Flexible Solutions International, Inc. (AMEX:FSI) Q4 2022 Earnings Call Transcript

Flexible Solutions International, Inc. (AMEX:FSI) Q4 2022 Earnings Call Transcript April 3, 2023

Operator: Good day, and welcome to today’s Flexible Solutions International Full Year 2022 Financials. 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. Please note this call may be recorded. And it is now my pleasure to turn the call over to Dan O’Brien. Please go ahead.

Daniel O’Brien: Thank you, Chris. Good morning. This is Dan O’Brien, I’m the 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 full year FSI conference call.

I’d like to speak first regarding our company condition and our product lines, along with what we might see in 2023. Afterward, I’ll comment on our financials. 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, NCS started food grade toll operations using our spray dryer, which 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 with a plant used to use.

TPA is also a biological and 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 in the oil as it exits from the rock formation. Preventing scale keeps the oil recovery pipes from clogging. TPA is also sold as a biodegradable ingredient in cleaning products for certain food uses and as a water treatment chemical. SUN 27 and N Savr 30, our nitrogen conservation products. Nitrogen is a critical fertilizer that can be loss 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 rising nitrogen loss from food products.

Our Illinois plant is food grade inspected and we have received our FDA number. We’ve commercialized one food grade product based on polyaspartates that was developed fully in house. We have a pipeline of additional products developments that are either our ideas. Full production of outside ideas or a mixture where an outside idea — outside idea is being optimized by our team. NCS will focus on food products equally, with our other market verticals because we’ve determined that this is an area with large markets that we’re skilled in servicing and where we can obtain good margins. 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.

Opening of the economy after the pandemic has affected ENPs sales into the home gardening market, especially home cannabis. We still expect revenue growth in 2023 at close to historic rates. The Florida LLC investment, LLC was profitable for all of 2022 except for a small loss in Q3. Companies focused on international sales into multiple countries, all of which face different issues and respond in varied ways. Revenue was very strong all year and we expect more top line growth in 2023. However, 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 in the near term. Our sales to the LLC continue to grow and we are able to obtain a positive margin.

Merger with Lygos did not proceed. On April 18 of last year, FSI and Lygos announced their intent to merge subject to shareholder approval. Merger was not completed by the end date of the agreement and so did not close. Strategic investment in Lygos. In December 2020, we invested $500,000 to Lygos in return for equity. We made a second investment of $500,000 in June 2021. Lygos is using these investments towards development of the microbial route to aspartic acid using sugar as a feedstock. FSI will be the major user of aspartic acid drive this way and believes that sustainable aspartic acid will allow us to obtain large new customers and develop valuable new products that both biodegrade and come from sustainable sources. We remain optimistic that we can continue to work with Lygos in ways that do not involve merging.

FSI is dedicated to the goal of sustainability, while finding a route to the goal that is profitable for us or our suppliers and for Lygos. Q4 2022 and first half 2023. Agricultural products had strong early buy season. It’s possible that some orders were pulled from Q1. However, we still feel that agricultural sales for the first half will exceed the same period in 2023. Oil, gas, and industrial sales, so of TPA experienced increased sales grow 2022. This was driven by shortfalls of competing products and high oil prices. Sales are expected to remain steady in. 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’ve acquired (ph) for the export rebates available to recover them.

The tariffs are affecting our cost of goods, our cash flow and our profits negatively. The 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. We’ll persevere until we succeed in recovering our funds. Shipping and inventory. Ocean shipping from Asia to the U.S. and ocean shipping from the U.S. to international ports are back to pre-COVID speeds, but have settled at higher prices. Land transport inside the U.S. is continuing to rise . We coped with shipping issues by ordering far ahead carrying additional inventory in 2022, resulting in some costs that we were unable to pass on to our customers. Raw material prices have also increased substantially in 2022.

Passing price increases along with the customers can take several months is not always possible and resulted in constrained margins throughout the year. The effects of this are obvious in our full year. We still expect revenue, operating cash flow and profit to grow strongly in 2023, but inflationary forces may keep us in a position where selling prices lag cost increases some other time. Our inventory was very high in 2020, where we could service our customers. We plan to reduce inventory as a ratio of sales in 2020, resulting in more cash on hand and a more rapid rotation of raw materials. Highlights of the financial reports. Pleased with results for 2020. Year-over-year revenue and operating cash flow were up significant. Profits were negatively affected by merger costs, shipping costs and raw material prices yet, we’re still very good.

We estimate that year-over-year growth in revenue, cash flow and profits will continue. Sales for the fourth quarter increased 34% to $12.1 million compared with $9.04 million for Q4 2021. Sales for the year increased 33% to $45.7 million, $34.4 million in 2021. Profits, strong growth resulted in profits for full year 2022 of $7.02 million or $0.57 per share compared to a net income of $0.45 million or $0.28 a share for full year 2020 (ph). 2022 had an upward one-time income tax revision of $0.16 per share that should be removed when comparing 2022 to 2021. In addition, 2021 had a one-time $0.03 EPP (ph) profit that increased the 2021 numbers, while 2022 had a one-time cost of $0.03 related to the merger that we did not complete. Excluding the one-time items, a reasonable comparison would be $0.25 for (ph) 2021 earnings and $0.44 for .

These are non-GAAP estimates only. Operating cash flow. This non-GAAP number is useful to show our progress with non-cash items removed for clarity. Full year 2022, it was $8.44 million or $0.68 a share, up from $5.65 million or $0.46 a share. Long term debt. We continue to pay down our long term debt according to the terms of the loan. However, we’ve consolidated all our debt for ENP and NCS with Stock Yards Bank. This has resulted in increased lines of credit with lower interest rates and reduced interest rates on our long term debt as well. At the same time, we bought all the units we did not already own in ENP Peru Investments LLC and guaranteed the mortgage held by that LLC. ENP the €“ the LLC owns the 5 acres and 60,000 square foot building on the Southwest corner of our Peru, Illinois factory.

So this action returns the full ownership of the 20 acre parcel and 120,000 square feet of buildings to FSI with a mortgage at favorable terms. Working capital. It’s adequate for all our purposes and it’s increasing continuously as we book retained profit from sales. We’ve got the lines of credit from Stock Yards Bank for ENP and NCS subsidiaries. We’re very 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 Tuesday, April 4. E-mail or fax copies can be requested from Jason Bloom, jason@flexiblesolutions.com. Thank you. The floor is open for questions. Chris, would you please give the instructions and get that going. Thanks.

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Q&A Session

Operator: Certainly. And our first question comes from William Gregozeski from Greenridge Global.

William Gregozeski: Hey, Dan. Heck of the fourth quarter. I know you always want to talk about everything in terms of an annual basis. But just given how high the sales were to the Florida LLC in the fourth quarter. Is there any sales that were pulled from the first quarter or things that were carried over from like the third quarter that — which is the reason why the revenue is so high there?

Daniel O’Brien: Thanks for the question, Bill. We think that there might have been some revenue pulled out in Q1, but I haven’t seen all of Q1 yet, and it’s entirely possible that it was early buy in general. But that — along with the early buy, there are — there’s a strong possibility that the agricultural world at the retail level of the farmers have been not buying. They’ve been holding off because of uncertainties. And that even though the early buy was strong, there is still a strong first half coming as well. So that’s the reason my speech was somewhat confusing on the subject is because we don’t have enough data for a firm opinion.

William Gregozeski: Okay. Given — so on an annual basis, the Florida LLCs revenues were up over 50%. I mean, I assume we should look for slower growth on that for ’23?

Daniel O’Brien: The Florida group is trying to replicate their success from last year. I don’t have a firm opinion on whether they’re going to be successful or not. But my anticipation is that their growth will continue. But if I had to guess, I’d say at a slower rate than it did last year.

William Gregozeski: Okay. On the tariffs, you guys haven’t gotten any money from that since this all started, correct?

Daniel O’Brien: We had not.

William Gregozeski: And there’s still no time or no word from anybody on when you might get anything?

Daniel O’Brien: No, there isn’t. And in fact, they’re still playing with us trying to say you need to add more information. Now I purposely cut that paragraph. Pointed that it to come up in the question in the Q&A. It’s gotten to the stage now where everything we send to the U.S. government is getting coffees to our corporate lawyers because some of it is COVID-related people working from home and not being properly overseen. Some of it is government confidence, but some of it is just plain. I don’t know. It’s just playing unfair. On the other hand, this is a — this is an exercise that I feel we must go through. We cannot give up on the money. And for international sales, given the smaller ancient tariffs when we get through this whole program and we get into a situation where they accept our documentation and give us our money, even the 3.7% to 5.1% tariffs that we had in the past, we’ll all be recoverable perpetuity, which will allow either greater margins or lower prices internationally that will allow us to increase sales.

So it’s an extremely irritating process, but it is a valuable thing to do.