Good morning. 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 full year 2016.
Prior to focusing on our financials, I’d like to talk about the fire that destroyed our Taber factory, recent space addition at our Peru IL factory, our product lines and what we think might occur over the next several quarters.
The fire at Taber was a sad event, however, there was only one small injury [now healed] and we carry full replacement insurance. Our employees are safe and we have received partial payment for our losses already with full payout expected by the end of Q2. As soon as the site is approved, we will begin rebuilding on a smaller footprint that suits our future operations.
The “Ecosavr™” fish for swimming pools will not restart. The Heatsavr™ liquid pool cover will be back in production soon to serve our worldwide customer base. The new building will also be available as needed by the NanoChem division and for other corporate purposes.
In 2016, the NanoChem Division invested in an LLC. We paid $100,000 in cash and 5 acres of unused land at our Peru IL factory site in return for 41.6% ownership of the LLC. The LLC subsequently built 60,000 square feet of high quality factory space of which we have leased 30,000 feet at a fair price. The other 30,000 feet are leased on the same terms. NanoChem is using the extra space for additional inventory and for production of certain agriculture products. NanoChem profits from the LLC in ratio to its ownership.
The NanoChem division, NCS, represents most of the revenue of FSI. This division makes thermal poly-aspartic acid, called TPA for short, a biodegradable protein with many valuable uses. NCS also manufactures SUN 27™ and N Savr 30™ which are used to reduce nitrogen fertilizer loss from soil.
TPA is used in agriculture to significantly increase crop yield. The method of action is by slowing crystal growth between fertilizer ions and other ions in the soil resulting in fertilizer remaining available longer to increase yield. The attraction between the TPA and the fertilizer ions also reduces fertilizer run-off. Keeping fertilizer more easily available for crops to use, results in better yield with the same level of fertilization.
TPA in agriculture is a unique economic situation for all links in the sales to end user chain. FSI earns a profit on manufacturing, distributors earn a strong profit selling to dealers, dealers make good profits selling to growers, yet the grower still earns a great profit from the extra crops he produces with the same land and the same fertilizer program. More than 400 trials over the last 15 years have demonstrated that investing $10 - $20 per acre in TPA can pay back $30 to $100 or more. For example: in summer 2015, 2 quarts per acre of TPA added to the normal fertilizer program on dry beans in Idaho resulted in an increase of the marketable yield by 400 pounds per acre. With beans selling for 40 cents a pound in fall 2016, $20 of investment in TPA brought this farmer $160 in added revenue for every acre he treated.
TPA is also a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale. Our sales into this market are well established and growing steadily but, can be subject to temporary reductions when production is cut back or when platforms are shut down for reconditioning. A simple explanation of TPA’s effect is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the rock formation. The scale must be prevented to keep the oil recovery pipes from clogging. Used as a biodegradable additive in fracking fluid, TPA has the same positive effect on the pipes but is also known to reduce scale plugging of rock pores thus increasing the flow of oil and gas to the pipes from the rock. Many alternative chemicals are used to prevent pore plugging – TPA is the biodegradable choice.
SUN 27™ and N Savr 30™ are our nitrogen conservation products. Nitrogen is a critical fertilizer but it is subject to loss through bacterial breakdown and soil runoff. Both our nitrogen products are becoming well respected and seeing increasing sales.
SUN 27™ is used to conserve nitrogen in cold dry soil while N Savr 30™ is directed toward nitrogen retention in warm wet soils. Both our nitrogen products are equal to, or better than, the competing products and we have very compelling pricing.
Watersavr™: We are continuing our efforts in the USA, Turkey, Africa, Chile, Brazil parts of East-Asia and Australia. This could be a break-through year.
I think it is important to illustrate the potential of WaterSavr™: using it on Lake Mead for 6 months a year could save 166,000 acre feet per year. This is the same as 56 billion gallons. It’s not just water; WaterSavr™ can have huge results on city water budgets. Delivered water costs now exceed $1000 per acre foot in many California cities and the total cost of saving an acre foot using WaterSavr™ is less than $200. WaterSavr™ can reduce losses in reservoirs by 2 feet on every acre. A theoretical city with 10,000 acres of reservoir surface could reduce its water budget by $16 million a year - $16 million that could be redirected to help the citizens. We are emphasizing both water and money conservation in our interactions with Californian and other prospects.
Q1 and the rest of 2017
EX-10™, our brand name for TPA for agricultural use, has peak uptake in Q1 but with significant sales on into Q2. The crop cycle is delayed in many parts of the US this spring so the peak of EX-10™ uptake may occur in Q2 rather than Q1.
SUN 27™ and N Savr 30™, the nitrogen conservation products for agriculture: We have also initiated a new sales program into Latin America. This marketplace is counter-cyclical to the North American market and is showing strong interest in our nitrogen products. We think it’s likely that sales will begin in small amounts during Q2 and increase quarterly throughout the year.
Growth in oilfield use of TPA driven by our worldwide sales efforts is likely. Increased rig counts in America should lead to greater sales into the US industry while oil price stability in the $50 per barrel range could result in increased international sales as customers refocus on production growth.
WaterSavr™ had a $50,000 sale to Mauritius in Q1, 2017 – this bodes well for the coming year. A similar contract is being negotiated in Honduras and larger ones are progressing in South Africa and Turkey. Recent trial results showing savings of 45% in Southern California may result in sales in both Q2 and Q3. Water costs are now so high in parts of SoCal that Watersavr™ is able to cut water acquisition budgets by a factor of several hundred percent more than the Watersavr™ cost – even in the winter months.
We are comfortable predicting that full year 2017 revenue will increase significantly compared to 2016 once the discontinued Ecosavr™ operations are accounted for. We also expect that profits and EBITDA will continue to increase. The usual warning applies - that we can’t control customer behavior, shipping dates, weather, crop pricing, oil platform maintenance and the other variables of our business, so quarterly results will not form a straight line on a graph.
Highlights of the financial results:
Sales for the year increased 2% to $16.24million, compared with $15.89 million for FY 2015. The result is a profit of $1.79 million or $0.16 per share in the 2016 period, compared to a gain of $1.50 million or $0.11 per share, in 2015. Share count for 2016 was lower by 1.75 million due to the January 2016 buyback.
Working capital of $7.2 million is very adequate including $2.5 million in cash on hand as well as a line of credit with Harris Bank of Chicago. We are confident that we can execute our growth plans with our existing capital.
In the past, FSI has provided a non-GAAP measure useful for judging year over year success. “Operating cash flow” is arrived at by removing taxes, interest, depreciation, option expenses and one-time items from the statement of operations. As the company has matured over the last several years, “operating cash flow” has become closer and closer to the more common term “EBITDA”. Therefore, we have decided to show both figures in our FY 2016 financials news release and in this conference call. For Q1 2017 and future reports, we will only show EBITDA.
For the year ending December 2016, operating cash flow was $3.7 million or 32 cents per share compared to $3.0 million or 23 cents per share for full year 2015. EBITDA in 2016 was also $3.7 million and 32 cents a share. The 2015 numbers are based on shares outstanding prior to the buyback while the 2016 numbers are based on the new share count after the buyback. Detailed information on how to reconcile GAAP with “Operating Cash Flow” and EBITDA numbers is included in our news release of March 31st.
The text of this speech will be available on our website by Tuesday, April 4th and email or fax copies can be requested from Jason Bloom at 1 800 661 3560 or Jason@flexiblesolutions.com.
Thank you, the floor is open for questions.