Flexible Solutions International Inc (FSI) Q1 2023 Earnings Call Transcript

Good day, everyone and welcome to today's Flexible Solutions International First Quarter 2023 Financials Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. I’ll be standing by if you should need any assistance. It's now my pleasure to turn the conference over to Mr. Dan O'Brien. Please go ahead.

Thanks James. Good morning everybody. I'm Dan O'Brien, CEO of Flexible Solutions. Safe harbor provision. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Certain of the statements contained herein, which are not historical facts are forward-looking statements with respect to events, the occurrence of which involve risks and uncertainties. These forward-looking statements may be impacted either positively or negatively by various factors. Information concerning potential factors that could affect the company is detailed from time to time in the company's reports filed with the Securities and Exchange Commission. Welcome to the FSI conference call for the first quarter of 2023. I'd like to speak first regarding our company condition and our product lines along with what we think might occur in Q2 and Q3 2023. Afterwards, I will comment on our financials. The NanoChem division, NCS represents approximately 70% of FSI's revenue. This division makes thermal polyaspartic acid called TPA for short, a biodegradable polymer with many valuable uses. NCS also manufactures SUN 27 and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil. In 2022, NCS started food-grade toll production operations using the spray dryer that we installed over the last several years. TPA is used in agriculture to significantly increase crop yield. It works by slowing crystal growth between fertilizer ions and other ions in the soil, resulting in the fertilizer remaining available longer for the plant to use. TPA is also a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale. TPA's effect is prevention of scale for minerals that are part of the water fraction of oil as it exits the rock formation. Preventing scale keeps the oil recovery pipes from clogging. TPA is also sold as a biodegradable ingredient in cleaning products for certain food uses and as a water treatment chemical. SUN 27 and N Savr 30 are nitrogen conservation products. Nitrogen is a critical fertilizer that can be lost through bacterial breakdown, evaporation, and soil runoff. SUN 27 is used to conserve nitrogen from attack by soil bacterial enzymes that cause evaporation, while N Savr 30 is effective at reducing nitrogen loss from leaching. Our Illinois plant is food-grade inspected and we've got our FDA number. We've commercialized a food-grade product based on polyaspartates that was developed fully in-house. We have a pipeline of additional products in development that are either our ideas, oil production of outside ideas, or a mixture where an outside idea is being optimized by our team. NCS will focus on food products equally with our other market verticals because we have determined that this is an area with large markets that we're skilled in servicing and where we can obtain good margins. The ENP division represents most of our other revenue. It's focused on sales into the greenhouse, turf, and golf markets as opposed to our NCS sales, which are into row crop agriculture. The opening of the economy after the pandemic has affected ENP sales into the home gardening market, especially home cannabis. We still expect revenue growth in 2023 at close to historic rates, but with the growth more likely in the second half of the year. Our Florida LLC investment was profitable in 2022 as a whole and again in Q1. The company is focused on international sales into multiple countries, all of which face different issues and respond in varied ways. Revenue was very strong in 2022, and we expect more top-line growth in 2023. However, the LLC remains exposed to high costs of goods while experiencing difficulty passing all the costs to customers. As a result, margins are compressed, and earnings may not reach historical levels in the near term, although we do expect an improvement compared to 2022. Our sales to the LLC continue to grow, and we are able to retain a positive margin. Our merger with Lygos did not proceed. On April 18, 2022, FSI and Lygos announced their intent to merge subject to shareholder approval. The merger was not completed by the end date of the agreement, September 30, 2022, and did not close. Strategic investment in Lygos. In December 2020, we invested $500,000 in Lygos in return for equity. We made a second investment in June 2021 for $500,000 and then again in equity. Lygos is using these investments towards the development of a microbial route to aspartic acid using sugar as a feedstock. FSI will be the major user of aspartic acid derived this way and believes that sustainable aspartic acid will allow us to obtain large new customers and develop valuable new products that are both biodegradable and come from sustainable sources. We remain optimistic that we can continue to work with Lygos in ways that don't involve merging. FSI is dedicated to the goal of sustainability while finding a route to the goal that is profitable for us, for our suppliers, and for Lygos. In Q2 and Q3, agricultural products were not as strong in Q1 2023 as they were in Q1 2022. We feel that some customers who normally buy in Q1 are waiting until Q2 to make orders. However, we still feel the agricultural sales for the first half will exceed the same period in 2020. Oil, gas, and industrial sales of TPA had increased sales throughout 2022. This was driven by shortfalls of competing products and high oil prices. Sales are expected to remain steady in 2023, but with the possibility of temporary reductions if customers reduce inventory or perform maintenance that was delayed in past years. Since 2019, several of our raw materials imported from China have included a 25% tariff. International customers are not charged the tariffs because we've applied for the export rebates available to recover tariffs. Tariffs are affecting our cost of goods, our cash flow, and our profits negatively. Rebates take many years to arrive. We submitted our initial applications 4.5 years ago. The total dollar amount due back to us is well in excess of $1 million, and we intend to persevere until we succeed in recovering our funds. Ocean shipping from Asia to the US and ocean shipments from the US to international ports are back to pre-COVID speed, but they've settled at higher prices. Land transport inside the US is continuing to stabilize. We coped with shipping issues last year by ordering far ahead and carrying additional inventory, resulting in some costs that we were unable to pass on to our customers. In 2023, we hope to begin reducing our inventory to a more normal level and replacing expensive raw materials with less expensive ones. As this proceeds, margins may stabilize at slightly higher levels. Raw material prices do not appear to be reverting to historic levels. Instead, they seem to be stabilizing at a new base level that's also experiencing inflation. Passing price increases, even small inflation-related ones along to customers can take several months, not always possible, and may result in constrained margins throughout the year. We still believe that revenue, operating cash flow, and profit can grow strongly in 2023, but inflationary forces may keep us in a position where selling prices lag cost increases some of the time. We're reasonably pleased with the results for Q1 2023. Year-over-year revenue and operating cash flow were down, possibly because certain customers had inventory to work through, and it's very likely that some agricultural sales were delayed into Q2. Profits were negatively affected by product mix, cost of goods, and reduced sales volume. We estimate that year-over-year growth in revenue, cash flow, and profits will continue in 2023, with the increases likely to occur in Q3 and Q4. Sales for the quarter decreased 9% to $9.85 million compared with $10.78 million. Profits were $884,000 or $0.07 a share compared to $1.53 million or $0.12 a share in Q1 2022. Operating cash flow, this non-GAAP number is useful to show our progress of the non-cash items removed for clarity, and in Q1 2023 it was $1.73 million or $0.14 a share, down from $2.47 million or $0.20 a share in the 2022 period. We're continuing to pay down our long-term debt according to the terms of the loan. We've consolidated all of our debt for ENP and NCS with Stock Yards Bank. It has resulted in increased lines of credit with lower interest rates and reduced interest rates on our long-term debt. At the same time, we bought all the units we did not already own in ENP Peru Investments LLC and guaranteed the mortgage held by the LLC. The LLC owns five acres and 60,000 square feet of buildings on the southwest corner of our Peru, Illinois factory. This action returns full ownership of the original 20-acre parcel and 120,000 square feet of buildings to FSI with a mortgage at favorable terms. Now, working capital is adequate for all our purposes. It’s increasing continuously as we book retained profit from sales. Our lines of credit with Stock Yards Bank for our subsidiaries are sufficient and we're confident that we can execute our plans with our existing capital. The company declared a special dividend on April 13, which will be paid today to shareholders of record April 28. We are pleased and proud to be able to return capital to shareholders this way. This is, of course, a special dividend and will not be repeated until management and the Board are sure that paying another special dividend can be done without hurting the forward progress of FSI. Text of this speech will be available as an 8-K filing on www.sec.gov by Wednesday, May 17, and e-mail or fax copies can be requested from Jason Bloom. Thank you. The floor is open for questions. And James can you set everybody up please?

Certainly. We'll take our first question today from William Gregozeski with Greenridge Global.

Hey, Dan, I have a couple of questions for you. Regarding the Florida LLC that we discussed on the last conference call, you mentioned you were unsure if anything was taken from the first quarter. The first quarter of this year showed growth compared to the previous year. So, can we assume that nothing was taken, or can we still expect strong year-over-year growth from the Florida LLC?

Good morning, Bill. And yes, I think I can confirm that Q1 did not pull from Q4 and didn't pull backwards from Q1. So when you see those numbers, they are accurate for the quarter, and they probably unless something changes indicate a good year for the LLC.

You mentioned a few times that agricultural sales were down in the first quarter but are expected to rise in the first half. Is that related to a significant customer who generated about $3 million in sales in the first quarter last year, compared to $1.5 million this year?

That's a part of it. I mean, it's not going to be any specific customer. But what we're noticing in the ag industry, in North America, it's not as true internationally where they have to account for shipping times. But in North America, we're seeing a sensitivity at the farmer level, that translates to a tentativeness at the distributor level, which translates to attempting to make just-in-time purchases from the manufacturer level, which is us. We've talked to several of our contributors, and even a couple of competitors, and everybody is getting the same feeling. It's not that people aren't going to buy; it's just they're waiting until the last minute.

Okay. All right. And then on the Food business, you mentioned kind of some self-developed products, some customer-demanded products. For the self-developed products, what's the plan to market those, if they're not being driven by a customer?

These are our ideas, but we aren't taking them to commercialization unless one of our distribution connections has shown an immediate and strong interest. So, we're not going to market ourselves. I think everybody who's followed us for a while has noticed that we're not great at retail marketing for our salespeople, and our skill set really involves solving problems and allowing distribution to get it into the marketplace. So, I think what you're going to see is that if an idea of ours has volume opportunities and an interested distributor, it's going to go forward. Otherwise, it's going to go on the shelf and we'll find another one that does have volume and an interested distributor.

Okay. Can you say how many products you have in the pipeline that are demanded by customers, just to get an idea of how often you're going to be rolling out a product?

Yes. I think we currently have five products at an advanced stage in the Food category, which means they won't lead to immediate sales. It will take several quarters as we navigate through the proof and approval process by distribution, followed by a medium-sized initial order and then growth from there. These products are expected to start materializing in the second half of the year and gain momentum moving forward. One point I want to emphasize during today's Q&A is that we are positioning ourselves this year for our next growth cycle that will span several years. Although no one has asked yet, I'm certain the question about our wages and administrative salaries will come up. We have increased capacity in our plants and among our workforce that we haven't previously had. This is costing us more money now, but it will enable us to generate more revenue in the future.

Okay. And then, the last question I had was you guys put more money into Trio. Should we look at that more as just parking stock for cash, or is there nothing, no equipment or anything, you can spend that money on right now for that future growth?

Yes, you should view it as long-term parking rather than short-term parking. It provides guaranteed returns of 8% and can reach as much as 11.5% each year, thanks to a bonus interest payment every three years. Additionally, it's a source of highly tax-advantaged income. I like to look at it from a straightforward perspective; the income generated from our Trio investment closely matches the costs associated with our executive managing our Cayman subsidiary. Therefore, consider it as long-term parking that ensures coverage of our executive expenses in the islands. It's an interesting point, and I can confirm that the Board has reviewed this matter. A sum of around $1 million is adequate for a single investment, and we will not be acquiring more Trio. If we require additional parking options, we will explore other properties.

Okay. All right. Thanks, Dan.

Thanks, Bill.

Next, we'll hear from Tim Clarkson with Van Clemens.

Hey, Dan, another nice quarter. Obviously, there's fluctuations with sales and earnings. In terms of the big picture, do you see a change in perception in agriculture with more emphasis on products like yours that are green and helping the environment? I mean, is there a shift towards people acknowledging that these products not only help grow more crops but also are healthier for the land and so on?

I would have to say that that's an individual farmer-by-farmer lifestyle choice. It will probably have a lot to do with the age of the farmer and how much of the 1980s they had to endure. But I would say that younger farmers that are taking over from their parents are definitely far more interested in stewarding their land and having it there for their children and grandchildren. It's amazing what a decade or a decade and a half of decent corn and soybean prices will do for people's thoughts about the future. Other farmers are just worried about next year.

Right. The other question I noticed is that you've done some insider selling on your stock. I assume that's just a little bit of a concentration risk and you're looking to diversify your own resources a little bit?

It's even less onerous than that. I'm expecting a personal tax hit towards the end of this year from my grateful government, and I'm positioning to have the cash to pay the bill.

Okay. All right. We want to avoid any legal issues, which is a positive thing. I understand that.

If it’s jail, I can work all the time.

Yes. Maybe depends on which jail, I guess. I'm done. Thanks. Good quarter.

Thank you.

It seems there are no more questions at this time. I will now hand the program back to Mr. O'Brien for any final remarks.

Thanks James. Well, thanks everybody. Appreciate you coming to listen today, and I look forward to talking with you again in about three months, and we're going to work hard. Hopefully, we have some good news for you. Take care. Bye now.

This does conclude today's program. Thank you for your participation. You may now disconnect.