LiqTech International, Inc. (LIQT) Q1 2020 Earnings Report, Transcript and Summary

Good morning. Welcome to the LiqTech Reports First Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [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.

Thank you very much, Kate. Hello, everyone, and thank you for joining us today to discuss LiqTech Internationals first quarter 2020 financial results. I’m 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, the company's 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 call, and that a transcript of the call will be available on the Investor Relations section of the company 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 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 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 speak 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. With that said, I would 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 first quarter 2020 financial results. We hope everyone on the call and your families are safe and healthy. The COVID-19 has certainly made the past months challenging. Situation in Denmark is now slowly, but safely normalizing and we are seeing the first signs of activity in the market. I will get back to this a little bit later. Our first quarter results were behind with the preliminary expectations we discussed with you during our March 26 conference call, with yet another record revenue quarter for the business of three point -- $10.3 million despite the negative intake from COVID-19, which impacted deliveries in the final weeks of quarter. As we discussed, we were on track to deliver approximately $12 million for the first quarter when COVID-19 began to disrupt operations. The $10.3 million we achieved represents a 39% increase from the first quarter a year ago and was due to the highest savings of our proprietary ceramic silicon carbide water filtration systems for the marine scrubber market, while we're continued achieve a significant commercial breakthrough. We also remain profitable, although, not at the level that we might normally expect as our cost structure for the first quarter was designed to meet both the higher revenue expectations we originally had prior to COVID-19, but also our expectations for continued reign in the business going into the second quarter. I would talk about our outlook for the second quarter and beyond moments here on. We also made very good operational progress since the start of the year. We successfully installed the first of the brand new customized furnaces around the start of the year and recently completed installation of the second new customized furnace for use in the manufacture of the company’s proprietary silicon carbide membrane filters. Each of the furnaces has throughputs that are approximately four times higher than the older furnaces due to size and efficiency. We are planning to install two additional new furnaces by the third quarter 2020, which upon successful installation of all four, increases the company's total capacity to be between $150 million to $200 million on an annualize basis by mid-2020. As we mentioned in the press release, we incurred approximately $200,000 of incremental of costs during the first quarter win data to reign in manufacturing. As the additional furnaces come on board, these amounts will decrease as our know-how improves. We improved our overall gross margins to 25.7% in the first quarter. The improvement was primarily driven by deliveries of our Mark 6.1 system, which we launched in the third quarter last year. The Mark 6.1 system is a lower cost and more efficient system. When you break out the contribution margin by systems, the Mark 6.1 had contribution margins of more than 40% during the quarter as compared to the older Mark 6 systems which had contribution margins of approximately 4%, 5%. Of the $7.9 billion of marine revenue during the first quarter, about two-thirds was on the older lower margin systems and one third was under the newer higher margin systems. We have now worked through all orders for the old lower margin Mark 6 systems and old fields systems that for delivery would be Mark 6.1 systems or higher, which should further drive improvement in gross margins overall going forward. When the impact from COVID-19 first began to occur, we implemented several measures to ensure manufacturing continuity and to the strict state guidelines and a number of personnel that can work in proximity. We divided the workforce into multiple shifts and had certain office people work remotely. Since the end of first quarter [ph], end markets now its guidelines and employees have now returned to more normalized operating procedures. We were also proactive in restructuring our overall cost base, given the expected near-term impact to the business. Overall, we have a process in place to reduce our annual cost base by approximately $1.9 million, which would be phased in over the next several months. Our hope is that we are able to quickly ramp back up to full capacity, but given the current uncertainty, these moves allowed us to create a cost structure whereby we can be profitable at about $7 million per quarter in revenue. We continue to monitor the current situation, and we are prepared to implement further plans to reduce costs, if necessary. As I mentioned back at the end of the March during our year-end call due to the impact from COVID-19, the rate of incoming orders for the marine scrubber industry has slowed and will likely impact the second and third quarter revenues. We are currently working through and delivering orders received earlier in the year, but with the slowdown in orders and difficulties in delivering and commissioning systems, this will translate into a slowdown in deliveries this and next quarter. What I can share with you is the following: We are now bagging full manufacturing in Denmark. Unfortunately, this is not the same case in many other countries around the world and I want to emphasize that our lack of visibility for the next two quarters is not due to our inability to manufacture products, but based on customers being able to receive product. We are currently in discussion on more than 17 marine system orders, but the convention later this year and beyond. This is a strong number that represents roughly $30 million in savings and based on our historical conversion cycles, I expect us to receive the vast majority of system orders. While there has some certainly been a slowdown in orders that started in Asia and gradually worked their way to Europe, customers around the world seem to be slowly coming back and the recent improvement and reason to believe is that our business will soon return to normal limits. I want to give you an update on our progress in oil and gas markets before I turn it back over to your questions. At a high level, the capabilities we have developed using our proprietary silicon carbide filters in our unique system design are ethical to a number of applications. We had our first commercial breakthrough of the technology in the marine scrubber segment and we continued to believe this will be a significant growth for our business. We have also made inroads in the power plant market, particularly in parts of Europe where similar regulations are limiting the discharge capabilities from these plants. The next application we are commercializing in the oil and gas market. One, we believe -- one that we believe will significantly surpass both of the other markets in terms of their overall size in the years to come. What makes LiqTech solution unique for this market is our ability to treat difficult water and reuse it in the process. We have tested our technology together with some of the largest oil and gas companies, and we have proven that our technology offers a better solution in terms of both quality and cost compared to existing alternatives in the market. As earlier discussed, it has matured in the Middle East for some time. These projects are for water reuse in the oil production, and related to water scarcity in the region. So, despite us the varying price of oil in any given period, these projects are focused on long-term solutions to long-term issues. This is why we think that our technology is ideally positioned to address the need for water treatment solutions areas in the Middle East, whether it's local water scarcity. We look forward to finalizing contracts in the months and years to come, with an expectation that the oil and gas market will be the largest contributor of revenue in 2021. And once again -- to once again note that this is not because the marine scrubber business will see a drop off, but because the oil and gas opportunity is simply that large. So, just to wrap things up before we turn it over to your questions, I want to say that I'm pleased with the operational performance by the team over the last number of months. We finished the first quarter with record revenues, despite the impact from COVID-19 midway through Q1, and maintain profitability in the business. Management team has quickly navigated the COVID-19 disruptions, ensuring manufacturing continuity, while at the same time ensuring our cost structure matches our revenue levels in the near-term and lowering overall breakeven point. We continue to make progress in the oil and gas market, which follow successful pilot programs with key customers in the region, and we believe that we are on track to announce significant orders for this industry in the near-term. And despite the impacts of COVID-19, we remain the leader in the marine scrubber industry for filtration. Our market share remains in the 50% range. And while there was a lot of orders, and given the global disruptions, activities once again picking up with us contemplating on more than 70 orders, which we believe will translate to return to our historical levels of growth later this year. One final note. I will be participating in a Virtual Investor Conference presentation next week, Wednesday, May 20 with the team at Lytham Partners. Saying on the webcast will be sent out later this week. And I will also be participating in virtual one-on-one meetings on Thursday, May 21. Please contact Robert Blum for additional information. And with that said, let me now turn the call over to any questions you might have. Operator please.

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

Morning, Eric.

Morning. So, you've kind of touched on it and obviously, things have slowed down, but I'd love to hear your thoughts just on the overall market and obviously there's been -- at least here near-term because of the spread -- a pretty widening or lengthening out of paybacks for scrubbers, what you're hearing from customers, whether you or they are saying they think that's a little bit more of a long-term situation, or is that truly a couple quarters?

So, what we hear from our customers is that they are not really focused on, let's say, the spread in any given time. They're more focused on the long-term spread between low sulfur and high sulfur. We see that now -- it has truly been quiet for some months. In the beginning of the COVID-19 situation, I'm very pleased to see that in the last, I'll say, two or three weeks, we have seen a significant take off in activity from the scrubber manufacturers and from the ship-owners. So, it looks like and things are now normalizing, we see the oil is coming off a little bit again, the price spread is coming up and it looks like they are now continuing with, let's say, the scrubber installation plans that they had already before the COVID-19 situation. So, we think it is a couple of months of disruption. And, especially what we've seen in the last couple of weeks leads us to believe that the situation is now normalizing. We're not completely back to normal. But as I mentioned, we are negotiating a significant number of new contracts. And so, that is a very positive for us.

Yeah. And when you talk about those new contracts, I mean, it's still a similar dynamic as what a month and a half ago when it was more activity out of China rather than Europe, or I mean, it's some of that renewed activity Europe?

In the past couple of weeks, we now see more activity again from Europe. Two weeks ago, three weeks ago, it was completely dead from Europe, was driven by the Asia players who've been back to work for a while now. But now we see the European players are coming back, which is a great sign. So, again, things are normalizing in Europe and I think, there is still a lot of challenges in southern part of Europe, but in northern Europe things are slowly, but safely normalizing and see activities picking up.

Got it. Thanks for that. And then maybe just the backlog, I know you don't quote the backlog. But maybe if you could just talk about the health of that a little bit. Are you seeing -- or have there been any cancellations, or is it more a case of what you've got in backlog? Just being pushed to the right in terms of timing.

We have actually not seen a single cancellation. We have seen issues in delivering a product, issues in commissioning systems over delivered. But we have not seeing any cancellations. So, again, a great sign. And it leads us to believe that this is more of a timing issue more than anything and that, that things will come back and obviously, we encourage to see that, that there has been no cancellations at all.

Yeah. Absolutely. Maybe the last one for me, just on the OpEx, could you just give some of the specific actions that you're taking there? And then just curious, you mentioned last quarter that there might be some help from the Danish government. I think, it was something like $400,000 a quarter. Whether that is something that you have chosen to, or are able to access? Thanks.

Yeah. There are a number of initiatives from the Danish government. You can send people home and have salaries pre-funded or partly pre-funded. And there's also an initiative that you can delay tax payments for four months. We have chosen to use the delay of the tax payments, which will help liquidity in the next four months. We have not chosen to use to reimburse part of the salaries for employees, because for our employees, the percentage was too low. So, the cost savings that we have now put in place is that we have laid off a number of people to reduce our overall costs. We have tried to be careful in the layoffs. So, they are in the manufacturing, they are people working with project management. We have not made any reductions in R&D and let's say, longer term important functions. And the Danish situation is little bit different. It's not like in the U.S. when you layoff people, they go home the next day. We often have three, four or five months off termination periods. So, these employees are currently working through their termination periods, which is why the cost reductions will come in to reinforce by August this year.

Okay. Thanks a lot.

Thanks, Eric.

Our next question is from Robert McCarthy from Stephens. Go ahead.

Yes. Good afternoon and good morning. Sune, how are you today?

Morning Robert. Good. How are you?

Good. So, appreciate all the color. Definitely a lot to noodle on. I guess, asking around the cash burn, it looks like, obviously, working capital, it's a good news story and the fact that you're expanding working capital to kind of meet demand. But how do we think about kind of your cash balance right now and your cash burn going forward? And would you anticipate any needs for additional funding, or do you think just given the fact that you're going to have these cost saves and ramping up production that cash generation is going to kind of take care of itself? Because obviously, I think, last time we spoke on the quarterly call, you suggested that obviously if activity would want more of, and you definitely had a long runway here. But given the fact that you're going to have some fits and starts with your working capital and your supply chain, your productive chain, how do we -- what your cash position could be kind of going into 2021 and beyond?

Yeah. So, the steps we've taken right now to reduce our overall cost base means that we should be profitable on approximately $7 million of revenue per quarter. So, we are definitely cautious here. We have taken in, I think, the light steps to reduce our overall cost base, and it means that we shouldn't burn too much cash due to this COVID-19 situation. Secondly, we saw our cash balance come down in the first quarter, but that was really a result of the increased level of business, the record revenues in the first quarter, which required more working capital. After the quarter ended, we have started collecting some of these payments on goods delivered in the first quarter. And our cash balance today is somewhat higher than it was ending the quarter. So, I think, we're in good shape here. We have no debt. We have to pay our cash balance. And we have taken steps to reduce our overall cost base to match revenues in this difficult COVID-19 situation. And we are now seeing signs of the business improving. We see more products use. We see more orders again. And that leads us to believe that by the end of this year, hopefully, we'll be back, let's say, where we were before this COVID-19 situation.

In terms of your backlog, I think, you suggested, obviously, given the mix shift to the better the Mark 6 I believe in terms of the product profitability, you expect 40% contribution versus by your historical 25% for your existing product lines. So, we should expect all things being equal, a pretty nice lift in gross margins in the back half of the year or into 2021, correct?

That is correct. So, very encouraging to see the development in the first quarter, about one-third of the deliveries was the higher margin Mark 6.1 product. Two-thirds was the old lower margin Mark 6 product. We have now worked through all the Mark 6 orders we had in our pipeline, all future deliveries would be Mark 6.1 or higher. And that also means that we'll see further improvement in the gross margins, which I'm very pleased to see.

And then how many -- what's the state of your tax credit right now in terms of what's going on? Remind us, how that -- how much of a tax advance that you get over the next couple of years?

Yeah, we have -- I think, it's all together about $6 million tax advance. And that we are now starting next week. We were nicely profitable in the Danish entities last year. And we kind of used that -- some of that tax assets and so, we're not paying tax.

So, final question. The third quarter, I think, is traditionally a period where you'd start to see some kind of just easing in production, just given the seasonal activity of production in Europe and Scandinavia, right? Do you expect, just given the disruptions we've seen, whether you'll be full bore in the third quarter, or do you think you'll see the same kind of seasonal production patterns?

So, [technical difficulty] COVID-19 situation is that we burned through a lot of the holiday allowance for the employees. So, in theory, if we see activity pick up in the market and the customers being able to accept deliveries, then we will be able to be more access than normal in the holiday season. But now seeing the first signs of the market recalling after COVID-19, it is still challenging. And I believe that our revenues will be impacted for the second quarter and the third quarter. To which extent is still difficult to predict. We are bagging full manufacturing and so, it all comes down to our customers' ability to actually accept products. So, yes, in theory, we will be able to have more people working for the holiday season, because they already took out some of their holidays at this point.

I'm sorry. Just one more. Diesel particulate sales in your business for the quarter and for the -- what's your expectation for the full year? Just so we kind of level set expectations.

Yeah. DPF, we have not really any changes to our expectations. We still think it will be between $6 million to $8 million for the year, and for the quarter, it was pretty stable. I believe it was around $1.5 million.

$1.5 million? Okay. Thank you, Sune.

Yeah. Yeah. Thanks.

[Operator Instructions] Next question is from Rob Brown with Lake Street Capital Markets. Go ahead.

Just on kind of timing of shipments and recovery and things recovering, how many units do you have sort of built, ready-to-go at this point, or sense of how quickly things can turn back on?

We have not discussed that, but we have stated full manufacturing. So, we do have a fair amount of systems. And it also means that when things pick up again, we will be able to ship products very quickly.

Okay. And then the oil and gas market, you talked about a significant ramp into next year. When do you sort of need to see order activity start to hit your goal of being larger part of the business next year?

We think that the second and third quarters will see first orders from the oil and gas industry. In fact, we have great confidence in that. We have been working on it for a long time now. We talked about it last six months now. And there are no changes. The projects in the Middle East are related to water scarcity and so, they are moving forward. I'd say the out swings in oil prices that we have seen in the last couple of months. So we are encouraged to see that. We're still making progress in that. And we would expect to see first orders in the next few months.

Okay. And it's -- I guess, gas business given the CapEx cuts in that world, but they're still moving forward with sort of the capital project, I guess. Have you gotten sort of recent checks there that are saying that the things are moving forward, or is this a case of the customer base that you're talking about? Have you using the lane [ph] CapEx as much? Just gives us a sense of why those projects can still move forward in the tough current environment?

Yeah. We are in contact with these customers almost on a daily basis. Things are moving forward. And I would say, yes, it is surprising environment in the oil and gas business. But again, these projects are not related to anything other than water scarcity. And so, they simply do not have anymore. And if they want to continue to manufacture oil, they need to do something otherwise, there would be a need of water. What they are doing today is trucking [technical difficulty] sweeping huge costs. So, even despite of the oil prices that we have today is really represents a great opportunity for the operators to cut their costs on water used in the process.

Okay. Great. Thank you so much. We'll turn it over.

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

Thank you, operator and thanks for everyone joining us on the call today. I look forward to speaking with many of you again next during our virtual presentation and one-on-one and hope that we can all visit face-to-face again in the near future. Have a good day and stay safe.

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