Flexible Solutions International, Inc. (FSI) Q3 2024 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Flexible Solutions International Third Quarter 2024 Financials Conference Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Dan O'Brien. Please go ahead, sir.

Thank you, Jen. Good morning. I'm Dan O'Brien, the 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 2024. I would like to discuss our company condition and our product lines first along with what we think may occur in the remainder of 2024 and the first half of 2025. I'll comment on our financials in the second part of the speech. NanoChem division. NCS represents approximately 70% of FSI's revenue. This division makes thermal polyaspartate acid called TPA for short. It's 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. In 2022, NCS started food grade toll operations using the spray dryer we installed over the last several years. TPA is used in agriculture to significantly increase crop yield. It acts by slowing crystal growth between fertilizer ions and other ions in the soil. The result is the fertilizer remaining available longer for the plant to use. TPA is a biodegradable way of treating oilfield water to prevent stale. Preventing stale keeps oil recovery types from clogging. TPA is also sold as a biodegradable ingredient in cleaning products and as a water treatment chemical. In our food division, a special version of TPA is sold as a stability aid. SUN 27 and N Savr 30 are nitrogen conservation products. Nitrogen is a critical fertilizer that can be lost through bacterial breakdown, evaporation, and soil runoff. SUN 27 is used to conserve nitrogen from a tract by soil bacterial enzymes that cause evaporation. And N Savr 30 is effective at reducing nitrogen loss from leaching. Food products. Our Illinois plant is food-grade qualified, and we have received our FDA certification. We've commercialized one food product based on polyaspartate that was developed fully in-house. NCS now has a pipeline of five products, each with seven-figure revenue potential at the final stages prior to purchase orders. All of the opportunities have progressed in Q3, and we hope to be able to announce success by the end of the year or early in 2025. ENP division. ENP represents most of our other revenue. ENP is focused on sales into the greenhouse, turf, and golf markets. NCS sells into row crop agriculture. The mild growth we predicted for second half of 2024 is occurring and we expect this trend to continue in 2025. The Florida LLC investment. The LLC was profitable in third quarter. The better margins for this investment continued in Q3. The company is focused on international agricultural sales into multiple countries. In third quarter, we actually sold this asset for $2 million in cash and $800,000 per year for five years, a total of $6 million. Our purchase price was $3.5 million. The LLC has retained us as an exclusive supplier for five years and we hope to extend the contract even longer by being better than any competitors. We also retain our rights to share and the LLC profits during the payout period, according to our remaining ownership ratio. Structure of the sale resulted in an accounting loss of $385,000 applied to this quarter. When we begin receiving the delayed payments in Q4 of 2025 and turn 2029, the loss will change to a gain. The one-time accounting treatment reduced earnings for this quarter to $0.05 from $0.07. Agricultural products in the US are selling reasonably well, but crop prices are still not increasing at the rate of inflation. Growers are facing a conflict between rising costs and low crop prices. We feel that because our products help increase yield in some cases while reducing costs in others, then we will be successful in growing sales in 2025. Oil, gas and industrial sales of TPA were stable in Q3, and this is likely to continue through 2024 and the first half of 2025. Food division sales are expected to grow rapidly in first half of 2025, depending on how early in the period orders are received and any increased uptake for the existing food products. Tariffs. Since 2019, several of our raw materials imported from China have included a 25% tariff. International customers are not charged the tariffs because we have applied for the export rebates available to recover the tariffs. The tariffs are affecting our cost of goods, our cash flow, and our profits negatively. The rebates are extremely difficult to obtain, even though [Technical Difficulty] applications were more than five years ago. The total dollar amount due to us is well in excess of a million and it grows each quarter. We will persevere until we succeed in recovering our funds. The election increased the probability of additional tariffs. For US customers, we will have to raise prices as tariffs increase. For international customers, we are planning alternative methods to compensate and will also be much more aggressive in our rebate recovery actions. Shipping in inventory. Shipping prices are stable but higher than prior to COVID. Shipping times are reasonable on the roots we use. None of our raw products or raw materials shift through the Red Sea area. And we've ordered extra inventory to position on US soil ahead of January 20th, 2025. Raw material prices do not appear to be reverting to historic levels. Instead, they are stable and increasing with inflation. Cost and price increases even small inflation related ones along with the customers always takes time. We are negotiating price increases whenever we can. We believe that the some of the issues we faced last year, which resulted in lower revenue, lower tax flow, and lower profits for the full year, have mostly resolved. Progress is being made. We streamlined our operations by closing our Naperville R&D facility and moving all that work to our Peru, Illinois building. The exit costs from this action were completed in Q2 and the benefits became fully evident in Q3. Some small price increases have been possible. Several large new opportunities have been found in the food and nutritional market and are proceeding towards revenue early in the 2025 year. Therefore, we expect growth will continue in sales, cash flow, and profit for the rest of 2024 and on into first half 2025. GLP-1 drug production line. The drug compounding industry is a logical progression for FSI. So when a production line for injectable drugs became available at an extremely low price we bought, we intend to de-risk our possible entry by securing sales prior to further expenditure and by looking for partners. We will proceed only when we have reduced risks efficiently. FSI has progressed from good manufacturing practice to food grade and SQS certification and production over the last three years. We've developed the skills to build and operate clean room environments as part of our food and nutrition division. And we're comfortable that our skills are transferable to drug operations. Senior executives are spending portions of their time searching for customers and potential partners. There's no guarantee that we will succeed in either, but if we do, there's a very large revenue and profit opportunity. [Technical Difficulty] careful entry into this area [Technical Difficulty] extra availability of GLP-1 drugs. We remain extremely positive about this opportunity that finding advance orders for a court partner is critical to success. The financial results. FSI and its subsidiaries will continue to examine all our costs and economize where possible. Even more critical is obtaining new sales in the food industry to ensure that our wage and other base costs are spread over more revenue dollars. We maintained our growth in Q3 with better profits than 2023. [Technical Difficulty] ‘24 year and during the first half of 2025. Sales for the quarter, they increased 7% to $9.31 million compared with $8.72 million in Q3, 2023. Profits, Q3, 2024 shows a profit of $612,000 or $0.05 a share, compared to a loss of $718,000 or $0.06 a share in the Q3, 2023 period. Note that this year, the 2024 Q3 would have been $0.07 except for the one-time accounting loss on the sale of the Florida LLC. Operating cash flow. This non-GAAP number is useful to show our progress with non-cash items removed for clarity. For the first nine months of 2024, it was $5.91 million or $0.47 a share, up from $3.28 million or $0.26 a share in the same nine months of 2023. The additional factory space in Illinois. In the second quarter of 2023, we invested to acquire 80% of an LLC called 317 Mendota that purchased a large building on 37 acres of land in Mendota, Illinois. We are determined that 240,000 square feet is available for our use or for rental. The ENP division has moved all operations to 60,000 square feet of the building. A second tenant moved in during Q3 of this year. And the remaining 130,000 square feet will be rented when suitable tenants are found. Long-term debt, we continue to pay down our debt according to the terms of the loans. Working capital is adequate for all our purposes. We have lines of credit with Stockyards Bank for the ENT and NCS subsidiaries. We're confident that we can execute our plans with our existing capital. The text of this speech will be available in an 8-K filing on www.sec.gov by Friday, November 15th. Email or fax copies can be requested from Jason Bloom at jason@flexiblesolutions.com. Thank you. The floor is open for questions. And Jen, will you set everybody up, please?

[Operator Instructions] We'll take our first question from William Gregozeski with Greenridge Global.

Hey Dan, a couple of questions for you. On the gross margin side in the last quarter, you mentioned, because they were good in the last quarter and they're even better this quarter, that last quarter was kind of the top end. I mean, should we just look at what the third quarter was as kind of a max and it'll start going back to a more normalized rate or how do you think we should look at that? Dan O’Brien: I would suggest that the second quarter was a better median position. You've been watching us for a period of time since about 2003, I believe. So you've seen gross margins all over the map, but I think, and we're pretty variable based on the lifetime between when we obtain our raw materials and when our customer actually books the sale. So I think the best number for now would be Q2 rather than Q3.

Okay. On the balance sheet, the total debt has been increasing as has the cash. Do you plan to leave both of those there to have the cash for opportunities or might start paying the debt down faster? Dan O’Brien: Our debt doesn't necessarily have repayment without penalties and of course it's floating debt which has recently been going down along with the central bank decisions. We will probably keep the cash, at least most of the cash, for opportunities and keep paying down at the normal rate. If something changes, we will change direction. We are also making quite a bit more effort to get the best interest rates on our cash forwards.

Okay. And then the last question on the kind of the food initiative. You mentioned, possibly having contracts beginning of next year are for the four products that don't have customers right now. I mean, how close are you or what kind of progress has been made since the last quarter update on just getting those closer to contract? Dan O’Brien: What we're finding in the food and nutrition field is that customers who want to do business with us always want to do just one more test or one more iteration before they buckle down to negotiating the price and setting a contract. And that one more thing attitude is what we've been doing for the last three months and expect to be completing across the rest of Q4. We wish it wasn't so, but it appears to be part of the market in this vertical. So we're doing the jobs. Every time we reiterate a product, it does get better. But of course, everyone is much -- is very aware that money really talks. And so we feel we're getting very close to the end of this cycle. And we thought we were close at the end of last quarter and we're engaged in the one more thing merry-go-round.

Okay. All right, that's all I have. Thanks, Dan. Dan O’Brien: Thanks, Will.

And we'll move next to Tim Clarkson with Van Clemens.

Hey, Dan, excellent quarter again. Now, on this food -- new area in the food, let's go out a little bit further than a quarter. Let's go out a couple years. I mean, is there a potential if these new products hit that this could double the size of the company? Dan O’Brien: Tim, that's yes, that's what we're aiming for. The market size in these verticals is -- let's say the addressable market size is multiples of our current revenue and active margins. This is why we chose, well there are two reasons why we chose to move into this industry. The first one is actually protectionism related. Food and nutrition products in the United States are made in the United States, in most cases, for consumption in the United States. And that solves a lot of the geopolitical problems. If you have to bring products in from outside the US, the US customer ends up paying the tariffs because we pass them through. Not ideal for quality of life, but it's the way it is. The second reason is that this is a marketplace that's really very large and very varied, and we have a unique skill set and a unique equipment set that allows us, we believe, to be positioned for multiplying our revenue over the years.

Sure. Now, I know that in the initial product, the wine product, the big deal is eliminating crystallization so that you can move these wines at higher temperatures. Is that the advantage on most of these food products, eliminating crystallization, or are there other things you're looking at? Dan O’Brien: Well, each one is a separate segment. Some of the target areas we're looking at is, I can name them, not guarantee that these are things we're going to close, but we're engaged in sleep aids, we're engaged in products that could be utilized for hormone supplementation. We're looking at products that are the opposite of sleep aids, alertness products. So the wine product was one -- well, the one that got us started, and it's based on polyaspartates. So that's our internal decision. But what's coming to us in the other situations is contract manufacturing for people with other -- with ideas that they bring to us and problems that we solve for them. And essentially, what I mentioned to Mr. Gregozeski was, this one more iteration thing is a function of problem solving. When your business plan is to find customers who have problems that need to be solved, sometimes it just takes a little bit longer to get it to perfection.

Right, right. Now with these new products that you're looking at, would they have good margins? Dan O’Brien: Yeah, they'd be equal to or better than our current margins.

Great, great. Well listen, I'm very excited and hanging in there, so good work. Thanks, Dan, I'm done. Dan O’Brien: Thank you, Tim.

[Operator Instructions] And it appears there are no further questions. Mr. O'Brien, I'll turn the conference back to you.

Thank you, Jen. Everybody, thanks very much for joining us. There's a big gap until our full year speech in March. But look, we're going to keep working hard. And hopefully, I'll have some great news before then and during then. So thank you again. And let's get it closed. Have a wonderful Thanksgiving. Goodbye.

And this does conclude today's Flexible Solutions International third quarter 2024 financial conference call. Thank you for your participation. You may disconnect.