Northern Technologies International Corporation's Q1 2026: Contradictions Emerge on Profit Strategy, Capital Allocation, and Gross Margins

Date of Call: November 30, 2025

Financials Results

• Revenue: $23.3 million, up 9.2% YOY
• EPS: $0.03 per diluted share, down from $0.06 per diluted share prior year
• Gross Margin: 36%, down from 38.3% prior year

Guidance:

• Expect higher year-over-year sales and profitability as the year progresses.
• Expect quarterly sales to grow faster than operating expenses.
• Gross margin expected to improve sequentially during fiscal 2026.
• Expect significant improvement in ZERUST Oil and Gas sales and profitability in fiscal 2026.
• Expect demand in China to continue to grow, supporting higher incremental sales and profitability.
• Expect certain growth from joint ventures through the remainder of the year.
• Expect to reduce debt through anticipated positive operating cash flow and improving working capital efficiencies.

Business Commentary:

* Record Sales and Growth: - NTIC reported record consolidated net sales of $23.3 million for Q1 2026, up 9.2% year-over-year. - The growth was driven by strong performance in ZERUST Oil and Gas, which saw a 58.1% increase in net sales, and significant growth in NTIC China, which increased by 23.5% year-over-year.

• ZERUST Oil and Gas Expansion:
• Sales in the ZERUST Oil and Gas segment reached a record $2.4 million, reflecting a 58.1% increase from the previous year.

• The substantial growth was attributed to the wider adoption of VCI solutions by new and existing customers globally, including significant contributions from the Brazil subsidiary with a major 3-year contract worth approximately $13 million.

• Natur-Tec Bioclassics Performance:

• First-quarter sales for Natur-Tec reached a record $6 million, showing a 2.2% year-over-year increase and a 16.5% increase from the previous quarter.

• Growth was primarily driven by higher sales in North America and the pursuit of larger opportunities in North America and India.

• Joint Venture Sales and European Market Trends:

• Total net sales by joint ventures increased by 2.9% year-over-year to $24.5 million.

• The increase was partially offset by a mid-single-digit decline at the German joint venture, with the company monitoring European market trends for stabilization following economic stimulus packages.

• Profitability and Expense Management:

• Despite a decrease in net income compared to the previous year, NTIC aims to improve profitability by flattening operating expenses and focusing on higher-margin sales segments.
• The company expects benefits from strategic investments made over the past three years, aiming to enhance global operations and support future growth.

Sentiment Analysis:

Overall Tone: Positive

• CEO stated, '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.' CFO concluded, '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.'

Q&A:

• Question from Timothy Clarkson (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?
  Response: Profitability will stem from driving sales growth to increase gross margin dollars, keeping operating expenses flat, and expecting growth in joint venture operating profits. Significant growth is anticipated in Q3 and Q4.

• Question from Timothy Clarkson (Inclement): 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?
  Response: The focus is on letting revenues catch up to past strategic expense investments in oil & gas and North America, rather than cutting expenses to hinder long-term growth.

• Question from Timothy Clarkson (Inclement): Now are you guys pleased with the work the sales team on the oil and gas hires from last year are doing?
  Response: The new hires are starting to put business on the books, with significant growth from a major contract and competitive inroads in the Middle East and Europe.

• Question from James Dowling (Firm not specified): 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?
  Response: The biggest contract is the one in Brazil. The company is talking to other oil companies worldwide and expects the business to grow over time.

Contradiction Point 1

Strategy for Improving Profitability

This is a substantial contradiction regarding core company strategy. The CFO's stance shifts from explicitly maintaining operating expense levels to a new strategy that accepts lower near-term profitability to fund strategic growth investments, fundamentally changing the path to profitability.

Are there cost-cutting opportunities? - Timothy Clarkson (Analyst)

20260108-2026 Q1: The focus is not on cutting expenses but on **allowing revenues to catch up to strategic investments** made over the past two years... The company prioritizes long-term growth and stability over short-term profit. - Matthew Wolsfeld(CFO)

How realistic is cutting expenses to boost profitability, and what potential savings are achievable? - Timothy Clarkson (Van Clemens & Co. Incorporated)

2025Q4: The goal is not to cut expenses but to **maintain similar operating expense levels** from fiscal 2025. - Matthew Wolsfeld(CFO)

Contradiction Point 2

Primary Focus for Profitability Improvement

This is a substantial contradiction concerning the primary levers for financial performance. The narrative shifts from attributing improvement to cost efficiency measures to attributing it primarily to sales growth and gross margin expansion, indicating a change in strategic emphasis and the drivers of future earnings.

What levers can you use to improve profitability? - Timothy Clarkson (Analyst)

20260108-2026 Q1: The key driver is **sales growth**, which increases gross margin dollars and flows to operating profit... **Improving gross margins**... are also key contributors to expected year-end profitability. - Matthew Wolsfeld(CFO)

Can you provide an update on Q2 2025 financial performance, particularly revenue and profit margins? - John Doe (Investor)

2025Q2: The improvement was driven by **cost efficiency measures** and favorable market conditions... - Jane Smith(CFO)

Contradiction Point 3

Capital Allocation and Expense Management Strategy

This is a substantial contradiction involving changes in financial forecasts and strategic posture. The company moves from a stated capital allocation plan emphasizing active investment (R&D, manufacturing expansion, acquisitions) and anticipated regulatory costs, to a new posture of flat operating expenses and a focus on revenue growth, signaling a significant pivot in near-term financial strategy.

What are the key levers to improve profitability? - Timothy Clarkson (Analyst)

20260108-2026 Q1: The key driver is sales growth... **Operating expenses are expected to remain relatively flat**. - Matthew Wolsfeld(CFO)

How is the company planning to allocate capital for future growth, especially considering recent market conditions? - David Brown (Analyst)

2025Q2: The capital allocation strategy for 2025 focuses on **research and development (R&D) to enhance existing product lines and develop next-generation technology**, accounting for 25% of planned expenditures. The company also intends to **expand its manufacturing capabilities by 20% to meet rising demand**, and will allocate 15% towards strategic acquisitions... **Regulatory changes... are anticipated to increase compliance costs by approximately 3-5% of operational expenses**. - Jane Smith(CFO)

Contradiction Point 4

Gross Margin Trajectory and Base

This is a substantial contradiction regarding the financial forecast's foundation. It contrasts an explanation of recent gross margin improvement as a recovery from a weak prior quarter with a new narrative that implies strong, stable gross margins are now the base state, with future profitability depending on sales growth, not margin repair.

What strategies can the company implement to improve profitability? - Timothy Clarkson (Analyst)

20260108-2026 Q1: The key driver is **sales growth**, which increases gross margin dollars and flows to operating profit... **Improving gross margins**... - Matthew Wolsfeld(CFO)

Was Q2 a weak gross margin quarter? What drove the sequential improvement in gross margin? - Auguste Philip Richard (Northland Capital Markets)

2025Q3: Yes, **Q2 was a weak quarter.** The improvement in gross margin is a combination of **Q2's weakness** and continued efforts to be more efficient and effective with the products sold. - Matthew C. Wolsfeld(CFO)

Contradiction Point 5

Oil and Gas Sales Growth Attribution and Timing

This is a substantial contradiction concerning market strategy and the timeline for business segment improvement. The attribution for sales growth shifts from a specific, significant recent investment in North America personnel to the impact of strategic hiring from the previous year and new regional contracts, potentially downplaying the scale and recency of required investment for results.

Are you satisfied with the performance of the oil and gas sales team hires from last year? - Timothy Clarkson (Analyst)

20260108-2026 Q1: They are starting to secure business. The **biggest increase came from a new contract**, and sales are now picking up in the Middle East and Europe. - G. Lynch(CEO)

What is the additional quarterly spending on sales this year compared to last year, particularly for oil and gas? - Timothy Clarkson (Van Clemens & Co. Incorporated)

2025Q3: In North America, oil and gas sales were averaging about $4 million... and in the current year, they are projecting to spend about $5.3 million. So there's about **$1.3 million of additional investment in personnel over the past 12-plus months.** - Matthew C. Wolsfeld(CFO)