Flexible Solutions International Inc (FSI) 2008 Q4 法說會逐字稿

Good morning everyone. This is Dan O'Brien, CEO of Flexible Solutions.

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 may 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 FSI conference call for the full-year 2008. Before we walk you through the numbers, I'd like to review what we have accomplished in the last year and what we see looking forward.

2008 was a transformational year for Flexible Solutions. I'm extremely proud of our team.

Despite a substantial and well-documented global economic slowdown, FSI grew its topline 45% and increased operating cash flow from $170,000 in 2007 to $1.9 million in 2008. Among our significant achievements for 2008, we grew our NanoChem division by 50%, including increases in all market segments.

As you know, this division makes polyaspartic acid, TPA, a biodegradable protein with many valuable uses. It now represents 90% of revenue and has become the main sales and profit driver of our Company for the next several years.

In the detergent market, we continue to proceed towards our first sale to one of the biggest world manufacturers. Our first sample of polyaspartates made entirely from sugar is destined for this potential customer. The market for our product in detergent is estimated as greater than 350 million pounds per year.

TPA is used in agriculture to increase crop yield. In North America alone, the wholesale market is over $2 billion a year and most crops are able to use TPA profitably.

We have made significant increases in our distributor roster and expect the new customers to drive strong growth over the next several years. TPA is also a biodegradable way of treating oilfield water to prevent pipe plugging with mineral scale.

Our sales into this market are strong and oil companies in the Nordic countries must use TPA as part of environmental regulation. In 2009, oilfield TPA sales are expected to increase.

Despite some slowdowns caused by equipment suppliers and steam permitting, our sugar to aspartic acid plant progressed quickly towards completion. This project is dedicated to producing most of the aspartic acid required for our current and future TPA production.

By using sugar in Alberta, we de-link our raw materials from oil, our current source; shorten our supply line by several weeks and thousands of miles; and dramatically improve the sustainable content of our finished product. Production from sugar will also result in reduced costs and the opportunity to gain customers who insist on renewable based materials.

All the equipment is being installed and test run during Q2 and early Q3. The building modifications are expected to be complete in June or July.

All the processes have moved beyond the laboratory and are now limited only by the difficulty of maintaining cleanliness during construction. Samples are being prepared for delivery to our Chicago operations in April.

Multiton level sample production is scheduled for June, July and August and the startup target is September. This project is still on budget.

We also reduced costs substantially in both the Watersavr and the swimming pool divisions, both headcount and overhead, without any reduction in effectiveness or loss of future opportunity. And we obtained the financing for the debt portion of the new factory on terms of 0% for 10 years and 5% for six years.

Looking forward into Q1 and the rest of '09, we're very optimistic about the coming year. Several product lines have opportunity for major growth and all but swimming pools are partly insulated from the recession.

With only a week of shipping days left in Q1, we have noticed that our customers in the pool industry and our existing detergent sales are maintaining lower inventory of our products than in the past and this will delay revenue into Q2 that in other years would've been recognized in Q1. However, we are pleased to confirm that we have increased our customer list without losing any important clients.

We're proud to announce that we have begun shipping our agricultural TPA to a new national distributor. This increases our number of representatives to over 3000 from less than 400.

We've also begun shipping to a new US biodegradable detergent manufacturer. While the economy makes it very difficult to predict revenue by quarter, we're confident that we will grow revenue for the year as a whole.

I would like to speak about the highlights of the financial results. The sales for the year increased 45% to $10.7 million compared with $7.4 million in 2007.

The result was a net profit of $400,000 or $0.03 per share in the 2008 period compared to a loss of $920,000 or $0.07 per share in 2007. This turnaround of $0.10 per share is an excellent result. Sales in Q4 were $2.24 million, up 32% compared to $1.7 million in the year-earlier period.

During the fourth quarter we adjusted our selling prices downward to support certain customers. This negatively affected margins as we had not yet cycled through high-priced raw materials purchased ahead of the Olympic shutdowns in China.

As I mentioned in my opening remarks, we've since begun to see the benefits of lower input costs and expect 2009 margins to reflect this. We also made provision for possible alternative minimum income tax at the NanoChem division and accounted for our 2008 audit and tax filing fees entirely in Q4. In future, we will estimate tax and audit costs quarterly and we -- as I said, the cost of raw materials has matched selling prices much more closely from January on.

Because of the outside effects of depreciation, stock option expenses and onetime financial items on the financials of small companies, FSI also provides a non-GAAP measure useful for judging year-over-year success. Operating cash flow is arrived at by removing depreciation, option expenses and onetime items from the statement of operations.

For full-year 2008, operating cash flow was $1.9 million, $0.14 per share compared to $170,000 and $0.01 per share in 2007. Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of March 26.

Finally a bit about our other product lines. Watersavr and swimming pools will be emphasized less than the NanoChem division, while maintaining the long-term opportunities and limiting cash flow and management costs. Rain and currency issues in Australia, along with global recession, have made Watersavr sales more difficult.

We're continuing our efforts in Turkey, Morocco, parts of the Far East, Australia and California. Small sales are expected at intervals through the year.

Swimming pool products, Heatsavr and Ecosavr, continue to gain customers. Lower energy prices and the recession will make sales more difficult. However, we're increasing our advertising frequency and direct to dealer contacts to ensure we maximize available sales.

We hope to announce a licensing deal for the BTI product in Q2. This should provide revenue, allow management to reduce internal efforts on the product line and redeploy executive time to areas of greater expertise.

The text of this speech will be available on our website by Monday April 6 and e-mail copies can be requested immediately from Jason Bloom at 1-800-661-3560 or by e-mailing Jason@FlexibleSolutions.com. That's Jason@FlexibleSolutions.com.

Thank you. The floor is open for questions. Joshua, will you take over please?

(Operator Instructions) [William Phillips].

Congratulations on some great numbers.

Thank you.

First question, in yesterday's press release, you mentioned that by using sugar in Alberta that you de-link your raw materials from oil and go on to say that you dramatically improved the sustainable content of your finished product. Can you please clarify what you mean by 'dramatically improved the sustainable content of the product' and how this is relevant to the product produced out the plant?

Okay, our current production of TPA is done in Chicago, IL. 100% of it is done in Chicago.

We use aspartic acid that we purchase from outside suppliers and those current suppliers are using oil-based raw materials to manufacture their aspartic acid. Our switch is to use sugar, sustainably grown in Alberta, to make our own aspartic acid, which we then ship to our TPA factory in Illinois.

So what we have done is take what is now a 100% oil-based aspartic acid and turn it into a 100% sugar based aspartic acid. For additional information, the only major raw material that goes polyaspartic acid is aspartic acid. So as you can see, this is an enormous sustainability shift.

Thank you. With regards to the Taber, Alberta plant; so you're not even partially productional at this point, is that correct?

No, we're not. We expect to be in full production in the fall, starting in the September. And we will have limited production through the summer.

Okay, I'll go back in the queue. Thank you.

Gary (inaudible)

Hi, Dan. A couple of questions. I missed what you said on inventory. You said something about inventories were lower?

No, I didn't say that.

(multiple speakers) higher?

Inventories were higher and that's in the financials. What I said about inventory is that in order to make sure that we had inventory for ongoing sales in the fall, we took on additional high-priced inventory in the summer ahead of the Olympic Games.

Many of the chemical producers in China were prohibited from exporting during the Olympic Games and we made sure we had lots of product, lots of aspartic acid on hand. That was expensive aspartic acid and we are finished selling that and converting it and selling it.

But it did affect our margins during fourth quarter because of course our customers are not always willing to pay summer prices for winter product. Does that make sense now?

Yes, the inventory at the end of December was still high. So, it was still up over $1 million from what it was last year.

Well, we've got a lot more sales, Gary. (multiple speakers) a lot more product on hand. We don't want to be caught short.

I understand. Is that still -- you said all the high-priced inventory is out of the way now?

We have cycled the high-priced stuff through and we are using low-priced.

So, we should see much better margins now in the first quarter (multiple speakers)

First and second quarter, we have enough product to maintain our margins at historical levels, not last year's crazy stuff with the oil prices.

Right. Now is this inventory -- is the raw material basically the same for whether you're using it for oil or agriculture?

Yes, polyaspartic acid, TPA, is made from polymerizing aspartic acid. We can change the length of the chain and various other things, but the raw material stays the same.

Okay and of the inventory that you have as far as the first quarter is almost done now, can you give us any guidance on how ag sales are going in the first quarter?

They're better than last year. I'm not going to give a number. As you know, this is a Company that can ship or fail to ship $500,000 worth of product in a couple of days.

So I don't want to get myself in trouble over all this. But in general, agriculture has gone much better than last year and the increase in representatives, if it hasn't had the effect we hope for in first quarter, then that will just have put things into second quarter and will be doing much better in that area.

Which are your three largest areas for selling your X10D, your main product for ag?

X10D is one of the many trade names. It's the one that we have for ourselves. But if you ask the question better phrased would be which of our distributors is the biggest and where are they selling the most.

The answer is it's the Western distributors and Wisconsin right now. It is by total volume California, Idaho, Wisconsin. But as a proportion of the acreages, it would go Idaho, Wisconsin, California.

(Operator Instructions) [Peter Ember].

Congrats. I was wondering if you can just talk a little bit qualitatively about progress of NanoChem over the last year into the different markets and sort of what you're seeing end market by end market and what the growth looks like in each of those end markets.

All right. I will start with agriculture. This is one of the strongest areas of business in the world right now.

I'm sure all of you on the phone are well aware that very few businesses have not been negatively damaged by the recession. Agriculture is one of them.

In agriculture, of course the cost of input has gone up dramatically and this has been a benefit to us. Our product increases yield. A grower is interested in his total revenue but he is also interested in the cost of obtaining that revenue.

Our product is one of the ones where whenever fertilizer prices and other input costs are high, people look to products like ours to improve their yield without dramatically increasing their cost. This has been noticeable around the world as well as in United States.

The fact that we have brought in an enormous new distributor is an indication that our products are becoming closer and closer to mainstream. We have also had interest from Europe, from -- we've made additional sales into Canada and Mexico.

We've got interest growing in Asia for our products as well. So in agriculture, we see a continued pressure that will increase our sales. The speed at which we grow of course will be determined by how well we can educate our new and existing distributors into making sure that more and more of their growers are using these types of products. That is our difficulty.

We believe that we have the right people for educating both the grower community and the distributor community. And we look forward to many years of growth in this because we are only just beginning to access the opportunity.

In detergents, moving to a sustainably based product is going be a very big deal. It is going to give us the opportunity to close deals with the detergent majors over the years. We have one deal that's quite close to fruition.

It is dependent on multiton samples as soon as possible and we are pushing every day and every hour of the day to get those samples out even earlier than we promised them. With those samples in the hands of our biggest potential client, we believe there is the opportunity to have a multi-million dollar new deal in our hands within three to nine months with a best guesstimate of six months following the delivery of the multiton samples.

This is an enormous opportunity because the detergent industry makes decisions on raw materials and then it sticks with them for many years. And this could be the base for growth on which we can depend and bring in new customers over the years.

The other area that we see as a major growth is in the oilfield industry. As oilfields get older and countries get more strict about how much bad chemicals they will let you put in the water, TPA will be used in more countries and it will be used in greater quantities in a given oil well as more water comes up with the one oil and it will be used in more wells as our new high-temperature versions of TPA are confirmed as functional by the oilfield industry and rolled out.

So those are the three areas where I see Flexible Solutions having multimillion dollar increases over the next several years and these are all available to us. We're the leader in all of these areas and we have the right people for making sure that these deals get done. So that is something -- those three product areas I'm very excited about.

[William Phillips].

Just a follow-up question. With regards to the oilfield extraction and you just mentioned the product, what has been the reception thus far with regards to those new product offerings?

It's an interesting sales cycle. This is engineer driven. We provide samples with our data on the scale control that can be obtained and the temperatures at which we believe breakdown is taking place too quickly.

That gets confirmed at the laboratory level by oilfield service companies and then provided there is agreement, and at this time there is agreement with our results, certain customers of the oilfield service companies are selected and offered trial runs. And that's the stage we're at right now.

So we could be three, six, nine months before we see any significant major order for a particular new product. But these products are well into the system and they are in the process of gaining internal acceptance by oilfield service companies, so that they can feel comfortable recommending them to their oilfield customers. Is that the question that you asked?

Yes, basically. I would say we have probably -- here have the horizons somewhere between six and 12 months to talk about meaningful acceptance in terms of revenues. Would that be a fair statement?

That would be fair.

And with regards to the multiton sample to prospective customer on the detergent side, when do you possibly expect to be able to complete everything that they want in terms of that bulk shipment?

The earliest date is June and the latest date that I will accept from my staff is August. So we are approaching a narrow window and I'm confident we can hit that window. I'm pushing my crew to make sure that they hit the first part of the window and not the later part.

And after that, you're probably looking at waiting for acceptance if it comes on a three to six-month basis, correct?

That's correct.

Thank you very much for taking my questions.

Hans (inaudible)

Just general questions about aspartic acid and your fermentation business. I guess aspartic acid must be storable or have a -- be stable in storage, as I guess you have been storing what you bought from China.

That's correct. Aspartic acid in its dry form is a crystal that almost resembles sugar. It is a white crystal. It's about the same size and it's stored either in bulk containers or in 2000 pound super sacs.

And I guess you will still be producing polyaspartate from oil-based material as well as the sugar based material for some time?

Actually, our intention is to support our current suppliers at lower levels, but with continuous support for the foreseeable future because they have supported us over the years and there are customers who do not demand a sustainably sourced material and it's also very good business practice, even if you control your own manufacturing, to have at least a certain amount of outside supply that you can call on in the event of growth faster than you had expected or problems inside your own system.

Okay, yes. Because that kind of was addressing -- obviously there is an art to whether it's a refinery or a fermentation system if you get contamination or a tornado or something. So obviously you can have storage, you can have some stockpiled and I guess eventually will you have a separate -- a couple years down the road -- an additional facility where you are fermenting beets?

That is in our plans. We need to walk before we run and crawl before we walk. But good business says that you should have multiple suppliers or multiple supplies, if you are the only supplier. And we're going to run this as a good business. Early on, you take slightly more risk. Later on, you take less.

It appears there are no further questions in the queue at this time.

Well if there are still people who haven't clicked off, I would just like to remind you that it was a fantastic year. I'm excited about the coming year and I'm looking forward to all your questions again in about six weeks because we have got first quarter coming up. Thank you very much for your time and we certainly appreciate your support. Good bye.

That does conclude today's conference call. Thank you for your attendance and have a wonderful day.