Flexible Solutions International Inc Earnings Call

May 16, 2017 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

FSI - Flexible Solutions International Inc
Flexible Solutions International Inc Earnings Call
May 16, 2017 / 03:00PM GMT 

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

Operator   [1]
 Good day, and welcome to the Flexible Solution International First Quarter 2017 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. Your line is open.

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [2]
 Thank you, Alexis. Good morning. This is Dan O'Brien, CEO of Flexible Solutions.

 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 Q1 2017 conference call. Prior to focusing on our financials, I'd like to talk about our recovery from the fire, our product lines and what we think may occur over the next several quarters.

 The fire at Taber was unfortunate. However, we've received a total of CAD 5.7 million from our insurance and may receive additional funds in Q3 after all details of the equipment we lost have been reviewed by our insurer.

 The Heatsavr liquid pool cover is back in production to serve our worldwide customer base. The property is clean, ready for the new building, and we are assessing bids for construction. Space in the new Taber facility will be available as needed by the NanoChem division and for other corporate purposes.

 The NanoChem division, NCS, represents most of the revenue of FSI. This division makes thermal polyaspartic acid, called TPA for short. It's 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 slowing crystal growth between fertilizer ions and other ions in the soil, resulting in the fertilizer remaining available longer to increase yield. The attraction between TPA and the fertilizer ions also reduces fertilizer runoff. Keeping your 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 links in the sales to end user chain. There are good profits from manufacturer through the distribution system to the grower, yet the grower still earns a great profit from the extra crops he produces with the same land, but no extra fertilizer.

 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 growing steadily but can be subject to temporary reductions when production is cut back or when platforms are shut down for reconditioning. A simple explanation of TPA's effect is it prevents the scaling of minerals that are part of the water fraction of oil as it exits the water formation. The scale must be prevented to keep the oil recovery pipes from clogging. Used as a biodegradable additive in fracking fluid, TPA has the same positive effects on the pipes, but is 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. TPA is the biodegradable choice.

 SUN 27 and N Savr 30 are our nitrogen conservation products. Nitrogen is a critical fertilizer, but it is subject to loss through bacterial breakdown, evaporation and soil runoff. Both our nitrogen products are becoming well respected. SUN 27 is used to conserve nitrogen from attack by soil bacterial enzymes, while N Savr 30 is directed towards nitrogen loss through leaching and evaporation. Both our nitrogen products are equal to or better than the competing products, and we have very compelling pricing.

 WaterSavr. We're continuing our efforts in the U.S.A., Turkey, Africa, Chile, Brazil, parts of East Asia and Australia. This could be the break-through year.

 We'd like to illustrate the potential of WaterSavr. Using it on Lake Mead for 6 months a year could save 166,000 acre feet each year. This is the same as 56 billion gallons. That's billion, with a b.

 It's not just water. WaterSavr can have huge effects on city water budgets. Delivered water costs now exceed $1,000 per acre foot in many California cities, and the total cost of saving an acre foot with the use of WaterSavr is less than $200. WaterSavr can reduce losses in reservoirs by 2 feet on every acre.

 In one city we're in discussions with, it has 5,000 acres of reservoir surface and could reduce its water purchase budget by $7 million a year, $7 million that could be redirected to help the citizens in other ways. We're emphasizing both water and money conservation in our interactions with California and other prospects who pay for water at high rates.

 Q2 and the rest of 2017. EX10, our brand name for TPA for agriculture use, has peak uptake in Q1 but with significant sales on into Q2. The crop cycle is delayed in many parts of the U.S. this spring, so EX10 uptake has continued firmly into Q2. There will be fewer sales in Q3, and then uptake begins in Q4 for the 2018 crop season.

 SUN 27 and the N Savr 30, the nitrogen conservation products for agriculture. 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 this quarter and increase quarterly through the year. Our goal is substantial growth over the next 4 to 6 quarters, with an annual bulge in sales during Q1 each year when U.S. sales are normally booked.

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

 WaterSavr had a $50,000 sale to Mauritius in Q1 2017, and this bodes very well for the 2017 year. The Brazil sale, just recently announced, is in the low 6 figures. An initial contract is being negotiated in Honduras for delivery late in the year, and larger ones are progressing in South Africa and Turkey.

 Recent trial results that showed savings of 45% 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 cost of the WaterSavr, even in the winter months.

 We're still 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 operating cash flow will continue to increase. Our usual warning applies, that 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 be unlikely to form a straight line on a graph.

 Highlights of the financial results. Sales for the quarter decreased 12% to $4.7 million compared with $5.3 million in Q1 2016. The result is a profit of $3.3 million or $0.28 per share in the '17 period compared to a gain of $741,000 or $0.06 per share in 2016. $0.22 of the Q1 2017 earnings are represented by the fire insurance recovery. The share count for 2017 was not significantly different due to the effects of the 2016 share buyback now being a full year old.

 Working capital is $11.7 million, which is an excellent number. It includes $4.9 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.

 FSI provides a non-GAAP measure useful for judging year-over-year success: operating cash flow is arrived at by removing taxes, interest, depreciation, option expenses and onetime items from the statement of operation.

 For the quarter ending March 2017, operating cash flow was $1.16 million or $0.10 per share compared to $1.4 million or $0.13 per share for Q1 2016. The 2016 and 2017 numbers are based on shares outstanding that are less than 1% different now that the 2016 share buyback is more than a year old. Detailed information on how to reconcile GAAP with operating cash flow numbers is included in our news release of yesterday, May 15.

 Finally, the insurance recovery from the Taber fire had a large effect on our GAAP results in Q1. Additional recoveries, expenditures during rebuilding, tax adjustments, depreciation on the new building and the amounts received already will affect our GAAP financials until Q1, 2019. The period allowed by Canadian tax law before a final tax occurs on any profits from an insured event.

 We think the GAAP financials, read along with the operating cash flow, will give a clearer view of our success until the effects to the accounting for the insurance recovery are over.

 The text of this speech will be available on our website by Wednesday, May 17, and e-mail or fax copies can be requested from Jason Bloom at 1 (800) 661-3560 or jason@flexiblesolutions.com. Thank you.

 The floor is open for questions. Alexis, will you proceed? I know there will be a short gap while you organize the situation. Thank you.

Questions and Answers
Operator   [1]
 (Operator Instructions) And we do have a question from [Stephen Weinstein]. He's a private investor.

 Unidentified Participant,    [2]
 I just had a couple of questions. So first, on the balance sheet, it seems like the accounts receivable was up about $400,000 this quarter. And after accounting for the write-down at Taber, inventory was up $1 million. Could you just add a bit of color, like, what's happening on the ground? Is it just lumpiness? Is it in anticipation of sales growth or just like investment into the company?

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [3]
 The accounts receivable is attributed to lumpiness. The increase in inventory is because when we have the amount of cash that we have available, when we get unusually good pricing on raw materials, we take advantage of it, because, as I say to some of my employees, the money in the bank earns no interest, and the inventory earns no interest, so why don't we have the inventory? That's the answer to your questions. Thanks for asking, Steve.

 Unidentified Participant,    [4]
 Also, I just actually have just one more question. So it seems like, right now, you have about, after the insurance proceeds, you have about $5 million in net cash. Just how do you plan on deploying it? And will we start to see capital returns in the next 6 to 12 months?

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [5]
 Like, please explain what you mean by capital returns so I can answer it.

 Unidentified Participant,    [6]
 Dividends or share buybacks. Anything like that?

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [7]
 All right. No. We're going to deploy some of the money. We'll be -- to rebuild the factory in Taber to the extent that we decide is correct for future plans. So that's an unknown amount, but it will be substantially less than the cash on hand. As for a return in the form of dividends, that seems unlikely because of the variance in tax positions between our Canadian, American and international shareholders, who's -- who I look out for as much as I can. On the other hand, a share buyback would be an appropriate method of returning capital at any time that we see the opportunity to do it at the right price.

Operator   [8]
 (Operator Instructions) And it appears we have no further questions at this time.

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [9]
 Alexis, thank you very much for your help on the call. Those of you who tuned in today, I hope to talk to you again at the end of the second quarter when we give the next speech. Thank you very much, and goodbye.

Operator   [10]
 This does conclude today's program. Thank you for your participation. You may now disconnect at any time.

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