Earnings Transcript for LIQT - Q1 Fiscal Year 2023

Operator: Hello and welcome to LiqTech International's First Quarter 2023 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. Robert, please go ahead.

Robert Blum: Great. Thank you so much, MJ. Good morning, everyone, and thank you for joining us on today's conference call to discuss LiqTech International's first quarter 2023 financial results for the period ending March 31, 2023. Joining us on today's call from the company are Fei Chen, Chief Executive Officer; and Simon Stadil, Chief Financial Officer. Before I turn the call over to management, 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 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 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 Fei Chen, CEO of LiqTech International. Fei, please proceed.

Fei Chen: Thank you, Robert. Good morning or good afternoon to everyone on the call. I am excited to get the opportunity to speak with you all today. Following my appointment as CEO in mid-September of last year, our commercial strategy is delivering the intended results with strong improvement from our recurring businesses, which experienced revenue growth of 27% sequentially with improved contribution margin. Further, we have recently signed multi-distribution agreements for key geographies and market segments to accelerate adoption, including recent agreement to advance phosphoric acid purification within China and water treatment solutions in Southeast Asia. Additionally, our distribution agreement with NESR is progressing nicely, as our two companies are closely aligned and have established joint targets for 2023 to address the significant opportunity linked to ESG objectives in the Middle East. We believe this agreement will expand our reach into these key markets, which I will touch on in more detail momentarily. Additionally, we have made significant progress implementing processes to drive improvement in our contribution margins, which have reached their highest levels in more than two years. This improvement within manufacturing as well as a 28% decrease in operating expenses significantly reduce our breakeven point, which we currently estimate to be around $7 million in revenue. These three key initiatives, focus on recurring revenue, creation of new partnerships and distribution agreements to expand our commercial reach and operational efficiencies, are all moving forward according to plan. Our other key initiative, the larger system sales, is advancing with a sales pipeline that continues to grow. However, proof is in the results, and we still have work to do in order to move pipeline opportunities to confirmed purchase orders and eventual commissioning of the projects. Again, I will touch more on this in a moment. Overall, I am pleased with the progress during the past few months to grow LiqTech, but more importantly, driven the business towards profitability. Let me expand a bit more on each of the areas I just mentioned. Recurring business. As I stated last quarter, we have a tremendous opportunity ahead of us to leverage our highly unique technological advantages, brand competencies and sustainability value to build a growing and profitable business in the years to come. We moved quickly following my appointment, defined our corporate vision and commercial strategy, with a clear focus on recurring business and the large systems opportunities. We also brought on a number of important members to the team with demonstrated ability to effectively grow businesses. As I mentioned, our recurring business, including swimming pool system, diesel particulate filters, ceramic membranes, plastic components operation and spare part was up 27% of the quarter. Growth is one thing, but we are extremely pleased with the profitability metrics that come out of this component of our business, which contributed to the overall strong contribution margins. Fundamentally, being in a position where we have recurring revenue, delivering this positive result is a good sign that we have finally hit a point in our business where we understand our cost base and can optimize our revenue base within our recurring business. The systems and the process that have been put in place have provided us with excellent insight into both of these areas, which should bode well for our business going forward, especially as we drive growth in our system sales. During the quarter, we delivered two swimming pool system orders and received a large order for full commercial swimming pool water treatment system in New Zealand, which deploys a complete filtration system solution, leveraging our enhanced Aqua Solution membrane. Right at the end of the quarter, we received another swimming pool system order. From a membrane element standpoint, we shipped two membrane orders during the fourth quarter and have since closed order for an additional key membrane order for delivery in Q2 and Q3. Overall, membrane represents a significant opportunity for us. On the BPI side, we have officially seen the type of decreases that we have seen in that business with sequential revenues up compared to Q4. We do not expect tremendous growth here, but working persistently into new application areas to hold this business steady will go a long way towards our goal. Finally, on the plastic side. In the fourth quarter, we experienced significant sequential growth of approximately 67%. This is mainly driven by a large order we received at end of last year in the area of biological-based material development. The future for this segment continues to look strong as our team continues to find new and exciting opportunities to deploy our capabilities. I mentioned this last quarter, but it bears repeating. Last year, our products and the service to the swimming pool, DPFs and the plastics were around $11 million in total. We will look to make strong increases on those numbers in 2023, which will improve predictability of our business, improve our manufacturing throughput and the gross margin and, ultimately, reduce our breakeven point. Q1 was an important first step in achieving that goal. Let us transition to our systems business. As a reminder to those who might be new to our company, this includes our large system solutions in the area of marine scrubber system, industry water treatment, the broader oil and the gas filtration and acid purification market. This business certainly has longer lead times to it and requires our team to identify areas where our solution can offer superior performance and add value to our customers. During the quarter, we delivered two marine scrubber systems and continued work on a new metal cooling project in Denmark. Furthermore, we continued our work on our Middle East oil and gas projects. On the marine scrubber market, this was once an aggressively growing market a number of years ago, but basically grounded to a halt during the pandemic. We delivered two systems during the first quarter and expect to receive new orders in the coming months. Where the market is not what it was, we are seeing signs of life. On the oil and gas side, we discussed last quarter a significant MEG order received from a major U.S. oil company operating in Europe. This was the first of a 2-part order for an offshore project where we have already demonstrated the silicon carbide membrane technology performance in pilot and have verified significant performance improvement to the MEG regeneration process when compared to other membrane technologies. At end of last week, we have signed a master service agreement with the U.S. oil company. Our people are carrying on-site commissioning in these coming weeks. Our MEG system should be a contributor to growth in the second quarter. The wastewater treatment system order, I mentioned, is for the metal processing industry application in Denmark, which worldwide represents a potentially large addressable market for the company. Our proprietary silicon carbide membrane is an ideal solution that can filter heavier metals, lubricants and other demanding substance and toxins. We will look to grow this market in the years to come. Our agreement in the Middle East addressing produced water treatment for oil and gas production where our technology in collaboration with our partners continues to demonstrate tremendous results. Our team is aggressively pursuing opportunities in the Middle East and where this is a longer lead cycle solution, I believe progress is being made. Finally, our acid purification system solution runs stable at our customer site. We are in a close dialogue with the client to explore the new project opportunity. With us making nice progress in each of these markets through our direct sales force, it has been a key focus of mine to create distribution partnerships that can open the doors for us to expand our reach in new geographies and access to key market verticals. In November, we entered agreements with the National Energy Services Reunited, or NESR, a publicly traded international provider of integrated energy services in the Middle East and North Africa region. The agreement will be focused on leveraging our capabilities in produced water filtration solutions for reinjection. NESR has close customer relationships and the strong service organizations within Middle East, North Africa oil and gas industry. Since the agreement was announced, we have succeeded in becoming closely aligned, and we have established target opportunities for 2023 to address ESG applications in the Middle East. In February, we entered into a distribution agreement to supply membranes to Liquinex water treatment solution for Singapore. Liquinex specialize in design, fabrication and system integration of compact water and wastewater treatment platforms using next-generation technologies such as ceramic, biomimetic and graphene membranes. An interesting opportunity pipeline is established and is being closely followed up. Last month, we entered into a distribution agreement with Silicon Filter, a China-based company focused on providing technologies for chemical industry, with a focus on supplying our advanced filtration systems for phosphoric acid purification. China is a very significant market for high grade of phosphoric acid production for food, pharmaceuticals, mining and automobile batteries. We have demonstrated that our technology can effectively help our customers enhance their process efficiency as well as product quality. We look forward to working with Silicon Filter to efficiently expand our market reach into this large and growing opportunity in China. As you can hear, we have signed agreements to focus on each of our core system areas

Simon Stadil: Thank you, Fei, and good morning, everyone. Let me add some color on the financial highlights for the quarter. Revenue was $4 million, compared to $3.6 million in the same quarter last year, representing an increase of 10%. Broken down by vertical, sales were as follows

Fei Chen: Thank you, Simon. Before I turn over to your questions, let me quickly summarize. First, we have moved quickly to accelerate the commercial and business development processes here at the company, which has begun to show tangible results. We are growing our more predictable recurring revenue opportunities, leveraging our differentiated technology. We are also focusing on opportunities where we can deploy larger systems. Importantly, the processes and the systems we have put in place, allowing us to better align our costs with revenues with more accurate bidding on projects, all of which are driving nice improvement in our contribution margins. We have created new distributor relationships to address certain end market and have made investments to the internal team to ensure an effective multi-strategic approach to commercialization. And as we keep reiterating every time, everything we are doing is set against the backdrop of achieving profitability. The organizational transition we are undertaking has proceeded with emphasis on utilizing our existing core competencies within the company and calibrate with our renewed strategic focus and the market dynamics. As Simon and I both mentioned, we remain on track to deliver breakeven at the $7 million in revenue, a number we think is achievable in the near term. I am highly optimistic about the future and look forward to take any questions there may be. Operator?

Operator: [Operator Instructions] Today's first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

RobBrown: Hi, Simon. Nice progress on the quarter.

Simon Stadil: Thank you.

Fei Chen: Thank you.

RobBrown: So first question here is on the pipeline. You talked about the pipeline of new large projects being -- starting to build. And I just wanted to get a sense of your view there. How is that built over the last quarter? And what's the confidence level in that pipeline sort of compared to Q4?

Fei Chen: I mean, as I mentioned in my speech, we have a very, very growing pipeline. It's growing each and every month. And we have increased our confidence also on the projects. I think some of them will be converted to purchasing orders in Q2. So you -- I mean, yes, in the near future.

Simon Stadil: Maybe just to add on that as well, Rob. So I think as you can see, going all the way back to last year, we are really focusing on fast-tracking our way to breakeven. And again, the recurring business, I think we just want to steer your attention to that as well because of the large orders have a longer decision cycle, which we also alluded to. And for us, seeing the tremendous improvement in recurring business is, obviously, what gives us better predictability going into the next quarters. And then on top of that, clearly, the larger system orders, more strategic orders, will be the icing on top of that. But as we can all see on guidance, we feel more confident in giving guidance now. And then hopefully, the track record will show that also over the coming quarters.

RobBrown: Okay. Great. And then, yes, I did want to ask about the Q2 guidance and outlook. I think you alluded to it there on the recurring business. But sort of -- what's sort of the confidence level there? And how do you have visibility or, I guess, what's the visibility into sort of beyond Q2 at this point?

Simon Stadil: So we are definitely looking to continue growing our recurring business, and that's also what we're looking at right now. Clearly, we're tracking it every single day. So yes, we are confident that a proportion of the growth quarter-on-quarter will definitely come from recurring business. So again, continuing the same trajectory as we've seen in Q1, again, underlining that we have better visibility. So that's definitely -- the key guidance here for us is that we have that visibility and stability. You can also say that the recurring business is starting to give us that predictability in our forward-looking analysis.

RobBrown: Okay. Great. And then I think you said you shipped two marine systems in the quarter. How is the marine business at this point in terms of activity and the pipeline in the marine scrubber business?

Fei Chen: As I mentioned, we do see there some life signs in the marine business. So things started moving again. So we are actually focused on this area. Actually, we just hired a new salesperson. He's going to start next week because we really want to build out a stronger pipeline here. So we believe there will be several systems that will come to us later this year. So we do there some things moving.

Simon Stadil: Maybe just to add to that as well, Robert. I think on that note, please bear in mind, we acknowledge that the marine market was an important contributor to us in the past. And right now, we also want to try to cover that together with our aftermarket focus. So again, with the new -- the onboarding of a new key VP of Aftersales, combined with a new salesperson, hopefully also help us address this large pool of installed systems and help drive our aftermarket business also in the quarters to come. So the marine is not only selling new systems, it's also a matter of like leveraging the existing number of outstanding systems that we have now operating on multiple ships across the globe.

RobBrown: Thank you. I'll turn it over.

Operator: [Operator Instructions] Seeing no further questions, this concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Fei Chen: Hello, everyone. I'd like to thank you all very much for being with us today. We look forward to communicating with you soon again. Thank you.

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