LiqTech International, Inc. (LIQT) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to LiqTech Reports First Quarter Fiscal Year 2019 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Robert Blum with Lytham Partners. Please go ahead sir.

Thank you very much, Nancy. Good morning, everyone, and thank you for joining us today as LiqTech discusses its first quarter 2019 financial results. I am Robert Blum of Lytham Partners and I will be your moderator for today's call. Joining us on today's call from the company is Sune Mathiesen, Chief Executive Officer. Before I turn the call over to Sune, let me remind listeners that following the conference call, there will be an opened Q&A session. You should also note that a replay of this call will be available shortly following the conclusion of the live call and that a transcript of the call will be available on the Investor Relations section of the company's website. Before we begin with prepared remarks, we submit for the record the following statements. This conference call may 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 during the conference call. The company therefore urges 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 advise interested parties of the risks that may affect our business, financial conditions and sales of operations and cash flows. If one or more of these risks or uncertainties materialize or if the underlying assumptions prove incorrect, the company’s actual results may vary materially from those expected or projected. The company therefore urge all listeners not to place undue reliance on these forward-looking statements, which speaks only as of this date and the date of the release and conference call. The company assumes 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. Now, I’d like to turn the call over to Sune Mathiesen, CEO of LiqTech International. Sune, pleased proceed.

Thank you very much, Robert, and good morning to all of you. Thank you for joining us today to discuss our first quarter 2019 results. I am excited to be speaking with you today. The first quarter of 2019 was a significant turning point in the history of LiqTech. Not only did the company report record quality revenues of $7.4 million but we also returned to profitability. The $7.4 million in revenue was a 210% increase from the same period in 2018, and it was up 156% in the most recent fourth quarter. Adjusted for non-recurring costs, net income for the quarter was approximately $450,000 compared to a loss of $1.5 million in the same period in 2018. We have alluded to the first quarter of 2019 being the tipping point for us for about a year now. And I'm happy to report that was exactly the case. Even though it has just been a couple of weeks since we last spoke, there's been a couple of exciting developments at LiqTech that I would like to share with you. The first is that our customer order commitments continued to grow. It has now approximately doubled from where it was in January 2019, when we announced compelling orders for more than 110 for our standardized water filtration systems. While we are moving away from providing specific numbers, rest assured that the backlog is extremely strong. Second, on April 16 we successfully completed the uplisting of our shares from the NYSE American to the NASDAQ. We are continuing to see a greater level of interest from institutional investors and we believe that this transition will allow for greater investor participation especially from larger funds who have restrictions against owning stocks on the NYSE American Third, we are now advancing our framework agreement announced in October 2018 with one of the world's largest marine global manufacturers. We plan to showcase or jointly develop system for treatment of marine scrubber wastewater at the north shipping conference in Oslo, Norway this June. We are very excited to be moving this into full commercialization. Fourth, as earlier discussed we expect sequential growth throughout the year and I'm happy to report that we expect second quarter revenue to increase more than 20% sequentially from the first quarter revenue of $7.4 million mainly due to the continued momentum in scrubber sales. And last but not least we are seeing increased interest to our water treatment systems for power plants. We have put several orders this year and we have been specified for a number of projects in 2019 and 2020. The power plant industry is an important part of our growth strategy and we are pleased to note this positive development. Between the strong brand in our marine scrubber of all the backlog new interest in non marine based applications for commercial launch of our first framework agreement and good visibility into the future we feel very good about the business right now. As many of you are familiar with IMO 2020 and the various regulations surrounding it, let me just bridge the key attributes for those that are newly joining the company. IMO 2020 main based the reduction of sulphur emissions from the green vessels and at least the ship owners with two options to comply with the new regulations. One is to switch to loss of a fuel that is significantly more expensive than the bunker fuel they are using today. The second option is to install the scrubber system which is a device that will spray water containing a solution of reagents over the emissions from diesel engine and thereby capturing the harmful substances and the emissions and contain them in the water. There are two basic types of scrubbers, an open loop system and a closed loop system. An open loop scrubber will take in seawater and return it to those sea after the scrubber process without being cleaned so including the aforementioned harmful substances and of course, this scrubber there would be a water treatment system such as the one that took the lives. It will separate the harmful particles from the water and allowed another clean water to be discharged into the sea or reused in the process. Some scrubber systems are capable of operating both open loop and closed loop which means that half of water treatment system. These scrubbers are called hybrid scrubbers. Over the last number of months, some of the largest ports including China and Singapore have ban the discharge of water from open loops scrubbers mainly in the industry expect this banning of open loops scrubbers to continue throughout the world. As we talked about over the last couple of quarters, there's countries such as China and Singapore, they ended discharge of water from open loop scrubbers. There's been an increasing movement towards loop scrubbers. Our ability to help shipowners address the most pressing concerns at the IMO 2020 regulation and key implementation of software environments and regulations by countries around the world has been a key driver in our growth. We believe that we are uniquely positioned within this industry to benefit from accelerating demand, regulatory and the moments of sequence. We are seeing orders from a range of scrubber systems from the retrofitting of coastal covers on the existing fleet, from the deployment of new builds where we expect them to design of new ships and from conversion of already installed open loop scrubbers into existing systems. For those unfamiliar with the history of LiqTech, we originally made our name within these particular sorts of industry. Since our founding in 2000, we have retrofitted nearly 2 million large vehicles with these particular services and we have been an important part of reducing environmental impacts of transportation. We are continuing developing products and solutions that improve the environments. One is a NOx reduction product for the marine industry. That is based on the same silicon carbide diesel particulate filters products, we have been manufacturing for nearly 20 years. We believe that our long-term experience in the manufacturing of EPS and our current success in the marine industry puts us in a unique position to take advantage of this new opportunity. We expect to have this new product ready for the market in the beginning of June. Let me also just provide a bit of an update on our manufacturing demand, where the company has done an excellent job in looking ahead to ensure we have capacity to meet the very strong demand which gives you. As we discussed recently, we anticipate this ramp up in demand several quarters ago and we placed orders for furnaces for our silicon carbide membrane manufacturing process. We also began the expansion of our systems manufacturing in both Denmark where we will more than double our manufacturing and office space and we will be improving our existing and laboratory facilities. The expansion is progressing according to plan and is expected to come online later this year and we are on track to meet current planned deliveries for 2019. We have already made down payments of $1 million for the furnaces and the expansion of the systems manufacturing in mobile is without [indiscernible]. Before I turn the call over to questions, let me just say that transitioning a business from concept to product development to full commercialization is never easy. With our fourth first quarter shipments and relations of our marine scrubber applications now behind us, I can say confidently that we are extremely well positioned to execute on the go forward plan. Every day we are gaining increased visibility into the intricacies of how orders will grow, how shipments and installations will occur and how the manufacturing will proceed. This experience covered with an increase in order backlog provides me with strong confidence in our ability to establish ourselves as the market leader. With that said, let me now turn the call over to any questions you might have. Operator please.

[Operator Instructions] The first question comes from Eric Stine with Craig-Hallum. Please go ahead.

So thank you. Do appreciate you given the commentary on the orders and how it's trended since early in the year. Just wondering if you can talk about the makeup of that backlog between the two framework agreements that have been underway. And then I'd also love your thoughts on kind of what the representative order is that you're seeing now. I know six months ago it might have been a handful but it seems to me that it's progressing where its 10 plus or it's a significant number. So any color there would be very helpful.

Yes. So first of all, the two framework agreements are performing very well. One of them was for an expected 35 systems to be ordered in 2018 and 2019 and they are well on track to exceed that if not already exceeded. So they are performing very well. The other one was on expected 95 systems to be older than 2018 and 2019 and they are also well on track to meet those expectations from maybe even exceed those expectations, so all of that is progressing according to plan. And you are absolutely right in the size of the orders if we go back 12 months it is like one system here and one system there. Now it’s more an order for 10 vessels here and 10 vessels here and 30 vessels there. So our size is significantly greater today than it was a year ago.

And the commentary on the third framework agreement that you’re going to have commercial launch or be at that tradeshow in June, maybe just some thoughts there in terms of how that's trending versus your expectations. I think previously you thought that it could be 82 to 100 systems in this calendar year and then curious, I know there was some talk that that customer might be moving away from using a centrifuge in that system and wondering if that changes the system size or the ASP for you?

ASP for this customer is a little bit shy of $200,000 per system. We still expect to see a significant amount of all those decision. We said for a while that we expect to see all those coming this year and we expect to see meaningful revenue come out of the agreement in 2020 and we still believe that. Potentially, this could be our largest customer and they are very big scrubber manufacture. A lot of potential and what we know is that they will be marketing our solutions for few systems only.

And last one for me just more on the regulatory side. I love your thoughts on what's going on with open loop scrubbers ports banning it in talking to people in the industry it sounds like there are kind of diversion viewpoints, whether the port bans that forces the industry shift or whether the industry wants to wait until the IMO does a worldwide ban, which may take some time, so just curious, it sounds like you're already seeing that shift but do you think that the ports banning it is that really the key to adoption of the closed and hybrid loop systems?

So last year in November we saw Singapore come out and bring the discharge from open loop scrubbers and ports. We saw China come out this year in generally and the end of discharge from open loop scrubbers in ports. And we know that more countries and ports have followed. There is a discussion right now about banning this worldwide. And we think that it will eventually be banned worldwide, of course, at this point with speculation. What we have seen though, there is a movement from open loop scrubbers towards closed loop scrubbers and we see a significantly greater part of the scrubbers place today closed loop systems versus open loop systems. So that is progressing in our favor. We see new customers sold upon new ship owners that are also new scrubber manufacturers who has previously been focusing on open loop scrubbers that now given the market movement are also focusing in closed loop scrubbers.

Our next question comes from Rob Brown with Lake Street Capital Markets. Go ahead please.

On the order book, could you give us a sense of how much the order book is framework agreements and how much are other customers?

Well, it’s about 50-50, so a little bit shy of 50% in order book right now comes from framework agreements and a little bit more than 50% comes from other customers.

And then thinking through the ramp for the rest of the year, how do you sort of view the order cadence. I know can you give a nice step up in Q2, should that continue to increase throughout the year or do you hit a point where that levels are?

Well, we've seen a great move from the fourth quarter last year when we had revenues of $3 million and so the first quarter this year where we had revenues of $7.4 million. And as announced a little bit earlier we expect more than 20% increase in the second quarter and so very healthy includes. We do still expect sequential growth throughout the year and there is loss in our current order book and same pipeline that process that growth…

And on the capacity expansion, could you remind us where you're - where you’ll be at when your capacity comes online on the furnaces in terms of annual units and then the whole power expansion what capacity is there and I think you mentioned on CapEx there, what's the financial commitment there?

So we have put for reference as in order right now which is as I mentioned commitment of approximately $3.8 million. We all made accounts payments of $1 million, which is included in the core. In terms of the expansion of systems manufacturing there is no capital spending, we are losing the permits.

[Operator Instructions] Our next question comes from Liam Burke with B. Riley FBR. Please go ahead.

Sune, you’ve given us sequential growth of the revenue side, but your gross margin step up sequentially was significant. Can we expect sequential improvement as gross margins based on just a higher expected volume?

We are expecting to see sequential growth in our gross margins. And with increased volume but also with the elimination of non-recurring costs that we had in the first quarter. It’s still a journey and so the better or the more you do think the better you get and I guess, it’s a same for us and we will improve in the second quarter and we are likely to improve in the third and fourth quarters as well. So yes, we are expecting to see that improvement throughout the year.

And you gave us the gross revenue number, how did your traditional DPF product do in the quarter? I mean, not looking as a legacy product but it is an important steppingstone to some of your future air filtration applications?

Yes, we actually had a pretty healthy quarter on DPFs. We expect to see revenues of approximately $6 million for DPFs this year but you are exactly right. We are developing new products ramp DPFs product. We are developing this [NOx] for the Marine industry. We expect to have that product range 2020 and should see an increase in DPFs sales from that. But for this year we are expecting down $6 million of revenues from DPFs.

And if I look at backlog or how you are looking at orders past 2020, are you looking at a – I know you're looking at a mix of newbuild in retrofits, but how is it waiting now or how do you see the waiting going forward, however you want to look at it?

So we are seeing three types of orders. We’re seeing retrofits for ASP. We are seeing newbuilds and we are seeing upgrades and our open loop scrubbers and closed loop systems. 12 months ago, it was all retrofits. Now we’re seeing more and more people that is developing very well. And we are also seeing more and more open loop conversion. Going forward, we would expect to see a lot of open loop conversions hopefully and even though new loops of course also the retrofits.

The next question comes from John Henderson from Kershner Trading Group. Please go ahead. Mr. [indiscernible], your line is open.

Just a lingering question, in light of the growth of the backlog and sort of unexpected or one-time charges coming forward to continue to be sort of rumors of analysts out there guiding that the company might have to do a capital raise and you had previously stated that that would not be an issue. I was hoping that for clarification purposes, you might be able to say whether or not you think it would be need to raise any money. I think that if there is not that would help things significantly?

It’s always the question of seeing how your business develops. We are pleased to see the company showing profitable and it will certainly helps on your cash. If we take our current cash position we had done a prepayment of the furnaces of $1 million in the first quarter. If you add that to our current cost cash position, our cash position has actually been unchanged since June last year, which means that the company is cash flow neutral and has been cash flow neutral from [indiscernible]. Our profitability should be improving throughout the year and so we think we’re in good shape.

The next question comes from John Henderson with Kershner Trading Group. Please go ahead.

Hey, Sune I’ll try that again. Quick question in terms of your visibility. The conversations you're having with shipbuilders directly, I mean, how far those do those extend for you guys is that kind of a 2020 conversation or did it extended to 2021. Just trying to get some color on that front? Thanks.

Yes, they actually extend into 2021. These are major investments for a lot of ship owners and they have big programs So they trend well ahead and so we’re getting more and more visibility on 2019 and 2020 and discussions we are having even it trend into 2021.

Our next question comes from Jeb Armstrong of Clear Harbor Asset Management. Please go ahead.

Hi, this is Roger Liddell sitting in for Jeb. Good morning, Sune. Could you clarify the scrubber market for power plants and other industrial facilities, we read again and again of heavy precipitation events causing overflows in ash lagoons and scrubber waste lagoons this just appears to be an ascending problem, so it ought to be a significant opportunity, but can you shed any light on ASP's timeframes, when might the rhetoric actually begin to impact the revenue lines?

Absolutely. So since we readdressed our business strategy in 2014 we have done or we have been successful in getting last year references in a number of industries. We have done installations in mining industry, in oil and gas, in drinking water and in power plants just to name some of them. What we are seeing now in the marine scrubber industry is the first industry really embracing our unique technology and a reason for that, the driver for that is legislation tightened legislation. We see some of the same things are happening now in the power plant market and we see tightened legislation really across the world. We've been successful in getting some really good references and then marking Finland and Germany and other countries and we now see that we are getting more and more orders and more importantly we have been specified more and more projects. So we're trying to attack this one industry at the time. So now we have successful in marine scrubbers. We are now attacking the power plant market which looks like it is successful. And when we see legislation as a driver in some of the other industries where we already proved our products, we will work trying to break into that as well. And so first things first, we are laser focused on the marines scrubber market right now. We are starting to dedicate more and more focus on to the power plant industry. And when that really develops and unfolds we will look into the next industry.

[Operator Instructions] Our next question comes from Shawn Boyd from Next Mark Capital. Please go ahead.

Thanks for taking the question and congrats on the quarter here Sune. Going back to DPF for one second, I heard you expect that to be over 6 million in the year but what exactly was that in the quarter?

You broke up sorry can you repeat?

Just in terms of revenue breakdown trying to understand what the diesel particulate filters revenue was in the quarter. I heard over 6 million still expected for the year but didn't get it for the quarter?

It was roughly $2 million for the quarter. So a little bit higher than usual but we're still expecting $6 million for the full calendar year.

And going out to when we start to see traction on the power plants. Is that the kind of business that we could see that double, triple in the first year or two or is it 10% to 20% growth? I know the earlier caller was trying to get a little more color there and I think it would help all of us if we could just put a little bit - quantify this little bit more.

Yes, it's still very early stages in the power plant industry. We are seeing now size in legislations especially in Europe and we know that it will come also in Asia and in North America. We have recognized that, we have a great solution with improving our products in this industry for several years now which is why we're now starting to get traction. So while we are still laser focused on taking advantage of the marine scrubber opportunity and we are trying to develop this market for the future. Potentially, it's a huge industry and could be similar sized opportunity at the marine scrubber opportunity.

And just to be clear the driver on this business actually before the power plants would be the Nox product for ships, as that starts to ramp and potentially 2020.

We're hoping to see them develop simultaneously. We know there is a market for the March reduction product which is why we are developing it. We are already starting to see business from around the power plant industry. So those two will be hopefully developing simultaneously.

Last question is going back to where it is only in our hearts right now in terms of the liquid filters and the opportunity on the scrubbers. You mentioned visibility, I think you talked about visibility for shipbuilders and discussions going out to 2021, but maybe you can just talk more about lead times whether it be a retrofit or a newbuild ship, just where you stand right now on different lead times and maybe also kind of related to the framework agreements versus business that you're looking outside of the framework agreements? If someone were to come to you today with a new order, what is delivery, how far out would that be et cetera.

Yes. So we actually just bought an order yesterday for August. So I guess the short lead time we can do right now it's about three months. We're trying not to be that short. So hopefully we can book orders which look better lead times to allow us to ramp up business in a better way. But let's say we have four to five months some average lead time right now. We are getting more and more visibility on 2019, very good visibility in 2019. We're giving more and more visibility in 2020 and we are having early discussions with ship owners for their 2021 leads right now.

The next question comes from [indiscernible] from Black Gold Investors. Please go ahead.

Just a quick question on your backlog. Can you give us some color on the percentage of small units and large units?

It's a nice mix I would say. We have a lot of large units in there and we have some smaller units, but it's a nice mix and scrub vessel it's very close to the ASP of around $400,000 costs previously.

This concludes our question-and-answer session. I would like to now turn the conference back over to Sune Mathiesen, CEO for any closing remarks.

Thank you very much, Nancy and thanks everyone for joining us on the call today. I would like to remind everybody about our Investor Day in New York on June 3. Should you wish to participate, please reach out to Robert Blum of Lytham Partners. We look forward to seeing some of you there and to speaking with you again soon. Thank you.

This conference has now been concluded. Thank you for attending today's presentation. You may now disconnect and have a great day.