Q2 2017 Flexible Solutions International Inc Earnings Call

Aug 15, 2017 AM EDT

FSI - Flexible Solutions International Inc
Q2 2017 Flexible Solutions International Inc Earnings Call
Aug 15, 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 Second Quarter 2017 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Dan 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 second quarter call. Before focusing on our financials, I'd like to talk about our recovery from the fire, our product lines and what we think might 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 and serving our worldwide customer base. The property is clean, but because the bids to rebuild were unreasonably high, we intend to find an existing building to buy instead. The property where the fire took place will be sold when a reasonable offer is received.

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 via slowing crystal growth between fertilizer ions and other ions present in the soil, resulting in fertilizer remaining available longer for the plants to use. 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 links in the sales to end user chain. There are good profits from manufacturer through to the distribution system to the grower. Yet the grower still owns a great -- 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, 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 that it prevents the scaling of minerals that are part of the water fraction of oil as it exits the water formation. 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 effect on the pipes, but it's also known to reduce the scale plugging inside the rock pores and increase the flow of oil and gas to the pipes from the rock.

Many alternative chemicals are used to prevent pore plugging, and TPA is the biodegradable choice.

SUN 27 and N Savr 30 are our nitrogen conservation products. Nitrogen is a critical fertilizer, but it's 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 compelling pricing.

There has been a recent interest from a new customer who could become quite large. If we're successful in earning this new business, it will begin to show in Q4 2017.

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

We like to illustrate the potential of WaterSavr. Using it on Lake Mead for 6 months a year would save 166,000 acre feet per year, which converts to 56 billion gallons. 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 using WaterSavr is less than $200. So obviously, WaterSavr can reduce losses in reservoirs by a couple of feet on every acre, so this is a big deal. The city of San Diego has finished the extra research they decided to do after our very successful trial, which we reported earlier this year. We expect to see the results in the next few weeks and hope this will be the last hurdle before purchase.

Every year that the city of San Diego does not use WaterSavr, the city is wasting $12 million to $14 million of taxpayer funds.

Q2 and the rest of -- or Q3, actually, and the rest of 2017.

EX10, which is our brand name for TPA for agricultural use, has peak uptake in Q1 but significant sales on into Q2. The crop cycle was delayed in many parts of the U.S. this spring, so EX10 uptake continued firmly into Q2.

There will be fewer sales in Q3, and then uptake begins in the fourth quarter for the 2018 crop season.

SUN 27 and N Savr 30, the nitrogen conservation products for agriculture. We've also initiated a sales program into Latin America. This is a countercyclical marketplace to the North American market, and it's showing strong interest in our nitrogen products. The sales have begun on a very small amount, and we expect them to increase quarterly throughout the year. Our goal is substantial growth through the next 4 to 6 quarters and, for these products, an annual bulge in sales during Q1 each year when U.S. sales are normally booked.

Growth in oilfield use of TPA is driven by our worldwide sales efforts, and it's likely increased rig counts in America should lead to greater sales into the U.S. industry, while oil price stability in the $45 to $55 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, and this bodes well for the whole year. The Brazil sale in Q2 was 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 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 winter months when evaporation is lower.

We're still comfortable predicting that full year 2017 revenue will increase significantly compared to 2016 once accounting for the discontinued Ecosavr operations.

We also expect that profits and operating cash flow will continue to increase. The 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.

The highlights of the financial results. Sales for the quarter increased 26% to $4.72 million compared to $3.73 million in Q2 '16. The result is a profit of $274,000 or $0.02 per share in the '17 period compared to a gain of $561,000 or $0.05 a share in '16. The major factors that reduced profits were the accounting treatment of the fire remediation cost and increases in raw material cost. Over several more quarters, the fire accounting will have unusual and unpredictable effects on our financials. The effects should be less and less over time.

We're working to increase our pricing to customers so that selling prices reflect the higher raw material cost we must pay. This will proceed over the remainder of the year. Share count in Q2 2017 was not significantly different due to the effects of the January '16 buyback being now a full year old.

Working capital is now $12.1 million, and we have $6.3 million in cash on hand and a letter 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 operations.

For the half year ending June '17, operating cash flow was $1.97 million or $0.17 a share compared to $2.5 million or $0.22 a share for first half '16. The '16 and '17 numbers are based on shares outstanding that are less than 1% different now that the 2016 share buyback is more than a year old. And the detailed information on how to reconcile GAAP with operating cash flow numbers is included in our news release of August 14. That was yesterday.

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

It's highly probable that our deferred tax asset, see the balance sheet, will offset any tax owing on the insurance recovery. We think the GAAP financials, combined with the operating cash flow numbers give a clearer view of our success until the effects of accounting for the insurance recovery are over.

The text of this speech will be available on our website by Wednesday, August 16, and e-mail or fax copies can be requested from Jason Bloom at 1 (800) 661-3560 or jason@flexiblesolutions.com.

Thank you, and the floor is now open for questions. Will the moderator please give the instructions?

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Questions and Answers
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Operator [1]
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(Operator Instructions) We'll take our first question from [Steven Weinstein].

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Unidentified Analyst, [2]
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I actually had a few questions. First one, very nice quarter. So first question -- I -- sorry, I just missed this on the call. When do you expect for the deferred tax asset to be monetized?

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Daniel B. O’Brien, Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director [3]
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The 2019 first quarter is when we do our final accounting to the Canadian tax authorities. The tax asset is in our Canadian operations. So I would expect that there will be some use of the tax asset in 2018, and the remainder will be consumed in 2019.

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Unidentified Analyst, [4]
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Okay, awesome. And then my only other question was on cost of goods sold this quarter. The 10-Q said that it was mainly higher because of increased cost from not having the Taber plant. I just was wondering if you could kind of like add some more descriptions to that.

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Daniel B. O’Brien, Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director [5]
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No, I would -- that was a Q1 statement. In second quarter, we're seeing additional costs for our raw materials purchased outside of North America. So that has been significant in the quarter, and it's up to us now to push the cost onwards to the customers over a period of time.

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Operator [6]
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(Operator Instructions) And it appears we have no further questions at this time.

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Daniel B. O’Brien, Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director [7]
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Thank you, all, for joining me this morning. I will be back with you in November. And all the best to you until then. Goodbye.

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Operator [8]
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This does conclude today's program. You may now disconnect your lines, and have a wonderful day.

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