Liqtech International Inc Q2 FY2023 Earnings Call

Hello, and welcome to LiqTech International's Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Rob Blum with Lytham Partners.

Thank you so much. Good morning, everyone, and thank you all for joining us on today's conference call to discuss LiqTech International's second quarter 2023 financial results for the period ending June 30, 2023. Joining us on today's call from the company are Fei Chen, the company’s 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 I 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.

Thank you, Robert, and good day to everyone on the call. I'm excited to get the opportunity to speak with you all today. During the second quarter, we continued to successfully execute against our strategy to drive profitable growth, which resulted in a strong 25% sequential increase in revenue and a significant improvement in gross margins. This combination of top line growth and the gross margin improvement, coupled with tight control of operating expenses, resulted in improving our adjusted EBITDA loss to just $0.6 million compared to a loss of $3.54 million in the year-ago quarter. Adjusted EBITDA loss is the best performance the company has achieved in years and demonstrates our very achievable pathway to consistent profitability in the near term. As I stated in the last few closed quarters, we have a tremendous opportunity ahead of us to leverage our highly unique technological advantage, brand competencies, and sustainability value to build a growing and profitable business. We moved quickly forward following my appointment to define our cooperative vision and the commercial strategy with a clear focus on four key initiatives. As a reminder, those four initiatives are a focus on recurring revenue solutions, the creation of new partnerships and distribution agreements to expand our commercial reach, enhancement of operational efficiencies, and the deployment of larger system sales. To account for those goals, we brought on key sales and operations personnel, which have made an immediate positive impact on the business. Further, I have leveraged many of my relationships and strategic approaches that proved to be successful when I was at Topsoe and Grundfos, two of the leading industry companies in the world with an emphasis on water treatment, chemicals, and clean energy technologies. While the new team has only been together for three full quarters now, I'm extremely pleased with the progress we have made and anticipate continued progress in the quarters to come. Let me dive into details regarding our four key initiatives. Let's start with our recurring revenue opportunities, which include installed base sales, diesel particle filters, ceramic membranes, and the plastic business. Our swimming pool systems business somewhat overlaps between systems and recurring revenue, and I will likewise go into details there. Across all of these key areas, we have improved our pricing discipline through enhanced cost visibility and elevated market intelligence to deliver increased gross profit. I said last quarter that while growth is one thing, we are extremely pleased with the profitability metrics that come out of these recurring areas, which contributed to the overall strong contribution margins. From a membrane element standpoint, we continue to increase ceramic membrane orders during the second quarter, which will be for delivery in quarter three. On the DPI side, we experienced a stable revenue contribution. We do not expect tremendous growth here, but are looking persistently into new application areas to hold this business steady. Finally, on the plastic side, in the second quarter, we experienced significant sequential growth of approximately 67%. This is mainly driven by a large order we received at the end of last year in the area of biological-based material development. For the coming period, our team continues to find new and exciting opportunities to deploy our capabilities. Stabilizing and growing our recurring business opportunity is the base by which this business can be sustainably profitable. I am pleased with the progress here and believe we have further growth ahead in this area of focus. Let us transition to our systems business. As a reminder, to those who may be new to our company, this includes our larger system solutions in the areas of industrial water treatment, marine scrubber systems, the broader oil and gas filtration, and acid purification markets. It also includes some crossover in swimming pool systems. The systems business certainly has longer lead times and requires our team to identify areas where our solutions can offer superior performance and add value to our customers. During the quarter, we signed commercial contracts for the delivery of 10 pool systems and successfully performed on-site commissioning of our first MEG unit at the customer's offshore platform in the Mediterranean. Subsequently, we saw 45% growth in this area. Swimming Pool Systems has clearly been a leading driver for us during 2023 following the launch of our enhanced Aqua Solution membrane based on our proprietary silicon carbon membrane technology. Year-to-date, we have received 15 pool system orders from a wide variety of geographic locations. Revenue growth during the quarter was driven by the successful on-site commissioning of our first MEG unit. This was the first of a two-part order for an offshore project. We have earlier demonstrated that silicon carbon membrane technology performance in pilot. This on-site commissioning has now verified significant performance improvements of our technology in the MEG regeneration process compared to other membrane technologies. The successful commissioning gives us confidence for additional opportunities within this market subsegment. Further, we are making progress in phosphoric acid purification with the delivery of a pilot unit to Silicon Filter in China, which we announced on Monday. We are very pleased to have delivered this pilot unit to our partner in the region, which will help them demonstrate that our ultrafiltration technology can effectively help their customers enhance their process efficiency and product quality. We look forward to building on this initial progress in the years to come as we look to address one of the strategically key markets for phosphoric acid. Regarding partnerships and distribution, as a reminder, we initially entered into the distribution agreement with Silicon Filter in April 2023 to address the large and growing market opportunity in China. The fact that we are getting initial pilot orders so quickly really highlights their desire to advance this partnership. On the same front, our collaboration with NESR for oil and gas-related solutions continues to advance, as we have built up an aligned pipeline with clear targets in the near term. I look forward to hopefully sharing more with you on this in the near term. To extend our distribution footprint further, we entered into an MOU to explore applications of our advanced filtration system to industrial water treatment in China with Nanjing Wondux. Wondux is experienced in intelligent environmental governance and resource utilization with a focus on garbage pollution control, zero discharge of industrial wastewater, recycling of waste, salt extraction of new energy materials, and provides customers with advanced technology equipment, system integration, and overall solutions to environmental problems. Wondux has extended customer groups across China and a good reputation in environmental and the water treatment area. China is a significant market for industrial water treatment, especially as environmental sustainability rises higher on the agenda of the government and enterprises in the country. Entering this MoU will allow us to tap into Wondux's market reach and position in China. I believe with a strategic combination of direct sales and distribution partners, such as our recently signed agreement with Wondux, NESR, and Silicon Filter, we have the right combination going forward to make continued progress in our key target markets of swimming pools, oil and gas, acid purification, and broader water treatment. With two quarters completed and better visibility into the business, I believe we are at a point where we can now provide an outlook for full year 2023. Based on the progress we are achieving in both our recurring and system sales businesses, we expect full year 2023 revenue growth of 20% to 30%, which would translate into total revenue of about $19 million to $21 million for the year. We also believe that with operational efficiency improvements we have made, the 2023 full year gross profit margins will be in the range of 15% to 20%. Please remember that our gross margin last year was only 3.5%. We are closing the gap on achieving quarterly breakeven with a strong balance sheet and tangible progress we are making. I am highly optimistic about what is coming for LiqTech.

Perfect. Thank you, MJ. Good morning everyone. Simon here, and sorry for that. Now let me add some color on financial highlights for the second quarter. The reported revenue was $5 million, comparable to the second quarter of last year and up 25% compared to the $4 million reported in the most recent sequential first quarter. Broken down by vertical, sales were as follows: systems sales and related services of $2.1 million, comparable to the second quarter of last year, and up 44% compared to the $1.4 million reported in the first quarter. Ceramic repair and membrane sales of $1.8 million, again, comparable to the same period last year and up 27% sequentially compared to the first quarter. Finally, plastics revenue of $1.1 million compared to $1 million in Q2 last year and down 3% compared to the first quarter. Overall, the second quarter benefited from a diversified and improved revenue mix, better suited for the existing manufacturing setup, allowing for increased manufacturing throughput and overall efficiency gains. Furthermore, the quarter’s revenue was underpinned by increased aftermarket activities leveraging our installed base spare parts sales, general service and commissioning activity, and contracted remediation work. In comparison, the revenue for the second quarter of last year was mainly driven by a few sizable projects, including the delivery of a Liquid Filtration System for an oil and gas client in the Middle East, as well as the final delivery of the legacy framework order for DPF transportation in Asia. So while the overall revenue was comparable to the second quarter of last year, the composition of the revenue is much more diversified in nature this year, reflecting our ambition to build a more robust and established business model. As Fei mentioned, we expect full year revenue growth of 20% to 30% compared to 2022, evidencing that we indeed are expecting growth in the second half of this year compared to the first six months, despite the impact from the European holiday season, which normally impacts our third quarter due to the slowdown in July. Turning to gross margin and more insight on our journey towards breakeven, the second quarter reflects yet another vital step in the right direction with a reported gross profit of $1.2 million and a gross profit margin of approximately 23%, compared to just $0.1 million and 3% reported in the same period last year. Even when looking at the first quarter, we saw sizable improvement in gross margin of approximately 10 percentage points, due to increased activity levels and more attractive revenue mix. Considering the comparable revenue levels between the second quarter of this year and last year, the improvement in gross margin was mainly driven by the reduction in cost of goods sold, underpinned by improvements in both product and pricing mix but also increased operational efficiencies supported by the newly implemented ERP platform, where we are gaining more business insights day by day. Notably, the more established and recurring business lines, including the sale of ceramic products and pool systems, were the main drivers behind the improvement in gross profit, further supported by the successful execution of ongoing strategic projects in the Middle East and Mediterranean. As we still have overhead and other fixed costs that are not fully absorbed, one of the key metrics we look at to highlight the progress being made is our contribution margin. During the quarter, when you back out fixed costs, our contribution margin was approximately 52%, the highest in more than two years, and well above the 43% reported in Q1 and a 31% reported for the full year last year. As we see continued revenue growth, contribution margin is an important metric to evaluate how quickly we can reach breakeven. As previously mentioned, we do maintain our guidance that our business will be breakeven measured on an adjusted EBITDA basis, assuming a quarterly revenue of approximately $7 million and potentially lower with the right revenue mix and profitability, as evidenced in the current quarter. Turning to OpEx, total operating expenses for the quarter were $2.8 million, down 42%, almost $2 million compared to the $4.7 million reported last year. The decrease was predominantly explained by the restructuring costs recorded in the second quarter of last year, but also a continued focus on cost control, partly offset by new investments in building a strong organization and execution platform. Moving to the next item, net other expenses during the quarter were minimal compared to the negative $1.9 million last year, with the change reflecting a gain on currency transactions and the early repayment of the convertible note in the second quarter of last year, significantly improving our capital structure. Concluding on the P&L, we reported a net loss of $1.6 million, reflecting an improvement of almost $5 million compared to the net loss reported in the same period last year. This positive development reflects both the increased gross profit derived from both price and mix improvements, but also a general reduction in both other and operating expenses. Commenting on our adjusted EBITDA, excluding the effects of depreciation and amortization and non-cash compensation, we reported an adjusted EBITDA of negative $0.6 million compared to a negative $1.3 million and $3.4 million for the periods of Q1 2023 and Q2 2022, respectively. Again, this metric is a key reference point for our cash flow and financial breakeven efforts. Hence, we will seek to implement this adjusted EBITDA in future reporting. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing over to Fei. We ended the quarter with $12.6 million in cash, down $1.7 million compared to the first quarter, explained by the operational result, maintenance CapEx, and investments in new machinery that will be delivered later this year. Furthermore, the development reflects an increase in accounts receivable and inventories due to the uptick in activity levels and proactive sourcing of long lead time items required for ongoing projects. In summary, the underlying cash flow profile is improving as we are showing progress on both top line and profitability. As reiterated in previous quarters, we are determined to accelerate the path to profitability, which ultimately will allow us to balance our cash flow and regain the required strategic and financial flexibility so we can execute on the long-term objectives and ultimately create shareholder value. Thanks for your continued support and over to you, Fei.

Thank you, Simon. Before we open up for your questions, let me quickly summarize. We have moved quickly to accelerate the commercial and business development processes here at the company, which is showing tangible results. We are growing our more predictable recurring revenue opportunities, leveraging our differentiated technology. We're also focusing on opportunities where we can deploy larger systems. Based on our outlook, this should translate into 20% to 30% growth in revenue during fiscal year 2023. We have improved our pricing discipline through enhanced cost visibility and elevated market intelligence and have placed a focus on recurring revenue opportunities which are delivering increased gross profit. As I mentioned, our outlook for the year is a gross margin of 15% to 20% compared to 3.5% in fiscal 2023. We are managing efficiencies across the entire organization. In addition to the manufacturing efficiencies I mentioned, year-to-date operating costs are down 36% and 18% excluding the restructuring costs. We are creating new distributor relationships to address certain end markets and have made investments to the internal team to ensure effective multi-strategy approach to commercialization. Our agreements with NESR, Silicon Filter, Wondux, and others are expected to be drivers of future system sales growth. And as we keep reiterating, everything we are doing is set against the backdrop of achieving profitability. The organizational transition we are undertaking has proceeded with an emphasis on utilizing our existing co-competencies within the company and calibrated with our renewed strategic focus and the market dynamics. As Simon and I both mentioned, we remain on track to deliver breakeven at $7 million in revenue, a number we think is achievable in the near term. I am highly optimistic about the future. On a final note, we will be attending a series of conferences in New York during the week of September 11, including the Lake Street Conference. We would love the opportunity to meet with you while we are there. Please work with Robert Blum to coordinate any potential meetings. With that operator, we would be happy to take any questions.

Thank you, Fei. We will now begin the question-answer session. Today's first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Hi, Fei, Simon. Wanted to follow up on your second half kind of growth confidence and outlook. I just want to get a sense of the visibility there and sort of what you're seeing in terms of demand and what gives you sort of the visibility into the second half growth?

That's a very good question. I would like to say it this way: what we have been working very hard this year is to get a very reliable sales pipeline and increase the visibility of revenue per customer. So when we say we're going to have a growth revenue trend of 30%, we have very strong visibility behind it.

Okay. Great. And then I know you've done a lot of work and made a lot of progress on getting the distribution footprint expanded and in place. How much further do you need to go there, or do you feel like you've got what you need? How is that where you are at in that kind of effort?

We are going to continue our efforts. First of all, we have already signed some distributor and partnership contracts. We would like to work on those agreements and partners to maximize the benefits. In the first half of this year, we signed 15 swimming pool system contracts, all in collaboration with our distributors. We definitely want to strengthen that. However, there are still markets we have not penetrated, such as the U.S. market for swimming pool systems, where we will look for new distributors. We aim to utilize all the agreements we have signed to maximize benefits while also continuing to seek new partnerships and distributors.

Okay. Great. Then on the system business, particularly the larger system business, I guess the oil and gas market and the marine market. How is that pipeline looking? And when do you see that playing out over the next 12 months?

We are very active in those markets with our distributors. And those areas take a little longer to really sign the contracts, but we have some very interesting opportunities in our pipeline. So we hope to see progress in the next two quarters.

Okay. Great. Thank you. And then you talked a little bit about the opportunity in the China acid filtration market. I know you had an order there. How would you rate that progress so far? And maybe just characterize the potential of that market.

The phosphoric acid market in China is huge because more than 60% of the phosphoric acid market is in China. So we are very happy that we are moving in that direction. Silicon Filter has been very quick to have this pilot unit order with us already. And in this market, it is quite conservative. The first thing you need to do to enter the market is to have the pilot up and running. So, that's why we are very happy we moved so quickly to have the pilot unit in China operational. I hope in the next two quarters I will be able to provide more updates on this pilot system in China. I think it sends a very strong signal; both our distributor and the market are very active, pushing ahead. We see very strong interest in the Chinese market for our technology.

Okay. Great. I'll turn it over. Great progress, and thank you.

Thank you.

Seeing no further questions, I'd like to turn the call back over to management for closing remarks.

Thank you. I just want to thank all of you very much for being with us today. We look forward to communicating with you soon again. Thank you for your support.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.