Q2 2022 Flexible Solutions International Inc Earnings Call

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Need assistance during your conference today, Please press Star Zero, Good day, everyone and welcome to today's flexible solutions International second quarter 2022 financial results Conference call.

At this time all participants are in a listen only mode.

You'll have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing star one on your Touchtone phone you may withdraw yourself from the queue by pressing star too. Please.

Please note. This call is being recorded and now it is my pleasure to turn the conference over to Mr. Dan O'brien. Please go ahead Sir.

Thank you guys.

Good morning. This is Dan O'brien CEO of flexible solutions.

Safe Harbor provision.

Private Securities Litigation Reform Act with 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.

Formation concerning potential factors that could affect the company is detailed from time to time.

In the Companys reports filed with the Securities and Exchange Commission.

Welcome to the Q2 conference call.

I'd like to update our company condition and our product lines, along with what's in our opinion.

Might occur in the third and fourth quarters of 2022.

Then I'll comment on our financials.

As the Covid virus, we are not experiencing problems due to the virus other than mild cases cases in our employee ranks and shipping delays when Asian ports experienced lockdowns.

Our nano Cam division NCS represents more than half the revenue of Ssi. This division makes thermal poly as part of <unk> 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 toll operations using the spray dryer, we installed over the last several years.

Tpa is used in agriculture to significantly increase crop yield.

Despite slowing crystal growth between fertilizer ions and other irons in the soil, resulting in the fertilizer remaining available longer for the plants to use.

Tpa is a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale.

The fact is that it prevents the scaling out of minerals that are part of the water fraction of oil as it exits the rock formation.

Must be prevented to keep the oil recovery pipes from clogging.

PPA is sold is a biodegradable ingredients and cleaning products and also as a water treatment chemicals.

On 27, and <unk> 30, our nitrogen conservation products.

<unk> is a critical fertilizer that can be lost through bacterial breakdown.

<unk> operation and soil runoff.

So im 27 is used to conserve nitrogen from attack by soil bacterial enzymes that cause and to evaporation well.

<unk> is vivek effective at reducing nitrogen loss through leaching.

Our E&P division.

E&P represents most of our other revenue.

E&P is focused on sales into the greenhouse turf and golf markets.

Two our NCS sales, which are into row crop agriculture.

The opening of the economy. After the pandemic has affected E&P sales into the home gardening market, especially home cannabis in a negative manner.

We now expect 2022 sales to be similar to 2021.

Programs, we have put in place to reinvigorate growth that E&P.

Take until the end of the year to take effect.

The Florida LLC investment.

Once again this investment was profitable.

The company is focused on international sales into multiple countries, all of which face different issues and respond and varied ways.

Sales have been very strong in Q1 and Q2 this year and we see this continuing in the second half.

However, the LLC is exposed to high cost of goods, while experiencing difficulty passing all of the costs onward to customers.

As a result margins are compressed and earnings may not reach historical levels until raw material prices abate.

Strategic investment in Lagos and December 2020, MSI invested $500000 of logos in return for equity.

We made a second investment of 500000 in June 'twenty one.

<unk> is using the investment to develop a microbial route to aspartic acid using <unk> as a feedstock.

<unk> will be the major user of aspartic acid derived this way and believes that sustainable aspartic acid.

Now us to obtain large new customers and develop valuable new products.

<unk> scientific team have already successfully developed other organic assets.

From sustainable feedstock and are recognized as one of the world leaders in synthetic biology by their peers and industry and academia.

We have high confidence in their ability to achieve sustainable aspartic acid through a fermentation.

Once this route is fully developed we plan to work with <unk> to build capacity and produce aspartic acid, which we can then polymerize into sustainable <unk> Barclays.

The merger with LIBOR logos.

On April 18th Ssi, and <unk> announced their intent to merge subject to shareholder approval.

Details of this plan are included in the news release from that day.

The companies have filed an even more detailed documents with the Securities Commission called and asked for.

This document is publicly available at www Dot FCC dot Gov if.

You have questions regarding the merger please consult the S. Four.

Q3 and Q4.

Tpa Sun 27, and N Savr 30 for agricultural use of peak uptake in Q1 and Q2.

This year was somewhat different due to high crop prices and fertilizer fertilizer prices, we saw increased interest in our products and stronger ordering.

Maintaining inventory to service customers remains key to maximizing sales.

And as one would expect shipping days of delays are not helping.

Date, or preordering of inventory made sure that no sales have been lost.

Historical behaviors recur in second half of 2022.

We would expect slightly lower revenue.

Paired to the first half, but continued increase as compared to your earlier periods.

Oil gas and industrial sales of Tpa experienced increased sales through late 'twenty Q4, 'twenty, one and into Q1 and Q2 2022.

This was driven by shortfalls of competing products and higher oil prices.

It continued throughout Q2 and as evidenced in Q3, so far we don't consider this a permanent effect.

Tariffs.

Since September 32018, and several of our raw materials imported from China have included a 10% additional tariff.

Which rose 25% in 2019.

International customers are not charged the tariffs because we've applied for the export rebates available to cover the tariffs.

The accumulating tariff payments to the government are affecting our cost of goods, our cash flow and our profits negatively.

The rebates are received.

Rebates can take many years to arrive.

Submitted our initial applications more than three five years ago.

Total dollar.

The amount due back now exceeds $7 billion and is continuing to increase.

The rebates will increase profitability and cash flow, while decreasing cost of goods for future quarters in which rebates are received.

We learned nine five months ago that our application had been sent to a government labs, so that our formula based calculations could be verified.

We were promised a 30 day response period about 90 days ago.

Shipping and inventory.

Ocean shipping from Asia to the U S and ocean shipments from the U S to international ports.

Our slightly quicker than Q1, but still very slow.

Prices for container remained more than triple the normal.

Land transport inside the United States is also taking much longer.

Unusual in pricing is extremely high.

Our best to cope with shipping issues by ordering far ahead.

We warn that some disruption will be unavoidable some of the extra costs, we will have to be borne by us in order to retain customers.

Raw material prices have also increased substantially over the last 12 months.

Passing price increases along to customers can take several months and result in temporarily constrained margins.

Just as we finished raising customer prices related to raw materials.

Increases from Q4, 'twenty, one in Q1 'twenty two.

Our new increases were imposed on us and we're working with our price to the customers on pricing again.

We still expect revenue operating cash flow and profit.

ROE as fast or faster than it did in 2021.

But inflationary forces may keep us in a position where selling prices lag cost increases most of the time.

Highlights of the financial results, but we're very pleased with the results for Q2.

Year over year revenue and operating cash flow were all up significantly.

Net profit also exceeded the comparable 2021.

And it was a quarterly record.

During Q2, we also incurred.

We incurred about 350000 in merger activity costs due to professional fees.

If these costs were not present, our Q2 profits would have been approximately 2% per share higher.

Merger costs are expected to be much lower in Q3.

We estimate that year over year growth in revenue cash flow and profits will continue in Q3 and Q4.

Sales for the quarter.

<unk>, 31% to $11 7 million.

Paired with eight $5 4 million for Q2 'twenty.

Profits. The result, the profit of $1, six 6 million or <unk> 13 per share in 2022.

From a gain of $1, one 8 million or <unk> 10, a share in the 2021 period.

Operating cash flow.

The non-GAAP number, but it's useful to show our progress with noncash items removed for clarity.

For Q1, and Q2, it was $4 $5 6 million or <unk> 37 per share.

Up from $3, two 9 million or <unk> 27, a share.

<unk> Q2 <unk>.

2021 period.

Long term debt.

We continue to pay down our long term debt. According to the terms of the loans.

However, we have consolidated all of our debt for E&P and NCS with Stockyards Bank.

This has resulted in increased lines of credit with lower interest rates and reduced interest rates on our term debt.

At the same time, we bought all the units we did not already own in E&P, Peru, Peru investments LLC.

Guaranteed the mortgage held by the LLC.

This LLC owns the five acres and 60000 square foot building on the southwest corner of our Peru, Illinois factory.

The action returns full ownership of the 20 acre parcel.

Si and the mortgages at favorable terms.

Funds to pay the mortgage her obtained by charging.

CFS and E&P rent on the building.

Working capital.

Is adequate for all our purposes and is increasing continuously as we book retained profit from sales.

We have lines of credit with Stockyards bank for the E&P and Mcs subsidiaries.

We're confident that we can execute our plans with our existing capital.

The equity investments in Lagos was made on.

Cash on hand through FSL, our Canadian operating company.

Text of this speech will be available as an 8-K filing on www Dot FCC dot Gov by Wednesday August 17.

E mail or fax copies can be requested from Jason Bloom.

Jason at flexible solutions Dot com.

Thank you the floor is open for questions and just would you prepare everybody for that thanks.

Thank you Mr. O'brien again, ladies and gentlemen, if you would like to ask a question. Please press star one on your Touchtone phone.

You may remove yourself from the queue at any time by pressing star Q. Once again it is star one to ask a question.

For a moment to allow everyone the chance to signal.

Our first question comes from William Kukowski at Greenwich Global Your line is open. Please go ahead.

Hey, Dan Great quarter.

In regards to the Florida LLC what percent I know you don't like giving too many specifics on this but I was under the impression most of their product was purchased from FSA.

You mentioned that they were having trouble with their higher cost of goods. So I'm trying to reconcile what the issue might be for them. If they are just having a hard time passing their price increases on that theyre getting from you guys or is it something else.

Actually you hit the nail on the head, we manufacture for them under contract and.

Our contract allows us to raise prices or input costs go up.

We are having trouble passing that along.

To their customers.

They have raised prices as far as I can but there are there is stress in there.

Selling hand.

We are.

Work with them to divest of our abilities inside the contract but.

That'd be giving money too.

Alright early us.

Okay. So at least for the.

The near future.

Low 20% gross margin range is probably going to be.

Continued for them on their results.

Yes, I would say that that's probably correct. That's absent another boat of amazing inflation.

If.

If inflation and raw material costs.

Stops or box off there'll be able to.

Increased their margin scan, but at the moment alright.

Margin is probably what youll see.

Okay.

There's been all kinds of news about the drought in the Western U S is there any interest in using water sabre to help with that problem and obviously it would be a fixed part but as anybody.

The case of schadenfreude, but.

It's.

It's really not the answer to their problems now the answer to their problems is to get their reservoirs full again.

Okay, Alright, that's all I had.

Thank you Bill.

No one second ladies and gentlemen, it was star one if you had a question what may of next to attempt Clarkson with band Clemens Capital. Your line is open. Please go ahead.

Hi, Dan.

Just wanted to know I you know the <unk> when do you think this.

<unk> or legal legos investment when when when do you think that will be completed.

Yeah I.

Good morning to you on the on the.

[noise] on the merger agreement Ah. This is an agreement that has.

It's contracts.

The contract.

States that the merger must be complete by September 30th.

If it is not complete by September 30th.

It's S.

Has to be either extended or it goes away.

So I guess, what I'm, saying is that expect it to be completed by September 30th or not to be completed.

And in terms of the the what what was the kind of logic doing this deal again Ah.

Is it all right what.

Go ahead.

Yeah, I know, it's a it's a good question because although it hasn't been well received by the market. The logic is pretty good is pretty solid.

The <unk>.

<unk> in a.

Bind companies that can start with corn sugar grown in the United States.

For meant that into aspartic acid at a price lower than than the current world price of aspartic acid and then utilize it to make.

Quite a variety of polyester partied and other chemistries.

At the at the flexible solutions factories.

Results in a value added specialty chemical platform.

That is.

Specifically attracted attractive to the detergent companies start with.

Who are trying to become 100 per cent sustainable.

And these these groups of detergent companies.

Really can't name names, but they're all the big ones.

They are trying to go completely sustainable and they need us for hundreds of thousands of metric tons.

Of of finished products from a company just like the flexible solutions law goes combination.

Obviously, it's a big it's a big project.

<unk> to get into a hundreds of thousands of tonnes from fives of thousands of tonnes, but that's the logic behind this is to is to not make a.

[noise] [noise].

A generic chemical like as far like acid, but to make a specialty chemical from his partick acid and to control the entire.

Route from.

Sugar all the ways of the specialty chemicals. So that was that's the theory behind it and it's a good business plan.

Right now what I mean is is is this a reasonable all that this would all turn profitable in two years or five years and yours or maybe you don't even know.

Well this is a point where I have to say to you. Please read the us the.

As for because there are forward looking statements anything is for.

It's an sadly, it's a 500 page document, which I have not memorized yet.

But yes, there are forward looking statements, there's a point where profitability is expected.

I'm pretty sure it's inside five years, but please I can't be quoted on that sure and and and you know just looking at again I'm, a big picture Guy, what's what's the biggest risk I mean, it doesn't sound like the risk is whether there is demand for the product it sounds like the risk is whether you can.

Create do it on a on a bigger scale right.

Yeah, it's an execution risk.

Okay, Okay, and and obviously you and you you must believe that you know based on that some of the execution successes on a smaller scale that already demonstrated at least a reasonable probability that they're gonna be able to do it right.

Yes.

[laughter], otherwise it'd be kind of a foolish ventures [laughter] right I mean, it's kind of that well yeah, yeah yeah.

The obvious obvious but the obvious has to be state at all.

You're you're you're right. It's we we believe it's a reasonable opportunity.

And then can flex.

Flexible flexible solutions fact that flexible solutions is coming into this is because you already give give these guys Ah Ah Ah Ah Ah good size market and and can help Ah Ah facilitate them you know getting getting up to the scale. It's at the.

Peace that flexible evolution brings to it.

Yeah, that's the peace, we bring as a route to market at a much higher price if they just make it fly goes went ahead on their own and made US Bartok asked that they would get one price per ton Ah Ah because it would be more or less a commodity organic acid.

Bye.

Owning flexible solutions and having the route to the specialty chemical sector that <unk>.

Flexible solutions services.

Selling.

Selling price per ton more than doubles and the margin increases dramatically as well.

Right.

And you've you've done some racing enough well, what these bond races and stuff that they had at least.

For the reasonable foreseeable future you've got enough money to try to make this happen.

That would be accurate, it's it it might not be as much as as some of the.

Synthetic chemistry companies have raised or synthetic biochem.

But the fact that the flexible solutions plant already exists ready to do the second half of the processing.

Is a pretty significant benefit compared to Ah.

What other.

Companies in the sector face.

Right right now just leaving out the detergent an application I mean.

Is there a is there a sizable market just for the for the proven fertilizer application.

If if the product with more available.

Yes, there's also markets that.

We've never address for one of them is actually the international market for aspartame.

Aspartame you may have personal.

Feelings about it but if it were made from sustainable chemicals, it would at least be somewhat safer than making it from oil based chemicals.

Yeah sure that would.

That would that would appeal to a lot of a lot [laughter] of people have all kinds of beliefs about.

Nutritional items that may or may not be based on science, but.

When he sounds a bit which is a big part of that a big part of that game. So.

Well I appreciate it I mean, I'm very very hopeful that this is gonna.

And I'm watching it and it got still some money in it and.

Really I'm, a admire what you're what you're doing so keep at it thanks Dan.

Thank you too.

Sure.

Our next question comes from Dennis Miller Lapin partner. Your line is open. Please go ahead.

Hey, good good morning, and congratulations on a beautiful quota [noise]. My question is pretty simple I spent number I was like you said going through that is four which was a very very lengthy the one question I couldn't get answered is how closely the commercialization.

[noise].

Yeah and it's.

It's probably not a question I should answer.

Well, it's a pretty important question honestly.

Yeah, I I kind of have an opinion.

But they are not that's close enough for me I I would I would like your opinion yeah.

I think my opinion is.

My opinion is that it's the full commercialization is is within five years and how much earlier than that I'm not certain.

Okay, Yeah, because I mean were taken a beautiful company like F. S I, which is growing profitable and what's her name into an R&D company, you know, where we with even with you $160 million. You know you like you just stayed in your sector peers, you know biochem, they've tried doing synthetic stuff you know.

One company I follow they spent over $1 billion is still not profitable.

So 160 sounds like a lotta money, but when you started getting into this.

Might not be enough money.

Why not for a buddy here, here's a here's a theory that I have in this world. Okay, you know going back to the very beginning of flexible solutions.

My father, and I funded the original private company with $500.

And.

When it was there is no more money coming make it work.

Sometimes bootstraps boot strapping and being forced to work inside a a tight budget is better for a company and then having unlimited funds.

Oh, I don't know that I see that I'd, certainly see the benefits that absolutely yeah.

And the potential.

Discounting the benefit the the potential of potential is is ginormous I mean, I don't think anybody questions that you know the question is you know how are we going to become.

A disaster, because it's gonna take seven years or eight years, and we got a raise another couple of hundred million in.

All along we were going to become a money losing her in the company.

Well Dennis Unfortunately, that's that stuff I really can't comment on.

Because it would be forward.

Stuff that I I actually I don't know the answers to it.

And I really don't want to put us in legal jeopardy, along with no no and I I would yeah I wouldn't want you to do that as well listen again beautiful quarter [noise].

[noise] Boy I have lost a lot of reservations going forward, but you know again I. Appreciate you taking the time. Thank you.

Oh, you're welcome Dennis and.

Ah.

Not over until the until the shareholder meeting so.

We'll keep working and we'll keep showing and why it's a good idea.

Okay. Thanks, [laughter] take care.

Yeah Mister O'brien at this time I do not have any other questions holding I will turn the conference back to you for any additional are closing comment.

Thank you just everybody thanks very much for.

Listen again today and for your questions hopefully, we'll be talking again at the end of the third quarter and thank you very much.

Ladies and gentlemen that will conclude today's program. We thank you for your participation you may disconnect at this time.

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