LiqTech International Inc (LIQT) 2020 Q4 法說會逐字稿

Good day, and welcome to LiqTech International reports its Fourth Quarter and Fiscal Year 2020 Financial Results. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Thank you very much, Tom, and good morning, everyone. Thank you for joining us today to discuss LiqTech International's fourth quarter and fiscal year 2020 financial results. As Tom mentioned, I'm Robert Blum of Lytham Partners, and I'll be the moderator for today's call.

Joining us on the call from the company is Sune Mathiesen, the company's Chief Executive Officer. Before I turn our 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 and that a transcript of the call will be available on the Investor Relations section of the company's website shortly.

Before we begin with prepared remarks, we submit for the record 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 the conference call. The company, therefore, urges all listeners to carefully review and consider the various disclosures made in our 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, sales of operations and cash flows.

If one 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, urges 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.

That said, let me turn the call over to Sune Mathiesen, CEO, LiqTech International. Sune, please proceed.

Thank you very much, Robert, and good morning to all of you, and thank you for joining us today. I've been looking forward to speaking with you today. We made a couple of exciting announcements this morning, and I've been looking forward to providing some more details on those.

The 3 primary drivers of growth we discussed during our Investor Day in January 2021: a rebound in the marine scrubber market, the water treatment solutions from our joint venture into the oil and gas market and the black carbon reduction market, particularly within the Chinese marine industry, are all increasingly gaining traction and providing enhanced optimism that fiscal 2021 will indeed see growth and a return to profitability for LiqTech.

This optimism has led us to make the decision to move forward with plans to build a new manufacturing facility in China, which we announced this morning. The manufacturing facility will service the estimated $26 billion black carbon reduction market for ocean growing and inland vessels and also function as a service center for our marine scrubber products.

Tightened legislation in the marine industry has created a new opportunity for our diesel particulate filters to reduce black carbon emissions from shipping. As you may recall, for 20 years, LiqTech has been a leader in the development and production of DPF to remove particulate matter from the exhaust gas of internal combustion engines.

We have now adapted this 20-year history in [liquid] DPFs and have developed the product specifically for plant carbon reduction in (inaudible) and has moved to commercialization with a very large potential pipeline. As a background. China has taken a lead in reducing black carbon emissions from inland and ocean-going vessels. The new mandates in China have created a $600 million opportunity for ocean-going vessels and a $26 billion opportunity for inland vessels. But this will, longer term, not just be a China opportunity as we have already seen new mandates in several European countries and the Artic region. We ultimately believe the IMO is likely to implement a new global mandate.

Today's announcement to begin construction of a new manufacturing facility in China is an important and exciting step towards capturing a significant share of this market. The manufacturing facility will be majority-owned and operated by LiqTech, but we will also have local [investments]. We realized that in order to be successful in operating in China, it's important to understand the culture and to have good contacts to the authorities. It is, therefore, my great pleasure to welcome Hans Halskov to our team as Managing Director of South China operations. Hans is Danish, but has been living and working in China for more than 15 years, (inaudible) and is Counsel General and Trade Commissioner for the Danish Foreign Ministry.

For the last 7 years, he has successfully been running his own company with a focus on M&A, and advising companies and doing business in China. He speaks Chinese, and he will be relocating to China when the construction starts. I'm convinced that Hans is the right person to lead our Chinese operations, and his experience will be important to keep the right balance between the Western and Chinese cultures.

The new facility is ultimately expected to have a capacity of approximately 5 million liters of DPFs. This compares to a current capacity of 1 million liters in our Copenhagen facility. We expect the first stage to be operational in 18 to 24 months.

The new facility in China comes on top of an already completed expansion in Copenhagen last year and a further capacity expansion we announced earlier this year. And in all honesty, the obvious question is, "Hey, Sune, you just finished the year with the $22 million in sales. Why are you continuing to ramp up your manufacturing capacity?"

And the answer is hopefully quite simple. We see a pipeline and expectation of significant orders that will lead to the need for this capacity across all aspects of our business. We did not enter into these transactions lightly. There was a thorough analysis and discussion, including risk to orders and other surrounding factors. While there never is a crystal ball, I can assure everyone that we have a very high degree of confidence in the pipeline of all our various businesses and believe this was a highly prudent move to make to not only increase our Denmark capacity but to move forward with the China manufacturing facility as well. We look forward to keeping you all posted on our progress.

To aid in the financing of the [thorough] expansion, we entered into a $15 million convertible note private placement with a single institutional investor. The note is convertible at 120% to market, and the notes will mature on October 1, 2023, unless earlier repurchased, redeemed or converted.

Let me now turn to our oil and gas segment for a moment. We gave a great amount of detail at our Investor Day, so I'll keep my comments relatively short. From the comments I just made on capacity, it becomes no surprise that we continue to have high level of optimism on our oil and gas joint venture focused on deployment of water filtration systems being built based on LiqTech's proprietary silicon carbide technology and operated by the joint venture under long-term water supply agreements with oil and gas producers in the Middle East.

Similar to China, the market in the Middle East continues to be driven by tightening the deflation towards more sustainable solutions by water scarcity and production challenges along with other technical issues presented by the underground structure in the region. As discussed at the Investor Day, while travel restrictions have made it difficult to conduct certain site assessments, which has caused a delay in the expected delivery of the first contract, we do maintain our confidence that oil and gas will be a significant contributor in 2021.

We're currently in the final stages on more than a handful of different projects totaling [$700] million in potential revenue. Again, I look forward to updating many of you in the near future on our progress.

And now an update on the marine scrubber market. Once again, we provided a significant amount of detail at our Investor Day, but let me just reiterate a few points. The marine scrubber market continues to show signs of improvement following the global economic effects of COVID-19. The price spreads between bunker fuel and low sulfur fuel, which remained lower than $50 throughout March of 2020, have recently expanded, and the spread is now consistently above $100. The company believes the business case argument supportive of marine scrubber installations ranges between $70 and $80.

Given the recent return to more normalized price spreads, we have now seen a renewed interest in scrubbers. Further, we continue to see a move towards closed-loop systems compared to open-loop systems. In November 2020, the European parliament voted to out-phase and ultimately ban open-loop scrubber systems. To date, more than 120 ports worldwide have already banned open-loop discharge. And there are some important meetings in the IMO this week and in June, to discuss amortization of open-loop discharge regulations, in other words, to discuss a global open loop [ban].

The company believes there are more than 4,000 vessels currently installed with open-loop scrubber systems that will ultimately need to be converted to close-loop systems by adding a water filtration system. Further, the company believes there will be 4,000 to 6,000 new scrubbers installed through 2025, that will all likely be installed with close-loop filtration systems, such as the ones supplied by LiqTech. Overall, this represents a potential market of up to $4.8 billion.

For 2020, the company believes that its systems are currently installed on approximately 50% of all closed loop systems. There are still more inquiries in the market, which provides us with confidence for return to strong growth in our marine scrubber business.

So to wrap things up, let me just say that our confidence in the future at LiqTech is as high as it has ever been. We are moving forward with important and exciting positions to increase our manufacturing capacity in Denmark and to build a plant in China, to handle the expected change in demand for our filtration products we see across a variety of industries. The pandemic clearly made the revenue trajectory we were on, leading from 2019 and into 2020, look somewhat disappointing. However, we used the year to put in place building blocks that should significantly alter the forward trajectory of LiqTech for the positive in the years to come.

We are no longer just a marine scrubber filtration company that will largely be dependent on just one industry. We are a diversified company with multiple multibillion-dollar addressable markets in a wide variety of industries. We have the technology, the products, the sales channels, the joint ventures, the environmental tailwinds and the manufacturing capacity to hopefully achieve significant shares of these large markets. We look forward to 2021 with high enthusiasm.

And having said that, let me now turn the call over to your questions. Operator, please?

(Operator Instructions) And the first question comes from Eric Stine with Craig-Hallum.

Just curious, if you could start with the facility in China, I mean, how important is it to signal to the market that you are bringing that online in terms of securing orders or commitments as that market develops?

And then I'm just curious, obviously, high level of confidence there. I mean, is there a customer or customers that give you the visibility, maybe it's not an official contract or anything, but give you the visibility that, that will be spoken for once it comes online?

Well, it's obviously a huge decision to make plans to build a facility in China. That is a big investment, and it's a huge decision to even do that.

We have carefully evaluated the market. We have spoken with our customers and partners in the market. And yes, the answer is yes. We see orders in the market now. And yes, it is essential that we would have local manufacturing not to secure the first orders because we can deliver those from our Danish factory. But longer term, it will be instrumental for us to be -- have local manufacturing. It is a demand from the government-owned companies that we'll be dealing with. So there's no way around it.

Having said that, it also makes sense for other reasons. The manufacturing in China is low cost. It will make us even more competitive, and it will increase our margins. So it's a combination of all these [considerations] that have now led us to make the decision to establish this manufacturing facility.

Got it. And then in terms of the cost of the facility, I mean, is it pretty safe to say that the convert that, that is earmarked for it? I mean, is it kind of a one-to-one investment there? Or is that something that would be more supportive of some [project] financing and that potentially it's a bigger CapEx number?

Yes. So the total investment is a big investment. We have already secured local investors, as I mentioned in my prepared remarks. We are negotiating financing with, amongst others, the Danish government. So there are a number of investors already in place, investors that we are still discussing with and financing opportunities that we are now in the process of sorting out.

Yes, it's a big investment, but we did a lot of work already, and it's investment that we feel that we can handle.

Okay. But a bit bigger and it sounds like then what you announced today in terms of the convert.

Yes, it's bigger than the convert. That is right, and not necessarily our part of it though. But the total investment is bigger than the convert.

Understood. Okay. And then last one for me. You just mentioned that this black carbon opportunity, you expect the world -- potentially worldwide or regulations worldwide. Is that something that you think you would be able to supply from this facility that you're embarking on? Or would that be something that would require additional facilities around the world as it develops?

No, the plan is to supply from this facility. Or in other words, the long-term plan is to have this DPF facility in China, where we have the low-cost manufacturing. And then kind of turn our Danish facility more into a dedicated membranes facility. That will provide us with a number of, let's say, advantages in terms of the manufacturing. You can have specialized equipment as the products are not the same and will be good for quality optimizations and cost optimizations.

So the plan is to supply the global black carbon reduction market out of the China facility eventually. And we are seeing a lot of developments on the black carbon adoption market. We have seen several European countries now implement regulations on inland vessels. And we think we'll see more and more new mandates throughout the world and eventually a global mandate from the IMO.

A recent development is that IMO implemented a black carbon reduction mandate in the Arctic region, and we think that will spread out globally.

The next question comes from Rob Brown with Lake Street Capital Markets.

On the China facility expansion, what will that facility manufacture? Will it be product assembly? Or will it actually be membrane production as well? And maybe could you give us a sense of what the capital is going to go for? Is it furnaces? Is it buildings? What's the sort of facility operation is going to be?

Yes. There's basically 3 parts of our marine products. One is the DPF itself, the diesel particulate filter itself. That would be manufactured in China. Then there is a catalytic coating, which will be manufactured in Denmark. And then there is the canning of the filter itself, which is basically bending and welding metal, which will be done in China as well.

We have no plans whatsoever to manufacture membranes in China. We are very protective of our IP, and that will continue to be work that we do in Denmark.

Okay. Okay. Great. And then on the black carbon market, what's sort of a typical selling price per ship that you can get?

It depends obviously on the size of the ship and type of the ship. If you look at the inland vessels, which is the big part of it, it's around 130,000 to 140,000 ASP per vessel. And the ocean-going vessels are somewhat more.

Okay. Okay. Great. And then just switching back to the scrubber market, how do you see that playing out this year? Have you seen orders ramp up at this point? Or are you still a little bit uncertain so over time instead of [uplift of the] back half (inaudible), but maybe help me understand the ramp rate of the scrubber market at this point.

So following the increase in the price spread between low sulfur and bunker fuel, we have seen more interest in scrubbers. We see more and more inquiries out there. We see orders in the market. And obviously, all of this leads to eventually to increased order activity. But admittedly, the order activity still remains at a lower than pre-pandemic level. But given the inquiries we see in the market, the activity we see in the market, it leads us to believe that we see a more normalized situation in the second half of 2021.

The next question comes from Cameron Lochridge with Stephens Inc.

I was hoping we could start just circling back to oil and gas. It sounds like there's been -- you're seeing a little bit maybe of a delay in some of the contracts or orders through that JV that you have in the Middle East. Just going forward, how should we think about the timing of those orders for oil and gas? And does that mean that we might see some revenue that was maybe expected in '21 get pushed to '22?

And then secondarily, if you could just maybe size for us the opportunity of the potential pipeline in oil and gas, that would be helpful as well.

Yes. So first of all, yes, there has been a delay in the expected orders from oil and gas. And the delay is related to COVID and the travel restrictions and the way people have been working from home and so forth.

There is no change in our revenue expectations for 2021 though. The orders that we thought we were going to deliver this year, it still looks like we can do that. And the orders that we thought we would book still looks like we're going to book. So in other words, we always knew that we're going to book some significant orders in 2021, which we still think we will.

We will see some revenue but most of the revenue was always planned to be in 2022 and onwards. So no changes there.

Okay. Got it. And then just in terms of the size of the potential pipeline there. I think I heard you say something about a few hundred million dollars in your prepared remarks. But if you can just maybe clarify that, that would be really helpful.

Yes. So we're currently in the final stages, negotiating more than a handful of projects. And the total amount of those are [several hundred million dollars]. And how that breaks down into the individual years, it's a little bit difficult to say at this stage. In other words, it depends on when we actually book them this year.

But it's, for us, very, very big orders, some of them multiyear projects and I would say, transformative for the company.

Got it. And then just if I could squeeze one more in. In terms of 1Q, could you just maybe help us frame expectations for what you expect revenue to be, just qualitative or maybe flat up or down compared to 4Q? Anything you could offer there would be helpful.

Yes. We think that it looks pretty flat compared to the fourth quarter.

The next question comes from Liam Burke with B. Riley.

Sune, can I just -- there are a couple of things that you discussed in the call. Scrubber market interest is ramping. You're looking at a second half [of that]. You expect the orders in oil and gas to track pretty much as you've laid out in the -- on your Investor Day.

Now I'm looking at actual revenue contribution. Do you expect oil and gas to exceed the scrubber-related sales in 2021?

Yes, we do.

Okay. Great. Okay. Good. And there was a large scrubber manufacturer announced that they are developing carbon filtration to a modified scrubber system. Have you been in any discussions with them about using silicon carbide?

Yes. We know that a lot of companies are right now focused on black carbon reduction as we are. And as we discussed in the past, there are several ways you can achieve the new limits. It can be done with diesel particulate filters. It can be done with EGR systems and many other technologies. It's a huge potential, $26 billion alone in China. And we know that all of these technologies are probably going to have a place in the [market]. We are focused on developing our technology together with our partners in China, which we have been working for several years. We think the solution that we have will be very competitive compared to other available technologies. And then we can demonstrate a lot of experience compared to other players in the market as well.

But to answer your question, Liam, we are focused on developing our technology together with our Chinese partners that we have been working with for scrubbers for the past 3 years.

(Operator Instructions) The next question comes from Dennis LaValle with Lantern.

I have a question concerning the Chinese facility. Are you dealing with the same people that you were dealing with like 4 years ago there?

No, [definitely not, Dennis]. We learned a lot in China, and I think we got burned a few times in China. With the scrubber market, we kind of had a new start in China.

We've got new relationships with very big shipyards with big shipowners in China. And we have now successfully had the same partners in China for 3 years. And in fact, China is our biggest market for marine scrubbers and has been for the last few years.

We are doing this at a position of strength. So meaning that we will be the majority owner of this facility. We will operate the facility. We already found the Managing Director for this facility. And any investors that we might invite into this, they will not have any decision power. But we'll be investing in the business case. But I can sincerely promise you that we are not looking to the same people as we did 4 years ago.

Okay. And then if I understand from your earlier commentary, all the IP and trade secrets will be kept in Copenhagen, and it will basically be a job shop, if you will, in design of the systems and have nothing to do with the silicon carbide production and manufacturing.

You are absolutely correct. The pieces we play on manufacturing in China, they are commodities. It's bending of metal. It's welding of metal. It's the DPF filters, which are also a commodity. But again the real IP will still be manufactured in Copenhagen and, of course, to protect the IP.

So you're absolutely correct. We are very aware of and very protective of our IP, so we will take all precautions in making sure that we don't risk Chinese companies copying us on this.

Very good. And I appreciate the fact that you understand the concerns of China.

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Sune Mathiesen for any closing remarks.

Thank you very much, operator, and thanks for everyone joining us on the call today. I look forward to speaking with many of you again already next week during our virtual presentation and one-on-ones. And I hope that we can all visit face-to-face again in the near future. In the meantime, have a good day, and stay safe. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.