Ladies and gentlemen, thank you for standing by and welcome to Northern Technologies International Corporation’s First Quarter 2020 Earnings Conference Call and Webcast. At this time, all participant lines are in listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [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 hand the conference over to your speaker today, Patrick Lynch, President and CEO. Thank you. Please go ahead, sir.

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 2020 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 2020 first quarter financial results, give a brief business update, comment on our net sales and earnings guidance for the remainder of fiscal 2020, and then conclude with a question-and-answer session.Our fiscal 2020 first quarter net sales set a new first quarter record in part due to a rebound in ZERUST industrial sales over the past three months, primarily caused by stabilizing demand in both North America and China. During the same period, however, demand across the majority of our other global industrial markets remained weak causing sales by our JVs to decline by 16% and negatively impacting first quarter profitability.Nevertheless, despite current short-term macroeconomic conditions brought on by various international trade disputes, we believe we are well positioned to grow our global market share as a result of our expansive geographic footprint, strong operating joint ventures and global corrosion prevention expertise as we believe fiscal 2020 will be another good year of profitable growth for NTIC.So with these highlights, let's examine the drivers for the first quarter. For the first quarter ended November 30, 2019, total consolidated net sales increased 3.8% to $14.6 million as compared to the first quarter ended November 30, 2018.Broken down by business unit, this included a 16.2% increase in Natur-Tec net sales and a 4.6% increase in ZERUST industrial net sales offset by a 9.6% decrease in net sales from NTIC to its ZERUST joint ventures and a 47.2% decrease in ZERUST oil and gas net sales.Total net…

Thanks, Patrick. NTIC's net sales increased 3.8% in the fiscal 2020 first quarter as a result of the trends Patrick reviewed in his prepared remarks. Lower sales across many of our global joint ventures impacted joint venture operating income which decreased 22.7% for the fiscal 2020 first quarter compared to the prior fiscal year.We continue to proactively manage expenses and our total operating expenses decreased 4.5% or by $280,000 to $5.9 million during the fiscal 2020 first quarter, primarily due to $446,000 reduction in G&A cost as a result of prudent cost control measures taken in the United States, India and China during the fiscal 2020 first quarter.We continue to invest in developing new VCI solutions as well as bioplastic products and during fiscal 2020 first quarter, NTIC invested nearly $1 million in R&D activities compared to nearly $900,000 in the first quarter last fiscal year. NTIC reported net income of $1.2 million or $0.13 per diluted share for the fiscal 2020 first quarter compared to $1.5 million or $0.16 per diluted share for the fiscal 2019 first quarter.I'm also pleased with the improvement in net income over the past three months as compared to – as the company earned $829,000 or $0.09 per diluted share for the fiscal 2019 fourth quarter. As of November 30, 2019, working capital was $25.3 million including $4.1 million in cash and cash equivalents and $3 million in available for sale securities compared to nearly $25.5 million, including $5.9 million in cash and cash equivalents and $3.6 million in available for sale securities as of August 31, 2019.NTIC’s business model does not require significant additional capital and we expect our financial model will continue to produce strong operating cash flows. As we’ve experienced in prior years, our cash balance is typically at its lowest…

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

Hi, guys. Good quarter. Just wanted to see if there’s any new color in terms of your compostable business in terms of where you’re seeing the best opportunities?

Yes. Thanks for the question, Tim. From a Natur-Tec standpoint, we’re still continuing to see the significant demand growth kind of on the same – with obviously the same business lines and with similar opportunities we’ve talked about over the past couple of years. There’s obviously still a growing demand for this product across North America. We’re seeing significant growth for the product in Asia, specifically what we’re selling through our Chinese subsidiary and still in India. So across the garment space, across the – just the traditional compostable business as far as supplying to bag liners and cutlery and things like that, it’s where we’re seeing the growth. We’re starting to also deliver larger quantities of resin to customers so they can produce their own products with the base resins that we are providing to them. So that’s one of the things that we think is an exciting opportunity for us is to provide larger quantities of resins to these companies. So we still anticipate kind of those three product lines being the main product lines that will kind of push us through the next – probably the next year, year plus.

I’ve been told that one of the big pluses that your compostable products have is superior strength and while the products are compostable, they have similar strength characteristics to conventional plastic. And how does that play out when you’re competing with competitive compostable products?

Very well for us. I think our customers are very pleased with the product performance and also the cost points we can reach. We’re talking not just stronger mechanical performance but also providing it at a lower cost to what our competitors are able to offer.

Okay. Now what’s been driving the China growth?

That’s primarily the garment industry. It’s an expansion of what we were doing in India and other parts of Southeast Asia.

Right. And you’ve been spending a lot of money on R&D. Is there anything that you can talk about in terms of potential new products that could be significant?

Nothing that I can share with you on this call today.

Okay. All right, I’m done. Thank you.

Thanks, Tim.

Thank you. Our next question comes from Jerry Weld [ph], a private investor. You may begin.

Good morning, guys. Just curious on the JV side. Where are you seeing the decrease primarily? Is it – if you could give us a little more color as far as industries tied to automotive or whatever, what’s driving down the revenue side and by country?

Sure. We are seeing – there’s still an ongoing slowdown in the automotive industry in China. We’re growing our sales in China primarily by selling ZERUST products into other market segments. But India, for example, is way off because the Indian automotive component supply base has really hit the skids in the last couple of – the last six months to nine months. And there’s even an article that was published today by – excuse me, on January 3rd in Bloomberg. It says, Germany’s humbled industrial titans set for a tough 2020 according to E&Y. There are – so even in Europe, a lot of the automotive companies like Daimler, BMW, Volkswagen, Renault are seeing a decrease in demand probably due to the ongoing trade tensions that we have been seeing around the world. So that’s the – so it’s pretty much spread out across the globe, across the automotive industry at this point.

Okay. And then one last question. I’m wondering relating to there’s been resistance on the oil and gas side to make the expenditure, right, and we’ve been talking about for a number of years. Have you seen any significant change in the way companies you’re looking at that investment on the oil and gas – on the protection side?

It is gaining – we are gaining greater acceptance and recognition because we’ve been presenting along with customers successful case studies at industry conferences like NACE, for example. So it’s getting easier to introduce this in new locations and we’ve been doing a number of new installations in Africa this year and parts of the Middle East that we haven’t been in before and so we are getting broader acceptance. The market conditions in oil and gas in general have been a little bit challenging over the last 12 months with fluctuating oil prices. So we’re just trying to combat that while the projects are going forward. It’s just taking some time and occasionally they will get pushed from one quarter to the next as they’re making adjustments to their budgets based on cash availability.

Okay. Thanks a lot, guys. Thanks for your hard work and dedication.

Sure.

Thanks.

Thank you. Our next question comes from Scott Billeadeau with Walrus Partners. Your line is open.

Hi, guys. Thanks for taking my question. I got just a couple of questions here. On oil and gas you mentioned that you are now delivering so you do see a pretty significant pick up and good visibility. Is that just for this quarter or is there longer-term visibility to that, maybe if you could just kind of give us a little view there?

Sure. What we’re seeing today as far as product that we expect to be out the door let’s say by January 15 is that we’re already at a point now where sales for this fiscal year through January are already at a point that is same as what we were at through the full first six months of the year last year. I would say last year we had a really poor Q2 from an oil and gas standpoint, but we had a much stronger December and a very strong January from a sales standpoint in oil and gas. So although it looks like from an oil and gas standpoint first quarter we’re down let’s say 50%, almost 50%, I don’t have a lot of concerns about eclipsing where we were last year through the six-month period. As far as the expectations for the remainder of the year, the pipeline of projects that we have right now that we expect to close on during the next eight, nine months of the year, it’s significantly more business than what we had at the same time last year. So there are more projects out there. There’s more projects that we expect to close. We expect at this point in time that our oil and gas revenue for the year will be higher than what the oil and gas revenue was last year, whether that’s going to be a few hundred thousand dollars more or a couple million dollars more that’s what we will see. But there are significant projects out there that as they’re closed, we’ll have a dramatic impact from both the revenue standpoint and an earnings standpoint given the margins that we see in oil and gas.

Great. Thanks. And then anything new on the pipeline side of that? I know it’s been working and those are long [cycle] [ph], probably lots of – I don’t know if there’s a test phase that has to or proving out phase for there? Anything new you can comment on there on the pipeline protection side?

I wouldn’t say specifically anything new. There are various opportunities that we’re looking at as far as pipeline protection. Those are coming along. There’s no projects that we have at this point in time that the size of what we did in fourth quarter 2018. We’re talking about protecting several thousand kilometers of pipe. We don’t have any projects that are on hold that are of that size, but there certainly are other pipeline proposals and projects that we’re looking at that are on a smaller scale. We think the technology and what we have as far as specifically dealing with the pipeline solution is a good one but it’s taking – takes some time to close on those deals and to become more of a standard.

Great. Thanks. And then one last question just related to Natur-Tec. I know you have talked about hopefully turning into more delivering resin as opposed to final product. Maybe you can give us a little sense, are we still really early in that because that probably will alter the optics of what that business looks like because you may see lower revenue, but since it’s just resin it may be higher margin. Is that something that we should see or start to see that transition at some point during this fiscal year?

I wouldn’t expect it this fiscal year. As Matt mentioned, we are getting – we have at least one large customer in the United States that is now buying significant quantities of our resin compounds to produce their own injection molded plastic products. So that’s probably our big anchor client at this point in that category. And we’ve got certain smaller projects we work on, but for at least for this fiscal year we see foresee most of the sales coming from finished products. And, Scott, even with the resin that we’re selling, it’s not like we’re selling a concentrate or anything like that. We’re still selling the same amount of total pounds of product that would be used to make a very – a product for these companies. So you wouldn’t have a situation where the amount of revenue is significantly lower than if we were selling the finished product. And margins on the resin are very similar to the margins that we were selling the finished product at.

Okay.

And I’d say with the resin deliveries, I want to say the first couple of resin deliveries just happened in the last month of the first quarter.

Great. Okay. Thanks so much for the update. Good quarter. Thanks for answering my questions.

Thanks, Scott.

Thank you. Our next question comes from Jim Dowling with Jefferies Capital. Your line is open.

Yes. Good morning. Can we get a little bit into the details on Natur-Tec in terms of 100% of their sales, how much is United States versus the rest of the world and put specific emphasis on China and India? And if you look at the sources of revenue and you take the first quarter, how were the growth rates different or similar among those major consuming areas?

Sure. If I break out – if I’m looking at Natur-Tec from a geographic breakout, the growth in Natur-Tec North America in first quarter was about 10%, the growth in Natur-Tec India was about 23% or 24% and the growth in Natur-Tec China was about 20%. And we break out the total revenues for Natur-Tec in the Q, but as I’m looking at it – so I’m looking at total Natur-Tec sales in North America for Q1 are close to 2.2 million. Total revenue at Natur-Tec India is about a little over 2 million. And Natur-Tec China is it looks like – I’m adding these up on the [indiscernible] numbers on the fly, so it’s about 450,000.

Okay. Thank you.

Yes.

Thank you. Our next question comes from Joe Furst with Furst Associates. Your line is open.

Good morning, gentlemen. My questions had to do with oil and gas and mostly have been answered. Just one question. The new business you are getting from there, is it coming from new orders from existing customers or from new customers?

It’s always a combination of both.

Okay. Thank you. Good job.

Thanks, Joe.

Thank you. [Operator Instructions]. Our next question comes from Gus Richard with Northland. Your line is open.

Yes. Thanks for taking my questions. On the ZERUST business you had a strong quarter. Is that a function of new customers’ seasonality or inventory replenishment, can you add a little color there?

I don’t know that we’ve seen a significant amount of inventory replenishment. It seems like we’re kind of still in the – we’re still in the phase at least what I’m seeing in North America as far as consistent orders. We haven’t seen a bump yet where customers are refilling inventories where you kind of see the double jump of existing orders and building up inventory yet. I can’t really comment on that for any of the joint ventures. I don’t have the data. I would say from a China standpoint as far as what we’re seeing at ZERUST China, the majority of the growth that we have seen there is outside of the automotive industry. And so while as Patrick commented that auto sales are still down throughout Asia and in China, we have been able to augment that decrease in the auto industry with new opportunities outside of the automotive industry. So the 20% plus growth that we’re seeing in China is due to non-automotive sales growth opportunities.

Got it. Thanks. And then on the Natur-Tec side, it looks like your year-over-year comps have been decelerating for a bit now and particularly I think North America. If with your new resin customer in North America, should those North America sales start to reaccelerate from here?

I would expect our Q2 Natur-Tec numbers to be higher than Q1. Things were a little bit slower in Q1 than what we expected, specifically in North America. We’re targeting certainly a higher growth rate than 10%. And like you said with the additional business coming in from just incremental customer growth throughout our distribution base to some of the new resin customers, I would expect those numbers to be higher throughout the rest of the year. As far as growth in India and China, a 20% plus growth rate is I think certainly reasonable for what they’re looking at given the growth that they saw last year out of those two regions.

Got it. And then the last one for me is you did a great job holding G&A down in the quarter. Is that a sustainable trend that we’re – is that a one-off for the quarter?

I would say it’s a little bit of both. There certainly are some – there were some items that we worked on as far as cost control initiatives across the company that’s certainly been a goal of the company, as I’ve kind of explained to each of you when I met with you individually that the goal is to have very low operating expense growth. I don’t expect to have cost decreases that are going to be sustainable going forward. There are some things that were as far as people leaving and other things like that that where we will be hiring people coming on, so there will be some additional expense growth. But we still have the overall corporate objective of having very low single-digit operating expense growth to be able to leverage the top line revenue growth. And with the expectations of – the concerns that we have right now about what’s going on from a macro standpoint with the automotive industry and other industrial industries certainly keeping a tight control of our cost is something that we are focusing on.

Got it. Thanks. That’s if for me. Thanks a lot.

Thanks, Gus.

Thank you. Our next question comes from Thomas Claugus with Ampla Capital. Your line is open.

Hi. Matt, since you predicted correctly that business will rebound this quarter, what’s the visibility on the JV side in terms of others bottoming or not? This is probably the lowest quarter in a long time and it changes the profitability significantly for the company. So is there any visibility on that?

You mind muting your line real quick because your – there’s a lot of feedback. I heard your question and I think I can comment on it, but if you could mute your line that would be terrific.

I’ll try. I’ll just hang up. You can answer the question.

All right. Sorry about that. As far as visibility into the joint ventures, I know Patrick has had conversations with numerous joint venture partners as far as kind of what we’re seeing from a global standpoint. Do you want to --?

I didn’t hear the question.

The question was basically what visibility does NTIC have into the joint venture performance given that this is the biggest decrease that we’ve seen in joint venture sales for some time?

Well, like I mentioned earlier, it’s tied to basically a global macro shutdown or slowdown primarily in the automotive industry so far but as I also mentioned that for example the key economy in Europe, Germany, is seeing a significant slowdown across all their top 100 companies, industrial companies. So I think that – I’d say with talking to the various partners, one thing I can comment on is we’re not seeing – it’s not as if there is a loss of any one customer or it’s not as if there is any kind of a competitor coming in that is taking the business or the market share away from us. What we’re seeing is that the sizes of the orders that are being placed, the volumes and the inventory levels at our customers are what is coming down. And so with few orders or smaller orders coming in, that’s what’s having the biggest impact on overall revenue. The expectations that we have are similar to the United States, a lot of the other countries in the world are going to be somewhat behind the United States and whether that’s going to be three months, six months, 12 months, the company is certainly positioned so that longer term when we see the industrial rebound across the world, the company is going to be positioned to how to leverage that rebound. So I hope that answers your question.

Thank you. Our next question is a follow up from Scott Billeadeau with Walrus Partners. Your line is open.

Hi, guys. Thanks. Just a thought just as a follow up to that question, is there – certainly we’ve seen a macro slowdown but is there any sense that within the auto or the industrial businesses out there that there is just less metal in general that needs to be protected on a go-forward basis? They’re taking metal out of things, i.e. electric can probably has less metal than an older combustion. You guys have any sense or is there a discussion about that at all?

Yes, electric vehicles use fewer metal components and we’re watching that trend, but we’re not seeing a significant shift in that yet. Also, like I said, right now it’s more of a decrease in general demand by our customers which they all seem to relate to temporary slowdowns because of macro issues. As Matt mentioned, we’re not seeing any loss of customers. We’re not losing projects. It’s just that we are ordering less given what demand levels are at right now.

Okay. Thanks. Certainly we got a macro slowdown, so it’s kind of hard to vet whether there’s an organic switch in there, so I just didn’t know if you --

And as I mentioned earlier in the call, for example, in China we’re shifting our focus away from the automotive industry because we know that we’re not going to get much joy from them in the next 12 months. So a lot of the business increase that you’re seeing in China, for example, are coming from other industries other than automotive where they’re using plenty of metal now and in the future.

Great. Thanks. I appreciate it.

Sure.

Thank you. And I’m currently showing no further questions at this time. I’d like to turn the call back over to Patrick Lynch for closing remarks.

I would just like to thank everybody for calling in today and wish you a nice afternoon. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.