FLEXIBLE SOLUTIONS INTERNATIONAL INC (FSI)·Q3 2023 Earnings Summary

Executive Summary

• Q3 2023 deteriorated sharply: revenue fell 25% year over year to $8.72M and the company reported a net loss of $(0.06) per share; management called it “a very poor quarter” and flagged cost reviews to restore profitability .
• Agricultural demand, product mix, higher cost of goods, and inability to pass through inflation were cited as key drivers of the miss; management expects lower revenue, cash flow, and profits in Q4 and for full-year 2023, with difficult conditions extending into 2024 .
• The Florida LLC investment remained profitable, but compressed margins persist; ENP’s move to new Illinois capacity is largely complete, consolidating operations and enabling incremental NanoChem capacity recovery .
• No numeric guidance was issued; tone shifted from “flat to mildly down” for FY23 in Q2 to “down significantly” in Q3, a clear guidance cut; Wall Street consensus from S&P Global was unavailable at time of writing (SPGI limit reached) .
• Potential stock reaction catalysts: confirmation of agricultural demand recovery (corn/farm input pricing dynamics), tariff rebate progress (> $1MM outstanding), and initial food-grade product orders; conversely, continued margin pressure and customer inventory reductions are risks .

What Went Well and What Went Wrong

What Went Well

• Florida LLC was profitable again in Q3; FSI’s sales to the LLC grew during the quarter, although margins remain compressed .
• Debt consolidation across ENP and NCS at Stock Yards Bank increased lines of credit and lowered interest rates; ENP Peru real estate actions returned full ownership of the broader Illinois site to FSI on favorable terms .
• ENP operations moved into new Mendota, IL facility; build-out largely complete and rent starts January 1, enabling NCS to recover 30,000 sq ft at Peru for potential growth .
• “Working capital is adequate for all our purposes,” supported by lines of credit; management expressed confidence in executing plans with existing capital .

Management quotes:

• “This was a very poor quarter… [customers] are ordering much less as they confront difficult conditions in their markets.”
• “Working capital is adequate for all our purposes… we are confident that we can execute our plans with our existing capital.”
• “The LLC was profitable again in Q3 2023… our sales to the LLC grew in the quarter.”

What Went Wrong

• Revenue down ~25% YoY to $8.72M; net loss of $(718)k versus +$1.11M in Q3 2022; EPS swung to $(0.06) from $0.09 .
• Product mix and higher cost of goods pressured margins; inability to pass through inflation promptly led to constrained margins and earnings .
• Agriculture and oil/gas TPA sales weakened; customers reduced inventory amid normalizing shipping and uncertain hydrocarbon demand; key ag customer (“Company D”) accelerated declines in Q3 .
• Food-grade initiatives saw slower-than-hoped order conversion in 2023; several quarters may be needed to obtain significant sales .

Financial Results

Segment/Division Context (disclosed qualitatively; no numeric segment breakouts provided):

Key KPIs (as disclosed):

Additional quarterly operating cash flow detail was not provided; CEO noted Q3 free cash flow was positive but “less than $0.005,” highlighting razor-thin cash generation in the quarter .

Estimates vs Actuals:

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “This was a very poor quarter… [we will] review all operating costs and search for lower cost of goods in the fourth quarter and throughout 2024 as we attempt to revert to profitability.”
• “We are not happy with the results for Q3 2023… Profits were negatively affected by product mix, cost of goods and reduced sales volume… we now estimate that year over year revenue, cash flow and profits will be down significantly in 2023.”
• “Wages have gone up substantially… raw material prices have dropped from the highest levels but not back to historic norms… we have been unable to raise prices sufficiently to cover costs and maintain our margin goals.”
• “The LLC was profitable again in Q3 2023… margins are compressed and earnings may not reach historical levels for some time.”
• “Working capital is adequate for all our purposes… we are confident that we can execute our plans with our existing capital.”

Q&A Highlights

• Agriculture exposure and demand drivers: Management confirmed agriculture is “greater than 50%” of revenue; farmers are questioning inputs as corn prices failed to keep pace with inflation, driving distributor inventory reductions .
• Cash generation and CapEx: Q3 free cash flow was positive but “less than $0.005,” underscoring tight cash generation; no major CapEx planned forward beyond food division and building move; ENP build-out remaining is ~$50–$200k .
• Customer concentration risk: A key ag customer (“Company D”) declined from $6.2M YTD in 2022 to $2.0M YTD in 2023; acceleration occurred in Q3, but FSI did not lose the customer .
• Capital return: Management reiterated intent to return capital via buybacks/dividends when prudent; priority is to “right the ship” first .

Estimates Context

• Wall Street consensus (S&P Global) for Q3 2023 revenue and EPS was unavailable at time of writing due to SPGI daily request limit; therefore, no beat/miss assessment vs consensus is provided [GetEstimates error].
• Given management’s lowered FY23 outlook and ongoing margin constraints, sell-side estimates for revenue/EPS likely need downward revisions to reflect weaker agriculture and oil/gas demand and limited pricing power; this is anchored in management’s explicit expectation for significantly lower FY23 revenue, cash flow, and profits .

Key Takeaways for Investors

• Trajectory worsened in Q3: revenue -25% YoY, swing to net loss; management reset FY23 outlook to “down significantly,” indicating a clear negative inflection versus Q2’s “flat to mildly down” framing .
• Margin headwinds are persistent: product mix, higher COGS, wage inflation, and delayed pricing pass-through will constrain margins into 2024; monitor raw material cost trends and any customer acceptance of price increases .
• Agriculture remains the fulcrum: >50% exposure and sensitivity to crop pricing cycles; watch corn/farm input price dynamics and distributor inventory levels for leading indicators of recovery .
• Florida LLC profitability helps but won’t offset margin compression: continued profitability with compressed margins; positive sales to LLC but earnings unlikely to reach historical levels near term .
• Execution levers: ENP relocation completed, footprint optimization frees NCS capacity; no major new CapEx, focus on price increases, cost reductions, and volume recovery rather than heavy investment .
• Potential catalysts: resolution of >$1MM tariff rebates (cash inflow), initial food-grade orders, stabilization of ag demand, and any signs of margin recovery could improve sentiment .
• Risk management: customer concentration exposures (e.g., “Company D”) and macro-driven inventory reductions magnify volatility; liquidity is adequate with expanded lines of credit, but operational improvement is necessary to support shareholder returns .