Flexible Solutions International, Inc. (FSI) Q4 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Flexible Solutions International Fourth Quarter 2015 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Dan O'Brien. Please go ahead, Mr. O'Brien. Daniel O’Brien: Thank you, Val. 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. And welcome to the conference call for full year 2015. First, let me describe the business and review the changes that have occurred in the past year after which I will move on to the financials. The NanoChem division. This division makes polyaspartic acid, TPA, a biodegradable protein with many valuable uses. It now represents approximately 95% of 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 the soil for several months, which has the effect of making fertilizer easier for plants to absorb. Because the plant extends less energy getting its nutrients, it has more energy available to produce valuable crops. In North America, the wholesale market for this product is over $2 billion a year, and most crops are able to use TPA profitably. Crop prices currently available to growers are well above the breakeven point for using TPA. 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 countries in the Nordic countries use TPA as part of environmental regulation. We are experiencing interest from forward-thinking oil-producing countries other than Scandinavia, and have reasonable expectations of gaining new customers over time. There's continuing research in the concept of TPA as part of tight oil and gas fracturing liquids. TPA is used as part of the fracking fluid and intended to prevent scale from destroying the permeability of the rock pores as well as its more known function of scale control in the piping. Plugged pores reduce well production. TPA has added value compared to existing fluid components due to its biodegradability. It does not need to be removed when cleaning used fracking water, and it demonstrates driller sensitivity to environmental safety, which can improve relationships with neighbors and regulators. Fracking has declined as oil prices have dropped, and we are seeing weak sales into this market. However, the industry is able to recover quickly if oil prices improve, and we're prepared to increase supply when needed. SUN 27. We've been selling this product for 2 years, and we're satisfied with the growth curve. SUN 27 is a fertilizer additive that reduces the speed of nitrogen fertilizer degradation in soil. Most soils contain the protein urease, which is an enzyme that degrades nitrogen fertilizer. Up to half the nitrogen applied to a field can be lost to urease activity. This is a significant cost to the grower and has negative environmental side effects. The size of the potential market for urease inhibition is very large. And nitrogen in various formats that can be protected by SUN 27 is applied to millions of acres of cropland each year. SUN 27 is equal to or better than competing products, and pricing is set to be very competitive at both the wholesale and the retail levels. SUN 27 has a lower freezing point than competing urease inhibitors, resulting in reduced storage problems, and we manufacture SUN 27 in the U.S. and sell it through the NanoChem subsidiary. It's available in multitruck load volumes and has been selling reasonably well. N Savr 30. As a result of our inventive work to develop SUN 27, we became expert enough in nitrogen conservation chemistry to formulate a solution to the second major cause of nitrogen fertilizer loss: denitrification. This is also caused by bacterial activity in soils. Warm, wet soils are the most prone. It results in oxygen being stripped from the fertilizer to leave nitrogen gas. The gas can't be used by the plants and escapes to the atmosphere. The gold standard for reducing denitrification is a DCD solution, and we have developed an excellent version. Sales in 2016 have been significantly larger than in 2015, leading us to believe that this represents a long-term business for us. At this time, we're manufacturing for distribution under trade names owned by our distributors as well as our pending trademark N Savr 30. WaterSavr. It may have had the breakthrough it has sought for years with the 2014 project in Wichita Falls, Texas. Flooding prevented us from repeating the 2014 sales in 2015, but unless the floods come again in 2016, we hope to obtain WaterSavr revenue from Texas this season. We're continuing our efforts in the U.S.A., Turkey, Brazil, Chile, parts of East Asia and Australia to sell WaterSavr. We're also pleased to hear from Lake Sahara, Las Vegas, that for the fourth year in a row, they are sure they saved money and plenty water. Water quality remains exactly as it was before the introduction of WaterSavr 4 years ago. And in addition, the endangered fish species population in the lake is larger today than the first year of use. Lake Sahara has confirmed they'll be using it again for a fifth season this summer. While this customer is small, their loyalty and continuity of use are valuable in showing prospective larger customers the safety, positive environmental profile and economic value of saving water with WaterSavr. Q1 and the rest of 2015 -- I should say '16. Agriculture revenue in the first 3 months of 2016 has been similar to 2015. We've noted an even greater trend to just-in-time orders this year compared to 2015, which could be related to both lower chemical prices and lower crop prices. This might result in larger Q2 agriculture sales. Oil prices remained low for a second straight year. We see stress is growing throughout the industry and expect to find it difficult to expand sales in 2016. We are working very hard to retain our existing customers and help them be as efficient as possible. WaterSavr sales. The true evaporation season just starts in April and May. So we're intent on closing sales in Q2 for delivery in late spring and through the summer. Given the half-dozen serious negotiations that are currently taking place, we are optimistic that we will report some successes in Q2. And on to the financial results. Sales for full year 2015 were $15.9 million compared with $15.9 million in 2014. The result was a gain of $1.51 million or $0.11 a share in the 2015 period compared to a gain of $403,000 or $0.03 a share in 2014. Subsequent to the year-end, a share buyback of 1,750,000 shares was executed at a price of $0.90 a share. This will have significant effect on the earnings per share figures going forward. The full year 2015 financials do not reflect the share-count change. Sales in Q4 were $3.73 million, down $230,000 compared to $3.96 million in the year-earlier period. Because of the outsized effects of depreciation, stock option expenses and onetime 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 the items I just mentioned from the statement of operations. For full year 2015, operating cash flow increased to $3 million and $0.23 a share compared to $1.54 million and $0.12 a share in 2014. Drivers of the increased performance include better margins, lower legal expansion -- expenses, improved product mix, further reduction in costs from shutting the Taber plant and currency gains from Canadian dollar weakness. The increase in operating cash flow allowed us to afford the January share repurchase and will fund our strategies to increase sales in the future. Detailed information on how to reconcile GAAP with non-GAAP numbers, such as this operating cash flow, is included in our news release of yesterday, which was March 30. The text of this speech will be available on our website by Thursday, March 31. E-mail or fax copies can be requested immediately from Jason Bloom at 1 (800) 661-3560 or at his e-mail, jason@flexiblesolutions.com. Thank you. The floor is now open for questions. Valerie, would you please take over.

[Operator Instructions] And we'll move to our first question from William Gregozeski from Greenridge Global.

Dan, you mentioned that the ag sales were difficult with the lower crop prices. Are you seeing that farmers are more willing to use the products now because of the net positive with the lower crop prices or is it harder because of the lower crop prices? Daniel O’Brien: I would say that, anecdotally, whenever farmers are feeling that their top line revenue is pressured, their immediate response is to look for ways to use fewer inputs rather than look for ways to improve their outputs. We don't believe that's going to be an insurmountable problem for us, but whenever there's headwinds, what happens is instead of losing customers or losing growth, you do slow down your forward motion. So yes, growers have a psychological response to lower than what they feel ought to be normal pricing. But this is where we get into psychology fairly deeply. The other part of the farmer's headspace is that he has already forgotten that his diesel prices has dropped in half, and his margins have increased from a result in input costs there. So I think it's a lot of a wash, and it's up to us to do a good job of putting our profit opportunity forward and get them buying.

Okay. Are you again seeing any potential interest from new distributors for any of the TPA products? Daniel O’Brien: Yes. There is interest throughout North America and several foreign countries. But I caution you that even after closing with the distributor, there is some trial-generation period because, no matter how many trials you have from the past, the first statement is that their soil is different and their water is different, and we can't really argue with that, but we do support them through at least a season of trials, which is after that season is when the significant sales start.

Okay. On the oilfield side, are you seeing declines year-over-year because of the low prices? Daniel O’Brien: We're not. This just sort of speaks to geopolitical situations. You and I as business people would say, oh, price of oil is down, let's pump less oil and wait for it to get better. An awful lot of countries who rely on oil royalties and revenues to keep their people happy don't see it that way. They say well, I guess we better keep the fields open and flowing, and to keep the field open and flowing, if you've been using TPA, you really need to continue using TPA because there's a significant risk that if you start switching chemistries in the middle, you'll have something go wrong, and if it goes wrong, then the revenue stream stops. So no, we're not seeing -- we're not losing customers, but we're going to find it harder in this environment to get new ones.

Okay. And then, last question is, you have 3 customers that make up 2/3 of your sales. Can you disclose what industries those customers are in? Daniel O’Brien: Oil, oil, agriculture. In that order.

[Operator Instructions] It appears that there are no further questions at this time. Mr. O'Brien, I'd like to turn the conference back to you for any additional or closing remarks. Daniel O’Brien: Thank you, Valerie, and thanks for a great call. Everyone who took the time to join us today, thank you very much. I look forward to speaking with many of you again in about 6 weeks' time when we will be able to talk about the first quarter and where we've gotten to by that time. Thanks a lot, and have a great day. Bye.

This concludes today's call. Thank you for your participation. You may now disconnect.