Q3 2023 Flexible Solutions International Inc Earnings Call
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Good day, everyone and welcome to today's flexible solutions International third quarter, 2023 financial conference.
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I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Dan O'brien. Please go ahead.
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 involves 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 Companys reports filed with the Securities and Exchange Commission.
Welcome to the F S. A conference call for third quarter 2023.
First I'd like to discuss our company condition in our product lines, along with what we think might occur in Q3 and Q4.
43 and on into 'twenty.
24.
I will comment on our financials afterwards.
The nano cap Division NCS.
NCS represents approximately 70% of Fsic's revenue this.
This division makes thermal poly aspartic 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.
And of course 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 irons in the soil, resulting in fertilizer remaining available longer for the plant to yes.
Tpa is also a biodegradable way of treating oilfield water to prevent pipes from plugging with mineral scale.
Tpa is effect is prevention of mineral scale.
From 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.
P. P. A is also sold as a biodegradable ingredient and cleaning products for certain food uses and there's a water treatment chemicals.
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 F D a number.
We have commercialized one food grade product based on poly Aspartase that was developed fully in house.
We have a pipeline of additional products in development that are either our ideas.
All production of outside ideas or a mixture where it outside idea is being optimized by our team.
NCS will focus.
Our food products equally with our other market verticals because we've determined that this is an area with large markets.
Gilden servicing and that where we can obtain good margins.
We have not received the food product orders, we'd hope 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.
Does the A&P division.
E N T represents most of our other revenue.
He 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 M. P sales into the home gardening market, especially home cannabis.
We're expecting a little revenue growth in 2023, and don't have any any clarity regarding 2024.
Our Florida LLC investment.
L. C 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 face different issues and respond and varied ways Rev.
Revenue was strong in Q3, but the remainder of the year can't be predicted.
Also the L. L C 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 are.
Our sales to the LLC through in the quarter.
Merger with logos did not proceed.
On April 18th 2022 F S I in Lagos.
Announced their intent to merge subject to shareholder approval. The merger was not completed by the end date of the agreement September 30th 2022 and did not close.
Strategic investment and like US in December 2000, 20-F S. I invested 500000 and logos in return for equity.
We made a second investment of 500000 in June 2021.
Lagos use the investment towards development of microbial route to aspartic acid using sugar as a feedstock.
F S I 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 in come from sustainable sources.
Logos as recently announced the change of focus to include other organic assets.
We anticipate that this may slow their progress towards sustainable aspartic acid.
S. I is researching alternatives to achieve the goal of sustainability, while continuing to support logos.
Q4, 23 had early 'twenty four.
Agricultural products were not as strong in Q3.
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 'twenty, three and all of 'twenty 'twenty four it could be difficult.
Oil gas and industrial sales of Tpa had been lower in Q3.
Three.
This is likely to continue for the remainder of the year and into 'twenty 'twenty four.
Customers are reducing inventory and reassessing their needs now that shipping has become a reliable again.
In addition, the possibility of reduced hydrocarbon demand could slow our sales over the next several quarters.
Paris.
Since 2019, and several of our raw materials imported from China have been included about 25% tariff.
International customers are not charged the tariffs because we have applied for the export rebates.
Available to recover the tariffs. These tariffs are recovering are affecting our cost of goods.
Our cash flow and our profits negatively.
Rebates can take many years to arrive.
We submitted our initial act applications more than four years ago.
The total dollar amount due back to us as well in excess of a million dollars and we're going to persevere until we succeed and rich everything our funds.
Chipping in inventory.
Ocean shifting from Asia to the U S and ocean shipments from the U S. O. Two international ports are back to pre COVID-19 speeds.
And have settled at 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 2020 to.
Resulting in costs that we were unable to pass onto 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.
It is also experiencing inflation.
Passing price increases, even small inflation related ones along to customers it.
It takes several months, it's not always possible.
And will probably result in constrained margins for the next year.
We believe that the some of the issues we faced during the rest of 2023 wells.
It will result in lower revenue.
Lower cash flow and lower profits for the coming quarter and for the full year.
Highlights with our financial results.
We're not happy with the results for Q3 23.
Year over year revenue and operating cash flow were down.
<unk> 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 financial 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.
Volume's down.
Been unable to raise prices sufficiently to.
However 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.
F S I and its subsidiaries will have to examine all our costs and economize where possible.
Even more critical as 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 872 million compared with $11 6 million in Q3 'twenty.
Profits.
Q3 profits.
In 2023 resulted in a loss of seven.
718000, or six cents a share.
Married to a profit of.
$1 1 million or nine cents a share in the year earlier period.
Operating cash flow.
non-GAAP number is useful to show our progress.
With noncash items removed for clarity for.
For the nine months of 2023 three.
3.28 million or <unk> 26 cents a share.
Down from $6 3 million or 50 cents a share in the 'twenty two period.
However, we've consolidated all of our debt for E M T and NCS with Stockyards Bank that says.
<unk>.
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 our E. M. P. Peru investments LLC and guaranteed the mortgage held by the L. L. C also at stock yards.
E L. L. C owns the five acres and 60000 square feet of building.
In Peru, Illinois on the southwest corner of the nano Cam property.
This action returns full ownership of the 20 acre parcel and the 120000 square feet of buildings to F. S. Si with eighth a mortgage at favorable terms.
Additional factory space in Illinois, and the second quarter, we invested to acquire 80% of an L. L. C called 317 Mendota that in turn purchased a large building on 37 acres of land in Mendota, Illinois.
We've determined that 240000 square feet.
Our available for our use or for rental.
The E M. P Division will move all of its operations to 60000 square feet of the building the.
The remaining 180000 square feet will be rented as suitable tenants are found.
This allows the NCS division to recover 30000 square feet in Peru, Illinois from E N T, making room for potential growth.
Our working capital it's adequate for all other 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 Dot FCC dot Gov.
Thursday November 16th email or fax copies can be requested from Jason Bloom case.
Jason at flexible solutions.
Com.
Thank you the floor is open for questions. Angela will you please give instructions and start the process.
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Our first question comes from Tim Clarkson with Van Clemens Capital. Your line is open. Please go ahead.
Hi, Dan.
Good to talk to you again.
Wanted to go over again, some basic questions trying to get a better understanding of the of the company. So what what percentage of your overall revenues. Then would you say are are tied into agriculture.
Well, we don't we don't break it out in our financials, but it's.
It's greater than 50%.
Right right and so.
Obviously, the you know the droughts in some of the issues with farmers that you know is impacting demand for the you know for that product at that minimizes our nitrogen.
Nitrogen loss in the soil.
You'd be a correct there it's actually more of a of an issue I think if if you were to open up a.
Ah graph of say corn prices for the last two years versus say inflation.
And I pointed this out in the speech.
Probably discover that.
Corn prices went up for a while and our sales went up dramatically and I and then the inflation took hold but it didn't take hold of corn prices there back where they were before the inflationary splurge.
And it's it's causing farmers to question inputs, which causes distributors to carry less inventory.
Sure sure.
Second second question is is it looks like even as bad a quarter is the third as the most recent quarter was it would you say that you I didn't break it out did you have relatively breakeven free cash flow for the quarter.
Didn't break it out but I did it in my head very early in my speech, writing I. It was positive but are less than a half a cent. So that's right that's pretty scary. We we've got some work to do to do.
Increase prices lower costs and finding additional volume.
Sure so nothing to do but renovate.
Sure now in terms of do you do you have any major plans for capital expenditures on a forward basis.
Oh Capex for our food Division has.
And completely done it's now a question of finding customers and setting.
Setting prices at good margins.
And then last question is I mean are there some.
Logical places to do cost cutting.
We're looking at it.
I would say that there are some minor cost cutting opportunities, but they truly are a miner and the answer is a margin improvement and volume improvement. So we're going to try but we don't want to damage our business.
Sure sure plenty highlights our current results are discouraging, but long term. The obviously your company has done very well, so I'm still optimistic with that I'll pass. Thanks.
The next question comes from William Greg I'll ski with Greenwich Global. Please go ahead.
Hey, Dan.
I know you don't like talking about the customers specifically, but in the breakout of your key customers. One of them was down from $6 2 million in the nine months first nine months last year to 2 million this year that relatively safe to assume that in a customer and you're not losing them. It just need to wait for the market to turn.
Good morning, Bill the answer is yes, that's an AG customer and yes, they they lost business, which caused us to lose business, but we did not lose the customer.
Okay, and then can you talk a little more about your business development plans for the food ingredient product.
Certainly we are constantly engaged in outreach we've hired some experts in the field to be both our consultants and employees.
Actually employ it took them both on as employees, but one of them is is his job is.
Idealized is consulting on formulation and.
Actual sales.
We are.
Yielding many many many opportunities.
The problem is in the food industry, it's turned out to be quite similar to the agriculture industry.
Everyone says there are million dollar customer and are ready to order tomorrow.
And.
We're sorting through the difference between the Posers and the real people.
And the real people like so many are.
Slow to approve the finished products and slow to make orders and.
And in the cases are they pitched to us based on volumes that they they are actually don't.
Tend to buy.
So it's a difficult period in a company trying to enter a new market space.
We know the names of the players, but we don't know how well they play their position yet and.
It's.
Ben.
Frustrating not disappointing, but frustrating learning that it's it's not an organized business.
And we are going to have to figure.
Figure out who's who.
And who are going to work with and and then we have to finish.
Proving to them that the products.
Our better than the product that <unk> current by it because we're we're definitely trying to replace other.
Other suppliers rather than do brand new.
Thanks.
And it's taking time.
Does that help you.
Yeah, Yeah, yeah. It does.
The the $4 million in Capex. This year is that related to the food product.
Yes, although remember we also bought sauce.
80% of a of a building.
And so there's capex from from the new building and there's capex from the food products.
Okay, and then you guys have really over the last year reduced receivables and inventory quite a bit.
And even after that 4 million still a $10 million on the balance sheet.
Is there any plans for that or is that really.
Cover you guide the wait and see how the marketer.
Yeah. That's there there's an interesting thing I you know I look at that and say Hey, do I have a $10 million kind of hit right at $10 million check and build the answer is no we can't right at $10 million check our accounts receivable.
Cash like items go into that cash position.
Uh huh.
Inventory as part of it we've invested in the additional inventory when we can find it at lower prices.
But as you say our inventories down our accounts receivable are down.
<unk>.
The.
Accounting.
Definition of cashes up.
But my opinion is we need to write our ship before we try anything new and I as I said to the previous questioner, we got some work to do.
Okay.
And last question why were your options that you got last year I cancelled.
Well, that's a that's a personal tax situation that.
Was the options, we're going to cost me more money then in taxes.
And then they they were worth to me so I asked.
To have them canceled.
Okay, and then when we get a when you guys take a reverse you've.
We've taken on that so far in the fourth quarter.
In theory, yes, with with options I'm always surprised that there seems to be an accounting program, where the auditors use where.
You you pay when you issue them and you pay when you cancel them.
I am receiving information that this may not be true this time, because they had invested.
But.
Either way.
It will be one of those.
Noncash numbers that.
We strip out to show our operating performance.
Okay, alright, thank Dan.
Thank you Bill.
The next question comes from Raymond Howe with CFP. Please go ahead.
Good morning, how are you today.
Doing well Raymond how are you.
Yeah, Dan Thanks.
Well follow up on <unk> question, the previous caller asked about about company.
Because it looks like that was the majority of the sales decline in both year to date and third quarter.
Can you reiterate what you said about the company these problems.
Yeah Company D had a had.
One or many I mean, obviously you don't share all their data with me.
One or many customers buying agricultural inputs.
And they were unsuccessful in re signing those customers year over year.
And it's resulted in a.
You've seen a huge shortfall.
$4 million across the nine months.
Company D is attempting to recover those sales, but there's no guarantee there.
The company D is in very good general shape, we just happen to be.
Uh huh.
Every year every company has some wins and losses.
We happen to be collateral damage to one of their losses.
Gotcha.
Is it a is that something that accelerated in the third quarter it looks like.
Absolutely okay.
Yep.
It wasn't predictable either.
Right right up until we didn't get the orders everybody was trying to get them.
Okay.
Hey.
Are the build out costs already been incurred for E&ps, new space or is that capex that still to come.
It's it's largely done there may be.
Somewhere between 50 and 200000 still to go.
And when will they actually take that space.
They've already moved in there are there rent starts being paid to the LLC on January one.
Okay, Great and I think that was a relatively smooth transition.
It was smooth at senior management I can I can tell you that that there were a whole pile of problems that needed to be solved and worst solved by our production team and I got to give him a call out for a really good job.
Great. Okay, that's all I got.
Thank you very much.
Yeah.
The next question comes from Cory Pritchard. Your line is open. Please go ahead.
Hi, My name is Cory Pritchard I'm, a retail investor I have two questions for you today. My first question is.
Regarding new products could you speak to the development of new products that you have planned for this upcoming year and maybe going into 2025.
Thanks for joining us Corey.
The new products that we're planning are all in the food industry.
They're all subject to NDA with their perspective.
Our customers so I can't.
Tell you, we're going to make X y Z.
But all of them are intended to either be included in finished food goods.
Included in finished nutrition goods either for.
Human consumption or pet consumption.
The nutrition products and the food products, we don't make the final the final goods, we make ingredients and sell them on to the group who does make the finished goods puts their label on it and sells it into the retail or industrial world.
Got it. Thank you for your for your answer My last question earlier in the year you. The company issued dividends based on unexpected profitability I believe Q1 going.
Going forward are there plans for may.
Maybe share buybacks additional dividends or reinvestment into research and development if we.
We do achieve.
Record profits that are unforeseen.
Returning returning capital to shareholders is a big is a big goal of ours are whether it's through share buybacks.
Special dividends as you've noted.
We will try and do it obviously, a bad quarter to ask me.
When.
We've got to reuse my a quote from the previous customer we need to right the ship.
R&D now that it's an interesting question.
We don't show it broken out as R&D in all cases.
But the sales and consulting people I spoke about.
Our senior operating officer, even myself we're engaged.
Assistance Lee and R&D.
As part of our part of our regular jobs. So there isn't an enormous amount going on.
It's unlikely to result in patents because trade secret is far more valuable, especially as we learn more about this food and nutrition world.
It's all about what you can do not about talking about what you can do.
And.
So we we're developing new new skills, a new technology.
We're just not going to see it in the financials broken out as R&D and you're certainly not going to get the details.
From us because we're going to keep it as trade secret.
Alright, much appreciate it I'll go back.
It appears we have no further questions at this time I will now turn the program back over to our presenter for any additional remarks.
Thank you Angela.
Thanks, everybody for joining us we will be back and several months with our full year numbers.
And.
Maybe this would be a great time to wish you all have a great Thanksgiving and talk to you soon.
Hi.
This does conclude today's program. Thank you for your participation you may disconnect at any time.