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

Good morning and good day, and welcome to the LiqTech International Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Thank you very much, Andrew. Hello, everyone, and thank you for joining us this morning. As the operator indicated, my name is Robert Blum of Lytham Partners. I'll be your moderator for today's call. Joining us on the call from the company is Sune Mathiesen, the company's Chief Executive Officer. Before I turn the call over to Sune, let me remind listeners that following the conference call, there will be an open Q&A session. You should also note that a replay of this call will be available shortly following the conclusion of the live call. Before we begin with prepared remarks, we submit for the record the following statements. This conference call may contain forward-looking statements. Although the forward-looking statements reflect the good faith and judgment of management, forward-looking statements are inherently subject to known and unknown risks and uncertainties that may cause actual results to be materially different from those discussed during the conference call. The company, therefore, urges all listeners to carefully review and consider the various disclosures made in the reports filed with the Securities and Exchange Commission, including risk factors that attempt to advise interested parties of the risks that may affect our business, financial condition and sales of operations and cash flows. If one or more of these risks or uncertainties materialize or if the underlying assumptions prove incorrect, the company's actual results may vary materially from those expected or projected. The company, therefore, urges all listeners not to place undue reliance on these forward-looking statements, which speak only as of this date and the date of the release and conference call. The company assumes no obligation to update any forward-looking statements in order to reflect any events or circumstances that may arise after the date of this release and conference call. Now I'd like to turn the call over to Sune Mathiesen, Chief Executive Officer, LiqTech International. Sune, please proceed.

Thank you very much, Robert, and good morning to all of you, and thank you for joining us today on such short notice. Clearly, the main reason we are having this call this morning is to provide some additional details on our first oil and gas order in the Middle East. We also want to provide some brief comments on our other various business initiatives, including an update on the marine scrubber market and the marine black carbon reduction market in China. To get started, let me just say that we are extremely excited to have finally announced our first order for the oil and gas markets in the Middle East. This is clearly a key milestone for LiqTech and one that I'm very excited to finally be able to share with all of you. This order is a very important step in our strategy to expand beyond our historical reliance on a single market. We have been working hard to position ourselves in the oil and gas market for more than 2 years now, and I'm very pleased to see this first success, which I believe will be the first of many orders. This order also marks LiqTech's entry into a build, own and operate model, a model we believe will gain significant success in the coming years. As mentioned in the press release, this order came from one of the largest oil service companies in the world. Our joint venture will purchase the system on normal terms and normal profits, and the oil service company will then rent the equipment on a 2-year agreement. LiqTech will then further -- and that is on top of the initial revenue and profits from the sales of the system, recognize a portion of the profits from the joint venture over the 2-year rental term. There is also renewal options that can allow this agreement to go on for many years. I would like to take a small step back to explain what it is we do in the Middle East and what the potential might look like over the coming years. The oil production in the world is approximately 76 million barrels per day, out of which approximately 32 million barrels are produced in the Middle East or corresponding to more than 40% of the world's production. In the production of oil, an average of 4 barrels of water are used to produce 1 barrel of oil. In other words, more than 300 million barrels of water are used in the production of oil in the world every single day. To put that in perspective, this order is a 3,000 barrel per day system. Today, a lot of the water used in the production of oil is transported to the site, then injected into the ground. It then comes back dirty and is transported offsite to [ deep port ] and disposal wells. This operation is obviously bad for a number of reasons. It consumes horrific amounts of water. There is a big environmental impact from the transporting, and the disposal wells poses a big environmental risk. LiqTech has the technology that allows the oil producers to reuse the same water over and over again. This order will help one of the largest oil producers in the world to operate in a more efficient, more economic and more sustainable way. We look forward to the successful deployment of this first system. As I've stated in the past, our pipeline of projects for the oil and gas market is very large. There is a significant shift taking place in the Middle East towards the reuse of water. In particular, new environmental regulations, combined with geological restrictions and local water scarcity, are driving a greater fraction of the produced water to be more extensively treated and reused. This reuse, plus 50% more of water expected to be treated over the next 10 years, is what is providing the significant opportunity for LiqTech. We believe that our current available market for this application is more than $7.5 billion. But as environmental awareness grows, the deflation tightens and water scarcity increases, we believe that this number grows much larger. But we are excited about the Middle East market and look forward to being able to share additional orders with you in the near future. We're also excited about another segment of the oil and gas market, which we discussed last quarter, the ethylene glycol recovery in deep-sea applications. This yet another challenging application, where our technology has proven more efficient and more effective than traditional equipment. As a reminder, we are working with one of the largest oil and gas companies in the world on this, and we are optimistic that there are a large number of other opportunities in this specific application. If you can remember back to our slide presentation at our Analyst Day in January 2021, we highlighted many of the reasons why the silicon carbide membranes were superior to the competition in treating produced water. They included our filters being a solution to the removal of very fine particles where traditional filters are challenged, to treatment of oil emulsions, to polymer flooded produced water; and the fact that our silicon carbide membranes can handle feed fluctuations in TSS, oil concentration and temperature and still deliver consistent permeate quality. Superior product performance, environmental pressures and scarce water resources are all in our favor. As I've stated on recent calls, our enthusiasm for this market is as high today as it has been at any point given the conversations that are taking place. We're excited to have announced this first order and are confident that we'll be able to share further launch orders with you this year. Let's transition for just a moment to the marine scrubber market. Similar to when we spoke back in August, the marine scrubber market continues to improve. The price spread between bunker fuel and low sulfur fuel, which remained lower than $50 throughout much of 2020, has now stabilized above $100 per metric ton. With this stabilization, we are continuing to see a steady increase in inquiries and orders. Importantly, we think the price spread will continue to widen in the coming months, further reinforcing the business case for scrubbers. The transition towards closed-loop systems that deploy our filtration technology is also continuing. As I've mentioned in the past, more than 120 ports worldwide have banned open-loop discharge. There is also an important meeting coming up with the IMO in November 2021 to discuss harmonization of open-loop scrubber water discharge regulations. I look forward to sharing more with you later this year. Similar to what we mentioned last quarter, the new orders are rather diversified. They're diversified by scrubber manufacturing, they're diversified by inducer and they are diversified by geography, although we are seeing a strong growth out of China. All said, we see the marine scrubber market is continuing to come back, and it will continue to be an important part of our business for the foreseeable future. Let's now transition to the black carbon reduction market, where our focus is on marine investments within China. To quickly remind you, China has taken a lead in reducing their carbon emissions from inland and ocean-going vessels. The new mandates in China have created a $26 billion opportunity for our product, which we have been a 20-year leader in, our diesel particulate filters, to remove particulate matter from exhaust gas of internal combustion engines. So just a brief update here. We have received first orders for this application and the market seems to be playing out as we expected, and it confirms our reasons for making the investments in manufacturing in the region. We have now obtained our business license for the Chinese facility. We have taken possession of the factory, and we're beginning to install equipment with everything to this point going according to schedule. We continue to remain on track to be operational in the second half of 2022. And as a reminder, this facility will manufacture both black carbon and NOx reduction products and will also function as a service center for our marine scrubber plants. In the meantime, we'll continue to supply orders out of our manufacturing facilities in Denmark while the Chinese facility is being completed. We are very excited about the future potential in China. So to wrap things up, we have officially entered the oil and gas market in the Middle East, a long journey, but we are here. And we believe that we are well positioned to become a leader for years to come. Not only is this a large addressable market opportunity, but the unique business model provides us with an opportunity to benefit not just from the sales of systems but also the ongoing service agreements. Further, it highlights the diversity of the market applications we can address. The marine scrubber market is back. Orders are increasing, particularly amongst the large ship owners. The market trends of price spreads and open-loop bans are all playing in our favor. Clearly, we continue to believe it will be an important part of our business for years to come. We continue to make progress in the China marine black carbon reduction markets, initial orders have been received and our factory remains on track to open in the second half of 2022. We have made great strides this year to rebound from the lows following the pandemic. But as always, there is still a lot of work to do. I thank you all for your support of LiqTech. And now I would like to turn the call over to your questions. Operator, please.

[Operator Instructions] The first question comes from Rob Brown with Lake Street Capital Markets.

Can you hear me?

Now we can you hear.

Congratulations on your first order. Could you give us a sense on the timing of how long this will take to ship? How the manufacturing takes place? And when you start to see revenue from this order?

Yes. So ships pretty quickly. We are in the process right now of looking into it. It looks like it will ship in January. That's the indication we have for you.

Okay. Okay. Great. And then maybe just some color on the type of order. Is this a pilot project? Or is this a kind of full-up project? And are the future orders you're talking about dependent on sort of the success of this project or are they independent?

Yes. So we completed what we call pilot trials that really qualified us to be where we are today. Having said that, this is a 3,000 barrel per day system. And even though we don't think it's a pilot anymore, it's actually a pilot for bigger system of 400,000 barrels per day. So it's a much, much, much bigger system. So we don't call it pilot anymore because we did that already, but it is actually, let's say, a pilot for potentially much bigger.

Okay. Great. And then the other projects that you have in discussion, could you give us a sense of how they kind of flow through and when you might see orders there?

Yes. So we -- as mentioned, we have a quite big pipeline in oil and gas. Some of the projects are more mature than others. But we think we can bring a couple of projects across the finish line this year. So anticipating further large orders already this year.

Okay. Great. And then maybe just the -- from the oil companies' perspective, I think you've talked before about the economic returns of reusing water versus bringing in kind of fresh water. Could you remind us again on kind of the payback or economic value to the customer of this type of system?

Yes. So we more or less cut the cost in half or a little bit more than that actually. And what they're doing today is they're trucking in water, use it in the process, they truck it offsite, they store it in disposal wells, and that obviously comes with a cost. We have proven that we can do that at less of the half of cost of doing what they do today. So it pays back within a year. So obviously, a very attractive investment for the oil company. And on top of that, it allows them to do things in a more sustainable way to keep up with tightening legislation.

[Operator Instructions] The next question comes from Michael Potter with Monarch Capital Group.

Sune, congratulations on the first of what hopefully will be many orders on the oil and gas side. You mentioned it's $4 million for the equipment and then a royalty. Do I have that correct?

No, it's a $4 million for the equipment, and we will then sell the equipment into the joint venture. So the joint venture is the partner towards the oil service company. So we sell our equipment into the joint venture. The joint venture takes the equipment and rent it to the oil service company on a 2-year agreement.

So is there any additional revenue that LiqTech will generate from this sale, from this opportunity?

Not revenue, but you could say it's -- there's 2 profits. So one, the profit from selling the system to the joint venture; and then second, our proportion of the profits generated in the joint venture company. So 1 time revenue and 2 times profit.

Okay. Okay. And you said it's scheduled to be delivered in January?

That's what we think right now, that it's going to deliver in January. That's correct.

Okay. And can you talk a little bit about our partners on this transaction?

Yes. So obviously, we have our joint venture partner in the Middle East with whom we set up the joint venture quite some time ago. I believe it's about a year ago now. And then the joint venture sells to an oil service company, one of the big guys. And then the oil service company sells it to the oil producer. So quite a lot of partners involved in this. That is the way it works in the Middle East. You need to have these oil service companies in between. And I actually think it's a good thing for us. It allows us to establish a relationship with this and other oil service companies, which then, as we can see now, has created opportunities outside of the Middle East because they have become acquainted with our technology. So it's actually working out pretty good for us.

Are you able to mention the name of the oil service company?

We have not disclosed that, but it's one of the top 3 oil service companies.

Okay. And can you give us a sense of the size and number of deals behind this one?

We have a very big pipeline for oil and gas, and we believe there's a huge potential for this. We believe that the, let's say, addressable or available market to us right now in the Middle East is about $7.5 billion. We also see that legislation is tightening around the world. We see more environmental focus around the world, and we see more and more water scarcity. So we think that, that number grows quite a lot in the years to come. We are working on several deals right now in the Middle East. We think we're going to be -- we are in a position to book further orders already this year. And we believe that they will be of higher value than this one.

[Operator Instructions] The next question comes from [ Larry Lytton ] with [ Second Line Capital ].

Sune, do you have any rough guess on the $7.5 billion opportunity in the Mid East, what percentage of that has this very compelling payback of maybe 50% cost savings or 30%-plus cost savings. How much of that is so robust?

We actually think all of it. So we call it available market. So we think that this is the market where we have the deflation in place, where we have a good business case comparable to this one, that the market potential today is already much greater than that. So this is why we call it available market, is because we think all of that is with a similar business case as this one.

Okay. And just a clarification. If you ship in January, is there an implementation process? Or is it up and running in January?

No, there's an implementation process, but not of a concern to LiqTech. So we will ship the product and recognize the revenue. And then the JV has to obviously install it and hand it over to the customer.

But how long do you think it becomes operational?

We think it will be operational in February.

Okay. And then the other thing I'm interested in and confused by is, so it's a 2-year rental agreement. Is there a presumption that it's likely to be renewed? And if it's not renewed, is this equipment then movable or usable in some fashion somewhere else?

I would actually say yes to both. So I think once it's up and running, yes, they will extend the rental agreement. If not, the system is containerized and can be moved everywhere in the world, really. So it can be used for other customers if we wanted to do that. But I think there's a very big chance that they will renew the rental agreement and extend it beyond the 2 years.

And what is -- do you have a general sense of how long the system is going to -- should be functional? And I guess there'll be a lot of maintenance over the course of its life.

Yes. The system is actually very similar to the systems that we supply for the marine scrubber applications. So we have quite good experience with the lifetime of it. We have now been installing marine scrubber systems for the past 8 years. And the first ones are still working very well. I think guessing, 10, 15 years is a good guess on the [ lifetime ] of the system.

Next question comes from Jeb Armstrong with Clear Harbor Asset Management.

Sune, congratulations. Great to hear this news. I wanted to touch -- I wanted to sort of take a step back a little bit and just thinking about the size of the numbers that we're throwing around here from a revenue perspective. The company has done a tremendous job to increase its capacity over the last couple of years. And given the size of this opportunity and some of the other opportunities that seem to be floating around out there, it seems possible, I don't want to get ahead of the tips of your skis on this. But it seems possible that the actual market opportunity is greater than your -- even your expanded capacity. And when you look out several years, how do you view the opportunity to expand access to capital and where you might be willing to add additional capacity, if you could sort of go through that a little bit, please?

Yes, you're absolutely right. We spent the last couple of years expanding our capacity quite dramatically, both in Copenhagen, but also now with the new factory that we are setting up in China. I think we gained a lot of experience in doing this. Obviously, when you start out, it's more difficult than after 2 years. So we learned a lot, and I think we are well prepared to further expand our capacity should we see the need to do that. We have a lot of capacity coming online in China next year, and we have spare capacity in Copenhagen right now. And we are more than prepared to expand capacity further if we see the need to do that. In terms of capital, well, what we have proven is that the capital spending to increase capacity is actually quite small compared to what capacity advises us. So I'm pretty confident that we can handle that as we grow, and we obviously try to stay ahead of demand and installed capacity when we see that there might be a need for it in the next 6, 12, 18 months.

You have -- I'm presuming you have physical space available in your Denmark facilities.

Yes or at least we have access to expanding that footprint should we need to do that.

Okay. Turning to sort of more immediate matters. There's been a lot of talk in the news about supply chain issues and bottlenecks and so forth and also supply cost and inflation. Could you provide a little bit of color about how that is shaping up for you?

Yes. We have also seen some delivery issues in the market, and it's typically related to the supply of pumps and PLCs. And so we are also experiencing those issues. We are doing what we can to avoid them. We are working with our suppliers to minimize any issues, but it is also something that we are noting.

And we have a follow-up from [ Larry Lytton ] with [ Second Line Capital ].

I'm just looking at the arithmetic. So if a 3,000-barrel-per-day facility is $4 million, you talked about at least a future potential of 400 -- I think you said 400,000 barrel per day. What is the 400,000 barrel per day facility cost?

It's not comparable -- so as the system grows bigger and, let's say, the cost of the system also is a little bit smaller, but that's around $300 million.

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

Thank you very much, and thank you for everyone joining us on the call today. I wish you a great day and stay safe. Thank you.

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