LiqTech International, Inc. (LIQT) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to LiqTech International Third Quarter 2017 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. I would now like to turn the conference over to your host, Mr. Donald Weinberger of Wolfe Axelrod Weinberger Associates. Thank you, you may begin.

Thank you, Melissa and welcome to all of you to today's conference call to discuss the financial results for the third quarter and nine months ended September 30, 2017 and recent business developments. Aldo Petersen, Chairman; will begin the formal remarks shortly. Before I turn the call over to them, 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 starting today at 3:00 P.M. and ending on December 5, 2017. To access the replay, please dial 877-660-6853 and enter the conference ID number, 13673141. To access the number for the reply for international callers, please dial 201-612-7415 and enter the same ID 13673141. In order for all the listeners to have an opportunity to ask questions, please limit your questions initially to one question and one follow-up question. After all individuals have had the opportunity to ask their questions, you're welcome 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 contains 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 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 Risk Factors that attempt to advice interested parties of the risks that may affect our business, financial condition and sales of the operations and cash flows. 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 this date and the date of the release and the 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's my pleasure to have Aldo Petersen begin the conference call with his remarks. Aldo, please proceed.

Thank you, Steve, and a good morning and a good afternoon, ladies and gentlemen, to this conference call to discuss our third quarter results. This is a time where a lot of things are happening in LiqTech and we are seeing significant approval of the technologies that we have been working on for long time. I think I will turn over the conference to our CEO, Mr. Sune Mathiesen; to discuss the recent result and renewed business development in LiqTech. Sune, please?

Thank you very much, Aldo, and first of all, a warm good morning to all participants from the U.S. and good afternoon to participants from Europe. Thank you very much everybody for dialing into this LiqTech International conference call to discuss the third quarter 2017 results and the outlook for our business. Our results for the third quarter were largely in line with our expectations, and today I would like to speak about the near-term and long-term opportunities we have for our business. Three years ago we acquired Provital Solutions, manufacturer of water treatment systems. We decided to readdress our business strategy and transform the company from a component supplier into a supplier for water treatment systems. Over the three years, we have invested significant resources in identifying a number of industries where our technology makes a difference. We've done a lot of pilots in various industries and we have also been successful in delivering large scale systems through applications within drinking water, agriculture, heavy metal removal scrubber systems and power plants, and oil and gas. The large scale references have now qualified us to be specified for other projects in these industries. We are building a healthy pipeline with projects within these industries and I believe that this will be an important part of our business in the longer term. This year, we have however dedicated most of our resources into the marine scrubber industry. The decision by the International Maritime Organization last year to implement a new lower global cap on sulfur emissions from international shipping has opened up an interesting market. The new lower cap will come into force from January 1, 2022, and it basically leaves the ship owners with free alternatives to use significantly more expensive alternative fuel with a low content of sulfur, to convert the sheet into energy, or to install a scrubber system. Experts following the industry have been debating on the uptake of scrubber systems from ship owners. We have of course followed this debate very closely. Some experts have been predicting a low uptake and others often predicting a larger uptake. It seems like most analysts now agree that it is likely that around 20% of the fleet will be retrofitted with the scrubber system by 2025. There are approximately 70,000 vessels worldwide affected by the new legislation. And with an uptake on 20% in scrubbers and an arid selling products of $450,000 for one of our marine scrubber systems better opens up a total addressable market for us of approximately $6.3 billion. On top of that comes the newbuild market where our analysts predict that the uptake of scrubbers will be even higher. We have worked into all the billion dollar markets before, however, in other cases we've been trying to enter into an already established market with a new technology. This has proven to be a lengthy process. With the marine scrubber market, it's a different story. We were one of the first players in this market and we have been investing into the marine scrubber industry for more than three years. Our technology has already proven well suited for this challenging application, and we are pleased to note that the market accepts our technology and we continue to form new relationships with scrubber manufacturers and inducers. When we talk to our customers, they all agree that the pace of adoption of scrubber system seems to be picking up. However, we believe that what we see now is just the beginning. From 2015 through first half of 2017, we delivered a total of 7 systems for marine scrubbers. In August we announced that we expected this number to be more than doubled in the second half of 2017. We are pleased to note that we are well on-track to exceed these expectations. The fourth quarter so far has been very busy for us and we have already delivered 4 systems. We are very encouraged by this current development. We have continuously improved our offering from marine scrubbers and today we offer a system that has the smallest footprint of any technology available in the market, this is very important for marine implications. We offer completely standardized system allowing for shortly, clients, and we offer direct competitors CapEx and OpEx. We believe that our unique silicon carbide technology and our long-term presence in the industry position us well to be one of the market leaders for water treatment systems through this market. Over the past six months we have rendered [ph] our business to be able to meet the increased demands, and we are ready for a further ramp up as the market develops. As earlier discussed, our TPS business has always been lumpy and relying on new vantage throughout the road. This year we have seen an improvement in our sense of DPS as we've experienced an increased activity level in the market. We believe that our sales of DPS will remain on a satisfactory level in the fourth quarter, and we have promising outlooks for 2018. This morning we announced the private placement of just over 1.6 million shares of preferred stock, convertible into common stock on 1:4 ratio. The net proceeds of just under $2 million will strengthen our balance sheet and allow us to invest further into the acceleration of our marine scrubber business. We are pleased to see that we were able to complete the private placement at market price and without any of our coverage [ph]. We are happy that our investors share our optimism for the future and we appreciate the continued support from our investments. As earlier mentioned, it has now been three years since we took the decision of transforming our business from a component supplier into a supplier for water treatment systems. It has taken us some time to identify the applications where our technology makes a difference and where we are able to offer competitive solution. We have been successful in getting large scale references in a number of industries that I mentioned before; this has allowed us to be specified for future projects. We are greatly encouraged by the success we are experiencing in the marine scrubber industry and we believe that will improve equally successful in our oil markets in the future. We do believe that our decisions to transform our business are narrowed focus and the development of standardized water treatment systems has been the right choices. We are convinced that our investments over the past years will pay off and that we will see acceleration of our business. We expect an improvement of revenue and earnings in the fourth quarter, and we believe that 2018 could prove to be a turning point for our business. We do appreciate the continued support from our shareholders, and we will continue our hard work to establish our technology in the market and bring value through our shareholders. Having said this, I would now like to turn the conference over to our Q&A session.

[Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, it's Aaron [ph] on for Eric Stine. Thanks for taking the question sooner. Maybe first on the marine opportunity, thanks for sizing that opportunity for us, obviously very large. Can you just maybe talk about what you're seeing on a competitive front there? And you know, if there is any changes to your strategy; is this something that you could potentially license or pharma joint venture?

Yes, Doug, this is a very interesting industry as you said it is very sizable market that we're addressing. Basically what we have seen is that there are two competing technologies for -- so water treatment for this. One is fluctuation, as we do; and the other alternatives is sense the futures that will spin the water and separate the oil from the water, basically. What we have seen is that we have a very defined output, it's like a ball, everything that ball circumcise will stay on the other side of our mettle and everything with a smaller sized underpass will pass through the mettle and can be safely bestowed [ph]. It means that the result of your filtration is exactly the same every day. With the centrifuges it's a different case because they rely on the mass of the medium, so the end result changes with the mass. And we also offer a small footprint; we offer some very attractive OpEx but of course there will be a lot of competition in this industry. As I said before, we were one of the pioneers in this industry, we made significant investments into this and we like to think that we have a headstart over competing technologies but for sure this will also be a competitive market but right now it is a market with -- I would say less competition than usual.

Okay, good. And then maybe on just the balance sheet; can you talk about if you collected anything on the mining order or the Serbia order to-date and if there is any changes to the outlook there? And then, just maybe any progress on structuring these orders going forward across your business with kind of improved cash collection terms?

Yes, the large collectible we have from the Serbian order is still there. I will be in Serbia next week trying to sort out the situation but basically we have changed our focus and now we're entering into discussion with the end user sort of municipality of them paying us directly, and we do have high hopes that this will turn out successful. So the collectible is still there and we are taking the different approach and hopefully on the next conference call we will have collected them those money.

Okay, good. And then maybe just one last one for me I guess; on the industrial side of things, you called out power plants today for deliveries, been a while since we've heard something there. Can you just maybe talk about the growth outlook there as you look at 2018 and kind of what you see the opportunity like in that space?

Yes, we have actually seen this year a number of smaller systems for power plants in Denmark and we are continuing to see a lot of interest from that. We have been specified for future projects; so it seems like it will be a nice industry for us in 2018, the trick now is to copy the success we have had in Denmark, into other markets and that will be focused for 2018.

Right, sounds good. Thanks for taking the questions.

Thank you. Our next question comes from the line of Joe Gomes with William Smith. Please proceed with your question.

Good morning. Just a quick, on the marine scrubber; you did talk about you've been speaking to other people in the industry in addition to Yara; and I was wondering if you might be able to provide a little more detail as to who some of these other customers? What are the number of other people you're talking with? How many systems have you sold through these other people that you're speaking with, in addition to Yara?

Yes, you're perfectly right Joe. We started out in this industry in close cooperation with Yara and Yara remains to be a very valuable customer for us. However, we have broadened out our focus and today we are working with five scrubber manufacturers. I think one important thing that I can also mention is that we have started to comment to concept directly with the ship owners; so we are talking directly with these. And I think that is very important because it allows us to explain exactly what makes our technology different from the centrifuges and why they should specify LiqTech technology for their ships. And this is actually proven on something else if you're very successful. We know that there the membership owners who are now specifying our technology and we think that it's important to stay in control of the markets to be in direct [indiscernible]. It doesn't necessarily mean that we will sell our products directly to the ship owner but it means that we will be specified for future projects. So you're absolutely right, today we are no longer relying just on Yara but we are relying on a wider customer base and we continue to form new relationships all the time with both scrubber manufacturers but also ship owners.

Okay, thank you for that. And could you just remind us what is the kind of the difference in CapEx and OpEx for the LiqTech system versus the centrifuge alternative?

Yes. We are very similar in CapEx, there is not a significant difference. We are however, much lower in OpEx with our technology, we end up with a dry cake, so all the heavy metals, their salts or whatever is in this media, we would then offer a dry cake that is easy to storm and brought, it takes up as most of the paint and also when you get to shore and you have to dispose it, you would pay a $1 amount per count of waste. Where against with the sensor future and off with a large amount of sludge that you will need to store in bond, first; and also you have to pay more money when it gets to shore to dispose of it. But also the electrical cost and everything, we are much lower than centrifuges. So I think we have a very attractive offering and a very good combination of attractive CapEx and OpEx it's well for our customers.

Okay, thanks for that. And just briefly, did you talk a little bit on Serbia contract there and now trying to potentially collect the remaining order funds from the municipality? Earlier in the year we talked -- you probably had I think three other potential contracts lined up in Serbia once this one had been fully approved and paid for. Do you still see those contracts coming to fruition or they've been delayed for some reasons?

We still see a very attractive market in Serbia. There we have a lot of issues with our senate, with barren -- oil substances, harmful substances in the water that needs to be cleaned out before you can safely drink the water. So it's definitely, still an attractive market. And I think this last project, we have learned a lot about what's to do and what not to do in Serbia. So there are some interesting opportunities and we will continue to work on those opportunities but we will have a much different set up in regards to securing our pains [ph]. So yes, still opportunities but we will use what we have learned from this project to avoid the issues we are now heading in the future.

Won't you still using the same partner that you originally were with in Serbia; are looking at different potential partners?

We would look to different potential partners.

Okay. And one last one here; you know, you'd say today that the results -- third quarter results were largely in-line with your expectations and just wondering how do you square that or can you square that for me with what you said in the second quarter conference call when you said that you expected improvement of revenue earnings in the second half of '17? If both, revenues decline sequentially and the net loss is worse; so I'm just trying to square those statements and I wonder if you give me some more color in detail on that?

That is an understandable question Joe. What we said is that we expect that the second half of 2017 to be an improvement from the first half, and that is still correct. As I mentioned earlier, we have been extremely busy until now and before the fourth quarter. Should some of those deliveries have fallen into the third quarter -- instead of fourth quarter, we would have had a different texture than what we have to take. So our focus remains to improve the second half of 2017 and we believe that we are still well on-track to meet our expectations from that.

Okay, thanks Sune I appreciate it.

Thank you. Our next question comes from the line of Tom Gannon [ph], private investor. Please proceed with your question.

Yes, thank you. The 7 scrubbers in the press release; are 7 to be sold in the Q4 or 2 or 3 sold in Q3?

I believe it was 2 from top of my head in Q3 and the remaining that we're anticipating will be in the first quarter.

Okay. With 7 scrubbers per quarter in the short-term over the next couple of quarters be about the run rate now for supplying ship filters -- the water filter systems for ships?

We believe that we will see a gradual raindrop in this business and we believe that we're seeing now is really just a start. So to answer your question, I think we would expect to see that number grow on a quarterly basis moving forward.

Okay. Supplying 20 to 50 filter systems for ships in 2018, is that realistic?

Yes, I definitely believe that that could be a realistic number.

Okay. One last question was -- with so many ships, the 20%; is there a shipyard supply constraint for ships to add scrubbers. And is your system quicker to install and is that a strong selling point to your system versus the competition?

Yes, there is definitely a restraint in the shipyard capacity worldwide, and this is also why I mentioned earlier that the analysts following the industry are modeling that 20% of the fleet would be retrofitted by 2025 and not 2020 when the legislation actually kicks-in. This is really due to the restraint that was in shipyard capacity worldwide; our system is definitely very easy to install, I would even say it's a plug-and-play system; but in all honesty, I also have to say that the majority of the work that needs to be done in the shipyard is not related to our water treatment system, it is related to the scrubber itself. But yes, it is a plug-and-play system and very quickly installed.

If one large -- I know there is a large ship company that have large fleet and if one of those companies really like your technology and wanted to install it on their fleet; what kind of numbers are you looking at if a large ship owning company wanted to use your water filter system on older ships?

Well, as I said earlier, we are already in direct contact with several ship owners and we know that several of them are modeling several installations that could be 50, even into the 100 of all ships.

Okay. So the ones right now are [indiscernible] 2 or 3 and if they like it, they can roll it out to -- let's say, a much larger number.

Yes, how it typically works is; if we take a ship owner with 100 ships, he could very well have 10 or 15 identical ships. And what we have seen until now is that they order a prior project for one of the ships and then they stay satisfied, then we roll it out to the remaining identical ships in the fleet. So you're correct, that will be a typical way that we're going to see it develop.

Okay. If that were to occur, does the company have manufacturing capacity to handle a relatively quick increase in orders if there was suddenly a large order? I remember in the past conference call, I believe there was $60 million of sales capacity to your manufacturing, is that still about right.

I believe that our current capacity is probably, I would say 70 to 80 scrubber systems in a year, that is however easily land up and we have chosen the direction to subcontract most of the work outside; so we buy the finished type tools outside, we buy tanks and so on from outside, and we do the assembly and testing in our facilities. So that capacity could be easily rented, not to follow the market development.

I see. Okay, those were all of my questions. Thank you

Thank you. Our next question comes from line of Anthony Markesie [ph], private investor. Please proceed with your question.

Good morning. A question for you; you mentioned earlier that the principal competitor in the ship area is a difficult process, let's call it. With seeming advantages in OpEx, similar CapEx, and a plug-and-play system why would anybody consider the alternative? Is it a question of you're David and the others are Goliath? In other words, with such seeming advantages it would seem to me that it would be a no-brainer unless I'm missing something.

We think you're right, Anthony, we think we have a good offering. But to be honest, yes some scrubber or some of the centrifuge manufacturers are judged into companies and they have a good presence in the marine industry already. However, I have to say we are considered an excerpted technology for this market. We already have a good market presence and even though the numbers are still low, we actually have also good market share. We are working with -- I would say good proportion of the scrubber manufacturers in the world. So I think we are well positioned but you're right, we're up against some large companies offering the centrifuge technology and I think we will always have competition, whether it comes from centrifuge tools are different filtration or whether, we will always have competition. The important thing to me is that we are already very well positioned into this industry we are working with good part of the scrubber manufacturers and I think the positions is throughout to have our part of the market.

Yes, I guess my question is; are there situations where it makes more sense to use the alternatives rather than yours?

No, we actually think that we offer a better solution in most cases. The reason why you would choose centrifuge; well, some like one technology, some like another and we cannot work with 100% of the scrubber manufacturers in world and somebody else have to work with the remaining part we are not working with, and that happens to the centrifuges now right. So I think it's just natural market dynamics that will always be a competition and in this case it happens to come from a different sequential.

Congratulations, thanks.

[Operator Instructions] Our next question comes from the line of [indiscernible]. Please proceed with your question.

Good morning, Sune. I'd like to change the topic a bit from market potential to costs and margins. Now I know that in your filter manufacturing process there are a lot of fixed costs there; so as a result your gross margin level is very dependent on volume which obviously you know less, quite a few quarters this has been low but now it looks like it could be getting up to medium or high. At least in the past, I recall you saying that with some decent volume there is no reason why a company shouldn't show something in 50% anyway area for gross margins. But that was some time ago, is that still the case? And kind of related to that is, at least in the past and I don't recall exactly but you thought that it would be somewhere around $5 million in revenues in a quarter or maybe with $6 million, like I say my memory is fading here as to where breakeven would be for a quarter. So gross margin potential with some volume and about where in terms, it would be breakeven.

Good morning, Rick. And you're quite right; our margins today are Berryman related, so it's a volume. And as we see, the volume come into the business; we will also see the gross margins improve significantly. We have invested a lot of resources into refining our systems for scrubber. And we believe that we will be able to achieve higher margins future with improvements that we have maid. It is correct, in the past we have mentioned a number of approximately $5 million in a quarter to often breakeven point. And the reason, calculations that we have down shows that 5 to 6 scrubber systems in a quarter; and about $1.5 million of revenue come from our DPS business. We are at the breakeven point, and that comes through call it for $400 million to $4.5 million as a breaking point. With that, split.

Okay, well that's an improvement. And if you had fairly high volume such that you're doing $6 million or $7 million; could gross margins get up into the 50% range again?

They could, yes. But it all depends on the volume. So when we see the volume kick-in, we will see a totally different picture on gross margins.

Okay, great. And if I can just switch the subject yet again; one of your partners that we haven't heard much from in a while is Grundfos -- and I'm wondering if you could comment because they were -- you were working with them or water filtration and other things.

Yes. We are still working with Grundfos, in fact they have just released a new product to clean washing water from washing metal parts and we are inside that product with our own ceramic maintenance. So still strong cooperation, we -- I think there are a lot of opportunities for us to cooperate with Grundfos and we're happy to see that they have based a new product line on our technology and hopefully we will see that develop even further.

Does that product line have -- and is that a potentially big market or smaller one?

No, that is potentially a big market. What the case is that when you fabricate metal parts, you will use oil and that oil needs to be removed before you can weld the metal parts. That is a big industry and it is -- today, you used a lot of water, you have to dispose the water, you're taking new water, use chemicals to clean it and so on. And they have come up with a product based on our ceramics technology that can reuse that water again and again. So it's nice for the environment, good for economics, and we know that it is a very big market, potentially, and we hope that they will be able to get a good market share with their new product.

Okay, thank you.

Thank you. Our next question comes from the line of Roger [ph] with Clear Harbor Asset Management. Please proceed with your question.

Sune, I'd like to pursue several things. The DPF market is lumpy as it is but $1.5 million figure has come up several times; is lumpy north of $1.5 million and another is there may be some base load? And then the lumpiness is up or are we in peak and valley, and hope for $1.5 million or better.

Well, to answer your question, our DPF business has historically been a lumpy business. We have been relying on bandage throughout the world and it has just been difficult to predict from quarter-to-quarter and more from me into the year [ph]. What we have seen this year is that we need, we're exceeding a positive development in the market, it seems like there are some new opportunities emerging around the world. And we do anticipate that we will continue to see this throughout 2017. We have some interesting discussions with new potential customers for 2018 and I actually have personally great hopes that 2018 will prove to be a better year for our DPF product and it seems like we would be able to get them. It's not going to explode but definitely we predict that 2018 maybe could be a more stable market for our DPF product than it has been in the past, and that we could also see an increase in volumes.

All right, thank you. And -- for potable water, there have been several opportunities in China, as well as Grundfos and other places; I don't know whether or can you please comment on whether Serbia is the unique place where potable water opportunities exist, albeit under totally different structure. But I don't know how to -- what to make of the opportunity in potable water?

I personally believe there are huge opportunities in portable water. They have the same problems that they have in Serbia with arsenic, with [indiscernible], and those substances, they are exactly the same problems that we have in North America, South America and Southern Europe, Asia; and there are a lot of issues. And I've been hearing for 10 years now, drinking water will be the goal of tomorrow and to-date that has not been the case but I actually believe that in the future we will see some large opportunities come to fruition for 2021. There are not enough clean ground water in the world to supply the growing population in the world, and I think that we have an interesting solution to some of the issues around the world. Now that we have the large scale references, we can now pursue these opportunities and this is also what I mentioned in my initial remarks today, we're not forgetting about these opportunities, we will continue to pursue them. We are not expecting to see this in the near terms, so can you -- the basis of our company but definitely we do have a good technology to be part of the solutions to some of these issues. And I think we will have a place in the market in the longer term with our technology.

And the final question on mining, as I recall, the field trial or the pilot or demonstration project; the criteria were drafted by the customer and they were -- either those performance criteria were either met or exceeded. And yet there doesn't appear to be follow-on; are there changing environmental regulations now decreasing the need for that type of thing, or how should we look at that opportunity?

I think that -- again, in mining I think there are a lot of opportunities for our technology. We saw in North America, in Colorado, a few years back, the big spill from the mining company with a very bad impact on the environment. I think there is a lot of attention to these issues and we will see more legislation in the future. Again, this is an area where we now have large scale reference and it allows us to be specified for future projects. We have a lot of interest by the way from mining companies around the world. Again, I would also have to say these are opportunities that takes a long time to mature, and this is why we are mentioning it as a long-term opportunity for our company. Even though we are now out there specifying our products for future projects, it may take one year, two year, three year, five years for the project to mature. But yes, it will be a part of our business in the future and we are definitely not forgetting about this opportunity, and there will be an increased environment of focus from governments around the world to do something about these issues. So yes, there is a growing market and a growing opportunity for us.

Thank you.

Thank you. Mr. Mathiesen, there are no further questions at this time. I'll turn the floor back to you for final comments.

Thank you very much. I would like to take the opportunity to thank you all for dialing into the conference call. We have discussed our long-term and near-term opportunities today. And we do realize that is taking us some time to identify the right markets for our technology. And we also believe that the investments that we have made has positioned us well for opportunities and in the marine scrubber industry in the near-term and several other markets in the longer term. We do believe that we are on the right path and that 2018 could prove us to be a turning point for our business. Thank you for dialing in, and thank you for the continued support to our company.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.