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

[Operator Instructions] 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. Matthew Wolsfeld, CFO. Sir, you may begin..

Good morning. I am Matt Wolsfeld, NTIC’s CFO. Patrick Lynch, NTIC’s CEO is currently traveling internationally, so he asked me to lead this conference call. Please note that our financial results for fiscal 2017 second quarter were included in our 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 our fiscal 2017 second quarter financial results, give a brief business update, comment on our net sales and earnings guidance for fiscal 2017, and then conclude with a question-and-answer session. Global demand has remained strong for our core Zerust industrial products.

For our second quarter ended February 28, 2017 total consolidated net sales increased 13.5% to $8.7 million compared to the three months ended February 29, 2016.

Broken down by business units, this included a 23.6% growth in and Zerust industrial net sales of 36% decline in net sales in NTIC of the sales from NTIC to our Zerust joint ventures, a 45% decline in oil and gas net sales and 14.8% growth in Natur-Tec sales.

Total sales by our joint ventures which we do not consolidate in our financial statements grew to nearly $23 million for fiscal 2017 second quarter compared to $20.1 million for the same period last fiscal year.

The 14.1% increase in JV sales was a result of improved global demand with good execution across our global joint ventures to increase market share. We continue to closely monitor our international markets and proactively work with our joint venture partners to strengthen market share and improve global performance.

The 23.6% increase in Zerust industrial sales during fiscal 2017 second quarter was due to higher sales to existing customers for new and existing products and increased demand across many of our end markets including automotive, agriculture and mining sectors.

Sales by our wholly-owned subsidiary in China increased 94.1% to $1.7 million during the second quarter of 2017 compared to $756,000 for the same period last fiscal year as our strong China team has continued to convert customers from our former joint venture partner as well as aggressively expanding into market sectors.

During the second quarter of fiscal 2017 our China subsidiary approached breakeven and have reported a small operating loss of $23,000 compared to $327,000 operating loss incurred in the same period last fiscal year and $293,000 operating loss in fiscal 2017 first quarter.

Demand in China is strong and sales in NTIC China increased 13.1% from the fiscal 2017 first quarter to second quarter despite slower demand in the second quarter as a result of the long Chinese New Year holiday period. NTIC's market share has grown in China and we expect profitability at our China subsidiary in the third quarter of fiscal 2017.

Our litigation against Cortec Corporation in the United States recently faced a setback. On February 16, the court dismissed our complaint without prejudice based on a non-executive forum clause contained in a prior settlement agreement between the parties.

Consequently we are working with our legal team to develop a legal strategy to continue to protect NTIC's business interests and global trademarks while maximizing shareholder value.

Year-to-date NTIC has incurred legal expenses of $477,000 or approximately $0.10 per diluted share compared to $221,000 or approximately $0.05 per diluted share during six months ended February 29, 2016. It is still too early to determine what impact any new actions by NTIC will have on our legal expenses going forward.

Oil and gas sales in the second quarter of fiscal 2017 declined 45% compared to the same period in the prior fiscal year.

We are confident in our oil and gas product offerings especially in our tank bottom corrosion prevention solutions, but it has taken us longer than anticipated to penetrate the markets and the sales cycle has gotten longer because of the result of volatility in oil prices and high turnover in personnel for many customers.

With this said, we have a pipeline of projects from both new and existing customers for our solutions and we expect to invoice approximately $1.2 million in orders in the third and fourth quarters of fiscal 2017.

Turning to our Natur-Tec bioplastics business for the fiscal 2017 second quarter Natur-Tec sales were $1.5 million or nearly 15% increase over the same period last fiscal year.

This growth in sales was due to increased demand in North America through our domestic distribution network as well as higher sales of finished products by NTIC's majority-owned subsidiary in India. Global demand for our compostable bioplastics has continued to be strong.

Historically we've experienced favorable market acceptance for our Natur-Tec products from janitorial and senatorial distributors as well as food service companies. More recently Natur-Tec had experienced increased demand from the garment and apparel industries for biodegradable packaging bags.

We are working with large multinational apparel brands and expect to increase our customer base in this sector over the next several quarters. At this point, let me quickly summarize our financial results for the fiscal 2017 second quarter.

As I mentioned earlier net sales in NTIC's Zerust products increased 13.2% in fiscal 2017 second quarter as a result of a 23.6% increase in sales of Zerust industrial corrosion preventing products and growth at NTIC China. Partially offset by 45% decreased in sales of our oil and gas market segment and a 36% decline in sales to our joint ventures.

The decline in sales to our joint ventures largely resulted from the variability in timing of shipments, the result of which is a larger amount of joint venture sales that fell into March 2017. Lastly, sales of Natur-Tec products increased 14.8% to $1.5 million during fiscal 2017 second quarter compared to the same period last fiscal year.

Income from joint venture operations increased 33.4% to $2.6 million during fiscal 2017 second quarter compared to the same quarter in the prior fiscal year. This increase was primarily a result of higher sales and profitability at our joint ventures.

Our total operating expenses increased 10% to $4.8 million during fiscal 2017 second quarter compared to the same period last fiscal year. This increase was primarily due to increased legal expenses related to litigation in North America and the accrual of employee bonuses as no bonuses were accrued for our last year during the same period.

As we previously mentioned, the transitioned expenses they were formally treated as research and development expenses to selling and general administrative expenses, specifically as they relate to Natur-Tec and the Zerust oil and gas business.

Many of the expenses associated with these business units had transitioned from development stage expenses to regular operating expenses and we expect to invest between $2.2 million and $2.8 million in the remainder of fiscal 2017 our R&D activities. Year-to-date we have invested $1.4 million in R&D activities.

NTIC reported net income of $387,000 or $0.09 per diluted share for the fiscal 2017 second quarter compared to a net loss of $108,000 or $0.02 per common share for fiscal 2016 second quarter.

As of February 28, 2017 our working capital is almost $15.4 million including $3 million in cash and cash equivalents, $748,000 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.

Capital requirements are typically the highest in the second quarter as we have experienced historically. We expect our cash balance will build throughout the remainder of the fiscal year.

At February 28, 2017 the company had nearly $21 million of investments in joint ventures out of which approximately 64% or $13.5 million is in cash with the remaining balance invested in working capital.

This balance does not include a dividend payment from certain joint ventures of $4.5 million that NTIC receives during the first week of the third quarter of fiscal 2017.

Turning now to NTIC’s annual guidance, net sales and profit ability in both North America and other joint ventures have traditionally increased in the second half of our fiscal year compared to the first half and we expect this trend to continue in fiscal 2017 as well.

As a result, we are 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 2017.

These wide guidance ranges are 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 our legal strategy relating to such litigation and other such risks and uncertainties.

Our second quarter results demonstrated the solid foundation of our business plan. We’ve successfully grown Zerust global market share while expanding into new large and growing market segments.

NTIC China and Natur-Tec will continue to scale their businesses and we expect both business units to begin producing operating profits in the near short-term which will fundamentally enhance our financial model going forward.

Oil and gas sales are taking longer than expect to develop, but the continued increase in interest we’re seeing from an expanding number of countries and customers leaves us confident in our long-term growth potential for this market.

Based on the high number of new request for proposals and implementation planning meetings we expect to see an increase in oil and gas purchases and installations throughout calendar year 2017. With that update, I’ll now answer any questions you may have..

Thank you. [Operator Instructions] Our first question comes from the line of Tim Clarkson of Van Clemens. Sir, your line is open..

Hey, Matt very good results.

Just a couple of questions, one a technical question, I understand most of the items here, but this Zerust joint venture net sales, what does that represent?.

The joint venture, what that is showing I’m assuming what you’re looking at is the sales that we make to our joint ventures..

Okay..

Masterbatch, other products that we manufacture that we sell through our joint ventures, that’s traditionally a product that we sell at very little margin, margin simply to cover our operating costs and moving the product and then processing it internally. However, there is a large number of orders that went out in February.

However, because of the amount of time that it sits in the ocean and how we kind of slow go the product to these other joint ventures, these sales were recorded in March..

Okay..

So it looks like there is a very large decrease in sales two joint ventures in second quarter, but what I can tell you is, if you look at the overall sales by joint venture as a total and see that the sales at the joint ventures are growing, that’s something it just kind of fluctuates a little bit, because our joint ventures tend to make very large purchases only a few times a year..

Sure..

And so the timing of those get shifted from quarter-to-quarter and can make one quarter look better and one quarter look worse, but because it is at lower margin it doesn’t have as much of an impact from quarter-to-quarter on gross profit kind of compared to how it visibly looks from a sales standpoint, if that make sense..

Is that a new revenue item on the income statement or it has been there before?.

No that’s traditionally been there, so that’s not a new revenue number..

And you can see kind of for the six months if you look at the six months numbers you’ll see that it’s much more consistent with some – where there was a slight increase, there is just a little bit of volatility from a quarter-to-quarter standpoint..

I know that – okay that's a little – detailed question, the big question I know that you’ve guided in previous disclosures that you know you think there's a potential the company earning up to $2 a share within a couple years out.

What are the dynamics that allow you to be confident that that can occur?.

Well it’s kind of, we’ve always talked about and I have talked with many of our different shareholders kind of – the four key prongs of the company as far as the joint venture operations and North American operations, the oil and gas sector and the Natur-Tec sector.

And I get these individuals kind of individual strategic plans for each group and we’re right in the middle of our annual strategic planning process right now.

And it is pretty easy to see where the growth is coming from as far as how we think that – I think the number you’re talking about before is hitting $60 million in sales with the target of a $2 of earnings per share in our fiscal ’19.

And the one thing I can tell you is that, each of the four different units that we’re looking at is experiencing in a period where they’re experiencing growth in sales. And what I can tell you is that the majority of those of the expense that we have are pretty stable expenses.

So we’re seeing now as – we’re seeing that we’re able to increase Natur-Tec sales, increase oil and gas sales, the joint ventures are coming around a little bit as you can see from the sales results and our North America numbers are coming around from the sales results.

Similarly with China we’re seeing a significant ramp up in sales with very little change in operating expenses.

So over the next two years what you're really going to see is a leveraging of kind of fixed base of expenses that’s going to allow us to – we think dramatically increase the earnings per share on a quarter-by-quarter basis with adding another what we think is going to be another $17 million, $18 million you know $19 million in sales over the next two or three fiscal years.

So, I mean, I'm looking at it and I look at these different groups and I don't see our operating expenses increasing significantly over the next two or three years. There is a very solid fixed base of expense that we have.

There are going to be some additional sales people in different areas and things like that, but I look what we’re spending in China we’re – they’re all adding sales but not adding expenses as we’re going because of how much we’ve had to spend to get those operations up and running.

Same thing with Natur-Tec, same thing with oil and gas, same thing with our North American operations, so I think that's really what you’re going to see as far as how we get to those numbers that we’re projecting two years out..

Great, well there is some evidence now based on this quarter and your forward projections that that can happen, so thanks. I’m done..

Yes..

Thank you. Our next question comes from the line of Joe Furst of Furst Associates..

Good morning and congratulations on doing a great job, I appreciate it. Can you answer in a little bit more on the reasoning behind the dismissal of the lawsuit? I didn’t quite understand what was behind that..

I can’t provide – one I’m not an attorney and two, I don’t want to unnecessarily lay out exactly what our strategy is going forward, but to kind of make a long story short, from a simple standpoint a large portion of the lawsuit that we have against Cortec relates to a settlement agreement in 2005 and that settlement agreement was based in Ohio.

And when we – and I think that's just because [indiscernible] didn’t have any office there and everything else it was we used to hire attorneys at the time and it was based in the jurisdiction of Ohio.

For various reasons, we've just being in Minnesota, Cortec being in Minnesota we filed in Minnesota which we thought was certainly on a solid legal standing with past precedent to do so.

After two years of going through this or initiating litigation and going through the discovery process and depositions everything like that, we essentially got a one page document from our judge that said that he is dismissing the case without prejudice, meaning it’s not a won or loss it's simply – what he is saying is it’s out of my hands.

So our options are basically to appeal in Minnesota to refile in Minnesota, to refile in Ohio or to accept the dismissal and not do anything going forward with the case.

I don't see that last option is something that is likely that we would continue with and you know what I would say is at this point in time we’re meeting, weighing the advantages and drawbacks of each of the other scenarios to figure out what we’re going to do going forward.

I mean I can say that regardless of how we move forward the majority of the work in the case has been done. At this point in time as you know from before, we were really eagerly waiting to get into court and to get in front of a jury to explain the case.

This is certainly going to add a delay to it, but we’re looking at various ways as far as what’s the best way going forward for the company long-term to protect our trademarks and protect the company, but also from a shareholder standpoint of what makes the most sense as far as the business setting.

So we'll probably have, you know, I don’t want to, I certainly don’t want to project right now what we're going to do going forward because I don't really want to give any kind of a how we're leaning to the opposition. But we'll certainly have a pretty good idea and most likely have acted in the coming month..

Thanks a lot, I appreciate it.

Basically is what you're saying that after two years the judge said you filed in the wrong state?.

That's to make a long story short, yes and for a whole bunch of reasons we don’t feel that that's the right, we don’t feel that that was the right decision based on a whole bunch of reasons, but we're not the judge and we have to deal with what was handed down..

Sure, you think they would have told you that in the beginning not after two years work. Anyway….

I would agree 100%..

Thank you very much, I appreciate it..

Yes..

Thank you. [Operator Instructions] And our next question comes from the line of Jerry Well [ph]..

Hi Jerry..

Jerry your line is open. Okay and we have a followup from the line of Joe Furst of Furst Associates..

Another question would be you’ve got quite a bit of cash are you doing anything in the way of looking for any accretive acquisitions?.

I would say that – we’re certainly not aggressively looking for anything to acquire to use the cash on. I don’t know that - we certainly do have cash as we traditionally have had and certainly we're giving the $4.5 million dividend in March, we’re certainly flush with cash. I think we want to kind of get everything stable.

At this point in time I'd still say the company’s main focus is getting everything stable and growing in China as far as making sure all those working capital needs are taken care of and similarly for Natur-Tec.

I think we’d had a better idea of what we’re going to do either from a dividend standpoint or from an acquisition standpoint probably in November of this year we’ll be able to kind of explain hopefully what we’re going to do with the cash that we have..

Right, thank you certainly March..

Yes..

Thank you. And sir, I'm showing no further questions in the queue..

Okay..

So I'd like to turn it back to you..

All right, I'd just like to thank everybody for calling in today and participating in the call and for your interest in NTIC. Hope everybody has a good day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call, you may now disconnect. Everyone have a wonderful day..