Flexible Solutions International Inc (FSI) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third-quarter financial conference call.

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)

This conference is being recorded today, Friday, November 12, 2010. I would now like to turn the conference over to Mr. Daniel O'Brien. Please go ahead.

Good morning, everyone. This is Dan O'Brien.

The Safe Harbor Provision of 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. And before we go through the numbers, I would like to speak about where we are in our major projects and what we see going forward.

The global economic conditions are better than 2009. This has supported growth for FSI in each of its divisions and market segments.

The result is improved sales and operating cash flow. As in 2009, the revenues for Q3 2010 was a record for the third quarter. Our sugar to aspartic acid plant in Alberta has not yet received the last piece of equipment needed to begin commercial volume production.

Small volumes are being produced and significant volume will start in late 2010 or early 2011. Production from the Alberta plant will allow FSI to supply the only renewably based polyaspartic acid in the world. The NanoChem division now represents 90% of our 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. One of the most prospective uses is in detergent formulations where it is useful in reducing the volume of non-biodegradable ingredients without reducing the cleaning effectiveness.

We have significant detergent sales already but sustainably sourced production from the Alberta plant is key to more rapid sales increases and to the conclusion of sales to major players. The market opportunity in detergents is estimated at greater than $350 million per year.

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

We made a significant increase in our distributor roster in 2009 and the expected growth was realized in sales increases in 2010. Crop prices are strong, farmers have had a profitable year and so we anticipate that 2011 could be a breakthrough year in agricultural TPA sales.

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 but they can be subject to temporary reductions when production is cut back or when platforms are shut down for repair.

In some areas, including the Nordic countries operating in the North Sea, the use of TPA is mandated as part of environmental regulation. Looking forward, Q4 and the start of 2011, three strong quarters of growth in 2010 have positioned us well for the last quarter of 2010 and the first half of 2011.

We expect that Q4 will allow us to complete 2010 with an average sales increase of 15 to 20% for the year. We expect Q4 to be cash flow positive and we expect the full year to show a net profit.

In the first half of 2011, we project organic growth in detergent, oilfield, agriculture and swimming pool revenue in the 15 to 20% range with possible upside if commercial production at the Alberta plant results in quicker uptake by detergent customers. From a point of view of cash flow and profits, we expect first-half 2011 to be much better than the 2010 period.

And when the Alberta plant reaches breakeven production levels, several hundred thousand dollars per year of operating expenses will be offset by sales of aspartic acid to our US operations. There are sufficient accumulated tax losses in the Canadian subsidiary but this change will flow entirely to the net profit line.

I would also like to speak about where FSI has come from over the last six 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 $11 million and we have positioned the Company for increased growth. Raw material pricing and availability and sustainability was identified as the single most important risk to our long-term plan, one of replacing a significant fraction of the polyacrylic market with our polyaspartates in conjunction with market leadership where polyaspartates are the only available chemistry.

Raw material pricing availability and sustainability is the risk that 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 multi-billion-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.

Once again, I wish to emphasize the opportunity in agriculture that is increasing with every increase in crop values. These like the previous goals will take time and have bumps, but the FSI team has shown that they can achieve amazing results.

Highlights of the financials. Sales for the quarter increased 9% to $2.7 million compared with $2.45 million in Q3 2009.

Third quarter is usually our weakest quarter as a result of holidays in the North Sea, lower sales in polyaspartates for agriculture, and reduced sales in swimming pools. So increased revenue in this quarter is considered more positive than usual. The result was a net loss of $155,000 or $0.01 per share in the 2000 (sic) period compared to a loss of $162,000 or $0.01 per share in 2009.

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 nine months of 2010, operating cash flow was $1.74 million or $0.12 per share compared to $558,000 or $0.04 per share in the same period of 2009. Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of November 11.

And onto our other product lines, WaterSavr is being emphasized less than the NanoChem division while maintaining the long-term opportunities and limiting cash flow and management costs. We are continuing our WaterSavr efforts in Australia, Turkey, Morocco, parts of the Far East and the Middle East. Small sales have occurred in intervals throughout the year and there are indications that larger orders may be received in 2011.

Swimming pool products. The swimming pool sales are increasing on a quarter over quarter basis and this is expected to continue in 2011. However, one of the lingering effects of the recession appears to be permanent reductions in inventory at the distribution and sales level.

This means that although our sales are increasing, the ability to predict revenue by quarter is becoming more difficult. Our negotiations to license our BTI mosquito control product have stalled. If they are not revived in a favorable manner by the end of the year, FSI will consider alternative methods of monetizing the asset.

The text of this speech will be available on our website by Monday, November 15 and e-mail copies can be requested from Jason Blum at 1-800-661-3560 or Jason@flexiblesolutions.com. Thank you. The floor is open for questions. Marissa, will you please take over?

(Operator Instructions) John Noble, Taglich Brothers.

Actually I'm relatively new to the story, so I have some basic questions I hope you can answer. The

first one I'm looking at is the TPA production with the sugar-based process. I'm not sure if this is going to be solely reliant on the Alberta plant or are you currently producing TPA with a sugar-based process currently? I know you said that you had few -- a little bit being produced actually during the quarter, but I'm just trying to get a feel for how much.

John, thanks for the question. The plant in Alberta is not critical to the Company's growth except in the detergent area.

We are currently buying all the aspartic acid we need from China. Unfortunately, this aspartic acid is made from oil sources.

So our plant in Alberta is designated as a way of removing our reliance on oil and moving our production to an in-house facility. Now, our production in third quarter and fourth quarter until we get our next piece of equipment is in the small tonnage level.

So we don't consider that commercial. When we have a commercial volume which will be in the range of multiple tons per week, we will make an announcement and we are hoping to do that by the year or very early next year.

Okay and obviously this is projected to reduce cost with the sugar-based process versus obviously the cost of buying it right now and the oil-based process. So I was wondering if you could shed some light as to how much of a cost reduction say on an annual basis the sugar-based process would reduce your annual expenses versus the current expense for that product, the TPA product.

John, that's a trade secret that we are not willing to share at this point. It will be a reduction, it will also provide us with a product that nobody else can match because there is no other sugar-based aspartic acid production on earth.

So we have to be a little bit careful. I know you will see as time goes on an increase in our margins as we report our financials, but we are not prepared to tell the rest of the world our trade secrets at this point.

Okay and obviously you'll have the intellectual property to protect [at the patents] and such.

We have patents in various areas. Some of it covers our Alberta plant, some of it covers the end products. We also maintain substantial amounts of trade secret because patents are often stolen in certain countries outside of North America.

Understood. If I could just rehash what you had said earlier as far as the Alberta plant is concerned, but looking at a significant pickup in volume in late 2010, early 2011, is that correct?

That's our best estimate as of right now. I should mention because it will get asked by someone else if not by you what is the delay with the equipment, it is not our fault.

We don't know whether it is our equipment manufacturer or the Alberta boilers approval branch. But because it is a piece of pressure equipment, it is finished, it is sitting at the factory and waiting for boiler approval before it can be moved to the site and installed.

So it is a finished piece of equipment, just a technicality at this point?

I would believe that to be true.

Okay and I just wanted to back up again on the guidance for the year. You said the average sales for the year, full year, we're looking at a 15 to 20% increase over last year?

Correct.

And you expect to be profitable obviously. You're not prepared maybe to give a certain dollar number (multiple speakers)

No, we are not

Okay, and profitable -- you're talking bottom line obviously?

Bottom line net earnings per share.

Okay, let's see -- I was hoping -- I had a presentation from you and you had projected $22 million to $30 million in revenue within three years of the Alberta facility producing a sugar-based product. So I was hoping you could elaborate on that projection. From where you are now, it seems like obviously very strong growth going forward but I just hoped you could shed some more light on that projected $22 million to $30 million from that plant.

Now that of course is an estimation. No guarantees, but it is based on our knowledge of the availability of major detergent contracts measured in tens of millions of dollars available to a company that can produce a polyaspartatic acid from natural sources that is of course like all polyaspartic acids biodegradable.

We have been working with the major soap companies, detergent companies, for several years and we believe that these contracts are available to us if we have the production capacity. So, coming from a year finishing at 11, maybe 11 and a bit for 2010 and with the organic growth we're predicting for 2011 only a single (audio ends abruptly)