Flexible Solutions International Inc (FSI) 2009 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by. Welcome to the Flexible Solutions third-quarter financials. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

I would now like to turn the conference over to Mr. Dan O'Brien. Please go ahead, sir.

Thank you, Ricki. Good morning. I am 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 risk and uncertainties. These forward-looking statements may be impacted either positively or negatively by various factors. Information concerning potential factors that could reflect 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 third-quarter 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 conditions are better than the first half of the year but they have not returned to pre-recession levels. 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 to increase revenue and positive operating cash flow in Q3. Our cost of goods was properly rationalized to our selling prices for the quarter and gross margins are at historic norms. In fact, the revenue for Q3 '09 was the highest we have ever recorded in the third quarter.

Our sugar to aspartic acid plant in Alberta began operation in September. Small volumes are being produced in the current quarter and a significant volume will start in Q1 2010. 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 creative material is the dish and laundry detergent market. One very large potential detergent customer has samples. This customer has decided to proceed to reformulation of a product line to include sustainable polyaspartate. Reformulation will delay sales by six to nine months but increases the potential size of the project by a factor of 2.5. The plant was completed on budget and a grand opening ceremony took place in Taber Alberta on September 18. The ribbon was cut by the Minister of Agriculture for Alberta, the Honorable George Groeneveld.

The NanoChem division now represents 90% of revenue and has become the main sales and profit driver of our Company 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 have made significant increases in our distributor roster. We expect these new customers to drive strong growth over the next several years.

As any of you who follow the agriculture and fertilizer markets know, the '09 fertilizer sales season was disappointing. Farmers refused to pay high prices when crop prices were not at peaks. However, the current level of fertilizer use is not sustainable without major impact on crop yields and we expect our partners to see increased demand in 2010.

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 the Nordic countries operating in the North Sea, the use of TPA is mandated as part of environmental regulation.

Q4 '09 and the start of 2010, we continue to be optimistic about the coming year. Several product lines have opportunity for major growth and all but swimming pools are partly insulated from the recession. As the economy recovers, we expect to resume our momentum.

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

What is important is that we can maintain profits and cash flow even during times of customer pull back such as now and we are well positioned for strong increases in sales, cash flow and profits when the customers return fully to the marketplace.

Our optimism is more solid in the area of cash flow and profit. Now that the factory commissioning costs are almost complete, the Company expects to resume strong positive cash flow and return to profitability. Although the economy makes it very difficult to predict revenue by quarter, we are confident we will finish 2009 in a very strong condition able to take advantage of the opportunities we find and we are sure that we can maintain positive cash flow throughout this year in 2010.

I would like to speak about where Flexible Solutions has come from in the last five years and the long-term goals of the Company. In 2004, we purchased the assets of Donlar Corporation from bankruptcy and began operating them as our NanoChem solutions division. Companywide sales have increased from $4.5 million a year to about $10 million a year over that time and we have positioned the Company for more growth.

Raw material pricing, availability and sustainability were identified as the single most important risk to our long-term plans. The plan to replace a significant fraction of the polyacrylic market with our polyaspartates in conjunction with market leadership where polyaspartates are the only available chemistry. These are the risk we have overcome by designing, proving and building our sugar to aspartic plant in Alberta. Now we are properly positioned to challenge for several percent of the multibillion-dollar polyacrylate marketplace with the long-term advantages of being disconnected from oil prices and having a biodegradable product from sustainable raw materials. This has been our goal for the last four years.

Our next goal is obtaining large increases in revenue and profitability based on our advantages. This, like the previous goal, will take time and have bumps but the FSI team has shown that they can achieve amazing results. There are potential energy price scenarios where our products may be less expensive than polyacrylates as well as being biodegradable and from sustainable sources.

Now to the highlights of the financial results. Sales for the quarter increased 17% to $2.45 million compared to $2.1 million in Q3 '08. We think this may be the economic turning point for our Company after three quarters of declining sales caused by the recession. Third quarter is usually our weakest as a result of holidays in the North Sea, low sales in polyaspartates for agriculture and limited sales in swimming pools. So increased sales in this quarter is considered more positive than usual.

The result was a net loss of $162,000 or $0.01 per share in the '09 period compared to a gain of $144,000 or $0.01 per share in the 2008 period. The loss is a result of costs related to the finishing drive for our aspartic plant. These costs are almost complete, may have a small affect on Q4 and will not affect Q1 2010.

Because of the outsized effects of the depreciation stock options and one-time 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 [derived] by removing depreciation, option expenses and one-time items from the statement of operations.

For the nine months of '09, operating cash flow was $558,000 or $0.04 a share compared to $1.9 million and $0.13 a share in '08. We are pleased that even during a recession and while completing an expansion, operating cash flow has stayed solidly positive. Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of November 12, yesterday.

Finally, our other product lines, water saver and swimming pools are being emphasized less than the NanoChem division while maintaining the long-term opportunities and limiting cash and management costs. We are containing water saver efforts in Australia, Turkey, Morocco, parts of the Far East and California. Small sales have occurred to various intervals throughout the year to date, and there are indications that larger sales may arrive in 2010.

Swimming pool products. Swimming pool sales are showing signs of improvement as the industry is forced by empty shelves to purchase inventory. Lingering effects of the recession are making sales more difficult. However, we are increasing our advertising frequency and direct to dealer contacts to ensure that we maximize available opportunities. We hope to announce a licensing deal for the BTI product in Q4, slower than expected decision-making by the prospect of licensee has delayed the contrary. When completed, this will provide revenue, allow management to reduce internal efforts on the product line and redeploy the executive time to areas of greater expertise.

The text of this speech will be available on our corporate website by Monday, November 16 and e-mail copies can be requested from Jason Blum at 1-800-661-3560, or Jason@FlexibleSolutions.com.

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

(Operator Instructions) [Gary Schwab], [Valley Forge].

Good morning, Dan. A few questions. Can you talk a little bit about what is going on with United Agricultural Products, if anything?

Well, UAP is one of our distributors through Agrium and another of their divisions called Loveland products. They came on board last year. We had very high hopes for them and they did not sell nearly as much as we had anticipated or as they had predicted. We are not counting on this group although we were very happy to work with them. We have brought on two or three other distributors over the course of the summer and we think that the competition will be quite healthy and that as a result, we will be able to move the agricultural product forward.

Okay. As far as the Nordic countries that require biodegradable products for the oil industry, what about those countries' requirements and other products like detergent. Do they have any kind of regulations on biodegradable detergent?

Yes, they have and we have detergent customers who are already selling into that market. They have not expanded in 2009 but on the other hand, they haven't shrunk either so that has been a good product line for us this year. The prospective new detergent customers also will be selling into those markets as well as the rest of Europe and North America.

So we are quite comfortable that our selling system is accessing the places where there is legislation in place and also the places where legislation is likely to come into place over the years.

And one final question on water saver, you mentioned a bunch of countries but you didn't mention the US. Is the US dead right now or you are still working there?

We are still working quite extensively in the US but what we are finding is that the United States government's both state and federal and very much municipal as well, are finding it difficult to find money for projects. The economics are not good in the United States and one of the reasons that our project doesn't come to the top of the list is not because it doesn't consume money which is always nice for governments to do but because water is so heavily subsidized in the United States and so completely disconnected from the real cost of delivering it in many cases that it is hard to make a business case that will stand up to both recession and subsidization of water. Doesn't mean we don't think the US is a wonderful opportunity but it does mean it is a much more difficult sale.

Okay because I was reading recently that Schwarzenegger is now talking about putting in dams and spending hundreds of millions of dollars.

Billions of dollars. I believe is $4 billion is the starting figure and we are still aiming to try and find the opportunity to cover some of those dams but it is a long hard difficult politically charged process.

So Owens Lake is done. That is like -- forget that now?

Owens Lake will not recover the fighting between the state lands and the city of Los Angeles will prevent any forward motion.

And Salton Sea, also, that is like on the back burner too?

It is on a back burner because of the funding issues and the fact that the Salton Sea project does not have any funding. It gains its funding from Sacramento which is focused on building dams.

Okay. All right, thanks, Dan.

Thank you, Gary.

(Operator Instructions) Mr. O'Brien, I show no further questions at this time.

I would just like to say to the assembled group, thank you very much for joining us on this conference call. I look forward to speaking to you again after the full year has been completed. And I am very confident that we are going to be able to give you good news in the new year. Thank you all and goodbye.

Ladies and gentlemen, this concludes the Flexible Solutions third-quarter financial conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 using the access code 4179608. ACT would like to thank you for your participation. You may now disconnect.