Flexible Solutions International, Inc. (AMEX:FSI) Q3 2023 Earnings Call Transcript

Flexible Solutions International, Inc. (AMEX:FSI) Q3 2023 Earnings Call Transcript November 18, 2023

Operator: Good day, everyone, and welcome to today's Flexible Solutions International Third Quarter 2023 Financials Conference. 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. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Dan O'Brien. Please go ahead.

Dan O'Brien: Thank you, Angela. Good morning. This is 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 third quarter 2023.

A fleet of tanker ships crossing the sea as they deliver oil and gas to their destinations.

First, I'd like to discuss our company condition and our product lines, along with what we think might occur in Q3 and Q4, 2023 and on into 2024. I will comment on our financials afterwards. 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, NanoChem started food-grade toll operations using the spray dryer we installed over the last several years. TPA is used in agriculture to significantly increase crop yield. It acts 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 mineral scale from minerals that are part of the water fraction of oil as it exits rock formation. Preventing scale keeps the oil recovery pipes from clogging. TPA is also sold as a biodegradable ingredient and 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.

Food Products. Our Illinois plant is food-grade inspected, and we have received our FDA number. We have commercialized 1 food grade product based on polyaspartate, that was developed fully in-house. We have a pipeline of additional products in development that are either our ideas, full production of outside ideas or a mixture where an outside idea is being optimized by our team. NCS will focus on our food products equally with our other market verticals because we've determined that this is an area with large markets that were skilled in servicing and that where we can obtain good margins. We have not received the food product orders we had hoped for in 2023. Although, we're still convinced that this is a viable future business, it may take several more quarters to obtain significant sales.

The ENP division. ENP represents most of our other revenue. ENP is focused on sales into the greenhouse, turf and golf markets, while our NCS sales 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're expecting little revenue growth in 2023 and don't have any clarity regarding 2024. Our Florida LLC investment. The LLC was profitable again in Q3 2023 and was one area where some revenue growth has occurred in 2023. This company is focused on international sales into multiple countries, all of which faced different issues and respond in varied ways. Revenue was strong in Q3, but the remainder of the year can't be predicted. Also, the LLC remains exposed to high cost of goods, while experiencing difficulty passing all the costs to its customers.

As a result, margins are compressed and earnings may not reach historical levels for some time. Our sales to the LLC grew in the quarter. 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, FSI invested $500,000 in Lygos and return for equity. We made a second investment of $500,000 in June 2021. Lygos used the investment towards development of microbial route to aspartic acid using sugar as a feedstock. FSI would be a major user of aspartic acid derived this way and believes that sustainable aspartic will allow us to obtain large new customers and develop valuable new products that both biodegrade and come from sustainable sources.

Lygos has recently announced a change of focus to include other organic assets. We anticipate that this may slow their progress towards sustainable aspartic acid. FSI is researching alternatives to achieve the goal of sustainability, while continuing to support Lygos. Q4 '23 and early '24. Agricultural products were not as strong in Q3 as they were in the previous period. As a result, total revenue for the quarter was well below the previous year period. Agriculture customers are showing resistance to spending on inputs when crop prices are not increasing at the rate of inflation. We think that the remainder of '23 and all of 2024 could be difficult. Oil, gas and industrial sales of TPA have been lower in Q3 '23. This is likely to continue for the remainder of the year and into 2024.

Customers are reducing inventory and reassessing their needs now that shipping has become reliable again. In addition, the possibility of reduced hydrocarbon demand could slow our sales over the next several quarters. Tariffs. Since 2019, several of our raw materials imported from China have included a 25% tariff. International customers are not charged to tariffs because we have applied for the export rebates available to recover the tariffs. These tariffs are recovering -- affecting our cost of goods, our cash flow and our profits negatively. Rebates can take many years to arrive. We submitted our initial applications more than four years ago. The total dollar amount due back to us is well in excess of $1 million, and we are going to perseverance so we succeed in covering our funds.

Shipping in inventory. Ocean shipping from Asia to the U.S. and ocean shipments from the U.S. to international ports are back to pre-COVID speeds and have settled the prices very close to historic levels. Land transport inside the U.S. is continuing to stabilize, but at generally higher costs. We cope with the shipping issues by ordering far ahead and carrying additional inventory in 2022, resulting in costs that we were unable to pass on to our customers. In 2023, we've been reducing inventory to a more normal level. However, margin increases and margin maintenance has been difficult. 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 and take several months, it's not always possible and will probably result in constrained margins for the next year. We believe that the sum of the issues we faced during the rest of 2023 will result in lower revenue, lower cash flow and lower profits for the coming quarter and for the full-year. Highlights with the financial results. We're not happy with the results for Q3 '23. Year-over-year revenue and operating cash flow were down, profits were negatively affected by product mix, cost of goods and reduced sales volume. We now estimate that year-over-year revenue cash flow and profits will be down significantly in 2023. The financials show that our costs have increased as the year progressed.

Wages have gone up substantially over the last year to retain staff. Raw material prices did drop from the highest level, but not back to historic norms. Volumes down, we've been unable to raise prices sufficiently to recover costs and to maintain our margin goals. Our plans to enter the food industry have been delayed into next year. Higher interest rates are consuming more of our funds. FSI and its subsidiaries will have to examine all our costs and economize where possible. Even more critical is increasing sales in our traditional businesses and obtaining sales in the food industry, to ensure that our wage and other base costs are spread over more revenue dollars. Sales for the quarter. They decreased 25% to $8.72 million compared with $11.6 million in Q3 '22.

Profits. Q3 profits in 2023 resulted in a loss of $718,000 or $0.06 a share compared to a profit of $1.1 million or $0.09 a share in the year earlier period. Operating cash flow. This non-GAAP number is useful to show our progress with noncash items removed for clarity. For the 9 months of 2023, it's $3.28 million or $0.26 a share, down from $6.23 million or $0.50 a share in the '22 period. Long-term debt. We continue to pay down our long-term debt according to the terms of the loans. However, we've consolidated all our debt for ENP and NCS with Stockyards Bank. This 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 own in ENP, Peru Investments, LLC and guaranteed the mortgage held by the LLC also at Stockyards.

The LLC owns the 5 acres and 60,000 square feet of building in Peru, Illinois, on the southwest corner of the NanoChem property. This action returns full of ownership of the 20-acre parcel and the 120,000 square feet of buildings to FSI with a mortgage at favorable terms. Additional factory space in Illinois. In the second quarter, we invested to acquire 80% of an LLC called 317 Mendota that in turn purchased a large building on 37 acres of land in Mendota, Illinois. We've determined that 240,000 square feet are available for our use or for rental. The ENP division will move all of its operations to 60,000 square feet of the building. The remaining 180,000 square feet will be rented as suitable tenants are found. This allows the NCS division to recover 30,000 square feet in Peru, Illinois from ENP making room for potential growth.

Our working capital is adequate for all our purposes. We've got our lines of credit, and we're confident that we can execute our plans with our existing capital. The text of this speech will be available as an 8-K filing on www.sec.gov by Thursday, November 16th. E-mail or fax copies can be requested from Jason Bloom jason@flexiblesolutions.com. The floor is open for questions. Angela, will you please give instructions and start the process.

See also Top 30 Oil Producing Countries in 2023 and 12 Stocks Billionaire Stan Druckenmiller Just Bought and Sold.

To continue reading the Q&A session, please click here.