Northern Technologies International Corporation Stock

Good day and welcome to NTIC's third quarter 2026 earnings conference call and webcast. [Operator Instructions] The call 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 will now hand the call over to Mr. Patrick Lynch, NTIC CEO. Please go ahead, sir.

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 third quarter fiscal 2026 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 2026 third quarter 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 third quarter of our fiscal year in comparison to the third quarter of last fiscal year. Strong global demand and increasing adoptions of our Zerust corrosion prevention and Natur-Tec bioplastic solutions drove quarterly consolidated sales to new record highs. Disruptions to shipping through the Strait of Hormuz during the quarter caused by recent increased conflict levels in the Middle East contributed to a significant increase in our raw material costs.

Higher input costs reduced our gross margin by approximately 477 basis points year over year, and we estimate that gross profit was negatively affected by approximately $1 million based on gross margin levels prior to the increase in U.S.-Iran hostilities. We believe that the third quarter cost pressure was temporary, and we are pursuing pricing and procurement initiatives that we expect will improve gross margin and profitability in the fourth quarter. Since reaching the profitability levels we planned for is taking longer than expected, we believe NTIC must remain focused on the initiatives within our control to drive more profitable growth, including expanding sales of our higher margin Zerust Oil & Gas solutions and broadening Natur-Tec applications globally. Our liquidity and financial flexibility remain solid, supported by significant capital within our joint venture network and anticipated proceeds of more than $1 million from the pending sale of our Beachwood, Ohio facility, which is expected to close in fiscal 2027.

The resilience of our business model, demand for our technologies, and our focus on execution give us confidence in stronger, more profitable fourth quarter results. So, with this overview, let's examine the drivers for the third quarter in more detail. For the third quarter ended May 31, 2026, our total consolidated net sales increased 12.6% to $24.2 million as compared to the third quarter ended May 31, 2025. Broken down by business unit, this included a 72.3% increase in Zerust Oil & Gas net sales, a 10.3% increase in Zerust Industrial net sales, and a 5% increase in Natur-Tec sales. Turning to our joint venture sales, which we do not consolidate in our financial statements, total net sales for the fiscal 2026 third quarter by our joint ventures increased year-over-year by 15.1% to $26.7 million, reflecting improved year-over-year demand across many of our joint ventures.

We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement targeted economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Stable sales trends continued at our wholly owned NTIC China subsidiary. Fiscal 2026 third quarter net sales at NTIC China decreased by less than 1% to $4.5 million. As I've stated before, given that the majority of NTIC's China sales are domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to improve in fiscal 2026, helping to support higher incremental sales and profitability in the market.

On a trailing 12-month basis, NTIC China sales have increased 12.8% to $17.8 million, comparing to $15.8 million for the same corresponding period last fiscal year. We believe that China will likely become a significant market for our industrial and bioplastic segments, so we'll continue to take steps to enhance our operations in this geography. Now, moving on to Zerust Oil & Gas. Zerust Oil & Gas sales were $2.2 million, a third quarter record and increase of 72.3% from the same period last year. This growth reflects the investments we have made in our global sales infrastructure and the increasing adoption of our VCI solutions within the global oil and gas industry. The third quarter reflects the fourth consecutive quarter that Zerust Oil & Gas sales have been over $2 million, and on a trailing 12-month basis, sales are now over $10 million for the first time in our history.

We are encouraged by these trends as adoptions increase and we develop new applications for our corrosion prevention solutions across the global oil and gas market. During the third quarter, we experienced higher year-over-year oil and gas sales in the Middle East, North America, India, and China from both new and existing customers, reflecting the contribution of recent investments we have made to enhance our sales team and add resources to support future growth. This has improved our sales pipeline as the size and number of opportunities has expanded. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings, and offshore oil rigs from corrosion. The nature of this industry will always cause certain fluctuations in Zerust Oil & Gas sales. Nevertheless, we still expect to see Zerust Oil & Gas sales and profitability to improve significantly in fiscal 2026 as we leverage these investments and rein in operating expense growth.

Turning to our Natur-Tec bioplastic business. Third quarter Natur-Tec sales were a quarterly record $6.1 million, representing a 5% year-over-year increase. We continue to pursue several larger opportunities in North America and India that we believe can further benefit Natur-Tec sales in the coming quarters. In North America, Natur-Tec was recently selected for the International Fresh Produce Association's Packaging Innovation Program, where we are advancing commercialization of compostable barrier laminate solutions for food packaging applications. In India, we announced a collaboration with Bayer to develop biodegradable and compostable seedling cups for nursery applications. This initiative is expected to begin with pilot trials in vegetable and fruit nurseries and, subject to successful validation, could create a meaningful new application for our compostable materials platform.

These initiatives build on new food packaging opportunities we have discussed on prior calls and demonstrate the expanding range of markets in which Natur-Tec can provide a practical alternative to conventional plastics. Overall, we believe Natur-Tec is a best-in-class compostable plastics business that is well positioned for further growth in the U.S. and internationally, as we expect sales to continue to expand over time. 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 over the call to Matt Wolsfeld to summarize our financial results for the fiscal 2026 third quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 12.6% in the fiscal 2026 third quarter, the second consecutive quarter of year-over-year double-digit growth. Sales across our global joint ventures increased 15.1% in the third quarter. Joint venture operating income in the third quarter increased 12.2% compared to the prior fiscal year period, primarily due to higher sales at our joint ventures. Total operating expenses for the fiscal 2026 third quarter increased 5.3% to $10.2 million, primarily due to higher year-over-year selling, general, and administrative, as well as research and development expenses. Operating expenses as a percentage of third quarter sales were 42% compared to 44.9% for the prior fiscal year period. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations.

Gross profit as a percentage of net sales was 33.6% during the 3 months ended May 31, 2026, compared to 38.4% during the prior fiscal year period. As Patrick discussed, gross margin for the third quarter was impacted primarily by higher raw material costs as a result of the conflict in the Middle East and disruption of shipping through the Strait of Hormuz. We expect gross margin to improve sequentially for the fourth quarter of fiscal 2026. NTIC reported a net loss of $263,000, or $0.03 per share, for the fiscal 2026 third quarter, compared to net income of $122,000, or $0.01 per diluted share, for the fiscal 2025 third quarter. For the fiscal 2026 third quarter, NTIC's non-GAAP adjusted net loss was $158,000, or $0.02 per diluted share, compared to a non-GAAP adjusted net income of $228,000, or $0.02 per diluted share, for the fiscal 2025 third quarter. A reconciliation of GAAP to non-GAAP financial measures is available in our third quarter fiscal 2026 earnings press release that was issued this morning.

As of May 31, 2026, working capital was $20 million, including $7.3 million in cash and cash equivalents, compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025. As of May 31, 2026, we had outstanding debt of $14.8 million. This included $11.8 million in borrowings under our existing revolving line of credit, compared to $9.3 million as of August 31, 2025. Reducing debt through positive operating cash flow and improving working capital efficiencies is a strategic near-term focus. During the third quarter of fiscal 2026, we committed to a plan to sell our Beachwood, Ohio facility, which has historically been used for our Zerust segment. As a result, we reclassified the carrying value of the property by $869,000 from property, plant, and equipment to assets held for sale on the consolidated balance sheet as of May 31, 2026.

On May 31, 2026, we received a non-binding letter of intent to purchase the property for $1.15 million in cash, subject to a customary diligence period and execution of a definitive purchase and sale agreement. We expect the sale of the property to close during fiscal 2027. On May 31, 2026, the company had $30.4 million in investments in joint ventures, of which 54.4% or $16.5 million was in cash, with the remaining balance primarily invested in other working capital. To conclude our prepared remarks, we believe our third quarter results demonstrate the continuing strength and resilience of our business, highlighted by record quarterly consolidated sales and growth across our core corrosion prevention and bioplastics platforms. While profitability during the quarter was affected by a sharp increase in raw material costs associated with geopolitical disruption in the Middle East, we believe this pressure was temporary and does not change our view of the long-term earnings potential of the business.

As we move through the fourth quarter of fiscal 2026, we expect continued sales growth and improved profitability, supported by pricing actions and disciplined expense management. We also remain focused on advancing higher margin Zerust Oil & Gas opportunities and expanding Natur-Tec applications globally. We believe these factors position NTIC to deliver stronger financial performance and cash flow generation in the coming quarters. With this overview, Patrick and I are happy to take your questions.

Ladies and gentlemen, to ask a question at this time, you will need to press star 1 1 on your telephone and wait for your name to be announced. [Operator Instructions] The first question coming from the line of [ Timothy Clarkson ] with [ Ben Clements ].

I was just wondering if you're going to separate the oil and gas business, you said you're on pace to do about $10 million, I guess that's annually. I mean, how profitable would that division now be? Would that be a 10% net business or a 5% net business?

We don't specifically look at it like a separate business as a standalone like that. I mean, you can certainly look at oil and gas and say, yes, we expect the total revenue from oil and gas to be up above $10 million for the, you know, around $10 million for the year. You know, we know what the gross margins are. We know what the contribution is going to be. We can certainly see how things are ramping up in oil and gas kind of across the board. And certainly with expectations of what's going to happen and what we're expecting to see in the fourth quarter, that's going to drive a significant amount of profitability. And so that's really what's going to be the key contributors.

If you look at third quarter oil and gas this year compared to third quarter oil and gas last year, it's certainly up significantly, it's up 77 or so. 72.3% just oil and gas is comparing that amount. You know, I'd say the disappointment is that if you look at, you know, the trailing oil and gas numbers, third quarter was lower than second quarter. And the expectation was that we were going to kind of continue to build on oil and gas revenue. So there's obviously a very low comparison to the prior third quarter. There were some shipping issues, there were some large projects that came in and ultimately ended up being invoiced in June that will help significantly from a gross margin contribution standpoint in our fourth quarter, which kind of gives me, at least already having it invoiced at this point in time, we're already 40 days into the fourth quarter, a lot more confidence in our fourth quarter numbers compared to where we expected to be.

Sure. So, but I mean, just in general, the gross margins in oil and gas are higher than the gross margins in the rest of the company.

Yes. And so we expect that to kind of play out from a weighted average standpoint. The biggest hit we had in the quarter, if you look down the line, revenues were strong across the board, joint venture contribution in total was up the biggest, and we were able to hold operating expenses at the 5% level, which is what we had planned to do. The big issue that we had was the gross margin impact with polyethylene prices increasing by 30-plus percent with the conflicts going on in the Middle East. We have now seen polyethylene prices, if you look at the markets, return back to the August 2025 levels. We expect that to flow through, we've seen that flow through May and through June. We've seen that flow through our inventory and we were able to pass a lot of those cost increases on to customers, but ultimately, we dropped a few percentage points from a gross margin standpoint because of that situation.

So we're still pretty optimistic, given what we've seen in June, given what we've seen with what the backlog is for July and August, that we're still going to be a pretty strong fourth quarter. It should be our strongest quarter of the year. It'll certainly give us a lot of momentum with what we expect to do going into fiscal '27.

Right, right. Now you mentioned that there's been some positive things going on in Germany. Can you do a little more color on that?

I think the positivity, when I look at what's going on, you know, kind of in Germany and things like that, we are seeing from a revenue standpoint that revenues are bouncing back compared to prior periods. We're starting to see kind of a stabilization where we hope that we've certainly hit the trough as far as they're starting to come back as far as what's happening from an industrial standpoint. If they can get some things figured out at the country level as far as energy prices and things, hopefully that trend kind of continues from our standpoint.

Right, right. And I assume you guys are always looking to try to cut expenses wherever you can.

Yes, certainly. But I mean, I think, you know, one of the key comments that Patrick made, you know, when you look at it is we are ramping up revenues. We do expect fourth quarter revenues to be higher than third quarter revenues. And we do expect to hold our expenses relatively flat. And so, you know, we're not coming in and saying the reason why we didn't make money this quarter is because we increased our expenses and we made all these investments. We're now at a point where we have capped off the investments, we're holding things as flat as possible, and we're seeing the revenue where we expect the increased revenue to drive the gross margin dollars to the bottom line. And that's what I expect to see in the fourth quarter and expect to see throughout fiscal '27.

We do not have significant investment plans, either from an employee standpoint or from a capital purchase standpoint in North America in fiscal '27. One of the things we do have is because of the growth that we're seeing in Brazil inside of oil and gas, because of the growth that we're seeing at Natur-Tec India, because of the opportunities there that we're looking at over the next coming years, they are investing in some new facilities to be able to meet the demand there. So there will be some investments, but those are at the subsidiary level, not at NTIC.

Right, right. Okay. Well, I'm obviously anxious to see the improved profitability and I'm still there. So thanks for your time. Thanks, guys.

Thank you. Our next question coming from the line of [ John Merwood ], [ Ascend Wealth Advisors ], [ Willanis Melvin ].

Can you expand on how you're addressing your ability to source raw materials used for say Natur-Tec or even to get yourself away from the need to source raw materials from the Mideast, if that's possible, and how that might play out and help you in improving your raw material cost.

Sure. I think the one item to point out is that there are no raw materials that we're sourcing from the Middle East. It simply has to do with the raw material impact that the situation in the Middle East had on raw material prices around the world. And so we are not currently sourcing from anywhere, but obviously there's a huge amount of global trade that flows through the strait, and so that ripple effect is what caused the 30-plus percent increase in the LDPE prices. That ripple effect is what we saw that caused a lot of our other base chemistries that go into some of our powder-based materials and things like that to increase.

So from a production standpoint, we've spent the past 3 years looking at diversifying our capabilities of producing in China, producing in India, producing and subcontracting in Vietnam and Thailand, other areas so that as there are tariff changes and opportunities, we're able to kind of capitalize on those countries. We're still pursuing that plan. And so, you know, we've certainly established over the past 3 years the ability to source from different areas around the world to get the most effective pricing to keep our costs down and our gross margins, you know, at stable levels.

Okay, very good. And then my second question is, you could expand on your recently announced compostable seedling cup efforts and is that something that could be replicated in let's just say North America for the U.S., Canadian, Mexican market or maybe even in South America. Can you kind of expand on the timeline of when this effort could potentially play out beneficially for you. In other words, get away from the trial stage and implementation to where it actually may impact the bottom line.

I would say that it can be implemented globally. And in terms of how long it's going to take to hit our bottom line, I would guess that they'll be testing for another period of time. So maybe start some commercialization in a year.

I see. Okay. And so, is this effort focused in India with Bayer, but it has a global approach? In other words, can you set up operations to do this within, say, the U.S. or within Canada where there's large agricultural efforts?

Yes, there are absolutely applications in those countries.

Okay. And so is this a global effort with Bayer? In other words, it's not just specific to India?

For right now it's specific to India. I don't presume to know everything that Bayer is thinking. And they're becoming.

Right. Okay. Okay, very good. Thank you. Those are the questions I had.

Yep. Thank you.

Our next question in queue coming from the line of [ Don Hall ] with [ DMH Investments ]. [Operator Instructions]

I believe in previous conference calls you mentioned some contracts, particularly in Brazil and then possibly some other countries, and I think it was for the Zerust product. Are those proceeding as expected, or is there more you can tell us about them, or am I possibly mistaken?

No, you're not mistaken. The contract in Brazil was related to opportunities that we have for offshore FPSOs. And that is a contract that was about a $14-plus million contract over several years that is scaling up as far as our Brazilian subsidiary taking advantage of that. That is in process, that's been in process for a few quarters. If I look at the, you know, Brazilian oil and gas revenue, the 9 months ended in May 2026 compared to the prior 9-month numbers, is up close to 70%. That's a result of the implementation of this contract.

We expect, based on how we are servicing those companies, it's kind of a cumulative effect. It's not the kind of situation where you have, you know, $4 million per year over a 3-year period. It's a ramp up where you are providing the materials and services to these offshore FPSOs and continue to add more and more. So it's a slow scale up to where in year 3 you'd ultimately be implementing on a number of FPSOs, 3 times the number of FPSOs in the third year than you would in the first year. So it's kind of a cumulative buildup of the project.

But, yes, that's certainly moving forward and certainly is successful. And it should lead to some increased sales in that geography, right?

Yes.

Okay, good. Thanks very much. How about other – are there other possibilities like that?

Yes, I mean, overall, the 9-month oil and gas revenue across the board is up 67%. So that means the non-Brazil number is up 67% flat. The Brazil oil and gas number is up 67.7%. The increased revenue that we're seeing in the oil and gas space is in North American opportunities, in our new subsidiary in the Middle East that we spent significant amounts investing in over the past 12 to 18 months. That is scaling up well and is at a point where it's making contributions. So the expectations are that we're going to continue to see sizable annual revenue growth in all of the areas in oil and gas.

All right, thank you very much.

Thanks, Don.

Our next question coming from the line of Gus Richard with Northland Capital Markets. [Operator Instructions]

I just wanted to ask about Natur-Tec, you know, and the press release you mentioned gross margin pressure on the call. You mentioned new products, which I would expect to help gross margins. I was just wondering if you could talk about how you see the trajectory of those two things in terms of margins for Natur-Tec.

Yes, I mean, I think there's different aspects, as you're well aware, there's different business lines inside of Natur-Tec. And there is the, what I'll call the commodity Natur-Tec business, made up of bag liners and cutlery and things like that, and then there is the, you know, the proprietary resin formulations that we're working on for applications with other companies. And I think what we're seeing is that for a lot of the commodity-based trash bag liner revenue that we have, it is a price sensitive, cost sensitive, business.

And so, in order to maintain those revenues, at times there are pricing issues that we have that have impacted our gross margins. That's what I alluded to in the earnings release as far as how some of the Natur-Tec gross margins have been impacted. So we saw some positive gross margin improvement over the prior 18 months with some of the raw material prices coming down, but we're also seeing, as I noted, we're seeing some of the price competition inside of Natur-Tec being a little bit of a headwind. And so that kind of on top of the issues we saw with the Zerust Industrial raw material prices is what kind of caused the impact for the overall gross margin of the company to be lower than expected.

I mean, I can say that even inside of Q4, for the industrial business, we have seen a recovery of the gross margin. For Natur-Tec, it's still at a point where it's, you know, those aren't one-time issues. Those are discounts and pricing that we have pushed through to customers. That's not going to change unless we're able to change input costs.

Okay. Okay, got it. And then just so it's clear in my mind, the war has had an impact on the oil and gas business globally, not just you guys. And I'm just wondering, from your perspective, the war in the Middle East had a positive or negative impact on your oil and gas business, you know, people ramping up production places or ramping it down or what have you?

It definitely had a negative impact in the third quarter. I mean, we had our – the individuals that are working in our operations in Dubai were, you know, they weren't allowed to leave their houses during the times in our second quarter because there were bombs and missiles flying overhead and bomb sirens going off and things like that. So it certainly has an impact on what they're able to do and projects and normal business occurring in the area. So certainly what we saw in that area was down a little bit.

But I can say that there's a lot of infrastructure in that region that was damaged, you know, that is going to need to be rebuilt, there are going to need to be investments there. They are going to be doing that over the coming years, that certainly is going to continue to drive opportunities. So, you know, long term, I don't see, you know, even looking forward just a couple quarters, it looks like the opportunities have rebounded and things have calmed down, but certainly during the second quarter it was concerning with what was going on very close to employees that we had in the region.

Got it. Thanks. And then your decision to sell Beachwood to Zerust Industrial improving, looks strong, and just wondering what went into the decision to sell the Beachwood facility.

Well, we've had that facility for probably 20 years, right around there. And for the most part, with the building that we purchased up in Minnesota, the expansion, the building that we purchased right next to our headquarters we've had for a long time, it's given us more opportunity just to consolidate everything in Minnesota. And so we moved the – the Beachwood office was kind of the oil and gas group and the R&D people that were there, that were kind of working in the Beachwood office, they're being brought up to Minnesota just as an effort to kind of consolidate the facility. There's no real reason to remain in Ohio.

Okay. Got it. And then last one for me on SG&A, it was a little bit above what I would have expected. Was there a one-time item there or what's going on with that line?

No, no significant one-time charges or one-time expenses in SG&A.

Okay. All right. Thanks so much. Thanks, guys.

Our next question coming from the line of [ Zach Liggett ] with [ Desmond Liggett Wealth Advisors ]. [Operator Instructions]

Nice job handling things in the corridor, a lot of stress here in the Middle East. You guys seem to be handling things pretty well with the things you can control. Natur-Tec, good color there. Any way you can quantify what the volume growth looked like? And then my follow-up to that is on the innovation front, is there any more you can tell us about what's happening with the food packaging innovation.

From a volume standpoint, if I look at Natur-Tec from a revenue standpoint. Now the Natur-Tec revenues for the 9-month period are up 5%, for the third quarter it's up 5%. I would say from a volume standpoint, it's probably up closer to 10% to 12% if I'm looking at case quantities and things like that. So you can kind of see based on that what portion of it is price concessions and what portion of it is volume growth. So that's where we are from that standpoint.

As far as expectations of what's going on with food packaging, those are, I'd say, a little longer in the development as far as what needs to happen with these specific chemistries and then being able to use the resin that we produce on the customer's existing equipment to generate that product. There's just a lot more involved with doing things that involve food that take a little more time. But certainly the applications that we're pursuing have been very positive, we're very optimistic about them and they are, you know, sizable, you know, healthier margin opportunities. So those are certainly some of the things that we expect to fuel the growth of Natur-Tec over the coming 12, 18, 24 months are some of these food service opportunities both in the United States and in India.

Okay, great. And then last one for me on the AI front. I think I asked this before but I'm curious with your sales teams or just internally, are you guys piloting any projects? Are you finding any productivity gains from the use of AI tools at this point?

Yes. Well, specifically from an AI standpoint, one of the benefits that I wasn't expecting when we made this decision, but when we made the switch to SAP, you know, 18 months ago, let's say that the data that we're able to gather from both a manufacturing standpoint, from a sales standpoint, from a product sales standpoint, there's significantly more data available than what our historical system had. Is that with using external tools like Claude and being able to really, you know, kind of pound through and analyze, you know, hundreds of thousands of lines of data that we didn't have before.

It gives us a really, really clear insight into what's going on with each individual customer, each individual ordering level of the customers, gross margin at the customer level, gross margin at the product level, you know, which we didn't and wouldn't have had access to before. And so those are certainly some of the areas where we're able to go in and, you know, rather than going in and hammering something with a hammer, we were able to go in with a scalpel to kind of fix different things and kind of evaluate where we are.

Additionally, on top of that, what we're finding is that SAP that we're looking at implementing is they have internal AI tools that can be utilized directly in your system. So employees will be able to utilize, you know, the SAP AI tools to pull up things faster, to be able to respond to customers faster, things like that. So on all levels from executive level down we are working to implement these things to become, you know, I wouldn't say just more efficient but be able to be, you know, more reactive and be able to really tighten things up from a business standpoint.

Yep, good. Sounds great. Thanks for taking the questions.

Thank you. And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Patrick Lynch for any closing comments.

Thank you for joining us this morning, and have a nice day.

Thank you for your participation and you may now disconnect.

Good morning. 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 and 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 the 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 turn the call over to Patrick Lynch, CEO. You may begin.

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 2026 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 2026 second quarter 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 2026 in comparison to the second quarter of last fiscal year. Our results were in line with expectations as we continue to execute against our long-term growth strategy.

Second quarter performance was driven by solid top line growth across our businesses including a record second quarter, [indiscernible] gas net sales with year-over-year growth across all geographies, reflecting the investments we've made in our global sales infrastructure and the increasing adoption of our VCI solutions within the global oil and gas industry.

We have also seen continued strength at NTIC China despite the seasonal impact of the Lunar New Year and achieved another solid quarter of Natur-Tec growth. Overall, second quarter and year-to-date results reflect the resilience of our business model and the increasing value customers place on our corrosion prevention and compostable plastic solutions.

While the macro environment, including geopolitical tensions in the Middle East, ongoing supply chain pressures and continued challenges in the European economy has become more uncertain, we remain confident in the direction of our business and the strategies we are executing to drive long-term value.

The diversity of our end markets, geographic footprint and product portfolio positions us well to navigate near-term volatility. As we move through the second half of fiscal 2026, we expect continued sales growth and improved profitability, supported by stable trends in North America and ongoing strength in NTIC China [indiscernible] Oil & Gas and Natur-Tec.

So with this overview, let's examine the drivers for the second quarter in more detail. For the second quarter ended February 28, 2026, our total consolidated net sales increased 15.3% to $22 million as compared to the second quarter ended February 28, 2025.

Broken down by business unit, this included a 72.1% increase in ZERUST oil and gas net sales, an 11.2% increase in ZERUST industrial net sales and an 8.1% increase in Natur-Tec net sales.

Turning to our joint venture sales, which we do not consolidate in our financial statements, total net sales for the fiscal 2026 second quarter IR joint ventures increased year-over-year by 18.6% to $23.5 million, reflecting improved year-over-year demand across many of our joint ventures.

We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement targeted economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany.

Improving sales trends continued at our wholly owned NTIC China subsidiary Fiscal 2026 second quarter net sales at NTIC China increased by 18.5% to $4.4 million, demonstrating strong demand in this geography.

Furthermore, given that the majority of NTIC's China sales are for domestic Chinese consumption, we believe NTIC China -- China's exposure to U.S. tariffs is limited. We expect demand in China will continue to improve in fiscal 2026, helping to support higher incremental sales and profitability in this market.

We believe that China will likely become a significant market for our industrial and bioplastic segments. So we will continue to take steps to enhance our operations in this geography.

Now moving on to ZERUST Oil & Gas. ZERUST Oil & Gas sales were $2.7 million, a second quarter record and increased 72.1% from the same period last year. This growth reflects the investments we've made in our global sales infrastructure and the increasing adoption of our VCI solutions within the global oil and gas industry.

A highlight of increasing ZERUST oil and gas adoption includes the 3-year contract with an estimated total value of approximately $13 million we announced in November 2025 and for a major offshore project with a leading global EPC company.

We expect this project to ramp throughout the current fiscal year and continue through calendar 2028. This is a significant validation of our engineering capabilities the scalability of our ZERUST Oil and Gas business and the reputation we've built as a trusted partner to leading offshore operators.

Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets.

During the second quarter, we also experienced higher year-over-year oil and gas sales in the Middle East, North America, India and China from both new and existing customers, reflecting the contribution of recent investments we've made to enhance our sales team and add resources to support future growth.

This has improved our sales pipeline and the size and number of opportunities have expanded. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings and offshore oil rigs from corrosion.

The nature of this industry will always cause certain fluctuations in ZERUST Oil and gas sales Nevertheless, we still expect to see serious oil and gas sales and profitability improved significantly in fiscal 2026 as we continue to leverage these investments and rain in operating expense growth.

Turning to our Natur-Tec bioplastics business. Second quarter Nitrotech sales were $5.4 million, representing an 8.1% year-over-year increase in [indiscernible] sales. We continue to pursue several larger opportunities in North America and India for our Natur-Tec solutions that we believe holds significant promise to benefit our sales in the coming quarters, including advancing the compostable food packaging solution we mentioned on prior calls. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant future growth in the United States and abroad, and we expect sales to continue to expand throughout the year. 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 in direct results of their efforts.

With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2026 second quarter.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 15.3% in the fiscal 2026 second quarter, the strongest year-over-year growth rate we've achieved since fiscal 2022 because of the trends Patrick reviewed in his prepared remarks.

Sales across our global joint ventures increased 18.6% in the second quarter. Joint venture operating income in the second quarter increased 19.8% compared to the prior fiscal year period, primarily due to higher sales in our joint ventures.

Total operating expenses for the fiscal 2026 second quarter increased 7.7% to $9.5 million, primarily due to higher selling and general and administrative expenses partially offset by a reduction in research and development expenses.

Operating expenses as a percentage of second quarter sales were 43.2% compared to 46.2% in the prior fiscal year period. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations.

Gross profit as a percentage of net sales was 35.7% during the 3 months ended February 28, 2026, compared to 35.6% during the prior fiscal year period.

Higher gross margin for the second quarter was primarily due to the increase in sales. We expect gross margin to improve sequentially during fiscal 2026. As a reminder, during the second quarter of last fiscal year, NTIC recognized $1.1 million in other income due to the receipt of a onetime cash employee retention credit payment.

No other income was recognized in this fiscal year second quarter. NTIC reported a net loss of $35,000 or $0.00 per share for the fiscal 2026 second quarter compared to a net income of $434,000 or $0.04 per diluted share for the fiscal 2025 second quarter.

For the fiscal 2026 second quarter, NTIC's non-GAAP adjusted net income was $70,000 or $0.01 per diluted share compared to a non-GAAP adjusted net loss of $300,000 or a loss of $0.03 per diluted share for the fiscal 2025 second quarter. A reconciliation of GAAP to non-GAAP financial measures is available in our second quarter fiscal 2026 earnings press release that was issued this morning.

As of February 28, 2026, working capital was $20.2 million, including $5.6 million in cash and cash equivalents compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025.

As of February 28, 2026, we had outstanding debt of $14.3 million. This included $11.3 million in borrowings under our existing revolving line of credit, compared to $12.2 million as of August 31, 2025.

Reducing debt through positive operating cash flow and improving working capital efficiencies is a strategic focus for fiscal 2026 and beyond. On February 28, 2026, the company had $29.7 million of investments in joint ventures, of which 51.8% or $15.4 million was in cash, with the remaining balance primarily invested in other working capital.

In January 2026, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share payable on February 11, 2026, to stockholders of record on January 28, 2026. To conclude our prepared remarks, we believe our second quarter results demonstrate the continued strength and resilience of our business, led by strong year-over-year sales growth and improving year-to-date profitability, while the macro environment remains uncertain, we are encouraged by the underlying trends across our business and the momentum we are seeing across our operations.

As we move through the balance of fiscal 2026, we expect revenue growth to increase -- increasingly translates to improved profitability, supported by operating leverage, disciplined expense management and continued focus on working capital efficiencies and debt reduction.

We believe these factors position us well to navigate near-term macro uncertainty while driving stronger financial performance and cash flow generation over time. With this overview, Patrick and I are happy to take your questions.

[Operator Instructions] And our first question will come from the line of Timothy Clarkson of Van Clemens.

Obviously, a really good quarter revenues-wise. -- earnings are quite there. But maybe you can talk a little bit about the investments that have been made over the last year or so and the -- if you think the investments have -- are worthwhile.

Yes. I mean, I'd say there's kind of what I'll call the long-term investment and the short-term investments. I mean, the immediate investments that we made over the past 2 years are the -- it was really the hiring of a lot of people and starting with the new subsidiaries that we have in the UAE, specifically to view with the oil and gas opportunities there.

And we have seen success from that entity part of what has fueled the oil and gas revenue increase has been some of the revenues that we have achieved in the Middle East.

If I look at kind of the breakout of oil and gas revenue, I think part of the expectation was that the increase was due to the Brazil contract, which is true. But we're really looking at, let's say, a non-Brazil increase this quarter of about 85% compared to second quarter last year and a Brazil oil and gas increase of about 5% and this year compared to Q2 of last year.

So the growth that we're seeing in oil and gas is not localized to Brazil. It's happening based on opportunities in North America, in the Middle East, and other regions. So we certainly get the sense that we're starting to get traction in that area from the investments that we've made over the past 2 years.

So at this point in time, we're happy with those investments. We're kind of at a point now with oil and gas where it's a transition from the work that we've been doing behind the scenes to really focusing on closing business and adding revenue to the top line that will ultimately slow down to an earnings per share standpoint.

The other investments, key investments that we've made are -- will come through the investment section, the cash flow over the past couple of years where you look at purchasing and building next door and making improvements in that building and adding both warehousing capability and manufacturing capability to our facility, which helped us maintain the gross margins on the new products that we have, so we don't have to outsource and can essentially achieve better gross margins on those products.

So we spent about $4 million plus on that facility and bringing in some manufacturing capabilities here. And additionally, over the past 2 years, we implemented a new SAP system, which certainly has been a little bit more painful to deal with. But long term, I think the data that we're getting on an SAP system and the way that we will be able to kind of integrate things worldwide with the kind of how the company has set up with the subsidiaries around the world and joint ventures, it's going to give us much better data to be able to grow from a total global company perspective.

So those are really the 3 main investments we've made over the past 2 years, I think although a lot of them have been, I'll say, difficult and certainly added to operating expense over the past 2 years. I think that's really what's going to fuel the company for the coming 3 to 5 years.

Right, right. Now obviously, China is doing really well. I mean there was some concern that as they transition to electric cars, there wouldn't be very much demand for 0. So it looks like there's still plenty of demand for 0 electric cars or not.

Yes, China has done well, surprisingly well. They're transitioning -- if I look back at kind of where we were selling in China, when we established this subsidiary in 2014, '15, '16 compared to where we are now, there's been, I'd say, a little bit of a transition between supplying the, let's say, the U.S.-based or European-based automotive company is to now focusing on supplying for domestic consumption, which is good given kind of the volatility of what happens in China from an expectation standpoint.

So a lot of the increases that we've seen in China have been for domestic consumption of the ZERUST product which is very positive from our standpoint.

Right. One last question. Just on -- in general, on the R&D end. I mean, are there any -- is the R&D spend, particularly on ZERUST type products or on the compostable stuff or some of both? Are there some new emerging technologies coming from all the R&D spending?

The textiles, which in particular, we're very positive on what's what happen in the packaging sector. [indiscernible] estimate the bit in the next 6 to 12 months.

Okay. And that was, what, creating the compostable packaging that doesn't allow moisture in, right?

It is right.

Right, right. That's -- no one else has that product, right? .

Right. Right.

All right. I'm done. I mean, obviously, the -- well, 1 last question I'll ask it is, I mean, is there still -- I mean, historically, Northern Tech would net 10% net add kind of optimum sales level. Is that still the goal of the company, 10% after tax?

It's difficult to kind of look at it just from that standpoint of what the traditional net is because, obviously, the joint venture operating income that comes in is not included from a top line standpoint.

And so I think the big difficulty we have in the company is if you look back at kind of the historical contributions from the joint venture, it was significantly higher.

I mean, just looking at what we previously received from the German joint venture, that would be anywhere from $0.10, $0.12 per share per quarter coming in, where now you're looking at $0.05 or $0.06 per quarter coming in.

So what we're seeing is that as we get back to getting opportunities, which we expect to see in Q3 and Q4, a significant increase in the earnings compared to Q1 and Q2.

It's really a matter of how the nation business, the oil and gas business and the industrial businesses that we have, how are those really kind of offsetting some of the declines we've seen from the difficulties that the German joint venture, specifically dealing with the German economy.

They've done a good job of with what they're dealing with, given the difficulties with energy prices and things like that in Germany specifically. But it's really a matter of getting the income from the new businesses and seeing those take off to really augment or would have been kind of a decline in Germany.

Okay. Well, great. The revenue growth is already showing, so that's good. So I am done.

And our next question will be coming from the line of Jake Patterson of Talanta Investment Group.

Just a couple of quick ones. First off, on gross margin. I know you guided for sequential expansion and are continuing to guide for that. We saw a margin kind of flattish, even down slightly quarter-over-quarter, it looks like a lot of that was from Natur-Tec. I know one of the weaker margins we've seen in at least the last couple of years.

So I was kind of curious maybe what happened there and the outlook for the second half going forward on that margin?

Well, there's a lot of different factors that have kind of impacted Natur-Tec, I'd say, over the past if we look back 4 or 5 quarters. It's historic -- it's going to be a more volatile gross margin. The reason for the volatility is twofold. One is you have kind of fluctuating input prices from the materials that we're using.

And two, a bigger component of that is that we're doing global manufacturing for the Natur-Tec residents. And so there's been a lot of impact from the tariffs and the change in tariffs that we have in place.

So when we were focus more on manufacturing in China. And there was some volatility with Parisar. We saw some increases in the increases. We're now set up where we're going to use up very quickly where we're able to be manufacturing in China, in Vietnam, in India and longer term looking for some North American manufacturing capabilities for Natur-Tec.

The other component to the gross margin is the selling price. And we certainly have seen that the Natur-Tec end products it is a competitive environment, and we certainly are seeing that the companies we're dealing with are deal with raises and margins.

And at times, we have had to decrease price to remain competitive in some of those larger bids. So certainly, the goal is to move forward in selling more of the proprietary resins compared to the end products that are in the more competitive space.

But ultimately, there's just a lot of input factors to what impacts the gross profit for Natur-Tec specifically. Certainly, the goal is to hold it, hold the in gross margin and increased margin as much as possible.

It's just sometimes difficult depending on the region.

Okay. Okay. Still on the margin side, I mean, ZERUST, I mean, just looking at the oil and gas mix relative to last year, I mean, it's 500 basis points higher and gross margins down year-over-year there. Is that still any impact from that supplier issue you guys had in the first quarter as doesn't really seem like as much improvement as I would have thought.

Yes, we did continue to have the impact on inventory and the impact from suppliers as we talked about in Q1 and kind of the carry over to Q2 the other difficulty we have, it hasn't impacted us from a second quarter standpoint, is what's going to happen in Q3 and Q4 given what's going on with energy prices and polyethylene prices and things like that worldwide. .

We've dealt with this before whether during cobot or whether during other time periods. But we do our best to pass through increases in raw material prices to customers as much as possible. But certainly, we're seeing an increase in some of the main base materials that go into our polyethylene-based products.

So it's certainly something to kind of watch out for in Q3 and Q4.

Yes. So all that is down and I think razor prices 60% or so. So that should be interesting to see. I guess one last one. You just mentioned that the Middle East contributed to some of your oil and gas revenue growth, and they were up, I think, like 80% or something year-over-year.

When you go look at your investor presentation, you guys I think you break out the geographies for ZERUST oil and gas, and it only lists Brazil and North America, at least as of November or our fiscal '25 year.

So I was kind of curious -- I mean it sounded like there was some Middle East revenue from that geography last year, but I'm assuming it's a minute like pretty minimal at this point.

I mean I wouldn't say it's minimal. I mean, if I look at kind of what they did, we previously were selling to some of these Middle East opportunities as far as with larger contracts with British Petroleum, in Georgia and some other areas like that.

We've historically since sold to Reliance in India. And these sales were happening through North America. Now we're doing is pushing some of these opportunities to be more localized in that area because they're better set up to serve that region.

So it's kind of a -- those previously were going through North America. I think kind of going forward, once the once the subsidiary in the UAE, it's fully up and running fully functional and operating completely independently, will break out the revenues for that area in the investor presentation.

The other thing that's kind of changed is we are using the [indiscernible] network that we have in place to go after the oil and gas opportunity. I mentioned specifically opportunities in India. There's opportunities in China, certainly the subsidiary in Brazil.

These are all areas where we want to go after oil and gas opportunities with those subsidiaries. Some of them are also bringing in and hiring people that specialize in the oil and gas space to be able to go after those opportunities there.

So we'll establish kind of regional hub in Asia as we talked about in the Middle East, it's a sense Ultimately, we're looking to push those oil and gas products out through all the subsidiaries that we have to take advantage of that network that we spent so long to build up.

Got you. No, that makes sense. Cool fares. That's it for me. I appreciate it. .

And our next question will be coming from the line of Gus Richard of Northland Capital Markets.

Yes. I kind of want to focus on the impact of the war you guys reported the last quarter or the last quarter ended before the war started. -- there's been a lot of change in the world. And I'm first curious is that changing regional demand in terms of where companies or countries or regions are getting more active or less active?

I guess there's a bunch of different impacts from what's happening kind of across the board. You've got the very, very up and close impact where the individuals that we have with a subsidiary in Dubai are getting array irons and our locked in place and told not to go out at various times, and they're seen, they're seeing this first hand.

And so a lot of the areas where they're going to sell products and do installations and things like that are unlocked down. But you do have the opportunity that with some of the infrastructure that's been essentially blown up.

You are going to have opportunities where there's rebuilding and where there's different things going on and increased spending in those areas where they're going to need some gross protection and things like that. So there's a very direct impact from those things.

Then you have kind of the secondary impact of what's happening with the supply chain, energy price and things like that with what's going on in the straight and what's going on kind of -- from a relationship standpoint, which is causing energy prices increase, which is causing raw material prices to increase, which is obviously impacting not just NTIC, but certainly all the joint ventures and the subsidiaries.

On top of that, you've got subsidiaries that I'd say are further away, takers in Brazil, where they potentially have supply constraints from the standpoint of the product needs to be shipped. The raw material products need to be shipped there. There's potentially shortages of the product.

We're not seeing shortages of products in North America. It's -- the prices are going up, but we're not seeing shortages, but we're looking at certain regions around the world where they're potentially seeing we're they're running the issues of even having raw materials in place to be able to make the product, which is different than just seeing price increases.

And so there's a lot of different ways where -- what's going on in the Middle East of what's going on with the war is kind of impacting the company. But certainly, it's certainly a concern, but we have -- I think we're in a position where we're able to deal with those issues.

If I look at kind of what's happening in Brazil, we had a conversation in Brazil that was kind of a supply line -- we're fortunate that we have other subsidiaries and other entities around the world that could potentially be able to meet the -- meet those customers in Brazil if their demand and provide product to them.

So we're not sole sourced in areas. It allows us flexibility. It allows us the ability to pick and choose what we want to go after and have options as far as picking lowest-cost suppliers, things like that.

Got it. And then so you've got increase in input prices. Is that -- are you able to pass that increase on to your customers? How how are you adjusting to higher input costs? And how receptive are your customers today or contractually?

Well, the good thing that we have is that one, we have initially when things pick up, we did build up inventory a little bit. We're doing our best to hold prices where we can, but we also don't want to be in a situation like what we had in COVID, where we reacted too slowly and ultimately, we did raise prices for like 6 months, and we had issues.

So we're kind of in a -- we're in a situation where we're monitoring prices we are looking at raising prices where we can, specifically when we are selling custom-made products that is based off of the price that we pay, it's easy to push that increase on the customers.

The other benefit that you have is it's not like this is an anomaly where the customer is going to understand what's going on from an international standpoint from aerogel pricing standpoint. I mean they see what's happening at the gas pump specifically, they can read and hear what's happening from the supply chain and prices going up.

And so it net come in and explain as they look, the price of polyethylene has increased from by $0.20. This is how your price of our product is increasing and why. And so it's a matter of walking the customers through it and explaining what's happening, but we can certainly point to very clear data that shows exactly how long our input prices are increasing and that certainly helps us passing those increases on to customers and an increased final price of the gas.

Got it. And then you talked about operating leverage. Does the operating leverage come from holding OpEx flat and rising revenue? Or is there an opportunity to trim your OpEx and a little color there would be helpful.

The goal from -- the goal from a leveraging standpoint is to increase revenue. And if we kind of look forward right now with the backlog that we have and the projects that we have, the expectations are that our third and fourth quarter will be significantly better than first and second quarter. We've historically had very strong third and fourth quarter from a revenue standpoint. -- and I would expect that trend to continue.

Second quarter is historically not every second quarter, but traditionally, our second quarters are our slowest quarter from a revenue standpoint.

The reason why revenues look good in the second quarter this year is because second quarter last year was was down so much. It was such a bad quarter last year from a comparative standpoint. But given where we're at from a backlog and expected projects, we had to close, third and fourth quarter should really show, I think, how the company is going to back on track from an earnings standpoint and a profitability standpoint where we can see how we're going to utilize that leverage and push as many gross margin dollars to the bottom line as possible.

So holding OpEx flat or as low as possible is certainly the objective cutting expenses at this point in time.

Okay. Got it. And then the last one for me, just looking at the balance sheet, cash has declined last 5 quarters in a row or net cash, right, has declined here and debt has increased, the cash has kind of stayed the same.

And I just want to understand what was driving that decline was the investments in the business and sort of what's the plan to get cash back to a better place, can you [indiscernible] some of the cash in some of the JVs, for example? Any thoughts there?

Yes. There's kind of a 3-pronged approach. One is certainly to bring back from a dividend standpoint, cash at the subsidiaries and at the JV level to help increased the amount of cash we have here and ultimately get the credit.

The #1 thing that we need to do is we need to increase earnings. If you look back quarter by quarter what we're doing from an earnings standpoint, it's -- you're not going to be able to build your cash back.

Obviously, in fiscal '25, we virtually no earnings. The last time in fiscal '24, we generated $0.60 a share, which helped from a cash standpoint.

But obviously, everything we did in 2005 from an earnings standpoint hurt us, a big component to our income is the equity income, which obviously isn't cash coming in, it's the dividends that come in from the equity income that ultimately get you there.

And so the goal is to increase earnings, which is, I think, what you're going to see in Q3 and Q4, which will help pay down the debt. The other item is investing section from a cash flow standpoint.

We've made -- I kind of explained earlier in the call, we made significant investments in P&E items as far as the building next door and the SAP system that we had cash out the door to fund the actual investments that we're going to be making from a cash flow standpoint, over the next few years is going to be significantly smaller than we've done in the past 2 years.

And I think that's going to ultimately -- that's also going to significantly put more cash back on the books. So I think the trend is going to start kind of Q3 and Q4. We work on reducing the debt exposure.

I'm showing no further questions. I would now like to turn the call back to management for closing remarks. .

I just want to thank everybody for coming good morning and with you today. .

And this concludes today's -- today's program. Thank you for participating. You may now disconnect.

Hello, and welcome to the First Quarter 2026 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 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 these actual results could differ materially from those stated or implied by the forward-looking statements due to the certain risks and uncertainties, including those described in the 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 call over to Patrick Lynch, President and CEO. Please go ahead.

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 first quarter fiscal 2026 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 2026 1st quarter 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 first quarter of our fiscal 2026 in comparison to the first quarter of last fiscal year. .

I'm very pleased that for first quarter, we were able to deliver record consolidated net sales, driven by the strongest year-over-year growth rate we've had since fiscal 2024. Our performance was further augmented by higher sales across key sectors, including ZERUST Oil and Gas, NTIC China and North America and Natur-Tec sales. U.S. Oil and Gas achieved record first quarter sales marking the second consecutive quarter with more than $2 million in revenue, demonstrating improving demand from both new and existing customers. Improving profitability is a top priority for NTIC in fiscal 2026 and we expect to begin to realize the benefits from the strategic investments we made over the past 3 years towards upgrading our global operations and supporting future growth.

We are also focused on flattening our operating expenses and driving sales in the higher-margin segments of our business, which we expect will improve our profitability and strengthen our balance sheet this fiscal year. Overall, the start of fiscal 2026 is encouraging, and we expect these trends to support anticipated higher year-over-year sales and profitability as the year progresses. So with this overview, let's examine the drivers for the first quarter in more detail.

For the first quarter ended November 30, 2025, our total consolidated net sales increased 9.2% to a quarterly record of $23.3 million as compared to the first quarter ended November 30, 2024. Broken down by business -- this included a 58.1% increase in ZERUST Oil and Gas net sales a 6.9% increase in ZERUST industrial net sales and a 2.2% increase in Natur-Tec product net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2026 1st quarter by our joint ventures increased year-over-year by 2.9% to $24.5 million, reflecting improved demand across many of our joint ventures partially offset by a mid-single-digit decline at our German joint venture.

We continue to closely monitor trends across our European markets for sign of stabilization following years of subdued demand as governments begin to implement targeted economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany. Sales trends continued at our wholly owned NTIC China subsidiary fiscal 2026 1st quarter net sales at NTIC China increased by 23.5% year-over-year to $4.9 million, demonstrating a strong demand in this geography.

Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to grow and improve in fiscal 2026 helping to support anticipated higher incremental sales and profitability in this market. We believe that China is on its way to becoming a significant market for our Industrial and bioplastics segments. So we plan to continue to take steps to enhance our operations in this geography. Now moving on to ZERUST Oil and Gas. First quarter of fiscal 2026 ZERUST Oil and Gas sales were $2.4 million, a first quarter's record and an increase of 58.1% from the same period last year.

This growth rate demonstrates the wider adoption of our VCI solutions by new and existing customers across the global oil and gas industry as well as at our Brazil subsidiary. As discussed on our prior call in November 2025, we announced that our 85% owned subsidiary, ZERUST Brazil, secured a 3-year contract for a major offshore project with a leading global engineering, procurement and construction, or EPC company. Under this agreement, ZERUST will be providing advanced corrosion protection solutions for floating production storage and offloading units or FPSOs, with an estimated total value of approximately $13 million over the next 3 to 4 years based on current foreign exchange rates.

We expect this project to ramp up throughout the current fiscal year and continue through calendar 2028. We believe this is a significant validation of our engineering capabilities the scalability of our ZERUST Oil and Gas business and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets. As indicated in prior calls, we have continually invested in our ZERUST Oil and Gas business to enhance our sales team and add resources to support anticipated future growth.

This has improved our ZERUST Oil and Gas sales pipeline as the size and number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks pipeline casings and offshore oil rigs from corrosion. While the nature of this industry will always cause certain fluctuations in our ZERUST Oil and Gas sales, we still expect to see ZERUST Oil and gas sales and profitability improved significantly in fiscal 2026 as we plan to leverage these investments and rain in operating expenses.

Turning to our Natur-Tec Bioclassics business. First quarter Natur-Tec sales were a quarterly record of $6 million, representing a 2.2% year-over-year increase and a 16.5% increase from the fourth quarter driven primarily by higher sales in North America. We continue to pursue several larger opportunities in North America and India for our Natur-Tec solutions that we believe holds significant promise to benefit our Natur-Tec in the coming quarters, including advancing the composable food packaging solution we mentioned on prior calls. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant future growth in the U.S. and abroad, and we expect sales to continue to expand throughout the year.

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 2026 1st quarter

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increased 9.2% in fiscal 2026 1st quarter, driven by the strongest year-over-year growth rate we have achieved since fiscal 2024 because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 2.9% in the first quarter. Joint venture operating income in the first quarter decreased 5.1% compared to the prior fiscal year period. Primarily due to a slight increase in operating expenses at the joint ventures.

Total operating expenses in fiscal 2026 1st quarter increased to $9.7 million, a 2.9% increase compared to the prior fiscal year period, primarily due to higher selling and general and administrative expenses, partially offset by a reduction in research and development expenses. We expect quarterly sales to grow faster than operating expenses as we continue to leverage recent investments and upgrades across our global operations. Gross profit as a percentage of net sales was 36% during the first 3 months ended November 30, 2025 compared to 38.3% during the prior fiscal year period.

Lower gross margin for the first quarter was primarily due to a temporary supplier lead time issue. We expect gross margin to improve sequentially during fiscal 2026. NTIC reported net income of $238,000 or $0.03 per diluted share for the fiscal 2026 1st quarter compared to net income of $561,000 or $0.06 per diluted share for the fiscal 2025 1st quarter. For the fiscal 2026 1st quarter, NTIC's non-GAAP adjusted income was $344,000 or $0.04 per diluted share compared to non-GAAP adjusted net income of $667,000 or $0.07 per diluted share for the fiscal 2025 1st quarter.

A reconciliation of GAAP to non-GAAP financial measures are available in our first quarter fiscal year 2026 earnings press release that was issued this morning. As of November 30, 2025, working capital was $19.4 million, including $6.4 million in cash and cash equivalents, compared to $20.4 million, including $7.3 million in cash and cash equivalents as of August 31, 2025. As of November 30, 2025, we had outstanding debt of $12 million, including $9.1 million in borrowings under our revolving line of credit. This is down slightly from outstanding debt of $12.2 million as of August 31, 2025.

Reducing debt through anticipated positive operating cash flow and improving working capital efficiencies to the strategic focus in fiscal 2026. On November 30, 2025, the company had $29.3 million of investments in joint ventures, of which 53.4% or $15.6 million was in cash, with the remaining balance primarily invested in other working capital. In October 2025, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on November 12, 2025, to stockholders of record on October 29, 2025.

To conclude our prepared remarks, we believe our first quarter results demonstrate positive momentum building across many parts of our business. We expect higher year-over-year sales combined with improving gross margins and controlled operating expense growth through the year, which we expect to benefit our profitability in fiscal 2026. We believe we're well positioned for a strong fiscal 2026 and I look forward to sharing the progress we're making in future calls.

With this overview, Patrick and I are happy to take your questions.

[Operator Instructions] And our first question will be coming from Tim Clarkson of Inclement.

Patrick, Matt, great quarter revenues-wise. Earnings not quite there, but obviously, sharply improved from the fourth quarter. So just getting into some of the color, what are some of the levers you guys can do to improve profitability?

I think from an overall profitability standpoint, it still kind of comes back to the key fundamentals of driving sales growth, which is going to obviously increase gross margin, which is going to push money down to the operating profit line. We certainly have an expectation during the current fiscal year and what you saw from an operating expense standpoint of keeping relatively flat operating expenses and still achieving significant growth. I think the majority of the growth, typically our second quarter is one of our lower quarters. We expect it to be pretty consistent with what we saw in the first quarter with a significant amount of growth coming in the third and fourth quarter. which is pretty historically consistent.

So as we see that happen, I would expect the profitability is going to stem from the gross margin dollars that are flowing through to the bottom line. The other key contributor here is isn't associated with revenue is the joint venture operating profits. And kind of the expectation is that we are going to see certain growth from a joint venture level through the remainder of the year as well. So those would be the key drivers to get us back up to profitability levels that we saw [indiscernible] quarters ago which is kind of where we expect to be towards the end of the year.

Are there anything you could do on the expense and that would be where you can eliminate some expenses? I know you want to basically keep expenses flat, but are there any opportunities in terms of cost cutting?

There are some opportunities, but there's also -- the main situation that we're up against is that we have made specific strategic investments in the oil and gas business around the world and the business around the world. And in addition, we've made investments in North America from a -- both from a manufacturing investment standpoint and from a new CRM system, things like that. So I don't know if it's necessarily a matter of cutting expenses. It's more a matter of letting the revenues catch up to the increases in expenses that we saw over the past 2 years. So I think that's ultimately how we're going to get long-term profits. We don't want to cut expenses to potentially increase quarterly profits by a few cents and then ultimately hinder what would be long-term growth or the stability that we need and the people that we need for the long-term success of the business as we see Natur-Tec in oil and gas ramp up over the coming 2, 3 years.

Now are you guys pleased with the work the sales team on the oil and gas hires from last year are doing?

Well, they're getting -- they're starting to put business on the books. The biggest increase you saw this year, obviously, was from[indiscernible] , and that was a nbcontract. The rest is now starting to pick up that competitively by when they're getting business out of naan Middle East -- and we obviously Europe starting to contribute in the coming months.

And our next question will be coming from Don Hall. .

Did I hear my name Don Hall.

Yes. Happy to take your question.

Okay. I believe in previous calls, you mentioned the oil and gas opportunity in Brazil, plus another -- a couple of other major opportunities. Are there still other major ones that you can discuss?

In what business? .

I can't pick you up. It's kind of a. .

I mean the biggest contract we have in place right now is the 1 in Brazil. Obviously, we're talking to other oil companies around the world and starting to make inroads. So we expect to see the business growing over.

I'm showing no further questions. I'd now like to hand the call back to Patrick for closing remarks.

Thank you all for joining us this morning, and have a nice week.

And this concludes today's program. Thank you for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to NTIC's Fourth Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] 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 will now hand the conference call over to Mr. Patrick Lynch, NTIC's CEO. Please go ahead, sir.

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 fourth quarter and full year 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 fiscal 2025 fourth quarter and full year 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 fourth quarter and full year of our fiscal 2025 in comparison to the fourth quarter and full year of last fiscal year.

Fiscal 2025 was marked by order timing shifts and selective softness in our ZERUST oil and gas and Natur-Tec markets. So NTIC used this period to strengthen its competitive position and to execute strategic initiatives that we believe will enhance our long-term growth potential. We accelerated product innovation within Natur-Tec, advanced new ZERUST solutions across global industrial markets and pursued emerging opportunities in the South American offshore oil and gas sector. These actions have expanded our pipeline, sharpened our focus and positioned NTIC to reaccelerate growth and improve profitability in fiscal 2026 and beyond.

In fiscal 2026, we expect to start reaping the benefits gained from the strategic investments NTIC made over the past 3 years to upgrade our global operations and support future growth. We are also focused on flattening our operating expenses while expanding gross margins and driving sales in the higher-margin parts of our business, which we expect will improve our profitability and strengthen our balance sheet in fiscal 2026. While we anticipate macroeconomic headwinds to persist, especially in Europe, we believe NTIC is positioned to deliver growth and improved profitability across many of our key markets in the coming fiscal year.

So with this overview, let's examine the drivers of the fourth quarter in more detail. For the fourth quarter ended August 31, 2025, our total consolidated net sales decreased 4.4% to $22.3 million as compared to the fourth quarter ended August 31, 2024. Broken down by business unit, this included a 29.4% decrease in ZERUST oil and gas net sales and a 10% decrease in Natur-Tec net sales, partially offset by a 5.8% increase in ZERUST industrial net sales.

Turning to our joint venture sales, which we do not consolidate in our financial statements. Total net sales for the fiscal 2025 fourth quarter by our joint ventures increased year-over-year by 4.7% to $24.4 million. For fiscal 2025, joint venture sales declined 4.9%, reflecting the continued impact of high energy prices and regional political pressures on the European economy as well as significantly increased uncertainty related to U.S. trade and economic policies and the potential impact this will have on global supply chains. We continue to closely monitor trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement target economic stimulus packages. We expect that any economic recovery from these stimulus packages will lead to a positive impact on our joint venture operating income in future periods, especially in Germany.

Improving sales trends at our wholly owned NTIC China subsidiary continue. Fiscal 2025 fourth quarter net sales at NTIC China increased by 12% to $4 million. For fiscal 2025, NTIC China sales increased 14% to $16.2 million, the second strongest year of sales we have experienced in this market. NTIC China sales for fiscal 2025 demonstrate that demand continues to grow in this geography. Furthermore, given that the majority of NTIC China sales are for domestic Chinese consumption, we believe NTIC China's exposure to U.S. tariffs is limited. We expect demand in China will continue to improve in fiscal 2026, helping to support higher incremental sales and profitability in this market. We continue to believe that China will likely become a significant market for our industrial and bioplastics segments, so we'll continue to take steps to enhance our operations in this geography.

Now moving on to ZERUST oil and gas. Fourth quarter of fiscal 2025, ZERUST oil and gas sales were $3 million compared to $4.2 million in the same period last year. As a reminder, ZERUST oil and gas sales for the fourth quarter last year benefited from approximately $600,000 in sales that shifted from the third quarter due to timing. On an annual basis, ZERUST oil and gas sales were $7.3 million compared to $9.2 million for the prior full fiscal year. This decline was primarily due to timing of orders.

We have continually invested in ZERUST oil and gas to enhance our sales team and add resources to support future growth. This has improved our sales pipeline as the size and the number of opportunities have expanded among both new and existing customers. Our pipeline includes global opportunities to protect above-ground oil storage tanks, pipeline casings and offshore oil rigs from corrosion. The nature of this industry will always cause certain fluctuations in ZERUST oil and gas sales. Nevertheless, we still expect to see ZERUST oil and gas sales and profitability to improve significantly in fiscal 2026 as we leverage these investments and rein in operating expense growth.

Earlier this month, we announced that our 85% owned subsidiary, ZERUST Brazil, secured a new 3-year contract for a major offshore project with a leading global EPC company. Under this agreement, ZERUST Brazil will provide advanced corrosion protection solutions for floating production storage and offloading units, or FPSOs, with an estimated total value of approximately BRL 70 million, which is equal to approximately USD 13 million based on current exchange rates. The project started in Q4 and is expected to ramp up during our fiscal 2026 and then continue through calendar 2028. This is a significant validation of our engineering capabilities, scalability of our ZERUST oil and gas business and the reputation we've built as a trusted partner to leading offshore operators. Brazil represents one of the fastest-growing deepwater markets globally, and we believe this win provides a strong foundation for continued growth and expansion across international oil and gas markets.

Turning to our Natur-Tec bioplastics business. Fourth quarter Natur-Tec sales were $5.1 million, representing a 10% year-over-year decline in Natur-Tec sales, primarily due to pricing dynamics and the timing of orders. For example, during the past year, a large North American customer of our resin compounds late purchasing for nearly 6 months as they made tooling adjustments to increase the output of their manufacturing line. While this contributed to Natur-Tec's decline in sales for fiscal 2025, we have already received orders for the first and second quarters of the new fiscal year for the equivalent of what this customer purchased from us in all of fiscal 2025. It's also worth mentioning that in Q4 of fiscal 2025, we entered into a preferred supplier agreement with the nation's leading specialized distributor for JanSan, food service and industrial packaging. We expect this new relationship to translate into higher Natur-Tec sales growth in fiscal 2026.

We are also working on several larger opportunities for our Natur-Tec solutions that we believe holds significant promise to benefit our sales in the coming quarters, including advancing the compostable food packaging solution we mentioned on our last call. Overall, we believe Natur-Tec is a best-in-class compostable plastic business that is well positioned for significant further growth in the U.S. and abroad. While fiscal 2025 was more challenging than we expected at the beginning of the fiscal year, we remain steadfast on pursuing our strategic growth plan. We are confident in the direction we are headed.

Before I turn the call over to Matt, I wanted 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 fourth quarter and full fiscal year 2025.

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales decreased 1.0% in fiscal 2025 and decreased 4.4% in fiscal 2025 fourth quarter because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures increased 4.7% in the fourth quarter. Joint venture operating income in the fourth quarter increased 6.6% compared to the prior fiscal year period, primarily due to the corresponding increase in net sales.

For fiscal 2025, sales across our global joint ventures decreased 4.9%, while joint venture operating income decreased 9.8% compared to the prior fiscal period. Total operating expenses for the fiscal 2025 fourth quarter increased 2.2% or $9.7 million for the fiscal 2025, primarily due to strategic investments in ZERUST oil and gas, sales infrastructure and increased personnel expenses, including new hires, benefits and higher travel and professional fees.

As a percentage of net sales, operating expenses were 43.5% for the fourth quarter compared to 40.7% for the prior fiscal year period. For fiscal 2025, operating expenses as a percentage of net sales were 44.7% compared to 41.6% for the prior fiscal year. Gross profit as a percentage of net sales was 37.9% during the 3 months ended August 31, 2025, compared to 43.8% during the prior fiscal year period. Gross profit as a percentage of net sales was 37.6% for the fiscal year ended August 31, 2025, compared to 39.7% for the prior fiscal year. Lower gross margin for the fourth quarter and full year periods were primarily due to a less profitable mix of sales.

There were a couple of onetime items that impacted profitability during the fiscal year, including a $1.1 million benefit to other income due to the receipt of cash from the employee retention credit that was payable in February of 2025. Secondly, NTIC recognized $387,000 in other expense during the fourth quarter of 2025 as NTIC's Chinese subsidiary was assessed penalties from Ningbo Customs, a customs authority in China as a result of a technical classification matter. We have since updated our export documents and internal review procedures and believe this issue has now been fully resolved.

We also experienced an increase in our effective tax rate for fiscal 2025, which was 67.5% for fiscal 2025 compared to 17.3% in the prior fiscal year. The changes primarily reflect increased income tax expense in our foreign subsidiaries and is primarily due to the increase in income tax expense as compared to reduced consolidated pre-book tax income. As a result, our effective tax rate was unusually high and volatile in fiscal 2025. We expect the effective rate to normalize in future periods when additional profits are recognized in our North American operations. NTIC reported net loss of $1.1 million or $0.11 per diluted share for the fiscal 2025 fourth quarter compared to net income of $1.8 million or $0.19 per diluted share for the fiscal 2024 fourth quarter.

For the full year, NTIC reported net income of $18,000 or $0.00 per diluted share compared to $5.4 million or $0.55 per diluted share for the fiscal 2024 full year. For the fiscal 2025 fourth quarter, NTIC's non-GAAP adjusted net loss was $607,000 or $0.06 per diluted share compared to non-GAAP adjusted net income of $1.9 million or $0.20 per diluted share for the fiscal 2024 fourth quarter. For the fiscal 2025, non-GAAP adjusted net loss was $12,000 or $0.00 per diluted share compared to net income of $5.8 million or $0.59 per diluted share for fiscal 2024. A reconciliation of GAAP to non-GAAP financial measures is available in our fourth quarter fiscal year 2025 earnings press release that was issued this morning.

As of August 31, 2025, working capital was $20.4 million, including $3.7 million in cash and cash equivalents compared to $23.7 million, including $5 million in cash and cash equivalents as of August 31, 2024. As of August 31, 2025, we had outstanding debt of $12.2 million. This included $9.3 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 for fiscal 2026. We generated $2.4 million in operating cash flows for the fiscal year ended August 31, 2025. At year-end, the company had $28.6 million of investment in joint ventures, of which 51.7% or $14.8 million was in cash, with the remaining balance primarily invested in other working capital.

During fiscal 2025 fourth quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.01 per common share that was payable on August 13, 2025, to stockholders of record on July 30, 2025. To conclude our prepared remarks, we are optimistic NTIC's momentum is building across many parts of our business. We believe our multiyear strategies are working, our global markets are expanding, and our team is delivering results. With a clear vision and disciplined execution, we're confident that the foundation we have built will drive continued growth, stronger profitability and meaningful creation -- value creation for our shareholders.

With this overview, Patrick and I are happy to take your questions.

[Operator Instructions] And we have a question coming from the line of Tim Clarkson with Van Clemens.

Patrick, Matt, obviously, this year was not what everyone wanted. But just a couple of background questions. In general, are the income taxes on our international business, are they higher than the taxes domestically in the United States?

It's not that it's higher. It's that essentially what you have is you have a situation where with all of our subsidiaries, let's say, the main 5 subsidiaries, they have a standard statutory tax rate, somewhere between 20% and 33%, 34% depending on the country. And so all of those subsidiaries are profitable, so they generate tax expense. So if you look at it from an effective tax rate when you put it all together, you have essentially the numerator in the effective tax rate calculation is a fixed number. There isn't a significant amount of -- there isn't a significant amount of tax expense from North America. However, we do have tax expense in North America based off of the -- we recognize here based off of the royalties and dividends that we received from JVs.

The issue that we have is that the denominator in the calculation, there's very little profit, especially in fourth quarter that went into that number. And so what it created is a very large effective tax rate for fourth quarter. The expectations are that going forward, as there is more profitability, specifically in North America, the denominator in that calculation is going to be increased.

For example, if we had more profit in North America, we would have had the same numerator, the same tax expense, but the denominator in the calculation would have been significantly higher, would have led to a more normalized effective tax rate. It's just the nature of how the tax provision calculation works, especially when we had, I would say, a difficult fourth quarter from a North American standpoint. So I do expect it to normalize in fiscal 2026 as we get back to similar profit levels that we had before.

Okay. Sure. So I know you mentioned that you're looking to cut expenses in the company, too. I mean how realistic -- how much money do you think you can cut to improve profitability?

The goal at this point isn't to cut expenses. The goal is to, I would say, maintain the same level of operating expenses that we had or close to the same level of operating expenses that we had in fiscal '25. I mean you recall all through the end of 2024 and through 2025, we talked about the increased investments that we've made in the oil and gas group and a couple of other areas inside the company with the ability to kind of use those investments to drive revenues going forward. We didn't see the revenue increases in fiscal 2025.

The expectations are the investments that we made in 2024 and 2025, we'll start seeing the results of that in 2026 and beyond as those investments, specifically the people that we hired are able to gain traction and drive revenue growth. So the expectation is that we're going to drive revenue growth in 2026, those gross margin dollars falling down to the operating profit line as we're able to hold operating expenses as stable as possible.

Sure. Okay. On the oil and gas, it sounds like there's some additional business that will kick into the first quarter and further on out with some of these larger orders. Now what is driving this business? Is it just having more sales out in the field in places like the Middle East and Brazil? Or is it as the technology finally getting to be accepted as superior to the legacy technology of the cathodic arc stuff?

Yes. Can you hear me?

Yes, I can hear you. Go ahead.

Right. Okay. It's a combination of having [indiscernible] it's just general acceptance of the technology in the market, where we've proven that it works over and over again. We're getting repeat business from existing customers as we're putting in new customers. And that's really starting to starting to give our oil and gas business the attention that we think it deserves.

Sure, sure. In terms of the packaging, I know that you guys had a breakthrough in terms of being able to kind of replace the traditional Saran wrap packaging that doesn't allow air to go out and you've now developed packaging that's similar to that, that's compostable. I mean how close are we from getting some business from that?

For that, I'd like to turn the question over to Vineet Dalal, who runs our Natur-Tec business. Vineet, go ahead.

Yes, this is Vineet. Yes, we have several customers where we're doing trials with compostable packaging, especially for food -- consumer food applications. So this is something that we're working on. We've gotten some good feedback, not just here in North America, but also in India, where there's a big market for these kind of applications. So we expect some of those opportunities to start hitting our sales in 2026.

Okay. Are the costs similar for the compostable product versus the legacy product?

No. The cost is definitely higher as a premium solution, but due to legislation and government regulations in countries like India, these companies are forced to use compostable packaging instead of traditional plastic packaging.

Our next question coming from the line of Gus Richard with Northland Capital Markets.

You mentioned weakness in North America. Could you just describe where that's coming from?

The main weakness in North America, we experienced throughout the entire fiscal 2025 was primarily the Natur-Tec group and the oil and gas group. If you look at the oil and gas group in North America was down close to 46% on the year. Natur-Tec North America was down about [ 13% ] on the year.

Got it. Okay. And then in the floating platforms for the oil and gas, I'm trying to wrap my mind around how your solution work floating on the water and how much does that open up the market opportunity for you?

So it's a new market for us overall. It's not like you're trying to put the entire rig into a package, but you're taking sections of it and finding unique ways to apply our technology in those sections to provide long-term corrosion protection. And based on what we've seen in practice in Brazil so far, we think this is an opportunity, obviously, that can be very -- for us in Brazil, but in other areas around the world where they use offshore platforms.

The only thing I'll add, Gus, is that the work that we talked about in Brazil, specifically on these FPSOs, there's a service component to it, where there are actual ZERUST oil and gas employees that are living on the offshore -- essentially the offshore floating platforms and applying the ZERUST solution to the infrastructure and then they're on the rig for a period of time and then they leave and then replacements come in.

And so it's been a long process in order to be able to get slots where our specific workers can be on those platforms to do the installation work. And so that's a different -- it's kind of a different sales process than we typically see with onshore, where we're typically selling the solution and it's getting installed and then you don't need to continually apply and continually upkeep it.

Okay. And just out of curiosity, is that having to have folks on the rigs and continually reapplying, does that have an impact on the margin profile for the floating platforms?

Yes. There's -- I mean it's a slightly decreased margin given the service component and things like that compared to just selling any of the other ZERUST oil and gas solutions where you're just selling the actual product and somebody else is doing the installation work.

Got it. That's super helpful. And then the onetime, I guess, is the Chinese tariff custom, whatever the heck that charge was. Was that a onetime event and nonrecurring? Or is there an impact to the P&L going forward?

Well -- Vineet, do you want to address that?

Yes. It was a onetime event. I mean essentially, we produce some compounds in China that are filled compounds. So they contain minerals and then that we export out of China. And when you export it, I mean, we've always followed international norms for HTS codes that we use here in the U.S., in India, in Europe. And essentially, when we export it out of China, we get a VAT credit.

Now because of the trade war between the U.S. and China and Chinese customs cracking down on any exports that contain minerals or rare earths, there's a customs official who basically said that because your compounds contain these minerals, you're not eligible for the VAT refund. And so that basically accounted for -- we have to repay back all the credit or the rebate that we got. So we expect this to be a onetime event moving forward, that will be part of our cost of goods sold.

So essentially, it was a couple of years' worth of VAT that the Chinese government clawed back as well as a penalty on top of that for using what they deem to be the wrong code for the VAT. So the expectations are it's a onetime charge that we took and decided we weren't going to challenge the Chinese government and this we wanted to move forward as quickly as possible with the process so we can continue the import and export of the product.

Got it. And then on the food packaging application, is this going to be like packaging in, I don't know, like a vegetable produce supplier? Or is this something applied in a supermarket over chicken breast or whatever? Sort of -- go ahead.

Yes. So we are looking at multiple applications. One of the applications that we're looking at in India is packaging of milk. So these are milk pouches where we're working with all the largest dairies in India to change over from conventional polyethylene packaging to a fully compostable solution. And we have run trials. We had to engineer the product so that it met the barrier performance, the shelf life performance, the handling.

And then even on their form film machines, the throughput was -- with our solution was equivalent to the throughput with additional plastic technology. And so we have proven all that, and we expect that to be a growth business, at least in India. In the U.S., we are working with consumer foods companies where they're looking to -- we're looking at multilayer structures, which would be used for things like sauces and salad dressings and those kind of food items.

Okay. So replacement for Tetra Pak, am I getting it right?

Yes, or pouches, like these little pouches for salad dressings or short shelf life sauces.

Got it. Like the pouches you would get in a restaurant for -- salad.

Yes, in a restaurant or a QSR. So this one, the project that we are working on in the U.S., that's essentially for a QSR segment.

Got it. And when do you expect that to sort of add to Natur-Tec revenue? Is that revenue second half of fiscal '26? Is it starting today? Can you give a little bit of color as to when you expect that to contribute to revenue?

The application in the U.S. that requires some, I would say, fine-tuning. So we are working closely with the customer on trials and prototype validation. So that will probably take several quarters at least before we can introduce that in the market. But the application in India, we've already gotten an initial appeal from one of the dairy companies. And so we expect that business to kind of grow probably by Q2, Q3 of fiscal 2026.

And I'm showing there are 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.

One just queue up coming from the line of Zach Liggett, Desmond Liggett Wealth Advisors.

On your presentations here over the last, I think, couple of years, you've had a strategic objective of hitting greater than 15% top line growth and slower expense growth. I'm just curious, I know the last couple of years have been sort of investment years for you. But how are you thinking about those objectives looking forward?

Matt, I think you're better qualified to handle this one.

I guess from a top line growth standpoint, we are still certainly still optimistic. We look at the opportunities that we have in -- specifically in oil and gas, specifically in Natur-Tec, the expectations are that those 2 groups are going to have some significant growth in 2026. The traditional ZERUST business is going to be relatively stable with some slight growth.

But certainly, the opportunities that we have in Natur-Tec and oil and gas kind of worldwide are what we expect to kind of fuel that 15% growth this year. Certainly, we didn't get that last year, but we think the investments that we've made should put us back to that kind of growth rate, which would obviously have a significant impact from a gross margin standpoint. And again, with the dollar values flowing down to the EPS level.

Yes. Okay. And then the operating cash flow came off quite a bit this year. How are you thinking about that for FY '26 and free cash flow for that matter? If you could give us an update on your CapEx expectations?

Well, our fiscal 2025 was a large year, really '24 and '25 were a large year from a CapEx standpoint. We had a new ERP -- new SAP ERP system that was implemented, which was -- certainly wasn't cheap. We funded that out of operating cash. We also purchased a building that's directly adjacent to our existing headquarters here for the increased production and warehousing that we need given we're kind of outgrowing the current footprint that we have here. So we were able to add another 60%, 70% to our office -- to our space here.

The expectations are for 2026 that there's going to be very little capital improvements that are needed in North America. There are additional facilities we're looking at in Brazil, which they would fund on their own, which wouldn't involve operating cash coming out of North America, and they have a cash surplus in Brazil. And also at Natur-Tec India, they're looking at essentially building their facilities there to accommodate the production and warehousing needs for the Indian business. And again, they would be funding that and taking care of that entirely within their operating cash and any kind of financing in India.

So the expectations are specifically in North America in 2026 is that we're going to be able to add a significant amount of cash to pay down our line of credit. The goal is certainly to pay down the line of credit as much as possible, get back to the point that as we're seeing increased earnings, we're able to ramp the dividend back up and have a nice cash cushion to be able to kind of fund future growth and needs that the company has over the next few years.

All right. Yes, that sounds promising. And then last -- or 2 small ones for me, I guess. Any benefits you're seeing this coming year from One Big Beautiful Bill?

Not really. I mean...

No. That's our business.

Okay. And then any AI use cases that you guys have identified for the coming year?

No.

Thank you. I'll now turn it back to Mr. Patrick Lynch.

All right. Thank you all for joining this morning. I hope you have a nice day.

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