Patrick Lynch - CEO Matt Wolsfeld - CFO

Dick Solomon - Axiom Capital Tim Clarkson - Van Clemens Walter Ramsley - Walrus Partners Charlie Pine - Van Clemens

Good day, ladies and gentlemen, and welcome to the Northern Technologies International Corporation's Fourth Quarter 2014 Earnings Conference Call and webcast. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, President and Chief Executive Officer, Mr. Patrick Lynch. Sir, you may begin.

Thank you. Good morning. I'm Patrick Lynch, NTIC's Chief Executive Officer, and I'm here with Matt Wolsfeld, NTIC's Chief Financial Officer. Please note that our fiscal 2014 full year financial results were included in our press release issued earlier this morning, a copy of which is now available at ntic.com. During this call, we'll review various key aspects of our fiscal 2014 financial results, give a brief business update, provide fiscal 2015 annual guidance, and then conclude with a short question-and-answer session. As part of our discussion, we'll be making certain forward-looking statements regarding NTIC's future financial operating results, as well as our 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 our forward-looking statements due to certain risks and uncertainties, including those described in our most recent annual report on Form 10-K and subsequent quarter reports on Form 10-Q. We suggest that you read these reports and other future filings that we'll make with the SEC. We disclaim any duty to update or revise our forward-looking statements. During fiscal 2014, which ended on August 31, 2014, our total net sales and earnings per share continued to show strong year-over-year increases. At the same time, we achieved significant objectives in all three of our market segments that NTIC serves. All while, our competitive position, operations, and balance sheet grew even stronger. NTIC's total net sales increased over 19% in fiscal 2014 to over $23.8 million, compared to fiscal 2013. Most of the sales growth came from ZERUST products to new and existing industrial customers in North America, as well as customers in the oil and gas market. While we're certainly pleased to see this healthy sales growth in North America, we're also very encouraged to see an increase of 5% in the total net sales by NTIC's joint ventures to $118.8 million for fiscal 2014, along with the corresponding 12% percent in our income from our joint venture operations. All said, NTIC earned $0.90 per diluted common share during fiscal 2014 compared to $0.75 per diluted share during 2013, which is more than a 19% increase. During 2014, our oil and gas team focused its sales efforts on our proprietary corrosion solutions for protecting the bottom plates of oil storage tanks, which are high susceptible to aggressive rust and leaks. In this effort, our team has been systematically targeting oil terminal operators and refineries in North America, resulting in around 50 successful implementations. Having seen the need for an acceptance of our innovative solutions, we expect this growth to continue into fiscal 2015 and beyond. These continued successes with both existing and new clients bolster our confidence in the oil and gas market, and we're confident that our expansion in the oil and gas market will continue. However, as we have repeatedly mentioned, this is still a relatively new market for us, so we expect any associated benefits to our financial results will be choppy with spikes in sales when opportunities are converted and revenue is recognized over the next few years. Now, turning to our Natur-Tec bioplastics business; net sales of Natur-Tec products increased by almost 46% during fiscal 2014, compared to fiscal 2013. This increase was primarily due to finished product sales through NTIC's newly formed majority-owned subsidiary in India, which is now operating profitably. All future sales of Natur-Tec in this region will be made through this new entity, and we expect more manufacturers to implement Natur-Tec compostable packaging across their supply chains. We expect this application segment to continue to be an area of strong growth as we continue to target and convert additional manufacturers to the use of Natur-Tec sustainable packaging solutions. I'll now turn the call over to Matt Wolsfeld to summarize in more detail our financial results for fiscal 2014.

Thanks, Patrick. Sales of NTIC's ZERUST products increased across all market segments during fiscal 2014. Sales of individual ZERUST corrosion inhibiting products increased over 16% as we saw demand increase in both existing customers and new customers. Sales of ZERUST Oil & Gas solutions increased over 71% in fiscal 2014 as we completed many implementations at multiple new customer sites in North America. Additionally, we experienced an increase in oil and gas sales in the Brazilian market. It's also important to note that our gross margins improved over 2% during fiscal 2014, compared to fiscal 2013. Sales of ZERUST corrosion inhibiting products to our joint ventures increased over 16% in fiscal 2014. This increase was mostly a function of the overall increase in joint venture sales of 5% during the period, as Patrick noted earlier. Additionally, income provided by our joint venture operations increased almost 12% to almost $14.1 million during fiscal 2014, compared to fiscal 2013. Lastly, sales of Natur-Tec products increased over 45% to almost $3 million during fiscal 2014, compared to fiscal 2013. Our total operating expenses increased almost 12% to $16.4 million for fiscal 2014, primarily due to an increase in selling expenses, general and administrative expenses, and research and development expenses, and overall, reflected our efforts to support our new business efforts. Overall, net income attributable to NTIC increased 22% to over $4.1 million or $0.90 per diluted common share for fiscal 2014, compared to $0.75 during fiscal 2013. As of August 31, 2014, our working capital increased to $17.8 million, including $2.5 million in cash and cash equivalents and $5.5 million in available for sale securities, compared to $13.3 million in cash and cash equivalents at August 31, 2013. Regarding NTIC's annual guidance; for fiscal year ending August 31, 2015, NTIC expected net sales to range between $32 million and $34 million, inclusive of sales made by NTIC's majority-owned subsidiary in Brazil, and expect net income of between $5.4 million to $5.7 million or between $1.20 and $1.26 per diluted share. With that financial update, Patrick and I'll now answer any questions you may have.

Did we lose our operator? Hello?

I'm here. [Operator Instructions] And our first question comes from Dick Solomon of Axiom Capital. Your line is open. Dick Solomon - Axiom Capital: Good morning and congratulations on a solid quarter. I have a couple of questions; the first relates to Natur-Tec. In North America, I've read about certain legislative initiatives to ban plastic bags and things of this nature. And I wonder how you see that impacting your business opportunities?

Good question. Let me put it in this perspective; right now, a significant portion of our North American sales comes from the Bay Area in California. Now, this new legislation I think you're talking about is specifically the general ban across California, which should open significant markets like Los Angeles, San Diego, and other parts of the states to us. So this should present a significant opportunity for us to significantly expand our sales in North America. Dick Solomon - Axiom Capital: How would your sales break down today between your North American sales in which you're getting through the Indian operation?

The majority of sales at this point in time are still North American based. I believe it's broken out a little bit in the 10-K that will come out, but I want to say that the total sales in India are probably during the last fiscal year, which since we started the join venture up in December …

Subsidiary.

Subsidiary in India, sorry, which we started it up in December of 2013 was probably around half million dollars in sales. So the majority of the Natur-Tec sales are still U.S. based sales. Dick Solomon - Axiom Capital: And so, I guess based upon your earlier comments about India and the comment and answer to my question about what's going on in California, it would appear that the outlook for Natur-Tec's potentially is for a year of healthy volume gains?

That's certainly what we're attempting to do, and there's certainly -- it looks like there's certainly an opportunity for us to do that. Dick Solomon - Axiom Capital: Turning to ZERUST and the oil and gas base; you made some reference to gains in Brazil in the recent fiscal year, what type of backlog do you -- remains in Brazil and how do you see the outlook there in general?

We still think that the outlook in Brazil is healthy. We certainly still have a growing relationship with Petrobras and the sales from Brazil, like we did grow from fiscal 2013 to 2014. We still have a remaining balance on that existing FlangeSaver contract that we received a year or two ago, and we expect to continue to have Petrobras pull off of that contract. At the same time there's other opportunities outside of just FlangeSaver that we're working on with Petrobras that we hope to see the results from in fiscal '15. Dick Solomon - Axiom Capital: Would it be fair to say that the major opportunity you see ahead of the near term is on the tank side of the business around the world?

Certainly that's where we're seeing the greatest immediate growth. We'd certainly still see customers who are very interested in our FlangeSavers, but in terms of converting things into sales, it's easier to implement the tanks than certain other solutions we've offered. It's just a timing question. Dick Solomon - Axiom Capital: And with regard to the tanks, what type of repeat business are you getting? I think you said you did -- have done a total of 50 implementations.

Yes. When you say repeat business, obviously we're not working on the same tanks for getting orders from the same customers who do additional tanks either at the same facility or different facilities as they're coming down for maintenance. So in terms of repeat business where we work on the same tank, again, we're expecting to see that happening in a five-year cycle. So any tanks we worked on in this past year, we certainly expect to have additional business coming from those in five years from now, well, four years from now, at this point. Dick Solomon - Axiom Capital: So again, just like the FlangeSavers, this is a repeat business?

Yes. Dick Solomon - Axiom Capital: A different cycle, maybe.

A different cycle and you're talking about having to basically recharge or refill the dispensers -- the dispenser system on the tanks on a five- year cycle. Dick Solomon - Axiom Capital: In terms of quote activity, and availability of labor to do the installation, I wonder if you could give us any update there as far as the tanks are concerned.

Our teams are very busy in preparing quotes and proposals on a full-time basis. In terms of labor, as I mentioned before, we're not really spaced with the direct labor constraints because a lot of the actual installation work is subcontracted to service companies that are licensed and bounded to work in refineries and oil terminals. In terms of supervision, we have a supervisory team and are currently looking to hire to expand that team. Dick Solomon - Axiom Capital: Okay. Given the -- I'll let other people get in if there are other people on the call. So I'll go into queue.

Okay, thanks.

Thank you. And our next question comes from Tim Clarkson of Van Clemens. Your line is open. Tim Clarkson - Van Clemens: Hey, guys, really, really good quarter, really good year; just getting back to the tank business here, so what's this throughout the numbers if you guys had to do a 100 tanks in a given year, that would be no problem in terms of being able to do that?

Correct. Tim Clarkson - Van Clemens: Right, would there be problem if you had to do 200 tanks or would that be doable too?

It depends on how many locations you're talking about. I mean, given our existing supervisory capacity, if you're talking about a whole bunch of tanks in one location, then no problem whatsoever. If you're trying to do multiple comparing installations, then that's when we'd run into having to hire additional supervisors for the installations. So far we haven't run into that problem. But certainly as we continue to expand in an area that might be something we'd run into most likely a year from now, but probably not in 2015. Tim Clarkson - Van Clemens: Okay, in terms of -- I know your major customers are typically refiners, I mean, how far are we from getting 10 tanks from one customer? Is that a possibility this year to get that many tanks from one customer?

Absolutely. Tim Clarkson - Van Clemens: Okay. And in terms of how far are we from some of these companies saying this is kind of standard solution where if we're going to have new tanks, we're just going to do this automatically. Are we to that point yet or are we heading to that point or how far are we from that point?

I always hesitate to give you a specific answer because we've been surprised a few times in the oil and gas industry, but certainly in the companies we've been talking to, that is a prominent thought in the discussions. So I would not at this point expect that to be too far into the future. Tim Clarkson - Van Clemens: Okay.

I'm also [ph] saying that it could happen as soon as this year. It might be another year or two after that before they actually get it all papered up. Tim Clarkson - Van Clemens: Right, right. And in terms of your competitor, how would you differentiate yourselves from your one competitor?

Well, I think we have very innovative solutions, and really the technical expertise and marketing breadth to really capitalize on this at this point. Tim Clarkson - Van Clemens: Okay, good. All right, I'm good, thanks.

Our next question comes from Walter Ramsley of Walrus Partners. Your line is open. Walter Ramsley - Walrus Partners: Well, thank you. Congratulations, good quarter. Couple of questions; the stock option expense for the quarter, do you have a figure for that or for the year, either one?

I mean it's all -- it's going to be in the K. Relatively, we traditionally are very few, a very low amount of option expense, but as far as stock-based comp, the total expense was $454,000. You'd see it in the cash flow statement. Walter Ramsley - Walrus Partners: Okay. Well, I didn't see that on the press release. Anyway, okay. The dollar impact on the joint venture revenues, can you quantify that, was that an issue?

I'm sorry, I didn't understand your question. Walter Ramsley - Walrus Partners: The U.S. dollar went up over the last three months or six months, did that have an effect on the joint venture revenue number that you reported?

That wouldn't have a significant impact on the revenue number. I mean, what we traditionally see is 70% of our joint ventures are Euro-based; the other 30% are Asian-based. What you can find is that if you're looking in the balance sheet you can see what the impact was by looking at the foreign currency, the accumulative comprehensive income, which is basically showing the foreign currency translation adjustment. Walter Ramsley - Walrus Partners: Okay. Just wondering if that 5% figure represents the unit volume or if that distorted due to the translation that's taken place?

No. We've traditionally seen that there's a unit volume increase that we're seeing around the world. Walter Ramsley - Walrus Partners: Okay. Then in the first quarter, that's currently underway, has there been a slowdown in business due to the apparent demise in Europe and to a lesser extent, China?

Not that we've seen. Walter Ramsley - Walrus Partners: Okay. The gross margins, do you see any changes in them over the upcoming year?

In general, we hope it to be consistent or increase the gross margin based on volume, based on selling price, based on negotiations of suppliers. That's something that we have -- took a very -- we take a very special interest in making sure that we're able to keep our margins in a comfortable place. Walter Ramsley - Walrus Partners: Okay. The tax rate, do you see any changes in that?

No. Walter Ramsley - Walrus Partners: Okay.

Everything is pretty consistent with prior effective rates. Walter Ramsley - Walrus Partners: Okay. And just one last thing on the balance sheet; the value that's reported for the investment in the joint ventures, that decline 1.8 million year-to-year, can you explain what happened there?

Sure. The biggest impact from that is that we received $7.5 million in dividends from our joint ventures. So if you back out or if you'd take the dividends and put that back on to the investment balance, you'd see that the investment in joint venture grew significantly from one year to the following year. So the biggest impact that we have is the -- in newer years we had a large dividend come out on top of the equity income at each of the … Walter Ramsley - Walrus Partners: Yes. I see that. Okay. All right, anyway I don't have that schedule in front of me. So, now I understand. So basically you got more dividends than you reported this earnings?

Well, not often. Walter Ramsley - Walrus Partners: Okay. So, anyway that looks good. So, thank you very much.

Thanks, Walter.

Thank you. And our next question comes from Charlie Pine of Van Clemens and Company. Your line is open. Charlie Pine - Van Clemens: Hi, good morning, fellas.

Good morning. Charlie Pine - Van Clemens: Just a couple of questions; a one or two of them were asked, but in your prepared remarks I think also Patrick in your oral remarks, you talked about efforts to move ahead with regulations in the United States, in the above ground tank area to get a standardized coverage, and as far as being slumping that these would be standardized as far as maintenance going forward. Now, you talk about that there is a greater acceptance amongst companies on their own to look at this as a standardized maintenance process, but how would you characterize industry-wide what the efforts are as far as getting this sort of -- getting an industry-wide and premature, so to speak?

Well, in addition to our direct sales efforts and successes in that direction, obviously we're also presenting a lot at various technical conferences and industry conferences, and we're getting a very warm reception by the various technical experts who focus on these areas. So you're getting the technical experts who are embracing this as a solution. And in terms of legislature support, that continues. I think somehow these most recent midterm elections and various -- have slowdown a few things, but we're certainly expecting some good things to come through this year. Charlie Pine - Van Clemens: When you refer to legislative initiatives, what type of legislative initiatives are you referencing? Are these regulations will be statewide -- are these focused on individual states?

Right now they're focused on individual states, but ultimately we hope to translate that into a national recommendation. Charlie Pine - Van Clemens: All right. Do you have any -- is there any stance at this point in time on -- or is the American Petroleum Institute taking any stance right now on your solution?

No. Not that I'm aware of. Charlie Pine - Van Clemens: :

Well, yes. First of all, well, in our prepared statements I'll talk about North America because we've done installations in the Canada and the Caribbean. And we also have ongoing proposal and discussions in a number of other countries outside the United States, including the Middle East, India, Southeast Asia and parts of Europe. Charlie Pine - Van Clemens: Okay. Have you done anything there in any of those regions yet or is it still just in the discussion stage?

Well, it's gotten to the proposal stage. Right now, it's a question of budgets and implementation schedules. Charlie Pine - Van Clemens: Okay.

: : Charlie Pine - Van Clemens: All right. And how do you feel about just -- you obviously had some really wonderful rates of growth as far as the amount of tanks that you did in the United States over the last twelve months. How would you characterize just the addition to -- the nominal additional tank customers that you've added?

You mean the number of tanks we're trying to do or the number of customers we're looking in? Charlie Pine - Van Clemens: No, the number of individual companies that are doing the installs, and what's your feel is in your -- it sounded like you're pretty enthusiastic about where you're standing in looking ahead for the next 12 months, and I'm curious as if the number of companies that -- increase the number of companies over the last year and your line of sight for the amount of additional companies or a new customer that you think you might be …

I think we certainly expect to get more business from the customers we already have. We're also -- I'd not be surprised at all if the number of total individual customers would double in the next year. Charlie Pine - Van Clemens: Okay. Well, that would be wonderful. And finally, my last thing I was interested in, I think it was about a year and a half ago, you started to introduce some new industrial ZERUST solutions into the market. And I guess I'm curious now since I did in the marketplace for a while, what sort of acceptance have you been getting to some of those new solutions, and where do you see those products heading over the course of the next -- probably next year or so?

Well, those products have enabled us to win some very nice business opportunities as a complement to our broader offering. We're also seeing some opportunities for what we originally targeted as just the general industrial market as getting a lot of interest and acceptance also in the oil and gas sector, and we hope to see some significant sales in the next twelve months for those. Charlie Pine - Van Clemens: :

Thank you.

Thank you. And our next question is from Dick Solomon of Axiom Capital. Your line is open. Dick Solomon - Axiom Capital: If I take the midpoint of your revenue guidance, it implies like mid 20%, I think 23% gain in revenue; your ZERUST business, industrial ZERUST business is in more likelihood, not a generator of a gain of that magnitude. So I wonder how much are you depending on the rapid growth in the oil and gas, and plastics business, and what would be the impact of this on margins, and that the plastic business has considerably lower margins than the oil and gas business?

I certainly wouldn't say that the majority of our growth as far as the sales projections comes from the heavy reliance on the Natur-Tec product line. Dick Solomon - Axiom Capital: Okay.

What we certainly are anticipating in the Natur-Tec would continue to have growth in line with what it had done in the past year. We certainly still see significant growth coming out of the industrial products, the oil and gas products as being the big contributor. There is also opportunities in -- as far as growth coming out of Brazil that we anticipate to happen in 2015. So, all in all, I think the growth is proportional to the breakout that we currently have. But obviously if Natur-Tec does have a sizable increase that they do operate at smaller profit margins, but also the oil and gas tend to operate at higher profit margin than traditional ZERUST industrial products. So, all in all, I should say, the weighted average margin will stay pretty consistent. Dick Solomon - Axiom Capital: Okay, thank you. And I guess that covers the one question I had, so …

Okay, thanks.

: Tim Clarkson - Van Clemens: Yes, this is just kind of a curious question; the potential to convert some of your partially-owned subsidiaries into wholly-owned subsidiaries like you did with Brazil, are any opportunities like that in the foreseeable future this year?

That's more on our long-term consideration list. There's nothing really that we have on the short-term horizon at this point. Tim Clarkson - Van Clemens: Okay, all right, thanks. I'm done.

At this time, I'm showing no further questions in queue, I'd like to turn it back over to Mr. Lynch for any closing remarks.

I'd like to thank everyone for participating today. And in closing, I'd like to thank all of NTIC's global family of employees, joint ventures, friends and colleagues from across our worldwide joint venture network for their hard work and dedication in making fiscal 2014's achievements possible. We believe our strong international presence will continue to serve as a key competitive advantage to us in our increasingly interconnected marketplace, and with our technical strength and market reach, we're well positioned to pursue continued profitable growth. Thank you for listening and for your interest in NTIC.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.