LiqTech International Q3 2023 Earnings Call Transcript

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November 9, 2023

Key Takeaways

  • In Q3 FY23, LiqTech achieved a 53% year-over-year revenue increase to CHF5.1 million and improved gross margins from 3% to 19%, reducing net loss by CHF0.4 million.
  • Adjusted EBITDA loss narrowed to –€800,000 versus –€1.3 million a year ago, and management maintains a breakeven target at approximately €7 million in quarterly revenue.
  • The company delivered a record 10 commercial pool filtration systems in Q3 (up from 6 YTD 2022) and secured distribution partnerships with Spa & REIT in the Middle East and WaterCo in Australia/New Zealand.
  • LiqTech received its first new marine scrubber orders in over 18 months for an upgraded modular design that reduces OpEx, aiming to rebuild market share via enhanced distribution channels.
  • Pilot deployments continue in phosphoric acid purification (China), produced water treatment (oil & gas), and MED systems, while the company reiterates full-year guidance of $19–21 million revenue and 15–20% gross margin.
AI Generated. May Contain Errors.
Earnings Conference Call
LiqTech International Q3 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning, and welcome to the LiqTech Third Quarter Fiscal Year 2023 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

Please go ahead.

Speaker 1

All right. Thank you very much, Andrea, and good morning, everyone. Thank you for joining us on today's conference call to discuss LiqTech International's Q3 2023 financial results for the period ending September 30, 2020 23. Joining us on today's call from the company are Fei Chen, company's Chief Executive Officer and Simon Stadel, company's 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 today.

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. The company assumes no obligation to update any forward looking statements to reflect any events or circumstances that may arise after the date of this release and conference call.

Speaker 2

With that said, I'd like

Speaker 1

to turn the call over to Fei Chen, CEO of LiqTech International. Fei, please proceed.

Speaker 3

Thank you, Robert, and good day to everyone on the call. I am excited to get the opportunity to speak with you and to share with you our good progress. During the Q3, we made continued progress executing against our strategic plan to drive the business towards profitability. We saw revenue increase of 53% compared to Q3 last year. Gross margins improved from 3% last year to 19% in this year's Q3.

Speaker 3

And our net loss improved by $400,000 Importantly, our adjusted EBITDA was just a negative $800,000 as we move the business towards profitability. This improved results are due to the enhanced business strategy we enacted last year with focus on delivering revenue on our established business areas and we're driving growth through expansion into new targeted markets. To put it in other words, we are looking to look to protect and expand our established businesses such as commercial pool systems, ceramic membrane, diesel particulate, fissures and components and how and develop our target businesses, which includes areas such as phosphoric, acid, oil and gas and our overall strategic focus to increase our service business. As I mentioned in my recent corporate presentations, the key word here is focus. We are focused on making sure that we can have a sustainable business by protecting and defending our position in key markets where LiqTech has a demonstrated history of success.

Speaker 3

We're enabling high upside growth in exciting markets where we can leverage our core silicon carbon technology and system design capabilities. This dual approach assumes that we are not reliant on any one project or customer for us to be successful. Taking a step back, at LITEC, it is our vision to become a leading provider of advanced and sustainable filtration solutions. These key megatrends of water cleaning and reuse, greenhouse gas emission reduction and overall circular economy are all key to save the world's scary resource and protecting the environment. Beyond protecting the environment and preserving resources, our solutions provide real economic benefits to our customers.

Speaker 3

Whether it is the increased years through product purification of our phosphoric acid system, decreased the cost through the ability to reuse water in our produced water, oil and gas solution or lower energy consumption and the chloride dosing needs in the case of our upper solution for commercial swimming pools products. The recent sales wins that we have achieved and distribution agreements we have signed are all due to this key idea of providing value to customers. Let me take a minute to talk about some key developments that took place over the past few months. Let's start with our commercial swimming pool products. We successfully delivered 10 swimming pool systems during the Q3 and have recently received orders for 3 more systems, which we anticipate delivering during the Q4.

Speaker 3

Year to date, we have shifted 18 systems compared to 6 systems in 2022 with geographic focus in UK, Spain, Portugal, Australia and New Zealand. With the great progress we have made in this new geographic areas, we have been looking at ways to broaden our sales footprint by entering into distribution agreements with key partners. Following a thorough process, we entered into 2 key agreements, 1 with Spa and REIT, a UK and Dubai based group to cover key areas of the Middle East, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. As their CEO mentioned, LiqTech's poor filtration system is strategically a perfect match with the boundaries cutting edge work in the design and the build of the most prestigious state of art leisure centers and spas. We also entered into agreement with WaterCo to cover Australia, New Zealand, Papua New Zealand and the Pacific Islands.

Speaker 3

WaterCo is a well established player in the swimming pool market and has worked with LiqTech successfully over the past 3 years to bring solutions to their joint customers. We look forward to working with these 2 well respected companies to broaden our reach and make a substantial impact in the global Aquatics and the water treatment industries in these key territories. Within the marine scrubber market, we saw the return of our first new marine scrubber system orders in more than 18 months as we develop, deploy an upgraded modular design system through our recently enhanced distribution relationship with YouYou in China. Our dialogue with customers and partners has confirmed that DTIC's modular design marine scrubber water treatment system is highly reliable and delivers strong return on their investments. Furthermore, our new generation design reduces OpEx for owners significantly by largely reducing day to day operational and maintenance costs.

Speaker 3

Ziptic has more than 160 installations in marine scrubber market, which occurred primarily between 2018 2020. This new order not only demonstrates the continuous confidence from the market and the customers in our solutions, but also validates our enhanced commercial strategy I mentioned a few moments ago as we focus on driving revenue in established business verticals where Lietech has proven technical capabilities and installations. With a renewed focus on the market, coupled with capable distribution partners, I believe there is an opportunity to regain our position in this market in the future. Finishing off our established business contributors. From a membrane element standpoint, we continue to deliver ceramic membrane orders during the Q3 and received new orders which will be set for delivery in Q4.

Speaker 3

On the DPF side, we experienced stable revenue contribution. We don't expect tremendous growth here, but looking persistently into new application areas to hold this business steady. On the plastics side, in the Q3, we did experience a bit of a sequential pullback as we wrapped up a large order we received at end of last year in the area of biological based material development. We continue to look for opportunities to grow this area into the future. Finally, we did see significant increases in the sale of spare parts in quarter 3 as we have more systems in operation.

Speaker 3

This will become a nice recurring business opportunity for us. Overall, we are pleased with the progress we made on our established business areas across all of the key areas I mentioned, we have improved our pricing discipline through enhanced cost visibility and elevated mass intelligence, which is delivering increased gross profit and ultimately bring Lids closer to profitability. Where we are pleased with the traction generated from our established business, we recognize that there is a very large addressable market opportunity for our solutions in a wide variety of markets that can potentially drive growth for VTech. This large system solutions in the areas of industry water treatment, oil and gas filtration, acid purification and other industrial applications and ideally service strategic solutions in the long range. As we have stated, the downside is that this area has much longer sales cycles, but I believe progress is in place.

Speaker 3

Within the oil and gas market, our collaboration with Nissan is moving ahead. We are currently building what I would define as a pilot system, specifically for NACHA to utilize in various demonstrations. We are similarly in close dialogue with 2 to 3 target customers in the Middle Eastern for producing water solutions where our solution could be applied. Hope to have more to share with you in the coming quarters. We think for storage assets, we delivered and recognized revenue during the Q3 on our pilot unit to silicon filter in China.

Speaker 3

We believe this pilot unit will enable our partners in the region to demonstrate that our ultrafiltration technology can effectively help their customers, enhance their process efficiency and the product quality. We look to further build up this pilot and our U. S. Based installation to drive further phosphorous acid system sales into the future. During the Q3, we also delivered and recognized the review of our Metro cooling system here in Denmark.

Speaker 3

We are not a large market opportunity. It highlights the capabilities of our solution across a wide range of opportunities and the validation by yet another large international company. Finally, the monoethylene glycol or MEC front, our 1st offshore installation in the Mediterranean with the large oil and gas clients continue to perform well. As I mentioned last quarter, this first of a 2 part order for the offshore project with expectations for follow on orders strong. That said, due to the location of the platform, which is off the coast of Israel, there is some uncertainty on the timing due to the current conflicts in the region.

Speaker 3

We should know more in the coming weeks and whether or not this will be shifted in fiscal 2023 or slip to 2024. In summary, as we look to the rest of the year and into 2024, we see a number of opportunities in our targeted business segment, particularly with phosphoric acid, MED as well as produced water components of oil and the gas markets that we believe will be key contributors to growth hopefully in 2023 and certainly in 2024. Further, our newly established partnerships with the same the commercial swimming pool market are expected to expand our growth in this key market segment for us moving ahead. Where there is always uncertainty such as what we are in company with our MED installation in the Mediterranean, we feel confident in the guidance for the full year 2023 revenue of $19,000,000 to $21,000,000 Further, we also believe that we remain on track to achieve our full year gross profit margin position in the range of 15% to 20%. Please remember that our gross margin last year was only 3.5%.

Speaker 3

We have a tremendous opportunity ahead of us to leverage our highly unique technological advantages, brand, competencies and sustainability value to build a growing and profitable business. In 2023, we have succeeded in making continued progress in each quarter. And I am extremely pleased that with this good performance and anticipate continued progress in the quarters to come. With that, let me turn the call over to Simon to review the financials in more detail, after which I will wrap up with a few comments and then open the call for your questions. Simon, please proceed.

Speaker 4

Thank you, Fei, and good morning, everyone. Let me add some color on the financial highlights for the Q3. The reported revenue of CHF5.1 million increased 53% compared to the CHF3.3 million reported in the Q3 of 2022. It also marked a modest however important increase compared to the most recent quarter ended June 30. Broken down by vertical, sales were as follows: system sales and related services of CAD2.6 million, up more than 200% compared to CAD800 1,000,000 reported in Q3 last year and up 24% compared to the most recent sequential 2nd quarter.

Speaker 4

Looking at our ceramics business. EPS and membrane sales ended at CAD1.6 million down 13% compared to the quarter ended September 30 last year, reflecting a dedicated focus on improving profitability by carefully managing our revenue mix. And finally, plastics revenue and externally funded R and D projects of DKK0.9 million, up 25% compared to NOK7000000 reported in Q3 last year with stable plastics activity and progress on key external R and D projects. In summary, the development in revenue is directly correlated with our strategic focus to strengthen the established business lines, more specifically our core ceramics, consistent businesses with shorter sales cycles and a new complementary dedicated aftermarket strategy. To be specific, the key revenue drivers during the quarter was a record delivery of 10 pool systems shipped to clients across Europe and Asia, but also the delivery of our first phosphoric acid pilot to China.

Speaker 4

Continued progress in key projects with oil and gas and mesoscopy cooling and finally increased aftermarket sales with uptick in orders for both marine and asset applications leveraging our global installed base. Zooming in on our components business, our ceramics and plastic businesses executed on incoming orders post summer with decisive focus on improving throughput and cutting lead times. In terms of guidance and as Fe mentioned, we expect full year revenue in the range of €19,000,000 to €21,000,000 compared to the €16,000,000 reported last year with a gross margin rate of 15% to 20%. It's evident that we are pleased with the progress on both top line and profitability. However, we are carefully monitoring the escalating geopolitical unrest amid the conflict in Ukraine and Gaza, which in turn may fuel uncertainty or directly impact our business.

Speaker 4

This in particular in industries such as oil and gas or countries that are directly exposed. Turning to our gross margin and more insight on our journey towards breakeven. The 3rd quarter echoes the strong progress reported over the last couple of quarters with reported gross profit of €900,000 and an implied gross profit margin of 19% compared to just 3% in the comparable period last year. The positive development is a result of increased activity levels and equally important stringent focus on optimizing our revenue mix and company wide pricing discipline. As reported earlier this year, we are pleased to see the profitability remains robust across both our established business lines and new target business within oil and gas and phosphoric acid.

Speaker 4

From an operational perspective, we decided to onboard incremental staff towards the end of the quarter to help accelerate the ramp up of our ceramics manufacturing throughput and compress delivery times to help execute on our order backlog. Profitability was also underpinned by new quality and production optimization efforts seeking to standardize our manufacturing and system delivery platforms, which again will allow our business to reduce scrap and increase yield. Taking a quick look at our contribution margin, we remain focused on closely monitoring this important KPI to ensure we develop a profitable and sustainable business with accelerated focus on meeting our financial objectives of breakeven. During the quarter, when you take out fixed costs, our contribution margin was approximately 45% and that's well above the 33% reported in the Q3 last year. Our contribution margin has historically been very volatile as it directly correlates with the underlying revenue mix.

Speaker 4

However, as reported so far this year, we have succeeded in significantly improving and stabilizing our contribution margin well above 40%. On that note, we do maintain our quarterly breakeven target measured on an adjusted EBITDA basis of approximately €7,000,000 in revenue and potentially lower the right revenue mix. Turning to OpEx. Total spend for the quarter was $2,600,000 compared to $2,400,000 in comparable Q3 of last year. The increase reflects the onboarding of additional sales reps combined with investments in IT and marketing to help accelerate and scale our business.

Speaker 4

To reiterate, we remain focused on running a lean business by monitoring costs and carefully evaluating our spend to ensure we do not jeopardize our financial objectives. On that note, I'm pleased to see that our OpEx came down €200,000 from the quarter ended June 30, hence evidencing that we are very diligent when it comes to managing our OpEx spend. Other income of €300,000 came down compared to €500,000 last year with the development explained by reduced gain on currency transactions partially offset by increased interest income as we benefit from more favorable deposit rates on our U. S. Denominated excess cash.

Speaker 4

Concluding on the P and L, we reported a net loss of 1,400,000 compared to a net loss of 1,800,000 in the same period last year. Again benefiting from top line growth and increased profitability in a period where we invest in building a strong belief check from both an organization and operational perspective. Commenting briefly on our adjusted EBITDA, excluding non cash items, We reported an adjusted EBITDA of negative €800,000 compared to a negative of €1,300,000 in a comparable quarter last year. Considering the reported revenue, it's evident that breakeven remains achievable when adding incremental revenue of approximately $2,000,000 per quarter at cost ForEx contribution. Thus this remains our key focus.

Speaker 4

Finally, let me briefly comment on our cash flow and balance sheet before summarizing and handing over to Faye. We ended the quarter with $11,800,000 in cash, down $800,000 compared to the 2nd quarter as we took delivery of key manufacturing equipment at our ceramics facility in Copenhagen, more specifically new extruders and kilns. From a cash flow perspective, this quarter marks the end to the investment cycle initiated back in 2021, the planned capacity expansion both abroad and domestically in Denmark. Hence near to medium term cash CapEx will be confined to maintenance and smaller investments. Also I'm pleased that we during the quarter negotiated improved terms with our core banking partner reducing our cash collateral and securing incremental lease financing for the equipment delivered during the quarter.

Speaker 4

Furthermore, as mentioned in our release, we also practically addressed our June 'twenty four maturity related to our senior commissioner notes that was successfully extended to Jan 26 on terms mirroring the original agreement. In summary, the underlying cash flow profile is improving as we are showing progress on both top line and profitability, which combined with less cash CapEx and benefits of the improved capital structure will further support our path towards positive cash flow generation. Thanks for your continued support and over to you, Fei.

Speaker 3

Thank you, Simon. I'm pleased with the progress our new leadership team has made to transform LiTec operationally and commercially to become a leading provider of advanced and sustainable filtration solutions around the world. We look forward to finishing 2,003 on a high note and saving ourselves up for continued success in 2024. With that, operator, we would be happy to take any questions.

Operator

We will now begin the question and answer session. And our first question will come from Rob Brown of Lake Street Capital Markets. Please go ahead.

Speaker 5

Hi, Faye. Hi, Simon.

Speaker 3

Hi. Hey, Rob.

Speaker 5

You've made nice progress in building out the distribution relationships. I just wanted to get your sense on how much more there is to go there and are there geographies or other markets that you need to work on or do you feel like you've kind of gotten that now in place?

Speaker 3

Yes, we are still have quite many area geographic areas to be explored. For example, we don't have any distribution in the U. S. And also some other European countries. So we will definitely continue our journey and find more distributors to extend our geographic reach.

Speaker 5

Okay, great. And then I guess on the scrubber market, you had some orders in the quarter. How's the pipeline looking for that? And do you feel like that's sort of reengaging into next year? What's your sense on that market

Speaker 4

for the next 2 to 18 months? So Rob, we're not commenting on the pipeline. Clearly, we're disclosing orders as they come if they are obviously relevant in terms of tapping into new markets or they are reflecting a new product or a sizable order. Now we are diligently working through our marine portfolio as also alluded to on our conference participation back in September, where we're trying to really address that market through multiple channels. As Faye also alluded to at that point, we have onboarded a new sales rep for that market, a very experienced person that will help us build more channels.

Speaker 4

So we are working diligently to really strengthen our marine pipeline, and we'll elaborate more on that on future calls. And I'll obviously also disclose that on relevant press releases in due time. Thank you.

Speaker 5

And then maybe on your efforts to kind of get spares and services improving, I think you had some nice progress there. But how do you see that playing out? And what sort of goes into ramping that business?

Speaker 3

I mean, we do have 160 marine systems in the market and that give us a very good basis for our service business. And we're also selling more systems for the oil and gas and also phosphoric acid and also even for the swimming pool system. So we are actually in the process really work into our service offering and build up the professionalism on the actual, we do hope we do expect next year the service will contribute very significantly than before.

Speaker 5

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

Operator

And our next question will come from Bill Chapman, a Private Investor. Please go ahead.

Speaker 2

Yes, thank you. Hi, everyone. On the phosphoric acid, one of your presentations you said the ROI is well under 1 year. And is that still proving out? And then if so, what obstacles are you having to deal with for a company to adopt this?

Speaker 2

For example, they have to shut the plant down for 4 days and that's difficult or what are the issues that the plants have to deal with to adopt this?

Speaker 3

And you'll have it's nice to have you have seen our presentation. It is true. The return of investment is very short. It's less than a year and that still stands. So the really why the sales cycle is longer for this application is we are actually going to put our refrigeration system into their production line.

Speaker 3

So they always want to make a pilot testing before they really put into their rear system. So that's also why we have sought our pilots to, for example, city computer and we're going to have more pilots sending out. And when the pilot is up running, then they will become more reliable for them to really open their pipeline. So it's a little bit of a troubleshoot process because they want to take capital and they want to take the pilot process. But the return on investment is very impressive for all the customers we have talked with.

Speaker 4

And maybe just adding to that, Bill, I think the key thing here is also, as we mentioned, that the system is performing well. I think the quality of the system and the fact that we have a client that is really benefiting from this, I think, gives us the long term view that this is the right market for us to focus on. But obviously, we can't control the decision process on the client side. And as Greg mentioned, when we are tapping into the core production line, it unfortunately takes time. But I just want to reiterate that the system that we have installed is performing extremely well.

Speaker 2

Okay. Would this be considered substantial cost savings to the average manufacturing plant? Or is it marginal cost savings?

Speaker 3

I mean, it's a substantial savings because they're both saving the same the process cost and also the product quality increase and that is very much value for them.

Speaker 2

Okay. One last question. How big is the market on this? I don't think I've seen anything on that. If I did, I just overlooked it.

Speaker 2

So how big is the market for this?

Speaker 3

I don't think we have published exactly the max size for this one, but we did in our presentation, you have seen and for the new target business area, we're saying something about more than $2,000,000,000 potential addressable market. So it's a huge market there.

Speaker 2

Just one last question. Of all of the products offerings you have, which ones have the biggest revenue potential for the company, the way it seems right now to

Speaker 3

you? That's exactly why we have defined our commercial strategy as we have done today. And we do not want to take the same situation as we had before and understand on Wind Lake. We would like to have several different segments and it's more stable for the company. So I would say all the areas we focus on commercial swimming pool and the marine scrubber and the preferred assets and oil and gas, they all could be very substantial revenue contribution for our markets.

Speaker 2

Okay. Thank you very much.

Speaker 3

You're welcome.

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 3

Thank you all very much for being with us today. We look forward to communicating with you soon again. Thank you for attending.

Operator

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

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