Flexible Solutions International Inc (FSI) 2020 Q3 法說會逐字稿

Good day, everyone, and welcome to today's third quarter 2020 financial results. (Operator Instructions) Please note, this call may be recorded.

It is now my pleasure to turn today's program over to Dan O'Brien. Please go ahead.

Thank you, Gretchen. Good morning. 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 FSI conference call for Q3 2020. Prior to discussing our financials, I'd like to update our corporate condition and product lines, along with what and our opinion might occur over the next 2 quarters.

COVID virus. The NanoChem subsidiary, the ENP subsidiary and the Florida, LLC investment are all engaged in producing for the agriculture or the cleaning product sectors. Therefore, we are considered essential services and are likely to remain so, if restrictions are reinstated. Production and sales are continuing to meet the customer orders. We continue to shrink our inventory and increase our cash position in Q2 and Q3 by ordering less inventory than we consumed. This tactic was successful, and we feel that we now have the right level of inventory to suit the risks of COVID, while still having the ability to service our customers.

Our NanoChem division. NCS represents more than 1/2 the revenue of FSI. This division makes thermal polyaspartate acid, called TPA for short, a biodegradable polymer with many valuable uses. NCS also manufactures SUN 27 and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil. TPA is used in agriculture to significantly increase crop field. It acts by slowing crystal growth between fertilizer ions and other ions in the soil, resulting in the fertilizer remaining available longer for the plants to use. 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 normally grow steadily, but slowly. A simple explanation of the effect is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the rock formation. Scale must be prevented to keep the oil recovery pipes from clogging. Sun 27 and N Savr 30 are our nitrogen conservation products. Nitrogen is a critical fertilizer, but it can be loss through bacterial breakdown, evaporation and soil runoff. SUN 27 is used to conserve nitrogen from attack by soil bacterial enzymes while N Savr 30 is directed towards reducing nitrogen loss through leaching and evaporation.

The ENP division. ENP is focused on sales into the greenhouse turf and golf markets while our NCS sales are into row crop agriculture, two very distinct markets. The strong quarters for ENP are 2 and 3 to match the U.S. spring and summer. Q3 was very strong. ENP expects moderate year-over-year growth in Q4 2020 with the caution that Q4 early buy orders could be affected if the virus causes customers to keep inventory very low. Q1 2021 is still unclear at this time.

The Florida, LLC investment. This investment was profitable as usual. The company will be invested in has sold more to date in 2020 than it did in the first 9 months of 2019. The LLC is focused on international sales into multiple countries, all of which are facing different COVID issues and responding in varied ways. The large number of variables prevents any useful prediction for Q4 2020 and Q1 2021, other than continued growth at a moderate rate is likely.

Q4 2020 and early 2021. TPA, SUN 27 and N Savr 30 for agricultural use have peak uptake in Q1 and Q2. Early buy orders in Q4 could be reduced if our customers decide to use just-in-time strategies. However, recent strong increases in corn and soybean prices may counteract customer worries. Oil, gas and industrial sales of TPA are expected to be flat in Q4 compared to the previous year while predictions regarding 2021 are not possible under the circumstances. Like agriculture, our sales to cleaning products and water treatment are considered essential, leaving only oil and gas as a market vertical at risk. The risk in O&G is not permanent loss of business, rather it's the possibility of some wells shutting down for maintenance while oil prices are low.

Tariffs. Since September 30, 2018, many of our raw materials imported from China have included a 10% tariff, which rose to 25% in 2019. U.S. customers received price increases from us as this inventory entered production. International customers are not charged with tariffs because we're applying for the export rebates available to recover them. As a result, the accumulating tariff payments to the government are affecting our cost of goods, our cash flow and our profits negatively until the rebates are received.

Rebates are very complicated to apply for and it can take many months to arrive. The total amount due back to us has become significant and continues to increase. Changes in customs categories in Q3 2020 resulted in another of our raw materials being added to the tariff list, increasing the strain on us. The rebates will increase profitability and cash flow while decreasing cost of goods for future quarters in which rebates are received. In my Q1 speech, I expressed comfort that we would begin to see rebates in Q2 or early in Q3. I base this on the fact that we filed our templates and requests for our first rebate in mid-May. As of August 14, there had been no response from the government, except an excuse that employees are not in the office. In September, we were told that they had lost our file and instructed us to refile. We've done this because files are examined in order of receipt and there is a 30-day payment delay even after approval. We no longer expect rebates in Q4.

Highlights of the financial results. Sales for the quarter increased 10% to $8.11 million compared to $7.4 million in Q3 of 2019. The result is a gain of $582,000 or $0.05 a share in the 2020 period compared to a gain of $412,000 or $0.03 a share in 2019. We attribute the improvement to increased sales. It was not obvious why our revenue similar to Q2 would result in significantly lower profit in Q3. Reason one is product mix. Q3 historically sees a lower-margin product mix. Reason two is the addition of another of our raw materials to the tariff regime, resulting in additional costs until rebates arrive. And reason three is the relative strength of the ENP division, whose revenue is fully consolidated. However, 35% of ENP's profit is backed out to ENP's minority shareholder. ENP had an excellent Q3, which transformed our average Q into a good one. We feel that this is further valued in validation of our ENP acquisition.

Working capital is adequate for all our purposes and is increasing during 2020 as we book retained profit from sales. Continuous effort will be made to optimize inventory and accounts receivable while increasing cash until the effects of the virus become more predictable. We also have a line of credit with Midland States Bank. We're confident that we can execute our plans with our existing capital. The purchase of ENP in 2018 was funded by a term loan from Harris Bank, which is now carried by Midland State Bank and a $1 million convertible debenture taken by the seller. 1/2 of the debenture was converted to FSI shares in 2019 while the remaining $500,000 was retired for cash in Q2 of this year. The term loan is now more than half repaid. The LLC investment in 2019 was made with cash on hand provided by FSL, our Canadian operating company.

The text of this speech will be available as an 8-K filing on www.sec.gov by Tuesday, November 17. E-mail or fax copies can be requested from Jason Bloom, jason@flexiblesolutions.com.

Thank you. The floor is open for questions. And Gretchen, will you instruct people how to proceed? Thank you.

(Operator Instructions) It looks like our first question is from William.

Dan, was there anything specific that drove the strong ENP quarter? And is that growth or higher profit margin repeatable in the future?

Bill, they have identified and closed new customers, and there was a strong use of chemistry in the golf and turf markets this summer, once the fields and golf course has opened fully. I believe that this is probably a representative of third quarter, but let's also remember that ENP is seasonal and Q4 and Q1 are weaker than Q2 and Q3. And also subject, as I noted, to the early buy variability to strictly depending on the customers' analysis of the economy.

Okay. All right. In regards to the Florida, LLC, it looks like they had a strong first half, and the sales growth slowed a bit in the third quarter and then the net margin was back down. Can you give a sense for -- I mean, what we should expect for top line growth or a normalized net margin for them?

Without sharing details of their pricing structure that I'm not authorized to do, I can't really tell you much about the net margin, except that you should look at it as an annualized number because things are variable through the quarters. I do believe that each year, we're going to see significant growth from this investment. And as you know, we manufacture most, if not all, of the product that goes into their sales. So it's going to be beneficial for both the NanoChem division and our profits from the LLC, and a year-over-year analysis is going to be much more accurate than trying to predict quarters.

Okay. But looking annualized then on a net margin basis. I mean, are we talking low double digits, like 10% to 12% range?

Yes. We're looking at the same range as...

Just that the 22% last quarter was an outlier?

I would say so, yes. It'd be probably in the 10% to 15%, but yes.

Okay. And then last question was, have you applied for the PPP loan forgiveness and any word on that?

We've applied for it. It's a pretty complicated -- well, no, it's not complicated at all. The application is simple, finding out exactly where to send it, when and how is a little more complex. The bankers are not making this easy. We are doing everything we're being asked to do and told to do and we are awaiting things happening. It's like awfully similar to the tariff situation.

Okay. So likely it won't be forgiven in that income benefit for the -- the income statement probably won't be in the fourth quarter?

That seems likely to me. Although in theory, once these applications are in place for these simple companies like ours where we used 100% of the PPP for payroll support and nothing for any other purposes, we should -- if the process is taken care of at the government end properly, we should see a very rapid approval. So I guess my statement would be, I don't control the process. We're doing everything. It could come in fourth quarter, but half of that's gone already. So the more likely guess is first quarter next year.

(Operator Instructions) It appears that we have no more further questions at this time. I will now turn the program back over to Dan.

Thank you, Gretchen. Everyone who called in this morning, thank you very much for listening. I look forward to talking to you, again, next year. And good luck and good health to you and all your families. Goodbye.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.