Flexible Solutions International Inc (FSI) 2010 Q4 法說會逐字稿

Good morning. This is the conference call speech for the full-year 2010 for Flexible Solutions. This is Dan O'Brien, 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 full-year conference call for 2010.

Before concentrating on the numbers, I would like to review what we have accomplished in the last year and our estimates looking forward. 2010 was a good year for FSI and I am extremely proud of how our team performed. Our dedication to lean operations, low leverage, and sales into multiple market verticals have served us well.

Last year, for instance, agriculture maintained our topline revenue growth when oil field business was constrained by contract renewal activities at Norwegian oil service companies.

Among our significant achievements for 2010, we returned historical growth levels higher than 15% per year compounded. We achieved record sales of $11.5 million, exceeding the 2008 record by over $1 million. We increased distribution of agricultural products, leading to very strong revenue growth in this market vertical. We recovered the oil field and detergent volumes lost during the recession and even increased total sales in both market verticals.

In the first part of 2011, we completed projects started in 2010 to strengthen our balance sheet and increase shareholder value. First, we reduced the issued and fully diluted share count very substantially through an attractively priced buyback and option expiry, respectively. Second, we obtained a revolving line of credit at excellent terms that can be used to fund our growth without issuing equity.

I want to speak about the biomass factory in Alberta, Canada. The equipment we have waited for so long has been delivered and is almost ready for testing. The Alberta steam inspector has asked for additional data before we can run the equipment. We believe we can supply the data in days, not weeks, and provide -- and proceed to testing and in production.

This plant is designed to supply our Chicago operations with most of the aspartic acid that they use for making poly-aspartic acid. By using sugar in Alberta, we delink our raw materials supply 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 products. Production from sugar will result in reduced costs and the opportunity to gain customers who insist on renewable-based materials.

As the financials show, the Alberta plant is not needed for a strong and growing company, but it is wanted to improve our products and reduce our costs and risks.

The NanoChem division -- this division makes poly-aspartic acid, short form TPA, a biodegradable protein with many valuable uses. It now represents 90% of our revenue and is the main sales and profit driver of our Company. In the detergent market, we continue to proceed towards our first sale to one of the biggest world manufacturers. Our samples of poly-aspartates made entirely from sugar have been provided to this potential customer and we have received confirmation that they work as well as our oil-based products. The market for our products in detergent is estimated as greater than $350 million per year.

TPAs used in agriculture to increase crop yield -- in North America alone, the wholesale market is over $2 billion a year for TPAs and fertilizers, and most crops are able to use TPA profitably. 2010 was a good year for fertilizers and additives. The market saw excellent growth. A new distributor we signed in late 2009 has grown sales faster than any group we have ever worked with. Based on their stellar 2010 performance, we hope to see good growth in TPA for agriculture in 2011 and even more in 2012, when yet another motivated new distributor is expected to start generating significant sales.

TPA is a biodegradable way of treating oil field water to prevent pipes from 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 2010, oil field TPAs returned as predicted and total oil field sales are expected to increase again in 2011 and 2012.

For the first quarter of 2011 and the rest of the year, revenue in the first 2 1/2 months of 2011 has been stronger than 2010. Agriculture has led the way and swimming pool revenue has surprised on the upside also. The peak in pool revenue straddles Q1 and Q2, so it is still too early to predict the full year in that division.

Oil field sales are also tracking higher than 2010 with the growth driven both by new contracts for our standard products and new uses of our improved TPAs that have been developed and proven over the last several years. The last 12 months have also seen an increased willingness by detergent manufacturers to consider biodegradable compounds and we have added new detergent customers, as well as increasing sales to existing companies.

We are reasonably confident that revenue growth will continue through 2011 and 2012, likely at a rate of 15% or higher but variable from quarter to quarter as is usual for small companies.

The highlights of the financial results -- sales for the year increased 17% to $11.5 million compared with $9.78 million for 2009. This resulted in a loss of $190,000 or $0.01 per share in the 2010 period compared to a loss of $743,000 or $0.05 a share in 2009.

Sales in Q4 were $2.6 million, up 8% compared to $2.4 million in the year earlier period. We do not believe that the lower percent growth in Q4 is indicative. Rather, we think future growth should mimic the full-year data.

Because of the [outside's] 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, income tax, and one-time items from the statement of operations. For full-year 2010, operating cash flow was $1.91 million, $0.14 a share compared to $956 million -- $956,000 -- excuse me there -- $0.07 a share in 2009. We are very pleased with this result.

The Alberta plant is close to operation, as I mentioned earlier. And we expect that once it begins covering its expenses with production, the Company as a whole will show significant net profits.

Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of yesterday, March 31.

Income taxes -- our financials include $770,000 in income tax paid. The Canadian division, Flexible Solutions Ltd., is accumulating losses as the Alberta factories expensed and soon depreciated. This is a planned short-term situation since the Alberta plant will generate significant profit once it begins selling aspartic acid to the NanoChem division in the US. The NanoChem division, of course, must remit taxes to the US government, based on its income as a separate US company.

And finally to our other product lines. WaterSavr has had many more inquiries over the last several months. At least one large prospect is close to ordering. We are continuing our efforts in Turkey, Morocco, parts of the Far East, Australia -- although it has been raining there -- and Spain.

Swimming pools will be managed to optimize the cash flow to support the other divisions. And by providing a small portion of our Alberta factory, the Pool division, we have reduced lease costs by $120,000 a year. That is about $0.01 a share cash that can be used to drive other projects forward.

[Slower build] products Ecosavr and Heatsavr do continue to gain customers. And the business is a good one, just not as fast-growing as our other divisions.

Our prospective partner for the BTI product has declined to continue, citing too many other opportunities. We will look for alternative partners.

The text of this speech will be available on our website by Monday, April 4, and e-mail copies can be requested from Jason Bloom at 1-800-661-3560 or Jason@FlexibleSolutions.com.

Thank you. The floor is open for questions. Eva, will you please give the instructions?

(Operator instructions). John Nobile.

Good morning. I just wanted to back up to something you said, make sure I have it down accurately. The sugar samples, TPA samples from the Alberta plant you provided, was that to a detergent manufacturer, you said?

Those were to a major detergent manufacturer, yes.

Okay, major manufacturer. Okay. And the Alberta equipment, it was delivered. However you mentioned that you are looking at only days, not weeks, for the additional data that was requested to be turned over.

Correct.

Do you see anything as far as those data is concerned to be concerned about? I mean, is it something that they are looking for in this equipment that could delay you further? Or do you feel that the data they (multiple speakers)?

Yes. No. Thanks for the question, I'm glad to be able to explain that further. It is a situation where inspectors are expected to dot every i and cross every t. The data is easily obtainable. It is a matter of getting the engineers who designed the equipment to turn it over so that we can turn it over to the next group. So we don't see it as a big issue. (multiple speakers)

Is that like an environmental type of item?

No, this is a safety issue. And it is not an issue with the equipment, it is an issue with insufficient data, according to the inspector.

Okay. So it is just a matter of, like you say, crossing the t's, dotting the i's, and just saying, Okay, this equipment is safe. And we are looking at days, I imagine if everything gets processed correctly, shortly within maybe days or weeks, we could anticipate a press release about the okay for operations.

I will -- John, I will wait until we have run four batches and I can release not only that we are in operation, but that the equipment is operating successfully. Because of course, installed equipment is not much use to the investing public. Operating successfully equipment is a very important piece of information. Thank you.

I understand. How long of a ramp-up do you think -- this new equipment obviously -- to get significant quantities produced from this machine?

We will be seeing significant quantities in third quarter provided there are no more stumbles. Sorry, second quarter. My mistake.

Second. Okay. In other words the ramp-up should be relatively quick.

Correct.

Okay. Let me see. Due to the increasing agricultural sales, you mentioned in the press release that they had been ramping up and that there is seasonality associated with that.

I was curious if you could just have an idea of what the seasonality may be. But if you could just break that down by quarters, what type of seasonality you anticipate for agricultural sales from like the strongest to the weakest quarters?

Certainly. First and second quarter will be relatively similar because the fertilizing season moves north from southern Texas through to Minnesota over a period of months. So first and second quarter would be equivalent, and they will be roughly the -- they will be the largest two quarters.

Third quarter is harvest, and it will be our weakest quarter because you don't fertilize during harvest. There will be some sales towards the winter season at the end of third quarter, but again it is a weak quarter.

And fourth quarter will be right in the middle. Because winter wheat is being planted and winter vegetables are being started in the southern states and that sends us on into another season of first and second quarters.

And in regard to your agricultural sales, let's just say currently for fiscal 2010, what percentage of total sales would you say were responsible from the agricultural sector?

John, we don't break this out in our financials and I am not willing to do it in public because we do not intend to show people where our strength is exactly, because competition is always barking at our heels.

All right, fair enough. Just one further question. Obviously, you have been aware sugar prices have been increasing, along with petroleum prices.

But I'm just curious to get your take on how the increase in the price of sugar would affect selling prices of TPA from the Alberta plant. I'm not sure how much can be passed along to the customer, how elastic that might be also with the price differences there. If you could shed some light on that.

Yes, it is a complex spreadsheet and I won't give any specific answers. But I can suggest to you that the increase in world sugar has not made our product as expensive as oil-based product. If we were to see sugar in the $0.50 a pound range, we might be looking at an equivalency.

On the other hand, if sugar is at $0.50 a pound, that probably means oil has gone somewhere else. So you've asked me for -- to take a shot at a target that is moving at light speed. And frankly, all I know that I can give to the investors is that we are extremely happy to be dealing with an elastic commodity like sugar where they can plant more if the price is high than in any elastic commodity like oil where it takes five to 10 years to find new supplies if indeed they actually can be found.

So we believe that although there may be gyrations in the sugar price, that it will always be on average much cheaper for us to use sugar than oil.

And currently it is cheaper than oil. Never mind the environmental benefit, but even with the jump in sugar, we still have (multiple speakers).

It's currently cheaper.

Thank you. I appreciate that. Thanks.

Bill Gregozeski.

Following up on the Taber stuff. When you say significant quantities in the second quarter, is that enough to meet all of the demand in Illinois or just part of it? And when would you be at supplying everything needed in Peru?

My estimation is that it would be part of it in second quarter, an increasing part in third quarter and, if things are going well, close to 100% in fourth quarter. I should rec -- allow you to recognize that it is never our intention to go to 100% because we need to continue providing some business to the people who have supplied us so well over the last decade. And we don't want them going out of business because they are our mechanism for providing aspartic acid when we are in the middle of increasing our production.

So we need to keep somewhere around 10 to 15% of our aspartic acid coming from our current suppliers, so that they can stay in business and be there to support us as we grow.

And then on the fourth quarter, it looked like the gross margin fell a bit from a year ago. Is that just from the -- a changing product mix, or is there any increased costs?

There is definitely increased costs coming through on aspartic acid. Our suppliers are in China. Our -- the Chinese currency has been strengthening, the Chinese weight structure has been strengthening. The oil prices, as you know, have gone up considerably over the last year.

We have not been able to pass all that along to our customers even though they are oil companies. That's the -- another of the reasons why we are very excited about getting into our own production.

Okay. And then can you talk just a little bit more about the tax situation that you had to pay so much in the fourth quarter and an estimate on what kind of percent you are looking at for 2011?

Sure. Now I'm not a tax expert. We rely on our auditor to predict our tax for each year at the beginning of the year and in 2010, the auditor predicted one number, and that number was not accurate. It was on the low side. So we had an adjustment in fourth quarter that was very substantial, I am told around $300,000. And that is why our income projections were out.

That is the only thing we got wrong and of course it wasn't our fault. But we have instructed the auditors to try and be a little more optimistic about our revenue so that our income tax is not having to be adjusted wildly at the end of the year.

Okay. All right. That's all I have. Thanks a lot.

Gregg Hillman.

Good morning. In terms of the marketing strategy, in terms of the ag area, how many bodies do you have on that? Or how many product managers do you have involved with that?

We have two full-time salesmen. We are looking for a third right now. We also use our two senior scientists as technical sales assistants on the agriculture. Because agriculture is a very chemistry-oriented field and the addition of our senior scientists with PhDs has been extremely valuable in gaining the market entry.

Okay. And the senior scientists, do they lecture the salespeople of your distributors?

Yes, they actually -- they will go to meetings and it's not just the distributor sales people, but in many cases the distributor invites the senior sales of the retail groups that they work with. And it can be quite a large gathering. As many as 50 people.

Okay and so do you think the sales [area] is beyond the missionary effort? And do people -- even to believe that it's true?

Oh, it is way beyond that. We have what, 330 trials around the world that are all indicating that if you use this with your normal fertilizer program, you will get increased yields that exceed the cost -- substantially exceed the cost of using the product.

I think that will gain a lot of traction over the next couple of years. The recent changes in prices for commodities, agricultural commodities has been extremely beneficial for us. The breakpoint by my personal calculations for corn in an area that is growing between 150 and 200 bushels a year says that if corn is trading above $2.60 a bushel, you can make money using TPAs in your fertilizer program. And we're seeing corn so much above that that I think we are going to see years of growth as long as crop prices are maintained. Or reason -- as long as we have good crop prices, we are on the step to get this done.

Do you have adequate capacity to meet the demand?

Yes.

And then just continuing on the market thing. I didn't -- actually, my cell phone went out earlier on the call, but I take it, did you give forecast for --? Did you give sales forecast for the Company?

I did. I also mentioned that we are already know that 2011 is well ahead of 2010 for the first quarter, and I am sitting very comfortably predicting 15% compounded for at least the next two years.

Okay. And you didn't say anything about ag in particular because you are not breaking that out?

We are not splitting it out. It is doing very well.

Okay. And then just in terms of internationally, I mean, do you have distribution in Europe for ag for TPA? Do have an effort going there with distributors in Europe?

We have an effort. It has recently improved after a couple of years of trials. That will be a question for me in third quarter when you join us, ask how well Europe did because they have put together a significant order from -- in relation to their past. We'll have to see whether they sell it through and order more during the year.

We also have a program starting in Brazil. And we have had success in Israel and are hoping that that will continue to increase as well.

And do you have valid patents in all of those areas? Do they -- I take it they protect intellectual property in all those areas and you have patents in each of those markets.

We don't have patents in some of those markets, but we do have the best products. We have patents in the United States which is why we concentrate most of our costly efforts in the United States because the markets that we attain will be protected.

But we also find that we have been chosen in almost every country that looks at TPAs for enhancement, we come to the front because of pricing, because of product quality, and because we have a data pack that is absolutely 100 times greater than anyone else's.

And I take it Simplot has a TPA product, if I'm not mistaken?

Actually, it is not a TPA product. It is a biopolymer. It is called Avail. It does not infringe our products. In fact, the inventor at Simplot used to be an employee of the predecessor company of NanoChem and he knew exactly where he could go and where he couldn't go.

We are pleased to have a competitor, especially one where we often are able to prove that the effect is less and the cost is more.

Okay. That's encouraging. Okay, well, I'll get back in queue. Thanks for your comments.

Thank you.

John Nobile.

Just one follow-up on the guidance you suggested 2011, 2012, 15% possibly higher revenue growth. Is this with or without Alberta factored into that equation?

Yes, it is with or without Alberta. Alberta is not producing end sales products. It is producing a precursor material that goes into our end products. So what Alberta will do is change our gross profitability or allow us to increase sales even further than that.

So I guess what I'm saying is that sales are still going to originate at NanoChem, but if they are being supported by Alberta sustainable aspartic acid, the sales will be more profitable. And there is a probability of additional sales to people who will only accept sustainably based products.

Okay, so I --.

So 15% is the minimum.

Right. In other words we can go, obviously, people that would only accept the sugar-based TPA product sustainably --.

They would be additional and then of course -- (multiple speakers).

So this -- basically your guidance is at least 15% taking Alberta out of the equation and that could only add to that.

Correct. I'm being conservative because I hate to overpromise.

That's a good thing though. And I appreciate that. Thank you very much.

(Operator Instructions). Gregg Hillman.

In terms of becoming a much bigger company, I mean, do you have the infrastructure in place? You know, the human infrastructure, the IT industry and well just the infrastructure to become a really big company? Or is just the growth really going to hurt you and you have a major staff snafu because you don't have the infrastructure in place to handle really rapid growth?

Well, it's a good question. Not having done it yet, I don't know the answer for certain, but I do know that our Illinois plant in Peru, Illinois is able to take the Company to about $30 million in sales before we have to add machinery. And we have room to add machinery without increasing our building footprint.

Our factory in Alberta has the ability to supply about 75% of the aspartic acid necessary for a $30 million run rate, and adding equipment is an incremental situation when you are dealing with fermentation. You can add vessels that produce an additional 500 or 700 tons per year with relatively low capital cost and now that we have learned all the tricks of getting our steam permitting, we expect to be able to get our fermenters much more quickly than in the past.

So I would have to say that I believe that we can do this. And that the increase in size from an $11 million or $12 million company to a $30 million company will give us the ability to solve the small problems that occur during that stage. And then, moving from $30 million to $100 million, I think we will have worked out the wrinkles and be able to do it easily.

Okay. And then also the whole question of your fix in working capital requirements necessary to support your business plan or what you think you might do over the next three years. I mean, how are you fixed in terms of that? Can you -- do you think you could be self-financing up to $30 million or you'll have to do a financing that will dilute the shareholder -- existing shareholders a lot?

It's a good question. It's -- I will give you my best guess. We, as you know, have a line of credit for $1.5 million in working capital from the -- from a major bank in Chicago, who -- because we are advertising the interest rate of 4%, they won't let us use their name. They don't want everybody else coming back and saying, Why can't we have that interest rate?

But that LOC is based on our inventory and our receivables. So it is inventory and receivables secured LOC and we have a handshake agreement that it can be increased as our inventory and receivables increase. And that this group, the banking group would love to be loaning us $10 million on a revolving LOC if we could support it with our internal operations.

We also expect that, during the next period of growth, we will not have to expend huge amounts of money on capital equipment. So it is very possible that we can grow --. It is possible we can grow all the way to $30 million without any dilution and we will absolutely do our utmost to make that happen if our share prices at current levels. We don't believe we are being fairly valued for our future opportunities and so an equity situation will be the last thing on our list. In fact, we will try and self finance or debt finance.

Okay. And you don't have any warrants to be called to bring in more money right now?

There are no warrants outstanding. There are very few options outstanding. And we are just concentrating on moving from a GAAP loss to a GAAP profit and increasing our annual operating cash flow.

Okay. And with that receivable baseline, do they have customer concentration caveats like you can't have more of your receivables? You can't have more than like 25% of your receivables from any one customer or 30% if you get my (multiple speakers)?

There are caveats on that, but they are -- we are going to keep them to ourselves. They're not impinging on the amount that we can draw at this time, and we don't expect that to be a problem in the future.

And do you think you'll have a diversified customer base? Or will, just naturally, if you are going fast that one customer will just sprout up sooner, probably?

Correct. And in fact the growth is showing us that we are getting more customers and each customer is growing commensurately. The amount of concentration we have now is likely to decrease over time and, therefore, we are just not worried about customer concentration in our LOC.

Thank you.

Hans Kummerfeld.

Had a variety of things, but just sort of for background, sort of for [pre] to help with thinking ahead, you have had some experience now. This is in the agricultural uses for the TPA. So there must be some kind of a series.

You get an order for -- from a distributor, I guess. For one season, they get it out into the field, the producers then see whether they have had an increase or not compared with what it costs them to get that increase. And then do they have to have a couple of years of experience in the field before they say, Hooray, let's really order some more? Or, how does -- is this a two-year or a three- or a four-year build-up?

It's an interesting question. The trigger is not necessarily the grower. The producer counts on their distributor and their retailer to tell them what they need for their land.

And that is why, when I give my speeches and do my writing, I talk about the quality of the distribution groups that we are working with. A -- and it's not related to size. It's related to attitude. A good distributor is a distributor who takes on the product with the intent to do the most possible business with it.

In the Midwest and hopefully by next year in the American South, we believe we have found that type of distributor. The Midwest distributor, as I said, they started with us in the last month of 2009 and they have grown faster than anybody we have ever worked with and almost as fast as we think it should be possible to grow. If we can build another one or two of those people, we will see extremely quick results because, as I say, the data pack is completely convincing.

What has to happen is a distributor says, This is a product that we are going to make sure our client base uses.

Okay and then basically hopefully they will hear back and just to reinforce that.

If they succeed in year one, they -- in case of this Midwest distributor, they succeeded very strongly in year one. They doubled their sales force for year two and (multiple speakers).

Yes so that's -- it's good for them also then. They have a winner.

Odd little thing, I believe there's been some hope that people who want to shampoo their hair with wholesome products would be going for the sugar-based TPA. I think though it has to be polymerized in Illinois there and I guess there's been some petroleum-based aspartic acid going in one end of that. Is there any -- at least in the eye of the beholder, do you have to have a separate polymerization equipment or whatever it is to come out with the purest kind of renewable-based products? Or can you -- is that (multiple speakers)?

We could run it in our existing equipment. What is done is knowing the line speed, you start substituting your sustainably sourced material and run the line at a certain rate. And then, after you are certain by so much plus a safety factor that you have no more oil-based material left in the production line, you start segregating the material that has 100% renewables.

We also have the ability to segregate by shutting equipment down. We always do over the weekend, anyway. So if we shut down over the weekend, run it through to clean, we can start the following day or the following week with a segregated renewables-only raw material stream. So we have several methods.

And lastly and there is no answer to this, but I am guessing, it seems like when the Taber plant starts producing, there's -- and you have this issue, you are paying taxes in the States, I guess, and building up losses in Canada. So do you have any leeway as to how you price the product that comes from Canada and gets moved to the US as a raw material? I (multiple speakers).

We have -- we actually have no leeway. The cross-border pricing policy in naphtha is that it will be crossing the border at plus or minus 5% of the world price. Otherwise, we will get a cross-border pricing issue with one or both governments.

The effect there is that NanoChem will be -- the US division NanoChem will be paying taxes on their profits, based on the world price of aspartic acid. And the Canadian division will be paying tax to Canada based on the profits between their cost of manufacture and their selling price to NanoChem, which will be the world price. Yes. Which will be the world price.

Okay. Thank you very much.

Thank you.

We have no further questions at this time. Please continue.

Ladies and gentlemen, thank you very much for listening and for the interesting questions. I look forward to hearing from you all again in about six weeks with the first-quarter financials and hope to again be able to give you good news and good future predictions.

Thank you very much. Goodbye.

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

Thank you very much. Bye.