Q4 2016 Flexible Solutions International Inc Earnings Call

Apr 03, 2017 AM EDT

FSI - Flexible Solutions International Inc
Q4 2016 Flexible Solutions International Inc Earnings Call
Apr 03, 2017 / 03:00PM GMT

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Corporate Participants
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* Daniel B. O'Brien
Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director

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Presentation
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Operator [1]
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Good day, and welcome to the Flexible Solutions International Full Year 2016 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Daniel O'Brien. Please go ahead, sir.

The safe harbor provision. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Certain of the statements contained herein, which are not historical facts, are forward-looking statements with respect to events, the occurrence of which involve risks and uncertainties. These forward-looking statements may be impacted, either positively or negatively, by various factors. Information concerning potential factors that could affect the company is detailed from time to time in the company's reports filed with the Securities and Exchange Commission.

Welcome to the full year 2016 call. Prior to focusing on our financials, I'd like to talk about the fire that destroyed our Taber factory; recent space addition at our Peru, Illinois, factory; our product lines; and what we think may occur over the next several quarters.

The fire at Taber was a sad event. However, there was only one small injury, now healed, and we carry a full replacement insurance. Our employees are safe, and we've received partial payment for our losses already with full payout expected by the end of Q2. As soon as the site is approved, we will begin rebuilding on a smaller footprint that suits our future operations.

The Ecosavr fish for swimming pool products will not restart. The Heatsavr liquid pool cover will be back in production soon to serve our worldwide customer base. The new building will also be available as needed by the NanoChem division and for other corporate purposes.

In 2016, the NanoChem division invested in an LLC. We paid $100,000 in cash and 5 acres of our unused land at our Peru, Illinois, factory site in return for 41.6% ownership of the LLC. This LLC subsequently built 60,000 square feet of high-quality factory space, of which we've leased 30,000 feet at a fair price. The other 30,000 feet are leased on the same terms. NanoChem is using the extra space for additional inventory and production of certain agriculture products. NanoChem profits from the LLC in ratio to its ownership.

The NanoChem division, NCS, represents most of the revenue of FSI. This division makes thermal polyaspartic acid, called TPA for short, a biodegradable protein with many valuable uses. NCS also manufactures SUN 27 and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil. TPA is used in agriculture to significantly increase crop yield. The method of action is by slowing crystal growth between fertilizer ions and other ions in the soil, resulting in fertilizer remaining available longer to increase yield. The attraction between the TPA and the fertilizer ions also reduces fertilizer runoff. Keeping fertilizer more easily available for crops to use, results in better yield with the same level of fertilization.

TPA in agriculture is a unique economic situation for all the links in the sales to the end user chain. FSI earns a profit on manufacturing. Distributors earn a strong profit selling to dealers. Dealers make good profits selling to growers, yet the grower still earns a great profit from the extra crops he produces with the same land and the same fertilizer program.

More than 400 trials over the last 15 years have demonstrated that investing $10 to $20 per acre in TPA can pay back $300 to $100 (sic) [$30 to $100] or more. For example, in summer 2015, 2 quarts per acre of TPA added to the normal fertilizer program on dry beans in Idaho resulted in an increase of the marketable yield by 400 pounds per acre. With beans selling for $0.40 a pound in fall 2016, a $20 investment in TPA brought this farmer $160 in added revenue for every single acre he treated.

TPA is also a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale. Our sales into this market are well established and grow steadily but can be subject to temporary reductions when production is cut back when platforms are shut down for reconditioning. A simple explanation of the effect is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the water formation -- or sorry, the rock formation. The scale must be prevented to keep oil recovery pipes from clogging.

Used as a biodegradable additive in fracking fluid, TPA has the same positive effects on the pipes, but it's also known to reduce scale plugging of the rock pores, thus increasing the flow of oil and gas to the pipes from the rock. Many alternative chemicals are used to prevent pore plugging, but TPA is the biodegradable choice.

SUN 27 and N Savr 30 are our nitrogen conservation products. Nitrogen is a critical fertilizer but subject to loss through bacterial breakdown and soil runoff. Both our nitrogen products are becoming well respected and seeing increasing sales. SUN 27 is used to conserve nitrogen in cold, dry soil while N Savr 30 is directed towards nitrogen retention in warm, wet soils. Both our products are equal to or better than the competing products, and we have very compelling pricing.

WaterSavr. We're continuing our efforts with this product in the U.S.A., Turkey, Africa, Chile, Brazil, parts of East Asia and Australia. This could be a break-through year. I think it's important to illustrate the potential of WaterSavr. Using it on Lake Mead for 6 months a year could save 166,000 acre feet per year. This is the same as 56 billion, with a b, gallons.

It's not just water. WaterSavr can have huge results on city water budgets. Delivered water costs now exceed $1,000 an acre in many California cities, and the total cost of saving an acre foot using WaterSavr is less than $200. WaterSavr can reduce losses in reservoirs by 2 feet on every acre in California conditions. A theoretical city with 10,000 acres of reservoir surface could reduce its water budget by $16 million a year, $16 million that could be redirected to help the citizens. We're emphasizing both water and money conservation in our interactions with California and other prospects.

Q1 and the rest of 2017. EX10, our brand name for TPA in agricultural use, has peak uptake in Q1 but with significant sales on into Q2. The crop cycle is delayed in many parts of the year this spring -- of the U.S. this spring, so the peak of EX10 uptake may occur in Q2 rather than Q1.

SUN 27 and N Savr 30 conservation products for nitrogen. We have initiated a new sales program into Latin America. This marketplace is countercyclical to the North American market and showing strong interest in our nitrogen products. We think it's likely that sales will begin in small amounts during Q2 and increase quarterly through the year.

Growth in oilfield use of TPA, driven by our worldwide sales efforts, is likely. Increased rig counts in America should lead to greater sales into the U.S. industry while oil price stability in the $50 per barrel range could result in increased international sales as customers refocus on production growth.

WaterSavr had a $50,000 sale to Mauritius in Q1 '17. This bodes well for the coming year. A similar contract is being negotiated in Honduras, and larger ones are progressing in South Africa and Turkey. Recent trial results showing 45% savings in Southern California may result in sales in both Q2 and Q3. Water costs are now so high in parts of SoCal that WaterSavr is able to cut water acquisition budgets by a factor of several hundred percent, more than the WaterSavr cost even in the winter months.

We're comfortable predicting that full year 2017 revenue will increase significantly compared to 2016 once the discontinued Ecosavr operations are accounted for. We also expect that profits and EBITDA will continue to increase. The usual warning applies: We can't control customer behavior, shipping dates, weather, crop pricing, oil platform maintenance and the other variables of our business, so quarterly results will not form a straight line on a graph.

Highlights of the financial results. Sales for the year increased 2% to $16.24 million compared to $15.89 million in 2015. The result is a profit of $1.79 million or $0.16 a share in the '16 period compared to a gain of $1.5 million or $0.11 a share in 2015. The share count for 2016 was lower by 1.75 million due to a January 2016 buyback.

Working capital of $7.2 million is very adequate, including $2.5 million in cash on hand as well as a line of credit with Harris Bank of Chicago. We're confident that we can execute our growth plans with our existing capital.

In the past, FSI has provided a non-GAAP measure useful for judging our year-over-year success: operating cash flow. It's arrived at by removing taxes, interest, depreciation, option expenses and onetime items from the statement of operations. As the company has matured over the last several years, operating cash flow has become closer and closer to the more common term, EBITDA. Therefore, we have decided to show both figures in our 2016 financials and the news release and the conference call -- sorry, not in the financials. For Q1 2017 and future reports, we will only show EBITDA and, of course, the regular GAAP measures.

For the year ending December 2016, operating cash flow was $3.7 million or $0.32 per share compared to $3.0 million or $0.23 per share for full year 2015. EBITDA in 2016 was also $3.7 million and $0.32 a share. The 2015 numbers are based on shares outstanding prior to the buyback, while the 2016 numbers are based on the new share count after the buyback. The detailed information on how to reconcile GAAP with operating cash flow and EBITDA numbers is included in our news release of March 31.

The text of this speech will be available on our website by Tuesday, April 4, and e-mail or fax copies can be requested from Jason Bloom at 1 (800) 661-3560 or by e-mail, jason@flexiblesolutions.com. Thank you.

The floor is now open for questions. And Derek, can you give the instructions, please?

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Operator [3]
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(Operator Instructions) And there are no questions in the phone queue. (Operator Instructions) And sir, there are no questions in the phone queue.

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Daniel B. O'Brien, Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director [4]
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Thank you, Derek. Everybody who's listening, thank you for joining us. I hope that the lack of questions means the speech was good rather than total boredom. Hopefully, you'll be on the call in about 6 weeks for first quarter. Thank you very much. And Derek, you can end the call.

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Operator [5]
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This concludes today's call. Thank you for your participation. You may now disconnect.

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