Ladies and gentlemen, thank you for standing by, and welcome to the Northern Technologies International Corporation Fourth Quarter 2020 Earnings Conference Call and Webcast. . 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 plan, 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 the NTIC desires to avail itself of the protections of the Safe Harbor for these statements.

Good morning. Hi, 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 fourth quarter and full year fiscal 2020 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 financial results as well as provide a brief business update before concluding with a question-and-answer session. The COVID-19 pandemic had a material impact on our business for a significant portion of fiscal 2020. Since this crisis began, we have focused on safely providing uninterrupted service to our worldwide customers and I'm proud of our team's efforts and accomplishments during this trying period. Overall, our fourth quarter and full-year financial results reflect our ability to navigate the challenging COVID-19 market conditions. Our experienced management team, which has successfully steered NTIC through multiple market cycles, including the Great Recession of 2008, 2009, has been key to our ability to operate in current market conditions. The lessons learned during prior periods of unrest combined with our larger scale and market diversification and strong balance sheet have provided NTIC with the flexibility to confront current macroeconomic challenges. Naturally, we also have continued to invest in research and development initiatives that will support our long-term growth and product strategies. Over the near term, however, the pace of our recovery remains uncertain as the waves of the COVID-19 pandemic continue to rock the global economy, with several significant European markets re-imposing lockdowns this month. As of today's call, NTIC as well as all of its subsidiaries, joint ventures, suppliers, and customers are deemed essential businesses and continue to operate. Furthermore, to-date, we have not seen any negative impacts to our recent sales trends as a result of recent increases in COVID-19 cases or new pandemic countermeasures. And I am encouraged by the sequential quarterly improvement in sales we experienced in the fourth quarter of fiscal 2020, as well as the start of fiscal 2021.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 14.5% in fiscal 2020 and declined 25.4% in the fiscal 2020 fourth quarter because of the trends Patrick reviewed in his prepared remarks. A 35.4% decline in fourth quarter sales across our global joint ventures impacted joint venture operating income, which decreased 37% for the fiscal 2020 fourth quarter compared to the prior year period. For fiscal 2020, sales across our global joint ventures declined 31.4% and impacted joint venture operating income, which decreased by 31.4% or by $4.1 million compared to the prior fiscal year period.

. It looks like our first question is going to come from the line of Tim Clarkson with Van Clemens.

Hey, guys. Good quarter you know in comparison to what we've done. So just a couple of questions. First one for Matt, can you kind of explain in plain English, what the catalyst was for this write-down of the tax deferral?

Sure. I mean it's kind of important to point out because without the write-off of that $1.6 million -- without recording the $1.6 million valuation allowance, our fourth quarter would have been very close to breakeven, which would have been almost a $0.10 improvement over the third quarter. So it kind of -- it certainly skewed things as far as people being able to see the positive trend that we're seeing going from third quarter to fourth quarter now into first quarter.

Sure. Okay. In terms of new applications, you talked about in the quarterly report, Patrick, can you just give us an idea of where some of the successes are coming from and...

You mean in which market sectors or applications?

Yes. Well, applications in both the United States and China, without giving away any corporate secrets.

Well, then you make it tricky for me. I would say that the majority of the new applications right now, we're finding in China, some in the United States, but I think that it'd be a little bit imprudent to talk about them right now in this context, if you don't mind.

No, I get it. And then lastly, just again on this compostable stuff. I know it was a rotten quarter for compostable. But just -- one of the reasons, I'm in Northern Tech is because of the socially conscious investing potential here, and there is no question from my vantage point, I know McDonald's has stated that they're committing to converting to a compostable packaging in the next 2 to 3 years and you guys already have a relationship with McDonald's. I mean, we actually have a waste basket here at Van Clemens that has compostable items and we use it every day. And then lastly, just a point, I know that your compostable materials really are proprietary. I know that you've had some -- even in this COVID environment, you've had some luck with -- and you might want to comment about a customer that's using the resin in a machine and it knocks all the plastic forks and plastic knives and they came to Northern Tech because of the fact, your compostable resins were the only ones lacquer enough to not gum up the machines.

Well, yes, that's true. We are currently supplying and they've increased their orders to us for the resin compounds that they use to make compostable plastic cutlery, particularly because our resin compounds allow the finished products to be produced faster. You can knock them out of the molds easier and harden quicker, while they're curing in the ovens. So, we managed to help them make a product that they had tried to do themselves but were unsuccessful and -- after trying to do it on their own for a number of years. So, we're very happy with that relationship and it is growing over time. So, we have great expectations for this going forward.

Tim, I think it's also to point out, specifically with Natur-Tec that although we're seeing -- we saw a significant decline obviously after March of 2020. Although sales are down 50%-plus at this point in time, we've continued to add significant customers, distributors, what have you, around the country and in different areas around the world. So, we're still continuing to see the rate of customers that we're adding to the portfolio increasing, although the size are down because of what we're seeing, the volumes that have been ordered from existing customers. We're still seeing a net increase in customers so that as we hopefully come out of the COVID situation, I think there is going to be a pretty significant tailwind that we're going to feel from a Natur-Tec standpoint.

And we're also finding new applications during this crisis for the compostable plastic, particularly in Southeast Asia. So, we are seeing some very nice opportunities that we didn't have before that are currently developing.

Yes.

Thank you. And our next question comes from the line of Jim Dowling with Jefferies Capital.

Yes, good morning. Could you give us more color on the trends in all of the segments in September and October and what you're seeing so far in November?

I can comment -- I mean, I can roughly comment without giving you sales. Obviously, given that it's mid-November, we're pretty well into our first quarter and we have a pretty good idea, obviously, of where things ended up from a revenue standpoint in September and October. What I can say is that across the divisions as far as ZERUST industrial, we've seen a significant pick up in revenue from September, October, November to where we were in fourth quarter. One of the things that skews our numbers a little bit is that our third quarter numbers had a very, very good March in it, which was actually oddly enough March, while the pandemic was just starting, it was actually one of our strongest months of the year. So that skewed our third quarter revenue numbers a little bit higher than where they were, if you just look at the trends going from April and continuing through today. But what we're seeing is that order levels are now starting to rebound, back up in September, October, November, back to being very close to pre-COVID numbers in North America. So we're single-digit percentages behind where we were -- at least we're trending right now with single digit percentages behind where we were in the first quarter last year. Natur-Tec still remains further behind. As we talked about, their revenues look like they're improving from where they were in fourth quarter. But they're not back up close to where they were from a pre-COVID level as we kind of talked about recently in the call, they're going to be one of the slower groups that we have as far as how they rebound. And that's going to be the Natur-Tec product line in North America, in India, and in China. It's just going to be slower to rebound than what we're seeing from an industrial standpoint, given the use of the products. Similarly, from an oil and gas standpoint, oil and gas has had a strong -- compared to first quarter last year, a strong showing in the first couple of months of the year. So all in all, if you look at the growth that we saw from third quarter to fourth quarter as a total Company, it was only up about 2%. Expectations are that kind of going forward from fourth quarter to first quarter, you're going to see closer to a 20% sequential growth from quarters.

Just one follow-up question. Are you able to forecast that the oil and gas sector for you will become less lumpy?

I would love to be able to forecast that it's less lumpy. The problem that we run into is that the size of the projects that we work on for oil and gas are significantly bigger than the average order sizes that we see for Natur-Tec or for ZERUST. And so we tend to have orders come in that -- one order comes in and it's $80,000; another order comes in, it's a $125,000. It just lends itself to being more lumpy. I think what you're going to end up seeing is that as the oil and gas business grows, meaning in 18 to 24 months from now as we establish a base of business with customers and repeat orders, that's when things are going to be less lumpy. So, I think, everybody, from an oil and gas standpoint, is more interested in when are we going to see a significant increase in contribution coming from oil and gas? It's not when are you going to go from total sales of $3 million to $4 million; it's more when are we going to see some significant contribution to the overall total Company sales. So, I think when we see that and when oil and gas becomes a significant contributor, that's when it's going to be less lumpy.

Thank you. . And our next question comes from the line of Gus Richard with Northland.

Yes, thanks for taking the question. In terms of Natur-Tec, can you just talk a little bit about the declines in the garment bags versus cutlery and sort of which ones have been more impactful to the revenue line?

Well, you're talking about different markets. The cutlery is more important to our sales in North America, while the packaging for the garment industry is all in Southeast Asia. And certainly, since the pandemic with the closure of shopping malls, et cetera, the consumption of new apparel has gone down significantly. Obviously, once we -- once the markets recover or once we are opening up our economies, we expect those sales to increase again significantly. Same thing with the cutlery and the waste liners. As I mentioned earlier in my prepared remarks, the primary sales, they were sports arenas, stadiums, large college cafeterias and large corporate cafeterias and foodservice centers. And since a lot of these arenas and sporting venues and college campuses were closed or some of them remain closed, that's what's holding back our recovery of those particular sales. In the meantime, we are, as I mentioned, also finding new applications that are, in this pandemic, which are showing great promise, but it's going to take us some time to develop those to ramp up and significantly expand into those new applications.

Got it. And is there any opportunity in say, e-commerce in making those -- that packaging more sustainable?

Oh, you mean like the...

Amazon.

Amazon?

Yes.

Yes. We are in conversations with those -- with packaging companies. We're looking into doing something like that. But it's a little bit early in terms of, particularly regulation is an issue for us there. Because at least in that industry, they haven't quite come to terms as to what they want in terms of sustainable packaging. I mean, with your experience with Amazon, for example, the packaging varies every day, when you get your package delivered. And so they haven't come -- I'm not looking for the word, a standard of any kind, yes.

Got it. And then, are you seeing any competition from PHA versus PLA?

At this time, we're not. I mean, at this point in time, the base resins that NTIC are utilizing, we're not using PHA. Natur-Tec is base resin agnostic. At some point in time, we could potentially utilize PHA and it's something that we're considering. But at this point in time, we're not seeing either competition from it or -- and we're not currently utilizing it.

Is that a, basically, a cost decision or product quality decision?

I think given kind of -- at least for us, as far as me hearing about it PHA being relatively new, I know that we've been utilizing PLA for a long time. So to change resins, I'm guessing, would take a certain amount of research, certain amount of development to get there. I believe the price points on PHA are higher at this point in time than PLA as well.

Thank you. And our next question comes from the line of Joe Vidich with Manalapan Oracle Advantage.

Yes. Good morning guys and thanks for taking my question. I was wondering, you guys had ramped up your expenses in India and I was just wondering what the status of your operations are there?

As far as the ramping up of expenses in India, one of the main things that we've done in India is we're trying to make that more of a center for Asia to be able to provide goods for that region. And so during the past year, we invested in certain equipment, certain extrusion equipment, certain general expenses to make that a key base of operations, especially given the issues that we were seeing with the Chinese tariffs and what have you. So, we have a -- we see that market in Southeast Asia, whether it's India, Pakistan, Sri Lanka, Bangladesh, China, as being pretty key to the overall Natur-Tec growth. I mean, I can say that when I look at the increased revenues that we're seeing at Natur-Tec in China, it's pretty clear that the overall market and applicability of our products to be able to solve some of these larger sustainability initiatives and add to that what these companies are doing, that's a very big market for us. So that's why we're investing in India and in that region.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Patrick Lynch for any further remarks.

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

Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everyone have a great day.