Good day ladies and gentlemen and welcome to the Northern Technology Corporation First Quarter 2018 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 follow at that time. [Operator Instructions] As a reminder, this 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, President and CEO, Mr. Patrick Lynch. Sir, you may begin.

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 2018 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 our fiscal 2018 first quarter 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. Our positive momentum allowed NTIC to achieve both record sales and our most profitable first quarter ever. NTIC's global ZERUST and Natur-Tec quarterly sales, including all joint venture sales exceeded $40 million for the first time in the history of the company. Our core ZERUST solutions continue to gain market share and many of our joint venture partners around the world experienced record first quarter sales. Our emerging Natur-Tec business segment finished its third consecutive quarter of operating profits, while NTIC China closed the quarter with significant sales growth and it’s the second consecutive quarter of profitability. We are encouraged by the strong start to the year, and we expect fiscal 2018 to be a good year for the company. So, with these highlights let’s examine the drivers for the first quarter. Global demand remained strong for our core ZERUST industrial products and Natur-Tec products continued to perform well. For the first quarter ended November 30, 2017, total consolidated net sales increased 17.8% to a quarterly record of $11.5 million, as compared to the three months ended November 30, 2016. Broken down by business units, this included 34% growth in ZERUST industrial net sales, and a 24.6% increase in Natur-Tec net sales, partially offset by 38% decline in net sales from NTIC to…

Thanks Patrick. NTIC's net sales increased 19% in the fiscal 2018 first quarter as a result of 17.8% or $1.4 million increase in sales of ZERUST industrial corrosion inhibiting products, which includes the contribution of NTIC China and a $400,000 or 24.6% increase in Natur-Tec. 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 25.4% for the fiscal 2018 first quarter, compared to the corresponding period last year. Our total operating expenses increased 9% to $5.6 million, during the fiscal 2018 first quarter. The increase was primarily a result of higher personnel and research and development expenses, as well as expense associated with NTIC's annual financial audit, which were partially offset by lower G&A expenses. NTIC reported net income of nearly $1.1 million or $0.24 per diluted share for the fiscal 2018 first quarter, compared to net income of $300,000 or $0.07 per diluted share for the fiscal 2017 first quarter. NTIC is still assessing the impact of the tax cuts and jobs act that was signed into law in late December 2017. However, it’s important to note that NTIC is expected to take a one-time non-cash charge to write down its deferred tax assets. There are also many other provisions that need to be evaluated to understand the full impact of the new tax laws. These will be implemented in the second quarter of our fiscal 2018 and disclosed with our second quarter fiscal 2018 financial results. As of November 2017, working capital was almost $20.4 million, including $4.6 million in cash and cash equivalents and $3.8 million in available for sale securities, compared to $21.2 million, including $6.4 million in cash and cash equivalents and $3.8 million in available for sale securities…

[Operator Instructions] And our first question comes from Tim Clarkson with Van Clemens. Your line is now open.

Hi, congratulations guys, really good quarter. Just two questions, first of all, I noticed that your net margin in the first quarter is about 10%, I’m guessing that as your revenues continue to go up this year or next year that that net margin can increase maybe to potentially 12% or even 15% net.

That is certainly what the company is aiming for. We had an awful lot of expenses in Q1 that we don't anticipate having the rest of the year, and not just the $350,000 related to the Cortec case, but also our first quarter has an awful - all of our audit expenses go into first quarter, some additional tax expenses that go into first quarter, so tends to be a relatively expensive quarter for us. At least that’s what we’ve historically found. So, certainly the goal of the company is to see the overall operating expenses for the remainder to come down.

Great. Just in general, what do you think the new tax reform act will - how do you think that is going to affect you?

Well there is a couple provisions in the tax reform act that will impact NTIC specifically. The main, there is two main areas that we’re looking at. For most multinational U.S. companies, the big issue is the deemed repatriation of foreign dividends. And for NTIC, we would traditionally, if we did not have foreign tax credit carry-forwards, the tax expense that we would see related to the deemed repatriation of foreign dividends would be about $500,000. However, we have foreign tax credit carry-forwards, which are almost $3 million. So, there won't be any tax impact from the deemed repatriation of foreign dividends, which is good news. The bigger issue or the one area that other companies that are in a situation face is that we have about $1.75 million in deferred tax assets and those deferred tax assets are on our balance sheet at 35%, which is the - which was the tax rate that we had previously. In 2018, as the tax rate goes down to 21%, we need to revalue those deferred tax assets down to 21%. So, there’ll be a one-time non-cash charge of the impact related to that change, which if I’m doing a rough calculation, it’s going to be probably somewhere between $675,000 to $700,000-plus. So, it’s going to be a non-cash one-time adjustment of the asset, which I think a lot of companies are going to face that obviously have these deferred tax assets. But we’ll do that in second quarter and we’ll see how that impacts kind of impacts things going forward. But we’re still kind of evaluating any other provisions that are part of the tax - the tax that got pushed forward. But kind of keep that in mind with second quarter that there's going to be a really big spike kind of one-time non-cash spike in our earnings. Thanks for the question.

Thanks, Matt, I'm done.

All right.

Thank you. [Operator Instructions] And our next question comes from Joe Vidich with Manalapan Advisers. Your line is now open.

Yes, good morning. Congratulations on the quarter.

Thank you.

I just wanted to find out a little bit about what you think your opportunity is in the oil and gas sector? That’s my first question.

Well, it's a very significant market. It's a very - it's a market with very significant potential and good margins. The problem we've been facing most recently are the relatively low oil prices. The news out is that oil prices are expected to rise now from $50 a barrel to $80 a barrel or something to that effect. If that comes to pass, that will dramatically increase the amount of money that the oil companies have for their maintenance budgets, which would allow them to more dramatically expand the implementation of our solutions for their infrastructure protection.

Can I ask you what types of products in the oil and gas markets do you guys actually target?

I would suggest that maybe we have that conversation separately. You’re free to call Matt Wolsfeld at any time and he'll go into great detail as to what the products are. This is probably not the best forum to go over that, given that most people on the call, especially the previous caller are well acquainted with the products of the company.

Okay, that's fine. I'll do that. The other question I have is just with regard to your revenues from the China division. How do those flow through in your income statement? Are they part of the industrial net sales, or where would they actually show?

Yes. They're part of the top line. Whenever we talk about ZERUST industrial sales, we’re - the sales that we have in China would be included in that number.

Okay. Okay, great. That's all I got. Thanks.

Okay.

Thank you. And our next question comes from Jerry Well, a private investor. Your line is now open.

Thank you. Congratulations, guys. All that hard work gave some results now. My questions relate to the investor deck that you prepared. Your updated investor presentation that's posted on your website. Two questions here, guys. You've shown in your financial targets, we'll call them targets, I believe that's how you call them, is for significant revenue growth and earnings growth. So, you could give a - give me some thoughts - high-level thoughts on where you see most of that revenue growth coming between now and fiscal year 2019 and then the same with the earnings? And then the second part of the question is based on those earnings that you're kind of shooting for target, if you have anything built in there from the oil and gas division?

Sure. I mean, if you look at the overall total net sales, the company has it’s - you can break it down into probably six different categories. So, if you look at kind of the Northern - what our traditional normal ZERUST sales, which are kind of the North American ZERUST sales, in last fiscal year, we did about $18.4 million of ZERUST sales. We've traditionally seen a - anywhere from a 10% to 15% growth in our traditional ZERUST sales. So, looking at that, we would expect that to continue. We certainly saw that in first quarter. Our traditional ZERUST sales were actually up about 17%, even though we traditionally see about a 10% increase. So, kind of looking at that, having that number grow, there’ll be a big piece of growth coming from that area. As part of Natur-Tec, we expect Natur-Tec to continue the trajectory that it has with the 25% to what we've seen about a 25% to 40% year-over-year growth. Last year, they had $6.8 million of sales So as you continue that growth, we would expect it to - if you have 30%-plus growth year-over-year, you would see that double in two years or come close to doubling in two years. JV sales, which are sales that we make to the joint ventures, we would expect to remain relatively flat. The main item that we’re providing them are - is Masterbatch, so there might be some increase in JV sales, but not what we see in the other sales areas. The two other key items are the Brazil industrial sales, which we’re seeing some growth out of Brazil. But right now, the sales in Brazil are only $2 million. So, if they were to continue at 15% growth, you get a small increase there.…

No, that’s perfect. Exactly I was looking for a well-spoken. The last question and then I’ll get off is, I can't remember what's the break-even - annual break-even roughly in the oil and gas side, again?

What would we need for sales to be in order for the oil and gas to be break-even, is that your question?

Yes.

We would need sales of between US$3 and US$4 million to be profitable in oil and gas, probably the lower side of that.

Okay, all right. Thanks, guys. Congratulations again. I’m done.

Thanks, Jerry. I appreciate it.

Thank you. [Operator Instructions] And our next question comes from Walter Ramsley with Walrus Partners. Your line is now open.

Oh, thank you. Congratulations. Great quarter, Patrick and Matthew. I got a couple of kind of detailed questions. On the last conference call, you indicated that tax rates for the current year should be about the same as fiscal 2017, which was 15%, and this quarter was about 8%. Do you expect the full-year number to go to 15%, or is it going to be more than what you think?

I think, the full-year number is going to have a very material impact by what we do in second quarter. That’s the key driver in what's going to be the key driver in the overall tax rate. So, it’s difficult for me to say right now what the full-year’s tax rate effective rate is going to be. Obviously, [indiscernible] with all of our foreign business, we haven't paid - we don't pay U.S. taxes, because we pay so many foreign taxes and foreign taxes end up coming in an offset all of our North American profits. And so, we - that tends to lead to a little bit of a volatile tax rate, because it depends on how much - how many dividends come back from Germany and dividends from other countries and royalties from other countries as far as the - as far as what we see. I think the - if you were to discount what I talked about earlier with the deferred tax asset impact of second quarter, I think, you would see the overall effective rate for the company come down in fiscal 2018, specifically because we're going to have fewer dividends this year than we did last year specifically from our German joint venture. But again, it's going to be - the big question is, what is the - what’s the non-cash one-time charge going to be in the second quarter. But obviously, if that’s close to a $700,000 one-time charge, that's going to dramatically increase the effective tax rate for the year. That’s…

Right. I see what you're driving at there. Now I was just more interested in trying to figure out what tax rate you're using for that $1.10 to $1.15 guidance?

For the current guidance that we have out there, we’re using the traditional effective tax rate of around 15%.

Okay. I mean, that's pretty much really where I'm interested. I mean, if it changes for the better…

Yes.

…that's great. Okay.

Yes.

And the other one I had was the stock option, the noncash expense for the first quarter. It was at about $100,000, or is that starting to change?

No, that was pretty - that will be pretty consistent from year-to-year. And I want to say, that was - I can tell you exactly, that was - yes, $100,000. And so that would be pretty consistent from a quarter-to-quarter basis, at least, for the remainder of fiscal 2018 unless any options are granted, which we generally don't grant any options after September 1st. There should be any change in the quarterly amount of $103,000.

Okay. Well, anyway, that's great. So, thanks for answering these questions.

Yep. Thanks, Walter.

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

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

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