LiqTech International Inc (LIQT) 2021 Q1 法說會逐字稿

Good morning, and welcome to LiqTech International reports first quarter fiscal year 2021 financial results. (Operator Instructions) Please note that this event is being recorded. I'd now like to turn the call over to Mr. Robert Blum of Lytham Partners. Please go ahead.

All right. Thank you, Nick, and good morning, everyone. Thank you for joining us today. LiqTech International discusses first quarter 2021 financial results. As Nick mentioned, I'm Robert Blum, Lytham Partners. I will be the moderator for today's call.

Joining us on today's call for the company is going to be Sune Mathiesen, the company's Chief Executive Officer. Before I turn the call over to Sune, let me remind listeners that following the conference call, there will be an open Q&A session. You should also note that a replay of this call will be available shortly following the conclusion of the live call.

Before we begin with prepared remarks, we submit for the record the following statements. This conference call may contain forward-looking statements. Although the forward-looking statements reflect the good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause actual results to be materially different from those discussed during this conference call.

The company, therefore, encourages all listeners to carefully review and consider the various disclosures made in the reports filed with the Securities and Exchange Commission, including risk factors that attempt to advise interested parties of the risks that may affect our business, financial condition, and sales of operations and cash flows.

If 1 or more of these risks or uncertainties materialize or if the underlying assumptions prove incorrect, the company's actual results may vary materially from those expected or projected. The company, therefore, encourages all listeners not to place undue reliance on these forward-looking statements, which speak only as of this date and the date of the release and conference call.

The company assumes no obligation to update any forward-looking statements in order to reflect any events or circumstances that may arise after the date of the release and conference call. Now, I'd like to turn the call over to Sune Mathiesen, Chief Executive Officer of LiqTech International. Sune, please proceed.

Thank you very much, Robert, and good morning to all of you, and thank you for joining us today. So as I assume many of you saw in the press release this morning, our business is again improving. Orders have picked up significantly, and we now expect order intake for the second quarter to exceed $10 million. As you might remember, this equals the record first quarter 2020 revenues, and it does mark a milestone in the post pandemic recovery of our business.

The 3 primary drivers of growth we have recently discussed, a rebound in the marine scrubber markets. The launch of our water treatment solutions for our joint venture in the oil and gas market. And the black carbon reduction market, particularly within the Chinese marine industry, are increasingly gaining traction.

We continue to see an improvement in inquiries and orders from the marine scrubber market. Our pipeline in oil and gas continues to grow, and we have seen the first orders for our black carbon reduction product. This progress, coupled with recent orders from new applications, highlights the progress we're making in leveraging our proprietary silicon carbide technology to expand beyond our historical reliance on a single market.

We've made significant investments in sales personnel and with orders now back to pre-pandemic levels, it proves to us that this was indeed the right decision. I would like to take this opportunity to expand further on the 3 main markets.

First, the oil and gas market. So as mentioned, our pipeline in oil and gas continues to grow. It has grown to a very large number. And as mentioned in the press release this morning, we expect significant orders and revenue from this industry in 2021. New environmental regulations, combined with geological restrictions and local [wallet] scarcity are driving a great attention of the produced water to be more extensively treated and reused.

This reuse plus 50% more water expected to be treated over the next 10 minutes is what is providing a significant opportunity for LiqTech. If you can remember back to our slide presentation at our Analyst Day back in January 2021, we highlighted many of the reasons why the LiqTech silicon carbide membranes are superior to the competition in treating produced [water].

Our technology is capable of treating water to a much better quality than any other available technology on the market. Today, operators will truck in water to the production site, use it in the production of oil, and then truck it away and store it in disposal (inaudible). This is obviously bad for the environment and also comes with a high cost.

Our technology allows the operators to reuse the same water over and over again and narrows the environmental footprint and sales cost. The superior product performance, environmental pressures and scarce water resources are all in our favor. Until now, we have been laser focused on opportunities in the Middle East. But our thought is [there has been noted] by some of the large players in the industry, and we now are also in discussion for orders for our regions and offshore applications.

I look forward to the further maturing of this business in the quarters to come, and I believe we will be able to share news about first orders in future. I strongly believe that we have a great opportunity to be one of the significant key players in the oil and gas industry.

Let me briefly also expand on the black carbon reduction market, where our focus is on marine vessels within China, and we also announced the receipt of our first set of orders this morning. As I said last quarter, China has taken a lead in reducing black carbon emissions from inland and ocean (inaudible). The new mandates in China have created a $600 million opportunity for ocean-going vessels and a $26 billion opportunity for (inaudible).

This tightening legislation has created a new opportunity for our product, which we have given a 20-year (inaudible). The products is our diesel particular filters to remove particulate matter from the exhaust gas of internal combustion engines. As you recall, we have adapted this 20 years history in [DPS] and have developed a product specifically for black carbon reduction within the marine sector.

As we discussed last quarter, our pipeline in this market is very large, and it provides us with the optimism to move forward with plans to develop a new manufacturing facility in China. The manufacturing facility will service this black carbon reduction market for ocean-going and inland vessels and also function as a service center for our marine scrubber products. We're in the process of completing the site selection for a facility we came to lease. The frame of the building is already built, and our expectation is to have it operational by mid-2022.

As a reminder, the new facility is ultimately expected to have a capacity of approximately 5 million liters of DPS, and this compares to a current capacity of 1 million liters in our Copenhagen facility. We're very pleased to have received these initial orders in black carbon for the China marine industry and believe the opportunity here is significant.

And now an update on the marine scrubber market, which, as I stated, continues to show signs of improvement following the global economic effects of COVID-19. The price break between bunker fuel and low sulfur fuel, which remains lower than $50 throughout much of 2020, have recently expanded and the spread is now above $110.

We believe the business case argument supporters of marine scrubber installations ranges between $70 and $80. Given the return to normalized price (inaudible), we're now seeing a renewed interest in (inaudible). Whether we continue to see a move towards closed-loop systems compared to open-loop systems.

As I stated last quarter, in November 2020, the European parliament voted to out phase and ultimately (inaudible) marine scrubber systems. To date, more than 120 ports worldwide have banned open-loop discharge. And there are some important meetings in the IMO in June to discuss the (inaudible) of open-loop discharge regulations or in other words, to discuss equipment open looping.

As you break down the inquiries and orders that are coming in, the good thing is that they are rather diversified. They're diversified by scrubber manufacturer. They're diversified by end user and they're diversified by geography as Europe has begun to come back online.

Similar to the way in which this market again to shape up in its infancy, a few years ago, we are seeing things play out similarly again. For instance, many of the new orders we have seen to this point are smaller overall orders, somewhere in the area of 1 to 3 units per order.

And this is how things began 2 years ago. Then we began to see large orders following. Those larger orders are beginning to show up in [quotations]. And if history is any indicator, we would expect to begin booking them again in the coming quarters.

All told, we like what we're seeing in the marine scrubber market in terms of quotation activity and orders and a macro change towards a potential ban on open-loop systems, and the overall price paid increase provides us continued optimism for the near and long-term.

So to wrap things up, the journey to diversifying the business this year. We are receiving new orders in multiple end market applications, with large market opportunities in oil and gas and black carbon reduction coming to the forefront. And let me just say that I believe that the 3 we have talked about today are just scratching the surface in the longer-term potential of our silicon carbide technology.

We also received our first orders for the $26 billion black carbon reduction market in China, and we continue to make progress on the construction of our new facility in the region. And as I just mentioned, the marine scrubber market continues to show signs of improvement with inquiries and orders improving rapidly.

All told, our order intake is back to pre-COVID levels, a significant achievement for the entire team here at but in Titan here at LiqTech. As always, I thank all of you for your support of LiqTech and now would like to turn the call over to your questions. Operator, please.

(Operator Instructions) The first question comes from Eric Stine at Craig-Hallum.

So I just wanted to start with the black carbon orders. How would you characterize these? Are these more pilot orders where you would expect follow-ons based on a trial period? Or do you view these as initial orders that are just sort of a more general ramp now that you have better clarity into your manufacturing facility and being able to handle bigger orders in 2022?

I would say they are very still small orders, initial orders, but the market is just coming together. This is really early stages. But the important thing is that we're booking orders. We're building relationships with the customers already. And as we get further into 2021, the market will expand. We'll see more orders available in the market, and the orders will be bigger. But for now, still very early stages, but extremely pleased to see that we're picking up these initial ones.

But just to be clear, I mean, so these really are not pilot orders. I mean, these are more -- you would view these more as initial orders rather than pilot orders. So there's a test phase to move to the next stage.

That is correct. We supplied pilo1t orders for quite some time now, and we view this more as the first small orders in this market.

And moving to oil and gas. It sounds like you are more confident in near-term orders. And I know that COVID kind of hurt the outlook last year. I mean you've been confident in orders for some time. So maybe why the increased confidence now? And maybe just talk about the gating factors here. Is it what you talked about for some time that travel, in-person meetings to finalize things? I mean, is that it? Or are there other things that play here?

No, travel restrictions has definitely been a gating factor. And you're absolutely correct when you say that we feel more confident than ever about imminent orders. We think first orders are imminent. We think that we'll be able to share the news with our investors in the very near future. And we still have very strong confidence that oil and gas will be a significant contributor of new orders this year and even revenue in 2021.

And then maybe last one for me, just following up on that. I know in the past, your commentary has been you do expect oil and gas in the near-term here to potentially be the biggest part of your business. Is that more, I guess, orders in 2021 and results or revenues in 2022? Is that the right way to think about it?

What we see right now is that we will receive substantial orders tissue. We will even see some of the revenue this year and going into 2022, revenues will further increase, but we should see both orders and revenue in 2021, of course, ramping up further in 2022.

The next question comes from Cameron Lochridge of Stephens Inc.

Sune, I was hoping we could start just piggybacking off of that last line of question around oil and gas. Just to level set on expectations for 2021, is it still the case that we think oil and gas revenue will exceed that of scrubber revenue? Or is it now looking more like that will be pushed into 2022?

We definitely think that order intake from oil and gas in 2021 will be bigger than order intake from marine scrubbers. In terms of revenue, still a little bit uncertain. It will definitely be bigger in 2022. Whether or not it will be in 2021 is still a little bit of a question depending on how projects will deliver and so forth. But in terms of order intake, yes, we still expect order intake from oil and gas to exceed the order intake from marine scrubbers.

And then on the $10 million of orders that's LiqTech is expecting in 2Q. Just to make sure that I'm following it correctly. Is that for total company, not just one particular line of products or businesses? And then secondly, could you just maybe share with us where orders on a quarterly basis bottomed in 2020?

Yes. So we have not disclosed order intake, but it is very low at a certain point in 2020 when COVID hit. The reason why we used the $10 million number is that it equals our record first quarter last year, which is the highest revenue number ever we've taken in a quarter. I believe it was $10.2 million in the first quarter of 2020.

And that's why we think $10 million in order intake really proves to us that we are now back to pre-COVID levels. It's still low compared to where we expect to be a few quarters out. But we think it truly marks a return to pre-COVID levels. And that's something we're quite proud of that we now see recovery. In terms of where we're going, well, we expect this to develop further over the next coming quarters and getting up to, I would say, full speed towards the end of the year.

Our next question comes from Robert Brown of Lake Street Capital Markets.

Thanks. I was wondering if you could expand a little bit on the oil and gas market. You talked about oil and gas pipeline kind of expanding. Could you expand on that in terms of where you're seeing new market activity and what you're seeing there?

Yes. What we are seeing in oil and gas -- so we've been laser-focused on the Middle East for some time. And it looks like the progress we have made, a lot of the operators picked up on that. And we now see inquires coming from other regions as well and also from offshore applications.

So we are now really expanding our presence in the oil and gas industry. Things are shaping up quite well. We expect imminent orders from the Middle East, and we even expect imminent orders from offshore applications. So it's shaping up very well for us in oil and gas right now.

And could you maybe characterize your backlog at this point? How many -- how much activity have you sort of booked at this point for the back half of the year? And how much do you feel like is in quoting? And then following on to that, I think you talked about your quoting sizes increasing. What are you quoting now in terms of average sizes, if sort of 2 to 3 systems were the normal quote. What's sort of the size growing to at this point?

Now, I would say -- so all of our markets are in different stages of quoting. As mentioned a little bit earlier, the massive recovery in the marine scrubber business, we see these kind of smallish orders available, 1 unit here, 2 units here, and so forth. In terms of oil and gas, smaller projects, and when I say smaller projects, maybe a couple of million dollars ranging up to much, much bigger projects available in that industry.

And then finally, black carbon, we are starting to book small orders for that application, and we think it will ramp up to much bigger orders throughout 2021. And then we're happy to note that some of the work we have done in other applications is also now maturing for us. We announced a $2.2 million order this morning for acid filtration, which is also a great step for us. So slowly but safely, things are coming together.

We see that recovery in our business. Happy to note that our order intake for this quarter is now back to pre-COVID levels but I would say the different segments are in markets, are in different stages of [agreement].

And then last question is on capacity expansion. Where are you at with additional furnace orders? And when do you expect them to being solved?

So we are doing that planned expansion in Copenhagen right now and we will further increase our capacity there. And then, of course, we are doing that capacity expansion in China, making good progress. We are in the site selection process right now coming to the end of that. We plan on leasing a facility in China rather than building a new one, which should shorten the period of time before we can be in operation. So altogether, our expansion is moving along as planned.

The next question is from Liam Burke of B. Riley.

Sune, the scrubber ban internationally has been in place for over a year now. Shipyards have reopened about a year now. Dry docking schedules for the operators are continuing on schedule. Are you seeing any activity on the rehab or the upgrade side of existing systems? Or all of your orders coming from new builds?

So we actually see activity from several, let's say, several things in the marine scrubber market. We both see newbuilds. We see retrofits. So it means an existing vessel but without a scrubber installation. And we're also beginning to see open-loop scrubber conversions.

So there's activity from all of those. If we go back 1 year, the activity in the main scrubber industry really stopped overnight. With COVID starting, all the shipyards shut down and orders just came to a stop. And what also happened is that oil prices decreased. The prospect between low sulfur and bunker fuel even came to a negative but stabilized below $50 per metric ton last year. And that didn't really support marine scrubber installations. So throughout most of 2020, there was very little order activity in the marine scrubber business.

We saw prices or the price spread began to widen again last year and is now above $110 again. And that has certainly caused a lot of activity in the marine scrubber business again. And it's actually picking up at a faster pace than we anticipated, I think. So that's great to see. And I think what we're seeing right now is really just the beginning.

We will see a further increase in inquiries and orders throughout 2021. And hopefully, we will also see that open-loop scrubber ban that will lead to many open-loop conversions.

Even the vessel operators are admitting, hey, the spreads are -- with the price of oil now, the spreads are going to stay wide, and they have been wide for about 6 months. Is there any push now -- I mean, with shipyard capacity starting to normalize post-COVID, are you seeing any kind of push by the existing operator, the vessel operators with existing scrubbers, pushing you to retrofit.

Yes, we see quite a lot of that. You're right that the price spread started to widen again about 6 months ago. It has been increasingly widening until now, making the business case for marine scrubbers better and better, I would say. It always takes some time for a market to recover. I mean, when you start to see that price movement, ship owners begin to get interested in scrubbers again. They make a decision. They find the shipyard. They find the scrubber manufacturer, and all of that takes time.

So I would say, it's probably only in the last few months, we have seen a real increase in orders available in the market, and that is a continuing trend. But there is definitely a lot of interest for retrofits again.

Is your order composition at similar levels pre-COVID on scrubbers?

I would say the order composition is that we see smaller orders available. So typically, 1, 2, 3, 4 units. What we saw pre-COVID was a much bigger box of orders. So 10 systems here and 15 systems there. We now see that we see those inquiries now. And if everything goes like it did 2 years ago, and we think it will, then these inquiries will turn into orders soon and we'll see, let's say, much bigger orders available in the market.

(Operator Instructions) The next question is from Jeb Armstrong, Clear Harbor Asset Management.

I wanted to sort of hone in a little bit on the comment you had on the acid scrubber market. You're talking about a $2.2 million order for acid filtration. I'm wondering if you could provide a little bit more color around that please.

Yes, it's basically -- so it's in the acid production. And in that production process, you get a lot of sediments and impurities in the acid. And what they're doing today is that they're using, let's say, filters of a lower quality and with a limited life length, which as they need to be replaced because the acid is very corrosive.

And what we can do with silicon carbide is that silicon carbide is chemically inert (inaudible) pH. So it can easily be used for acid filtration and it will last for a very long time in application. And on top of that, we provide a much finer level of filtration making the quality of the acids much, much better. So it's a combination, let's say, the reason why the customers want to buy is a combination of a better life length and also a much better filtration quality.

Is this related to either pharmaceuticals or the food industry? Or is this completely separate from that?

It's actually both. I mean, a pharmaceutical company is basically a big chemical plant. And also food and beverage, we use quite a lot of acids. So I'd say it's in that group of applications and we've said for a while that we will expand into. We said the food and beverage and pharmaceuticals are very attractive markets for us. We've been doing a ton of work on that and this is one of the first major wins in industry applications.

So it sounds like that even with all the other activities you have in your plate that the pharmaceutical industry is starting to open up to you as well. That's a pretty good sign.

It is indeed.

And then just wanted to turn then quickly to another acid issue and that's acid mine runoff. Is that something that there's been much discussion of or considering all the other activities you have going on right now that that's sort of like another option, another potential market at the moment is not a priority.

It's actually something that we are looking into. And as I mentioned, both in the press release, but also on the call, we have taken on quite a lot of sales personnel over the last couple of quarters. We have made significant investments into this. And the idea was to have more sales power obviously into the market, but also to have a more diversified company.

And we're beginning to see the effects of that. We now have sales personnel dedicated for food and beverage and pharmaceuticals. We have sales personnel dedicated for marine, other personnel dedicated for industrial applications, amongst all this mining.

So with that, let's say, focus we now have in several markets, we're also beginning to see the results on that. And mining is definitely still an application that we think that we have a future with, with our technology.

The next question is from Rodney Hathaway of 1492 Capital Market.

My question centers around inflation (inaudible) mining. Are you seeing any inflationary pressures in any of your cost components, input cost components? And the flip side, are you able to price accordingly your end customer and recouping any inflationary costs or any components price (inaudible) have you seen on the input side?

We are not seeing any supply issues. Most of the, let's say, components we use are really commodities and widely available. We have not seen a lot of price increases. So that has not been an issue.

In terms of pricing, well, I would say, probably throughout most of last year, there were a lot of companies like ourselves suffering from the economic effects from COVID-19. And there was a general lack of audience in the market. And as a result, I think competition was probably tougher than normal. And certain price pressure arising from that as well.

We now see that there are more orders available again. We see that there's less price sensitivity in the market, which is a great sign. So we're obviously trying to increase prices. But in terms of supply issues and supply and, let's say, cost, we have not seen any major issues.

We have no further questions. I'll turn the call back over to management for closing remarks. Please go ahead.

Thank you very much, operator. And thanks for everyone joining us on the call today. And I look forward to speaking with many of you again next during our next set of virtual one-on-ones, as Robert and the team at Lytham will be hosting meetings the week of June 14. So please get in touch with him to arrange a meeting.

I thank you all for your support of LiqTech, and I wish you a great day and stay safe. Thank you very much.

The call is now concluded. Thank you for attending today's presentation. You may now disconnect.