Q3 2017 Flexible Solutions International Inc Earnings Call

Nov 15, 2017 AM EST
FSI - Flexible Solutions International Inc
Q3 2017 Flexible Solutions International Inc Earnings Call
Nov 15, 2017 / 04:00PM 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 Solutions International Third Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dan O’Brien. Please go ahead, sir.

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [2]
 Thank you, David. Good morning. This is Dan, 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 third quarter conference call for 2017. Before focusing on the 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 Q4 after all the 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 ready for construction, but because the bids to rebuild were unreasonably high, we bought an existing building. The new building, just blocks from the old one, now houses our Heatsavr manufacturing and our accounting activities. 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 polymer 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 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 through all the 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 produced using the same land, but no extra fertilizer. In 2017, a distributor for our TPA conducted a side-by-side trial on alfalfa. The results were an increase of 9.7% in dry crop [per weight,] but more importantly, the protein level in the alfalfa increased 30%. This is yet another illustration of the positive effect TPA has on farm yields.

 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 shutdown for reconditioning. A simple explanation of TPA's effect is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the water for the rock formation. The scale must be prevented to keep the oil-recovery pipes from clogging.

 Now 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 bacteria 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. We'd like to illustrate the potential of WaterSavr. For instance, using it on the Salton Sea in California for 6 months to a year, saves 320,000 acre feet of water. This is more than a 100 billion gallons, that's billion with a B. It's not just the 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 of water using WaterSavr is less than $200. WaterSavr can reduce annual losses from reservoirs by up to 2 feet per treated acre.

 The city of San Diego has finished the extra research they decided to do after our very successful trial together, which we reported earlier this year. The results reconfirm that WaterSavr does not change water quality. This was already known from research done by the South Nevada Water Authority and published in the World Renowned AWWA Journal.

 Regrettably, several individuals inside the San Diego water bureaucracy still refuse to issue the PO we were promised last February. Every year that the city of San Diego does not use WaterSavr, the city is wasting $12 million to $14 million of taxpayer funds. We will continue to push these individuals to do what is right for the people who pay their salaries.

 Q4 and the start of 2018. TPA for agricultural use has peak uptake in Q1, but with significant sales in fourth quarter for customers who have early buy programs. We expect Q4 increases in uptake compared to the year-earlier quarter. And in Q1 2018, the growth is expected to continue.

 SUN 27 and N Savr 30, the nitrogen conservation products. There will be early buy uptake in this product line as well. The amounts will be higher than in Q4 2016. And in Q1 2018, nitrogen product sales could also increase in comparison with Q1 2017.

 The 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., while the oil price stability in the $55 per barrel range could result in increased international sales as customers focus on production growth.

 WaterSavr had a $50,000 sale to Mauritius in Q1 of this year. The Brazil sale in Q2 was in the low 6 figures. We've received an order from Turkey that we'll ship as soon as payment is received. We've had an initial contract that's being negotiated with Honduras for a delivery late this year or early in 2018. So we're still comfortable predicting that full year 2017 revenue will increase significantly compared to 2016 once accounting for the discontinued Ecosavr operators.

 We also expect that profits and operating cash flow will continue to increase, but mention that the accounting effects of the fire will distort the numbers.

 In 2018, we expect growth to continue in most quarters and for the year overall. 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 the graph.

 The highlights of the financial report -- or results. Sales for the quarter increased 5% to $3.27 million compared to $3.12 million in the year-earlier quarter.

 The result is a loss of $279,000 or $0.02 a share in the '17 period compared to a gain of $86,000 or $0.01 a share in 2016. The major factors that reduced profits were the accounting treatment of the fire remediation cost and increases in raw material costs.

 Over several more quarters, the fire accounting will have unusual and unpredictable effects on our financials. The amounts should be less and less over time. We are also working to increase our pricing to customers so that selling prices reflect the higher raw material costs we must pay.

 This will proceed over the remainder of the year and into 2018.

 Our working capital of $12.1 million is excellent, and it includes $6.3 million in cash on hand as well as our line of credit with Harris Bank of Chicago.

 We're confident that we can execute our growth plans with our existing capital. FSI also provides a non-GAAP measure useful for judging year-over-year success.

 Operating cash flow is arrived at by removing taxes, interest, depreciation, our option expenses and any onetime items from the statement of operations.

 For the 9 months ending September of 2017, operating cash flow was $1.86 million, or $0.16 a share, compared to $2.8 million, or $0.25 a share, for the same period in '16.

 The detailed information how to reconcile GAAP with our operating cash flow number is included in our news release of yesterday, November 14.

 The insurance recovery and site remediation costs from the Taber fire have had a large effect on our results in 2017.

 Additional recoveries, purchase of the new building, tax adjustments, depreciation on the new building and amounts received already will affect our GAAP financials until at least Q1 2019, the period allowed by Canadian tax law before a final tax occurs on any profits from an insured event. It's highly profit probable that our deferred tax asset, which is visible on our balance sheet, will offset any tax owing on the insurance recovery.

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

 The text of this speech will be available on our website by Thursday, November 16. And you can request e-mail copies from Jason Bloom at jason@flexiblesolutions.com. Thank you. David, would you open the floor for questions, please?

Questions and Answers
Operator   [1]
 (Operator Instructions) Mr. O’Brien, at this time, we have no questioners in the queue.

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [2]
 David, thank you very much. Could you...

Operator   [3]
 We have one now, sir. We have one in the queue, if you would like to take it. It's from [Raymond Howe with CFE] Incorporated.

 Unidentified Analyst,    [4]
 Could you talk a little bit about the commercial potential of the WaterSavr product?

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [5]
 Well, certainly. As you heard in the speech portion, it's capable of saving water at about 1/5 of the cost that people in California are paying for water at a commercial level. The individual households would pay almost double that. So 10x less than a retail price. And it's also about 10x less than the cost to get new water from saltwater using desal processes. The difficulty in -- I mean, that was well illustrated in the speech, is that bureaucracies are really not very good at deciding to use new products and new ideas and even after a decade of proving us in many countries around the world, we still have trouble getting people to do -- essentially do their jobs. And it's quite frustrating. In terms of the size of the market, the one I mentioned, the Salton Sea in California would be in the range of $35 million per year contract. And we would probably recognize before-tax profits in the range of 35% to 40%. So this is something we're staying with, but I certainly don't want anyone thinking that we're going to succeed tomorrow.

Operator   [6]
 Mr. O'Brien, at this time, no other questions.

 Daniel B. O’Brien,  Flexible Solutions International Inc. - CEO, President, Principal Financial & Accounting Officer, Treasurer, Secretary and Director   [7]
 Well, thank you very much, David. Perhaps you can close off the meeting for us. Thanks.

Operator   [8]
 Yes, sir. Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines. And thank you for joining us for this morning's presentation.

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