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LiqTech International, Inc. (NYSEMKT:LIQT)

Q1 2013 Earnings Call

May 14, 2013, 11:00 am ET

Executives

Steve Axelrod - Wolfe Axelrod Weinberger Associates, LLC

Aldo Petersen - Chairman

Finn Helmer - CEO

Analysts

Walter Schenker - MAZ Partners

Fred Francis Milligan - Wunderlich Securities

Operator

Good morning ladies and gentlemen and welcome to the First Quarter Financial Results Call for LiqTech. All lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. (Operator Instructions)

At this time it is my pleasure to turn the floor over to your host Mr. Steve Axelrod. Sir, the floor is yours.

Steve Axelrod

Thank you, Rachel and thank you all for joining us to discuss the LiqTech’s first quarter fiscal 2013 financial results, the recent news announcements and the outlook for the company.

LiqTech’s management, Aldo Petersen, Chairman; Finn Helmer, CEO; Lasse Andreassen, COO and Soren Degn, CFO, are on the call and the formal remarks by management will begin shortly. But before I ask them to proceed, let me remind our listeners that following the discussion, there will be an open Q&A session and that a replay of the conference call will be available from 3 PM, Eastern Time today through May, 28. The replay information can be found on today’s release. And keeping with the usual procedure let me take a few moments to read the forward-looking statements.

This conference call contains forward-looking statements. Although the forward-looking statements in this conference call reflect the good faith judgment of management, forward-looking statements are inherently subject to known and unknown risk and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements.

Listeners are urged to carefully review and consider the various disclosures made by the company in its reports filed with the Securities and Exchange Commission including the risk factors that attempt to advise interested parties of the risk that may affect the company’s business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize or if the underlying assumptions prove, the actual results may vary materially from those expected or projected.

Listeners are urged not to place undue reliance on these forward-looking statements which speaks only as of the date of this conference call. The company assumes no obligation to update to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this conference call.

I would now like to introduce Mr. Aldo Petersen, Chairman of LiqTech International who will discuss the first quarter of fiscal 2013 results and other matters of interest. Aldo?

Aldo Petersen

Thank you very much, Steve and welcome and good morning and good afternoon to our listeners here in Europe. It is my pleasure to present our first quarter of LiqTech. We had, I am sure many of you attended our year-end conference call on March 27th, and we had a good chance to discuss some of the recent activities of the company that I will follow-up on in a little while.

We posted a revenue stream of $3.4 million and it represents the same trend as we have had in the previous quarters. A steep decrease in the DPF business that has had a slow-back and as I presented earlier have had a hard time on picking up, so we still see a slow DPF sales, but we continue to see an increase in our main business area, which is the silicon carbide membrane business, who has an increase of about 33% and our other business area, the kiln furniture, who has a significant increase as we have had the previous quarters.

Our first quarter result represents the very intense development on new products that LiqTech have been doing in the first quarter. The release on two new products which is the Flat Sheet Membranes and Disc Membranes has put us in a situation where we are creating a lot of interest from the market. We have a high volume of quotes on these new products out into different markets in Europe, in North America and especially in Asia which is a market that we have had significant impact in over the last couple of quarters after we started our representation with our office in Singapore.

As we released yesterday, we have had a sort of follow-up agreement with Fan Run Si, a big Shanghai company in fluid technologies, that sort of shows very, very promising increase in business and are involved in very high volume quotes on our Membrane Technology and it is very pleasing that we have seen sort of pre-launch developments over the last six months in the Chinese market and its very pleasing to see that our Membrane Technology that has been very well received in the Chinese market.

As many people are well aware there are huge markets in China especially in the waste water and the produced water area, but the impact that we have done with Fan Run Si, with the soybean protein recovery is based on the development of new technologies that our team has been doing over the last quarter.

So we are very optimistic about sort of development in the Asian market and especially in China. We are of course also very excited about our cooperation with FMC. We have started sort of this planning and producing the first systems that are going to be used in our corporation and we have very, very good relationship and very, very good reception. The two teams are working together very efficiently and we are already seeing great input back from the FMC organization on where our Membrane Technology can be utilized in our joint development agreement.

We have also seen the impact of the validation from the FMC agreement take place in great interest from many other large companies in the producer water sector and in the waste water sector. We have just been present at a very big clean water and oil exhibition in Houston, in Texas and our team had many, many very good conversation and contacts with potential customers. So we feel very assured that our silicon carbide technology has started to get the traction that the three year work have sort of been leading up to. It is a new technology, it is a development within the ceramic filtration platform and it is very pleasing to see that LiqTech is getting good traction on its technology platform.

We have also spent the first quarter of improving our management team. We are very pleased that we have Mr. Mark Vernon who is the CEO of Spirax-Sarco Engineering on board as a new member to our board and we are especially pleased that Mr. Finn Helmer has joined our company as our new CEO. And with his background, his knowledge and his technology savvy he has been working very hard over the last 45 days since he started on April 1.

And I would now like to sort of turn over the conference for Finn Helmer to sort of give his view on the development in LiqTech and especially on the recent developments of the company. So please Finn.

Finn Helmer

Thank you very much. Good afternoon and good morning to all of you. I guess (inaudible) five days and I've moved at the company a little bit from the sideline when you add on a city like this. And what I see is a company that I actually well placed to generate the manufacturing of the devices [lead] making. At the same time the company that has done several very exciting new projects and products prepared over the past four, five or six months that are now ready to take into the market and therefore demand opportunity into the big, there is a lot of big areas that we can go into and we are now into.

And then very promising thing is really that with more than 150, we've been trying optimally to take products, anything funded by the (inaudible) applications. (Inaudible) now that the orders are coming back for the second and the third time and that means customers are now also starting to manufacture. So we are growing in some of the areas from the first phase into the production phases. Of course it would take some time to ramp up production for our end customers, but at the same time, what we're seeing is an acceptance of the product in the market and that acceptance is very important.

So I am actually (inaudible) customers in the U.S. and I am seeing an enormous interest in different areas. One of course from our turmoil, from our different connections with FMC as one that’s just been mentioned, but also really generally order for oil wells and also an interest for oil sand in Canada, but that’s been one area that LiqTech can probably had an another very interesting area and that is waste water. And it's not only industrial waste water; it is waste water from power plants from water. In terms of waste water from refining society around, really rounds in the world and it is of course from those societies that has difficulties following these exactly at month on the waster water and maybe not having money available to invest (inaudible) interested in some of the solutions that LiqTech can offer.

(Inaudible) industry that also is giving us some new opportunities and while us are looking into some interesting opportunities around the world. And also mentioned, we really close my remark (inaudible) of produce where in some waste water that will up to 2% of protein and that we can -- filled up from (inaudible) and that protein has a very high value, so that will change and give me a very rapid marketing trends, the one that we saw in China, lot of interest in different states actually will it might from a lot of different food industries. So there we had also an opportunity to pick up and why don't think like that (inaudible) such cause involvements I mean (inaudible) drive a production that can be helpful and that is why we really taking this (inaudible) things valued added things and able to do them.

So with this remark, let me give the word over to Aldo.

Aldo Petersen

Thank you very much and sort of two areas of interest for our investors. I can inform that we are very well in line with our plans of sort of doing an uplifting. It is a processes that is a very well underway and we feel that we are in a position to sort of deliver on the promise to our investors that we would uplift as soon as possible after having sort of done our year-end filing of our 2012 numbers. So the whole process is moving along very well with great cooperation from the exchange, so we are certain that we can deliver on that promise very shortly from now and then to continue to sort of meet our investors. We had a very good reception on our recent road show to the New York area. And on Monday we will start sort of a west coast road show where we will be in Los Angeles on Monday and Tuesday, San Francisco on Wednesday and Thursday and then finish up in Denver on the following Friday. So we will have a chance to meet a great number of our existing investors but also a number of new investors and it is pleasing for us to see the ramp up of interest in LiqTech, especially based on the validation from our FMC agreement. We are very focused on adding more partners like FMC to our portfolio and we see that that job is going very well for the organization that really sort of is up into gear so that we can benefit from (inaudible).

And with these remarks I want to turn the conference over to questions, so please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Walter Schenker from MAZ Partners. Please take your question.

Walter Schenker - MAZ Partners

Before meeting you Finn, I have met some of the other people in the company. Two-part question, unrelated sort of two-part questions, the questions, first, as the liquids side of the business, at some point given the size of the end markets and similar contracts you are getting, this business should sequentially realizing this variability not be growing a few hundred thousand a quarter but some of the stuff kicks in much more significantly sequentially on the liquids side?

Finn Helmer

Yes, what I am actually seeing over that course it’s against, but what I'm actually seeing is that the (inaudible) over more time than we had I think in the project. The interest is given the size of the market in such a way that I think that (inaudible).

Walter Schenker - MAZ Partners

And in those markets you are, really you are not seeing a lot of competition given how few people can produce type of membranes?

Finn Helmer

There are of course competitions from a lot of different technologies and that will always be of course pricing on the prices, but on the other hand in many cases we have a very unique technology that has special features than our competitors do not. But in the long run of course we will be (inaudible), but we have some very strong advantages now that our (inaudible) has an opportunity to address the large (inaudible).

Walter Schenker - MAZ Partners

And having seen the facilities in Copenhagen, you will be able as revenues ramp to increase production meaningfully out of your existing facility in Copenhagen and Minnesota?

Finn Helmer

That is how I look at it, as we will be to ramp up with the refineries from the market for the foreseeable future also we have of course agreement with sub contractors. So we have (inaudible).

Operator

Thank you. The next question we have is from Fred Francis Milligan from Wunderlich Securities. Please state your questions.

Fred Francis Milligan - Wunderlich Securities

Hi, I have two questions, one, is FMC making any contribution in this past quarter?

Finn Helmer

No. As we discussed in our last conference call the agreement with FMC is that we are right now designing the first unit that will kick in revenue in the third quarter. So there has been no impact from the FMC in the numbers that we have in this quarter.

Fred Francis Milligan - Wunderlich Securities

But there will be in the third quarter you said.

Finn Helmer

There will be, yes.

Fred Francis Milligan - Wunderlich Securities

Can you give us some idea what the backlog might be at this time and how much of it is coming due in the current year?

Finn Helmer

Well, we have a very large number of quotation out especially in the two new business areas that we released in this quarter. The Flat Sheet Membrane that works very well into the waste water market that has been very well received and we have several million dollars of quotations out on these Flat Sheet Membranes. Also the disc membrane is in very high demand and it has given us sort of an entry into sort of the build to order market and for the Flat Sheet Membranes, the waste water markets where we are actually in a situation where we can replace immediately existing membrane technologies on already designed system. So we expect to see a rapid ramp up on revenue in these two areas, but as Finn was mentioning that more than 150 different customers who have started testing and using our membrane technologies is also generating a good flow of income. And to just follow up on Finn’s reply to you was yes this ramp up of revenue that we've been planning for, we have a very optimistic view on that in the coming quarters. The increase will be in the millions of dollars and not in the hundreds of thousands of dollars.

Fred Francis Milligan - Wunderlich Securities

Are you willing to offer any your guidance?

Finn Helmer

No, we will not give guidance on our revenue stream but we are very comfortable.

Fred Francis Milligan - Wunderlich Securities

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Gary (inaudible), from Securities.

Unidentified Analyst

Nice to hear from you. I wanted to kind of ask you about the margin business. As you go into membrane, you talk about ramp up third and fourth quarter. If you would take a little time and talk about the FMC business, the length of the contract, the kind of -- if there are minimums and what it means to you and then talk about Asia, talk about, I've seen these recent developments, your Singapore office, the amount of business coming out Asia, you mentioned two new flat and dismembranes and what that means and the kind of business that you are going to get from Asia and that growth?

Finn Helmer

Yes thank you, Gary. Let me start and you can sort of follow-up Finn because as I stated, yes Asia is as in any business as you know very important for growth of technology and companies and especially an area where we have a technology that are very, very difficult to replicate, we have a unique technology and the relations that we have set up with very large companies in China and the partnership that we have set up sort of opens up into markets that are by our standards and I think by any standard gigantic markets.

So these first orders that we are seeing in protein,, in wastewater is from our point of view sort of the top of the ice-burg and the commitment that we have had and the great work that our organization have been doing from the office in Singapore is sort of a proof to the strategy that we put forward of opening up reproduction in the local markets, they have done and continue to do a wonderful job. So we have pretty much every month over the last four, five months seen new developments in new business opportunities in the Asian and Chinese market and we think that that will continue.

Second part of your question is the FMC contract, and yes it's a very long term contract, there are by our standards very high minimums involved from developing business relationship, the goal from LiqTech and the goal from FMC is to develop systems that can sort of cover their existing business platform, which is currently a 127 business units

that they have in operation in North America, but it is also to develop system for their expansion into the global markets where they have business plans for very big areas like South America and especially in Argentina, in Australia and in the Russian area and especially in the Ukraine.

So we believe that in sort of going with FMC, giving them exclusivity on the fracking area on produced water give us a huge opportunity and we cannot disclose how many millions it is that there are involve, but it’s a very, very high number and it’s going to sort of do two things for LiqTech it will ramp up our revenue stream from starting the third quarter, but also as importantly, it has given us the validation that a small company like LiqTech with the new technology is in need of because it has open up relationship to many large companies around the world who have come in looking at the validation from a large company like FMC.

So it’s a very important step for LiqTech. And as I previously said it is also a focus that LiqTech has that we want to work together with the world leading companies in the different technologies that we see start sort of moving from traditional (inaudible) membrane technologies from other ceramic membrane technologies into sort of seeing the opportunity that silicon carbide membrane technology gives, because there is hardness of the material, the ability to handle very, very difficult filtration tasks, the elimination of chemicals that are used in fracking, the elimination of proteins that are difficult task for technologies.

So it has been really, really beneficiary to LiqTech to have enter into this first very large contract that we have done with FMC. Margin wise, yes, continuous disappointment on nothing really going on in the TPS market, but again building up our presence in the silicon carbide membrane market where our margins are much higher than it is in the TPS. So our expectations is that we can deliver 50% plus margins on our membrane technologies against sort of 25% margins on our TPS.

So as every investor can see very important that we focus and improve our membrane business and with the development of the new platforms, the Flat Sheet Membrane and the disc membranes, it gives us a faster access to already developed markets. So we are seeing that the lead time that we have had in many of the partners that we are working with, using several years to sort of establish new systems in the Flat Sheet and disc membranes it is usable right now and that's why the many quotations that we have out on Flat Sheet and disc membrane we believe will improve our revenue and our margins in the near-term future.

Unidentified Analyst

As you mentioned in the last conference call and Finn mentioned in this call, with the new customers in second and third orders, you had mentioned that many of these companies take six to nine months to go from the first order to a major contract. Can you talk about -- would you say based on the FMC business third and fourth quarter that your business will be backend loaded, a lot more business in the third and fourth quarter going forward in the membrane area with the new business in Asia, with FMC and other companies like the FMC these companies that came on board months ago with new business coming in with companies like that?

Aldo Petersen

I think that yes our experience in this market has been to the fact of coming with a new technology is often sort of guarded by customers with a fair amount of skepticism and therefore our membrane technology has been sort of put through very, very extensive tests to prove themselves as being usable for changes in existing systems.

And to answer your question, yes we are definitely seeing that the validation from FMC is making companies sort of shorten their lead time and trusting the fact that knowing companies like FMC is choosing this technology over so many other technologies enables these companies to trust our systems more. I tend to sort of try and describe our technology maybe a little arrogant, but we believe that if we compare to technology that we had developed a better chip than Intel has, but customers of course are much more comfortable by using technology from a company like Intel, but the validation of now having a large company and other large companies starting to utilize our technologies, we start to see leeway.

And we personally working together with Finn and sort of getting his input on our technology compared to where his previous success in the semiconductor business has many similarities. And I am very comfortable with Finn’s view on that our technology pretty much has some of the same benefits and the same characteristics as compared to semiconductor. So it's a long, it's a hard work, though we have the right organization. We have the right people. We have the management. We have good production capacity. We're on our way to get there.

Unidentified Analyst

Congratulations. I think clean water is the new goal and I look forward to future conference calls.

Operator

Our next question comes from [Bruce Dresner] who is a private investor. Please state your question.

Unidentified Analyst

Yes, can you tell you me if you had any progress with as you construct Korea in South America where you signed an exclusive agreement I believe last year?

Aldo Petersen

Yeah, it's Conconcreto, which is a big infrastructure company with huge presence in Colombia and Venezuela. And yes, we have taken great strides in their work, in working with the oil companies both in Colombia and in Venezuela. So we are seeing great profits in our relationship with Conconcreto.

Unidentified Analyst

Has progress translated into sales either I mean that prior quarter, what you expect to be in the coming quarters?

Aldo Petersen

There has been sales into the test systems that they had demonstrating through their customers and these systems are now tested by large national oil company in both Colombia and in Venezuela and with expectations of turning into system sales in the near future.

Unidentified Analyst

And the way you recognize sales, is it once you shift the product, or can you put a little color on that?

Aldo Petersen

Yes. It's the delivery on the membrane as when we recognize the revenue.

Operator

Our next question comes from [Louis Margolis from Select Advisors]. Please state your question.

Unidentified Analyst

One of the most difficult things in a conference call or in a developing company like this is to evaluate progress. We have all heard words in much like the previous discussion of this firm in South America. Yes we are making progress, but no not too many in sales. Based on sales at the end of 2013, what number should we look at and say, they did an okay job? Meaning, if you report 5 million in sales for the whole year that would clearly be disappointing, but what we should we look at and say, gee, these guys are doing great, they're making some progress, they're not making any progress, what number should we look at for 2013 and 2014?

Finn Helmer

I think what you should be looking at and what we would see ourselves as stating that we have been successful is, if we can get to a handful of system integrators who are buying four systems and are buying in the millions of dollars for their business. So if we can get to sort of five companies who buys more than $1 million worth of products from LiqTech in a developing business that will be very successful for us. And we think that we will on the verge of getting to these customers.

I think as previously stated, yes we are not looking at sort of increasing our sales by a few hundred thousand, but the state of the membrane business is that the testing of these systems takes such a long time and it’s much longer than we had anticipated, but to get companies to change technology is a very difficult thing. And especially because LiqTech is the only company who has managed to build a silicon carbide membrane technology into the market.

But the success is by our definition that we could get four more like FMC to start sort of putting their business on our platform because that will make certain that our business will grow quite significantly. So the increase in membrane sales that you have seen quarter-over-quarter of a few hundred thousand dollars will for us to be a success by the end of 2013 have turned into a large number, five plus large customers who are spending millions of dollars on membrane technology from the LiqTech.

Unidentified Analyst

And what about the 2014?

Finn Helmer

And that will sort of increase just from when we are looking at FMC, we are looking into many millions of dollars on membrane technology in 2014.

Unidentified Analyst

I think I recall you were saying that FMC had approximately 130 installations.

Finn Helmer

Yes.

Unidentified Analyst

That could use your equipment some number of that order?

Finn Helmer

Yes.

Unidentified Analyst

And about $0.5 million of equipment per installation.

Finn Helmer

Yes.

Unidentified Analyst

Are those numbers accurate?

Finn Helmer

Those are accurate, yes.

Unidentified Analyst

And how long do you think it will take to do that, build that?

Finn Helmer

Four to five years.

Unidentified Analyst

I see. What is your current capacity that produce materials, if you just did the membranes?

Finn Helmer

If we just did the membranes we had capacity to do $100 million plus in our three production facilities, one in Minnesota, one in Copenhagen and one with our partner in the middle of Denmark. So on the three facilities we can go from the $16 million, $17 million that we did last year into $100 million plus in membrane.

Operator

Thank you. (Operator Instructions) Okay as of right now we have no more questions in the queue.

Finn Helmer

I would like to thank everyone for participating in this conference call and I look forward to see some of you on my trip to the U.S. next week and next time I will be on East Coast. And if you should have any questions don't be hesitate to sort of reach out, either through our IR company or to the company and we will definitely come back to you and be there to discuss any questions that you have.

Thank you very much for participating and have a great day. Thank you.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.

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