Executive Summary / Key Takeaways

• Northern Technologies International Corporation (NTIC) is strategically positioning its specialized corrosion prevention (ZERUST) and compostable bioplastics (Natur-Tec) technologies to capitalize on growing niche markets, particularly in oil and gas infrastructure protection and sustainable packaging.
• Despite recent consolidated revenue declines (8.5% in Q2 FY2025) and profitability pressures (gross margin decline to 35.6% in Q2 FY2025) driven by macroeconomic headwinds, European weakness, and raw material costs, the company is making targeted investments for future growth.
• Significant growth opportunities are identified in ZERUST Oil and Gas, with management expecting accelerated sales in the second half of fiscal 2025 driven by strategic sales infrastructure expansion and a growing pipeline, targeting 20-30% growth for the full year with potential for acceleration.
• Natur-Tec continues to see strong market demand fueled by environmental mandates and new applications, with management expecting sustained growth around 20% this year, supported by expanding distribution and new product lines like food packaging.
• Disciplined capital allocation, including a temporary adjustment to the quarterly dividend, is aimed at preserving cash, reducing debt, and maintaining flexibility to fund strategic growth initiatives and navigate ongoing market volatility.

A Specialty Player's Strategic Pivot

Northern Technologies International Corporation, with a history spanning over 50 years, has built its foundation on developing proprietary solutions for corrosion prevention under the ZERUST brand. Initially serving traditional industrial sectors like automotive and electronics, NTIC has expanded its global footprint through a network of subsidiaries and joint ventures across more than 65 countries. This extensive international presence, while providing broad market access, also exposes the company to diverse regional economic conditions and geopolitical risks.

In recent years, NTIC has strategically diversified its portfolio and market focus. A significant pivot involves applying its core corrosion expertise to the demanding oil and gas industry, a sector characterized by critical infrastructure highly susceptible to corrosion and requiring specialized, long-lifecycle solutions. Concurrently, recognizing the growing global imperative for sustainability, NTIC launched its Natur-Tec brand, offering bio-based and compostable polymer resins and finished products designed to replace conventional plastics. These strategic initiatives represent NTIC's response to evolving market demands and its ambition to leverage its material science capabilities in high-growth, environmentally conscious niches.

NTIC operates within the broader specialty chemicals and materials sector, competing against larger, more diversified players like 3M Company (MMM), Sherwin-Williams Company (SHW), and RPM International Inc. (RPM), as well as smaller, niche-specific competitors. While these larger rivals possess significant scale, broader distribution networks, and substantial R&D budgets, NTIC differentiates itself through its specialized technology and integrated service model.

The company's core technological moat lies in its proprietary Vapor Corrosion Inhibitor (VCI) technology used in ZERUST products. This technology offers tangible benefits over traditional corrosion prevention methods, particularly in the oil and gas sector. Management highlights that NTIC's VCI solution is roughly a third of the cost of traditional cathodic protection for oil storage tanks and pipeline casings. Beyond cost, the technology provides efficiency gains in corrosion prevention, reducing failure rates in harsh environments. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, NTIC's current penetration in the oil and gas tank and pipeline casing market is estimated by management to be less than 1%, indicating a vast addressable market and significant growth runway if adoption accelerates.

In the Natur-Tec segment, NTIC leverages patented and proprietary technologies to develop compostable biopolymers. This technology addresses the growing demand for sustainable packaging and waste management solutions, driven by increasing environmental awareness and regulatory mandates globally. The company's R&D efforts are focused on developing new product applications and specialized resins for manufacturers, aiming to shift costs from R&D to selling expenses as these initiatives commercialize. Management sees developing specialized resins for companies to manufacture their own products as a particularly exciting opportunity, representing a potentially larger market long-term compared to selling finished goods.

Compared to competitors like 3M and Sherwin-Williams, NTIC's scale is considerably smaller, which can lead to higher per-unit costs in some areas and less resilience to raw material price volatility compared to rivals with greater purchasing power and more diversified supply chains. However, NTIC's focus on niche, high-performance solutions and its integrated service model, particularly in ZERUST Oil and Gas, provides a competitive edge in specific applications. The company's commitment to sustainability with Natur-Tec also positions it favorably against competitors with technological gaps in bio-based materials like RPM. While larger players may have faster processing speeds or more durable standard coatings, NTIC's advantage lies in specialized performance, cost-effectiveness in specific applications (like O&G), and environmental benefits. The company is actively working through industry bodies like API and NACE to increase the acceptance and credibility of VCI technology in the preservation market, which could further bolster its competitive standing.

Performance Under Pressure

NTIC's recent financial performance reflects the impact of challenging global conditions, particularly in the second quarter of fiscal year 2025. Consolidated net sales decreased by 8.5% to $19.07 million for the three months ended February 28, 2025, and were down 1.5% to $40.41 million for the six months ended February 28, 2025, compared to the prior year periods. This decline was primarily attributed to decreased sales and demand for ZERUST products, although partially offset by an increase in Natur-Tec sales over the six-month period.

Profitability was impacted by higher raw material prices, leading to an increase in the cost of goods sold as a percentage of net sales, rising to 64.4% in the second quarter of fiscal 2025 from 60.0% in the prior year quarter. This also contributed to a less profitable sales mix.

Joint venture operations, a significant contributor to NTIC's overall results, also saw a decline. Total joint venture operations decreased by 31.8% and 15.1% for the three and six months ended February 28, 2025, respectively. This was largely driven by decreased sales at most joint ventures, including a 15.7% and 7.2% decrease in total JV net sales for the three and six-month periods, respectively. The German joint venture, EXCOR, was particularly affected by decreased demand linked to high energy prices and regional economic pressures in Europe, including plant shutdowns in energy-intensive industries.

Operating expenses increased by 2.4% and 8.1% for the three and six months ended February 28, 2025, respectively. This was primarily due to strategic investments, notably in expanding the ZERUST oil and gas sales infrastructure, as well as increased personnel costs, travel, and professional fees. While these investments pressured near-term profitability, they are intended to support future growth.

Net income attributable to NTIC decreased to $434,319 ($0.04 per diluted share) for the three months and $995,410 ($0.10 per diluted share) for the six months ended February 28, 2025, compared to $1.70 million ($0.17 per diluted share) and $2.60 million ($0.27 per diluted share) in the prior year periods. The decrease was primarily due to lower gross profit and reduced income from joint ventures, although partially offset by a one-time $1.14 million Employee Retention Credit (ERC) payment received during the quarter, which management notes does not represent recurring operational revenue.

Liquidity remains solid, with working capital at $21.4 million as of February 28, 2025, including $5.09 million in cash and cash equivalents. The company's investments in joint ventures also hold significant cash, totaling $13 million. NTIC extended its revolving line of credit maturity to January 2026, albeit with reduced availability ($8 million) and a slightly higher interest margin. The company was in compliance with its debt covenants as of the reporting date. Net cash provided by operating activities was $3.2 million for the six months ended February 28, 2025, demonstrating continued cash generation despite lower net income, aided by favorable changes in receivables and payables.

Outlook and Strategic Momentum

Despite the recent headwinds, management maintains a positive outlook for the second half of fiscal 2025 and beyond, anticipating further sales growth and improved profitability. This optimism is largely centered on the expected acceleration in the ZERUST Oil and Gas and Natur-Tec segments.

For ZERUST Oil and Gas, management is particularly bullish, expecting compelling growth through fiscal 2025 and beyond. They project significant growth for the full fiscal year, consistent with expectations of 20% to 30% growth, with the potential for further acceleration. This is driven by a growing sales pipeline and strategic investments made in expanding the global sales team across North America, the Middle East, Asia, and Europe. While acknowledging the volatility of this business and the time it takes for new hires to become fully effective (6-12 months), management expects the impact of these investments to materialize in the second half of fiscal 2025, potentially leading to quarters with sales exceeding $4 million, a level achieved in Q4 FY2024. Strong performance in Brazil's oil and gas sector is cited as a positive indicator, prompting investment in a new facility there.

The Natur-Tec segment is also expected to continue its strong growth trajectory, with management anticipating sustained growth around 20% for the current fiscal year. This growth is supported by robust market demand for compostable plastics, driven by environmental regulations and increasing interest from consumers and industries. Key initiatives include expanding the distribution network in North America, securing new customer wins in India, and developing new applications, such as a promising new technology line for food packaging currently undergoing trials. Investments in India, including consolidating warehouses and adding manufacturing capacity, are aimed at supporting regional Natur-Tec growth.

While the ZERUST Industrial business faces ongoing challenges, particularly in Europe due to the difficult economic environment in Germany and the automotive industry transition, management sees signs of stabilization and expects demand in NTIC China to continue improving in fiscal 2025, contributing to overall growth.

Financially, NTIC is focused on disciplined capital allocation. The temporary adjustment of the quarterly dividend to $0.01 per share, effective with the fiscal 2025 third quarter, is a strategic move to manage cash, reduce debt, and enhance financial flexibility. This is intended to support ongoing investments in growth initiatives and navigate the current uncertain global environment.

Capital expenditures for the remainder of fiscal 2025 are expected to be between $600,000 and $800,000, primarily related to ERP system implementation and facility improvements.

Risks and Considerations

Despite the strategic focus on growth areas, NTIC faces several key risks. Macroeconomic headwinds, including changes in trade policies and potential supply chain disruptions, continue to pose challenges. The European economic environment, particularly the ongoing difficulties in Germany linked to high energy prices and the automotive sector, remains a significant risk, directly impacting the performance of key joint ventures like EXCOR.

The ZERUST Oil and Gas business, while offering substantial growth potential, is inherently volatile due to the size and timing of individual orders and seasonal factors. Achieving the projected growth relies heavily on the successful execution of the expanded sales strategy and market adoption. Similarly, the Natur-Tec business, while benefiting from favorable market trends, faces increased pricing pressures from competitors, which could impact margins, as seen in the recent quarter. The potential impact of tariffs on Natur-Tec sales also remains a factor to monitor.

NTIC's reliance on its network of joint ventures introduces risks related to their financial performance, management succession, and the ability to maintain strong relationships. Fluctuations in foreign currency exchange rates can also impact reported results, as a significant portion of revenue and JV income is generated internationally.

However, NTIC's asset-light business model, experienced leadership team, and increasing business diversity across products and geographies provide a degree of resilience. The disciplined approach to cash management and debt reduction is intended to enhance the company's ability to weather potential downturns and capitalize on opportunities as they arise.

Conclusion

Northern Technologies International Corporation is a specialty materials company executing a focused strategy to capitalize on high-potential niche markets in corrosion prevention for critical infrastructure and sustainable bioplastics. While recent financial results reflect the impact of challenging global macroeconomic conditions, particularly in Europe, the underlying narrative is one of strategic investment and anticipated growth acceleration in key segments.

The core investment thesis hinges on NTIC's ability to leverage its differentiated ZERUST VCI technology and Natur-Tec proprietary biopolymers to capture market share in the large, underserved oil and gas corrosion market and the rapidly expanding compostable plastics sector. Management's outlook for significant growth in ZERUST Oil and Gas and sustained strong growth in Natur-Tec in the second half of fiscal 2025 and beyond, supported by strategic sales expansion and new product/distribution initiatives, provides a clear path for top-line expansion and improved profitability.

Investors should monitor the execution of the expanded ZERUST Oil and Gas sales strategy, the successful commercialization of new Natur-Tec applications, and the company's ability to navigate ongoing macroeconomic and geopolitical headwinds, particularly in Europe. The temporary adjustment of the dividend underscores a commitment to financial discipline aimed at funding these growth initiatives. Despite near-term volatility and competitive pressures, NTIC's specialized technology, strategic focus, and disciplined capital management position it to potentially deliver sustainable growth and create long-term value by addressing critical industrial needs and global sustainability demands.