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FLEXIBLE SOLUTIONS INTERNATIONAL INC (FSI)·Q2 2023 Earnings Summary

Executive Summary

  • Q2 2023 revenue was $10.33M, down 7% year over year, with EPS of $0.07 vs $0.13 in Q2 2022; management cited higher cost of goods, lower sales, and adverse product mix as drivers .
  • Management lowered the full‑year outlook: expects 2023 revenue to be flat to mildly down vs 2022 and anticipates lower revenue, cash flow, and profits in H2 2023 due to inventory normalization, tariff costs, and slower ag/oilfield demand .
  • Florida LLC showed stronger revenue and some gross margin recovery in H1, with management noting ~30% gross margin as a potential level, albeit still compressed by costs; FSI’s sales to the LLC retained positive margin .
  • Operational actions: acquired 80% of “317 Mendota” (240k sq ft) to relocate ENP and free capacity for NCS growth; consolidated debt with Stock Yards Bank and affirmed adequate working capital .
  • Key catalyst: the lowered FY outlook and commentary on H2 softness and margin constraints, alongside delayed food-grade orders and normalized shipping/inventory, reset near-term expectations .

What Went Well and What Went Wrong

What Went Well

  • Florida LLC: H1 profitable; revenue strong in Q1/Q2; management believes ~30% gross margin is achievable over time despite competition; FSI’s sales to the LLC retained positive margins .
  • Capacity and financing: acquired 317 Mendota (240k sq ft), relocating ENP, freeing 30k sq ft for NCS; consolidated debt with Stock Yards Bank, expanded lines at lower rates; working capital adequate .
  • Strategic sustainability: continued collaboration with Lygos (equity stakes in 2020/2021) on microbial aspartic acid to enable biodegradable, sustainable products for detergents/water treatment .

What Went Wrong

  • Demand softness: agriculture sales and oil/gas/industrial TPA were lower; orders expected to be delayed from Q1 did not materialize; management now expects H2 revenue, cash flow, and profits to be lower vs prior year .
  • Cost pressures: raw materials stabilizing at higher levels; tariff burden (25% since 2019) adversely impacting COGS and cash flow; rebates >$1M outstanding and delayed for years .
  • Food-grade pipeline: initial commercialization, but Q2 orders fell short; management cautions significant sales may take several more quarters .

Financial Results

MetricQ2 2022 (oldest)Q1 2023Q2 2023 (newest)
Revenue ($USD)$11,165,143 $9,847,517 $10,331,291
Net Income ($USD)$1,662,455 $884,369 $809,865
Diluted EPS ($)$0.13 $0.07 $0.07
Income Before Tax ($USD)$2,371,372 $1,264,271 $1,349,099
Net Income Margin (%)14.9% 9.0% 7.8%

Notes:

  • Management attributed Q2 profit compression to product mix, higher cost of goods, and reduced sales .
  • Non‑GAAP Operating Cash Flow: $1.73M for Q1 2023; $3.22M for H1 2023 (26¢/share), down vs prior year periods .

Segment breakdown (not disclosed): FSI did not provide segment revenue by NCS vs ENP in Q2 materials; narrative indicates NCS ~70% of revenue and ENP focused on greenhouse/turf/golf .

KPIs

KPIQ1 2023H1 2023
Operating Cash Flow (Non‑GAAP) ($USD)$1,729,956 $3,220,674
Operating Cash Flow per Share (Non‑GAAP) ($)$0.14 $0.26
Basic Weighted Avg Shares12,432,914 12,434,230 (6M weighted avg)

Guidance Changes

MetricPeriodPrevious Guidance (Q1 2023)Current Guidance (Q2 2023)Change
RevenueFY 2023“Expect the year to exceed 2022” “Flat to mildly down vs 2022” and H2 lower revenue Lowered
Profitability (EPS/profits)H2 2023Growth likely in Q3–Q4 Lower profits in H2 and full year due to costs/product mix Lowered
Operating Cash Flow (Non‑GAAP)H2 2023Growth likely in Q3–Q4 Lower operating cash flow expected H2/full year Lowered
Agriculture salesH2 2023First‑half ag sales to exceed prior year Slower than 2022 for remainder of 2023 Lowered
Oil/gas/industrial TPAH2 2023Steady with possible temporary reductions Lower in Q2 likely to continue for remainder of year Lowered
SG&A run‑rateNear termNot specified~$1.75–$2.0M/quarter “fair” baseline Established baseline
Dividend2023Special dividend announced/paid in April No further special dividend unless prudent Maintained prudent stance

Earnings Call Themes & Trends

TopicQ3 2022 (Q‑2)Q1 2023 (Q‑1)Q2 2023 (Current)Trend
Tariffs/macro25% tariffs hurting COGS/cash flow; rebates >$1M, legal escalation Tariffs continue; rebates >$1M, delays Tariffs continue; >$1M rebates outstanding, constraining margins Persistent headwind
Supply chain/shippingElevated ocean freight; carrying extra inventory Pre‑COVID speeds but higher prices; plan to reduce inventory Shipping normalized; inventory being reduced; margins stabilizing gradually Normalizing logistics; margin still tight
Food‑grade productsInitial commercialization; confidentiality on customers Pipeline with 5 advanced products; commercialization via distributors Q2 orders weaker; sales may take several more quarters Slower ramp than hoped
Florida LLCRevenue strong but margins compressed Profitable; top‑line growth expected; margin compression H1 profitable; aiming ~30% GM; positive margin on FSI sales Improving gross margin, still compressed
ENP/home gardeningSales affected post‑pandemic; flat 2022 Expect growth in 2023 H2 Little revenue growth expected in 2023; 2024 unclear Weaker than prior expectations
Inventory levelsOpportunistic buying based on raw material cycles Plan to reduce inventory Target ~$7M+ inventory; avoid ~$10M peak Lower, more normalized
Financing/working capitalConsolidated bank debt; adequate WC Consolidated debt; adequate WC Consolidated debt; adequate WC; new 317 Mendota facility Stable liquidity, added capacity
Sustainability/LygosContinued collaboration; equity stakes Continued collaboration Continued collaboration Ongoing initiative

Management Commentary

  • “Second quarter was disappointing. We had predicted a rebound which did not occur… We are observing headwinds in most of our markets now and expect full year revenue to be flat to mildly down compared to 2022.”
  • “We have not received the food product orders we had hoped for in Q2… it may take several more quarters to obtain significant sales.”
  • “Agricultural products were not as strong in Q2 2023… The orders that we thought were delayed from Q1 did not appear.”
  • “Raw material prices do not appear to be reverting… Passing price increases… will probably result in constrained margins throughout the rest of this year.”
  • “We believe… lower revenue, lower cash flow and lower profits for the second half and the full year.”

Q&A Highlights

  • Outlook: H2 revenue likely less than H2 last year; demand visibility remains customer-driven .
  • Florida LLC margins: Management believes ~30% gross margin can be maintained over time, but competition and customer dynamics matter .
  • SG&A: ~$1.75–$2.0M per quarter seen as a fair baseline; intent to control costs unless revenue increases dramatically .
  • Capacity and financing: 317 Mendota ~240k sq ft; plan to use 60k for ENP and rent 180k; interest-only first 12 months, floating ~6.25% .
  • Inventory: Target ~$7M+ inventory as “about right,” down from ~$10M peak; opportunistic purchases possible when supplier headwinds create discounts .

Estimates Context

  • We attempted to retrieve S&P Global consensus for Q2 2023 (EPS, revenue, EBITDA), but the data was unavailable due to SPGI request limits at retrieval time; therefore, a beat/miss assessment versus Wall Street consensus cannot be provided at this time [GetEstimates error].
  • Implication: Without consensus, investors should anchor on management’s lowered FY outlook and the observed YoY decline in revenue and EPS in Q2 when considering estimate revisions .

Key Takeaways for Investors

  • Q2 softness and lowered FY 2023 outlook reset expectations; near‑term sentiment likely driven by H2 demand in ag and oilfield and signs of margin stabilization .
  • Margin pressures persist from tariffs and elevated raw material base costs; rebate timing remains uncertain and is a non‑operating lever on future cash flow .
  • Florida LLC shows improving volume and some margin recovery; continued scale could aid overall profitability, but competitive dynamics remain a watch point .
  • Capacity actions (317 Mendota) free NCS space for 2024+ growth; liquidity and bank lines appear sufficient to execute plans .
  • Food‑grade pipeline is intact but slower to commercialize; monitor order traction over coming quarters for validation of the growth vertical .
  • Watch SG&A discipline and inventory normalization to support cash generation in a softer demand backdrop .
  • Near‑term trading: stock likely sensitive to any updates on H2 trajectory, tariff rebate progress, and signs of demand normalization in ag/oilfield; medium‑term thesis depends on successful food‑grade commercialization and Florida LLC margin/volume trajectory .

Sources: Q2 2023 press release and 8‑K , Q2 2023 earnings call transcript , Q1 2023 press release/8‑K and call , prior Q3 2022 call for trend context .