Good morning. And welcome to the LiqTech International Third Quarter Fiscal Year 2019 Financial Results Conference Call. All participants will be listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Thanks so much, Gary. Good morning, everyone, and thank you for joining us today to discuss LiqTech International's third quarter 2019 financial results. I am Robert Blum of Lytham Partners, 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 open Q&A session. You should also note that a replay of this call will be available shortly following the conclusion of the live event and that a transcript of the call will be available on the Investor Relations section of the company website shortly. 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 urges 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, Chief Executive Officer of LiqTech International. Sune, pleased proceed.

Thank you, Robert, and good morning to all of you. Thank you for joining us today to discuss our third quarter 2019 results. I'm very pleased with the results of the third quarter, which highlighted our third consecutive quarter of record quarterly revenue and also a new net income record. Further and equally important our bookings continue to remain very strong with a growing order backdrop. Absent the hiccup we’re experiencing in the fourth quarter due to the mechanical issues in two of our four existing furnaces, I couldn't be more pleased about the progress we're making. Let's go into the third quarter a bit deeper. As I mentioned, our third quarter marked our third consecutive quarter of record quarterly revenue coming in at $9.7 million, a 189% increase from the third quarter of last year and up from $9.3 million in the most recent sequential quarter. I'd also like to highlight that the record quarter was achieved despite of the traditional European summer holiday season in July and August, where most companies shut down for several weeks. Our net income in the quarter was $656,000. This was also a new quarterly record for the company. This was a great improvement from a net loss of $922,000 in the third quarter of last year, and a step up from a net income of $147,000 in the most recent winter quarter. The new record was achieved despite of $200,000 of exceptional cost associated with the new expansion of our Hobro facility. We also had several low margin filtration system orders in the quarter, orders that we accepted due to the longer term strategic significance for our core market. We have now worked through the majority of these low margin projects and our strong growing market position has enabled us to increase…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Eric Stine with Craig Hallum. Please go ahead.

Yes, good morning, Sune, it’s Aaron Spychalla on for Eric, thanks for taking the questions.

Hey, Aaron. Good morning.

Good morning. Maybe first on the furnaces, it sounds like -- can you just talk if they're back up and running. And then any sense if you've seen or anticipate any impact from the scrubber relationships.

Yes, so let's take the furnaces first. We have right now two furnaces up and running. We have one furnace which is permanently down it’s like [ph] and we have another furnace that is running a little bit on off. And that's all baked into that fourth quarter revenue expectation that have announced today. We are getting the first of the new furnaces delivered right now. And it's been put into manufacturing right now. We expect it to be up and running by the end of December. And then we're getting three additional new furnaces in the first and second quarters of next year. And again, everything is baked into that $6 million revenue expectation for the fourth quarter this year and $12 million for the first quarter next year.

Alright. And then, I guess, anything on that business in the fourth quarter any impact you're seeing or anticipate to see with those scrubber customers?

No, we had a good dialogue with our customers and we're not expecting any negative impact from this at all.

All right. And then on that first quarter number, you kind of talked about it being baked in there, but just is there any -- in that $12 million, is there any expectation from the additional furnaces that are coming in? Or is that just kind of what you have now plus that first furnace that's kind of set to be up and running by the end of the year?

Yes, it's really based on that furnace being up and running, which it will be, and then the additional capacity that we have. We are getting the second furnace delivered in January. It will be up and running by mid-February. So that's also part of the revenue expectation.

Okay, thanks. And then, maybe on the orders, can you kind of disclose like you have in the past, you know, some sort of kind of a book to bill maybe on what you saw with the filtration systems. And then, just any color on kind of how that backlog is made up between the framework agreements versus others. And then, just anything on timing, is that mostly 2020, does it stretch into 2021?

Yes, so the framework agreement have been going very well. We have the two first ones we announced in the spring of 2018. One of those customers already exceeded the expectations for 2018 and 2019. The other one is coming pretty close to those numbers we were anticipating, so we're very pleased with that. As I mentioned in my prepared remarks, the third framework agreement we announced in October last year is now starting to generate orders. It's been kind of slow rolling out, we launched the new product in June this year. And we’re now seeing the first order is and from what we see right now, it looks very exciting. And it looks like we're going to be moving our expectations for that framework agreement, as well. In terms of book to bill, as I mentioned, we are seeing great order backlog and the book to bill ratio was about 1.4 in the quarter.

All right. And then, maybe last for me just you know, seeing the strength in shipping rates in the industry and just some of the commentary from some of the guys in Europe. Can you just maybe talk about that the market dynamic is that kind of pushing anything out and you kind of talked a little bit but it sounds like it's pushing some things over into Asia where you are capturing some new customers.

Yes, so we definitely saw a shift in market shares in the marine scrubber industry. Going back a year we had some very dominant European players, it was early stages what we’ve seen in the last 12 months is a lot of new Asian players coming into the industry. And there has been this shift in market share. It's correct we’re seeing certain European players come out in the last couple of months and say they saw softening scrubber demand. And we think more than anything that was due to shifting in market share really. On top of that, what I also mentioned in my prepared remarks is that we see a much higher adoption of closed loop scrubbers now versus open loop. Again, going back a year, there was approximately 10% closed loop systems where we are versus 90% open loop systems and what we see now and what we hear from our customers is that upwards against 50% of the orders for next year could be closed loop. So we really have an expanding market in front of us. We have -- we think we have about 50% of that closed loop market and it looks like we have tailwinds right now and that our addressable market would be much larger going into 2020.

All right, thanks for the color. I'll turn it over.

Thank you.

[Operator instructions] The next question is from Rob Brown with Lake Street Capital Markets. Please go ahead.

Thanks, Sune.

Good morning, Rob.

On the first furnaces issue, when did that start, how recent is that, did that impact Q3?

Yes, so we had issues throughout the third quarter with the two furnaces. We had one of the furnaces we had issues in previous quarters as well. I think it is what it is. We have some old equipment that we've been running for many, many years. We never really tried it out at the ones that we now have, and now that we are running at a much higher capacity, we have been experiencing some issues. I think what it highlights is the timing, timeliness in ordering new furnaces, which we did last year, we have the new furnaces coming in. The first one will be commissioned by end of this year, the next three ones in the first and second quarters of next year. And we'll scrapping the old furnaces entirely, which was always part of the plan. So when we get to July 2020, we will have tripled our current capacity and it is really just four quarter issue that we’re now encountering.

Okay. And given that the new furnaces won't be commissioned till the end of the year, what's the risk that that kind of delays with those big new kind of what gives you confidence that you can get those up and running and not see issues there?

We have been in the market for silicon carbide manufacturing for 20 years now. On top of building our own factory, we have actually set up a number of factories for other companies over the years. We set up a factory for Pirelli Ordinance [ph], we set up other factories for other competitors in the TPS market. So we are quite experienced in setting up new equipment and we're not foreseeing any major issues in doing this.

Okay. And could you maybe characterize the order book a little more? How long does that give you visibility for what sets of maybe number of units, or size of that order book some clarity there would be helpful?

Yes, so with the order book we have had now, we are getting more and more visibility into 2020. And with the current order book, we do have very good visibility that we’ll see another strong year of growth in 2020.

Great. Okay. And then, maybe how much of that order book at this point is the third framework agreement units and have you shipped any of those yet?

We shipped one system so far and in terms of the backlog, it's a growing part of the backlog. As I mentioned, we just started seeing the first orders come out of that framework agreement, what we see so far, is extremely positive. And they are very, very positive in terms of reaching the anticipated volume for 2020.

Thank you. I turn it over.

[Operator Instructions] The next question is from Dave Covis with Overweiss [ph]. Please go ahead.

How you're doing guys. Just a couple of quick questions for you, what other color can you give on bookings so far this quarter in terms of what you’re seeing?

I think the color we can give is that we saw bookings from the first framework agreement, we are seeing a strong -- continue to see a strong book to bill ratio, which again was about 1.4 and that is a new record revenue quarter.

Okay, got it. And then you talked -- you mentioned the split between the closed loop and open loop shifting and I know you mentioned one customer getting new I think you said 50%, I think you said in this current year 2020 or the year ahead 2020. What do you see for across the border?

Yes, what we see when we speak to our customers in the scrubber industry is that they have seen a drive towards closed loop systems. If we go back one year to split between closed loop and open loop was about 10% closed loop, 90% open loop.

In 2018?

In end of 2018, that was kind of the split between the two. Now, going into 2020 when we talk to our customers in the marines copper industry, they are all very positive for closed loop. They see a lot of things happening and now more than 60 ports around the world who have banned open loop discharge, and I think there’s general expectation that we’ll see a worldwide ban of open loop discharge in the coming years. And the third thing that we’re seeing is a pressure from big end customers, asking the shipping companies to have the most environmentally friendly scrubbers installed. And all of this together, they are expecting upwards against 50% of all orders for 2020 to be closed loop.

Okay, got it. And then you had mentioned more entrants into marine scrubber industry, are you seeing more entrants in the filtration market? And how typical is that now versus say a year ago?

Yes, so when we readdressed our business strategy in 2014 and transformed the company into a water treatment supplier, we’ve started looking into a lot of different applications. Since then, we have been successful in getting large scale investments in oil and gas and power plant, in drinking water treatment, in mining and so forth. But what happened in 2016 was that the iron ore passed this new lower cap on sulfur emissions IMO 2020 and then we started focusing a lot into the marine scrubber industry. But, simultaneously we have been focusing into some of the other industries where we have large scale references right now. Some of the industries that are developing well for us right now is the power plant industry, which we have set for a while, we expect it to be a meaningful part of our revenue streams in 2020 and onward. We are starting to see the orders from that industry. What is also developing well for us is the oil and gas market, where we now have some very successful pilots behind us, with some of the big players, and we are now excessively bidding for new profits in this industry. So, besides the marines scrubber industry, we have a few markets that are developing quite well for us at the moment and we’re expecting them to turn into meaningful revenue in 2020.

Okay, thank you.

Thanks.

The next question is from Shawn Boyd with Next Mark Capital. Please go ahead.

Hi, Sune can you hear me okay?

Yes, very good.

Just so sort of real quick on the revenue breakdown, did you disclose earlier what the diesel particulate filters were in revenues in Q3?

No, we have not done.

Okay. Would you mind just is it to what we’ve seen in the past or are we still sort of on track for $5.5 million, $6 million year-over-year or is there something different going on?

No, we’re still on track for that, so from the top of my head revenue from DPF was about $1.3 million in the third quarter. And we’re still on track for that about $6 million revenue for the year. We’re actually looking into -- so as you probably know that diesel particulate filter market has been challenging for us, for some time. And it kind of stabilized at that $6 million revenue for the last couple of years. Now that we’re going into 2020, we actually have hopes to see that grow. We have new mandates in Denmark in 2020 through 2022. And we could be up to about in excess of $10 million in revenue from DPF next year as a result of those new mandates.

Got it. It’d be great to see that growing again. Moving back to the finance issues and the liquid filters, if you did not have the mechanical issues that you're having right now, is your demand such that the March quarter, can you give us -- with your March quarter guidance for $12 million, would that have -- would that be that higher?

I think there was a certain amount of potential upside to that number if everything comes together. And we are continuing to see strong demand for marine scrubber systems.

And the other question I have is, within that $12 million, can you give us any idea of how much of that is pushed out from December orders that would have been in December?

The orders from December are pushed out to several quarters, but I do not have a specific break down from the top of my head.

Okay. Gross margin, switching to that real quick, as you bring these new furnaces online, would that start to bring the gross margin up, I assume, I mean, Q4 is going to be much lower in terms of scale, so probably nothing there. But would we start to see gross margins up in the potential mid-20s or something greater than what we've been seeing even through Q3?

Yes, so we actually had an increasing gross margin in the quarter due to several reasons. What is going to happen in the coming quarters is, is a lot of different things. First, in the third quarter, we introduced the 6.1% of our filtration system that offers lower manufacturing costs about 20% lower than previously. We delivered that system for about one-fourth of the orders in the third quarter. And we'd be delivering it for a bigger proportion of the orders in the fourth quarter in the first quarter next year. So that will generate lower gross margin. When we get into the second quarter of 2020, we'll be launching our MK7 version, which is currently in development. The MK7 version offers even more significant cost reductions. So that should drive higher gross margins as well. And then finally, as I mentioned in my prepared remarks, we had several low margin projects in the third quarter orders that we booked six, nine months ago to get established, especially with the new Asian players in the marine scrubber market. Now that we are established, and with the market position that we have, we have a little bit more pricing power. So the orders that we are booking now they have better margin profile, so that should improve gross margins as well. And altogether, overall we are set to hit that goal of exceeding 30% gross margins in the first half of 2020.

30%, first half, got it. Okay. And just last question for me, with the expansion of Hobro, your operating expenses of around $2 million a quarter, I'm thinking that's already kind of baked in there. Is there any reason that those need to come up significantly in the near-term?

We are anticipating a nice growth for 2020 and as we grow the company, they will grow as well. Having said that, it was a big jump in the third quarter, we're not anticipating as bigger jump in the coming quarters.

Got it. Okay, thank you.

The next question is from Roger Liddell with Clear Harbor Asset Management. Please go ahead.

Yes, good afternoon, Sune.

Good morning, Roger.

Question on the ports that have banned open loop scrubbers you mentioned 60, which is quite a bit higher than China, Singapore and certain -- in the Middle East, that one refueling port and some in the North Sea area. Can you give examples of key ports other than those already mentioned? I'm just trying to get texture on whether -- on really what the meaning is of the number of 60 ports.

Yes, it's certain ports in Scandinavia, it's certain ports of Germany, Australia. So really spread around Europe and Asia. As you mentioned, China has been very aggressive on this ban they are even suggesting further lower discharges limits in several things from scrubber waste water. So I think we'll see tightening legislation, especially in China in the near future. These bans around the world have caused the IMO to now, put a study group together. They're doing the work right now. They have to report in the IMO meeting in the spring of 2020. And I think, the general expectation in the market is that we'll see a global ban of open loop discharge in the near future. More importantly, what we’ve noted in conversations with our customers is that the shipping companies are now seeing certain pressure from large induces. Big global companies that have sustainability policies in place now, they are also forcing the ship owners to install the most environmentally friendly scrubber systems on all of their ships. So there is this big push towards closed loop and the thing was that there will be a bigger, bigger part of the orders in 2020.

You mentioned China's activism on banning open loop. They've also banned or are -- or will be banning discharge of PAHs, which are powerful and well-known carcinogens. Is there interest elsewhere in the globe beyond China on that?

Yes, there is. It's more and more part of the discussions we have with ship owners. As you know, Roger, we compete against centrifuges in the market. And one of the advantages we have over centrifuges is our ability to remove other things than just sulfur. PAH is one of them. It's already an integrated part of our system. And it's an add on you combined with the system. So we are seeing more and more interest for this and it's something that there's a certain banners in the market now about these things.

Regarding NOx, it is a major health issue. Is there a process underway at IMO to deal with it? And is this a two year, four year kind of process as SOx turned out to be or is there a shorter timeframe on NOx?

So, there is a great awareness now about the environment issues with NOx emissions, it is a big problem. The emission of NOx from the shipping industry is horrible, and is what you have been addressing in passenger cars for many, many years. I think there is a drive in the shipping industry in general that it's moving towards a similar emissions industry. We have seen a lot of new mandates in the shipping industry with some new mandates on ballast water treatment on those water treatment now and SOx reduction with the scrubbers. And I'm -- I think the general consensus in the industry is that NOx reduction is the next big mandate in the industry. There are certainly environmental protection stones around the world right now, where we do knew NOx adoption already. And in terms of timing, I think realistically in the next couple of years, we'll see that mandate and then there will be a grace period of maybe a couple of years before it kicks into French [ph].

Okay. And power plant business, you haven't given anything very concrete about that. Would you be able to put more texture on your expectations for power plants?

Yes. Again, it's something we've been developing for the last three or four years. We've been successful in getting a number of installations in Denmark. We had our first international orders and we are now booking orders into 2020. As we said for a while, we think it would be more meaningful part of our revenue stream in 2020 and onwards, we have not quantified that yet. It's still small baby growing, but we think will turn into some significant -- something significant in 2020. And by then we'll be quantifying our expectations for the progress.

Okay, thank you.

Thanks, Roger.

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

Thank you very much, and thank you for everyone joining us on the call today. As a reminder, we invite all of you to come to Denmark in January for our Investor Day and if you have an interest, please contact we are looking for additional details. I wish you all a good day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.