Q2 2024 Northern Technologies International Corp Earnings Call

Participants

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

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

Gus Richard; Anlayst; Northland Securities

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

John Bair; Analyst; Ascend Wealth Advisors, LLC

Walter Ramsley; Analyst; Walrus Partners, LLC

Presentation

Operator

As part of the discussion today, 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 protection of the Safe Harbor from 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 and TSE disclaims any duty to update or revise its forward-looking statements.
I will now turn the call over to NCRIC management.

G. Patrick Lynch

Good morning. I am Patrick Lynch, NTIC's CEO, and I'm here with Matt Wolsfeld, NTIC's CFO. Please note that a press release regarding our fiscal 2024 second quarter 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 2024 second quarter financial results, provide a brief business update and then conclude with a question and answer session. When we discuss year-over-year performance, we are referring to our fiscal 2024 second quarter as compared to our fiscal 2023 second quarter.
NTIC set a series of new records in the second quarter, driven by robust demand across many parts of our business most notable among these were record second quarter ZERUST Oil and Gas sales and record quarterly Natur-Tec sales. I'm also particularly encouraged by the continued year-over-year improvement in our gross margin, demonstrating that our broad initiatives aimed at improving profitability are working as intended.
We anticipate that profitability will continue to improve, and then we will continue to generate positive operating cash flow throughout the second half of fiscal 2024 year over year, cash from operating activities improved by nearly 156% to $5.6 million, primarily due to higher net income and positive changes in working capital. We intend to continue to allocate capital to support our growth initiatives and quarterly dividend payment, while using excess cash flow pay down the balance on our existing line of credit.
As we look to the remainder of fiscal 2024, we believe we are well positioned for top line growth across our US industrial fuel, oil and gas and Natur-Tec product categories. We also remain focused on the performance and profitability of our joint ventures across Europe and Asia.
As our team continues to navigate a fluid, the global economic environment. I am pleased with NTIC's improving performance and believe fiscal 2024. It will be another good year of growth and profitability. So with this overview, let's examine the drivers for the second quarter ended February 29, 2024 in more detail.
For the quarter, our total consolidated net sales increased 14.1% to a second quarter record of $20.8 million as compared to the second quarter ended February 28, 2023. Broken down by business unit. This included a 47.5% increase in Natur-Tec net sales, a 20.1% increase in Zerust Oil and Gas net sales and 3.1% increase in US industrial net sales.
Total net sales for the second quarter by our joint ventures, which we do not consolidate in our financial statements, decreased year-over-year by 7.9% to $23.5 million. Mexico Germany, our largest joint venture, experienced a 5.6% decrease in net sales compared to the prior fiscal year period, due primarily to a previously-disclosed loss of the customer and softer demand within the region related to higher energy prices and other externalities linked to the ongoing war between Ukraine and Russia.
Fiscal 2024, second quarter net sales by our wholly owned NTIC China subsidiary increased on a year-over-year basis by 20.3% to $3.5 million. Most notably, this was the first year-over-year increase in quarterly sales in over two years as sales during this period have been impacted by prolonged COVID related lockdowns and overall weakness in the Chinese economy.
We remain cautiously optimistic that demand in China will continue to improve throughout the second half of fiscal 2024, helping to support higher incremental sales and profitability in this market, while near-term economic conditions in China remain uncertain.
We are committed to the long-term opportunities. The Chinese market provides our industrial and bioplastic segments, and we continue to take steps to enhance our operations in this geography as a result, we continue to believe China will likely become a significant geographic market for us in the future.
Now moving on to Zerust Oil & Gas. The second quarter of fiscal 2024 was the eighth consecutive quarter of Zerust Oil and Gas sales over $1.5 million, reflecting the positive momentum within our oil and gas business. For the fiscal 2024, second quarter US oil and gas sales were $2.2 million compared to $1.8 million for the same period last year.
A 20.1% year over year increase in US oil and gas sales was primarily due to the shift of certain oil and gas projects from the first quarter to the second quarter and positive overall demand for our oil and gas solution. Our Zerust Oil and Gas Solutions are still focused primarily on protecting above-ground oil storage tanks and pipeline casings from corrosion as a result, we believe fiscal 2024 will be another good year of growth for U.S. oil and gas has this business further scales and continues to contribute to our overall profitability.
Turning to our Natur-Tec bioplastics business. Natur-tec sales were strong during the second quarter and increased 47.5% year over year to a quarterly record of $5.6 million. Matrix growth during the second quarter was a result of recent new customer wins in North America and India.
We expect NeedleTech sales growth will continue throughout the second half of fiscal 2024. Globally, we continue to see robust market demand for new applications of certified compostable plastic products and resin compounds, as well as increased interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics. As a result, we believe we are well positioned for long-term sustainable growth within our niche bioplastics business.
As you can see our fiscal 2024 second quarter financial results reflect the progress we are making towards growing our business and improving profitability. We believe fiscal 2024 will be a strong year of sales growth and improved profitability. We are excited by the positive momentum underway and the direction MGIC is heading with this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2024 second quarter.

Matthew Wolsfeld

Thanks, Patrick. Compared to the prior fiscal year period, NTIC's consolidated net sales increase 14.1% for the fiscal 2024 second quarter to a second quarter record because of the trends Patrick reviewed in his prepared remarks.
While sales across our global joint ventures declined 7.9% in the fiscal 2024 second quarter joint venture operating income increased 4.2% compared to the prior fiscal year period. The year-over-year increase in joint venture operating income was primarily due to the efforts underway to enhance profitability at the Company's joint ventures, partially offset by lower joint venture sales.
Total operating expenses for fiscal 2024 second quarter increased 9.4% to $8.6 million compared to $7.9 million for the same period last fiscal year. Higher operating expenses were primarily due to increased personnel costs as a percentage of net sales.
Operating expenses were 41.3% for the fiscal 2024 second quarter compared to 43.1% for the prior fiscal year period. Gross profit as a percentage of net sales was 40% during the three months ended February 29, 2024, compared to 34.5% during the prior fiscal year period. The 551 basis point improvement was primarily a result of successful actions taken by the company to address inflationary pressures and in-sourcing of various production.
Net income attributable to NTIC was $1.7 million or $0.17 per diluted share for the fiscal 2024 second quarter compared to $411,000 or $0.04 per diluted share for the fiscal 2023 second quarter. As of February 29, 2024, working capital was $24 million, including $4.8 million in cash and cash equivalents compared to $23 million, including $5.4 million in cash and cash equivalents as of August 31, 2023.
As of February 29, 2024, we had outstanding debt of $4 million. This included $1.2 million in borrowings under our existing revolving line of credit compared to [$3.6 million] as of August 31, 2023. We generated $5.6 million in operating cash flows for the six months ended February 29, 2024 compared to $2.2 million for the six months ended February 28, 2023.
The 156% year-over-year improvement in operating cash flow was driven primarily by higher net income and positive changes in working capital. Throughout the second half of fiscal 2024, we expect to generate continued operating cash flows, which we plan to invest in the growth of our business, support our quarterly cash dividend and pay down the remaining balance on our existing revolving line of credit on February 29, 2024, the company had $23.5 million in investments in joint ventures, of which 55.7% or $13.1 million was in cash with the remaining balance primarily invested in other working capital.
During the fiscal 2024 second quarter, NTIC's Board of Directors declared a quarterly cash dividend of $0.07 per share payable on February 14, 2024, to stockholders of record on January 31, 2024.
To conclude our prepared remarks, our second quarter financial results reflect the progress we are making navigating a fluid business environment while successfully pursuing our products end market and geographical diversification strategies, we've seen stable.
North American demand trends had robust growth across our global oil and gas and bioplastic markets, and we expect these trends to continue throughout the remainder of our fiscal year. As a result, we believe our fiscal 2024 will be another good year of sales and higher profitability franchisee who are excited about our long-term prospects.
With this overview, Patrick and I are happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions)
Gus Richard, Northland.

Gus Richard

Yes, thanks for taking my questions and congratulations on the strong results. I was just wondering if you'd talk a little bit about the pipeline for on Zerust and Natur-Tec on you had to pull in in the quarter for oil and gas. Wondering if that growth is sustainable sequentially and just sort of your outlook on those two product lines moving forward.

I guess my question, Gus, just kind of asking the question back to your question is about what is the pipeline for Xerox industrial business and the growth that we expect to see there for oil and gas, oil and gas, oil and gas.
I think oil and gas was pretty strong and had a relatively strong Q2. I think expectations are that we're going to see Q3 and Q4. They're going to surpass our Q1 and Q2 expectations. There's just a lot of projects that are that we've been working on for some time that are coming are coming online and should likely be coming to fruition where we expect to see it in the current fiscal year. And hopefully, that's going to build a base level of oil and gas revenue on a quarterly basis that we can see as shipping and kind of shipping shown during the call.
I know Patrick talked about there's a number of times really exceeded $1.5 million in revenues. You know, my expectations and my hopes are that we're raising that number and saying the number of times we've been over [$2 million from the number of times or $2.5 million]. We'd see it as more of a step function in that in growth.
And what's exciting for us is the repeat business that we're getting with existing customers, that's really showing that the products are working and that we're starting to see the penetration into the into the market. And so we're certainly working to continue the investment in bringing new people on short from a technical service and a technical service positions to help with installations. And also from a sales standpoint, to Pheno drive more bit more top line oil and gas business around the world.

Gus Richard

Got it. Thanks. And then sort of the same question for on Atritech on a very strong quarter, is that new OEM.s on starting new projects or is it not resin sales? Will you know, can you put some arms and legs around what's going on in terms of the growth trajectory of Natur-Tec?

Yes, it was obviously a strong second quarter, certainly when you're comparing Q2 to Q2. And part of that is because our second quarter last year was not as strong. I mean, if you look at the history of the quarterly numbers, last year's second quarter was certainly off a little bit compared to the other three quarters.
However, it still was $5.6 million of revenue, which is significantly above any previous quarters that we've had. There are new new new opportunities, selling a pin liners and cutlery, some traditional opportunities that we have been selling to for many years that are continuing to expand in North America. And as far as the opportunity that we have, there's also new projects coming online as far as increasing the amount of resin that we are that we're selling as well come at any time.
There's actually a lot of projects in the pipeline from a Natur-Tec standpoint that we're working on and on those are starting to kind of come to fruition as well, similar to some of the stuff that we're working on from an oil and gas standpoint, there's a lot of projects we're working on in Natur-Tec that are going to set themselves up as recurring monthly recurring quarterly revenues that are going to continue to build on the nature of total Natur-Tec sales.
And so I expect and what I look at as far as kind of a base level of business, the base level of Natur-Tec business is simply growing on a month-to-month basis, and we're starting to see those results. So my expectations are that Jones Natur-Tec is going to have a very strong second half of the year to extract oil and gas to have a strong second half of the year. Typically, our industrial business has a much stronger Q3 and Q4 than Q1 and Q2. So we're pretty excited by the project's.

Gus Richard

Got it. And then just do you have a target for gross margins going forward, if it's significantly above on the run rate over the last five or six years on is 40 sort of a long term target? Or do you think how much higher do you think those can go? And as your revenue ramps in Europe and given the expected mix?

Well, I certainly think that there we've achieved some economies of scale from that as far as being able to harvest more of the gross margin dollars. And I would say that our goal is to keep our fixed expenses as stable as possible. And if you don't see the variable cost components, the cost of goods sold is going to go up based on a function of revenues.
And so I think the gross margin we achieved in the quarter was obviously very good. It certainly as a target. I don't know if it's completely that sustainable, that I would target that number or higher number going forward. But I can say that one of the objectives that we have as a company is to continue to work on improving gross margin and for all the product lines.
And that and that's one of the reasons why we invested in the building that we have right next door to our specialty circle kind facility that basically came online a few months ago. We've been able to in-source as certain production and certain the manufacturing of certain certain small light manufacturing items that we were previously outsourcing.
And additionally, there's going to be some investments that were going to be making in Natur-Tec where we can do some of the manufacturing of the resolution blending to the resident on our own to do things. And we're strategically doing to specifically work on improving gross margins and so on the increase in gross margin we've seen over the past two quarters is exciting for us, I think 40% is a good target restaurant.
I certainly think that's sustainable for the next few quarters. But obviously, there's a lot going on from a global standpoint, energy prices, things like that, that could have an impact on some of the base materials and cost unit based materials that we have set that makes sense.

Gus Richard

Yeah, that does. And then last one for me and I'll turn it over. China was strong up for the first time in a very long time. Could you provide a little bit of color on is that the automotive sector in China, you know, internal and bus congestion in industrial, what sort of what is leading to the improvement in your China operations?

And I think there's some new opportunities in new markets that we've been we've been going after. I think there has been a slight uptick in, at least compared to what we're what we're seeing. And we're starting to see some of the signs of a I don't want a fair recovery because obviously not all macro environmental factors are pointing that way. But certainly with the customers that we're going after, we're seeing some some rebound in the volumes that they're ordering from us.
And so there's been some positive signals that we've seen specifically in our second quarter that give us a little bit more hope that third and fourth quarter will continue to see some improvements. Additionally, we've made some, let's say, cost cutting edge, which we made some cost cutting efforts in China to to increase their profitability.
So there will be a contribution coming from China this year from our subsidiary in China this year compared to the contribution that we saw last year, which was basically breakeven. So with no contribution and so I think that as that economy recovers more and as the we see some of the opportunities we're going after come to fruition, I think we're going to see a recovery in China.
I don't know when you get back to the kind of growth rates that we're expecting several years ago or if we do, but clearly the market there, we've continued to see a lot of opportunity opportunity there. So both from an auto sector and from other new markets that we're going up.

Gus Richard

Got it. All right. That's enough from me. Thanks so much.

Operator

Tim Clarkson, Van Clemens & Co.

Tim Clarkson

Hey, guys. So obviously a great quarter on just a couple of questions on the stuff that's working here on what percentage of the oil and gas business at this point would you say is repeatable, so you did what $2.2 million, what percentage of that was kind of repeat stuff.

G. Patrick Lynch

Kind of I mean, technically, it's all repeatable.It's all business with customers that have larger opportunities there's certainly no markets in oil and gas that we're in that are that are saturated. We're still at a point where the customers that we're dealing with, we are making up very small portions of their typically their repair and maintenance budgets that are utilizing VCS technology to protect their infrastructure. So the expectations are that on a specific amount of tank bottom there's certainly recurring revenue after a period of time when you need to recharge the tank bottom.
But typically the fields and with where these installations are taking place, there's nearly 100 attacks. And we have it's a single digit number of tanks and in different facilities. So we feel that as the technology becomes more mainstream as it becomes more accepted has further standards or past in dealing with the API and other. We know it and other regulatory bodies that it still continues to be a very, very big market opportunity for us, right.

Tim Clarkson

So obviously, you guys have only exploited a small percentage of that market like less than 2% or something like that.

[I'd say near two tenths of a percent. I mean it's right. It's a very big market compared to the revenue growth].

Tim Clarkson

Let me ask you this. I mean, from I mean, do these guys ever get excited about the fact they can take a tank and make it last 30 years versus having to replace it 10 years out to me that would be pretty exciting. I mean, just as a as a technological feat. I mean, it's really breakthrough technology. I mean, is there any kind of like gee whiz? This is wonderful stuff.

Well, I mean, in general, people are really excited about rest in general.

Matthew Wolsfeld

Tim, I know I get your point. It's the kind of thing where when our when our salespeople are in the field and they're meeting with people that are protecting the infrastructure and a charge of protecting the infrastructure from. I think the wheels are starting to turn in people's heads about you don't potentially the cost savings that they would see on a long-term basis from from these dealers use using our products to protect the infrastructure.
And you can see that with the people that we're dealing with you can see that as you go up the chain of command inside of the company that we're dealing with that people are starting to understand the value added component to using these these products and the oil and gas market industry in general is known for being relatively slow when it comes to embracing new technologies.
But we're blocking and tackling and going after business and moving ahead as quickly as we can. I mean, I can tell you we are we are starting to see some things accelerate a little bit and part of the reason why we are looking to hire.
So I mentioned before, looking to hire and looking to make investments in this business because we are starting to see some of the milestones and some of the things happen where we're now comfortable with how the growth is going. And we want to make sure that as that business increases, we're able to able to support it and able to take advantage of take advantage of.

Tim Clarkson

Right. Okay. Let's switch to the compostable a little bit now. What does that product? It really differentiate itself against the competition. I mean, can you find specific applications where somebody says, yes, we want to do business with this Natur-Tec stuff rather than the competition because of AB and C I mean, does that show up or is it just another another compostable product?

No, that definitely shows up. I mean, we certainly sell commodity products that are some semi-finished products. Certainly or commodity products as far as selling certain bean liners and things like that. But the majority of our business and some of the larger projects that we've rolled out, we've developed proprietary resins for these companies to be able to manufacture successfully manufacture the products that they want to be compostable on their own manufacturing equipment.
And that's something when they've tried either competitors or tried just base resins or tried to develop something internally they have been able to do. And so the really the value add and the benefit that the Natur-Tec group is providing is the ability to tailor something specifically to a customer that ultimately leaves us in a position where we're able to supply them with a product and develop a longer-term partnership with companies where they want to make compostable products.
And so I think a lot of the growth that we're going to see in the coming 12 months, 24 months is going to be are going to be these opportunities where the product that we're selling is not replaceable by other compostable resin. It's going to be specifically developed by us in partnership with with some of these main suppliers.

Tim Clarkson

Right, super. And would you say at this point, Natur-Tec is profitable on a standalone basis?

Matthew Wolsfeld

Natur-tec is definitely profitable on a stand-alone basis. That's been one of the most exciting things for us over the past six quarters really is seeing the growth and the profitability of Natur-Tec and the contributions that we're seeing from the overall Natur-Tec business to the bottom line profitability.
Certainly one of the one of the key things that I think people that really follow the company have a difficult time understanding is that the over the past four or five quarters, we've seen the joint venture contribution. You be relatively flat or even down south. And we talked a little bit about how the big joint venture that we have in Germany and the amount of income coming from that joint venture has gone down significantly over the past two or three years because of some of the difficulties with the overall German economy.
And right, the growth that we've seen from a profitability standpoint has been the total company has been where the Natur-Tec is making us giving contribution oil and gas is profitable, making a contribution. So certainly my view, certainly what I hoped for and what I'm is that as we see a, you know, the tailwinds as far as what's going on with some of the joint ventures.
Hopefully, that turns around a little bit. We get back to the point where we're seeing the growth of the joint venture level that that's going to be an additional tailwind where you really really see the earnings acceleration.

Tim Clarkson

Right, right, great. I mean, I'm pleased obviously pleased with how things are gone and I expect things to continue. And I mean, one thing I'll make I don't know why I'm saying this, but I mean, this is unbelievable. How long it takes people to be convinced of technologies.
Everybody thinks people want to change to do innovative stuff, but the experience that Northern Technologies historically just shows that it takes 10 years sometimes for people to see the obvious and start to change their behavior.
So I'm glad you guys are hanging in there on everything you're doing is clearly not only making money but it's also helping the environment even the tank technology, obviously, so about Great quarter. Thanks.

Operator

John Bair, Ascend Wealth Advisors. Your line is open.

John Bair

Thank you. Excuse me. Thank you for taking my questions and looking at your slide deck on the slide with your joint venture operating income has been relatively steady in that 10% to 11% range over over the past few years.
So I'm wondering if there's opportunities there to expand that segment of your business and you just referenced hoping that overall things might increase what would prevent or provide a good tailwind. You did in your prepared remarks mentioned that China has shown some improvement. Didn't really mention anything about India, and I'm just kind of wondering what you're seeing there.

Matthew Wolsfeld

I'm sure. As far as far as what we're seeing in in India, we see investment that we made to acquire the additional 50% of HNTI, which we can cause the rest India it was made at the end of 2001. So the impact started coming in in 2002.
We saw a pretty dramatic drop-off in our on 2000 is it -- after the acquisition, we saw a drop-off in the expected contribution. They were contributing about $1.2 million to our total profit and fiscal 2023. That contributed about $1.5 million. And this year, we expect them to contribute close to $2 million of total operating bottom line net income contribution.
So the Indian business has been strong there. We're seeing there the growth in sales growth and overall profitability and so it's been very positive. The investment that we made in regulatory made the investment with a little bit of a decline. But we're certainly at a point now where the $2 million of operating profit that we're taking in is making a contribution in the Indian market in general, is a strong market for us, both in Natur-Tec and for and for the nearest industrial.
Specifically, we're talking about the Natur-Tec business, which isn't included any of the numbers that I just mentioned about the $2 million contribution, the Natur-Tec business that we have there as a separate company and they too have been seeing significant the significant growth. We have a contribution that similar to the growth rates we've been seeing in Natur-Tec in not in North America.
And so that continues to be a big market just because of all of the opportunity that they have there in supplying various compostable materials. We're also seeing as I kind of alluded to, the need to make an investment in China because we now have the opportunity to do some production of Natur-Tec resins at the facility here at what will be a new facility in India for the for the Natur-Tec group that should continue to increase and help us increase the gross margins that we receive. We're achieving across all of Natur-Tec. So we look at India as a very key contributor to us, both from a Natur-Tec and from Zerust industrial standpoint.
Touching on the other, your other question about the joint venture contributions to the joint venture percentage contribution that you mentioned and reference from the slide deck of about 10% to 11% of top top line revenue going to our bottom line income has been pretty consistent for for a while. It's gone up a little bit down a little bit by a few a few tenths of a percent, but it's been pretty consistent.
So I don't think that we have a path. Typically the joint venture, the subsidiaries that we have around the world are servicing all the industrial markets that are out there. I don't anticipate any new joint ventures from the standpoint of a new geographic region. We would go after that isn't currently serviced by one of the entities that we have and I know that the joint ventures certainly work together and see what's working for a joint venture.
And hopefully they can have various means various technical meetings to understand what's working and how they can further develop and further push products out through that distribution network that we have. And Patrick right now is calling in from Europe at a joint venture partners meeting where they come together and basically talk about what's going well, what's not going well, what what's different, what changes we need to make? How do we what business do we need to go after and how can we accelerate revenue? And that's a normal function, and that's something that takes place on a very consistent basis.
So I would expect that as we kind of go forward into Q3 and Q4 and then into our fiscal 2025, that we're going to see a rebound and see the joint venture contributions and joint venture sales increase on their own, given the efforts that they're doing right now.

John Bair

Okay. Is there much opportunity in acquiring 100% of some of these JVs like you did with the India operation. I mean, is that something that you kind of look at as and as those are kind of more long-term relationship kind of things in the right situation occurs as it did was with your with your India operation.
But what's kind of the as a backdrop, I guess in that situation, are there many similarities of the other ones that are kind of similar to that situation specifically.

Matthew Wolsfeld

I would say that we deal with that more on a case-by-case basis and there are there roughly [10% or 11%] European. The European joint ventures are in that region and four or five in Asia. We kind of handle on a case by case basis as far as how transitions, how transitions occur, what regions make the most sense for us to potentially acquire an ownership interest.
If that's something that becomes available, we're not actively going out and looking to buy out partners or push partners out. But if the opportunity comes up and it's a region that we feel we could effectively control or own more of than certainly we look at taking over that, we look at taking advantage of that opportunity, right?

John Bair

And that's kind of where it was. What I was looking at looking to hear is whether it's an active pursuit or whether if the the operator ends up saying, okay, I'm unwilling to give up my ownership per watt hours.

Matthew Wolsfeld

Certainly, certainly ownership percentage that the other shareholders have we view as part of the succession planning of the joint ventures, what are our opportunities for acquiring that? Or does it make more sense to look for a different strategic partner that we think could add more value than if NTIC. were to adjust some purchases.
And so it's our joint ventures, our partnerships that we've had for a long period of time where we've developed very long, trusting relationships with the individuals. And so there's a lot more to it than just the what it looks like on a balance sheet or what it looks like from a from a it's an operating income contribution standpoint.
And so we're certainly aware of that. And we certainly appreciate our joint venture partners and want to work to make sure that we're doing the right thing and working together, that's going to be in the best interest of all the joint ventures and kind of the entire NTIC Federation.

John Bair

Sir, one last question you did indicate, but the third and fourth quarter should be stronger with the Russian the oil and gas is. Do you still feel that that's as much a function of the higher oil prices that we're seeing right now? Or is it a combination of that plus a greater adoption of your technology to be used in their infrastructure.

Matthew Wolsfeld

I think it has more to do with the adoption of the technology and then the oil price volatility that there certainly is a correlation between oil prices and what I'd say are repair maintenance budgets, some of the companies that we're working with. But typically these companies that we're working with have been trialing things for a period of time. They've been gathering data for a period of time. And as we're able to show that, we're able to protect the infrastructure.
So that's what we used to kind of roll out and tried to expand a program inside of a inside of a company. And so I would like to think the increases that we're going to hopefully see and likely see in oil and gas for the next, if I look out three to five years are going to be based off of the adoption of the technology and not the volatility of the oil prices and it does have application to other infrastructure outside of the tank holding tanks.
Yeah, there there are applications dealing with pipeline heating applications dealing with just protecting the infrastructure with some of our existing industrial products. And so there's certainly other there certainly are lots of other applications that we're looking at other than just the tank bottom solution.

John Bair

Yeah, reducing, say, emissions and so forth. Long pipelines or pipeline repair, perhaps?

Matthew Wolsfeld

Yes, exactly. You're looking at protecting the infrastructure to make it safer and less likely to have leaks or anything else that would potentially be hazardous from an environmental standpoint.

John Bair

Would that have application in water infrastructure as well.

Matthew Wolsfeld

And that's possibly but it's not an area that we're targeting the targeting right now. I mean, I think the potential risk and the amount that people are willing to look at from a water standpoint, I just don't think it's comparable to what we've seen from oil and gas.

John Bair

Okay. Very good. I appreciate your taking my questions taking the time.

Matthew Wolsfeld

Yes, thank you.

John Bair

Good results. Thank you.

Operator

Walter Ramsley, Walrus.

Walter Ramsley

Thank you. Congratulations on a really good quarter. Couple of follow-ups. I guess Patrick is in Europe. Can you give us a idea that the economy over there has begun to improve or is it still kind of flatlining or getting worse?

G. Patrick Lynch

I mean, what's the story in Europe nowadays according to what I've been hearing the last couple of days, it's just holding steady.

Walter Ramsley

Okay. And in the United States, can you give us an update on how the automobile part of the business is doing and maybe just overall US Zerust industrial.

G. Patrick Lynch

Zerust industrial in general as US industrial in general is doing okay. But there isn't a I don't have any incentive to report in terms of ACV growth we're expecting in the near future.

Walter Ramsley

Okay. All right. And then I guess just one other thing. The last couple of days, there's been economic reports about inflation increasing again, has that begun to affect your company?

G. Patrick Lynch

Not that I'm aware of.

Walter Ramsley

Okay, sounds good. Congratulations. Thanks for answering the call.

Operator

I'm not showing any further questions this time. I'd like to turn the call back over to Matt and Patrick for any closing remarks.

Matthew Wolsfeld

I'd like to thank everybody for oh sorry, go better than what you planned, but we just want to thank everyone for participating and enjoy the rest of day. Thanks.

Operator

Ladies and gentlemen, that does conclude today's presentation. You may now disconnect and have a wonderful day.