LiqTech International's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.14.13 | About: LiqTech International, (LIQT)

LiqTech International, Inc. (NYSEMKT:LIQT)

Q2 2013 Earnings Call

August 14, 2013 11:00 AM ET

Executives

Steve Axelrod – IR

Aldo Petersen – Chairman

Finn Helmer – CEO

Analysts

Gary Zwetchkenbaum – Palm Tree Consultants

Walter Schenker – MAZ Partners

Otis Bradley – Gilford Securities

Gregg Hillman – First Wilshire Securities

Operator

Good day ladies and gentlemen and welcome to the LiqTech International Inc. Reports 2013 Second Quarter Financial and Operational Results Conference Call. 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, Aldo Petersen. Sir, the floor is yours.

Aldo Petersen

Thank you, very much and thank you all for joining us to today to discuss the current status of LiqTech and its future. In today’s call first of all, I will discuss the issues that many of you have asked and how the company is responding as well as to discuss the opportunities that lay ahead.

As you have seen when we released our numbers, it is a sub-part results that we have posted today. It is a second quarter that have seen a lot of progress, but that doesn’t reflect in the financial numbers.

Our sales force have been very focused on establishing some of these very large partnerships that we have seen established with companies like FMC, companies like Cemco, who represent Shell and who we now can see is going to be the future of LiqTech.

The work that has been done has not reflected in the second quarter numbers and we see some offsets in delays in the order flow that we had expected for the second quarter. But we are very confident that we are on the right track and we will see a significant pickup in the coming quarters.

We have improved our production output and efficiency very significantly in the second quarter after our new CEO has come on board, Mr. Finn Helmer, has worked very close together with will often addressing to improve the entire production platform and that has given us a huge improvement in the way that we are producing membranes that we are sure will have quite an impact on the margins in the future.

We have also had our strong sales force being out in different numbers of countries establishing relationship with very large customers and I will now take the opportunity to go through some of the progress that we have been making. Especially, in the market of China, we have seen establishment of some very large relationships with test system orders in some significant business areas of ours.

When we look at the second quarter, we have established four new partnerships within the produce order segment a company called, Sinopec which is one of the four national oil companies of China with capital of more than $30 billion have started testing our membranes for re-injection and pre-treatment for reverse osmosis, which means that the produced order that comes out of oil production will be turned into industrial grade water and can be used for industrial use.

There is a huge potential in this market and if successful in testing, we see a market potential of up to 500 smaller systems which will be in the range of $50,000 to $100,000 for LiqTech. CNOOC which is another national oil company of China is testing our membranes for produced water deep discharge and treatment of sea water for injection.

Dalian and Fan Run Si refineries is testing for condensate waters. So alone in the second quarter we have entered into four new relationships in the Chinese market on produced water at the oil industry.

LiqTech has also been working with the established partners that we have issued in earlier press releases on Fan Run Si has placed two orders additional for protein recovery by before the end of 2013. Wright have placed order for agricultural waste water and we expect to have three orders in the magnitude of $200,000 to $300,000 each in the third quarter and the fourth quarter.

We have been tested with promising results for treating coal and chemical waste water in China working with some very large energy company providers in China. In Saudi Arabia, we have entered into a testing platform for cleaning groundwater by removing salt and metals, as some of you know from early on.

We have had huge success in removing metals from water in Italy and it now those systems that moves into other parts of the world and we are very optimistic about what can happen with cleaning the metals and salt out of the water in Saudi Arabia.

We are in advanced tests on ballast-water system; a very large American company is testing our membranes to be used in the ballast-water systems that starts to go into installment into the large ship industry that is under IMO, the International Maritime Organization, but also under the US Coastguard.

Ballast-water is the effect of removing the bacteria and the particles out of water that comes from international waters before you are able to offload your ballast-water into your own harbors. So, we are very advanced in the testing of systems with them.

And we are also advancing testing with our partner in Singapore, where have been approved by the Singaporean Government for the ballast-water treatment inside the harbors of Singapore which is one of the three four largest harbors in the world. So in ballast-water there has been great progress.

The development that we had in the first quarter of coming up with our flat sheet membranes, it is something that we are very excited about because we see huge demand in the flat sheet membranes within the coal chemical wastewater treatment. We have a very big test here in Europe with a big German electricity company that we are very advanced into and it can open up a lot of business for LiqTech in the future.

We are also working and seeing advances with our new disc membrane. So, overall, the product platform has given us in the second quarter a number of new business opportunities that we see will materialize in the third and the fourth quarter

We have earlier on in our last conference call addressed as a fact that a success for LiqTech would be establish a handful of strategic partnerships in line with what we did with FMC in the first quarter. We think that we are very well on track on reaching those goals and look forward for establishing these partnerships within the next two quarters. So that we have a very healthy large customer base to go into 2014 on.

Other issues then the business issues, I know that we discussed in our last conference call, our listing on New York Stock Exchange, we applied for a listing on New York Stock Exchange in April and was given an outlook that we could be listed on New York Stock Exchange in July.

Unfortunately, the time taken in compliance has taken that process somewhat longer. We are in communication with New York Stock Exchange and we feel that we have covered all the issues that is on the table and look forward to being able to hopefully list on New York Stock Exchange before the end of this quarter.

It is also obvious that we have been spending a lot of money in the first six months of 2013. We have been spending that money in improving our products and developing new products. But we are very cautious and very careful on the fact that, we will operate our business within the capital that we have at hand.

We are not worried that we can get into a cash squeeze situation. We are very confident that we will be able to execute our business plan within the cash that we have access to and we have no plans for issuing new shares into the market.

We are confident that we will execute in the coming quarters and that the money that we have spent in the first half of 2013 has been spent well into improving our product portfolio improving our output and establishing an organization that can be very successful in getting LiqTech to where all the shareholders want to take it.

The second quarter is the first quarter where we have been under the guidance of our new CEO, Mr. Finn Helmer and I want to congratulate him with the improvements that he had managed to do within the first quarter and I will now leave over the conference to Finn Helmer for a discussion on the progress that has been made in his time in LiqTech in the second quarter. Please, Finn.

Finn Helmer

Thank you, Aldo. Good afternoon and good morning to everyone on the call. We actually look at LiqTech as a hi-tech company within the nano technology space and some of my discussion will reflect that. In my time, it’s now four-and-a-half months. I am focused on two key areas while reviewing our production predecessors.

I have focused on ways to improve the quality, so we can ensure a uniform but also try new specifications on the product we deliver to the market, because the market is constantly looking for better performance. We have mature – a much tighter specification while the yield which is important over the last three months has been the same improved.

And this will surely secure our market position in the future. I have actually also focused on how we can ramp up the production rapidly and but at the same time reducing production cost. And we have a treatment LiqTech has been able to find solutions to those challenges.

We have improved production flow but of course at the same time, we have been able to reduce the production cost quite a bit. Based on the results from this process, we are confident that we can respond to the need to ramp up production quickly. And we feel that that will critical for us to meet the expected increase and long-term current sales activity.

Looking on the research side, we have developed membranes with our membrane coating of 10 nanometer and 4 nanometers. This gives a pore size that are ten times smaller than the company have ever before made. The membrane is produced as a carrier with a membrane with coating layer that gives the filter a function. And this filter function we have done with factor on tender thereon.

So over the next six to eight months, we will move the membranes from the later to final product and make introduction to the market and we are already now looking into the market having talked to a few customers we can see clear interest and a significantly higher price per membrane area.

We have already seen the new initial results and the results of that opening a new market to LiqTech and we believe that the product will have a that offer really LiqTech’s model.

And we have also reviewed the market segments that LiqTech is operating in and with respect to Diesel Particulate Filters, there is not so much to say at the moment except it is a dominant market that should – we are waiting but we cannot predict when this will happen.

However, I expect that second half of the year will be equal to or better than first half. So, there is a bit of life in this area.

Kiln Furniture is on its way to become a profitable niche market for the company and that’s been made significant investments earlier on and we think that will payback now. But coming to silicon carbide membranes, that is a new technology. Many of the potential customers are very large organizations.

Large organizations are very slow to change and the change only when it becomes clearer to that businesses. At the same time however, when they do change, they often require large volumes of products.

Therefore all the preparation in our production. I see, really seen a large change between LiqTech and GIGA, the company I was President for earlier and also equal for $1250 million. Both companies are serving a large market with big customers and when the customer starts to move the revenue grows rapidly.

It however takes a long time because big companies movement. We will have to wait for that. Because of the way the interest is growing month-over-month, I am confident, that LiqTech will be a success.

It will take some time, but if we look at back on second quarter we had an order intake for liquid membranes that was three times higher than the same quarter last year. So the order income through the company are growing rapidly. Further out year-to-date order intake for the period ending June 30 2013 was the same as for the whole year of 2012.

The increased liquid filter order rate resulting in a liquid filter backlog of approximately $3.1 million as of June 13, 2013 or approximately $1 million more than reported liquid filter revenue for the six months period ended June 30m 2013.

We are active in a number of systems sold for our customers and the prices are $115,000. Customers who are presently evaluating our membranes with a commitment to test of the products for $150,000 we delivered, that’s also high commitment to follow through when that first meets the customer’s specifications.

Our new products flat sheets and disc membranes are creating significant interest. Even though they are products, we are already seeing initial sales. We currently have significant outstanding – on flat sheet membrane business. Applications are mainly drinking water, but also in customer waste water and processed water.

Over the next six to 12 months, we believe the membranes will continue to be tested by potential customers or they would not capture all of these orders as finalized, we still expect significant orders to result.

On the flat sheet membrane technology, the membrane function is different from the standard one. It functions as an outside in principle while the flat sheet membrane thus submerge directly into the feeding water allowing more solids in the feed water.

The flat sheet is submerged into the liquid, surface water, from river, streams, oceans or lakes or water from beneath the ground. The technology is now proven technology for pre-reverse osmosis also filtration steps for groundwater filtration.

Including removal of iron, manganese and radium with all water through the desalination step. Next the remaining diluted salts will pass through our flat sheet, are removed with a typical salt filtration process in order to end up as pure water. After desalination, minerals will be added to pure water.

Not only with silicon carbide flat sheet include the unique properties of the silicon carbide material, but it will also open the market improvement patent pending right technology for mounting our flat sheet modules. This will enable exchangeability of flat sheet modules along the lifetime and significantly smaller footprints.

At this time, we are working on projects where ceramic flat sheets are the only other technology evaluated used in the region. Polyamide membranes are banned as pre-RO due to the heat and to the rough feed water in that region. We believe we can demonstrate the material advantages of silicon carbide over ceramic filters on this market.

As mentioned, the technology can also be used for surface water treatment, water from, rivers, lakes, streams, wet lands or oceans, has pre-reverse osmosis filters. Often times, this will lower CapEx and polyamide membranes and offers with a significantly lower OpEx than polyamide membranes.

This is due to higher recoveries of the feed water of 99% for silicon carbide and around 90% to polyamide membranes which we believe is due to significantly higher flow rate. polyamide flat sheet membranes are widely use as pre-RO however, we believe we can increase our market share now that we have a technology able to retrofit for membranes that has limited lifetime high foot print and inferior performance.

So, really to summarize my comments, I would say as follows, LiqTech is a high-tech company with new and exciting products that are currently being tested by many potential customers. In addition, we are close to taking our new advanced nano technology products to the marketplace.

It is a sole process but one that we believe will be rewarding over time. And I will then pass the word back to Aldo.

Aldo Petersen

Thank you very much, Finn. And I just want to summarize before leaving over for questions that, yes, as you can sense and feel, we are disappointed about the revenue in this quarter. We are not discouraged. We firmly believe that this is revenue that will come in the third quarter and fourth quarter and as you have heard, we see significant signs that it’s picking up very rapidly.

I have not talked about FMC, but I can say that we are ahead our schedule with FMC. We expect that FMC to be efficiently in production in the quarter that we are right in and that we have hopes that we will see a greater number of systems installed already in 2013 than we have expected.

So, also, it shows that the strategy of establishing these firm partnerships is very crucial to the success of the LiqTech business model. I would also end up commenting on the development with Shell as most of you remember we had our first system in operation with Shell in the North Sea.

This quarter that we are in, they have started testing for the second system out in Malaysia and we are also being advised that they have four other projects that they will start testing within 2013. So that is also an area of business that we expect to see pick up.

But in essence, from following up on the last call, our expectations is very clear for the third quarter. We will be listed on the New York Stock Exchange. We will see growth in our revenue that will be substantial to where we are right now. We have managed to bring down the cost of our production and improve the quality and production, so that our scrap rate is still down which will improve our margins.

We have established a new management that has been able to establish a very, very good foundation for LiqTech to continue to grow. So although, disappointed, we are very optimistic for the future. And with those remarks, I would leaver over the conference to any questions.

Unidentified Company Representative

But before we – hello, Kara, can you hear me? Aldo can you hear me? Before we go on to that, we did not really read the forward-looking statements and we want to make that everybody understands that lot what was said is forward-looking statements. So let me just take a moment before you go to the Q&A to go through that.

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 LiqTech in its reports filed with the Securities and Exchange Commission including the risk factors that attempt to advise interested parties of the risks that may affect LiqTech’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 incorrect, LiqTech‘s 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 any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this conference call.

And having said that, let us proceed with the Q&A. Kara, please go ahead.

Question-and-Answer-Session

Operator

Thank you (Operator Instructions) And our first question comes from Gary Zwetchkenbaum from Palm Tree Consulting. Please state your question.

Gary Zwetchkenbaum – Palm Tree Consultants

Good morning Aldo, Finn, how are you today?

Aldo Petersen

Good morning, Gary. We are fine, how are you?

Gary Zwetchkenbaum – Palm Tree Consultants

I’m doing great.

Aldo Petersen

Good.

Gary Zwetchkenbaum – Palm Tree Consultants

I wanted to focus on the area that you talked about with the flat sheet membranes. In your report you mentioned that the flat sheet membranes we used as a pre-filter for reverse osmosis, generating drinking water from salt water, desalinization. In there, you quoted that you had, you had quoted 10 major projects with significant revenue, if I am quoting correctly.

My questions are can you be more specific on the value of these orders, okay, then can you give us an idea, when revenue might begin from this area and the potential for 2013, 2014 and beyond, then a little bit about the margins.

And then, if I am not mistaken, the turnaround time in this area for orders on the flat sheet is significantly less than what was happening regarding FMC and projects like that. So if you could focus on that for me, I’d greatly appreciate it.

Aldo Petersen

I can try, Gary, it was a wide question, but a good question. Yes, as you probably sense, our excitement about flat sheet membrane is quite significantly, because it was a product that we put to market late in the first quarter and the interest in this business area has been very, very significant and it has opened up a new range of customers for us and yes, we have more than 10 potential customers in this area where we have closed out for than $20 million already at this stage.

The interesting thing with the product is that it fits into changing existing membranes in existing systems and this is the huge difference to what we are working with, with many of the system integrators where they are building new systems.

So, FMC is building a complete new system that has not been used before, has not been established which means that there is a number of issues that needs to be solved before they have a product in the market and this is why we have spent or they have spent, more than three years on testing our membrane, and how our membranes sort of coincide with the technology that they need to use for the flow back in fracking.

So a three year lead time on a new product for fracking, we saw the same lead time for the Shell rig in the North Sea. And this is in general, we have a very long lead time on getting new systems using our membrane technology, where flat sheet membranes are different is that we can replace these sheets of membranes into existing structures.

And this is why we see a significant lower intake on getting orders in this market and this is why we are very confident that we will have significant orders in 2013, but much higher volume of orders in 2014. So in general, we will see that the sales process is much shorter between two to six months for replacing the existing systems.

But also with the potential of building new systems based on our flat sheet membrane technology, so that we will see both replacement revenue but also seen new system revenue which is why that we believe that the revenue stream that we have quoted on will be quotes that will bring in business within the next three to eighteen months’ time period.

And that is significantly shorter than what we have on our cylinder membranes that goes into new systems.

Gary Zwetchkenbaum – Palm Tree Consultants

Is it too much to ask and say that, some of this business could begin as early as the next two or three months and what kind of ramp up, in other words, 2013, when you are into 2014, what kind of ramp up would you get? What kind of margins, how much could this business be in the next year or two? And how much of your total sales could this be?

Aldo Petersen

Again, it’s difficult to say exactly, but I think that, most people can understand how excited that we are that we have come up with a membrane technology that can significantly bring down cost in the desalinization process. It is of course the big quest of being able to do much more desalinization than we have as of today and having these membrane technologies to be a part of these systems in the pre-filtration of desalinization.

It opens up huge markets. I can comment on the interest that we have from Saudi Arabia we have been quite taken back about the interest and the indication of business that they have, I don’t think we have a clear enough view of what it can be. We have indicated that we have quoted more than $20 million. We are sure that we will see some of that revenue come in, in 2013 and a much higher revenue stream coming in 2014.

But, to be able to participate, not just produced water, not just in waste water, but in the quest that we in 2011 received $2 million from the Danish Government to start working on the reverse osmosis and being able to come up with desalinization product.

We feel that these flat sheet membranes is a half way step there and in combination with the technologies that are available is reducing the energy cost quite significantly and therefore opens up a huge market, not just in the Middle East, but also in other areas of business. I think that is as close I can answer your question Gary.

Gary Zwetchkenbaum – Palm Tree Consultants

Well, thank you. It seems that the flat sheet membrane area is very exciting and it’s coming along very well. Thank you very much.

Aldo Petersen

Thank you.

Operator

Our next question is from Walter Schenker from MAZ Partners. Please state your question.

Walter Schenker – MAZ Partners

Hi, Aldo. Have you – or are you converting the US facility to do liquid filtration as well as you look to the ramp is the first question?

Aldo Petersen

I think, you can answer that question, Finn. I know you are going to the US on Sunday, so. The answer is, yes, but Finn can elaborate on that.

Finn Helmer

Yes, currently, we are preparing to ramp up the liquid filter production in Denmark and then we will over time transfer all the Diesel Particulate Filters production to the US as step one.

And when the market development is in the level where we need to use the production facilities in the US, we will take some of that production facility into liquid filters. But currently we have prepared to more than double the production over a three months period. So when the orders come, we are also ready to double up the production.

Walter Schenker – MAZ Partners

But then does that require additional ovens or is that’s just an event before you, long-term?

Finn Helmer

Well, the first toppling of production to and that would not require more ovens. But when we get to the second toppling which we are also preparing when we will need to add ovens because of course they have the limiting factor. But currently, there are not and I don’t think they will be over the next nine month time.

Walter Schenker – MAZ Partners

Okay and lastly, with all of the opportunities and the substantial benefits from the product, can you give us some sense as to again, maybe a competitive question, what sort of gross margin or manufacturing margin given the benefits of the product, we might be able to get in some of these markets?

Aldo Petersen

I think you have known, and we have previously stated that we have currently a gross margin on membrane technology, that is close to 50%. I think we can say that the work that has been done in the last three or four months is improving that margin.

We have a goal that we can get to a 60% plus margin within 2013 on the improvements that we see on the production facilities that we have right now. So we will definitely see improvement on margins it has been a huge quest for us to bring down the scrap rates that we have had on membranes and the team has done a significantly good job in the last three four months in that line.

Walter Schenker – MAZ Partners

Okay, thank you.

Aldo Petersen

Thank you, Walter.

Operator

Our next question is from Otis Bradley from Gilford Securities. Please state your question.

Otis Bradley – Gilford Securities

Two quick questions, number one, and how many shares does Alexia have left to sell? Number two, you’ve mentioned that the flat sheet membrane can bring down cost significantly, what advantage to the customer, how much lower prices will you be able to sell to the customer then the existing technology having today?

Aldo Petersen

Again, on a wide range I will answer your second question first, Otis. On the wide range of technologies that we have in membranes, we currently have on the big cylinders that we sell. We have a price that is in the range depending on quality between $4,000 and $10,000.

Again, as a new product, that can significantly solve issues. Our experience is that, when for example discussing with FMC and other large partners, the majority of those partners is not putting pressure on us on price, because we are solving specific areas of problems that they are having, because the silicon carbide membrane has some unique qualities that will enable significant improvement from these customers.

So, it is not a price pressure right now, but, yes, when we sort of get into significant production volumes, we will see some kind of price competition and I think that, if we can get our margins to 60% plus, we will also have an even more competitive membrane technology against other ceramic membrane technologies that we have out there.

But currently, that’s not what LiqTech is seeing. We are not seeing price pressure. The pressure that we have seen is the significant test time that are involved using our membranes.

Second question on the financial advisor that we hired to do the listing for LiqTech back in 2011, I am actually not too familiar with the number of shares that are available and that is not true, because my CFO has just send it to me, it’s 1, 299,792, 000 shares left with (multiple speakers) the other day.

Otis Bradley – Gilford Securities

Aldo, on my question about cost, I was really referring specifically just to desalinization, where…

Aldo Petersen

Okay, yes, again, our membranes is in the tests that have been conducted eliminating about 40% of the energy cost related and since most of you know that the majority of the cost involved in desalinization is related to the energy cost. We are seeing no price pressure on the flat sheet membranes, Otis.

Otis Bradley – Gilford Securities

That’s the answer I was looking for. Thank you.

Aldo Petersen

Thank you.

Operator

Our next question is from Gregg Hillman from First Wilshire Securities. Please state your question.

Gregg Hillman – First Wilshire Securities

Yeah, good morning gentlemen. I wonder ask you about traditional waste water surge treatment and the flat disc that you are using, what kind of tests are going on there? And what’s the improvement over the existing technology?

Aldo Petersen

Again, we have a number of tests, especially in the large coal electricity companies. So, both in the Middle East and Europe, we are doing test with the flat sheet membranes in this area and the result is, that it brings down the output cost off the clean water quite significantly. Finn, I know that you have some numbers regarding the test that we are doing in Germany.

Finn Helmer

Yeah, but as I also understood the question is, it was whether discs and on the disc, when they are using a system, we see a reduction of 80% of the energy used and secondly the disc seems to able to concentrate the materials to a much higher level that you have been able to dissolve.

And that concentration makes it possible to continue with other treatments of the material from waste management. So, we are seeing again, two things we can concentrate it higher than never before and at the same time we can reduce the energy cost for doing it.

Gregg Hillman – First Wilshire Securities

Okay. It’s my understanding that with this you quote too often, and I think that your discs are more highly viscous, the surface, so they get clogged up often is that correct?

Finn Helmer

Well, actually, the way they are constructed and the operation in the system means that they are clogged less than you will see in a normal system and that’s the whole idea about the disc as such.

And what we are seeing is that the clogging is much less you will see in a normal system. That’s why we can make the higher concentration of solids in the fluid. I mean, it gets to a paste more than it is a fluid when we are finished with it.

Gregg Hillman – First Wilshire Securities

Okay, thanks very much and just finally, I mean, you talked about pricing before. How you know how to price these products when they have been fully tested overall lifecycle in terms of the benefit to the customer?

Finn Helmer

Well, actually, pricing is depending on the system that you are working in because, it’s an overall cost of ownership that really worries the customer. So it has to be a balance what is the cost of ownership for a system and then you can actually balance your price for the product based on that. And that’s how we are addressing new markets like this one.

Gregg Hillman – First Wilshire Securities

Okay, thank you very much.

Aldo Petersen

Thank you. I think we have room for one more question.

Operator

There appears to be no further questions at this time.

Aldo Petersen

Okay. Gentlemen, I want to thank you so much for attending our conference call. We are looking forward to be in touch. On a final note, I will be in the US. I will be in the Denver area on August the 27th and 28th, I’ll be in Boston on the 30th and I will be in New York on the 3rd, 4th and 5th.

So if anyone would be interested in further discussions, I would be more than willing to meet up with you guys and I would like you to get in touch with our higher company who can set it up. So, gentlemen, thank you very much and have a great day.

Operator

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

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