LiqTech International, Inc. (LIQT) Q2 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the LiqTech International Inc. Reports 2013 Second Quarter Financial and Operational Results Conference Call. All lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. (Operator Instructions) At this time it is my pleasure to turn the floor over to your host, Aldo Petersen. Sir, the floor is yours.

Thank you, very much and thank you all for joining us to today to discuss the current status of LiqTech and its future. In today’s call first of all, I will discuss the issues that many of you have asked and how the company is responding as well as to discuss the opportunities that lay ahead. As you have seen when we released our numbers, it is a sub-part results that we have posted today. It is a second quarter that have seen a lot of progress, but that doesn’t reflect in the financial numbers. Our sales force have been very focused on establishing some of these very large partnerships that we have seen established with companies like FMC, companies like Cemco, who represent Shell and who we now can see is going to be the future of LiqTech. The work that has been done has not reflected in the second quarter numbers and we see some offsets in delays in the order flow that we had expected for the second quarter. But we are very confident that we are on the right track and we will see a significant pickup in the coming quarters. We have improved our production output and efficiency very significantly in the second quarter after our new CEO has come on board, Mr. Finn Helmer, has worked very close together with will often addressing to improve the entire production platform and that has given us a huge improvement in the way that we are producing membranes that we are sure will have quite an impact on the margins in the future. We have also had our strong sales force being out in different numbers of countries establishing relationship with very large customers and I will now take the opportunity to go through some of the…

Thank you, Aldo. Good afternoon and good morning to everyone on the call. We actually look at LiqTech as a hi-tech company within the nano technology space and some of my discussion will reflect that. In my time, it’s now four-and-a-half months. I am focused on two key areas while reviewing our production predecessors. I have focused on ways to improve the quality, so we can ensure a uniform but also try new specifications on the product we deliver to the market, because the market is constantly looking for better performance. We have mature – a much tighter specification while the yield which is important over the last three months has been the same improved. And this will surely secure our market position in the future. I have actually also focused on how we can ramp up the production rapidly and but at the same time reducing production cost. And we have a treatment LiqTech has been able to find solutions to those challenges. We have improved production flow but of course at the same time, we have been able to reduce the production cost quite a bit. Based on the results from this process, we are confident that we can respond to the need to ramp up production quickly. And we feel that that will critical for us to meet the expected increase and long-term current sales activity. Looking on the research side, we have developed membranes with our membrane coating of 10 nanometer and 4 nanometers. This gives a pore size that are ten times smaller than the company have ever before made. The membrane is produced as a carrier with a membrane with coating layer that gives the filter a function. And this filter function we have done with factor on tender thereon. So over the next…

Thank you very much, Finn. And I just want to summarize before leaving over for questions that, yes, as you can sense and feel, we are disappointed about the revenue in this quarter. We are not discouraged. We firmly believe that this is revenue that will come in the third quarter and fourth quarter and as you have heard, we see significant signs that it’s picking up very rapidly. I have not talked about FMC, but I can say that we are ahead our schedule with FMC. We expect that FMC to be efficiently in production in the quarter that we are right in and that we have hopes that we will see a greater number of systems installed already in 2013 than we have expected. So, also, it shows that the strategy of establishing these firm partnerships is very crucial to the success of the LiqTech business model. I would also end up commenting on the development with Shell as most of you remember we had our first system in operation with Shell in the North Sea. This quarter that we are in, they have started testing for the second system out in Malaysia and we are also being advised that they have four other projects that they will start testing within 2013. So that is also an area of business that we expect to see pick up. But in essence, from following up on the last call, our expectations is very clear for the third quarter. We will be listed on the New York Stock Exchange. We will see growth in our revenue that will be substantial to where we are right now. We have managed to bring down the cost of our production and improve the quality and production, so that our scrap rate is still down which will improve our margins. We have established a new management that has been able to establish a very, very good foundation for LiqTech to continue to grow. So although, disappointed, we are very optimistic for the future. And with those remarks, I would leaver over the conference to any questions.

But before we – hello, Kara, can you hear me? Aldo can you hear me? Before we go on to that, we did not really read the forward-looking statements and we want to make that everybody understands that lot what was said is forward-looking statements. So let me just take a moment before you go to the Q&A to go through that. Although the forward-looking statements in this conference call reflect the good faith judgment of management, forward-looking statements are inherently subject to known and unknown risk and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Listeners are urged to carefully review and consider the various disclosures made by LiqTech in its reports filed with the Securities and Exchange Commission including the risk factors that attempt to advise interested parties of the risks that may affect LiqTech’s business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize or if the underlying assumptions prove incorrect, LiqTech‘s actual results may vary materially from those expected or projected. Listeners are urged not to place undue reliance on these forward-looking statements which speaks only as of the date of this conference call. The company assumes no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this conference call. And having said that, let us proceed with the Q&A. Kara, please go ahead.

Thank you (Operator Instructions) And our first question comes from Gary Zwetchkenbaum from Palm Tree Consulting. Please state your question. Gary Zwetchkenbaum – Palm Tree Consultants: Good morning Aldo, Finn, how are you today?

Good morning, Gary. We are fine, how are you? Gary Zwetchkenbaum – Palm Tree Consultants: I’m doing great.

Good. Gary Zwetchkenbaum – Palm Tree Consultants: I wanted to focus on the area that you talked about with the flat sheet membranes. In your report you mentioned that the flat sheet membranes we used as a pre-filter for reverse osmosis, generating drinking water from salt water, desalinization. In there, you quoted that you had, you had quoted 10 major projects with significant revenue, if I am quoting correctly. My questions are can you be more specific on the value of these orders, okay, then can you give us an idea, when revenue might begin from this area and the potential for 2013, 2014 and beyond, then a little bit about the margins. And then, if I am not mistaken, the turnaround time in this area for orders on the flat sheet is significantly less than what was happening regarding FMC and projects like that. So if you could focus on that for me, I’d greatly appreciate it.

I can try, Gary, it was a wide question, but a good question. Yes, as you probably sense, our excitement about flat sheet membrane is quite significantly, because it was a product that we put to market late in the first quarter and the interest in this business area has been very, very significant and it has opened up a new range of customers for us and yes, we have more than 10 potential customers in this area where we have closed out for than $20 million already at this stage. The interesting thing with the product is that it fits into changing existing membranes in existing systems and this is the huge difference to what we are working with, with many of the system integrators where they are building new systems. So, FMC is building a complete new system that has not been used before, has not been established which means that there is a number of issues that needs to be solved before they have a product in the market and this is why we have spent or they have spent, more than three years on testing our membrane, and how our membranes sort of coincide with the technology that they need to use for the flow back in fracking. So a three year lead time on a new product for fracking, we saw the same lead time for the Shell rig in the North Sea. And this is in general, we have a very long lead time on getting new systems using our membrane technology, where flat sheet membranes are different is that we can replace these sheets of membranes into existing structures. And this is why we see a significant lower intake on getting orders in this market and this is why we are very confident that we will have significant orders in 2013, but much higher volume of orders in 2014. So in general, we will see that the sales process is much shorter between two to six months for replacing the existing systems. But also with the potential of building new systems based on our flat sheet membrane technology, so that we will see both replacement revenue but also seen new system revenue which is why that we believe that the revenue stream that we have quoted on will be quotes that will bring in business within the next three to eighteen months’ time period. And that is significantly shorter than what we have on our cylinder membranes that goes into new systems. Gary Zwetchkenbaum – Palm Tree Consultants: Is it too much to ask and say that, some of this business could begin as early as the next two or three months and what kind of ramp up, in other words, 2013, when you are into 2014, what kind of ramp up would you get? What kind of margins, how much could this business be in the next year or two? And how much of your total sales could this be?

Again, it’s difficult to say exactly, but I think that, most people can understand how excited that we are that we have come up with a membrane technology that can significantly bring down cost in the desalinization process. It is of course the big quest of being able to do much more desalinization than we have as of today and having these membrane technologies to be a part of these systems in the pre-filtration of desalinization. It opens up huge markets. I can comment on the interest that we have from Saudi Arabia we have been quite taken back about the interest and the indication of business that they have, I don’t think we have a clear enough view of what it can be. We have indicated that we have quoted more than $20 million. We are sure that we will see some of that revenue come in, in 2013 and a much higher revenue stream coming in 2014. But, to be able to participate, not just produced water, not just in waste water, but in the quest that we in 2011 received $2 million from the Danish Government to start working on the reverse osmosis and being able to come up with desalinization product. We feel that these flat sheet membranes is a half way step there and in combination with the technologies that are available is reducing the energy cost quite significantly and therefore opens up a huge market, not just in the Middle East, but also in other areas of business. I think that is as close I can answer your question Gary. Gary Zwetchkenbaum – Palm Tree Consultants: Well, thank you. It seems that the flat sheet membrane area is very exciting and it’s coming along very well. Thank you very much.

Thank you.

Our next question is from Walter Schenker from MAZ Partners. Please state your question. Walter Schenker – MAZ Partners: Hi, Aldo. Have you – or are you converting the US facility to do liquid filtration as well as you look to the ramp is the first question?

I think, you can answer that question, Finn. I know you are going to the US on Sunday, so. The answer is, yes, but Finn can elaborate on that.

Yes, currently, we are preparing to ramp up the liquid filter production in Denmark and then we will over time transfer all the Diesel Particulate Filters production to the US as step one. And when the market development is in the level where we need to use the production facilities in the US, we will take some of that production facility into liquid filters. But currently we have prepared to more than double the production over a three months period. So when the orders come, we are also ready to double up the production. Walter Schenker – MAZ Partners: But then does that require additional ovens or is that’s just an event before you, long-term?

Well, the first toppling of production to and that would not require more ovens. But when we get to the second toppling which we are also preparing when we will need to add ovens because of course they have the limiting factor. But currently, there are not and I don’t think they will be over the next nine month time. Walter Schenker – MAZ Partners: Okay and lastly, with all of the opportunities and the substantial benefits from the product, can you give us some sense as to again, maybe a competitive question, what sort of gross margin or manufacturing margin given the benefits of the product, we might be able to get in some of these markets?

I think you have known, and we have previously stated that we have currently a gross margin on membrane technology, that is close to 50%. I think we can say that the work that has been done in the last three or four months is improving that margin. We have a goal that we can get to a 60% plus margin within 2013 on the improvements that we see on the production facilities that we have right now. So we will definitely see improvement on margins it has been a huge quest for us to bring down the scrap rates that we have had on membranes and the team has done a significantly good job in the last three four months in that line. Walter Schenker – MAZ Partners: Okay, thank you.

Thank you, Walter.

Our next question is from Otis Bradley from Gilford Securities. Please state your question. Otis Bradley – Gilford Securities: Two quick questions, number one, and how many shares does Alexia have left to sell? Number two, you’ve mentioned that the flat sheet membrane can bring down cost significantly, what advantage to the customer, how much lower prices will you be able to sell to the customer then the existing technology having today?

Again, on a wide range I will answer your second question first, Otis. On the wide range of technologies that we have in membranes, we currently have on the big cylinders that we sell. We have a price that is in the range depending on quality between $4,000 and $10,000. Again, as a new product, that can significantly solve issues. Our experience is that, when for example discussing with FMC and other large partners, the majority of those partners is not putting pressure on us on price, because we are solving specific areas of problems that they are having, because the silicon carbide membrane has some unique qualities that will enable significant improvement from these customers. So, it is not a price pressure right now, but, yes, when we sort of get into significant production volumes, we will see some kind of price competition and I think that, if we can get our margins to 60% plus, we will also have an even more competitive membrane technology against other ceramic membrane technologies that we have out there. But currently, that’s not what LiqTech is seeing. We are not seeing price pressure. The pressure that we have seen is the significant test time that are involved using our membranes. Second question on the financial advisor that we hired to do the listing for LiqTech back in 2011, I am actually not too familiar with the number of shares that are available and that is not true, because my CFO has just send it to me, it’s 1, 299,792, 000 shares left with (multiple speakers) the other day. Otis Bradley – Gilford Securities: Aldo, on my question about cost, I was really referring specifically just to desalinization, where…

Okay, yes, again, our membranes is in the tests that have been conducted eliminating about 40% of the energy cost related and since most of you know that the majority of the cost involved in desalinization is related to the energy cost. We are seeing no price pressure on the flat sheet membranes, Otis. Otis Bradley – Gilford Securities: That’s the answer I was looking for. Thank you.

Thank you.

Our next question is from Gregg Hillman from First Wilshire Securities. Please state your question. Gregg Hillman – First Wilshire Securities: Yeah, good morning gentlemen. I wonder ask you about traditional waste water surge treatment and the flat disc that you are using, what kind of tests are going on there? And what’s the improvement over the existing technology?

Again, we have a number of tests, especially in the large coal electricity companies. So, both in the Middle East and Europe, we are doing test with the flat sheet membranes in this area and the result is, that it brings down the output cost off the clean water quite significantly. Finn, I know that you have some numbers regarding the test that we are doing in Germany.

Yeah, but as I also understood the question is, it was whether discs and on the disc, when they are using a system, we see a reduction of 80% of the energy used and secondly the disc seems to able to concentrate the materials to a much higher level that you have been able to dissolve. And that concentration makes it possible to continue with other treatments of the material from waste management. So, we are seeing again, two things we can concentrate it higher than never before and at the same time we can reduce the energy cost for doing it. Gregg Hillman – First Wilshire Securities: Okay. It’s my understanding that with this you quote too often, and I think that your discs are more highly viscous, the surface, so they get clogged up often is that correct?

Well, actually, the way they are constructed and the operation in the system means that they are clogged less than you will see in a normal system and that’s the whole idea about the disc as such. And what we are seeing is that the clogging is much less you will see in a normal system. That’s why we can make the higher concentration of solids in the fluid. I mean, it gets to a paste more than it is a fluid when we are finished with it. Gregg Hillman – First Wilshire Securities: Okay, thanks very much and just finally, I mean, you talked about pricing before. How you know how to price these products when they have been fully tested overall lifecycle in terms of the benefit to the customer?

Well, actually, pricing is depending on the system that you are working in because, it’s an overall cost of ownership that really worries the customer. So it has to be a balance what is the cost of ownership for a system and then you can actually balance your price for the product based on that. And that’s how we are addressing new markets like this one. Gregg Hillman – First Wilshire Securities: Okay, thank you very much.

Thank you. I think we have room for one more question.

There appears to be no further questions at this time.

Okay. Gentlemen, I want to thank you so much for attending our conference call. We are looking forward to be in touch. On a final note, I will be in the US. I will be in the Denver area on August the 27th and 28th, I’ll be in Boston on the 30th and I will be in New York on the 3rd, 4th and 5th. So if anyone would be interested in further discussions, I would be more than willing to meet up with you guys and I would like you to get in touch with our higher company who can set it up. So, gentlemen, thank you very much and have a great day.

Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time and have a great day.