LiqTech International Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 5 speakers on the call.

Operator

Hello, and welcome to LiqTech International's First Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners.

Operator

Robert, please go ahead.

Speaker 1

Great. Thank you so much, MJ. Good morning, everyone, and thank you for joining us on today's conference call to discuss LiqTech International's Q1 2023 financial results for the period ending March 31, 2023. Joining us on today's call from the company are Fay Chen, Chief Executive Officer and Simon Stidahl, Chief Financial Officer. Before I turn the call over to management, let me remind listeners that there will be an open Q and A session at the end of the call.

Speaker 1

Before we begin with prepared remarks, we submit for the record the following statement. This conference call may contain 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 during the conference call. The company therefore urges all listeners to carefully review and consider the various disclosures made in the reports filed with the Securities and Exchange Commission, including risk factors that attempt to advise interested parties of the risks that may affect our business, financial condition, operations and cash flows. If one or more of these risks or uncertainties materialize or if the underlying assumptions prove incorrect, the company's actual results may vary materially from those expected or projected.

Speaker 1

The company therefore encourages all listeners not to place undue reliance on these forward looking statements, which pertain only as of this date and the date of the release and conference call. Company assumes no obligation to update any forward looking statements to reflect any event or circumstances that may arise after the date of this release and conference call. Now, I'd like to turn the call over to Fei Chen, CEO of LiqTech International. Fei, please proceed.

Speaker 2

Thank you, Robert. Good morning or good afternoon to everyone on the call. I'm excited to get the opportunity to speak with you all today. Following my appointment as CEO in mid September of last year, our commercial strategy is delivering the intended results with strong improvement from our recurring businesses with experience, revenue growth of 27% sequentially with improved contribution margin. Further, we have recently signed multi distribution agreements for key geographic and the mass segment to accelerate adoption, including recent agreements to advance phosphoric acid purification within China and water treatment solutions in Southeast Asia.

Speaker 2

Additionally, our distribution agreement with NESR is progressing nicely as our 2 companies are closely aligned and have established joint targets for 2023 to address the significant opportunity linked to ESC objectives in the Middle East. We believe this agreement will expand our reach into these key markets, which I will touch on in more detail momentarily. Additionally, we have made significant progress, implementing processes to drive improvement in our contribution margins, which have reached their higher levels in more than 2 years. This improvement within manufacturing as well as a 28% decrease in operating expenses significantly reduced our breakeven points, which we currently estimate to be around $7,000,000 in revenue. These three key initiatives are focused on recurring revenue, creation of new partnerships and distribution agreements to expand our commercial reach and operational efficiencies are all moving forward according to plan.

Speaker 2

Our other key initiative, the largest system sales is advancing with a sales pipeline that continues to grow. However, proof is in the results and we still have work to do in order to move pipeline opportunities to confirm purchase orders and the venture commissioning of the projects. Again, I will touch more on this in a moment. Overall, I am pleased with the progress during the past few months to grow Diptics, but more importantly, driven the business towards profitability. Let me explain a bit more on each of the areas I just mentioned.

Speaker 2

Recurring business. As I stated last quarter, we have a tremendous opportunity ahead of us to leverage our highly unique technological advantages, brand, competences and sustainability value to build a growing and profitable business in the years to come. We moved quickly following my appointment of defining our corporate vision and commercial strategy with a clear focus on recurring business and the large systems opportunities. We also brought on a number of important members to the team with demonstrated ability to effectively grow businesses. As I mentioned, our recurring business, including swimming pool system, diesel particulate filters, ceramic membrane, plastic components operations and spare parts was up 27% for the quarter percent of the quarter.

Speaker 2

Growth is one thing, but we are extremely pleased with the profitability metrics that come out of this component of our business, which contributed to the overall strong contribution margins. Fundamentally, being in a position where we have recurring revenue delivering this positive result is a good sign that we have finally hit a point in our business where we understand our cost base and can optimize our revenue base within our recurring business. The systems and the process that have been put in place have provided us with excellent insight into both of these areas, which should bore well for our business going forward, especially as we're driving growth in our system sales. During the quarter, we delivered 2 swimming pool system orders and received a large order for 4 commercial swimming pool water treatment system in New Zealand, which deployed complete filtration system solution leveraging our enhanced Aqua Solutions membrane. Right at the end of the quarter, we received another swimming pool system order.

Speaker 2

From a membrane element standpoint, we shipped 2 membrane orders during the Q1 and have since closed orders for an additional key membrane order for delivery Q2 and Q3. Overall, membrane represents a significant opportunity for us. On the DPI side, we have officially seen the type of decreases that we have seen in that business with sequential revenues up compared to Q4. We do not expect tremendous growth here, but working persistently into new application areas to hold this business steady will go a long way towards our growth. Finally, on the plastics side, in the Q1, we experienced significant sequential growth of approximately 67%.

Speaker 2

This is mainly driven by a large order we received at the end of last year in the area of biological based material development. The future for this segment continues to look strong as our team continues to find new and exciting opportunities to deploy our capabilities. I mentioned this last quarter, but it bears repeating. Last year, our products and the service to the swimming pool, DPF and the plastics were around $11,000,000 in total. We will look to make strong increases on those numbers in 2023, which will improve predictability of our business, improve our manufacturing throughput and the gross margin and ultimately reduce our breakeven point.

Speaker 2

Q1 was an important first step in achieving that goal. Let us transition to our systems business. As a reminder, to those who might be new to our company, this includes our large system solutions in the area of marine scrubber system, industry water treatment, the border oil and gas filtration and acid purification markets. This business certainly has longer lead time to do to it and requires our team to identify areas where our solution can offer superior performance and add value to our customers. During the quarter, we delivered 2 marine scrubber systems and continued work on a new metro cooling project in Denmark.

Speaker 2

Furthermore, we continued our work on our Middle East oil and gas project. On the marine scrub market, this was once a rapidly growing market a number of years ago, but basically granted to a halt during the pandemic. We delivered 2 systems during the Q1 and expect to receive new orders in the coming months. Where the market is not what it was, we are seeing signs of life. On the oil and gas side, we discussed last quarter a significant MEG order received from a major U.

Speaker 2

S. Oil company operating in Europe. This was the first of a 2 part order for an offshore project where we have already demonstrated the silicon carbide membrane technology performance in pilot and have verified significant performance improvement to the MEG regeneration process when compared to other membrane technologies. At end of last week, we have signed master service agreement with the U. S.

Speaker 2

Oil companies. Our people are carrying on-site commissioning in this coming weeks. Our MEG system should be a contributor to growth in the Q2. The wastewater treatment system order I mentioned is for the major processing industry application in Denmark, which worldwide represents a potentially large addressable market for the company. Our proprietary silicone carbon membranes are an ideal solution that can feature heavier metals, lubricants and other demanding substance and toxins.

Speaker 2

We will look to grow this market in the years to come. Our agreement in the Middle East addressing produced water treatment for oil and gas production, where our technology and collaboration with our partners continues to demonstrate tremendous results. Our team is aggressively pursuing opportunities in the Middle East and where this is a longer lead cycle solution, I believe progress is being made. Finally, our acid purification system solution runs stable at our customer side. We are in a close dialogue with the clients to explore the new project opportunity.

Speaker 2

With us making nice progress in each of these markets through our direct sales force, it has been a key purpose of mine to create distribution partnerships that can open the doors for us to expand our reach in new geographies and access to key market verticals. In November, we entered agreement with the National Energy Services Reunited or NESR, a publicly traded international provider of integrated energy services in the Middle East and the North Africa region. The agreement will be focused on leveraging our capabilities in produced water filtration solution for reinjection. MEI SA has closed customer relationships and a strong service organization within Middle East, North Africa oil and gas industry. Since the agreement was announced, we have succeeded in becoming closely aligned and we have established target opportunities for 2023 to address ESP applications in the Middle East.

Speaker 2

In February, we entered into a distribution agreement to supply membranes to Liquinix water treatment solution for Singapore. Liquinix specialize in design, fabrication and system integration of compact water and wastewater treatment platforms using next generation technologies such as ceramic, bromine strength and the graphing membrane. An interesting opportunity pipeline is established and is being closely followed up. Last month, we entered into a distribution agreement with the Silicon Future, a China based company focused on providing technologies for chemical industry with a focus on supplying our advanced filtration system. For phosphoric acid purification, China is a very significant market for high grade grade of photonic acid production for food, pharmaceutical, mining and automobile batteries.

Speaker 2

We have demonstrated that our technology can effectively help our customers enhance their process efficiency as well as product quality. We look forward to working with Silicon Fisher to efficiently expand our market reach into this large and growing opportunity in China. As you can hear, we have signed agreements to focus on each of our core system areas, oil and gas with NESR, wastewater treatment with lipid mix, phosphorous acid with silicon filter, and we should look for more to come. One key distribution area we are working on is the creation of swimming pool system partnerships. To this point, we have mostly gone through direct sales, which has been effective, but we want to look to accelerate the growth through distribution partnerships.

Speaker 2

Looking for strong distribution partnerships will be a focused area throughout the rest of the year. As we look to the Q2, we are expecting revenue of about RMB5 1,000,000, which would represent a RMB1 1,000,000 increase from the just recently completed Q4 or a 25% increase. The key drivers here are continued growth in our recurring business, coupled with an increase in system sales with the major contribution coming from the commissioning of the significant MEG order we received from a major OUS oil company operating in Europe. We are expectation for continued improvement in contribution margin and the efficient management of operating expenses. We are closing the gap and achieving quarterly breakeven.

Speaker 2

With a strong balance sheet and the tangible progress being made, I'm optimistic about what is coming for LiqTech. With that, let me return the call over to Simon to review the finance in more detail, after which I will wrap up with a few comments and then open the call to your questions. Simon, please proceed.

Speaker 3

Thank you, Fei, and good morning, everyone. Let me add some color on the financial highlights for the quarter. Revenue was $4,000,000 compared to $3,600,000 in the same quarter last year, representing an increase of 10%. Broken down by vertical, sales were as follows: system sales and related services of $1,400,000 compared to $600,000 in the same period last year and $1,800,000 in Q4. DPF and ceramic membrane sales of €1,400,000 compared to €1,900,000 in the same period last year and up sequentially compared to the €1,300,000 in Q4.

Speaker 3

And finally, Plastics revenue of $1,200,000 compared to $1,100,000 in Q1 last year and up significantly compared to the $700,000 in Q4. As you can hear, the largest increase year on year was in our systems business due to increased traction with delivery of 2 marine scrubber systems for the Asian market, installation of crude orders in Europe and continued progress on our important Middle Eastern and Mediterranean oil and gas efforts. As Faye mentioned, on a sequential basis, the improvement was most predominant within our Plastics business due to partial delivery of a large strategic order combined with a general uptick in order intake following a challenging Q4. Looking at our gross profit for the quarter, we reported $400,000 on implied gross profit of approximately 10% compared to $200,000 7% in prior year's Q1. The positive development is underpinned by higher activity and improved profitability partly offset by increased costs related to maintenance and refurbishment of our high temp kilns at our Ballarat ceramics facility.

Speaker 3

As we still have overhead costs and other fixed costs that are not fully being absorbed, one of the key metrics we look at to highlight the progress being made is our contribution margin. During the quarter, when you back out fixed costs, our contribution margin was approximately 43%, the highest in more than 2 years and well above the average of 31% reported last year. Notably, the improvement is delivered despite the cost and resources tied to ongoing remediation work on legacy marine scrub installations, which we expect to conclude over the summer. Furthermore, the positive impact is a result of improved pricing discipline, more attractive product mix, but also our ability to leverage our new ERP platform where we now can access and streamline our operational setup. As we see continued growth in revenue, contribution margin is an important metric to evaluate how quickly we can reach breakeven.

Speaker 3

As previously mentioned, we do maintain our guidance that our business will be breakeven measured on an adjusted EBITDA basis assuming a quarterly revenue of approximately $7,000,000 Turning to OpEx. Total operating expenses for the quarter was $2,600,000 compared to $3,600,000 in Q1 of last year, a decrease of $1,000,000 or approximately 28%. As stated over the last quarters, we remain diligent in managing the business reflecting our determination to defend profitability through organizational rightsizing, mix improvement and capacity optimization. Looking at Q1 numbers in more detail, we did incur non recurring costs due to organizational changes. However, it's important to note we have and will continue to strengthen our commercial capabilities and invest in improved business intelligence, which going forward may result in slight increases in OpEx compared to the Q4 low point.

Speaker 3

But please be assured, we are investing in areas that can drive growth efficiently and highly focused on steering the business back into breakeven without jeopardizing our financial position. Moving to the next item. Net other expenses during the quarter was $200,000 compared to $400,000 in Q1 of last year with the development reflecting our improved capital structure, high interest income, partly offset by FX losses due to the U. S. Dollar appreciation against the euro.

Speaker 3

Concluding on the P and L, net loss was $2,400,000 for the quarter. This compared to a $3,700,000 loss last year, mainly explained by revenue growth, improvement in gross profit and a decrease in operating expenses. Our adjusted EBITDA for the quarter was negative 1,200,000 dollars compared to a negative of $2,400,000 in the Q1 of last year. Again, this metric remains a key reference point for our cash flow and financial breakeven efforts. Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing over to Faye.

Speaker 3

We ended the quarter with CHF 14,300,000 in cash, down CHF 2,300,000 compared to the 4th quarter, explained by the cash used in operating activities due to increased inventories linked to strategic sourcing for ongoing projects to cut lead times, but also reduction in prepaid expenses due to annual insurance premiums and licenses paid. Furthermore, our back end loaded revenue in Q1 resulted in collections being pushed into the Q2 explaining the increased AR. Finally, we also paid our penultimate installment on our Danish COVID-nineteen loans with the final payment due in the Q2. To summarize, balancing our cash flow remain a key KPI for our business and we determined to preserve cash to maintain our strategic and financial flexibility. We also committed to position our business for growth with upcoming deliveries of new manufacturing equipment in Denmark Q2.

Speaker 3

We also acknowledge that we need to increase the throughput of our existing facilities to drive growth, reduce lead times and ultimately pave the way to a business imbalance from both the net income and cash flow perspective. Thanks again for your continued support and over to you, Fei.

Speaker 2

Thank you, Simon. Before I turn over to your questions, let me quickly summarize. 1st, we have moved quickly to accelerate the conversion and business development processes here at the company, which has begun to show tangible results. We are growing our more predictable recurring revenue opportunities, leveraging our differentiated technology. We are also focusing on opportunities where we can deploy larger systems.

Speaker 2

Importantly, the processes and the systems we have put in place allowing us to better align our costs with revenues with more accurate bidding on projects, all of which are driving nice improvement in our contribution margins. We have created new distributor relationships to address certain end markets and have made investments to the internal team to ensure an effective multi strategy and strategic approach to commercialization. And as we keep reiterating, every time everything we are doing is against the backdrop of achieving profitability. The organizational transition we are undertaking has proceeded with emphasize on utilizing our existing core competencies within the company and the category with our renewed strategic focus and the market dynamics. As Samuel and I both mentioned, we remain on track to deliver breakeven at the $7,000,000 in revenue, a number we think is achievable in the near term.

Speaker 2

I am highly optimistic about the future and look forward to take any questions there may be. Operator?

Operator

Thank you, Today's first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Speaker 4

Hi, Tay. Hi, Simon. Nice progress on the quarter.

Speaker 3

Thank you. Thank you.

Speaker 4

So first question here is on the pipeline, you talked about the pipeline of new large projects being starting to build and just wanted to get a sense of your view there. How is that built over the last quarter? And what's the confidence level in that pipeline sort of compared to Q4?

Speaker 2

I mean, as I mentioned in my speech, we have a very, very growing pipeline. It's growing at each every month. And we have increased our confidence also on the project. I think some of them will be convert to form purchasing order in Q2. So you I mean, yes, in the near future.

Speaker 3

Maybe just to add on that as well, Rob. So I think as you can see going all the way back to last year, we are really focusing on fast tracking our way to breakeven. And again, the recurring business, I think we just want to steer your attention to that as well because of the large orders have a longer decision cycle, which we also alluded to. And for us, seeing the tremendous improvement in recurring business is obviously what gives us better predictability going into the next quarters. And then on top of that, clearly the larger system orders, more strategic orders will be dicing on top of that.

Speaker 3

But as we can also see on guidance, we feel more confident in giving guidance now. And hopefully, the track record will show that also over the coming quarters.

Speaker 4

Okay, great. Thank you. And then, yes, I do want to ask about the Q2 guidance and outlook. You alluded to it there on the recurring business, but sort of what's sort of the confidence level there? And how do you have visibility?

Speaker 4

Or I guess what's the visibility into sort of beyond Q2 at this point?

Speaker 3

So we are definitely looking to continue growing our recurring business and that's also what we're looking at right now. Clearly, we're tracking it every single day. So yes, we are confident that a proportion of the growth quarter on quarter will definitely come from recurring business. So again continuing the same trajectory as we've seen in Q1. Again, underlining that we have better visibility.

Speaker 3

So that's definitely the key guidance here for us is that we have that visibility and stability. You can also say that the recurring business is starting to give us that predictability in our forward looking analysis.

Speaker 4

Okay, great. And then I think you said you shipped 2 marine systems in the quarter. How is the marine business at this point in terms of activity and the pipeline in the marine scrubber business?

Speaker 2

And as I mentioned, we do see there are some life science in marine business. So things are moving again. So we are actually focused on this area. We just hired a new sales person. It's going to start next week because we really want to build up a stronger pipeline here.

Speaker 2

So we believe there will be several systems that will become to us in later this year. So we do see that some things moving.

Speaker 3

Maybe just to add to that as well, Robert. I think on that note, please bear in mind, we acknowledge that the marine market was an important contributor to us in the past. And right now, we also want to try to cover that together with our aftermarket focus. So again, with the new the onboarding of a new key VP of aftersales will combine with a new salesperson, hopefully also help us address this large pool of installed systems and help drive our aftermarket business also in the quarters to come. So the Marine is not only selling new systems, it's also a matter of like leveraging the existing number of outstanding systems that we have now operating on multiple ships across the globe.

Speaker 4

Great. Thank you. I'll turn it over.

Operator

Seeing no further questions, this concludes our question and answer session. I would now like to turn the call back over to management for closing remarks.

Speaker 2

Hello, everyone. I would like to thank you all very much for being with us today. We look forward to communicating with you soon again. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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LiqTech International Q1 2023
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