Good morning and welcome to the LiqTech International reports fourth quarter and fiscal year 2021 financial results conference call. [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.

All right. Thank you very much, Anthony. Good morning, everyone, and thank you all for joining us today for today's conference call to discuss LiqTech International's fourth quarter and year-end financial results for 2021. I'm Robert Blum with Lytham Partners. I'll be the moderator for today's call. And joining us on today's call from the company is Alex Buehler, the company's Interim Chief Executive Officer; and Simon Stadil, company's Chief Financial Officer. Before I turn the call over to Alex and Simon, let me remind listeners that there will be an open Q&A session at the end of the call. 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 condition, 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, encourages all listeners not to place undue reliance on these forward-looking statements, which pertain 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 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 Alex Buehler, Interim CEO, LiqTech International. Alex, please proceed.

Thank you, Robert, and good morning to all of you and thank you for joining us on today's conference call. Please note that I sincerely appreciate your continued interest in and support of the company and its prospects. I know that today's call is unique, occurring shortly after last week's announcement about Sune and his medical leave of absence. So let me start by conveying my very best wishes to Sune and his family for which we hope and pray for a speedy recovery. While I cannot provide any further details related to his condition or time line, we will work diligently to ensure for a seamless transition. I will ask in advance for your patience as clearly I lack Sune's command of the many details of the business, its markets and its technologies. But rest assured that I am a fast learner, and I will climb the learning curve as quickly as possible. I'm honored to lead the company at this time with the full support of the Board of Directors. I am currently in Denmark at our headquarters and manufacturing facility in Greater Copenhagen, and I'm very pleased to observe a team that is welcoming of interim leadership, rising to the occasion of the moment, adapting to the transition and meeting head-on the market challenges that we are facing as a business. I think that it is fair to say that we all embrace the bright and exciting future at LiqTech. Importantly, our investors should know that you have my full commitment, my undivided attention. And I will work tirelessly to provide strong leadership, strategic clarity, commercial intensity and execution discipline during this transitional time. So with that said, let's dive into the business with further detail. I thought it would be important to frame an agenda upfront…

Thank you, Alex. Let me talk through some of the financial results and add some further clarity. Revenue in 2021 was $18.3 million compared to $22.5 million in 2020, this representing a decrease of 19% year-on-year. Revenue for the fourth quarter of $6.1 million was in line with the range of expectations that we provided back in November. On the full year, results were negatively impacted by a decrease in sales of our water treatment systems, the marine scrubber industry, impacted by the global pandemic, continued supply chain disruptions and general market volatility, all of which we have previously discussed. The decrease in marine scrubbers was partly offset by an increase in sales of our DPF filters and our engineered plastic products, this reflecting a robustness of our business and a continued interest in our environmental solutions. As Alex mentioned, we are now expecting a Q1 revenue of $3.5 million to $4 million compared to the $4 million recorded in the same period last year. This is below the expectations conveyed during our Q3 earnings call, reflecting delayed oil and gas orders caused by disruptions to the global supply chain, general market volatility as well as the absence of marine scrubber deliveries due to the unwillingness of ship owners to dry dock vessels during periods with elevated freight rates. In the context of the decreased revenue, gross margins were also adversely impacted by an unfavorable shift in our product mix with lower membrane and system sales, reduced utilization across our manufacturing facilities and, finally, rising input cost inflation associated with raw materials, labor and utilities. Additionally, we experienced increased costs related to our upscaling projects in both Denmark and China, more specifically project management costs and depreciation expenses on new machinery. In summary, this resulted in a gross profit margin…

[Operator Instructions] Our first question comes from Rob Brown with Lake Street Capital Markets.

I just wanted to get a little more detail on the oil -- or, sorry, on the marine market. How many units are sort of in backlog right now that have been ordered, but you can't ship? And then maybe, how has the order rates come in? How is that backlog build? And then how much visibility do you have in Q1 '22?

Yes. Look, as you know, we don't really give specific backlog guidance, right? Generally, as we look at our business, it's pretty short-cycle, small-order, flow-through business across a diversified set of customers. As you said, kind of the marine scrubber market is a little bit different with a little bit longer lead times. Having said that, however, we're not in the business of publishing our backlog on an ongoing basis. We will continue to announce large orders that are long cycle and outside the ordinary course of business. We'll keep up with that practice and honor historical precedent. But when it gets into kind of backlog, what's shipped, what's not shipped, I just don't want to go into that level of disclosure. Hopefully, you can understand that.

Oh, yes. Yes, I definitely understand. And just really trying to get kind of a sense of visibility for '22. I know you said there was a number of moving pieces, but I'm just trying to get a sense of the revenue number you gave for '22. What's the visibility there? And what needs to come in, I guess, to kind of [ compensate ] [indiscernible]?

Look, I know it's probably a large downgrade or revision from the last quarterly guidance. But look, from my perspective, I just arrived. I'm new to the business. I can't say that it's changed in the last week or so, right? This revised guidance was probably coming. And we just got our arms around this thing and brought it to the surface. That does not undermine the fact that we strongly believe in these core end markets: marine, oil and gas, black carbon, NOx reduction, drinking water and otherwise. I think the current forecast, considering limited time on the ground, is a middle-of-the-road one, right? I have an adequate level of confidence. I do not believe it's unduly conservative. I think there is adequate and responsible stretch in that number. We kind of got there on a bottoms-up basis with Simon engaging with our sales team pretty evenly. So I think we feel good about the forecast as it currently exists. Obviously, as things change, we will do our very best to keep all stakeholders updated and apprised of recent developments and changes in the forecast. But I think in summary, it's probably a middle-of-the-road approach.

And Rob, if I may add one thing here. It's Simon. I think it's -- order backlog for marine scrubbers is a one thing. But for us right now, it's all about getting clarity on the overall diversification, the opportunity pipeline, reassessing all corners of the business. I think that's one of the robust positive elements that we're looking at right now, but it's more the marine scrubbers. So please bear that in mind that when you raise your questions on backlog, gross backlog and opportunity pipeline is more than just the marine scrubbers, giving us more comfort and the ability to execute on proposed numbers because we have a more diversified end market and opportunity pipeline than previously.

Okay. Yes. Great. And then just to clarify the oil and gas comments you made. I think you said there was some order release delay. That was sort of the -- that was the new expected orders? Or was that shipments from the orders you've already received?

These were the new orders that we specified in prior releases. So the orders still stand intact. But yes, the shipment on those orders and the recognition of revenue for those shipments is delayed.

Okay. Okay, great. And then just lastly on the marine -- oh, sorry, the membrane supply agreement. You have made specificity on that ramping. Is that -- maybe just clarify. You're seeing a regular order cadence there. Is that part of a -- is that a membrane that goes into a product that has an existing kind of flow-through? And will that become kind of a regular monthly shipment-type business then at the...

Yes, that is the nature of the agreement we executed with this European customer. It entails the provision of membranes. We are not integrating a system around those membranes. The customer in this case will integrate that system more for modular drinking water applications. But by virtue of a framework agreement over several years, yes, we want to get into a position where we are consistently supplying membranes over the term of that agreement.

Our next question come -- oh, pardon me. [Operator Instructions] Our next question will come from Cole Couzens with Stephens.

I saw the update to the full year 2022 guide. Assuming you're in that range, what's a reasonable operating margin we can expect? Do we think breakeven, positive, negative? Kind of anything to get us in the range.

Look, we're going to stick to revenue guidance. I don't want to get into the business -- and I'm sensitive to the fact that it helps you with your modeling exercises and the value of the business, et cetera. But look, I want to start with revenue. So we had some specific guidance out there in the market as of Q4 of last year kind of getting down into margins, et cetera. I just don't think we're ready for that, so I am going to pull it back a little bit. We will forecast revenue kind of for the current year, and then give a little clarity on the front month quarter. I'm not in a position where we're going to get down into revenue, OpEx and earnings. Perhaps with more time. And maybe that's just me, honestly, being new to the role and the business, although I've observed it from afar as an independent director. It's quite another thing to be an interim CEO and fully engaged in the day-to-day details of the business. So for me, until I'm comfortable, I'm going to stick with annual revenue guidance with some calibration for the front month quarter.

Fair. I guess kind of sticking to that revenue guidance, two quick follow-ups. First, just to support that, how much CapEx will you need? And what are some of the key budget items there? And then second, if you think about working capital across inventories, accounts receivable and accounts payable, how much investment would you need to support the revenue outlook? And is $5 million a reasonable number? .

Well, look, I'll start, and then I'll turn it over to Simon. And I'll kind of start with the first question on CapEx, and he could go into more detail on working capital. Look, obviously, CapEx is something we're evaluating right now, particularly in light of sort of our operating performance, balance sheet, cash flow characteristics, et cetera. So I do think we are evaluating the level and the pace of our investments in light of our current operations and cash flow and balance sheet strength. So we will closely look at CapEx and apply that for future investments with a known return. I'm not prepared to quantify a range of CapEx options just because I personally haven't gotten into that process yet except for looking at sort of the high-level financial statements. But you can expect a little bit more clarity on CapEx during the next conference call in May after I/we've had a full opportunity to assess the planned investments, planned and budgeted investments for the current year. I will say, however, and reiterate that we are reevaluating the level and pace of our investments. We know we need to expand our manufacturing capability and capacity to meet growing demand across our global end markets, but it's a question of how do we -- the how and where do we best do that. So I know that's high level and thematic. It's not providing you the quantification that you were after on CapEx. But with that, let me hand it over to Simon, and he could provide, hopefully, a little bit of color on working capital.

Thanks, Alex. Just one final comment on the CapEx. I think it's important to note that at the moment, we have excess capacity within our Danish manufacturing plants. And as -- again, that's evidenced by the fact that we obviously, a few years back, delivered plus $30 million of revenue. So clearly, for us right now, it's also a matter of understanding where will the growth come from, which part of the business. And obviously, if it's within the system business, then we obviously have capacity that doesn't require more CapEx to service near-term growth. So again, the growth and the spending CapEx, I think, more ties into our views on '23 and '24 which end markets that we're going to service. Finally on CapEx, clearly the European flat sheet membrane order clearly requires some investments in the near term, and that's what we're going to focus on. Turning to your question on working capital and, again, the number that you flagged, I think it's a fair assumption, though I think it's obviously clearly sensitive to the sequence of revenue in terms of the quarterly revenue over the coming 3 quarters in terms of collections and so on and so forth. But I think the level you're referring to here, Cole, I think it's fair. But again, be mindful that we're early in the year. And in terms of revenue sequence, that can impact working capital quite significantly. But let's go with the assumption we make for now.

[Operator Instructions] Our next question will come from Alex Blanton with Clear Harbor Asset Management.

Could you give us a little more color on the shifting of orders in the oil and gas part of the business from the first half to the second half that you mentioned in your opening remarks? You said there were -- it had to do with geopolitical concerns and commodity price changes. Could you give us a little more color on that? What are [indiscernible]?

Yes, I guess that was -- I'd think about it on -- sorry, I didn't mean to interrupt you. I'll let you finish that thought before I answer.

No, just a few more specifics on what those factors are and how they're causing the delays in the orders.

Yes. So let's think about it on two levels. Obviously, there's the strategic and the macro and then the more tactical and the micro. Strategic, yes, we can talk about this commodity price environment, which would generally be helpful to investments in oil and gas. We could talk about the geopolitical tensions, and everybody is kind of looking around saying, okay, what's going to happen here with crude oil flows and what's going to be the impact, right? I think what that has caused is a certain stasis and uncertainty among our major customers. Now on one hand, you would say, well, they should be more likely to invest because commodity prices are at historic levels. But practically speaking, they're not, right? Kind of everybody has stopped waiting around saying, okay, where is this market going and what are we doing at the moment. Beyond that, they don't want to disrupt any operations that could undermine production, right? So you keep production churning at very high levels without interruption, particularly interruption concerning integration of new products and technologies. So that's kind of the macro and the strategic. In terms of the micro and the tactical, I would just point to kind of logistical challenges on the customer site. There are freight challenges to get deliveries and materials in place. There are operational challenges just with their scheduling on the ground. And then some of the orders are just a little bit being recalibrated for very good reasons, by the way. I won't go into specifics, but we think some of these orders might expand, but they're evaluating kind of the size and the need and the timing. So hopefully, that's enough color. But to summarize, that's how we -- I would characterize it. On one hand, you've got the macro and the strategic, and, on the other hand, you kind of have the micro and the tactical, both of which are causing orders to slip out of both the first quarter and the first half of the year. Now having said that, obviously we remain very bullish on the oil and gas market. When you look at produced water or deep-sea drilling or any of these other segments in oil and gas, the need is manifest and potentially very large. So we fundamentally believe in these markets. We believe we have a very strong technology and value proposition. We believe that things like the disposal of produced water even in places like the Middle East, where they have not had much environmental awareness, all that is changing overnight. Because of the increasing awareness, sensitivity, ESG, et cetera, their stakeholders are making them embrace these changes. So long term, the fundamentals are very good. The future is very exciting. However, things are pushing out of the first quarter and first half of the current year. We just can't deny that. Therefore, we've got to recalibrate.

In line with that, I've been reading that the oil price increase is going to lead to more spending on capital goods in Saudi Arabia specifically. So is there a thought that a higher oil price might make these orders larger when they eventually come in than they would have been otherwise? Is that a possibility?

Yes, definitely. Yes. I mean I think slower and bigger is hopefully the mantra here, right? Obviously, Saudi considered a petro state, right, and they have a Vision 2030 that consists of significant investment not only in oil and gas but also across water, desal, infrastructure. By way of example, they're building new mega cities, greenfield projects in the desert, right? So they have very ambitious investment plans in oil and gas and beyond. And elevated commodity prices are only going to accelerate -- I shouldn't say accelerate, deepen their investment plans. I think it will go bigger but slower because, again, they don't want to do anything to disrupt production or interfere at the moment with kind of global trade flows of crude oil, right? So we are sort of hanging in the balance here of sort of one, not -- one more geopolitical event that completely disrupts all oil and gas markets. So everybody is kind of producing outright right now. And even the Saudis are close to maximum capacity. There's almost no spare capacity in the market with the exception of Saudi and maybe, to a lesser extent, the Emirates. But yes, I would agree with your conclusion. They're going to be much richer as a petro state. They're going to have a lot more dollars to invest. So I have to assume in the long run, that's good for our products and technology and good for our business. But I think it'll be slower.

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

I want to thank all of you for your participation in today's call, along with your continued interest in and support of the company. While we face continued uncertainty in our target markets, we are not tempering our growth ambitions or altering our strategy. It remains our intent to continue progressing our sales efforts to fully deploy our water system filtration technology and leverage our deep experience manufacturing silicon carbide ceramic filters into several large, growing end markets. The company is fortunate to benefit from a strong, adaptive organization with market-leading products and technology and stable corporate governance. As I stated at the beginning of the call, please note that I will work tirelessly to provide strong leadership, strategic clarity, commercial intensity and execution discipline during Sune's absence. I look forward to continued dialogue in the future and more specifically revisiting our discussion in May during the Q2 conference call. Thanks again for your attention, and please have a great day.

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