Participants

G. Patrick Lynch; President, Chief Executive Officer, Director; Northern Technologies International Corp

Matthew Wolsfeld; Chief Financial Officer, Corporate Secretary; Northern Technologies International Corp

Tim Clarkson; Analyst; Van Clemens & Co, Inc.

Gus Richard; Analyst; Northland Securities

Zach Liggett; Analyst; Desmond Liggett Wealth Advisors

Gregory Weaver; Analyst; Invicta Capital Management

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Northern Technologies International Corporation second quarter 2025 earnings conference call and webcast. (Operator Instructions) Please note that today's conference is being recorded.
As part of the discussion today, the representative 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 will now hand the conference over to your speaker for today, Mr. Patrick Lynch, NTIC Chief Executive Officer. Please go ahead, sir.

G. Patrick Lynch

Good morning. I'm 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 2025 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 second quarter fiscal 2025 financial results, provide a brief business update, and then conclude with a question-and-answer session. Please note that when we discuss year-over-year performance, we are referring to the second quarter of our fiscal 2025 in comparison to the second quarter of the last fiscal year.
Our fiscal 2025 second-quarter performance demonstrates the increasing intensity of the headwinds we are currently facing, including recent unprecedented changes in U.S. trade and economic policies, the seasonality of our industrial and oil and gas business, and the timing of certain Natur-Tec orders.
Furthermore, regardless of this considerable uncertainty, we believe we are poised for a rebound in Natur-Tec and ZERUST oil and gas sales in the second half of the fiscal year. These expectations are supported by our current sales pipeline and demand from new and existing customers within our Natur-Tec and ZERUST oil and gas segments.
NTIC and our joint venture partners have successfully navigated difficult economic cycles before. And we believe we entered this period from a position of strength as a result of our asset-light and profitable business model; experienced leadership team; and size, scale, and diversity of our business.
In addition, it is also important to note that we continue to have a solid cash position with over $5 million in cash and cash equivalents and available-for-sale securities in the US as well as $13 million of additional cash at our international joint ventures.
Our disciplined approach to managing cash, including adjustments to our quarterly dividend and prioritizing debt reduction, are intended to position us to seize future growth opportunities in our oil and gas and compostable plastics businesses. We believe that our strategic growth priorities and financial discipline will drive sustainable growth and long-term shareholder value.
So with this overview, let's examine the drivers for the second quarter in more detail. For the second quarter ended February 28, 2025, our total consolidated net sales decreased 8.5% to $19.1 million as compared to the second quarter ended February 29, 2024. Broken down by business unit, this included a 28.5% decrease in ZERUST oil and gas net sales, an 11.8% decrease in Natur-Tec net sales, and a 3.7% decrease in ZERUST industrial net sales.
Turning to our joint venture sales, which we do not consolidate in our financial statements. After a year-over-year increase in the fiscal 2025 first quarter, total net sales for the fiscal 2025 second quarter by our joint ventures decreased year over year by 15.7% to $19.8 million.
We believe this year-over-year decline in joint venture sales reflects the continued impact of high energy prices and regional economic pressures in the European economy, as well as increased uncertainty related to US trade and economic policies and the potential disruptive impacts these will have on global supply chains.
I am encouraged by the continued improvement of sales trends at our wholly owned NTIC China subsidiary. Fiscal 2025 second-quarter net sales at NTIC China increased by 8.1% to $3.7 million. The slight decline compared to first quarter sales levels was due to the seasonal impacts this Chinese New Year. Overall, sales in this geography continue to stabilize and are approaching quarterly sales levels that we last experienced in fiscal 2021 and 2022.
The majority of NTIC China's production and sales are for local consumption. And therefore, we believe NTIC China's exposure to tariffs, included those recently imposed by the US, is limited. We expect demand in China will continue to improve in fiscal 2025, helping to support higher incremental sales and profitability in this market.
In addition, we are committed to the long-term opportunities the Chinese market provides for our industrial and bioplastics segments, and we continue to take steps to enhance our operation in this geography. As a result, we continue to believe China will likely become a significant geographic market for us in the future.
Now, moving on to ZERUST oil and gas. ZERUST oil and gas sales were $1.5 million in the second quarter of fiscal 2025 compared to $2.2 million in the same period last year. Please remember, however, that last fiscal year's second quarter benefited from certain oil and gas customers shifting deliveries from the first quarter to the second quarter.
Seasonality and the timing of orders can impact quarterly comparisons, which is why we encourage investors to look at ZERUST oil and gas sales on a trailing 12-month basis. On a trailing 12-month basis, ZERUST oil and gas sales were $8.6 million, a 7.2% increase from $8 million for the trailing 12-month period at February 29, 2024.
Our sales pipeline continues to grow among both new and existing customers for our ZERUST oil and gas solutions, which still focus primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion. While we continue to expect seasonal ordering patterns to drive fluctuations in ZERUST oil and gas sales, we believe we are well positioned for compelling growth in this sector through fiscal 2025 and beyond.
As I mentioned on prior calls, we made strategic investments to expand our oil and gas sales infrastructure during the first quarter to support accelerated ZERUST oil and gas sales that we expect to start occurring in the second half of fiscal 2025.
Turning to our Natur-Tec bioplastics business. Natur-Tec sales were $5 million in the second quarter of fiscal 2025 compared to $5.6 million in the same period a year ago. We believe the 11.8% year-over-year decline in Natur-Tec sales was due to a couple of factors, including order timing and seasonal variation.
While we are assessing the near-term impact tariffs recently imposed by the US and those that may be imposed by other countries in response may have on Natur-Tec, we believe our long-term market opportunities remain strong.
In addition, US organic waste diversion mandates and waste management rules are created at the local municipality and state levels. So we don't expect changes to federal priorities to impact local US demand for our compostable solutions. We are also working on several large opportunities for our Natur-Tec solutions that we believe could help to reaccelerate our growth in the coming quarters.
As we navigate dynamic global and economic uncertainty, please consider that NTIC's long-standing leadership team has previously navigated several challenging economic periods, including the great recession, 2008 and 2009; and more recently, the COVID-19 pandemic. Since then, the size, scale and diversity of our business has increased.
Finally, the strength of our balance sheet and benefits of our asset-light business model provide us with significant flexibility and resources to navigate this type of economic and business uncertainty. We remain confident in the direction we are headed and that our strategic growth priorities and financial discipline will create sustainable growth and long-term value for our shareholders.
Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our success and our ability to navigate more complex economic periods are a direct result of their efforts.
With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2025 second quarter.

Matthew Wolsfeld

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 8.5% in the second quarter of fiscal 2025 to $19.1 million because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures decreased 15.7% in the second quarter compared to the prior fiscal year period.
Joint venture operating income decreased 31.8% compared to the prior fiscal year period, primarily due to a decrease in equity income from joint ventures and fees for services provided to joint ventures, both of which were primarily driven by lower sales at many of NTIC's joint ventures.
Total operating expenses for the fiscal 2025 second quarter increased 2.4% compared to the prior fiscal year period to $8.8 million, primarily due to strategic investments we're making to support expected growth in the second half of the year within our oil and gas business and, to a lesser extent, increased personnel costs across the company.
On a sequential basis, second-quarter operating expenses were down 6.9% from the first quarter. As a percentage of net sales, operating expenses were 46.2% for the second quarter compared to 41.3% for the prior fiscal year period.
Gross profit as a percentage of net sales was 35.6% during the three months ended February 28, 2025, compared to 40.0% during the prior fiscal year period. The 440-basis-point decline was primarily a result of a less profitable mix of sales.
NTIC reported net income of $434,000 or $0.04 per diluted share for the fiscal 2025 second quarter compares to $1.7 million or $0.17 per diluted share for the fiscal 2024 second quarter. NTIC recognized other income of $1.1 million during the three and six months ended February 28, 2025, due to the receipt of the employee retention credit payment.
For the fiscal 2025 second quarter, NTIC's non-GAAP adjusted income was a loss of $300,000 or $0.03 per diluted share compared to non-GAAP adjusted income of $1.8 million or $0.19 per diluted share for the fiscal second quarter of 2024. For a reconciliation of GAAP to non-GAAP financial measures, it's available on our second quarter fiscal year 2025 earnings press release that was issued this morning.
As of February 28, 2025, working capital was $21.4 million, including $5.1 million in cash and cash equivalents compared to $23.7 million, including $5.0 million cash and cash equivalents as of August 31, 2024.
As of February 28, 2025, we had outstanding debt of $8.1 million. This included $5.4 million in borrowings under our existing revolving line of credit compared to $4.3 million as of August 31, 2024. Reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus in the remainder of fiscal 2025.
We generated $3.2 million in operating cash flows for the six months ended February 28, 2025. At quarter end, the company had $25.0 million of investments in joint ventures, of which 52% or $13 million was in cash, with the remaining balance primarily invested in working capital.
During fiscal 2025 second quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per common share that was payable on February 12, 2025, to stockholders of record on January 29, 2025. As Patrick commented earlier in the call, to manage our cash position, reduce debt and enhance flexibility, we're taking a disciplined approach to capital allocation and temporarily adjusting our quarterly dividend to $0.01 per share effective with our next quarterly dividend.
To conclude our prepared remarks, we're committed to our long-term growth opportunities. We're confident that our strategic priorities and financial discipline will drive sustainable growth and create value for our shareholders.
With this overview, Patrick and I are happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Tim Clarkson, Van Clemens.

Tim Clarkson

Obviously, a tough environment to do business. Just wanted to ask. I know we're making some pretty big investments on the oil and gas on the sales team. How are those working out?
I mean, how many people have we hired? Or have we changed out any of those people yet, or are they all performing the way we expected?

G. Patrick Lynch

Well, it's an extended question. Yes, we hired -- I believe it was eight people. Some of them did not work out, and we had -- and they have left the company since then. We're expecting the impact to start showing in the second half of this year. And other than that, just going ahead full steam.

Tim Clarkson

Okay, good. And in terms of the compostable, you mentioned that there's some potential deals in that area that could reignite business there. Are those in new areas? Or what's the dynamic behind those?

G. Patrick Lynch

One of the opportunities is just a large distributor in the United States that we've added, which is going to add a significant business for us. And also, there's a new line of technology in food packaging that we're currently building. I think the trial results are looking good. And if it works out, it should be a significant opportunity for us.

Tim Clarkson

Okay, good. Good. In terms of -- I see that you've got this employee retention payment. Was that an actual cash payment or was that just an accounting adjustment?

G. Patrick Lynch

That was an actual cash payment.

Tim Clarkson

Okay, good. All right. Well, it looks like -- how is your core business doing right now? Is it still deaccelerating? Or is business about the same, slightly worse? Or what are your expectations for this quarter with your core business?

G. Patrick Lynch

It's going to be flat.

Tim Clarkson

Okay. Flat might be good.

Operator

Gus Richard, Northland Capital Park Markets.

Gus Richard

Just on the gross margin, it was down fairly significantly year over year. Natur-Tec actually was down as a percentage of revenue. And I'm just wondering, $0.5 million of oil and gas was -- the loss of that, was that the pressure on gross margin? Or a little bit of color there would be helpful.

Matthew Wolsfeld

Yeah. There's two main impacts from a gross margin standpoint. The gross margin across the traditional ZERUST industrial business has remained relatively steady, and we haven't seen significant deviations there.
I'll say that there was increased pricing pressures from competitors in the Natur-Tec business. And so we have decreased our top-line sales price probably at an average of anywhere from 4% to 6%, even up to 8% in some areas, to maintain competitive and that business. So that's been one of the impacts to gross margin.
You'll note that over the past two years, we've been able to increase that gross margin from the lower 20% up into the higher 30%-plus, 35%. And so we saw a little bit of pullback in the gross margin at the Natur-Tec to what I'd say is more of a mean level.
And then additionally, from the oil and gas business, gross margins remain flat. But obviously, with gross margin sales being down year over year, that's just the weighted average of the product set.

Gus Richard

Got it. Very helpful. And then just on the Natur-Tec opportunity that you talked about, can you add a little bit more color what the application might be? Is it resin versus finished product? Is it cutlery or some other product category?

G. Patrick Lynch

It's food packaging.

Gus Richard

Sorry?

G. Patrick Lynch

It's on food packaging.

Operator

(Operator Instructions) Zach Liggett, Desmond Liggett Wealth Advisors

Zach Liggett

Could you give us some more color on ex core and what's happening there and what levers you have to affect change? I appreciate macro is very difficult, but any color on leverage you have to effect change and the outlook for dividends to improve from those joint ventures?

G. Patrick Lynch

You've been mentioning ex core Germany, specifically. The problem is that the German economy and, more broadly, the European economy has been suffering from the fact that, with the Ukraine crisis, the cost of energy has gone up dramatically in Europe so much so that certain plants that are high end users, let's say, foundries, steel mills, et cetera, are not profitable to operate at all.
And so a lot of these manufacturing plants are actually shutting down and laying off their workers. And that's an ongoing situation that's not going to change very soon in Germany. So ex core, I hope that the decline is going to level off at some point not the distant future. But for right now, it's going to be more of the same for the foreseeable future.

Operator

Gregory Weaver, Invicta Capital Management.

Gregory Weaver

Could you give a little more color about the second-half ramp you're expecting in oil and gas in terms of applications and maybe some chunky customers ordering?

G. Patrick Lynch

It's going to be, again, the oil storage tank bottoms in pipeline casings primarily in various geographies around the world.
And in terms of lumpy customers, I mean, we are working closely with some very large companies that are obviously looking into a number of -- quite a large number of tanks and bottoms and pipeline casings. I'm not exactly sure how many in total, but it should be a decent pickup.

Gregory Weaver

All right. And in terms of the sales guys that you hired, is that geographic or any segment? Or how do you divide that up?

G. Patrick Lynch

It's been all over. We added in North America, in the Middle East, Asia, and in Europe.

Gregory Weaver

Has anything come out of the BP relationship in terms of other customers or other geographies in which they're interested?

G. Patrick Lynch

BP, we're talking to them in various locations, but nothing that's come out of it yet, no.

Gregory Weaver

Okay. And lastly, how about Brazil in terms of, I guess, that getting straight down back on track? And you had some pretty good activity there.

G. Patrick Lynch

Yes. Brazil is actually doing very well with the oil and gas industry. They're picking up some significant business and their sales are ramping up very nicely.

Gregory Weaver

Okay. Well, it sounds like this is the business that's going to make the difference here in terms of the numbers in the second half anyway. So hopefully, we can get some deals closed.

G. Patrick Lynch

Yes, I agree.

Operator

And I am showing no further questions in the queue at this time. I will now turn the call back over to Mr. Patrick Lynch for any closing remarks.

G. Patrick Lynch

Thanks again for everybody for calling in this morning. I hope you have a nice rest of the week.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and you may now disconnect.