Flexible Solutions International Inc (FSI) 2009 Q1 法說會逐字稿

Good morning. I'm Dan O'Brien, the CEO of Flexible Solutions.

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 FSI conference call for the first quarter of 2009. Before we go through the numbers, I would like to speak about where we are in our major projects and what we see looking forward.

The global economic slowdown continues, as the media informs us daily. This continues to affect FSI in each of its divisions and market segments. However, despite continued inventory reduction and more aggressive just-in-time ordering from our customers, we still managed strong revenue and positive operating cash flow in Q1.

Reduced volumes prevented us from selling all the high cost raw materials we converted into finished goods at the end of 2008 and resulted in higher than expected cost of goods sold. This pressure on margins finally relaxed in the second half of the quarter.

Our sugar-to-aspartic acid plant in Alberta is much closer to completion. The steam permit we were waiting for has been issued, and we are confident that it will begin commercial operation in September, to coincide with the earliest possible availability of sugar beet juice from the 2009 crop. Production from the Alberta plant will allow FSI to supply the only renewably-based polyaspartic acid in the world.

One of the primary potential customers for this grade of material is the dish and laundry detergent market. One very large potential detergent customer has requested hundredweight and metric ton samples for commercial assessment in Q2 and Q3, respectively. The market opportunity for our product in detergents is estimated at greater than $350 million a year.

Customers in other market segments will receive samples after the detergent group has been serviced.

This plant remains on budget, and a grand opening ceremony will take place in Taber, Alberta in the second half of September, this year.

Our NanoChem division now represents 90% of revenue and has become the main sales and profit driver for the next several years. This division makes polyaspartic acid, TPA, a biodegradable protein with many valuable uses.

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

We've made significant increases in our distributor roster and expect the new customers to drive strong growth over the next several years. As any of you who follow the agriculture and fertilizer markets know, the 2009 planting season is well behind normal and has slowed this growth temporarily. However, the current levels of fertilizer use are unsustainable without having a major impact on crop yields, and we expect our customers to see increased demand in the second half of 2009 and into 2010, and we hope this demand growth will benefit our products.

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 but can be subject to temporary reductions when production is cut back or when platforms are shut down for repairs. In some areas including many Nordic countries' companies operating in the North Sea, use of TPA is mandated as a part of environmental regulation.

Q2 and the rest of 2009. We continue to be optimistic for this coming year. Several product lines have the opportunity for major growth, and all but swimming pools are partly insulated from the recession. As predicted, swimming pool sales picked up in April but are still expected to be weak as customers pick and choose how they will spend their disposable income.

Given the continued economic uncertainty surrounding most of our end markets, it is very difficult to predict our revenues with any accuracy. We have a number of new product initiatives that could drive revenue growth in 2009 and beyond. However, if our customers or their end customers continue to delay spending decisions, this could push the timing of the growth back into 2010.

What is most important to remember is that we can maintain profits and cash flow even during times of customer pullbacks, such as now, and we will be very well positioned to strongly increase sales, cash flow, and profits when the customers return to the marketplace.

Our optimism is more solid in the areas of cash flow and profit. Now that material costs versus selling price has been normalized, the company expects to maintain strong positive cash flow and resume profitability.

When the Alberta plant begins operation, we obtain insulation from oil price gyrations and have the opportunity to gain major new customers. This has been a cornerstone of our planning for several years, and it's about to come to pass.

Although the economy makes it difficult to predict revenue by quarter, we are confident that we will finish 2009 in very strong condition, able to take advantage of the opportunities we find, and we are sure that we can maintain positive cash flow throughout the year.

Some highlights of the financial results. Sales for the quarter decreased 24% to $2.66 million compared to $3.5 million for 2008. The result was a net loss of $133,000 or a penny per share compared to a gain of $310,000 in the year-earlier period.

The reduced sales and profit were a direct result of the economic climate change since last year. Our customers are carrying less inventory. Our average selling prices are lower as we try and pass some of our lower input costs along to our customers, and we were unable to sell through the last of our high-cost inventory until the end of February. Under these circumstances we believe the company has done a good job limiting losses, moving projects forward to completion efficiency, and increasing our customer count.

Now, because of the outside effects of depreciation, stock option expenses, and one-time items on the financials of small companies, FSI also provides a non-GAAP measure useful for judging our year-over-year success.

Operating cash flow is arrived at by removing depreciation option expenses and one-time items from the statement of operations.

In first quarter 2009 operating cash flow was $180,000, $0.01 per share compared to $670,000 and $0.05 in 2008. We are pleased that in even these difficult times, cash flow has stayed solidly positive. Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of yesterday, May 14.

Finally, a bit about our other product lines. WaterSavr and swimming pools are being 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 continue our efforts in Turkey, Morocco, parts of the Far East, Australia, and California. Small sales are expected at intervals through the year.

In the swimming pool product line, Ecosavr and Heatsavr continue to gain customers. Lower energy prices and the recession will make sales more difficult. However, we are increasing our advertising frequency and direct to dealer contacts to ensure we maximize the sales available.

We hope to announce a licensing deal for the BTI product in Q3. Slower than expected decision making by the prospective licensee has delayed his contract. When completed, it will provide revenue, allow management to reduce internal efforts on the product line, and allow us to redeploy our executive time to areas in which we have greater expertise.

The text of this speech will be available on our website by Monday, May 18, and e-mail copies can be quested from Jason Bloom at 1-800-661-3560 or by e-mail -- jason@flexiblesolutions.com.

Thank you. The floor is open for questions. Sarah, would you please take over?

(Operator Instructions). Hans Kummerfeld, Nutmeg Securities.

Just curious about the TPA. I know you sell it up to the Norwegians in particular. How is the cost difference between TPA versus -- I think it's poly-acrylic acid is your competitor, and maybe there is others. I'm just curious about that.

It is an interesting question. Thank you Hans. At various times in the oil price cycle our product is very close to poly-acrylic acid. At other times when oil and natural gas are extremely cheap, the differential is quite large.

Poly-acrylic acid is not biodegradable, so it doesn't compete with us in the North Sea. However, it does drive how we have to price our products in order to ensure that we don't leave a large pricing gap and allow startup companies to look at that marketplace and think they can grab our sales from us. So as oil prices drop, we do need to drop our prices to our oilfield customers, and we've done so. We are keeping our opportunity there and treating our customers very well.

But this quarter and fourth quarter of last year both had a situation where we had extremely high-priced products left over -- or raw materials left over from the summer of 2008, and they were purchased knowingly because with the Olympics, our Chinese supply of aspartic acid was shut down for almost two months. And so we had to take the choice of no product or high-priced product, and of course we took the choice of staying in business.

Sure.

Thank you.

(Operator Instructions). Hans Kummerfeld.

Yes, if I have got the time, then -- I'm just curious, the seasonality of sugar production, and I'm wondering -- I hadn't thought of juice going in -- sugar beet juice makes perfect sense. You must -- how are you handling -- there's got to be water coming out of that plant that has to be disposed of in some fashion.

Correct. Now, we recycle the water to the greatest possible extent, and then the finished water, after we can't recycle it back into our process, is treated until it is -- until it has no organic content and is fit to go into the regular water system.

In the long term we have plans in place to actually treat the finished water in a reverse osmosis process and put it straight back into the front end of our business.

The other point that perhaps wasn't clear is that sugar beet juice has to be concentrated if you are going to keep it for any period of time. It has about a three-day period, even after sterilization, before it needs to be used up or condensed.

In February each year we start having to use condensed sugar from the same supply and add our own water, and during that period of the year, after the juice is gone and we're using condensed sugar water, we actually have to use water, and the recycled water can go back into diluting the next batch of condensed sugar. It would be lovely if sugar beets grew 12 months a year, but they don't.

Okay. So that's just part of your management things going on.

Yes. We are eventually aiming to be one of those companies where only raw materials go in and only products come out. There is no waste.

(Operator Instructions). Mr. O'Brien, it appears we have no further questions.

Well thank you Sarah. And thank every one of you for joining us on the call this month. There will be another call of course at the end of next quarter, and I hope you will all join me with more interesting questions like Hans has just asked.

Thank you and goodbye.

Thank you. That does conclude today's conference call. We thank you for your participation. And have a great day.