Flexible Solutions International, Inc. ($FSI)

Good day, everyone, and welcome to today's Flexible Solutions International's Full Year 2025 Financials Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Dan O'Brien. Please go ahead.

Thank you, Good morning. This is Dan O'Brien, CEO of Flexible Solutions. The safe harbor provision of the Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Certain of the statements contained herein, which are not historical facts, are forward-looking statements with respect to events, the occurrence of which involve risks and uncertainties. These forward-looking statements may be impacted, either positively or negatively by various factors. Information concerning potential factors that could affect the company is detailed from time to time. in the company's reports filed with the Securities and Exchange Commission. Welcome to the full year conference call for 2025. I'd like to discuss our company condition and our product lines first, along with what we think might occur in Q1 and Q2 2026, I'll comment on our financials in the second part of the speech. NanoChem division. NCS represents the majority of FSI's revenue. In 2022, NCS started food-grade operations. And by the end of 2026, we expect that NCS will be 100% focused on food grade products. Growth in the NCS division will be in food and nutraceutical only. The Panama division. This division makes polyaspartic acid, called PPA for short. It's a biodegradable polymer with many valuable uses. Panama also manufactures SUN 27 and N Savr 30, which are used to reduce nitrogen fertilizer loss from soil. Panama is taking over production of all the legacy industrial and agricultural products historically made at NCS. This is a step-by-step process that is intended to be complete by the end of 2026. PPA is used in agriculture to significantly increase crop yields. PPA is also a biodegradable way of treating oilfield water for scale prevention. It's also sold as a biodegradable ingredient in cleaning products and as a water treatment chemical. Nearly all of our product for international sales will be made in Panama using material source without the U.S. tariffs. There will also be shipping advantages. The new plant is 30 minutes from the port. Inbound raw materials and outbound finished goods will not have to be shipped across the U.S. to and from Illinois for our international customers. Delivery times will be shortened by many days. Reduced shipping times and no exposure to U.S. tariffs on international sales would allow us to increase sales to existing customers and obtain new customers over the next 2 years. We're already engaging with potential new customers. NCS food products. Well, our Illinois plant is FDA and SQF certified. We have commercialized two food products. The first was our wine additive based on polyaspartate that was developed in-house. Last August, we announced our second major food grade contract of 2025 and our third overall. As noted in the news release, it's a 5-year contract with protection from tariffs and inflation. As a minimum revenue of $6.5 million per year and a maximum is the customer requested of greater than $25 million per year. The August contract has reached full production. It's running 24 hours per day and is now our second food grade product after the wine product. We're reviewing methods of increasing production quickly if the customer requests it. Production utilizes equipment we've been buying and installing over the last 2 years but did not have a customer for. Therefore, little CapEx will be needed to reach -- about $15 million per year in sales for this contract and mild CapEx in the $2 million to $3 million range to reach $25 million. In January 2025, we announced another larger food grade contract. Actual production at small volume started this week and will be increased weekly until full production is achieved. Significant revenue from this on track may be visible in our Q2 financials. Growing these two food contracts to the estimated maximum revenues of greater than $50 million per year, it's our critical goal for the next 4 to 6 quarters. We hope to execute this to the customer's absolute satisfaction and obtain all their business before taking on additional major projects. It does not mean that we're not looking for more customers. We're already doing R&D work in certain areas. However, it does mean that several quarters are likely to relapse before other major customers are announced. We would also like to be clear regarding margins in the Food division. In order to obtain such large contracts from a very low base, and in order to negotiate tariff and in protection clauses, we have lower margins than we prefer. We hope to be in the 22% to 25% range before tax. Future customers will be selected in order to increase our average margins now that we have a strong base in flows. The E&P division. E&P represents most of our other revenue and is focused on sales into the greenhouse, turf and golf markets. E&P grew in 2025 and growth is expected again in 2026. Q1 is the weakest quarter for this division, followed by Q2. And growth is usually concentrated in the second half of the year for E&P. The Florida LLC investments, the LLC had a small profit for the 2025 year. It's focused on international agriculture sales into multiple countries. Its management has advised us that they estimate a return to growth in 2026, which should translate into increased revenue for FSI. However, the international agricultural markets like the U.S. market are stressed. So we expect the growth rate to be low. Agricultural products in the United States remain under extreme pressure. Crop prices are still not increasing at the rate of inflation and extreme uncertainty is present due to tariff changes, energy costs and fertilizer scarcity. Growers are facing a conflict between rising costs and low crop prices, aggravated by political actions and war. In some cases, sales are being lost for the whole season. As a result, we saw a weakness in agriculture throughout 2025 and expect 2026 to be another difficult year. Tariffs, the current tariff on all our imports of raw materials from China into the United States is between 15% and 58.5% depending on the material. We are very careful not to import materials unless destined for U.S. customers who are guaranteed to from us and are aware that the tariffs will be added to their invoices. We did not manage our transition to Panama perfectly and have had to import some raw materials into the U.S. in the second half of 2025. Some of these tariff costs will be passed on to customers, some will qualify for the rebate program and some reduced our 2025 margins. Moving most agriculture and polymer production to Panama has free space in the Illinois plant so that food grade production in the U.S. can be optimized and expanded substantially as more U.S. customers are found. Shipping and inventory. Shipping prices are not stable. Shipping times are longer than usual on the routes we use. These issues are caused by the Iran war and are expected to subside if the war does. Raw materials prices are unstable and increasing to account for the oil prices caused by the Iran War. We have significant inventory of most raw materials, but we estimate that we will have to raise prices to our customers in the third quarter unless there's a significant -- a reduction in the price of oil that also reduces our raw material costs. Now highlights of the financial results. Sales for the year were unchanged compared to 2024, $38.51 million versus $38.23 million in profits. 2025 recorded a gain of $787,000 or $0.06 a share compared to a gain of $3 million or $0.24 a share in 2024. Many costs incurred to prepare for the potential new revenue from the food grade contracts announced in January and August, negatively affected 2025 profits because they were expensed as they occurred. Substantial costs for the Panama factory were also expensed quarter-by-quarter. This will continue in first half 2026 for Panama and for food products in Illinois, but at much lower levels. We anticipate some profits in Q1 and Q2 2026, followed by rapidly increasing profits in the second half of the year. We've done our best to maintain profitability as we built the new factory and repurpose the existing one for the new revenue streams in food products. For 2025, we achieved these goals. We did so while reducing net debt and avoiding any equity financing. This should be considered very significant for shareholder value. Operating cash flow, this non-GAAP number is useful to show our progress, especially with noncash items removed for clarity. For 2025, it was $5.54 million or $0.44 a share, down from $7.08 million or $0.50 -- $0.57 a share in 2024. Cash flow has been reduced by the same cost as noted for profits, and it's expected to rebound similarly in 2026. Long-term debt. We continue to pay down our long-term debt according to the loan terms. The loan we used to buy our E&P division was paid in full in June 2025. Our 3-year note for equipment was fully paid in December 2025. This has freed up more than $2 million in cash flow per year for other purposes. Only one small term loan and the mortgage on our Illinois factory remained. Working capital is adequate for all our purposes. We have lines of credit with stock hard banks, for E&P and the NCS subsidiaries. We're confident that we can execute our plans with our existing capital and without resorting to any equity actions. The text of this speech will be available as an 8-K filing on www.sec.gov by Monday, April 20, and e-mail copies can be requested from Jason Bloom, [email protected]. Thank you. The floor is open for questions. Jen, will you set that up for us, please?

[Operator Instructions] And our first question will come from Ron Richards.

I was just wondering on the $800,000 payment due from the floor LLC. Do you expect them to pay that this year?

We are negotiating the payment, and we don't know which way it will go. So that one, I can't answer you explicitly other than to say that we are doing our best to obtain that cash.

Okay. And the second nutraceutical contract, when do you think it will be a full production?

We're hoping for end of second quarter or the very earliest part of third quarter. So -- that's what appears to be feasible at this point, but without a guarantee, of course.

And our next question will come from Tim Clarkson with Van Clemens.

Dan, nice to meet you a month or so ago. Just wanted to ask what would be a reasonable after-tax net margin by -- forget about third quarter even, let's say, by fourth quarter, I mean, are we looking at a company that can get 10% net or 5% net or 15% net, what would be a reasonable net margin once those new revenues start coming in?

I would suggest -- and I get a calculator open because I was unexpected question, Tim. It was good to meet you, too. I think we're looking at '22 -- yes, probably a 15% net margin after tax.

Okay. Great. And then this is sort of a nerdy agricultural question, but it seems to me that with the price of nitrogen fertilizer exploding some of your products that add value and allows the nitrogen fertilizer to stay in the soil longer. I mean those should be really valuable products and benefit the fertilizer situation?

Yes. In theory, you're correct. On the ground, it's not quite as clear. Remember that if the grower -- if a grower isn't expecting to make a profit from his land, he not only cuts back on our products, but he cuts back on his nitrogen as well. And in the farm industry, it's known as fertilizer mine. They -- in order to cut their costs, they actually -- especially with phosphates, but to a certain extent with nitrogen as well. They cut back their usage of everything and except the lower crop yield per acre because it's one of the ways to keep their open. So -- my analysis of this is that it's not going to affect us this year. But if nitrogen prices continue to be high and crop prices rebound, then we will do very well.

Right. Right. Well, great. And yes, I'm excited, and it doesn't sound like you need to be raising any additional money from stock issues or anything like that?

No, definitely not. It's -- as everyone knows, who's been paying attention, we have a shelf registration in place, but that is not for you at today's prices.

Okay. Okay. Well, I know one cynical observer was commenting on that, but I know that you're a large shareholder, the largest shareholder, so you're not interested in diluting yourself. So with that, I'll pass.

And our next question will come from William Gregozeski with Greenridge Global.

Dan, on E&P, with the sales down in the fourth quarter relative to the third, should we be looking at E&P more as a first half against first half, second half against second half kind of thing?

Yes, that would be fair, Bill. What's happening in the turf and ornamental market appears to be a general movement towards early buy programs and the best value on the early buy programs typically are in third quarter because that's when the people we sell to are trying to book next year's sale. They drifted into fourth quarter, and we don't really control this process. So my feeling would be lump Q4 and Q3 together and lump Q1 and Q2 together to give you a better analysis whether we're doing a good job or not.

Okay. And then are you guys -- what kind of growth are you expecting from E&P this year just year-over-year for the full year?

Very much in line with historical numbers, low double digits, 10%, 12%, certainly not greater than that. It's not a great environment in America right now.

Okay. With the Florida LLC, there it looks like their margins were up quite a bit in the quarter. Is there anything going on there where they're somehow getting better margins from customers? Or is that more of a onetime thing?

I would say that's a onetime thing. And in relation to earlier question from Ron, we are working with the Florida LLC to get them better organized and receive our payment tranche. I think that you should treat Q4 as an aberration. And let's look at that company going forward more than going backward. And as I get clarity on that particular topic, we'll probably be making actual news release announcements to keep the transparency going.

Okay. On the January food contract, the big one that you mentioned is kind of going up slow. Should we be looking at kind of lower than the margins you disclosed, what you expect for this as it ramps up just because of the low base and just starting it up?

It's -- let me explain that further for everybody. We're carrying a substantial number of employees who are drawing nice salaries and installing equipment and testing equipment and learning how to run the equipment. That's where all the pressure on our profits and EBITDA is coming from is people and large numbers of small value purchases that don't qualify as CapEx and end up on the expenses. So this is slowing down. And as the production ramps up, the amount of employee and operational expenses that are covered by the sale of the product increases. So throughout this quarter, as we ramp up we will go from making a loss on every employee that's working on this project to break even and then onwards to making a profit on each of them. The margin is not going to ever exceed the 22% to 23% level because that is contractually limited. So where we are aiming for is full production in Q3 at full margin because each of the employees is properly utilized. Is that a useful explanation?

Yes, absolutely. Last question was on Panama. You mentioned it's not -- the shift hasn't gone as well as we planned. I mean, are you -- are we going to see lower margins as that shift happens over the course of this year from where you initially got or how should we look at that?

It's going to be similar margins to our legacy products in the past. We're not going to increase our margins. But what is happening there is identical to the food grade plant. We are employing people and building out a factory where the volume of sales doesn't match the cost of expenses and people at this time. And as the sales increase, the employees will be properly utilized for making stuff and selling it instead of building the factory, learning their jobs and doing and putting things in place. So it's happening at the same -- roughly the same rate. We're expecting that by third quarter, most of the legacy business will be coming out of Panama. There will still be some until the end of the year coming out of Illinois. But again, margins in Panama will creep upwards as we utilize the factory properly and the employees properly. They will creep up to historical margin levels for our legacy products.

[Operator Instructions] And Mr. O'Brien, it appears there are no further questions at this time.

Well, thank you, Jen. Everybody, thanks very much. Sorry, we were delayed for audit and [Audio Gap]

And Mr. O'Brien has disconnected. This will conclude today's conference call. Thank you for attending.