LiqTech International, Inc. (LIQT) Earnings Call Transcript & Summary

All right. Good afternoon, everyone here in Denmark in Ballerup, and good morning to everyone in the United States. Welcome to the January 2020 Investor Day from here in Ballerup, Denmark for LiqTech. My name's Robert Blum. I will be the moderator for today's event. As a reminder, this event is being recorded. It will be available both through the live webcast and by way of replay for the next 30 days. The slide presentation being utilized today is going to be available here through the webcast that I mentioned. And an agenda of today's presentation is available on the company's website. And we'll also have Sune Mathiesen, the company's Chief Executive Officer, review that here momentarily. Before we begin the event, I'm going to read the safe harbor statement. This presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Although the forward-looking statements in this presentation reflect the good faith 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 these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission, including the risk factors that attempt to advise interested parties of the risks that may affect our business, financial condition, results of operation and cash flows. 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. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this presentation. With that said, I'm going to turn the event over to Sune Mathiesen, Chief Executive Officer for LiqTech. Sune?

Thanks, Robert. Thank you. Good afternoon, everyone. Great to see you in Copenhagen. Thank you for making the trip over here. Appreciate it. And also, thank you for everyone joining us on the webcast today. We have a great day in front of us. We're excited, and we look forward to sharing some of the updates on the company with you guys. So here, we have the agenda for today. We will go through the 2019 financial highlights. We issued a press release this morning with some of the highlights, and we'll just go through it a little bit more in detail here. We're going to do an update on the marine scrubber market. As all of you know, we have now come into 2020, and the new 2020 IMO regulations are now in force. And we'll give you an update on how we see the business developing from here. We think it's good news for our technology. We think it's good news for scrubbers. We think it's good news for the environment, but we'll get to that. We'll give you an update on the capacity expansion across the company. We recently expanded our Hobro facilities. We'll have a look at that. And Karsten, our CTO and plant manager right in Copenhagen, will go through our capacity expansion here. We'll give you an update on the new products and markets that we are currently developing. We're developing quite a lot of new products. We're excited about that we're bringing online this year. And we look forward to presenting that to you guys. Also an update in oil and gas. We'll get to it later in the presentation, but we're doing more and more business in oil and gas. We think already in 2009, we started our efforts in oil and gas. We kind of withdrew from that industry in 2014 following a big drop in oil prices. But recently, we came back into that industry. Prices are now good again. We see a lot of investments in oil and gas. And silicon carbide is a very well suited material for oil applications. And we're getting to the end here. Our promise for a sustainable future is the next point. Something we've been working a lot with. Sustainability is increasingly on the agenda. I would say, in the political environment, in the last couple of years, we've seen a big change. There's a lot of support for sustainable businesses and sustainable products. We think that we are in that industry. What we basically do is we minimize the impacts from some of the most polluting industries in the world like shipping, power plants, oil and gas and so forth. And then finally, the 2020 IR calendar. So we look forward to going through all of this with you guys. So if we take the highlights for 2019, we think it was a great year for LiqTech. We reached $32.4 million of revenue, which was up from $12.3 million in 2018, so a 265% increase. Very pleased with that despite of a shortfall in the fourth quarter due to some manufacturing issues that we have now fixed. But overall, we think the year was a great year for LiqTech. Fourth quarter revenues of $6 million due to that manufacturing issue. We already guided to that. It was not a big surprise, in line with our expectations. And we also turned the company profitable. From a loss of $4.4 million -- $4.5 million in 2018, we turned the company profitable, very pleased with that. From now on, focus is on increasing profitability, and we think we'll do that in 2020. Operational-wise, I think we can say we had a commercial breakthrough for our technology in the marine scrubber business. We struggled many, many years. We developed our technology for many, many years. And finally in 2019, we had this commercial breakthrough. Really happy about that. We also completed a number of pilot projects into adjacent industries, predominantly oil and gas, power plants in 2019. That will drive general -- that will drive revenues as we get into 2020 and beyond. We completed the expansion of our Hobro facility. We also installed the first of our new furnaces. We are right next to that furnace. We're very proud of that. We'll go more into details later. We have 3 more coming in this first half of the year. So when we get to July, we will actually have increased our capacity to approximately $160 million to $200 million of revenue. And we successfully completed the acquisition of BS Plastic, our plastic supplier who manufacture tanks and everything for us. We also do outside sales. We're about 20%, I think, about of BS Plastic revenue is internally going to us and about 80% is for other customers. We have a strong balance sheet. We've reported $11.6 million of cash exiting the September quarter, and we recently established a $5 million credit line at very attractive interest rates. It's a normal line of credit with a Danish bank. So all together, we think that 2019 was a great year for us. It was definitely a transformation of our business, and we're now going into 2020 in a much better situation that -- than the company has ever been in. So the revenue growth, we see it here, quite substantial revenue growth. We already guided to about $12 million of revenue in the first quarter this year. Still good. We had that shortfall in the fourth quarter last year and -- due to manufacturing issues. So that's kind of behind us now that we have the new furnace installed. Otherwise, a great, great development. We're also looking to improve gross margins. As you can see, we improved significantly in 2019. We improved throughout the year. We have a goal of being above 40% in 2021. It's a goal. It's a target that we're working against. We see a positive development right now. We have some updates on our marine scrubber system that is coming out in the second quarter this year that will drive further increases in margin. So I think it's a tough goal, but realistic. We're shooting for about 30% or plus 30% in the first half of 2020, which we earlier guided to. And then finally, operating profitability. What a relief. After years of investments, we have now managed to turn the company profitable. And all thanks to you guys. You are the reason why we made it to this point. You showed a lot of interest and faith in us over the years. We raised a lot of capital. And all thanks to that, we are now in a position where we turned the company profitable. And in the years to come, we should drive further profitability and see the company reach new levels. So an update on the marine scrubber market. Well, what we know now is that more than 90 ports around the world have now banned open-loop discharge, which is good news for the environment and good news for LiqTech, obviously. Bahrain came out yesterday, they were the last one to pay an open-loop discharge. There was a press release yesterday. We have seen Malaysia in the past couple of months ban open-loop discharge. And this is a map showing the areas where open-loop discharge is now banned. Nobody knows what will happen. We see more and more countries banning open-loop discharge. There is an anticipation for a worldwide ban. Let's see when and if it happens. We think the drivers of that, there's a big political focus on reducing pollution. And we think this makes a lot of sense. So let's go through the scrubber opportunity. Well, up until this point in -- or let's say up until 2019, we saw about 10% of all scrubbers installed were closed loop, about 90% were open loop. There is a change. And when we talk to our customers, they predict a higher uptake in closed-loop in 2020. The numbers we hear are somewhere between 25% up to 50% of the orders this year are expected to be closed loop, which is obviously a big, big increase from the 10%. Again, this is information we have from our customers. We think it looks like it's that direction it's heading. Whether it's 25% or 50%, nobody knows, but it's definitely growing. The key drivers when we speak to our customers for this change is the 90 ports around the world that have now banned the open-loop discharge. That is really a big driver. And the customers, or the ship owners, are now installing closed-loop scrubbers because they think, "Oh, now it's more than 90 ports. Maybe in 6 months, it's 120. Maybe it's a worldwide ban. Who knows?" But that is one of -- those are one of the drivers. And also, there's an end user desire for the most environmentally friendly solutions. So big, big corporations, worldwide corporations, they are now approaching the ship owners and saying, "Well, we would like to use your services, but you have to install the most environmentally friendly scrubbers," which is a closed-loop scrubber. So that's also driving that change in the market. There are about 4,000 scrubbers installed or on order by the end of 2019. About 10% of those were -- are closed loop. 90% are open loop. So it also means, if we do that calculation, our addressable market up until this point, with all the scrubbers already ordered, has been around $160 million. We think that we have a healthy market share. We think it's around 50% of the market. Looking into 2020 through 2025, we think -- or the industry thinks that there will be an additional 4,000 to 8,000 scrubbers installed on top of the 4,000 that we already have. We think that closed-loop installations will be 25% to 50% or 1,000 to 4,000 vessels. So if you calculate that opportunity for LiqTech, it means $400 million up to a potential of $1.6 billion of business, or revenue opportunity, we should say. So obviously a big increase. What could significantly change, and that's in the bottom, if we see a global open-loop discharge ban, it means that the 4,000 already installed scrubbers will all have to be closed loop. And it means 100% of the 4,000 to 8,000 expected installations for '25 -- or 2020 through '25 will also have to be closed loop. So if that happens, it means an addressable market for us of $3 billion to $5 billion. So some big fluctuations, right? Minimum expectation, around $400 million addressable market up to a potential up to about $5 billion. And what will happen? Impossible to know. But what we do know is that we see that trend towards more closed-loop scrubbers. And we do see a political environment where we think it's likely that more and more countries will decide to ban open-loop and maybe even there will be a worldwide open-loop discharge ban. So that's an update on the scrubber market. I forgot to say this in the beginning, there will be a Q&A session at the end. So we'll go through all presentations, mine and others, and we'll have a Q&A session at the end. Just an update on the Hobro facility, we have a small video here showing the updates that we made to that facility. We more than doubled our area -- or office space and manufacturing space in Hobro. And it looks like this. So these are -- this is a fresh video from yesterday, I think, actually. This is the old building we had actually that we see on the video now. We refurbished it. This is the new building that we put in. This is the test area where we test all the marine scrubber systems. And you see that we have 4 systems on testing right now. These are all finished systems that we see now that are ready to go out in the first quarter. And of course, we're still assembling more systems for the first quarter. So quite a lot going on in that facility. Now we are outside the building. And as you can see, we're right next to a highway. That's the highway going from North to South in Denmark and really the place where you want to be situated for logistic reasons. So we have an ideal location. We now expanded to the size that we need for 2020 at least. Let's see what happens in the future, but we think that we're in good shape. And that takes us into the capacity expansion right here in Ballerup, Copenhagen, which is a little bit more complicated. We're putting in these new furnaces that you see right here. We are upgrading a lot of our equipment. And I will hand over now to Karsten Hansen, who is our CTO and plant manager here, who will go through that with you.

Hello, everybody. So Ballerup is about manufacturing ramp-up of the production of membranes for Hobro side. Silicon carbide, this is what we do here in Ballerup site. And as Sune just mentioned, to meet the market demands, we need to expand our production capacity. And this is why we are sitting here today, us showing you this very nice new furnace that would help us in our ramp-up plans. For us to ramp up and to implement new equipment and getting also a higher yield and more uniform quality from batch to batch, we implement these new equipments, including the new furnace and other infrastructure and equipments that you will see later on the factory tour. As Sune also mentioned, we have a cost-optimizing schedule. And for us to implement these new equipments, we also strongly believe that we will reach higher margins. So the ramp up, basically, you see in this graph. So in last year, late last year, we installed, as Sune mentioned, installed and included this new furnace in the ramp up schedule. Meanwhile, we were actually decommissioned in 2 of the old furnaces. And the next new #2 furnace will be installed in February. For us to ramp up so that we can follow-up with infrastructure and manpower as well, slowly, we believe that our existing furnaces, old furnace #3, will be commissioned during April month. Together with another ramp up furnace, #3, will being installed in April. And the last of the 4 new furnaces will be installed in June later this year. So that's us ramping up quite dramatically during first half of this year, 2020. And potential, we have an option for including new #5 and #6 furnace as well. So in terms of 2020 ramp up revenue, we are actually looking into, if you take into account decommissioning and ramp up furnaces, that during 2020, we will be able to reach USD 160 million to USD 200 million in revenue capacity. So ramping up from last slide, meaning that last quarter last year, was around USD 20 million to USD 25 million in revenue capacity. So first quarter this year, taking into account ramping up and decommissioning of old furnaces, we are able to reach USD 60 million to USD 75 million in revenue capacity. Second quarter and third quarter 2020, we will end up having the capacity revenue of around $200 million. Now we are sitting in the area nearby furnace, new furnace #1. And actually, some of you is actually also sitting on the spot where #2 is planned to be positioned, actually in that table over there. You see on that slide. So that's 1, 2, 3 and 4. So in this nearby area, we are planning to position furnace #1, 2, 3 and 4. So for ramping up, that's not only us investing in the furnaces because the furnaces also need a lot of infrastructure. So we have been investing in local power, power central as well, ramping up our amps for powering up these new furnaces. So with the new power plant, we're actually able to supply the furnaces and the ramp-up equipment with more than 3,600 amps. Cooling plant. Because when we heat up these special furnaces, we also need to have cooling so it's not overheating. So this cooling plant is also a larger investment in this ramp up. And you will actually see it just outside the plant. So the plant is able to supply more than 5,400 kilowatts for cooling these 4 new furnaces. And then we have other auxiliaries as in other installations. We need to have argon for the process. We need to have pressurized air and so forth. These are the other things that you need to take into account when you do a ramp up like this. During ramp up, you also need to take into account the processes before and after the furnaces. So we are not only ramping up on equipment. We also need to ramp up on how we do things and the manpower as well. So automation. So we are in -- this year, we're in a transition process state as well. So we have to go from manual processes, what you will see today on the factory tour, manual processes to more automated processes, meaning conveyor belts, robot technology and so forth. So I'll just show you a couple of examples of how we do things in 2019. And then later, we will show our ideas or tell ideas about how we plan to be able to ramp up. So this is one of our guys testing, manually testing our membranes. So clean water coming out in one of our adjusted equipment for final inspecting a membrane. We have cutting. Membranes need to be cut to the correct length. Manually, we put 12 membranes and cutting. You will see that afterwards on the tour as well. Extruding manually. We put our recipe in an extruder. And then manually, we cut and further process the membranes. So automating. Automation. This will include a robot technology. We have resources internally. But of course, we will also add external consultancies on that as well. So for us to upgrade the traditional ramp up of manufacturing, for ramping up the furnace process, we are able -- we have to be able to ramp up the existing processes as well. And we have many, many good options for doing that. Also for ramping up the plant here to make it a lean manufacturing plant using internal and external resources. The next movie here is a membrane being coated. You see definitely that it takes one guy to put the membrane in the machine, push a button, and then it will be coated. So this is kind of semiautomatic, but we want it to be fully automatic. So this will incorporate robot technology to take it to the next level to be able to supply membranes for our ramp-up furnaces. So products and developments. Also, we need to take into account, of course, the future. Silicon carbide, as you see it also on your tables there, you got a little gift. So basically, this is a support with a membrane inside. And then we zoom in the channel, you will see a membrane layer inside the channel which is fully covering the channel. If you zoom in even more on that, you will be able to see the large grains, which is to support the carrier. And you would see layers on top of that, that's the silicon carbide membrane technology. And this is where we want to develop even further to be able to target new markets and new opportunities. So current offering will be microfiltration, ultrafiltration. And of course, we also have a market on diesel particulate filters. In Q2 2020, we'll be offering a disc and flat sheets as well using our ramp-up equipments as coating technologies, and of course the new furnaces, for being able to supply the market with these new products. In Q3, we have development for entering the market with nanofiltration as well. So we will have ultrafiltration and microfiltration and nanofiltration as well. And going even further down the road in 2021, we are now starting to develop products outside the silicon carbide technology. But looking into oxide ceramics or hybrids which includes oxides together with silicon carbide for being able to target even more markets and applications, such as water utilities, drinking water market, food and beverage, pharmaceuticals and chemicals. So basically, to sum up for the plant here in Ballerup near Copenhagen, it's about ramping up not only equipment but also manpower and being able to supply still a production -- a daily production. Even though we are ramping up, we still have to supply to customers, and we are able to do that. And to develop new products for future application and future markets. Yes. And now I'll hand over to Ken -- or Sune again, yes?

Thanks, Karsten. Thank you, Karsten, for that presentation. As Karsten says, up until this point, we've been manufacturing membranes basically for our own needs, so to put inside our own systems. With all of these new developments, it will allow us to sell membranes to other system integrators as well and enter into new industries. So exciting times for this plant in Copenhagen. Moving on. As I said in my introduction, we are bringing a number of new products online this year. A lot of the products are for marine. We now have a marine presence with the scrubber, wastewater systems. And now that we have that presence, we want to bring online some new products as well. First product that we're bringing online is an updated version of our Mark 6 standardized system that we're selling currently. The updated version will be updated in terms of more efficiency and lower cost, so higher margins. That is ongoing. We expect it to be ready in the second quarter this year, and we should start deliveries from the third quarter. We also are developing a freshwater maker. So basically an RO system to do desalinization and make drinking water onboard ships from seawater. It's something that's already on the market today. It's a growing industry. What they used to do in the old days was they used to use the excess heat from the engines to evaporate the salt from the water and drink -- and make it into drinking water. Now with the more -- new marine engines, they are more and more efficient. So we see more and more RO systems onboard ships. So we're developing a series of products for that application. It should also be online this year. We're developing a bilge water treatment system. And the reason why we do that, so it's a fairly big industry, bilge water treatment. Bilge water is what is in the bottom of the ship. So it's basically, everything is overboard water. It's leaking pipes. It's all the water that you will find onboard a ship that leaks from a pipe or comes overboard or whatever it is. Why we are developing that is tightening legislation. We think that there will be new regulations for oil in water, on bilge water you discharge. Typically today, you use a centrifuge, a high-speed centrifuge. So the same technology that we're competing against on the scrubber water systems. Why we want to enter into that market? Yes, it's the tightening legislation. So if you have a lower amount of oil in water that is now accepted, you're no longer able to use the centrifuges. You need something else. NOx reduction, we spoke about it in the future. We think NOx reduction is a big issue in the shipping industry. We think it will be mandated at some point. You have environmental protection zones around the world already now where it's already mandated. We think we'll see a global mandate in the coming years. It's basically a big SCR system, so a system like you know it from trucks and buses, passenger cars. It contains air flow injection, it contains a catalyst system. So well known technology, but scaled to a much larger scale now. And then there's carbon black emissions. Carbon black is something that has been discussed a lot now in marine. It's the business cost that it should be mandated, and we think it will be in the near future. Carbon black reduction is basically DPF, so diesel particulate filters, the product we've been manufacturing for 20 years. So it could actually be that we see a new market for our DPF products in the marine industry. And then finally, we're developing a pool system. As many of you remember, we've been in the pool market with our ceramic membranes for quite a while. All the arguments we have in swimming pools with our technology, they really apply to marine. So we are less footprint, we use less water, we're guaranteed barrier of bacteria and pathogens. So a lot of these arguments are really something you need onboard a cruise ship. We're developing a new version, a new and even more compact version of that system now that we plan on selling for cruise ships and luxury yachts. Really excited about that. We think there's a good -- it's a niche market, but we think there's a good potential for that. We're also developing products outside of marine, not as many, but a few. We're developing our OEM membrane systems. As Karsten just explained, we are now developing a nanofiltration membrane. We're developing a hybrid product of silicon carbide and oxides. All of this will make us a much more attractive solution to other system integrators, for them to buy membranes and integrate in their systems. I personally think it's a huge opportunity for the company. Ceramic membrane is an $8 billion market. So we are really just scratching the surface here. We'll be largely competing against alumina-based members and other ceramics, and which is why we're developing those hybrid products to compete against that. We think with all the improvement we are making in this factory, we're ramping up our manufacturing, we have brand-new furnaces, we'll have more automation. We will also be a very attractive player in that industry. And then finally, we are developing a filter press. We actually sell a lot of filter presses together with our marine scrubber system. And we came up with the idea, why not make our own filter press? It'll be ready in the next 3 or 4 months. We plan on using it for our own scrubber filtration products, but we also plan on selling it on a stand-alone basis. It's about a $3 billion industry worldwide right now. Lots of suppliers, so it's a highly competitive market. But we think that we are coming up with a product that is differentiated a little bit from what is in the market today. If we look into how will our company look like in the company -- in the coming years. Well from 2015 and onwards, we think at least until 2025, it'll be a lot about marine and marine scrubbers. So we have marine scrubbers, we have NOx reduction, carbon black reduction, drinking water onboard ships, we have a bilge water treatment and pool water treatment, that is the product package that we are now bringing to the marine industry. We think that marine -- it is a big part of what we do, and we think it will continue to be a big part of what we do for the next coming years. One industry where we are making a lot of progress, and Kenneth will talk about that in a short while, is oil and gas. We originally entered into the oil and gas industry in 2009, as many of you probably remember. We were successful at that point and getting a lot -- some large-scale pilots with a number of the big oil players in the market, very successful pilots. The nature of the silicon carbide makes it a very attractive material to use in oil-water separation, where we'll go more into detail later. We pulled out of the industry in 2014 following a big drop in oil prices. We spent the last 12, 18 months repositioning ourselves in the industry, and we think we're actually on the edge of a commercial breakthrough in oil and gas now as well. Power plants, it's been part of what we do for a couple of years now. We've been successful in getting a number of installations in Denmark now. We are more and more specified into new projects in 2020 and 2021. We recently completed a rather large project in Finland successfully as well. So it's an industry where we think we make a lot of sense as well. What we do is condensate water reuse, scrubbers, make up water. So actually quite similar to the applications that we have with marine scrubbers. Drinking water, well, an industry where we think we'll make progress in the coming years. We're currently not there. You see the arrow is a bit further out, in 2022. We have a good offering for heavy metal removal pre-RO systems, RO backwash reclamation. We did a few installations up until this point also successfully. We are now trying to establish ourselves in that industry. We think that silicon carbide membranes has a lot to offer in that industry. And we're starting right now our efforts to position ourselves. And we think from '22, '23, we'll make progress in that industry. Water reuse in general, wastewater reuse, water reclamation, is becoming a big issue around the world. We know that our technology is also well suited for water reclamation. And it's something that we think will be a larger part of what we do in the future. Food and beverage, pharmaceuticals, processed water installations. It's what's Karsten told about a little bit earlier. With a tighter membrane, it will really allow us to enter into those industries. So all together, these are the industries where we see LiqTech being successful in the next coming years. Some of the industries like marine, we are already successful. Oil and gas and power plants, we already made the first progress, and we are now on the edge of commercializing those opportunities. And the other opportunities, we think, is a little bit further out, but we're already starting to look into it. So that's the future LiqTech and gives you an idea about the direction we're heading in. As I mentioned before, in 2019, we were successful in turning the company profitable, really working on a $160 million addressable market. That's a small market. If you look at all of these markets, they are all multibillion-dollar markets. So we are now expanding into much bigger markets, using the experience that we now have from the marine scrubber market. So having said that, I will turn it over to Kenneth Johansen, our VP, Sales, who will go through our oil and gas opportunities.

Okay. Thank you, Sune, for the introduction, leading to my part of the presentation, oil and gas. Just before I start, a quick introduction to myself. I've been with LiqTech since 2007 and leading the sales activities today for our membrane products and water treatment system sales. And we now appreciate the fact that we have found a nice home for our technology in the marine industry. But obviously, we have much bigger ambitions, as Sune mentioned, and we believe there are good reasons to consider the oil and gas industry as the next big home for our technology. So doing my presentation now, I will give you an introduction to the specific segments that we are targeting within oil and gas. I will explain you why we believe the silicon carbide membrane technology is a superior technology for these specific markets. I'll also give you an insight to the experience and exposure that we have had in oil and gas since 2009. And at the end, I'll make a quick summary and look ahead, what's in the future for LiqTech. Since we started our work in the oil and gas industry back in 2009, our primary attention has been towards produced water treatment. So what is produced water? Produced water is a waste stream composed of formation water and injection water. So when you produce oil and gas, you have a huge amount of water being injected into the reservoirs to transfer the oil to the surface. At the surface, you need to, again, separate oil and water. You can do that with various technologies. But in fact, you have to deal with up to 10x the amount of water compared to the oil that you produce. So this is a lot of water, and you have various scenarios or treatment objectives to handle this water. We have identified at least these purposes or applications. So either you can discharge this produced water back into the environment, open discharge to sea, to onshore. You can reinject the produced water back into the reservoir or, in a few cases, we have also seen that people want to reuse this water for irrigation purpose or further desalination of the produced water. As I said, this is a big part of the oil production today. And actually, produced water is the biggest waste stream in the petroleum industry. And historically, the focus and the interest have been towards removing free oil and particles. But due to these new tightening environmental legislation, new unconventional methods to produce oil and gas, there is a drive towards more efficient filtration technologies to remove more of the oil, more of the particles and up to 95 of all these pollutants found in produced water. This is a graph that shows the historical treatment processes for produced water consisting of primary treatment. That's core filtration, separators, hydrocyclones. Then you will have secondary treatment, typically by filtration units. But what we are offering is the third treatment -- tertiary treatment where we see the need for our membrane technology. So in total, the data that we have recorded for last year, 2019, the produced water treatment equipment market has a value of approximately USD 3.7 billion. We believe -- or the market believes that there will be a steady growth over the next decade. And within these produced water treatment segments, the tertiary treatment is identified to be the most lucrative treatment step going into the next decade. So that's where we want to be. Another application that we have been following is the fracking flowback water. This figure pretty much shows the big potential for our water treatment technology in this market. Fracking today is that you typically truck in freshwater, you mix it with chemicals, you inject this mixture, you do the fracking, releases the gas. This water chemical mixture then resurface. You need to either treat the water, reusing it or you need to truck out the water. What we are able to do with our technology and other filtration technologies is to actually reuse this wastewater on the site. And this is a huge potential because approximately 49% of the total spend in this operation is related to transfer of the water. And from this year and 10 years forward, it's expected that the total spend in water management for fracking flowback is approximately USD 7 billion. So half of that is related to handling the water. Here, we have listed the applications that we're seeing produced water. So first, it's conventional oil and gas production, produced water treatment. It's unconventional oil and gas produced water treatment from fracking, from SAGD, Canadian oil sands, steam assisted gravity drainage process, where you need a lot of freshwater. We know the oil industry is looking towards enhanced oil recovery techniques, where some of these techniques, they include adding polymers to the water. Addition of polymers to the produced water introduces new challenges for the conventional water treatment systems where we see the benefit of the silicon carbide membrane to actually release these challenges. We also know there are huge amounts of water to be treated in the refinery wastewater segment. But as of today, we have little insight to this. But obviously, this is something that we're going to look into as well. Common for the previous slides, objective treatment is the tertiary treatment goals. So this lists why we do tertiary treatment for discharge. The environmental legislation is increasing. There is a greater demand to remove more of the oil, free oil, dispersed oil, heavy metals, other pollutants. So this is a clear case for most of the operators out there today from the authorities, but also internally from the company, the corporate policies. For reinjection of produced water, the benefits you achieve when you reduce -- or remove more of the solids, smaller particles and more of the oil is that you maintain an open permeability in your oil reservoirs. This means that you are able to increase production, that you can extend the well lifetime, you reduce your energy costs, you protect your high CapEx equipment, you're able to recover more oil and you even achieve bacteria removal, which will reduce formation of H2S gas, which is a very corrosive gas. Produced water reuse for other purposes. There, we see the need to remove more of the oil in order to facilitate further desalination of the produced water because freshwater injection is also a part of the enhanced oil recovery strategies. And obviously, you want to have freshwater or low salinity water for your steam purpose applications. Okay. So the conventional technologies today, they are limited in their capabilities to achieve these objectives. And the main reasons why they are limited is the fact that when you want to remove more of the oil, you're looking at smaller droplet sizes. When you are adding polymers or other chemicals to your production water, you are creating strong oil emulsions, which are, again, difficult to remove by gravity-based systems or these flotation systems. So here, you actually see very clearly the limitations in droplet size of these conventional filtration technologies. The reason why we want to introduce the silicon carbide membrane to these tertiary treatment objectives is the fact that we are able to do mechanical filtration of the produced water, which means that 100% that passes through the membrane will be treated. So this mechanical barrier will be the guarantee to achieve the requested filtration objectives. Silicon carbides by material is a very robust material that can handle extreme conditions in terms of ph, in terms of temperature. It's a very abrasion-resistant material. The oil and gas industry, they require robust systems. We believe this is the most robust membrane material on the market. Besides being very robust, silicon carbide membranes also benefit from the fact that they have the highest permeability, the highest throughput of any ceramic membrane material. So combining a very robust membrane with a very high capacity, we believe, is the ideal answer to many of these applications. What we also know is one of the reasons why silicon carbide is showing a high capacity of transporting water is the material property of being very hydrophilic. It means the material love to transport water. Being hydrophilic also means that it's repelling oil droplets. So what we have determined, together with oil companies in Europe, is the fact that since the oil is being repelled from the membrane surface, we only see a very thin layer of oil building up on the membrane surface. This, we call, is a reduced fouling tendency, which, again, means that we are able to operate at a higher capacity, longer operating intervals between need for cleaning the membrane. So very important features of the silicon carbide ceramic membrane for oil and water separation purposes. So to address the challenges that I mentioned before, we have actually now shown that we are able to deal with tight oil emulsions. We have actually deal with polymer introduced -- produced water applications. We have shown that we are able to handle quite large fluctuations in the important feed characteristics of suspended solids. Oil and water concentration in the feedwater, we are able to deal with those fluctuations, still delivering a high quality of the treated water. That's a bit of a game changer compared to the conventional technologies. And we have seen that for some applications, depending on the requested flow rate, we're actually able to do both tertiary and secondary treatment in one treatment step. So when we have comparing -- been comparing our membrane technology with our competitors at the alumina oxide, titanium oxide membranes in the field, we have actually confirmed for these, at least 3 occasions, produced water projects in China, in the North Sea and onshore Europe, that we have this capability of handling higher capacities with reduced need to clean the membranes. Together with the high throughput, we are able to make more compact systems, less weight, which is absolutely premium when you're working in an offshore environment where space and weight are clear restrictions. Over the years, we have also developed quite a lot of process know-how in how to operate a ceramic membrane in an oil and gas environment, which obviously benefits our customers today. I'll now move to the next part of my presentation, where I will give you some insight to the actual field experience that we have developed and our exposure to the oil and gas industry since 2009. I'll start with one of the first big projects that we did. This is a project in the North Sea. We were invited to participate by a European oil company because they had a challenge to meet the overboard discharge values of oil and water concentrations. One of the reasons why they had this challenge was production chemicals that caused these very tight oil emulsions that caused the conventional equipment to fail for a greater part of the production time. So the consortium of oil companies, they actually invited and trialed 16 different technologies -- filtration technologies, amongst them 3 membrane providers, our silicon carbide membrane, alumina oxide membrane and a polymeric membrane. And out of these tests at the end, the consortium decided for the LiqTech silicon carbide membrane to be installed in the full-scale implementation. So this is what's part of this platform today. We are able to treat up to 36 cubic meter per hour condensate water. We saw upstream values of oil and water relatively high. We reduced it to well below the OSPAR limitations for discharge of produced water. This is what's installed graphically shown and the complete packages delivered by a Danish customer to LiqTech called Semco Maritime. As I said, this work was carried out in 2009, and the results were really remarkable for us and for the oil and gas industry. And we actually anticipated that we'll be more busy selling our membrane products into oil and gas. But we learned, it's not going to happen overnight. It's a conservative industry. And at that time, we didn't see the same drive by the authorities, the environmental legislation and also the awareness of the membrane capability. So that's changed luckily over the years. Now the price seems to be right again. And the environment -- the environmental legislation is in place to drive a membrane technology, like ours, back into oil and gas. Another example of a project that we did, a field test also for produced water treatment discharge purpose offshore now in Asia. It was a project where we saw relatively low concentration of solids. We saw a nice smooth operation of the membrane system. There was a relatively long operating interval between the need to do chemical cleaning of the system. Some typical values. Nice flux rates, 300 liters per square meter per hour membrane and a recovery of 90% to 95% transmembrane pressure, which is the driving force of less than 0.4 bar, very smooth operating conditions for the system. We have more examples this time in China, still offshore, discharge, some same representative values and innate conditions, oil and water, typically 20 to 50, and we reduced this to comfortably below 5 PPM oil and water and less than 1 milligram per liter total suspended solids. Nice recovery, high flux rates and even lower operating pressure. This is an example of produced water treatment for reinjection, onshore Europe. This is one of the first projects that we did. This is actually produced water taking straight from the 3 phase separator with relatively high concentrations of oil, solids. The membrane technology show that we are able to deal with these conditions as well, still delivering very high quality of the treated water permeate less than 5 PPM oil concentration. This is the most recent project that we did, completed end of last year in the Middle East for a major oil company in the region. They were very clear on the success criteria for treating this water in order to be able to reinject it because they are aware about their limitations of the reservoir, the permeability, what quality that they need. So they had these clear criteria. And again, we comfortably met those criteria. And we have good reasons to believe that there will be some short-term followup on large equipment supply to this customer. Another project for reinjection onshore. The objective in this case was to remove particles greater than 0.5 micron. So the other graph shows the initial particle distribution. And below, you see that we are well within the 0.5 micron mark, so for reinjection. One example of produced water treatment for reuse, pretreatment for reverse osmosis to desalinate the produced water, in this case, in China, typical feed compositions, again, 10 to 40 milligram per liter oil and water and permeates less than 5 PPM. We have done work also in the unconventional oil and gas production market. We have done some field work doing flowback in fracking in the U.S. We have seen that it's actually possible to get to the quality that, these operators, they require to reuse the flow back on site. It's a question of price, of course. And it's a question of the local pressure to avoid trucking of the water. And again, we believe the solution is available. And together with our filtration technologies, we are able to shorten the circuit, reuse the water for reinjection and continue the fracking. Another important case for unconventional oil production is the polymer flooded enhanced oil recovery case that we have completed. It shows that we are able to still remove the requested amount of oil, solids, while we pass the polymers in the treated water in order for the operator to reuse the polymers for reinjecting this mixture instead of being able -- or instead of being -- having the need to dispose or truck away this wastewater stream. We have also been in contact with the Canadian oil sands operators to do tailings treatment on the tailing points. And we have done a field test showing that we are able to deal with this water as well, relatively high loads of suspended solids satisfying particle removal prior to steam generation. And we didn't see damage on the membrane layer, even under these quite challenging, very aggressive conditions. So this is a summary of the oil and gas industry references that we have as of today. We have delivered a complete system built in our location in Nordjylland. For enhanced oil recovery in South America, we separate oil and water prior to a steam generation plant. So this is a turnkey supply that we did. We have also sold membranes to an engineering company that delivered a system for produced water reinjection in Europe. We have delivered the membranes to the offshore plant that you saw for the 36 cubic meter per hour project. We have delivered membranes for another produced water discharge application in the North Sea, a smaller system. Comparing the company today, LiqTech, to 2009, being now a solutions provider, we have the in-house capabilities to make turnkey solutions. This is what we have supplied to our mining customer in Sweden. This is by far the biggest installation that we have delivered today. We are handling 2x 500 cubic meter per hour water. This is, again, a turnkey solution, where we have pretty much done everything related to the water treatment part. It was commissioned 2016 at a total value of approximately USD 7 million. One of the reasons why I want to highlight this project is the fact that the end user, in this case, the mining company, they rely on the water treatment to fulfill the environmental legislation in order for them to maintain their license to operate their mining facility. So for them, it's placing their operation, their life into the hands of the membrane of the water treatment system. So they identified the LiqTech system being the most robust on the market at that time. And we believe, for some of the same arguments, the oil and gas industry will have a preference for the most robust solution that is found on the market. So a short summary of our activities in oil and gas. As we have told a couple of times, we ended in 2009 and looking in hindsight, that was probably a bit too early for the oil and gas industry to adopt for the reasons told, lack of the tight environmental legislation that we have today; lack of awareness, I believe, of what are the real benefits of protecting the reservoirs. So this has changed now in 2020. We left in 2014, the oil price. And we found the home in the marine industry. We have been quite successful. We want to continue that. But we are now, as Sune said, we are increasing our activities in the oil and gas again. Yes. What else? So yes, I just want to finalize this presentation saying that -- or highlighting LiqTech is a unique company with the capabilities to produce a unique membrane technology. We are experts in the actual membrane technology over the years. Now we have transformed the company to provide the systems, the solutions. So we have everything in house, and this is key to our marine customers, it's key to our oil and gas customers that they want to deal with the experts. They want to deal with the companies who knows their technology, the equipment in details. And you don't see that many other companies out there in the market today that offers exactly this combination. So I think that's very unique to LiqTech. I think it's very unique that we have had this past experience that we'll now be utilizing going forward in an environment with this awareness and environmental focus. So with that said, I think it looks very promising going forward in oil and gas for LiqTech. So Sune?

Thank you, Kenneth, for that nice presentation. I've realized we spent a lot of time on oil and gas today. And honestly speaking, I doubted whether or not to use that time today to talk about oil and gas. Let me be crystal clear why we are talking about oil and gas today. It's not because the marine scrubber market is not developing well for us, because it is. Why we're talking about it today is because, now, we have laid the groundworks for commencing of our technology in oil and gas as well. We've been keeping quiet for the last 12 to 18 months. We've been trying to reenter into the industry. We have not talked a lot about it because we didn't know at that point whether or not we would be successful. Now we think that we are on the edge of a commercial breakthrough in oil and gas as well. And we think it was prudent for us to talk about it today. I'm super excited about it. As Kenneth told you, we now have a totally different political environment than we did 10 years ago when we were first in the industry. Now there's a willingness to put new mandates in place and to actually enforce them. And we now see it, especially in the Middle East, that they are putting new legislation in place that they have to reuse the water instead of trucking it away, storing it in disposal wells. That makes very little sense. So super excited about these new developments and progress that we're making in the industry. And I don't know my screen down here actually went out, so I don't know if there's any way to fix that or I just look here. Okay. So LiqTech brand. We've been working a lot on our identity. Up until this point, we've been trying to commercialize our business. In 2019, we have been successful in doing that. And one of the reasons why we have been successful in doing that is the increased focus on sustainability in the world. It has also caused us to take a hard look on ourselves, on our industry and kind of try to figure out what it is we do. And after a lot of work -- because this is not something you do overnight, but after a lot of work, we came up with a brand promise, and I'm going to read it to you because it means a lot to us. So as a pioneer and the leader on development, manufacturing and supply of revolutionary silicon carbide technology for purification of liquids and gases, we, at LiqTech, have committed ourselves to help solving the environmental challenges caused by the constantly improving global lifestyle. And what it basically means is that we have the key to solve some of these things. We like to go on cruises. We like to go on holidays. We manufacture DPF filters that make it safer for us to travel by bus and car. We manufacture diesel particular -- or sorry, ceramic membranes that helps ease the impact on the environment from going on a cruise, for example. And that's important to us. We are here to clean water for oil pathogens and heavy metals and to take an active role in reducing world pollution. We care about the future and, at the same time, about growth. We see it as our mission to enable companies to grow stronger, while meeting the environmental demands of tomorrow. That means the world to us. That is our promise to the world. We think we have that technology to help address some of these environmental issues. We also came up with a new brand mark, the Q and not by incident. It actually means a lot to us. We have the Q that forms a circle. It symbolizes performance dynamics and sustainability of reusing something. And we have the line in the Q that shows the direction, and it symbolizes our commitment to being pioneers in purification of liquids and gases. So a path into the future. We're excited about this. It means a lot to us. It means a lot to our employees being part of creating a better tomorrow. We have also made a new video that we'll now show to you that explains a little bit about what is LiqTech about. [Presentation] And it takes us into the last slide of the day, the sustainability goals. You probably already know all the 17 UN sustainability goals. We support number 6, 13 and 14. We think it ties very well into what we do. We help clean the world's oceans with our marine scrubber wastewater systems. And future products that we bring online in the marine industry will help reducing global heating with our DPF filters that we've been manufacturing for many years just with the work that we do in power plants and other industries and oil and gas. We also support clean water. Some of the industries we're looking into for the future. Proud to be part of this. It basically sums up what we do. We are not here to save the world, but we're here to minimize the impacts from the lifestyle that we have. And also takes us into rounding off for today with the IR calendar for 2020, quite a lot of things going on. We have the Investor Day right now in January. In March, we have a number of -- or we have 2 conferences. We have the Stephens conference in San Francisco. We have Roth Conference -- or Roth Capital Partners in Newport Beach. And we have our year-end financial results conference call. Kind of took the excitement out of that by preannouncing the numbers today, but I'm sure we have some other exciting updates to share. In May, we have Craig-Hallum conference in Minneapolis. We have our first quarter results. And we have to B. Riley conference in Los Angeles. July, we'll have another Investor Day in New York this time. Quite a lot easier for our U.S. friends to join. And in August, we'll have our second quarter financial results. September, we have a Lake Street conference in New York. And in November, we'll have our third quarter financial results; another Craig-Hallum conference in New York; and the Stephens conference in Nashville. So we look forward to meeting a lot of our investors again in 2020. Takes us into the Q&A session. And yes, fire away.

All right. I'm going to pass the microphone around and make sure you're speaking for the webcast.

You want me to state my name? Or is that necessary?

Yes. Go ahead and state your name.

It's Rob McCarthy with Stephens. Sune, I guess, the first question that's for you and probably for your plant manager is just could you help us think about the deployment schedule, the furnaces and the related CapEx association with it and the lessons learned with the ramp that we had. And what's the risk that we could see some delays here? And how do you ring-fence the deployment and the risk, so that we just get a little more comfort with it? And then I just have one more.

Yes. So in terms of the ramp-up, we now have the first furnace installed here. We'll have a second furnace, which is going to ship in the next couple of weeks from the U.S., will be on site in February. We have the third furnace that will be on site in April and the fourth one on site in June. Manufacturing of the furnaces has been going quite well. We see very little risk that we should face any delays to that schedule. We went -- Karsten went through the ramp-up in manufacturing capacity. So in the fourth quarter, it was $20 million to $25 million on a yearly basis capacity on the 2 old furnaces that we have in the next room here. In the first quarter, now we have this online, takes our capacity much higher. And when we get to June, we'll get to that $160 million to $200 million total capacity on a yearly basis. As you will notice, you that are here today, unfortunately, not on the webcast, you will see that this new furnace is significantly bigger than the old furnaces that we have in the other room. In fact, the output is around 4x compared to the old furnaces. So each of the new furnaces has a revenue capacity of $40 million to $50 million if we use the membranes of our own systems. So it's kind of a max capacity. So yes, that -- that's where we are, and we see limited risk that we should be delayed on the schedule from now on.

And my second question is around the marine scrubber market. As the market develops and, obviously, I think you have an expectation of bigger uptick in the use of closed loop, but maybe you could just speak as to how you think it's going to develop for hybrid, the fact that you could partner with a traditional scrubber in open loop and have a closed loop. And then part and parcel of that is, given you've had the emergence of different players in the market at the scrubber side, the market has changed pretty radically, could you talk about maybe the competitive threat of captive players coming out of Asia, coming up with competitive product?

Yes. So first of all, hybrid closed-loop systems is basically the same for us. So a hybrid system contains a water treatment system as well. And when we talk about closed loop, it's in reality hybrid. Most of the scrubbers are hybrid today, but it means closed loop for us. So hybrid scrubbers, just for the ones not so familiar with the scrubber processes, a hybrid can run both open loop when you are in waters where you're allowed to do that, and it can run closed loop in waters where you should do that or where it's mandated. We see a lot of hybrids. And pure closed-loop solutions, we don't see very much. It's more or less all hybrids, but the same development. In terms of more competition, I think we've already seen smaller players try to enter into this market. It's a lucrative market. It's a growing industry. And of course, you see more and more competition. In all honesty, we are on the sixth generation of our system. And the first systems we made were not very good. And fortunately enough, we see the same thing with the new players that are trying to enter into new -- into this industry. Their first systems are not very good. And it actually means, even though we lost a few orders here and there, the customers have come back to LiqTech. So we think that we're well positioned here. We've been doing this for a long time. We made, if not all, then most of the mistakes, and we learned a lot in the process, which really positions ourselves very, very good. We've also been able to reduce manufacturing cost over the years. It means that we are very competitive also, if somebody new wanted to enter into the industry. So much to our surprise, actually, we have not seen our market share come down. If anything, we have seen it come up in the last couple of quarters. So obviously, very pleased with that. But we are constantly keeping an eye on competition and making sure that we try to stay ahead of that.

Sune, Rob Brown with Lake Street. With the IMO 2020 now in place and some of these regulatory changes, how has your order book been more recently? And how do you see the order book playing out in 2020?

Order book is good. We booked some nice orders last year. I think we showed that throughout the year. In our conference call, we spoke about how we saw our bookings against our billings in the quarters. It's been developing well. We think that we're well positioned going into 2020. What we think, in addition to what was happening last year, is that we now see a lot of the shipowners that were taking the wait-and-see approach last year. There were a lot of shipowners that wanted to wait and see what happened with the price spread between low sulfur and bunker fuel. Now that we enter 2020, we see that price spread has been growing. And what we hear from the scrubber manufacturers is that a lot of the shipowners with the wait-and-see approach, they are now going ahead and ordering scrubbers because of that. So the business case for scrubbers is better than it has ever been at this point. In fact, the price spread is expected to reach new record highs. It has done that so far in the first quarter. It's expected to reach even higher levels in the first and second quarter and go to maybe $400 per metric ton, which is a very, very attractive business case for installing a scrubber. The tipping point is around $100 per metric ton. So we're well, well, well above that right now. So yes, we are expecting to see even increasing demand for scrubbers going into 2020.

Okay. And then shifting to the oil and gas market, you talked about a commercial breakthrough. What does that look like? Do you need to do more R&D? Do you need to see regulatory changes? Or what does the commercial breakthrough look like? And how does that ramp?

So R&D is kind of behind us. We did -- as you saw from Kenneth, we did a lot of pilots in the past and during the last 12 to 18 months. So that's kind of behind us. We're being specked right now into projects. And what we still wait to see is orders. So we're building a very attractive sales pipeline right now. In fact, it's our biggest sales pipeline at the moment in any industry, and we hope to convert off those projects into orders in 2020. So in other words, we're not expecting to see significant revenue from oil and gas this year, but we are expecting to see meaningful orders.

Yes. Roger Liddell, Clear Harbor Asset Management. On marine scrubbing, there are 5 issues that are in play. One, SOx, obviously being addressed. Second, NOx, you didn't put any expectations as to when -- or the probability of IMO making a decision. PAHs, I believe you uniquely are addressing now. Fourth is bilge. I saw a note in The Economist that IMO has put a 2024 date on bilge water treatment. If you can confirm that and discuss the implications. Finally, ballast. IMO addressed it in 2017 but I don't think put a date on it. So of those 5, 2, I believe, are addressed now. Help us on the other 3.

So ballast water treatment is actually already in place. There is new regulations for ballast water treatment. LiqTech looked into that at an early stage, and we decided not to do it. So that race is over. We will not enter into that industry. In terms of bilge water treatment, it's correct that they are discussing new regulations with a lower oil and water number. If that happens, and we think it will, then our technology becomes very, very attractive because you will not be able to use high-speed centrifuges anymore, which is the common solution today. And that's why we are developing that product. It's still something for the future. It's something that we expect 2 or 3 years out before we actually see those regulations. In terms of PAH, China is now trying to implement new rules on PAH discharge from marine scrubbers. If that happens, we are uniquely positioned because we already addressed that in our solution, which other competitors' high-speed centrifuges does not. So you're correct. NOx reduction is the product that we're developing. I did not put a time on that, but the timing is more likely to be 2 or 3 years out, again, before we see a global mandate. There is a market to go after right now. You do have environmental protection terms around the world where you do need to use a NOx reduction system today. Black carbon emissions is probably nearer term. The news that we hear from IMO and rumors in the market is that, that is the next mandate we are likely to see carbon black mandate or cap. And if that happens, we're again uniquely situated because we've been working with DPF technology for 20 years now. And in terms of SOx reduction, that is the IMO 2020 mandate, and we are in place for that. The potential, as we discussed earlier today, is that we'll see a ban of open-loop discharge. We have seen that in more than 90 ports around the world by now. There is the potential that we'll see that global mandate, a ban of open-loop discharge or that we see more and more ports banning it.

Follow up on open loop. If IMO bans open loop or the market simply changes to open loop, isn't that LiqTech solution the preferred one? In other words, there are several thousand installed or on order open loop that needs conversion. What share do you think you would get in that conversion?

What we do know by now is that we have approximately 50% of the closed-loop market. If we see a global open-loop ban, there will be approximately 4,000 already installed open-loop scrubbers that will need to be converted. In theory, we could catch as much as 50% of that, which will -- is a dream scenario. But what we know right now is that we do have 50% of that potential market.

Adam Stettner, Special Situations Fund, AWM. Is there any chance that you could actually outsupply your -- you could have more demand than you could supply in -- if assuming your furnaces and your production come up to speed at the rates that you suspect, is there any chance that you could actually outstrip your capability?

I'd love to have that problem, and we kind of fall a little bit ahead here. So we put in additional orders, as you know, conditional orders at this point for additional furnaces to be installed in the second half of this year. So if we decide, if we see the demand and everything explodes around us, we actually have the option to have 2 to 4 more furnaces, so in addition to the 4 installed in the second half of this year. So I think we planned ahead, but it sounds super aggressive at the moment.

And all the balance of the systems that you would need in Hobro and coding and things like that, I mean, could you even...

That, we can handle.

You can do.

So we sought contract, the manufacturing of the pipe spools and everything that is all outsourced today. What we do in Hobro is put the systems together. We do the software development. We do the electrical fittings and so forth. And we can ramp that up to meet any increased demand.

Two other questions. One, when you test these systems in Hobro, every one of them gets a full -- I mean, I didn't see in the video, but I assume they're all completely run -- they're hooked up to water supplies and run, correct?

Yes. What we do for each and single system is what we call an FAT test, so a Factory Acceptance Test. I would say 90% of the cases, the customer will actually come for that. You will hook up the system. You'll work through its several pages of boxes you need to take off, and the customer will sign for it at the end of that session. So yes, everything is 100% tested when it leaves the factory. And when we did the expansion, we also took into consideration that we should be able to expand that capacity because that is one of the limiting factors. So we have more than enough room to expand our capacity to do those tests. It takes about a day per system.

One more question. In terms of global mandate for closed loop, is -- would that be actually something that could be driven by the IMO? Or would that be just a tipping point as more and more ports required and everybody -- I mean, who -- is that an agreement through IMO?

What we've seen so far is the individual countries have come out and say, "We are not going to accept that. We don't want you to dump that dirty water inside our waters." China has come out, Malaysia, Bahrain, all these new -- all these 90 ports around the world. We think that we'll continue to see more and more ports on a weekly basis, basically, from now on, and we think that will drive eventually. That's our belief. Not something we can know for sure, but our belief is it will eventually be a global mandate by the IMO.

Could you talk a little bit about the integration of BS, I guess, or no more BS as the case may be, and how that's going to help you enhance your gross margin? Anything you can help us to inform that 2021 target would be helpful.

It's already improving our gross margins. In the last 3 months, BS Plastic became part of the group on September 1. And we have already done a fair amount of integration. When you look at the tanks on the system, they all come from BS Plastics and is driving higher margins for us right now. As we progress, our new Mark 7 product will be plastic piping. Today, it's super duplex steel. That will significantly lower the cost of the overall system, help us drive gross margins, but it also gives us that extra push from the integration of BS Plastic because we will have the manufacturing no longer outsourced but in house.

The second question I would have is, looking at these kind of new opportunities and go to market now that your VP of Sales talked about, obviously, big TAMs and big opportunity, but maybe different ecosystems from who you could collaborate with, for lack of a better term, in terms of system integrators or other larger players, it seems, obviously, getting access to the market and the channel would be helpful and then also, I guess, maybe even a strategic investment from the standpoint of someone backing you for reliability because it seems to be a reliable manufacturer, a reliable supplier could be an issue. I mean how do you think about partnering within that ecosystem for success just given the fact that while they are big markets, they're markets that you don't really -- they're fairly nascent and you don't really have all the demand expertise?

You're very much in line with our own considerations. We have been, in 2019, successful in the marine's global market. In 2019, there was a $160 million addressable market, so a very small market, in other words. We are now going into the oil and gas industry, which is closer to $4 billion, so a very big industry with very big players. And our effort is exactly the same. So expect us to see -- or expect to see us team up with somebody bigger already present in the industry. That's a likely scenario.

Rob Brown with Lake Street again. Just wanted to get a little bit into the margin, the gross margin. You talked about at 40% in 2021 as a goal. What are the key drivers there? And how much is automation a part of that? Or is it really a question of scale with the Hobro manufacturing?

It's a lot of moving pieces. First piece is right here in Ballerup where we manufacture the membranes. We have the new furnaces. We'll have more optimization, and it all drives lower cost, better quality and higher margins. Coming into the new Mark 7 model, which will be plastic piping, we already have the plastic manufacturing capacities through that acquisition we did last year. That will also drive higher margins. It's the new manufacturing space we have in Hobro, allows us for more lean manufacturing. It's the new products that we bring online with better margin profiles. We are in the process of raising prices on our products as well. We wanted to have that market presence in the marine scrubber market and, to some extent, we lowered prices a year ago, and we're now in the process of raising prices that's also going well. So a lot of moving pieces, but altogether, that should drive higher margins and arriving to those goals that we set for 2021.

Roger Liddell. On gross margins, the target you laid out was 40% second half of 2020. Is the achieving of that 40% a function of volume, of throughput and furnaces being at the yield rates that you anticipate, you hope for? Or is it cost reduction driven? I'm sure it's some of each, but I'm trying to assess what is the probability of your being able to meet that 40%. And for 2021 and onward, do you have a dream of higher than 40% margin?

So the 40% margin -- plus margin is a goal for 2021. And what is driving that is all of these moving pieces. So cost improvements in the ceramic membrane manufacturing, cost improvements in the systems manufacturing, raising customer prices, introduction of the new lower-cost Mark 7 model and everything. So it's a lot of pieces that needs to come together. We think they will. And of course, we have higher ambitions. I mean 40% is kind of our next target. And beyond that, we'll continue to make improvements. We'll continue to be ambitious. And hopefully, we'll have a market position that will allow us to further increase prices and maintain our market position. So I would say it's an ongoing target. Let's get to the 30% we set as a target for the first half of 2020, and then we'll take it through the 40% that we set as a target for 2021, and then we'll continue our work.

Turning to oil and gas side. I'm interested whether the appeal of your product offerings is in cost reduction or in meeting standards. The oil industry has been very creative in squashing the imposition of standards. Whereas cost reductions, they get that, and there's a tailwind. So generically, can you speak of standards versus cost reductions?

So we are getting to a point -- so first of all, in any industry to be successful, you need legislation. And what we see now in the Middle East is they are putting legislation in place. They will no longer accept the fact that you are injecting water that you need to get from somewhere, water do you not have. Then you inject the water. You get it back. You truck it away with the environmental impact from the trucking. And you put it in disposal wells with that environmental risk. They will no longer accept that. We offer a solution where you can treat it on site and reuse the water, so you don't have to fight for the water in the first place. You don't have to truck it away. You don't have to take the risk of the disposal wells. That's the first, let's say, selling argument. Having said that, we are getting close to a scenario where we also offer a business case. So the price for the water, the price for the trucking, the price for the disposal well, all combined is anywhere from $0.50 a barrel up to $1.30 per barrel. We reckon we're about $0.70, $0.75 per barrel in cost. So actually getting to the point where we actually offer an attractive business case on top of the environmental aspect.

Do you offer a full solution for cleaning the produced water for reinjection? Or are you pretreatment to RO, which then allows injection?

In both -- it varies. So we can be a stand-alone solution. We can be in combination with other solutions. We could even be that total combination of the solution, so do the RO piece as well. In terms of how this is to play out, well, we think there will be oil companies around the world who's willing to invest in this, buy the system, run it themselves. We also think there will be oil companies around the world who wants a build-on and operate solution. And this is where it comes into play that we need new partners that are established in the industry who will buy our equipment and provide that solution to the oil companies.

Right. Finally, on pore sizes, you currently offer down to 40 nanometers. I thought your best offering was 200. So something may have changed dramatically since I was last informed on that. Are there any new processes, new opportunities that are addressed by 40-nanometer that were not available before and does it make good business sense to pursue it? Just because you can do it doesn't mean you should do it.

You're right. So where we are right now, we probably have a product that is a cutoff value of 100 to 200 nanometers, and that's well suited for the industries we're working in, in oil and gas, in marine scrubbers and so forth. That's a good pore size. What we are developing is products that will go down to 15 nanometers, that will go even down to 10 nanometers and lower. And that opens up opportunities in pharmaceutical applications, chemical manufacturing, food and beverage, stuff like that, where you typically see alumina-based membranes today. So in other words, right now, we are in the markets where silicon carbide makes a difference because of the durability of the material. It's noncorrosive. You can put -- use any chemical. It's very abrasion resistant. In the future, and that's about a year out, we will have products, hybrid products, if you will, that will go into completely other applications where we will compete against other ceramic materials.

Are there any additional questions?

Then that's all that is left is to thank everyone for joining us today, both on-site and on the webcast. There will be a factory tour for those on-site, following this presentation. And to those of you joining us on the webcast today, thank you so much for doing so. We look forward to speaking with all of you in the near future again. First time will be in March when we report our year-end results. And remind you again about that Investor Day in July in New York, might be much easier for our American friends to join us on that one. So thank you so much, everyone, and thank you for joining us.