Flexible Solutions International Inc (FSI) 2011 Q4 法說會逐字稿

The missing text will be added if a replay becomes available.

(audio in progress) 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 full-year 2011. Before concentrating on the numbers, I would like to review what we have accomplished in the last year and our estimates looking forward. 2011 was an exceptional year for FSI and I am extremely proud of how hard each employee worked to support greatly increased volume to many more customers with only a few additional personnel.

Our dedication to lean operations, low leverage and sales into multiple market verticals has been maintained. And the data that I will present later regarding total revenue growth in relation to EBITDA and operating cash flow shows this very nicely.

Our significant achievements in 2011 include growth of 35% year-over-year. Another record year of sales, $15.5 million, $4 million higher than 2010. Growth was recorded in all market verticals with the strongest growth by percentage being in the agriculture once again.

The Alberta sugar to aspartic acid factory was declared operational. We note that this does not mean production is at any specific level yet. Our Alberta employees are increasing operations at the best rate possible. And we reiterate that we will not make production figures available in the foreseeable future.

Regarding the biomass factory in Alberta, Canada, this plant is designed to supply our Chicago operations with most of the aspartic acid that they use for making polyaspartic acid. By using sugar in Alberta we delink our raw materials supply from oil, which is 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 cost of goods sold and the opportunity to gain customers who insist on renewable-based materials. The Alberta plant is one of the eventual parts of optimum success for Flexible Solutions. It plays a supporting role for the NanoChem division by backward integration and simplification of our supply chain, and by reducing the number of external profit margins NCS must pay between the base carbon source and finished aspartic acid ready to be polymerized in Chicago.

The NanoChem division, this division makes polyaspartic acid, TPA. It is a biodegradable protein with many valuable uses. It now represents 95% of our revenue and is the sales and profit driver of our Company.

TPA is used in agriculture to increase crop yield. The chemical mechanism is the ability of TPA to maintain crystal embryos of fertilizer salts in their embryonic form in soil, which has the effect of keeping fertilizer easier for plants to absorb. The plant expends less energy getting its nutrients and has more energy available to propagate in the form of valuable seeds.

In North America alone the wholesale market is worth over $2 billion a year, and most cops are able to use TPA profitably. 2011 was another good year for fertilizers and additives due to high crop prices.

The market verticals saw continued good growth. One distributor signed late in 2009 has grown sales faster than any group we have ever worked with. Based on their excellent 2011 performance, we expect to see good growth for TPA in agriculture in 2012, and more in 2013 as additional distributors finish their research and development seasons and begin marketing seriously.

TPA is a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale. Our sales into this market are strong and oil companies in the Nordic countries use TPA as part of environmental regulation. In 2001 (sic - see press release) oilfield TPA sales increased substantially and are expected to increase again in 2012 and on into 2013.

We are experiencing interest from forward thinking oil-producing countries other than Scandinavia, and have reasonable expectations of gaining new customers over the next several quarters.

There is also research interest in the concept of TPA as part of tight oil and gas fracturing liquids. Should this progress from concept to use, TPA would be part of the fracing fluid and intended to prevent scale from destroying the permeability of rock pores. Clogged pores reduce well production.

TPA may have added value compared to existing fluid components due to its biodegradability. It does not need to be removed when cleaning used fracing water.

Q1 and the rest of 2012. Well, revenue in the first two months of 2012 has been stronger than 2011. Increases have been recorded in all verticals of all product lines, including swimming pools. We expect the largest percentage growth in 2012 will be in agriculture, followed by oilfield.

We are confident that revenue growth will continue through 2012 at a rate of 20% to 30%, but variable from quarter-to-quarter, as is usual for small companies. Based on 2011 revenue this converts to revenue in the range of $18.6 million to $20.1 million for full year 2012.

Highlights of the financial results. Sales for the year increased 35% to $15.5 million compared to $11.5 million in 2010. The result was a gain of $183,000 or $0.01 per share in the 2011 period compared to a loss of $190,000 or $0.01 per share in 2010.

Sales in Q4 were $3.37 million, up to 29.6%, compared to $2.6 million in the year-earlier period. The Q4 revenue was strong and evenly spread through our various markets.

Because of the outsized 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, income tax and one-time items from the Statement of Operations. This year the FASB treatment of consultant option expenses has been changed again, requiring that consultant options be revalued at vesting as well as at grant. This was negative for our GAAP results. We consider consultant options to be a useful tool and we will continue using them judiciously.

For full-year 2011 operating cash flow was $2.71 million, $0.21 per share compared to $1.91 million and $0.14 a share in 2010. We are very pleased with this result. 50% growth in operating cash flow with 35% growth in revenue indicates we are controlling costs well. The credit for this goes to our highly productive employees.

The Alberta plant is now termed operational, so starting in Q1 2012 we will report operating cash flow with Alberta plant costs included in operations. Detailed information on how to reconcile GAAP with non-GAAP numbers is included in our news release of March 30 -- actually, March 29.

Income taxes. Our financials include $1.126 million in US income tax paid. The Canadian division, Flexible Solutions Ltd., is accumulating losses as the Alberta factory is expensed and soon depreciated. This is a planned short-term situation since the Alberta plant will generate profit once it begins selling significant amounts of aspartic acid to the NanoChem division in Chicago.

The NanoChem division, of course, must remit taxes to the US government based on its income as a separate US company, which is why our tax expenditure is so high in relation to total GAAP earnings. As income occurs in Canada the accumulated losses will be consumed, after which our tax load will become a mix of the 25% Alberta rate and the 40% Illinois rate.

And then 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 efforts in Turkey, Morocco, parts of the Far East, Australia and Spain.

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

Swimming Pool products, Ecosavr and Heatsavr, continue to gain customers, and growth is in the low-double-digits. It is just not as fast growing as our other divisions.

The text of this speech will be available on our website by Monday, April 2. And e-mail copies can be requested from Jason Bloom at 1-800-661-3560 and by e-mail at Jason@FlexibleSolutions.com.

Thank you. The floor is open for questions. Amaryllis, could you start that process please?

(Operator Instructions). John Nobile, Taglich Brothers.

I am just backing out the numbers here. Obviously, it was a good year, but I am looking at your Q4 numbers. When I back it out, I believe that -- I mean, there was a profit before taxes -- I mean, slightly. It looks like there is about a $5,000 profit before taxes, which I thought was an impressive feat for the fact that it is usually your slowest quarter, but obviously the tax rate not being able to take the loss from Alberta put you in the loss for the fourth quarter.

But I wanted to just get into the net operating loss carryforwards in Canada, particularly how much they are as of like December 31 the Canadian net operating was carryforwards. And when do you believe that division will be profitable?

Okay, two questions. The absolute number for the operating loss carryforwards, I don't have the number in front of me, but I believe it is in the range between $2 million and $3 million at this point. And we begin depreciating the factory this year, so it will increase by the depreciation.

As to your question about when we will be profitable, that depends on volume production, and you will note that we are just simply not going to give our competitors the valuable information of production levels. We are going to do it as quickly as we can.

And since once again -- and I think I have said this several times over the quarters -- this is a new factory of a type that has never been done before, and it is impossible to predict the date of breakeven and then the day of profitability. I know you want more, but that is the best I can do for you, John.

Okay. I am curious, have you shipped any sugar-based TPA to detergent manufacturers? And if you have, is there any feedback in regard to that or any potential contracts that may happen from those, because I believe you have shipped small quantities already in the fourth quarter?

We have shipped quantities to various places. I'm not going to focus on the particular customer market verticals, but we have received confirmation that our sugar-based product is as good as our oil-based products. And the determination of any contracts has to wait until production reaches a point where we can promise uninterrupted deliveries of sugar-based products that is discrete from oil-based product, because any contracts that are based on sugar-base will have features that require us to be very confident we can deliver.

So we are interested in those contracts. We have the contacts necessary to get contracts of that sort. We have not reached the production volumes necessary to confidently take them on. .

Okay. And, obviously, as we speak the first quarter, it is in the book. I was just hoping to get a little color on what percentage of TPA shipped in this first quarter was actually sugar-based of total TPA sales, and what impact -- I know you won't give the particulars on margins -- but a rough impact it might have on margins.

I won't give you anything on either of those because, in fact, they were just other ways of asking me for my production in Alberta. (laughter).

Okay, well, when this is actually out in a 10-Q filing will there be a breakdown of the percentage of sugar-based?

No, there never will be. We are not interested in giving information to potential competitors.

Okay, you don't make my job easy.

I am sorry. Well, actually, I do make it very easy. You can just crunch the numbers, but the predictions are very difficult.

Yes, okay. Just one final question. You have guidance 20% to 30% revenue growth. I was just curious if you had derived this growth from increased business from existing customers or does this take into account business from new customers?

The greatest emphasis is on what we can predict better, which is our current customers. But we did at the top end of the 20% to 30% range there is an inclusion of prospective customers that we believe are realistically predictable for 2012.

Now, of course, this usually means that we are having to decide on the speed with which large companies can react, and whether they decide for our products or decide to go in a different direction. But we have discounted those opportunities fairly heavily, and as a result, we think that the top end of the prediction is a fair top end, and then we have taken in both new customers and increase from existing customers.

Okay, so as you say, this is really -- as you see it now from prospective customers you are trying to be very conservative to give this type of growth, because, obviously, you're coming off a 35% topline growth in 2011. So unless business was to fall apart I would imagine that level of growth, especially with the price of crops right now -- I think you had mentioned a while ago a certain breakeven price, I think, on corn and it looks like we are significantly above that.

And I think forecast for crops in general -- food crops in general, even though forecast may be slightly lower it is still a lot higher than so-called breakeven numbers would suggest for using your TPA product.

That is correct. Corn, which is the biggest crop in the United States, somewhere between $2.50 and $3 a bushel corn is the breakeven for using TPA to enhance your fertilizer. And the spreadsheet looks very good when corn is above $5.

So we are in a position where we feel that the limitations to our growth are the marketing skills of our distributors. But, of course, if you have had any experience with CEOs who fell into distribution, you are aware that we all consider distributors to be both the most wonderful thing in the world and the worst thing in the world because their actions are almost impossible to predict.

We have one good one, several average ones, and some that I don't really consider particularly good at all. So we try not to overestimate other people's behavior and give you estimates that we think we can manage with our own skill set.

Fair enough. Well, thank you for your comments. Obviously, I am not going to say good luck. Just keep on doing what you're doing, because, obviously it looks like it is going to definitely pay off in the future here. Thank you.

Thanks very much.

(Operator Instructions). I am showing no questions. You may continue.

Well, thank you all for joining us at today's conference call. Either the lack of questions indicates a lack of interest or I managed to get hit most of the high points in the speech.

Of course, you are all welcome to phone independently, and either Jason Bloom or I will happily take your calls. This concludes our conference call speech for full-year 2011. And I look forward to reporting to you in six weeks about first-quarter of 2012. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.