Release Date: April 11, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Record second quarter ZERUST Oil and Gas sales and record quarterly Natur-Tec sales.
- Continued year-over-year improvement in gross margin, indicating successful initiatives aimed at improving profitability.
- Anticipation of continued profitability improvement and positive operating cash flow throughout the second half of fiscal 2024.
- Significant year-over-year increase in operating cash flow by nearly 156% to $5.6 million, primarily due to higher net income and positive changes in working capital.
- Fiscal 2024 second quarter net sales increased by 14.1% to a second quarter record of $20.8 million.
Negative Points
- Total net sales for the second quarter by joint ventures decreased year-over-year by 7.9% to $23.5 million.
- Mexico Germany, the largest joint venture, experienced a 5.6% decrease in net sales due to loss of a customer and softer demand within the region.
- Near-term economic conditions in China remain uncertain despite year-over-year increase in quarterly sales for NTIC China subsidiary.
- Total operating expenses for fiscal 2024 second quarter increased 9.4% to $8.6 million compared to the same period last fiscal year.
- While joint venture operating income increased, it was partially offset by lower joint venture sales.
Q & A Highlights
Q: Can you talk a little bit about the pipeline for Zerust and Natur-Tec and if the growth is sustainable sequentially?
A: (Unidentified Company Representative) For Zerust Oil and Gas, the expectation is that Q3 and Q4 will surpass Q1 and Q2 expectations due to projects coming online. For Natur-Tec, the strong Q2 growth was due to new customer wins in North America and India, with expectations of continued growth.
Q: Do you have a target for gross margins going forward?
A: (Unidentified Company Representative) The company aims to keep fixed expenses stable and improve gross margins for all product lines. The 40% gross margin achieved in the quarter is a good target, and the company is making strategic investments to improve this further.
Q: Can you provide some color on the improvement in your China operations?
A: (Unidentified Company Representative) There's been a slight uptick in demand and new opportunities in new markets. Cost-cutting efforts have also been made to increase profitability.
Q: What percentage of the oil and gas business is repeatable?
A: (G. Patrick Lynch) Technically, it's all repeatable as the company is still capturing a small portion of customers' repair and maintenance budgets, and there's a large market opportunity for growth.
Q: What differentiates Natur-Tec products from the competition?
A: (Unidentified Company Representative) Natur-Tec develops proprietary resins tailored to customers' needs, which are not replaceable by other compostable resins. This leads to long-term partnerships.
Q: Is Natur-Tec profitable on a standalone basis?
A: (Matthew Wolsfeld) Yes, Natur-Tec is profitable and has been contributing to the company's bottom line for the past six quarters.
Q: Are there opportunities to expand the joint venture operating income segment of your business?
A: (Matthew Wolsfeld) The company handles joint venture opportunities on a case-by-case basis and is not actively looking to buy out partners unless a strategic opportunity arises.
Q: Is the third and fourth quarter strength in oil and gas a function of higher oil prices or greater adoption of your technology?
A: (Matthew Wolsfeld) It's more about the adoption of the technology rather than oil price volatility. The company expects growth in oil and gas for the next few years based on technology adoption.
Q: Can you give us an idea of the economy in Europe and the automobile part of the business in the United States?
A: (G. Patrick Lynch) The economy in Europe is holding steady, and there's no significant growth expected in the near future for the US Zerust industrial business.
Q: Has the recent increase in inflation begun to affect your company?
A: (G. Patrick Lynch) Not that the company is aware of.
