 plus of legal expenses in three quarters which is multiple of what we traditionally have as far as -- sorry, in the three months.

We're traditionally at a run rate of around $20,000 to $30,000 where all of a sudden because of the activity we had in Q1 there's a huge -- huge increases in expenses. We also expect, as things are going on in China, that China had a loss, as we said of about US $300,000 in Q1.

Our expectations are that China is going to be able to eliminate some of those losses, and certainly they’re going to be profitable in Q2 given that Chinese New Year takes place and Q2 is just traditionally slow. We certainly expect to have increased profitability in Q3 and Q4 related to China.

So just looking at that US $600,000 swing in operating income, that's a significant increase to the to the bottom line.

Also looking at some increased revenue from oil and gas and also with what we're looking at from some of our joint ventures which traditionally have stronger third and fourth quarters than first and second quarters, we feel like our Q1 is kind of a first step where we're at $0.07 per share now.

We look to increase that in second quarter and then significantly increase it from there in third and fourth quarter so that we would be at -- in the middle of where our guidance is. You're right if you take the $9.7 million that we had for Q1 and you multiply that by 4, you're already at the high end of our sales guidance.

If we have a Q2 where we expect to come out and things are looking good, then we could certainly raise at least our revenue guidance. But right now we're being pretty conservative as far as what we think we're capable of doing. And one of the things we'll be focusing on for the remainder of the year is cost control and expense control.

Hope that answers your question..

Yes, it’s great. Thank you. It helped a lot..

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Mr Patrick Lynch for any closing remarks..

I'd like to thank everyone for participating today and for your interest in NTIC. Have a good day..

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..