Earnings Transcript for LIQT - Q3 Fiscal Year 2023

Operator: Good morning, and welcome to the LiqTech Third Quarter Fiscal Year 2023 Results Conference Call. All participants will be in 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.

Robert Blum: All right. Thank you very much, Andrea, and good morning, everyone. Thank you for joining us on today's conference call to discuss LiqTech International's third quarter 2023 financial results for the period ending September 30, 2023. Joining us on today's call from the company are Fei Chen, company's Chief Executive Officer; and Simon Stadil, company's 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 today. Before we begin with prepared remarks, we submit for the record the following statement. 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. That said, I'd like to turn the call over to Fei Chen, CEO of LiqTech International. Fei, please proceed.

Fei Chen: Thank you, Robert, and good day to everyone on the call. I am excited to get the opportunity to speak with you and to share with you our good progress. During the third quarter, we made continued progress executing against our strategic plan to drive the business towards profitability. We saw a revenue increase of 53% compared to third quarter last year. Gross margins improved from 3% last year to 19% in this year's third quarter. And our net loss improved by $0.4 million. Importantly, our adjusted EBITDA was just a negative $0.8 million as we move the business towards profitability. This improved results are due to the enhanced business strategy we enacted last year with focus on delivering revenue on our established business areas and we're driving growth through expansion into new targeted markets. To put it in other words, we look to protect and expand our established businesses such as commercial pool systems, ceramic membranes, diesel particulate filters and components. Enhance and develop our target businesses, which includes areas such as phosphoric acids, oil and gas and our overall strategic focus to increase our service business. As I mentioned in my recent corporate presentations, the key word here is focus. We are focused on making sure that we can have a sustainable business by protecting and defending our position in key markets we are listed as a demonstrated history of success. We're enabling high upside growth in exciting markets where we can leverage our core silicon carbon technology and system design capabilities. This dual approach ensures that we are not reliant on any one project or customer for us to be successful. Taking a step back, at LiqTech, it is our vision to become a leading provider of advanced and sustainable filtration solutions. This key megatrends of water cleaning and reuse, greenhouse gas emission reduction and overall circular economy are all key to save the world's scary resource and protecting the environment. Beyond protecting the environment and preserving resources, our solutions provide real economic benefit to our customers. Whether it is the increased years through product purification of our phosphoric acid system, decrease the cost through the ability to reuse water in our produced water, oil and gas solutions, or lower energy consumption and the chlorine dosing needs in the case of our after solution for commercial swimming pools products. The recent sales went -- that we have achieved and distribution agreements we have signed are all due to the key ideas of providing value to customers. Let me take a minute to talk about some key developments that took place over the past few months. Let's start with our commercial swimming pool products. We successfully delivered 10 swimming pool systems during the third quarter and have recently received orders for three more systems, which we anticipate delivering during the fourth quarter. Year-to-date, we have shipped 18 systems, compared to six systems in 2022, with a geographic focus in U.K., Spain, Portugal, Australia and New Zealand. With the great progress we have made in these new geographic areas, we have been looking at ways to broaden our sales footprint by entering into distribution agreements with key partners. Following a thorough process, we entered into two key agreements. One with Barr + Wray, a U.K. and Dubai-based group, to cover key areas of the Middle East, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. As their CEO mentioned, LiqTech's pool filtration system is strategically a perfect match with Barr + Wray's cutting edge work in the design and the build of the most prestigious state-of-the-art leisure centers and spas. We also entered into agreement with Waterco to cover Australia, New Zealand, Papua New Guinea and the Pacific Islands. Waterco is a well-established player in the swimming pool market and has worked with LiqTech successfully over the past three years to bring solutions to their joint customers. We look forward to working with these two well-respected companies to broaden our reach and make a substantial impact in the global aquatic and water treatment industry in these key territories. Within the marine scrubber market, we saw the return of our first new marine scrubber system orders in more than 18 months as we developed -- deployed an upgraded modular design system through our recently enhanced distribution relationship with Joyo in China. Our dialogue with customers and partners has confirmed that LiqTech's modular design marine scrubber water treatment system is highly reliable and delivers strong returns on their investments. Furthermore, our new generation design reduces OpEx for owners significantly by largely reducing day-to-day operational and maintenance costs. LiqTech has more than 160 installations in the marine scrubber market, which occurred primarily between 2018 and 2020. This new order not only demonstrates the continuous confidence from the market and the customers in our solutions, but also validates our enhanced commercial strategy, I mentioned a few moments ago, as we focus on driving revenue in established business verticals where LiqTech has proven technical capabilities and installations. With a renewed focus on the market coupled with capable distribution partners, I believe there is an opportunity to regain our position in this market in the future. Finishing off, our established business contributors from a membrane element standpoint, we continue to deliver ceramic membrane orders during the third quarter and received new orders which will be set for delivery in quarter four. On the DPF side, we experienced stable revenue contribution. We don't expect tremendous growth here, but looking persistently into new application areas to hold this business steady. On the plastics side, in the third quarter, we did experience a bit of a sequential pullback as we wrapped up a large order we received at the end of last year in the area of biological-based material development. We continue to look for opportunities to grow this area into the future. Finally, we did see significant increases in the sales of spare parts in quarter three as we have more systems in operation. This will become a nice recurring business opportunity for us. Overall, we are pleased with the progress we made on our established business areas across all of the key areas I mentioned. We have improved our pricing discipline through enhanced cost visibility and elevated market intelligence, which is delivering increased gross profit and ultimately bring LiqTech closer to profitability. While we are pleased with the traction generated from our established business, we recognize that there is a very large addressable market opportunity for our solutions in a wide variety of markets that can potentially drive growth for LiqTech. This large system solutions in the areas of industry water treatment, oil and gas filtration, acid purification and other industrial applications are ideally suited for LiqTech solutions in the long run. As we have stated, the downside is that this area has much longer sales cycles, but I believe progress is being made. Within the oil and gas market, our collaboration with NESR is moving ahead. We are currently building what I would define as a pilot system, specifically for NESR to utilize in various demonstrations. We are similarly in close dialogue with two to three target customers in the Middle East for produced water solutions where our solutions could be applied. I hope to have more to share with you in the coming quarters. Within phosphoric acid, we delivered and recognized revenue during the third quarter on our pilot unit to Silicon Filter in China. We believe this pilot unit will enable our partners in the region to demonstrate that our ultrafiltration technology can effectively help their customers enhance their process efficiency and product quality. We look to further build out this pilot and our U.S.-based installations to drive further phosphoric acid system sales into the future. During the third quarter, we also delivered and recognized revenue on our metal cooling system here in Denmark, where not a large market opportunity, it highlights the capabilities of our solutions across a wide range of opportunities and the validation by yet another large international company. Finally, the monoethylene glycol, or MEG front, our fourth offshore installation in the Mediterranean with the large oil and gas client continue to perform well. As I mentioned last quarter, this first of a two-part order for the offshore project with expectation for follow and orders shown. That said, due to the location of the platform, which is off the coast of Israel, there is some uncertainty on the timing due to the current conflict in the region. We should know more in the coming weeks. And whether or not this will be shipped in fiscal 2023 or slipped to 2024. In summary, as we look to the rest of the year and into 2024, we see a number of opportunities in our targeted business segments, particularly with phosphoric acid, MEG, as well as produced water component of oil and the gas market that we believe will be key contributors to growth, hopefully, in 2023 and certainly in 2024. Further, our newly established partnerships with -- within the commercial swimming pool market are expected to expand our growth in this key market segment for us moving ahead. Where there is always uncertainties such as what we are encountering with our MEG installation in the Mediterranean, we feel confident in the guidance for the full year 2023 revenue of $19 million to $21 million. Further, we also believe that we remain on track to achieve our full year gross profit margin position in the range of 15% to 20%. Please remember that our gross margin last year was only 3.5%. We have a tremendous opportunity ahead of us to leverage our highly unique technological advantages, brand competences and sustainability value to build a growing and profitable business. In 2023, we have succeeded in making continued progress in each quarter and I am extremely pleased that with this good performance and anticipate continued progress in the quarters to come. With that, let me turn the call over to Simon to review the financials in more detail, after which I will wrap up with a few comments and then open the call to your questions. Simon, please proceed.

Simon Stadil: Thank you, Fei, and good morning, everyone. Let me add some color on the financial highlights for the third quarter. The reported revenue of $5.1 million increased 53% compared to the $3.3 million reported in the third quarter of 2022, and also marked a modest, however, important increase compared to the most recent quarter ended June 30. Thrown down by vertical, sales were as follows

Fei Chen: Thank you, Simon. I'm pleased with the progress our new leadership team has made to transform LiqTech operationally and commercially to become a leading provider of advanced and sustainable filtration solutions around the world. We look forward to finishing 2023 on a high note and saving our sales up for continued success in 2024. With that, operator, we would be happy to take any questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Rob Brown of Lake Street Capital Markets. Please go ahead.

Robert Brown: Hi, Fei. Hi, Simon.

Fei Chen: Hi.

Simon Stadil: Hey, Rob.

Robert Brown: You made nice progress in building up the distribution relationships. I just wanted to get your sense on how much more there is to go there? And are there certain geographies or other markets that you need to work on? Or do you feel like you've kind of gotten that now in place?

Fei Chen: Yeah. We still have quite many areas -- geographic areas to be explored. For example, we don't have any distributor in the U.S. and also some other European countries. So we will definitely continue our journey and find more distributors to extend our geographic reach.

Robert Brown: Okay. Great. And then, I guess, on the scrubber market, you had some orders in the quarter. How is the pipeline looking for that? And do you feel like that's sort of reengaging into next year? What's your sense on that market for the next coming months?

Simon Stadil: So Rob, we were not commenting on the pipeline. Clearly, we're disclosing orders as they come, if they are obviously relevant in terms of tapping into new markets or they are reflecting a new product or a sizable order. Now we are diligently working through our marine portfolio, as also alluded to you on our conference participation back in September, where we're trying to really address that market through multiple channels. As we also alluded to at that point, we have onboarded a new sales rep for that market, very experienced person, that will help us build more channels. So we are working diligently to really strengthen our marine pipeline, and we'll elaborate more on that on future calls. And obviously, we will also disclose that on relevant press releases in due time.

Robert Brown: Thank you. And then maybe on your efforts to kind of get spares and services improving, I think you had some nice progress there. But how do you see that playing out? And what sort of goes into ramping that business?

Fei Chen: I mean we do have 160 marine systems in the market, and that give us a very good basis for our service business. And we're also selling more systems for the oil and gas and also phosphoric acid, and also even for the swimming pool systems. So we are actually in the process, really looking into our service offering, and build up the [ proficiency ] on that. So we do hope -- we do expect next year, the service will contribute very significantly than before.

Robert Brown: Okay. Great. Thank you. I’ll turn it over.

Operator: [Operator Instructions] And our next question will come from Bill Chapman, a private investor. Please go ahead.

Unidentified Participant: Yes. Thank you. Hi, everyone. On the phosphoric acid, one of your presentations, you said the ROI is well under one year. And is that still proving out? And then if so, what obstacles are you having to deal with for a company to adopt this? For example, they have to shut the plant down for four days, and that's difficult. What are the issues that the plants have to deal with to adopt this?

Fei Chen: It's nice you have seen our presentation. It is true, the return of investment is very short, it's less than a year and that still stands. So the really widen -- the sales cycle is longer for that application is we are actually going to put our ultrafiltration system into their production line. So they always want to make a pilot testing before they really put into their real system. So that's also why we have sold our pilot to a [indiscernible], and we're going to have more pilots sending out. And when the pilot is up running, then they will become more reliable for them to really open their pipeline. So these are a little bit troublesome process because they want to see [indiscernible] and they want to take the pilot process. But the return on investment is very impressive for all the customers we have worked with.

Simon Stadil: And maybe just adding to that, Bill, I think the key thing here is also, as we mentioned, that the system is performing well. I think the quality of the system and the fact that we have a client that is really benefiting from this, I think, gives us the long-term view that this is the right market for us to focus on. But obviously, we can't control the decision process on the client side. And as Fei correctly mentioned, when we are tapping into the co-production line, it unfortunately takes time. But I just want to reiterate that the system that we have installed is performing extremely well.

Unidentified Participant: Okay. Would this be considered substantial cost savings to the average manufacturing plant or is it marginal cost savings?

Fei Chen: It's a substantial savings because they both save the process cost and also the product quality increase, and that is very much value for them.

Unidentified Participant: Okay. One last question. How big is the market on this? I don't think I've seen anything on that. If I did, I just overlooked it. So how big is the market for this?

Fei Chen: I don't think we have published exactly the max size for this one. But we think, in our presentation, you have seen, and for the new target business area, we're saying something about more than $2 billion potential addressable market. So it's a huge market there.

Unidentified Participant: Just one last question. Of all of the product offerings you have, which ones have the biggest revenue potential for the company, the way it seems right now to you?

Fei Chen: That's exactly why we have defined our commercial strategy as we have done today, and we do not want to take the same situation as we had before and we stand on one leg. We would like to have several different segments and is more stable for the company. So I would say, all the areas we are focused on, the commercial swimming pool and the marine scrubber, and the phosphoric acid and oil & gas solutions, they all could be very substantial revenue contributor for our market.

Unidentified Participant: Okay. Thank you very much.

Simon Stadil: Thank you, Bill.

Fei Chen: You are most welcome.

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

Fei Chen: Thank you all very much for being with us today. We look forward to communicating with you soon again. Thank you for attending.

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