LiqTech International's (LIQT) CEO Sune Mathiesen on Q4 2015 Results - Earnings Call Transcript

| About: LiqTech International, (LIQT)

LiqTech International, Inc. (NYSEMKT:LIQT)

Q4 2015 Earnings Conference Call

March 23, 2016 11:00 AM ET

Executives

Stephen Axelrod - Wolfe Axelrod Weinberger Associates, LLC

Aldo Petersen - Chairman

Sune Mathiesen - Chief Executive Officer

Analysts

Joe Gomes - William Smith & Co.

Eric Stine - Craig-Hallum

Jim Kennedy - Marathon Capital Management

Walter Schenker - MAZ Partners

Operator

Greetings, and welcome to the LiqTech International Fourth Quarter and Year-End 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now turn the conference over to Mr. Stephen Axelrod of Wolfe Axelrod Weinberger. Thank you Mr. Axelrod, you may begin.

Stephen Axelrod

Thank you, Mattie, and welcome to today's conference call to discuss the financial results for the fourth quarter and year ended December 31st, 2015, and recent business developments. Aldo Petersen, Chairman; and Sune Mathiesen, CEO will begin their formal remarks shortly. But before I turn the call over to them, let me remind listeners that following the conference call, there will be an open Q&A session. You should also note that a replay of this call will be available starting at 3 PM today and ending on April 6, 2016. To access the replay, please dial 877-660-6853 and enter the conference ID number 13632496. To access the numbers for the replay for international callers, the number is 201-612-7415 and the ID number is 13632496.

In order for all listeners to have an opportunity to ask questions, please limit your question initially to one question and one follow-up. After all individuals have had an opportunity to ask their questions, you're welcomed to ask additional questions. Now please bear with me for a minute as I read the forward-looking statements.

The press release and conference call contains forward-looking statements. Although the forward-looking statements reflect the good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause actual results to be materially different from those discussed in the press release and conference call. We therefore urge all listeners to carefully review and consider the various disclosures made in the reports filed with the Securities and Exchange Commission, including the risk factors that attempt to advice interested parties of these risks that may affect our business, financial condition and other factors, sales and operations and cash flow.

If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected. We therefore urge all listeners not to place undue reliance on these forward-looking statements, which speak only as of the date of this release and the conference call. We assume no obligation to update any forward-looking statements in order to reflect any events or circumstances that may arise after the date of this release and conference call.

Having dispensed with that, it is now my pleasure to have Aldo Petersen, begin the conference call with his introductory remarks. Aldo, please proceed.

Aldo Petersen

Thank you, Steve, and good morning and goof afternoon to you ladies and gentlemen, and welcome to this conference call. I will start by apologizing. I’m trapped in an airport due to the very sad event here in Europe that significantly changes travel plans for us, who is in European airport right now. So if there any noise on my part, I apologize in advance.

This fourth quarter represents the second profitable quarter for LiqTech and indicates that the implementation of our business model focusing on system is well underway. It’s also a fourth quarter that has taken a lot of resources in our company to produce and build the largest system order that we have had in our history in delivering a very, very large system within the mining industry. So we are satisfied with being profitable. We’re satisfied with our ability to progress and build large systems.

And with these remarks, I will leave the conference over to our CEO, Sune Mathiesen for further explanation of this quarter, so, Sune, please.

Sune Mathiesen

Thank you very much, Aldo, and good morning to our listeners from the U.S. and good afternoon to our listeners from Europe. We’re very proud to announce and to discuss our fourth quarter and fiscal year end 2015 results.

Net sales for the fourth quarter were $5.1 million and in line with now previously discussed expectations offer revenue of approximately $12 million for the third and fourth quarters combined.

Our net sales in the fourth quarter increased by 104% compared with the same period last year and at the constant currency, the improvement was 148%.

The fourth quarter was the second consecutive profitable quarter for the company and we are very pleased that we’ve been able to ramp up our production capacity rapidly and also remain profitable at the same time.

We’ve even been able to lower our production costs. And as we continue our growth, we feel confident that we’ll able to make further cost reductions in our production. This will allow us to be in even more attractive alternative in our target markets.

After an improved third quarter for our DPF business, we experienced a decline in the fourth quarter. A lack of new emission zones in Europe and the United States had a negative effect on our sales and also the Chinese market was not as robust as we had hoped. We do have oversea a more regulated market starting to form in China and we still see good opportunities on diesel particulate filters worldwide. We will continue our efforts to develop this market.

The significantly improve overall business we experienced in the second half of 2015 is a result of our revised business strategy transforming the company from being supplier of performance, into being a supplier of water treatment systems.

On our systems business, we’re able to get a much higher portion of each project and we also carry higher gross margins than we do for our other products. The positive development in the second half of 2015 proved to us that our revised strategy is a success.

The sales cycle for our system sales is however longer than for the one of selling components. We have learned that it typically takes 6 to 24 months to mature projects. This means, that we still are in the early stages of the implementation of our new business strategy and that is increased level of business we have seen over the past six months is still only the early stages results.

We’re pleased to see that our sales pipeline to this constantly improving in both size and quality. And as we get further into the implementation phase, we’ll see more and more projects materialize into orders and revenue. We’re also very pleased to see that we are seeing the first returning customers with new projects and we convinced all we’ll see is no [ph] effect as we progress further.

Being in the early stages of the implementation, we will still see some expected lumpiness in both order inflow and revenues, however, overall we believe that we have a significantly improved business model.

The UN sustainable development goal number six is that by 2030 safe and affordable drinking water should be available for all. This is a very ambitious target. And at the same time, we see drought in many areas of the world and we still - and we see still more water is polluted by heavy metals and chemicals.

In February this year, we announced a $2 million order for ground water treatment plant at Serbia. In this project, we’ll remove arsenic, boron, iron and manganese and we will provide safe and affordable drinking water to the public.

Over the years, we’ve done server other titles and installations in the ground water treatment market and we believe that with that the unique combination of low OpEx and reliable performance that we offer, we have one of the best suited technologies to help the UN’s ambitious goal of becoming reality.

We’re currently working on several other projects for ground water treatment and we are also working on several projects with reclamation of surface water and even reclamation of waste water.

In March this year, we announced the first pool order from a French customer. We have recently been successful in setting up new distribution partners and agents for our pool products in France, Spain, The Netherlands, The U.K. and Norway. And the phase pipeline we have for our pool projects has been growing rapidly over the last six months.

We convinced that we had much improved distribution network and we believe that we’ll see further pool orders in the near future.

In the fourth quarter last year and the first quarter this year, we have been manufacturing the $6.9 million order for a mining company that we announced last year. The manufacturing of the systems and the installation onsite has been progressing according to plan and we are in the final stages of completing the onsite installation.

We are very pleased that we’ve been able to execute this largest order in the history as the company without any problem so far and we look forward to the commissioning of the system and to handing over the project to the customer. We are happy with the development we’ve seen over the past two quarters and we will continue our hard work to further develop our business.

This concludes my remarks and I would now like to turn the conference to our Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Joe Gomes of William Smith. Please go ahead.

Joe Gomes

Good morning, guys. Nice quarter.

Sune Mathiesen

Good morning, Joe.

Joe Gomes

I just wondering a little bit on the water contract in Serbia if you might be able to provide a little more detail how that, you ended up being awarded that contract, you know was that a competitive bid, you know if you can us a little more detail around that? In the 2 million, is all of the 2 million coming in the second quarter?

Sune Mathiesen

Yes, to answer the first question, Joe, yes, we actually had a competitive bid against in all our suppliers ceramic membranes. We probably that 12 months ago, we did a pilot, we’ve discussed them onsite and we proved our technology. We ended up in the competitive situation against in all supplier but that we are able to steer that order. So we’re very pleased with that. With regards to the delivery, yes, it is schedules for delivery in the second quarter.

Joe Gomes

Okay, that’s great. And also I was wondering you know if you could just give us a little more color on some of these pool markets. I mean you touched a little bit about France, you know we’ve talked about Denmark in the past, the Disney order we’ve talked about in the past, you know some offer you received into the ability now that to make more head away hopefully here in the U.S. and I was wondering if you could just give us a little more colors to where we are in some of those markets?

Sune Mathiesen

As I mentioned before, we’ve been successful in setting off a new distribution network in several countries over the past I would say two quarters. That has resulted in a lot of new offers that we made to customers. We are pleased to see that we had a breakthrough in France. We expect that some of other markets would also show a bit progress in the near future.

With regards to the U.S. market, we have started developing the U.S. market again. And I would say we know it takes time from when we start to develop the market so we see actual orders and I would still stay that the U.S. market is in the early stages, but we are starting to see interest and we hope to make good progress in the first half of 2016.

On the other hand in Europe, we’ve a little bit more progressed and I would expect to see further pool orders in the near future.

Joe Gomes

Okay. And anything new on Disney, because I know we had last year, early last year that was potential large order that we are - lot amount of business that we are looking at here?

Sune Mathiesen

What we’re doing with Disney is for our UV products, so the UV sterilizer that is developed. We’re in still early stage. We are developing a few prototypes for them at the moment. And we know that Disney is very interested in technology and hopefully we will see business this year coming out that, but I wouldn’t expect see any major revenue also in the second half of 2016.

Joe Gomes

Okay. And last one, I’ll let someone else jump in. Liquidity, obviously the cash is down sequentially in year-over-year and just if you guys give me an idea of how you are feeling right now in terms of liquidity and cash needs?

Sune Mathiesen

So as we said on our last conference call, cash is tight. On the other hand, we are managing the situation. We do have a strict policy of collecting a large down payment with every order and we are continuing that policy. So right now, we feel pretty comfortable.

Aldo Petersen

And so, this is Aldo, I just want to add to that we still have a majority of the money with regards to the mining order outstanding that will be payable upon to a degree of final system. So we will have a significant amount of money coming in in the near term future.

Joe Gomes

Okay, great. Thanks guys, I appreciate it.

Sune Mathiesen

Thanks Joe.

Operator

Thank you. The next question is from Eric Stine of Craig-Hallum. Please go ahead.

Eric Stine

Good morning. Maybe just sticking with the mining order, I know that the plan there was fourth quarter you are going to see a big portion of it which you did, and then the second slug of it was going to tie to installation and so just curious, is that something you know you are targeting in Q1 or is that more of a Q2 event? And then how should we think about the breakdown kind of versus fourth quarter - fourth quarter versus first half on the mining order?

Sune Mathiesen

Good morning, Eric.

Eric Stine

Good morning.

Sune Mathiesen

As we rightful of say, we did include that order in the fourth quarter numbers. However, we do have a large part outstanding for completion in Q1 and Q2. So to answer your question, we’ll see revenue from that order in both the first and second quarter.

Eric Stine

Okay, got it. Then maybe before moving on to just some of the big opportunities, just quick I want to touch on DPF, you have the step down and I know China wasn’t quite where you thought it maybe you have the announcements last year and at the time I think you viewed that that would be a $1 million a year that sort of an opportunity for that business. Is that still your view of that business or is China - I mean do you think that it’s a little bit slower on the ramp?

Sune Mathiesen

Well what happened in China is not that unusual for us. Every time we see a new market immerging for our DPF product in the worlds. We also see that even this new regulations are put into force, they are unfortunate, they not always have to means to test and control that everybody is actually complying with the rules. And that has been the same situation for China. So lot of how could you put this not products not complying with the rules has been put out into market and installs on trucks and buses.

We do have oversea that a more regulated market is starting to form in China and I would expect that we’d see some improvement this year.

Eric Stine

Got it. I mean when we think about, I think you’re in one of a handful of provinces, I mean in thinking about expanding in China is that more of a see how the market develops in 2016 and potentially more of a 2017, 2018 driver for the business?

Sune Mathiesen

Where we’re definitely very interested in developing the Chinese market, we are taking to a lot of potential customers and we’re also talking to some potential partners. So right now, we’re trying to form the right strategy for controlling the market and I am sure that we will be more successful in 2016 that we’re in 2015.

Eric Stine

Got it, okay. Alright, then you know the - one of the big opportunities that I am particularly interested in is the agriculture, I know you had a pilot project, you know maybe just feedback on that you know I am curious how that initial system which was relative small, you know how that compares to the size of a commercial system and kind of what our next steps from that end market?

Sune Mathiesen

Where we used the great feedback we got from the pilot system in Denmark to go worldwide with our agriculture projects. And I can honestly say that our pipeline is rapidly growing with new opportunities in the agriculture market. And also since it is the small industry worldwide with a limited number of players, we know that they have been speaking generally and it seems like the feedbacks from the customer in Demark has been so positive that we see a lot of enquires from new markets and new customers.

So I would be surprised if we do not see further projects from the agriculture markets very soon. And also with regards to size of the projects and it is a very large project. I would say they would be from $1 million to $10 million depending on the country and depending on the tight offering fish farm.

Eric Stine

Got it, as that’s the one location, I mean just to clarify one -

Sune Mathiesen

That is $1 million to $10 million.

Eric Stine

$1 million to $10 million, okay.

Sune Mathiesen

Yes, I would say $1 million to $10 million, so it could be in range between this.

Eric Stine

Got it. And this is you know just and you may be limited as to what you can disclose but with the pilot project within with this one customer anyway that say how many locations or how many fish farms that customer has?

Sune Mathiesen

That customer is right now planning two new fish farms, one in the U.S. and one in Denmark. But we’re working with some other players was numerous fish farms across the world.

Eric Stine

Okay, got it. Thank you. Thanks a lot.

Sune Mathiesen

Thanks Eric.

Operator

Thank you. The next question is from Jim Kennedy of Marathon Capital Management. Please go ahead.

Jim Kennedy

Good morning, Sune.

Sune Mathiesen

Good morning.

Jim Kennedy

Couple of follow-ups, number one, did we get the NSF approval in the U.S.?

Sune Mathiesen

Yes is the short answer.

Jim Kennedy

Okay. You know I would have loved to see an announcement on that because I think that is a material event for the company but that’s up to you. So we do have NSF approval in the U.S.?

Sune Mathiesen

Yes for pool systems and we’re currently planning our re-approval of the drinking water approval.

Jim Kennedy

Okay. I wanted to follow-up on the Serbia question. What prompted that event or that bid, did they have a demonstrable problem or was this something they did a normal course of upgrading their water system, what prompted that them to seek a bid?

Sune Mathiesen

Well the problem in Serbia is more or less that across the country, they have very poor drinking water quality and unfortunately the government has little on their money to correct that. So what they actually doing is that they are selling license service to private companies to run more the distribution. So our customer in this care is a privately held company who bid for the lights to do water distribution, we won the rights to do so for ten years and now we have to build a water treatment plant and provide drinking water to the customers.

Jim Kennedy

And is this for the entire nation of just a part of the country?

Sune Mathiesen

This is a nationwide problem and we see numerous municipalities in Serbia right now doing exactly the same, so there are quite a lot of tenders going on right now.

Jim Kennedy

Okay, so in other works, the one that you won was with a specific company for a specific project and there are many more available projects in the country that you may or may not bid on, is that correct?

Sune Mathiesen

That’s correct.

Jim Kennedy

Okay. Thank you. And did you win because was it a price issue, was it that you filtered better more things, what we show impression of your win versus the competitor?

Sune Mathiesen

Well it came down to two reasons really. One was that we did very successful pilots on some of the projects in the forehand. And the second one was our ability to do a systems manufacturing to competitor we were up against and it rely on outside companies to do the systems manufacturing and we just ended up to more competitive actually.

Jim Kennedy

Got it, okay. Thank you. Switching over to the French pool contract, can you describe that a little more detail, is that something that you are going into a specific area in France a city, I mean this or whatever or was that blanket order to basically go hunt in the rest of the country?

Sune Mathiesen

Well in France it’s very much like the specific pool market really that you have some number of specifiers who will specify the components that needs to go into that specific pool. So they were specified filters, the type of pumps and tight pools and everything. And in this case, the specification work was done by specifier who does about 40 to 50 pools nationwide in France over the year. He became very fond of our technology and decided to specify for this specific pool. We are currently specified as we said in the press release for numerous projects in France, so I’d surprised not to see further orders from that market.

Jim Kennedy

Okay and then I may have missed it earlier, is there any update on Denmark and I believe it was July 2017 deadline?

Sune Mathiesen

And that deadline is still in force but the market is moving very slow indeed.

Jim Kennedy

Okay, but you don’t see at this point that’s a legislative mandate, it’s - that’s an awful lot of pools to get done in roughly one year or 15 months.

Sune Mathiesen

You are exactly right, Jim and it’s going to be tough. On the other hand, you can say hopefully everybody will start at the same time because then that could price up - price quite significantly. But the mandate is still in force and they have to comply with the new rules by June 30th next year.

Jim Kennedy

Now does that mean is that has to be installed or they just have to begin the project?

Sune Mathiesen

Has to be installed.

Jim Kennedy

Okay. And are you seeing any RFPs at this point?

Sune Mathiesen

Yes, there are some projects out there, but I would expect it more at this point hopefully will see a lot of them coming outside.

Jim Kennedy

Okay. And then quickly on Yara, how is the progress there, have you installed on how many ships and how is that going?

Sune Mathiesen

I believe to date we delivered six systems.

Jim Kennedy

Okay.

Sune Mathiesen

And we are in the phase of installation right now, so the first one will be commissioned very shortly.

Jim Kennedy

Okay and do we expect follow-on orders there. If I recall correctly, they appear to have quite a pipeline of business.

Sune Mathiesen

They do have a very nice pipeline. I think they are struggling a little bit with a low order as well like anybody else, but they do have some nice pipeline and yes, we would expect to see additional orders from this industry. It is also new legislation that if you want to go within all from sure in the U.S. in Europe and in large parts of Asia, you need some sort of system like this installed one year. So we do believe that we will see further orders from this industry.

Jim Kennedy

Got it. Okay then following up on Eric’s questions about agriculture, could you just remind us of why you were selected and the benefits that you were delivering and are these benefits available from other filtering systems?

Sune Mathiesen

Well the problem was and is in salmon farm is especially that if you are taking order, you are also taking bacteria and parasites. And unfortunately that will make this fish unsafe, we’ll have to vaccinate them and you’ll have to just to throw out a number of - a good number of that fish because there was a good high. So this Danish company came out with the idea to put a barrier so that parasites and bacteria and ended up choosing our filtration. And it is why we are so - of that application is that we do also good mix between removing parasites and bacterial that we also able to maintain a high flux rate and obviously we need one of that in this industry.

And I guess the incentives to our technology would be RO but that won’t simply being too costly. So I’d say we are in the kind of unique spots in this industry.

Jim Kennedy

Got it, okay. And final question for you is, would there be any reason why we would expect the top line in 2016 to go backwards compared to ‘15, I mean it sounds like you have an awful lot of growth opportunities, should we expect overall in growth year?

Sune Mathiesen

Well, we can at this stage is that we sort of confident that we underwrite, we feel confident that the decision of transforming the business into a system’s manufacturer instead of just the supplying components was the right choice. We have a very nice pipeline and we see the pipeline growing I would say month by month. However, we also and as I said earlier, we know that it stays between six to 24 months to mature project, which means that we are still in a very early stage of that business transformation. Could there still be some lumpiness from quarter-to-quarter? Absolutely. But overall we believe that we underwrite past and we believe that we are set for growth.

Jim Kennedy

Very good. Okay, thank you for taking my questions.

Sune Mathiesen

Thanks Jim.

Operator

Thank you. The next question is from Walter Schenker of MAZ Partners. Please go ahead.

Walter Schenker

Thank you. As a general comment, why do we need to maintain given our liquidity as more high in inventory level as we seem to maintain. I understand why receivables and work in progress are up given the ramp in volume that we did in the second half of the year, but one would hope that of setting that to at least a minor extend would be working down inventories, it seems like an awful lot of inventory for a company doing our volume?

Sune Mathiesen

Yes and probably you are right, Walter. But what we also know is that especially now DPF market our most competitive edges that we are able to deliver quickly. That allows us to collect a much higher price than our competitors and that is partially why are you seeing the high inventory, but I understand you view.

Walter Schenker

Okay, and secondly as you point out, I guess the good news is as you largely don’t operate in the United States, currency played a fairly significant role in the quarter adversely affecting the revenues and probably earnings conversion to dollars. As you look competitively and compete in Europe and in China and in other locations, is - are you finding that the currency is generally helping you are not much of an effect or hurting you? You are Euro Company.

Sune Mathiesen

It does go both ways. What we do prefer is to sell in euros because currency is linked with the Danish krone and we have most of our cost in Danish Krone. So this is why we are hurt by the high dollar currency at the moment. But overall I would say there are some pros and there are some cons, but obviously it hits our revenue numbers since we are doing most of our revenue in euros.

Walter Schenker

Although most of you quests are also euro related to the centering krone, I mean similarly.

Sune Mathiesen

Correct. Yeah.

Walter Schenker

Okay, thank you.

Sune Mathiesen

Yeah, thanks Walter.

Operator

Thank you. We have no further questions in queue at this time. I would like to turn the conference back over to management for any closing remarks.

Stephen Axelrod

Well I would like to - yeah Sune, please go ahead.

Sune Mathiesen

Well in that case, thank you very much ladies and gentlemen and thank you for listening in. We - as we said earlier, we are pleased with the development and we will work out to make further progress. Thank you and have a nice Easter.

Operator

Thank you. And ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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