Good day. And welcome to the LiqTech International reports Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. All participants will be listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead..

Thank you very much, Sarah. Good morning, everyone and thank you for joining us today as LiqTech discusses it's fourth quarter and fiscal year 2019 financial results. I am Robert Blum of Lytham Partners, I will be your moderator for today's call. Joining us on today's call from the company is Mr. Sune Mathiesen, the company's Chief Executive Officer.

Before I turn the call over to Sune, 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 shortly following the conclusion of the live event and that a transcript of the call will be available on the Investor Relations section of the company website. Before, we begin with prepared remarks; we submit for the record the following statements.

This conference call may contain forward-looking statements. Although the forward-looking statements reflect a 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 conditions and sales of 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.

The company therefore urges all listeners not to place undue reliance on these forward-looking statements, which speaks 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 in order to reflect any events or circumstances that may arise after the date of this release and conference call. With that being said, let me turn the call over to Mr. Sune Mathiesen, Chief Executive Officer of LiqTech International. Sune, pleased proceed..

Thank you, Robert, and good morning to all of you. Thank you for joining us today to discuss our fourth quarter 2019 financial results. First of all we hope everyone on the call and your families are safe and healthy. We're certainly operating in some unprecedented times.

As you see from the press release results for the fourth quarter and yearend were in line with our preliminary results we had provided back on January 21, which highlighted record revenue for LiqTech in 2019 and the transition to profitability.

For the year, revenue was $32.6 million compared to $12.2 million in 2018, an increase of 167% or 182% in constant currency. The growth in revenue was due to the higher sales of our proprietary ceramic silicon carbide water filtration systems in markets where we achieved a significant commercial breakthrough.

We're also driving the company profitable with net income of $40,000 compared to a loss of $3.8 million in 2018 which is a turnaround of the $24 million.

We have highlighted over the last year the average we believe it's available in our business model and it clearly highlights that opportunity and remember this was despite the fact that we had to overcome the impact of the shutdown during the fourth quarter.

With the first furnaces now online and as we continue to improve our margin optimization program, we believe that we we're seeing a further growth and profitability in the years to come. For the fourth quarter revenue was $6.2 million compared to $2.9 in the fourth quarter of 2018 representing an increase of 116%.

This was in line with our initial expectations for the fourth quarter we discussed back in November and reflected the impact from the mechanical issues affecting our legacy furnaces.

As just mentioned and many of you saw firsthand during the following the investment in Denmark these issues have now been resolved by the successful installation and commission of new furnaces that each has four times the capacity of any individual legacy furnace.

Overall I'm pleased with our performance in 2019 which highlighted our commercial breakthrough in the [indiscernible] industry.

As we look through the future, our goal to continue commencing that strong market share in the marine scrubber market where we estimate our shares to be at approximately 50% of all scrubber filtration systems currents installed or more.

But also leverage that success our expanding the application for our proprietary water filtration technology into adjacent markets which we believe has the potential to significantly is larger than normal in scrub opportunity.

Let me first spend some time on obviously happened in the marine scrubber space and then provide some other teachings from those in the markets. The marine scrubber market continues the trend we have discussed for the past several quarters towards increased adoption of closed-loop scrubbers.

Again those scrubbers include a water filtration system that used for dirty water products to reuse of this into the ocean. Operating systems simply take the dirty water which includes all the contaminants and discharges back into the ocean.

Open systems really defeat the purpose of what was trying to achieve by removing harmful contaminants from the environment. More than 100 firms around the world have now opened new scrubbers nearly double the number from just a few months ago. In addition the other significant environments or benefits are employing close to the scrubbers.

It is estimated that there are currently about 4,000 scrubbers installed all over through the end of 2019 worth approximately 10% of 400 of those being close loop. This implies an additional potential addressable market opportunity of nearly 3600 systems that maintenance to be converted from open loop to close loop.

We have global bandwidth to occur and more continue to implement open banks. This would highlight a very significant market opportunity for LiqTech of nearly $1.5 billion simply based on the already installed fleet of new systems.

Remember the cost to install the filtration system on the scrubber is about $400,000 to $500,000 with the overall cost of a scrubber ranging between $1.5 or to $3 million. So if ship owners already invested million into our scrubber the additional expense to install a filter is a small part of the overall expense.

Beyond that current market estimates indicate an additional 4,000 to 8,000 scrubbers to installed on existing vessels between 2020 and 2025 if the recent trends towards closed loop system hold and that the historical 10% closer to production jumps to 25% or 50% as has been highlighted [indiscernible] and market potential remains extremely large.

As I stated last quarter this trend towards closed loop scrubbers is not only driven by the filtration of global discharge and of open loop discharge in more than 100 faults around the world but also driven by increased pressure from any customers and shipping companies to utilize superior environmental scrubber solutions.

A question that has come up often recently has been the spread between low sulphur fuel and high sulphur fuel and the impact that lies ahead from the ship owner's decision to install the scrubber, but it obviously makes the economic argument much an issue or a ship owner to install the scrubber when the spread between the two is higher, every other fees that most of these are looking at long term trends and market filtrations between the two.

We certainly have said in the times for the oil and gas industry over the last month, the absence of shipping across the world has significantly decreased to the main sulphur fuel in the near term, which has driven the price between the two much lower than during normal times.

When I talk to we expect this spread to normalize in the coming months and their decision to install the scrubber or not is mostly based on that normalized spread at any one point in time. Obviously we will see how this all plays out but we remain bullish on the long term opportunity within the marine scrubber market.

In the most immediate term, we are in close communication with our customers and suppliers in light of the recent global event surrounding COVID-19. As of today we have made all planned deliveries for the first quarter and we have not had any cancellations of existing orders. In the quarter to date we had shipped approximately $10 million of revenue.

As you all know the situation is developing day by day and given current uncertainties we are now lowering our guidance for the first quarter to $10 million, which despite of the global situation would mark a new quarterly rate for the company.

Additionally, our incoming orders have obviously slowed and will impact second quarter revenues although we along with the rest of the world don’t have a good enough feature on it yet on what that impact will be.

Operationally, we implemented several measures to ensure manufacturing continuity in order to daily facilities operational and comply with state guidelines under normal personnel that can work in proximity, we have provided our workforce into multiple shifts. We are also permitting certain office personnel to work from home.

We continue to monitor the change situation closely and have taken additional steps to reduce our overall cost base as necessary. As you may recall from our November conference call we have significantly diversified our customer base as our proprietary water filtration systems work seamlessly with a number of business scrubber manufacturers.

We have been seeing significant expansions of orders from Asia at the time where we had added a number of new customers. With Asia being the first to encounter many of the challenges that the current COVID-19 situation has created, they also appear to be the first to launch again [indiscernible].

Over the last week I've spoken with many of our customers in the region and after a difficult period they appear to be returning to normal. We are optimistic that our customer diversification will allow us to minimize disruptions to our operations in the immediate term.

But it seems like a lifetime ago when we spoke with you during our Investor Day in Denmark you may recall that we spent considerable time highlighting the opportunity we believe is in front of us to expand the application of our core filtration technology to our industries including our advance and power plant markets.

As we discussed new regulations combined with geological restrictions and local entity are driving the increase the need to have a greater portion of the more extensively treated and ultimately reduced.

Moreover the growth in the application of water intrinsic processes to extract unconventional oil and gas resources has increased the need for cost effective treatment and reuse of reduced water to reduce fresh water.

As discussed on our Investor Day in January, we are constantly working on a number of very large opportunities in the Middle East, which we believe will result in very significant orders in the near term.

But the obvious question here is whether or not this is still a viable option given the current price of oil as I had conversations very recently with our partners and they continue to relay to me that this is less a function of the price of oil and more a function of new legislation that is being put in place in large oil producing counties with limited water resources to minimize the water usage in their production particularly in the Middle East.

Until everything is finalized, we have brought it into proper perspective we have to put it into proper perspective that we remain highly optimistic that the oil and gas market will be a significant drive for us in the years to come with an expectation that we will always take the marine scrubber business in terms of revenues contribution for LiqTech and I clearly have to note that this is not the scrubber business will see a drop off that because of the oil and gas opportunity is simply that large.

Quickly on a few additional areas for expansion of our core technology we continue to book orders for power plant systems and believe that will be an important part of our business in 2020 and onwards.

We are also continuing to make progress on developing our marketing [indiscernible] products and as I've stated in the past many in the industry believe this will be the next key initiatives following the implementation of our 2020 which is a reduction initiative. We remain on target to launch the product later this year.

Finally with the new member in capacity coming online we will also be advancing our oil and sales.

And so turning back to our operations for marine, as those of you that were at our facility in January saw we made a few milestones to expand our production capacity through the installation of the list of several new furnaces and the expansion of our systems manufacturing capacity.

The new furnaces are approximately four times the company's existing furnaces due to increased size and efficiency. The installation of the first furnace that appear towards the end of last year the second in barrel is coming online soon but two additional new furnaces set to be installed by June 2020.

Following successful installation of all four brand new efficient furnaces in June 2020 we expect to completely retire our older less efficient furnaces. Overall the company's manufacturing initiatives are expected to result in social capacity of between $150 million to $200 million on an annualized basis until 2020.

We've also continued our efforts in our margin optimization program with important process improvements for the system design efficiencies and the in-sourcing of some manufacturing operations.

The acquisition of BS Plastics has so far exceeded our financial targets and has provided important in-sourcing for some key plastic components for water filtration systems.

Our gross margins are dependent on achieving certain revenue thresholds assuming we achieve our expectations for 2021 we believe that we're well-positioned to achieve gross margins of more than 40% in 2021.

While we are certainly working through some unprecedented times, I believe that we are in a very strong position both from a product standpoint as well as a financial one, besides once again we return to certain level of uncertainty. We've made tremendous strides diversifying our customer base and developing new end market volatility technology.

I believe the marine scrubber market will show continued strong growth for LiqTech and about future and at new markets such as oil and gas will become significant contributors for growth for us. Financially, we have a strong balance sheet with approximately $10 million in cash and positive net income and have no debt.

Again we hope all of you and your families are safe and healthy and look forward to be able to visit with you again in the near future. With that said let me now turn the call over to any questions you might have. Operator please..

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Eric Stine with Craig Hallum. Please go ahead..

So I know your balance sheet is in very good shape and you've got a history of running things pretty tight when you need to.

But just curious if you could talk about some of the cost-reductions that you referenced in the release, what some of those levers are what the potential magnitude of that could be as you navigate the current environment and maybe are those some things that would show up fairly quickly in your financials..

So we have already taken some steps, we are taking further the column [ph] and to put a number of initiatives in place to help Danish companies through this crisis and altogether the magnitude we are looking into is the ability to scale off about $420,000 per month. So a little bit more than $1.2 million on a quarterly basis.

I'm not saying that we will do all of that. Just saying that that is what we are prepared for and if we take all the steps that we put into our plan that will come into effect by July and step-by-step some cost-reductions already next month and some later. We'll be using a combination of old initiatives and the government initiatives in place..

That's helpful and then maybe you mentioned no order cancellations, but just as you think about the backlog that you have in place maybe just how the timeline the expected timeline has been likely pushed out I think in the past it was kind of hopeful that it was a 12-month sort of backlog maybe what that looks like today just in light of activity slowing down given the current environment?.

It's obviously been developing day by day here. I think a good way of showing that is that we've actually made all deliveries planned in the first quarter so far. Now it's getting more and more I would say quiet especially from the European… [Abrupt End].