# To the Shareholders of Northern Technologies International Corporation

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NASDAQ_NTIC_2019/NASDAQ_NTIC_2019.mmd` · pages 2-8_

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To the Shareholders of Northern Technologies International Corporation (NTIC),

## Letter from Patrick

By financial and operating metrics, fiscal 2019 was a strong year. We ended the year with record annual net sales and one of the highest levels of profitability in our 50-year history. Fiscal 2019 also showed the benefits of our product and geographic diversification strategy, as sales growth from Natur-Tec and NTIC China offset declines in our core ZERUST \( ^{®} \)  industrial business caused primarily by the current global manufacturing slowdown. While uncertainty regarding global trade and industrial production remains, we are confident our strategic plan will continue to create value for our stockholders for years to come.

Natur-Tec and NTIC China have expanded both our product lines, as well as our target markets. Looking back to fiscal 2015, 85.9% of our consolidated net sales were from ZERUST \( ^{®} \)  industrial products, and included only 1,070,000 in sales at NTIC China. From fiscal 2015 to fiscal 2019, Natur-Tec's sales have increased at a 42.4% compounded annual growth rate (CAGR), while NTIC China's sales have increased at an 86.8% CAGR to 13,030,000. As a result, for fiscal 2019, only 68.5% of NTIC's consolidated net sales were from our ZERUST \( ^{®} \)  industrial products. In addition, while ZERUST \( ^{®} \)  industrial sales declined 7.7% in fiscal 2019 compared to fiscal 2018, we were able to leverage our operating expenses during the year as a result of overall sales growth and controlled spending.

NTIC's consolidated net sales for fiscal 2019 were an annual record of \(55,570,000. The 8.4% annual increase was a result of a 74.9% increase in Natur-Tec sales to of \)17,575,000. Partially offsetting Natur-Tec's growth was a 7.2% decrease in sales of ZERUST \( ^{®} \)  industrial products and an 11.1% decline in sales of ZERUST \( ^{®} \)  oil and gas products.

Net income attributable to NTIC decreased 22.3% for fiscal 2019 to \(5,210,000, compared to \)6,701,000 last fiscal year. On a per share basis, net income attributable to NTIC decreased 23.6% for fiscal 2019 to \(0.55 per diluted share, compared to \)0.72 per diluted share last fiscal year.

NTIC generated \(5,531,000 in cash from operating activities during fiscal 2019, up from \)609,000 during fiscal 2018. At the end of fiscal 2019, NTIC had \(9,422,000 of cash, cash equivalents, and available for sale securities, compared to \)7,463,000 at the end of fiscal 2018. In addition, NTIC has over \(21,207,000 in investments in joint ventures, of which \)13,040,000 is cash. Maintaining a strong balance sheet and capital structure has enabled us to self-finance our growth-generating initiatives and has provided us with significant flexibility to navigate changes in market dynamics.

Our strong balance sheet, compelling operating cash flow, and asset light business model support NTIC's cash dividend policy. I am pleased by the decision of our Board of Directors to increase our quarterly dividend 20% from \(0.05 per share to \)0.06 per share during fiscal 2019, and the Board's recent decision to further increase the quarterly cash dividend to \(0.065 per share during fiscal 2020. For fiscal 2019, NTIC paid \)2,180,000 in cash dividends, compared to \(1,816,000 last year. Our current quarterly cash dividend payment of \)0.065, represents an 8.3% increase over the fiscal 2019 quarterly dividend payment.

## ZERUST \( ^{®} \)  Industrial Corrosion Prevention

ZERUST \( ^{®} \)  industrial sales were not immune to the on-going global manufacturing slowdown. The negative impact was clearly visible in ZERUST \( ^{®} \)  sales throughout fiscal 2019 both in North America and across the territories served by our global joint ventures. Sales by our joint ventures decreased approximately 4.5% to 114,635,000 during fiscal 2019, compared to 120,061,000 last fiscal year. For fiscal 2019, we estimate 45-50% of ZERUST \( ^{®} \)  industrial sales worldwide are to the auto market, compared to over 60% in fiscal 2015. We believe this end market diversification within our ZERUST \( ^{®} \)  industrial business, combined with the growth we have experienced in China, improves our ability to navigate any prolonged slowdown in both the auto industry and any of the other

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industrial markets we serve. We believe we are well positioned to increase our market share as we leverage our technical expertise and global footprint, continue to develop solutions for new markets, and further expand our brand in the large, diverse and growing Chinese market.

## ZERUST \( ^{®} \)  in the Oil & Gas Industry

ZERUST \( ^{®} \)  oil and gas sales remain volatile primarily due to the market's long sales cycle and overall challenging market conditions. As a result, ZERUST \( ^{®} \)  oil and gas sales declined 11.1% to 2,727,000, compared to 3,067,000 for the previous fiscal year. While it continues to take longer than expected to scale ZERUST \( ^{®} \)  oil and gas, our funnel of sales opportunities remains robust and our applications continue to provide value to our current and potential customers. In 2019, in addition to repeat orders from established customers, we closed sales in several new countries with an expanded product line. We are committed to expanding our presence within the global oil and gas market due to its size and profit potential, and believe we will be able to successfully grow ZERUST \( ^{®} \)  oil and gas sales over time.

## Natur-Tec \( ^{®} \)  Bioplastics

Sales of Natur-Tec \( ^{®} \)  products grew to a record 17,575,000 during fiscal 2019, representing a 74.9% increase over fiscal 2018. With this increase, Natur-Tec \( ^{®} \)  represented 31.5% of NTIC's consolidated net sales for fiscal 2019, compared to 19.5% of fiscal 2018's net sales. Favorable regulations, corporate green initiatives, and changing consumer preferences continued to have a positive influence on global demand for Natur-Tec's bioplastics. We expect these trends will continue to benefit Natur-Tec \( ^{®} \)  throughout fiscal 2020 and beyond.

## Closing

In closing, I want to thank all the members of NTIC's global family of employees, joint venture partners, friends and colleagues for their hard work and dedication during fiscal 2019. In addition, I want to thank Barbara D. Colwell for her six years of service to NTIC as a director, and welcome Nancy E. Calderon and Sarah E. Kemp to NTIC's Board of Directors. Nancy and Sarah are exceptional executives with profound experience in creating value for complex global organizations and I look forward to the contributions they will make towards growing our company.

As we start fiscal 2020, I am excited by the potential NTIC has to continue to create value for stockholders with profitable sales growth throughout our ZERUST \( ^{®} \)  industrial, ZERUST \( ^{®} \)  oil and gas, and Natur-Tec \( ^{®} \)  product categories.

Sincerely,

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G. Patrick Lynch
President & CEO, NTIC

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G. Patrick Lynch