LiqTech International, Inc. (LIQT) Q3 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the LiqTech International Third Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. And it is my pleasure to introduce your host, Donald Weinberger, Managing Member, Wolfe Axelrod Weinberger Associates. Please go ahead sir.

Thank you, Kevin and thank you all for joining us for today’s conference call to discuss the financial results for the third quarter and nine months ended September 30, 2015, as well as recent business developments. Aldo Petersen, Chairman, and Sune Mathiesen, CEO will begin their formal remarks shortly. Before I turn the call over to them, let me remind listeners that following the conference, there will be an open Q&A session. You should also note that a replay of this call will be available starting at 3 PM today and ending on November 26th. To access the replay, please dial 877-660-6853 and enter the conference ID number 13616802. To access the number for the replay for international callers, the number is 201-612-7415 and the ID number again is 13616802. In order for all listeners to have an opportunity to ask questions, please limit your question initially to one question and one follow-up. After all individuals have had an opportunity to ask their questions, you're welcomed to ask additional questions. Now please bear with me for a minute as I read the forward-looking statements. The press release and conference call contain forward-looking statements. Although the forward-looking statements reflect a 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 in the press release and conference call. We therefore urge all listeners to carefully review and consider the various disclosures made in the reports filed with the Securities and Exchange Commission, including the risk factors that attempt to advice interested parties of these risks that may affect our business, financial condition and sales of operations and cash flow. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected. We therefore urge all listeners not to place undue reliance on these forward-looking statements, which speak only as of the date of this release and conference call. We assume no obligation to update any forward-looking statements in order to reflect any events or circumstances that may arise after the date of this release and conference call. Having dispensed with that, it is now my pleasure to have Aldo Petersen, begin the conference call with his introductory remarks. Aldo, please proceed.

Thank you, Don. And a good morning, and a good afternoon ladies and gentlemen and welcome to this conference call. Since our acquisition of Provital in July 2014 we think it worked on a significant change in our strategies, from providing filters and membranes to other system integrators we are now focusing on building systems to end-customers. This change has taken most of the year to implement and this quarter is the first quarter that reflects the delivery of larger systems to customers in a significant way. In the first half of 2015 our team focused on presenting new systems to end-customers and in that period our order base increased by close to $50 million. In the third quarter we have delivered a number of systems in the oil and gas industry, the maritime industry, to coal firing plants and other industries. We will continue as we now see in the fourth quarter to build our order base and we now have a very good integration between sales and system build capacity. As discussed in previous conference calls, our focus is to get a steady growth in sales based on a focus on specific systems and applications and our team has done a very good job in the third quarter to get a very good order base, but now significantly delivered a number of systems that has impacted our third quarter in a very positive way. Thanks to our CEO, Sune Mathiesen and his great team. This has been a good quarter for us and I'm now happy to turn over the conference to our CEO, Sune Mathiesen. Please Sune?

Thank you, Aldo and good morning to our listeners from the U.S., and good afternoon to all listeners from Europe. We're proud today to announce the following numbers for the third quarter. Net sales for the third quarter was $6.9 million, gross profit for the quarter was $2.3 million. The net profit attributable to LiqTech for the third quarter was $621,000. The composition of the revenue in the third quarter was as follows. Sales of membranes and systems amounted to $4.6 million and the sales of diesel particulate filters amounted to $2.3 million. As anticipated and earlier discussed the third quarter proved to be a quarter of improvement. The revenue of $6.9 million marks the highest revenue since the fourth quarter 2011 and the second best in the history of the Company. The net profit of $621,000 is a new record for the Company. Our results this quarter has been significantly impacted by currency translation effects. As a result, third quarter net sales at a constant currency were 85% higher than last year and net profit at a constant currency was 182% higher than last year. After a long decline in our DPF business, we’re happy to see that this quarter showed a significant improvement. We see an increased level of activity, not only on the Chinese market but also on our other markets. In the beginning of this fourth quarter, we’ve seen that the activity in the market remains on a high level. We believe that the general outlook for our DPF product has changed for the better. In the third quarter, we successfully delivered the $2.4 million system order we announced in January this year. This system is the biggest system we ever delivered to the oil and gas industry. We also commissioned two pilot systems for the oil and gas industry. Despite the lower oil price, we remain confident that we’ll see further development in our sales to this industry driven by a tightening legislation and an increased environmental focus around the world. We will continue our efforts to develop further partnerships in this industry and we believe that the robustness of our membrane technology is the perfect match for these demanding applications. Also in the third quarter we have seen a significantly improved level of inquiries from the swimming pool market. The new legislation in Denmark will come into force by June 30, 2017. We initially expected that we would have been the market react to this new legislation already last year. However, instead the market has been very slow waiting for somebody else to be first movers. Now we finally received the first project out for bidding and we are actively pursuing these opportunities. We’re also proud to announce that we have passed the necessary mechanical tests to obtain the NSF 50 approval for our swimming pool systems. This allows us to finally enter into the American market. In July 2014, we announced a $350,000 order from an agriculture company. The system was installed in August 2014 to filter seawater for an Atlantic salmon farm. Our system is a vital part of the bi-secure system that makes sure that no parasites, bacteria or viruses are instituted into the water. In old salmon farms sickness and death of the fish due to parasites and bacteria is very common and it causes big losses to owners and industries. Our system has now been into operation for more than one year and there has been no outbreaks of sickness. To our knowledge, this is the first time that any salmon farm has been able to operate for one year without any outbreaks of sickness. Based on this success, we’ve seen a very strong interest from agriculture companies around the world and we believe that this marks a breakthrough for our technology in the market. In addition to the performance in markets, we are still focusing on our other applications within water, water reclamation and heavy metal removal. We feel that we’re getting still more traction and we see increased interest and acceptance from all the markets we focus into. In the first nine months of the year, the order inflow was a record $18.4 million some of that order inflow has now started to materialize into revenue. However, it’s worth noticing that none of the $6.9 million order for a mining company we announced earlier this year has shipped in the invoices. We’re happy to see that our sales pipeline is constantly improving in both size and quality and we’re very pleased with our current order backlog which gives us good visibility on the coming quarters. The record order inflow this year is the result of hard work from our sales team. To continue the positive development and to support our aggressive revenue targets, we’re now in the process of expanding our sales activities. To significantly improve the order inflow revenue and net profit is a direct result of the new business strategy we formed last year. Our focus on sales of systems to a number of applications, where our technology has proven to be competitive and in many cases superior of existing technologies has been successful. The improvement proves to us that our decision to acquire Provital and become a provider of complete water treatment systems instead of selling only membranes was right. We’re still only seeing the illustrated results from this new strategy. However, we are very satisfied that the Company has now moved into profitability. We will continue our hard work to further develop our markets and products. We feel confident that we've now laid the groundworks for further success and we will continue our work to establish our technology and sustain that within our selected applications. This concludes my remarks, and I would now like to turn the conference to Q&A session.

Thank you. [Operator Instructions] Our first question today is coming from Eric Stine from Craig-Hallum. Please proceed with your question.

Maybe we could just start with fourth quarter and I guess specifically on the mining. Mining order that 6.9 I know that's going to be a swing factor in the quarter but wanted your current expectation for how you'll recognize the revenue there, maybe the split between 4Q and 1Q and then just kind of based on project schedules, how do you view fourth quarter sequentially versus third quarter?

Well, to take the mining order first Eric, this consists of a delivery of a membranes kits, so basically systems kits which will be delivered in the fourth quarter or is expected to be delivered in the fourth quarter. These kits account for about 60% of the order value. So, if everything goes to plan we would be able to recognize the revenue from that delivery in the third quarter. The remaining 40% is installation on-site and delivery of tanks and other equipment. And we expect to be able to recognize that revenue probably in the beginning of the second quarter next year. With regards to the fourth quarter as a whole, we earlier announced that we expected the combined quarters to be around $12 million and we still expect to be in excess of that.

Maybe just turning to cash, very good to see the cash collection after the end of the quarter, so it looks like potentially Q2 was a low point and you're starting to build there. Just curious could we talk through you mentioned it a little bit in the release and you've talked about a little bit in the past, but progress you're getting structuring these projects to be working capital neutral to positive and I mean are you getting push back from your customers or is that something that's going to be normal course of business going forward?

Well, obviously as we increase the business as we're doing now, this will put restrain on our cash position from time-to-time and we will have to be able to manage that. Having said that, we've structured our orders in the way that we receive substantial down payments to be able to handle the cash position and we do expect that we have sufficient cash to manage through this significant growth that we're experiencing. We do actually have access to credit lines to manage single orders, so if needed we will utilize that credit line but that is not something that we are doing right now.

Okay.

And Eric, I just want to add as we described in the second quarter conference call, the high focus on these larger orders with prepayments as we have seen with the order to South America that has now been fulfilled, the structure that we have on our mining payments is satisfactory against the cost of us building these systems. And it is a strong focus from the Company that we will enter into -- we now see significantly larger contracts, but also with very professional customers that understands the need for having a payment structure that allows a Company like LiqTech to build high quality systems. So, the focus from our financial department and from our sales department is very integrated and we up until now do not see a push back from the market of having to give very long credit lines to customers to pay. We'd have to say that we have not lost orders to potential customers because of our payment structure these payment structures seems to be acceptable in the market.

Maybe last one from me, just back to the mining order, I know that you still got to deliver on that, but when that's in the market I mean how do you view that as a reference site and do you expect, I mean how do you expect the growth to play out going forward, is it with that same customer or do you think it's based on in a certain region and in a more stringent regulations?

We know that this specific customer has a number of sites around the world, where they would need to do something similar like this. We also know that legislation is tightening as a whole around the world and this will be a great reference site to use for further orders for this industry. And of course it helps us that earlier this year we had the disaster in the U.S. from that mining company where they leaked a lot of water containing heavy metals. And something like this obviously helps us to get new legislation and new mandates asking for solutions like this. So, yes we expect this to be a great reference for us and also to help us to get additional business in this industry.

[Operator Instructions] Our next question today is coming from Joe Gomes from William Smith. Please proceed with your question.

Just on the order inflow I think you said for the first nine months it was about 18.3 million, which would seem to indicate that there is a little slowdown in the third quarter compared to the first and second quarters of the year. I was wondering if you might be able to give a little more detail or color to that as where order inflow -- what happened to order inflow in the third quarter and how is it looking here so far in the fourth?

Yes I can answer that Joe. It’s correct that the order inflow in the third quarter was slightly down from the average of the first and second quarters. If you average out first, second and third quarters, we average about $6 million per quarter. The reason why it slowed a little bit down in the third quarter is natural because almost all of July and August are vacation months in Europe and it’s normal for us to see a significant slowdown in the order inflow. We’re happy to see that we have started the fourth quarter strong and we expect that the order inflow will be back on same level as earlier this year.

And I was wondering if you might be able to talk a little bit more here on how things are going in China. I think we thought that that would be a real big driver here especially given some of the legislation over there and some of the incentives to get some of these orders placed I think it was before the end of this year. So can you give a little more color and detail there I appreciate it.

Yes, we see the Chinese market developing and we also see that mandates will now come into force in several other provinces. We’ve been able to secure some orders for China. However, we see that the next round of mandates that will now come into force will hopefully generate further business for us. We are working hard right now to establish further partnerships in China. We are working hard to get the LiqTech brand known out there. And also I have to say this is a new emerging market and we have all likes, like normally when you have new emerging market you have a lot of players in the market who is trying to bring into that new, new market. Right now we’re trying to go through these players and find the ones that we believe in, in the long-term and I believe that we will be successful in securing a number of these partners.

And just one last one from me, on Grundfos the pump company we had talked about running it past during the summer and having some results in mid-September just wondering where that all stands?

Yes, it’s running. Well, we’re still waiting for first results so hopefully it’s watched in the future Joe we’ll be able to share some of the results with you. We know that the pilot units will now be tested for several applications. One is the groundwater that we talked about earlier this year to remove manganese, iron, bacteria from the water. But one is also on a site where they reclaim the water so they take surface water which has been reclaimed for -- not for drinking water but water for technical use like toilet flushing and washing of equipment and so on and we will be tested for that application as well. So, hopefully later this year we can share some results with you.

Thank you. [Operator Instructions] If there are no further questions at this time, I'd like to turn the floor back over to management for any further or closing comments.

Yes ladies and gentlemen, thank you very much for attending our conference call today. We are as Sune has described very pleased with the results that we have managed to deliver in the third quarter. Our focus will be to continue the profitability of this Company and we believe that we have built a very good base to do that. So, after a period of integrating Provital into the LiqTech business we now see that we have a business model that allows us to be in control of our own sales and our own production and we have seen in the third quarter that this is going to give us the ability to enter into some very significant partnerships with end-customers and not with partnerships with potential developers of our product. This is a very satisfying situation to be in and our team will now work very hard to continue to deliver good results for our shareholders in the future. So, ladies and gentlemen thank you very much and have a great day.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.