Flexible Solutions International Inc (FSI) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the second-quarter financials conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I'd like to remind everyone that this conference call is being recorded today, Friday, August 13, 2010 at 11 a.m. Eastern time. I will now turn the conference over to Dan O'Brien. Please go ahead, sir.

Thank you. I am Dan O'Brien, 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 are detailed from time to time in the Company's reports filed with the Securities and Exchange Commission.

Welcome to the FSI conference call for second quarter 2010. Before focusing on the numbers, I would like to speak about where we are in our major projects and what we see going forward. Our sugar to aspartic plant in Alberta is much closer to commercial production. The equipment-related delay reported earlier this quarter is being fixed quickly and we expect to be able to announce commercial volume levels before the end of the year.

Production from the Alberta plant will allow FSI to supply the only sustainable polyaspartic acid in the world. One of the primary customers for this creative material is the dish and laundry detergent market. The market opportunity for our product in detergents is estimated as greater than $350 million per year. FSI considers the start of commercial production at the Alberta plant a material in event and will provide and news release when the event occurs.

The NanoChem division, polyaspartic acid, represents 90% of revenue and is the main sales and profit driver of our Company for the next several years. This division makes polyaspartic acid, a biodegradable protein with many valuable uses. Along with detergents mentioned earlier, 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.

Sales into this market vertical have increased substantially this year. New distributors have made sales quickly and existing channels have increased volumes. We are focusing more effort on this marketplace and believe we have identified methods to accelerate the use of TPA in agriculture. Sales are lower in the second half of every year compared to the first half, but we still expect growth in the fall of 2010 compared to fall 2009 and strong growth in first-half 2011.

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, using t-PA is mandated as part of environmental regulation. It has been several quarters since we experienced any repair shutdowns so we are prepared for some soon.

On the other hand, we have developed new products for the oil industry that will enter field trials soon and open up many millions of dollars in new business in the North Sea and other environmentally-aware areas. In 2011, we expect added revenue from growth in our traditional products and the start of revenue from the new ones.

Q3 and Q4 2010, along with first-half 2011, our expectations. We continue to be optimistic about the second half of the year and next year. Many customers are increasing the volume of their orders and we have several new accounts that are small now, but have large prospects. Management believes that the percentage growth in revenue recorded in the first half is likely to continue in second half and early indications for 2011 foreshadow continuing strong growth, especially in the agricultural market. We feel confident in extending our prediction of 15% or higher year-over-year revenue growth for each quarter through June 30, 2011.

And now for the highlights of the financial results. Sales for the first quarter increased 25 -- sorry -- sales for the quarter increased 25% to $2.83 million compared to $2.27 million in 2009. The result was a net loss of $134,000, or $0.01 per share in the 2010 period, compared to a loss of $215,000, or $0.02 a share in 2009. Conservative accounting dictated that we show an income tax expense of $413,000 in this quarter based on first-half results and second-quarter expectations, which significantly impacted the GAAP results.

The increased sales and lower GAAP loss were a result of the economic climate change since last year and new business. Customers have returned to the market who were absent in 2009 and other customers have increased their volumes. Because of the outsize 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 year-over-year success.

Operating cash flow is arrived at by removing depreciation, option expenses and one-time items from the statement of operations. For the first half of 2010, operating cash flow was $1.52 million, or $0.11 a share, compared to $255,000 and $0.02 a share in 2009. The 400% increase compared to the year earlier period clearly illustrates the health of FSI and will allow us to take advantage of new opportunities as they arrive. Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of yesterday August 12.

And finally to our other productlines. WaterSavr and swimming pools are being emphasized less than the NanoChem division while maintaining the long-term opportunities and limiting the cash and management costs. We are continuing our WaterSavr efforts in Australia, Spain, Turkey, Morocco, parts of the Far East, including Singapore. Small sales are expected in intervals through the year and we will continue to work this product because we believe that there are breakthroughs coming in the future.

Swimming pool products. Ecosavr and Heatsavr are continuing to gain customers and marketshare. The pool industry has stabilized in North America and our sales in these productlines have returned to pre-recession levels. 2011 revenue in pool products is expected to increase by 10% or more and we hope to announce a licensing deal for the WaterSavr BTI product this year. The decision-making at the prospective licensee has been delayed, but they are moving forward again.

The text of this speech will be available on our website by Monday, August 16 and e-mail copies can be requested from Jason Bloom at 1-800-661-3560 or Jason@FlexibleSolutions.com. Thank you. The floor is now open for questions and John, will you please take over and give instructions.

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

Yes, good morning, Dan. Hi. On your ramp-up for the TPI, I know that it is a complicated ramp-up and you have to do it in stages. Has this delay given you the time to get each stage absolutely correct? Can you talk about that?

Yes, a little bit. What we discovered, as we went from the last level of below commercial production rates, and I am not going to give numbers because we are trying to keep our trade secrets and so forth away from any potential competitors, we discovered that it was not going to be efficient without one more piece of equipment, and the equipment has been specked, ordered, it is in build now. We are relatively confident and of course, it is new technology, but we are relatively confident that we have solved the last issue that prevented us from going to commercial production.

And then there still will be a stage-up. You don't go from zero to 5000 tons a year overnight, but when we announced that we have reached commercial production, it will be because we have reached a level of production that will actually impact our cost of goods and allow us to provide true commercial volumes to the customers who require a sustainable sourced product.

Okay. Now when you have a commercial production and it does impact your cost of goods, how do you determine how to set your pricing on goods when you have a biodegradable product? Like a couple of quarters ago, you said that you actually lowered the price of your biodegradable TPA for the oilfield. Even though your cost of goods came down, you lowered it more than your volume went up.

Gary, that wasn't for biodegradable. Oh, I see what you're saying, biodegradable products, not sustainable products. We are going to price all our products at the best price that we can achieve and what that really means is that extremely high-volume customers who make guaranteed purchases over a number of years will get a better price than people who order month by month. And we will probably also, in certain cases, not always, we will be able to get a premium for the sustainable product as opposed to the nonsustainable product.

Say sustainable, you mean biodegradable?

All our products are biodegradable. Some of them are made from sustainable products starting with sugar and some of them are made from nonsustainable aspartic acid made from oil.

Oh, okay.

The Alberta plant is making our sustainable product starting with sugar.

Okay. But there is nobody else that is really making a competing product in the markets that you are selling into?

For sustainable products, we are the first and only and we are being quite careful with the trade secrets we are building up during our buildout so that the people who will inevitably try and take our market will be forced to move much slower and endure many problems.

Okay. And how is the qualification process coming on the big detergent customer after this little setback with your plant? Has that changed anything?

It has only changed the timing, not any of the social or chemical situations.

Okay. So are they waiting for anything further to qualify the product or are they still just working on what you delivered them?

I haven't been in touch and I am not going to share everything, Gary. I haven't been in touch with them for the last month. But the opinion from our side of the fence is that they are satisfied with our product and would move to the next stage, which is deciding on or not on a contract when we can confirm that we have production ready.

Okay. And just one last question. On your three -- can you give a percentage breakdown on oilfield ag and detergent as far as -- are they (inaudible)?

No, I'm sorry, Gary. That is very private information because --

Okay. I probably asked this once before. I didn't know if you'd share it.

We are never really going to break it down. We have both Chinese and European competition who check these conference calls and we don't want to give them information that will help them.

Can you give me one, two and three?

Oilfield is largest, agriculture and detergents are now currently very close to tied for second.

And where do you see them in two years, that mix, in your head?

I honestly believe that detergent will be number one, oilfield will be number two tied with agriculture and that the total revenue will be substantially higher than it is now.

Great, okay, all right. Thanks a lot, Dan.

[John Hales].

Hi, Dan. Not to focus on the part that is not one, two or three, but is there any color you can share with us about any progress on WaterSavr with municipalities, whether they are in California, Colorado or Indonesia?

Okay, yes, and thank you for asking that. It is -- let me start over. In early July, the Singapore government hosted over 300 water authorities in Singapore and not only did the Singapore Water Utilities Board make a presentation on our WaterSavr product, which they had been trialing for 18 months, they recommended it as safe and effective and several newspapers in South Asia picked up the information and published it.

The Singapore Public Utilities Board has indicated verbally and in e-mails that they would like to purchase product. However, they have not issued a PO and I can feel for them. They are getting the fringes of the Pakistan monsoon and their bigger problem is keeping the water out of the streets right now rather than trying to keep the water in the reservoirs. We are expecting the monsoon to be over fairly soon and to be able to move forward towards the possibility of a significant sale in Singapore.

How about anywhere else?

Well, the presentation in Singapore did light a fire under several people and we have had 100 or more inquiries, but we are not sure which of them are true inquiries and which of them are people who want to be seen to be trying to do something, but not actually do it. So we are in the process of checking our contacts backwards and forwards and making sure we are dealing with real people. But I do think there will be success in 2011 and possibly even in fall 2010 in WaterSavr. And the one place I don't feel comfortable that anything will get done is California because of the economic issues that are faced by the government there.

Understood. Thanks, Dan.

Hans Kummerfeld.

Sure, hi. Just a couple detail things. You mentioned in the past that when you get to commercial production volumes on the existing plant that your guess anyway is that one customer will take up all of that production. And then you would basically add I guess another line or you can expand at least once within the existing building is my understanding.

That's correct.

Any guesses about -- you mentioned commercial production, you might announce it before the end of this year. Then there will be a stage-up which will I suppose be a couple, three months or something like that. And I guess you will be talking contract with whomever during that time. I am just guessing when you will be adding the next round of equipment, thinking maybe optimistically. So that is, what, like a year from now or not quite a year, just guessing?

If I were to guess, I would say we would put in place -- we are already planning for expansion. We know where in the building it will go and what we will need. But we will be seriously considering placing orders for equipment in the second quarter of next year to be sure that we would be ready for the start of 2012 at a much higher production rate. That would be my best guess. And we could be a little bit quicker than that if we had to be and of course, if we don't have to be, we will keep our wallets in our pockets until we do have to.

Sure. And on the oilfield products, I think you said you have new products there. Are these different kinds of anti-scaling compounds or do you have something that does some other procedure in the pipes or in the process somewhere?

Yes, and I think I can explain that quite well. In ocean oil drilling, there are two divisions in the minds of the oil drillers. They call anything above the seafloor to be topside and anything below the sea floor to be squeeze. Squeeze is an area where we haven't been able to operate with polyaspartate because of high temperatures in the oil and water involved. And our new products that are being trialed this year are more temperature-resistant and as a result are capable of being used below the sea floor, which allows us to do what we do in terms of controlling scale and keeping things running without clogging up in a second and actually much larger area of the oil recovery business, which is below the sea floor. That is the first product coming on board.

And then I won't talk about what the second product does because it is next year's product. The squeeze product is being trialed this year. Next year's product I will be able to talk about next year when my scientists let me. Right now, they would like just a little bit more time being secret so that other companies don't have as much time to try and play catch-up.

Okay. And just confirming the BTI product, hopefully you get a license by the end of this year.

Yes, hopefully.

Well, I guess give them a license or whatever --

Yes, correct.

Yes.

We will be the licensors, they will be the licensees.

Okay, thank you.

[William Oakland].

Yes, would you discuss what your thinking is on when you'll start to report profits?

Well, okay. First quarter, we reported $0.04 in profits. This quarter, we are minus $0.01, so we are plus $0.03 for the year right now and that is very, very rough. The second quarter we think would have been profitable if a different mechanism was chosen for choosing our income tax expense. Our auditors have asked us to be extremely conservative and take a very large income tax allowance. But I honestly think that we will complete 2011 with a full-year profit and continue that profit with increases into 2011.

(Operator Instructions). John Hales.

And just to correct what you said, you said 2011 twice.

Twice.

I assume you mean '10 and '11?

I mean '10 and '11. Profitable for full-year '10 and increasing profits in full-year '11.

Thank you, sir.

I'm sorry about that.

Mr. O'Brien, we have no further questions at this time. Please continue.

Thank you all for joining us. I know it is Friday the 13th in a hot August in the middle of a year. I appreciate your time listening and John, will you please close the conference link down. Thank you all.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.