Good morning ladies and gentlemen and welcome to Northern Technologies International Corporation’s Fourth Quarter 2017 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 provided at that time. If anyone should require operator assistance during today’s conference, please press star then zero on your touchtone telephone. As part of the discussion, 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 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’d now like to introduce your host for today’s conference, Mr. Patrick Lynch, President and CEO, and Mr. Matthew Wolsfeld, CFO. Mr. Lynch, the conference is yours.

Thank you. Good morning. I’m Patrick Lynch, NTIC’s CEO, and I’m here with Matt Wolsfeld, NTIC’s CFO. Please note that the financial results for our fiscal 2017 fourth 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 our fiscal 2017 fourth quarter and our full-year financial results, give a brief business update, comment on our net sales and earnings guidance for fiscal 2018, and then conclude with a question and answer session. I’m extremely pleased with our strong fourth quarter as well as full year financial results and expect that fiscal 2018 will enjoy record sales with improved profitability. Our core Zerust solutions have continued to gain market share and many of our joint venture partners around the world have experienced record sales. Our emerging Natur-Tec business segment finished the year with its second consecutive quarter of operating profits while NTIC China also closed the fourth quarter profitably. NTIC China and Natur-Tec’s transition to profitable business segments has a profound impact on our financials which until now have been sustained by our core business in North America as well as our global joint venture network. Overall, NTIC’s annual operating margin increased to 11.6% in fiscal 2017 despite spending $849,000 on Cortec litigation- related legal expenses during the year. With these highlights, let’s examine the drivers for the quarter and full fiscal year. Global demand remained strong for our core Zerust industrial products. For the fourth quarter ended August 31, 2017, total consolidated net sales increased 14.5% to a quarterly record of $10.9 million as compared to the three months ended August 31, 2016. Broken down by business units, this included 11.9% growth in Zerust industrial net sales, a 47.2% increase…

Thanks Patrick. NTIC net sales increased 20.1% in fiscal 2017 as a result of a 20.4% or $4.7 million increase in NTIC sales of Zerust industrial corrosion inhibiting products, which include the contribution of NTIC China and a $1.4 million or 26.6% increase in Natur-Tec sales. Higher sales and profitability across many of our joint ventures drove strong double-digit growth in joint venture operating income. Income from joint venture operations increased 24% and nearly 15% for the fiscal 2017 fourth quarter and full year respectively compared to the corresponding prior period last year. Our total operating expenses decreased 4.5% to $5.2 million during the fiscal 2017 fourth quarter and was up only 4.1% for the full year despite the significant increase in sales. As a result, NTIC experienced significant improvements in operating margins for both the fiscal 2017 fourth quarter and full fiscal year. As we’ve previously mentioned, we transitioned expenses that were formerly treated as research and development expenses to selling, general and administrative expenses, specifically as they relate to Natur-Tec and the Zerust oil and gas business. Many of these expenses associated with these business units have transitioned from development stage expenses to regular operating expenses, and we have invested $2.9 million in R&D activities compared to $4.7 million last fiscal year. NTIC reported net income of nearly $1.4 million or $0.30 per diluted share for the fiscal 2017 fourth quarter compared to a net loss of $1.4 million or $0.32 per common share for fiscal 2016 fourth quarter. The net loss in the fourth quarter of fiscal 2016 included a $1.1 million impairment to write down NTIC’s investment in its former Chinese joint venture. In addition, the company also wrote off various inventory in China and receivables associated with the former Tianjin Zerust joint venture, the impact…

[Operator instructions] Our first question comes from Tim Clarkson with Van Clemens Capital. Your line is open.

Hey, great results. I’m glad you’re doing the dividend, guys, and this shows just what a solid profitable company Northern Tech is, so it’s great--it’s a great commendation to your efforts and to the efforts of all the employees at Northern Tech. That’s great results and great news. On the compostable end, what kind of impact--you know, I’m hearing that there’s going to be additional favorable legislation out of California. What are you hearing on that end?

First of all, thanks for the nice comments, but quite frankly I’m not aware of the legislation on California. We’d have to look into that for you and get back to you.

Okay. How about in terms of you have a proprietary product, obviously, in the Natur-Tec and you have this joint venture now going with Cargill. How is that developing, and how do you feel about that product in terms of differentiated product in the marketplace?

Well, with Cargill and BASF and a couple of other people, we feel that we have certain properties in our specific formulations that again gave us advantages in terms of cost and performance versus the competition, and that’s in part what’s leading our sales, both in the United States and in Southeast Asia.

Okay. One last question - on the oil and gas, are we seeing signs that you’re starting to get some more traction with these big oil companies?

We’re working on some very nice projects which, unless we get some unexpected delays, should make the second, third and fourth quarter of this year look much more favorably.

Great, thanks. No more questions.

Thank you. Our next question comes from Joe Vidich with Manalapan Oracle. Your line is open.

Yes, hello guys. Your results were very impressive and it’s great to see that China is profitable. That’s really great. I did have some questions on Natur-Tec. From what I’ve been reading, it seems like a number of countries in Africa have been outlawing plastics, and I was just wondering if you guys are working in Africa or making any sales there.

We are not currently. We currently do not have any marketing efforts in Africa, and generally speaking we are trying to target our products into areas where you have a closed loop disposal cycle, where we can make sure that our products wind up getting directed towards a compost site versus a landfill. I am not quite sure that the waste disposal systems in various African countries would lend itself to that, and also there’s a cost factor involved - I mean, bio-plastics are still more expensive than conventional plastics. The cost benefit comes in when you can divert the waste bio-plastics into a compost site for disposal. So again, I’m not quite sure that the African infrastructure really lends itself to this particular application at this time.

Right, okay. That explains a lot. Could you tell me which markets do lend itself to Natur-Tec? Which are the key markets that you think are what you’re going after?

Well, to give you an example, the waste infrastructure on the west coast of the United States is very sophisticated, and so in those markets we are targeting large food service organizations that can take their entire organic disposable waste and divert it in our products or with our products to a compost site, where it has--so they save money by sending it a compost site rather than sending it to a landfill, so while the initial products might cost more than conventional plastic alternatives, by allowing them to go into a lower cost waste disposal system, they save money on the entire life cycle of the product.

Right, okay. I guess my other question is, and I probably should know more about this, but with regard to the lawsuit that was dismissed, which part of your business did that involve, and how do you think that will impact you going forward?

Sure. Well, the primary aspect of our business that was potentially going to impact was our operations in China, where Cortec Corporation had tried to pursue a relationship with our former joint venture partner. Now, during the course of this litigation, the relationship between Cortec and our former joint venture partner fizzled and ended, to the best of our knowledge, so Cortec’s position in China continues to be a non-factor. They have no significant position in the Chinese market. They did not have a strong position in the Chinese market before, they do not have a strong position in the Chinese market today, so on the whole, while we would have preferred to win the litigation, initiating the litigation by itself was already a positive move that helped us get to our position in China today.

Great, I appreciate that. That’s all I’ve got. Thanks very much.

Thank you. Once again ladies and gentlemen, if you do have a question, please press star then one on your touchtone telephone. Our next question comes from Greg Weaver from Invicta Capital. Your line is open.

Hey, good morning guys. Nice job, and I think both Phil and Lorne would be happy to see the dividend back.

Well, that just tells you how long you’ve been with the company, Greg.

Yes, well, I’m still sticking around because I think you guys are still going to get it here, and it looks like you’re headed in the right direction. So just a couple of random questions here. In terms of--you had a very nice gross margin in the fourth quarter. Is that sustainable, and what drove that, especially with oil and gas being weak?

We certainly feel that it’s sustainable. There wasn’t a significant--you know, there wasn’t a significant change in gross margin, just a couple points. That had more to do with some sourcing decisions that we’ve made and different ways that we have worked at, let’s say, decreasing some of the inputs to get a little bit more from the gross margin. So we certainly think that the changes we’ve made the last fiscal year are going to benefit us going forward from a gross margin standpoint.

Okay, nice, and if we get oil and gas going again, that’s gravy on top of that?

Correct.

Okay, good. How about FX? Obviously I think we got a little bit of a tailwind here for you. What impact did that have on JV revenue and earnings, would you hazard to say, for fiscal ’17?

For fiscal ’17, it’s been--it certainly has been a small boost. The one thing I’d say is that we still take the average currency throughout the year, and that’s what is going to get applied, so during the year, I think the euro was all the way down to 1.05, we saw it bounce back to at one point in time almost 1.2. I think going forward, we’ll see it having a bigger impact on fiscal ’18 than we did in ’17, but it certainly helped in third and fourth quarter as the euro bounced back. Going forward, our goal is certainly--not our goal, but certainly what benefits us is the weak U.S. dollar, so hovering at 1.2 or right around 1.2 and maybe going a little bit higher will certainly have a benefit on our JV operating income.

Okay. Any sense of what the tax rate is next year? I mean, you were in, like, a 15-ish this year, I think?

I think it will stay pretty consistent with this year. There certainly are foreign tax credit carry forwards that we have. We’re starting to generate more profits in North America, so I would see a pretty consistent tax rate compared to last year.

And not to jinx it, the legal--I mean, should we consider this Cortec money that you spent on top of whatever random stuff is happening at the company from legal, so that should all come back this year?

Well, there was about $300,000 of expense--the actual trial took place in September of this year, so I think we had--in fourth quarter, we had, I want to say roughly $350,000 of expense in fourth quarter. The actual trial and all the supporting expenses in September were right about USD$300,000, so there continues to be kind of a--call it a slight hangover into first quarter, just in the first month. After that, then everything would fall off.

So half a million or so less?

No, I mean, just $300,000 in first quarter and then going forward, we don’t have any active litigation that would provide any kind of expense to the company.

Got you, right - half a million in savings this year relative to last year.

Yes, sorry. Yes.

Got you. So what would you say is the biggest swing factor in your fiscal ’18 EPS outlook at this point?

I would say probably the contribution of China being profitable compared to last year, still having a cumulative loss in fiscal ’17. Natur-Tec is going to provide some profits where, again, the cumulative loss--was still a loss position last year, even though they were profitable in the second half of the year. You have the currency tailwinds, so you certainly--you know, if foreign currency changes by 10% or 15%, that’s something that would push our JV operating income up by 10% to 15% even if profitability at the joint ventures were to be flat, and we expect increased profits at the joint ventures, slightly increased profits at the joint ventures, and then on top of that a push from the foreign currency piece, and so that will provide a nice boost because the JV operations are so significant. On top of that, sales that we’re seeing from our North American Zerust operations going into Q1 are very strong, certainly stronger than they were in Q1 of last year and even Q4 of ’17. At the same time, we’ve kept our operating expenses outside of litigation--you know, operating expenses have been very flat, so the goal of the company going forward is to dramatically increase sales coming out of China, coming out of North America, coming out of the joint ventures while keeping our operating expenses relatively flat, and if we can do that, I think we’re going to see a very significant boost in our earnings in fiscal ’18.

Yes, that’s a good summary of my case. That’s where I was going with the question. I mean, I like your guidance, and not to give you a hard time, but if you get $7 million of incremental revenue plus all the things we talked about - FX, legal savings, gross margins are better, etc., I’m thinking why is it that we’re only seeing less than $2 million of flow through to net, kind of given--$7 million of incremental revenue at 35% gross margin with half a million dollars of savings in legal, even if you tax that at 20%, we’re still talking $2.5 million of incremental net, ignoring all the other stuff you just mentioned.

Yes, I’m following you and I certainly have similar spreadsheets showing what the company can do right in front of my eyes right now, and it’s certainly possible that we would exceed our guidance; however, we’re trying to kind of establish a baseline of, you know what, 50% to 60% growth in income is a baseline. If we’re seeing that earnings are going to be more than that, which is certainly possible, then we’ll increase guidance from our revenue and earnings per share standpoint at that time.

Okay, that’s fair. Just making sure I wasn’t missing something here that’s not--

Well, we haven’t always hit our guidance numbers, Greg.

Under-promise, over-deliver - I’m on board with that, so just making sure there wasn’t something else going on. Okay, nice job. Thanks guys.

Thanks Greg.

Thank you. Our next question comes from Charlie Pine with Van Clemens and Company. Sir?

Hi, good morning Pat and Matt. I just wanted to applaud you guys for hitting the numbers for Q4 and also really liked seeing the announcement on the dividend. Some of my questions have been answered, but there’s a couple things that I’d like to have you address. First of all, you did take write-offs on all of the activity, the old activity a year ago in China. What’s the status right now of what you can talk about regarding your discussions with your former partner, Tianjin, of trying to--I understand that you’re still sort of in a recovery process. Could you discuss that a little bit?

Well, there are no active discussions with our former joint venture partner in China. The matter is still being--is still before the courts in China in the city of Tianjin, and we are looking forward to a ruling at some point within 2018, but neither Matt nor I have any feeling for how the Chinese judicial system actually functions.

At this point in time, the only thing we’re waiting on in China, or trying to push forward in China, is the litigator--is the liquidation of the former joint venture. It’s something that we don’t anticipate any significant legal expenses from it, but it’s simply a matter of tying up loose ends and having that entity dissolved. We did take large write-offs at the end of last year as we did not feel that that entity had any value. There certainly could be money still on that balance sheet of that company when it’s liquidated, but at this point in time we don’t have any kind of certainty, or at least enough certainty to include that as an asset for the company. It certainly is our intention to try and recover as much as we can, but at this point in time, given how things are going in China, we’re not sure exactly when or how much money is there, so our main focus in China just has to do with growing the existing business from where it is now.

Okay, thanks for clarifying that. Can you expound a little bit more then on--I mean, I know you had been going after a lot of the older legacy customers, and you also had mentioned that you were going after new business that your former joint venture partner had seemed to be somewhat indolent about capturing for several years. Can you talk a little bit about what new areas or segments that you’re going after in the new Zerust subsidiary and where you expect to get some successes there in 2018?

Well, I would restrict my comments to basically saying that the--it’s more--well, it’s a significant part and a larger geographical reach that our current sales and distribution network in China has. Our former joint venture was focusing its sales and marketing efforts primarily around the Shanghai area, while our current or our new sales and marketing network covers the majority of China, or China’s industrial regions, so it gives us greater access to more customers in more markets. Beyond that, I’d prefer not to discuss any details in a public setting.

Okay, all right, that’s understood. Let me ask a couple other questions regarding Zerust oil and gas. You’ve talked from time to time about your efforts of getting an API certification. Do you have anything new to provide us since your last communication with us on that matter?

To the best of my knowledge, the discussions with the API are ongoing and are going in a favorable direction. We don’t know exactly when these new rule will come out, but it seems to be on track that API will be taking action in the foreseeable future.

Would you characterize foreseeable future? Do you think that means that we have a pretty good chance of seeing that certification coming during fiscal 2018?

I’d be a little bit hesitant about promising anything for 2018, but--and quite frankly, I don’t have enough experience with API in general to give you a good feeling for the timeline.

Okay. You mentioned that you’re working on potentially some nice large new deals in the storage tank arena. The numbers of those, how would you characterize the level of interest right now for that segment currently and as you move into--as you’re in the first quarter right now versus where you were a year ago?

First quarter, I’d be a little hesitant, but basically the volume we’re looking at right now for second and third quarter for this year should be even or up from last year.

Okay. Are you looking for contributions? Is this mainly going to be from legacy customers, Pat, or do you think that you’re going to be adding some new companies to the fold at this point?

It’s a combination of both. We’re looking at repeat orders from prior customers as well as new customers from new geographies.

Okay. Lastly on this, are you hearing from some of these people now that they’re getting more interested in going back and spending some more capital in their budgets on maintenance again?

Well, a number of projects that we were expecting to come in towards the end of last fiscal year and beginning of this year, which got delayed because of the hurricanes, we should expect to see those coming in second and third quarter, so those budgets are opening up again. As for the rest, I don’t have any immediate information that I can share with you right now.

Okay, well that covers it for me. Thanks a lot, and I’m very encouraged with the progress that you guys made in the last couple quarters last year, so keep it up. Thank you very much.

Thanks Charlie.

Thank you. Our next question comes from Jerry Well. Sir, your line is open.

Good morning guys. Glad to get that lawsuit behind us, and good quarter. I’m looking more of a big picture over the next three to five years of all the different divisions you’re currently active in from a gross revenue percentage. Obviously some are starting on a pretty low basis, but where are you most excited about as far as growth in revenue for the company overall, what division - Natur-Tec, China, etc.? Just give us a flavor without any specific numbers, if you would.

Well, our core Zerust industrial business continues to be strong, and most of our--actually, almost all of our joint ventures had growth last year and we expect to see the same this year; so again, our core business is strong and growing. We’re very happy to see what happened in China and that we reached profitability, and we expect good things to continue to come out of China for the foreseeable future. Natur-Tec also is moving along strongly, so that’s also contributing, and quite frankly ultimately we expect our oil and gas business also to be a strong contributor within the next couple of years. As to one specific aspect, I would say, like I just mentioned, we are right now doing well in almost all of the sectors we are active in, so I wouldn’t put one over the other necessarily.

Okay. Just a follow-up on some previous correspondence, you had had a test in Europe with a plastic extruder over there in Germany, if I remember, for Natur-Tec. How did that go? Anything new on that front, on the extrusion side of the business in Europe?

That was an injection molding project in France--

I was close, I was close.

Yes well, same general region. I don’t really know exactly what’s happened to that project at this moment. I believe it’s an ongoing test case.

Okay, thank you much.

Thank you. Once again ladies and gentlemen, if you do have a question, please press star then one on your touchtone telephone. I’m not showing any further questions in queue, so I’d like to turn it back over to Mr. Lynch for closing remarks.

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

Thank you. Ladies and gentlemen, that does conclude today’s conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.