Good day, and thank you for standing by. Welcome to the Northern Technologies International Corporation Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference 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 hand the conference over to your speaker today, Patrick Lynch, Chief Executive Officer. Please go ahead.

Good morning. I am Patrick Lynch, NTIC's CEO. And I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our second quarter fiscal 2023 financial results was issued earlier this morning and is available at ntic.com. During today's call we will review various key aspects of our fiscal 2023 second quarter financial results, provide a brief business update and then conclude with a question-and-answer session. For almost 20 years now, NTIC has been singularly focused on building a solid foundation comprised of an experienced and committed leadership team, as well as a constantly growing portfolio of solutions to answer their diverse and evolving needs of our global customer base. We have continually invested in our business by adding capabilities, enhancing our operations and opportunistically buying out select joint venture partners. This in turn has enabled us to pursue long-term growth strategies aimed at diversifying our end-markets, product categories and geographic footprint. Our second quarter financial performance reflects the success of these initiatives and the resilience of our platform as stable demand for our Zerust Industrial products and services in North America, coupled with growing interest in our Natur-Tec and Zerust Oil & Gas products, both in the U.S. and abroad, provided yet another new sales record in the second quarter. Even as we continue to navigate an extremely complex operating environment comprised of, but not limited to, persistent inflation, raw-material cost increases, geopolitical conflicts in Europe and the lingering effects of the COVID-19 pandemic in Asia. I'm also pleased to report that we are making considerable progress rebuilding our gross margins and controlling operating expenses. In fact, our second quarter gross margin of 35% marks a significant improvement on both a sequential and year-over-year basis, reflecting the growing contributions made by a profitable Zerust Oil & Gas business, as well as the benefits of other measures we've implemented successfully so far this fiscal year. Overall, momentum remains positive and we expect NTIC China sales will improve in the third quarter and beyond as the Chinese economy finally has the opportunity to start rebounding from its exceptionally long self-imposed pandemic freeze. In addition, Natur-Tec sales are expected to benefit in the third quarter from new customer relationships and incremental orders. Consequently, we believe we are well positioned for a strong finish to fiscal 2023. So with this overview, let's examine the drivers for the second quarter in more detail. For the second quarter ended February 28, 2023, our total consolidated net sales increased 9.1% to a second quarter record of $18.3 million as compared to the second quarter ended February 28, 2022. Broken down by business unit this included a 212.4% increase in Zerust Oil & Gas net sales, a 5% increase in Natur-Tec net sales, and a 3.7% increase in Zerust Industrial net sales. Total net sales for the fiscal 2023 second quarter by our joint ventures, which we do not consolidate in our financial statements, increased 3.6% to $25.5 million. This increase was due primarily to a rebound in demand across the territories serviced by our global joint ventures, after several quarters of lower demand due to certain geopolitical conflicts and their impact on raising the cost of energy, while simultaneously reducing its availability. Fiscal 2023 second quarter net sales by our wholly-owned NTIC China subsidiary decreased by 31% to $2.9 million due to the negative impact of severe COVID-19-related lockdowns across much of that country during the quarter and the resulting weaker economic conditions, as well as the impact of Chinese New Year. We continue to closely watch market conditions in China. Now that the Chinese government has terminated the PRC's zero-COVID policy, we expect demands to improve throughout the remainder of this fiscal year. We remain committed to the Chinese market and the long-term opportunities it represents for NTIC. We continue to take steps to enhance and protect our Chinese operations, and we continue to believe China will likely become our largest geographic market in the future. Now moving on to Zerust Oil & Gas. The fiscal 2023 second quarter was one of the strongest quarters we have ever had for Zerust Oil & Gas, as sales increased 212.4% to $1.8 million. The second quarter of fiscal 2023 is also the fourth consecutive quarter of Zerust Oil & Gas sales, over $1.5 million and on a trailing 12-month basis, we have reported nearly $6.5 million of oil and gas sales. We believe these positive trends reflect accelerating momentum within our oil and gas business. Interest is growing for our Zerust Oil & Gas solutions, which include applications to protect aboveground oil storage tanks and pipeline casings from corrosion. We believe the third quarter of fiscal 2023 will be another good quarter of oil and gas sales and growth. The expanding adoption of our Zerust Oil & Gas solutions within the oil and gas industry is supporting bigger opportunities for our Zerust Oil & Gas products and technologies. As a result, we believe fiscal 2023 will be a transformative year for Zerust Oil & Gas as this business scales and continues to contribute to profitability. Turning to our Natur-Tec bioplastics business. Fiscal 2023 second quarter, Natur-Tec sales were $3.8 million, a 5% increase over the prior fiscal year period. While sales trends within the Natur-Tec remain positive, second quarter sales growth slowed due to seasonality and the timing of both shipments and orders. We expect Natur-Tec sales growth to re-accelerate in the third quarter supported by favorable demand in North America and India and significant new customer wins and orders in these geographies. Globally, we continue to see growing market demand for new applications of certified compostable plastic products and resin compounds, as well as increased interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics. As a result, we believe we are well-positioned for long-term sustainable growth within our Natur-Tec bioplastics business. While the global economic environment remains extremely complex, our results have continued to demonstrate the powerful platform we have created. Every day our team members and joint-venture partners are working closely with our customers to provide leading solutions to help protect global supply chains and oil and gas industry infrastructure from corrosion. While also improving the environment by providing best-in-class compostable bioplastics. I am proud of our team's strong performance during a very fluid business landscape. And I'm extremely excited by the opportunities we have in the future to create lasting value for our shareholders. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for fiscal 2023 second quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 9.1% in the fiscal 2023 second quarter to a second quarter record. This growth was driven by the positive trends Patrick reviewed in his prepared remarks. A 3.6% increase in second quarter sales across joint ventures combined with the actions to improve gross margins drove a 9.8% increase in second quarter joint-venture operating income compared to the prior fiscal year period. Total operating expenses for the fiscal 2023 second quarter were $7.5 million and 11.8% increase over the prior fiscal year period, which was primarily due to increased personnel expenses and expenses incurred in the current fiscal year period in connection with the startup of a new indirect majority-owned subsidiary formed to assume the operations of a former joint-venture in Taiwan. Operating expenses as a percentage of net sales were 41% compared to 40.1% for the prior fiscal year period. Gross profit as a percentage of net sales was 35% during the three months ended February 28, 2023 compared to 29.8% during the same period last fiscal year. The 520 basis-point improvement was primarily result of successful actions taken by the company to address inflationary pressures and the increased sales of higher-margin Zerust Oil & Gas solutions. NTIC reported net income of $885,000 or $0.09 per diluted share for the fiscal 2023 second quarter compared to a $183,000 or $0.02 per diluted share for the fiscal 2022 second quarter. NTIC's non-GAAP net income adjusted for amortization expenses and expenses related to the NTIC India transaction was $991,000 or $0.11 per diluted share compared to $392,000 or $0.04 per diluted share for the fiscal 2022 second quarter. A reconciliation of GAAP to non-GAAP financial measures are available in our second quarter earnings press release that was issued this morning. As of February 28, 2023, working capital was $24 million, including $5.5 million in cash and cash-equivalents compared to $23.2 million, including $5.3 million in cash and cash-equivalents as of August 31, 2022. As of February 28, 2023, we had $7.1 million outstanding on our revolving line of credit. During the second quarter, we purchased the 26,000 square-foot facility immediately adjacent to our headquarters in Circle Pines, Minnesota for $1.2 million. The building will be used for additional warehousing and production space to support our continued growth. We generated $2.2 million in operating cash flow for the six months ended February 28, 2023, including $202,000 in the second quarter. During the second half of the fiscal year, we expect to use positive operating cash flow to reduce the outstanding balance of our revolving line of credit. On February 28, 2023 the company had $21.5 million in investments in joint-venture, of which approximately 52.9% or $11.4 million was in cash with the remaining balance primarily invested in other working capital. During the fiscal 2023 second quarter NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable on February 15, 2023 to stockholders of record on February 1, 2023. To conclude our second quarter and year-to-date financial results demonstrate the progress we've made to increase sales across our diverse end-markets and geographies. And the success of our near-term initiatives to improve profitability. I'm encouraged by the direction we're headed. And while the economic environment remains extremely fluid, we continue to believe fiscal 2023 will be another good year of sales and profitability in NTIC. With this overview, Patrick and I are happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Gus Richard with Northland Capital Markets. Your line is now open.

Yes, good morning. Thanks for taking my questions. I was just wondering if you could talk a little bit about what you're seeing in China now. Clearly, the last quarter was challenging and just wondering how quickly you see that geography coming back.

That's still - we're still in wait-and-see mode, really. We are expecting now, that China will flush out this long period of times. It is taking some time for them to recover and get things going again. We'll have a better picture of how quickly China will recover basically at the end of the third quarter.

Got it. And then you mentioned a couple of new customers applications in Natur-Tec and I'm just again, any color around that in terms of geography end-market, et cetera?

Well, one of those domestic we have one large customer we feel - this comes about to come online. We've already started production on their initial orders and we expect start delivering this quarter.

Okay. And then the last one for me. Oil and natural gas, no pun intended, what's the pipeline look like there.

Right now, it looks really good.

Any color do you add - multinationals is the pipeline work aboveground storage just --

It's combination of both and it's a very healthy pipeline at this point.

Okay, all right. I appreciate it. Thanks so much.

And Gus, I'll just add comment that the revenues of second quarter for oil and gas did not include any sales to British Petroleum from the contracts that we received in the first half of the year, that's something that we're starting to deliver on in the second half of the year.

Got it, got it. And just one follow-on. Sort of how many customers do you have in a quarter? Is it a handful, or just any sense there?

From an oil and gas standpoint, yes, I mean, the number of customers would be in the 10 to 20 per quarter, I mean, if I look at kind of an opportunity listing, it's certainly not like the Zerust Industrial listing when you look at the backlog, as far as the hundreds of customers that we're continually delivering to. It's obviously a product that we sell from a price per opportunity at much higher than either the Zerust and Natur-Tec traditional business. So, yes, it's simply a handful of customers per month and that's what adds to the volatility of the revenues. It is positive and a good note that we're finally starting to see is somewhat of a baseline of revenue is coming out, as Patrick said in his prepared remarks that in the last four quarters, it's been over $1.5 million in revenue per quarter. As we're looking forward, we're better able to kind of plan where we are not just in third and fourth quarter coming up, but also through our fiscal 2024, we can see the size of the opportunity, we can see the growth that we're looking at and that's one of the reasons why we're excited about the direction of oil and gas has had it.

I'm sorry, I keep on thinking of more questions. How many customers roughly are in the pipeline?

I would say you're probably - it's not necessarily all new customers but if you look at, I'm looking at just opportunities that we are in and deliver on in third quarter, you're likely looking at probably 30 or 40 different customers.

Okay, got it, got it. Very helpful. Thank you.

Thank you. [Operator Instructions] Our next question comes from Tim Clarkson with Van Clemens & Co. Your line is now open.

Hey, guys, great quarter. Anyhow you've got this new URL number to get onto the call, you thought you could shake me off knowing how bad I am with details, but I hit Angie to the rescue saw there. Anyhow, on the oil and gas stuff, I mean, what are the typical gross margins on oil and gas versus your traditional business?

I mean, there's certainly more positive. We like putting out specific gross margins because it's obviously it does vary based on opportunity, but it certainly has a higher gross margin than what we see in - compared to Zerust Industrial and obviously Zerust Industrial has historically been slightly better than the Natur-Tec gross margins.

All right. What approximately is the breakeven in that division?

The breakeven in the oil and gas division?

Yes.

We have - if I'm looking at oil and gas, I think we had, it's right in between about $4.2 million to $4.8 million in revenue, so given the trailing four months - trailing, however, you want to want to go back from when we kind of saw the step-up in revenue, the oil and gas group has been positive for the last few quarters, which was kind of big milestone - which was a big milestone for that group. And now it's - now we're looking at what are the additional opportunities, what are the additional geographies that we can start going into. There's additional hiring that's taking place in oil and gas kind of service these opportunities. And so part of what gives us a lot of optimism with what's going on currently in oil and gas.

Right. And so, just on a big-picture intuitive basis, I guess what's finally happening which Patrick predicted is after eight to 10 years, people are actually seeing this technology work dramatically better than the traditional technologies. And they see the other people using it so between seeing other people using it and wanting to catch-up and actually seeing the technology continuously prove out there finally and believers, and along with less government variances that you've jumped through.

That's exactly right. Thanks.

Yes. Okay, well good. And then on the compostable stuff, I guess, I've been hearing again in Hennepin County here locally, putting a push on the compostable. I guess that's the other big picture that they're starting to be some government movement requiring organics to get pushed out the garbage stream and you need to have the packaging as part of that solution.

That's exactly right. I mean one of the key drivers for the - that market in general, are the municipal and state mandates that we're seeing and even countrywide mandate that we're seeing in various markets. So - and also with Natur-Tec, we're also seeing positive movements with some of the key raw materials that are going into the products as far as those price points coming down as well. So the expectation is that we're going to see continued recovery in the Zerust Industrial gross margins and also improvements in the Natur-Tec gross margins compared to where we were in first and second quarters.

All right. What are the considerations in terms of potentially spinning this division out and having a trade separately.

Well I mean, we're certainly looking at that opportunity just because it's prudent to do so, but I mean at this point in time NTIC is such a small - we always say, we aspire to be a microcap company. At this point in time Natur-Tec we don't feel has the size, the revenues and the profitability at this point to be standalone, certainly in the future, that's something that we're going to be - it's going to be evaluating and looking at because it's - it is something that could be valued differently as it wasn't seen in conjunction with the rest of the industrial and oil and gas business.

All right. Is there a potential to get a strategic partner that would help with that? I mean, like a [Cargill] someone like that, that would bring technology and maybe sales and marketing into the deal.

It's possible. I don't it's - nothing - there is no external conversations that we've had with anybody from that level of partnership, but as we -- as Natur-Tec continues to grow in the market it continues to grow. Now, certainly, there'll be a lot of different options out there for the business.

Now in your past the issue of there being a shortage of the key element that you're using, yes to make this stuff.

No restrictions at this time. We've got plenty of raw material available to us.

All right. Okay, well great, good quarter. And it sounds like quarters coming up are getting be even better. So thanks, I'm done.

Thanks, Tim.

Thank you. And I'm currently showing no further questions at this time, I'd like to hand the call back over to NTIC management team for closing remarks.

I'd just like to thank everybody for listening in today. I hope you have a good week.

This concludes today's conference call. Thank you for joining. You may now disconnect.