Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Fluence Corporation Q4 2019 Quarterly Update Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Henry Charrabé, CEO. Please go ahead.

Thank you, operator. Good morning to those of you in Australia, and good evening to our U.S. listeners. My name is Henry Charrabé, and I'm Managing Director and CEO of Fluence, and I'm joined on the call today by Francesco Fragasso, our Chief Financial Officer. To begin the call, I will start by providing some details about our operational performance over Q4 2019, and importantly, the positive outlook for Fluence in 2020. I will then hand over the call to Francesco to cover the Q4 cash flow metrics, and finally, we will answer questions you may have. I also want to note that all financial references are in U.S. dollars and then we will make forward-looking statements, which are protected under the safe harbor provisions of Australia's -- Australian securities laws. Further details are provided in the ASX release. By now, I have -- you have hopefully had the opportunity to review our Q4 2019 business update, along with the Appendix 4C cash flow report that we released on the ASX on Friday. As Francesco and I were in Argentina last week for important business meetings, we were both on airplanes returning to United States Thursday evening. As such, our quarterly business update and cash flow report could only be lodged on Friday afternoon, and our call scheduled for this morning in Australia. So rather than summarize the releases as the market has had the time to absorb our quarterly, we'd like to provide additional context and highlight some key points. We were excited to announce to the market the very significant financial close for the Ivory Coast project in early January. Finding the financial agreements for the Ivory Coast project 7 days into the new year defers the timing of Fluence achieving sustainable EBITDA profitability by 1 fiscal quarter. It has now underpinned our ability to deliver strong growth in revenue as well as earnings in fiscal year 2020. The achievement of financial close allows Fluence to immediately recognize no less than $20 million of revenue for work that has already largely been completed. The margin contribution from this project allows Fluence to remain EBITDA profitable and focus even more of our efforts in expanding our activities in the decentralized preengineered Smart Products Solutions segment of our business. Fluence becoming EBITDA positive is an important achievement, opens a new chapter in Fluence's story and allows us to plan for 2020 and beyond. Although we are very focused on making sure that Fluence will remain EBITDA profitable, we also believe that our 2020 revenue will exceed annual revenues of 2019 and 2018, respectively. With planning work on the Ivory Coast project now largely completed, Fluence can fully focus on moving towards construction commencement of this important turnkey water treatment plant. The substantial contract backlog amounting to $265 million as of December 31, 2019, provides us with revenue visibility, mainly for our Custom Engineered Solutions business, which will be the bulk of 2020 and 2021 revenues due to the size of the Ivory Coast project. In addition, Fluence continues to help create the industry narrative on the new strategic approach of decentralized and distributed preengineered Smart Products Solutions for water and wastewater treatment applications. We are very pleased that our Smart Products Solutions continued to gain traction, and we are seeing continued growth in that area. The size of the SPS opportunity and pipeline has never been greater, especially in China, where SPS revenue is expected to double from 2019's record level. 2020 SPS guidance is underpinned by the previously announced Chinese partnerships, which provide us with strong visibility for the 20-plus percent growth. Guidance is for at least $32 million with upside from ex-China markets and new China partnerships, both of which have been treated conservatively in calibrating guidance due to lower visibility. Our revenue from China was approximately $8 million in the last quarter of 2019. As anticipated, the strong final quarter of 2019 helps to underpin the Smart Products Solutions' revenue for the full year of $26.5 million, representing a 20% year-on-year growth and exceeding our previously revised guidance of $26 million for this strategic product segment. MABR sales continue to materialize in China, representing the bulk of our MABR revenue. Our flagship MABR-based products continue to build a strong sales pipeline in China. We have received multiple contracts in 2019 through our channel partners and, in coordination with provincial government, are creating the foundation of a strong platform for future growth for our products in the region. We expect that in 2020, we can further strengthen our market position in China by signing additional volume partnerships. As we -- sorry, as a result of the strong demand and the support by both existing and new investors during the October capital raising, we have established new MABR assembly lines in Yiyang and Panjin. As all of us around the world follow the dynamic situation regarding the outbreak of the coronavirus in China, Fluence is monitoring any impact it may have on our business but particularly as it relates to the well-being of our staff. At the moment, we are not aware of any negative implications for our staff or our 2020 business forecast as a result of the outbreak. But we will obviously continue to closely monitor the situation. It's important to remember just why we are so excited about the opportunities we see for Fluence longer term, given our environmentally safe and sustainable products that help governments and corporations combat the negative effects of pollution and reduced energy use. Our Smart Products Solutions save an average of 19 gigawatts per hour annually compared to conventional technologies. This is equivalent to saving about 13,500 tons of CO2 emissions. And in addition to this pollution reduction, Fluence's waste-to-energy installations around the world produce biogas from biomass and generate approximately 120 gigawatt hours annually of clean energy. As we all live in a time where pollution and water scarcity particularly is one of the most important areas of focus across multiple regions around the world, we are committed to decreasing traditional [ fossil fuel ] energy production. Currently, Fluence is removing 500 tons of excess nitrogen and phosphorus annually and recycles more than 8.6 billion liters of water through our wastewater solutions. We are committed to continuing our work to provide products, which align with United Nations' Sustainable Development Goals. Now let me turn to our recurring revenue segment. Our guidance for this segment in 2020 is that revenues are expected to grow a further 30% to $9 million compared to $7 million in 2019. During the year, we successfully completed the Bahamas project, which is expected to deliver annual recurring revenue of $1.7 million for 15 years. We have also begun the development work on our Peru project, which should reach commercial operation during the second half of 2020 and is expected to generate $3 million of annual recurring revenue over a 10-year period once completed. Now as for San Quintin, Fluence expects to receive guidance from the State Water Commission of Baja California, CEA, and the local municipalities in Q1 2020, following completion of an ongoing reevaluation of all projects undertaken by the new local government in Mexico, which has been inaugurated in the fall of 2019. This guidance from CEA will then enable construction to commence thereafter. Now before turning the call to Francesco, I would like to briefly remind everyone of our established policy with respect to disclosure of material contracts on the ASX platform. Only new contracts with a value of greater than $3 million or that our strategic wins are published on the ASX platform. If there are brief periods of time when no such announcements are made, we can assure you that this does not mean we are not actively pursuing and executing new contracts. It may seem to mean, the contracts we execute in that period do not rise to the level where they warrant public disclosure. Of course, all of the contracts we execute regardless of disclosure build our backlog and grow revenues even if no announcements are being released by the company with respect to each and every contract. I would like now to turn the call over to Francesco Fragasso to discuss our Q4 2019 revenue and cash flows. Francesco, please go ahead.

Thank you, Henry. We expect to release our audited 2019 financial results by the end of March, but I would like to share some preliminary unaudited results with you. Fourth quarter unaudited revenue of $23.4 million was negatively impacted by the delays of the San Quintin and Ivory Coast projects. Unaudited revenue for 2019 will be approximately $60 million. In addition to the $20 million from Ivory Coast, which will now be recognized in Q1 2020, is the about $18 million from San Quintin, which was expected in 2019, there has also been a delay in recognizing revenues from new orders booked at the beginning of 2019 such as $10 million contract won in Brazil and $20 million in New Mansoura contract won in Egypt, just to mention the largest. Both contracts are signed and are waiting execution phase. They will contribute to 2020 revenue. This delay impacted the timing of revenue recognition, mainly from -- for Custom Engineered Solutions segment in 2019. Second half 2019 unaudited revenue was $37.1 million, of which 50% or $18.3 million was derived from Smart Products Solutions; $3.9 million from recurring revenue and aftermarket, and [ $15 million ] from Custom Engineered Solutions. Revenue from Smart Products Solutions increased 20% year-on-year. We are very pleased to continue to transform the organization by reducing overhead costs, with at least unaudited annual savings of $5 million in 2019, achieving a 12% reduction year-on-year. This reflects the company's continued shift towards preengineered Smart Products Solutions, which require lower headcount and lower overhead. With the financial close of the Ivory Coast Project, we will be sustainably EBITDA positive for the beginning of -- from the beginning of the year. Historically, Fluence's revenue has been skewed to the second half of the year. However, given the financial close of Ivory Coast, we can expect a more balanced year in 2020. Turning now to cash flow. Cash and cash equivalents stood at $21.9 million at the end of 2019. In addition, the company held $5 million in term of deposits. Net cash used from operating activities in Q4 was $9.3 million, approximately $3.3 million higher than what we had forecasted previously. This is caused by the delay of receiving 2 payments in December from Custom Engineered Solutions contract in the Middle East. $1 million has already been collected in January, and the second payment of $2 million is expected in the coming weeks. Based on current contracts, we expect $22 million of cash received from customers during Q1 and cash payments of $27.8 million, resulting in an expected net operating cash outflow of $5.8 million. While cash outflow in Q1 2020 includes payments related to work already performed for the Ivory Coast project, the first disbursement from this project is only expected in Q2 2020. Our contract backlog of $265 million underpins our near-term goal, and we have the capacity to utilize non-dilutive funding options to capitalize on the opportunities ahead of us. Let me now turn the call back to Henry.

Thanks, Francesco. So as discussed earlier, our Smart Products Solutions continue to grow strongly, led by the demand for Aspiral and SUBRE products. Fluence's plan for 2020 is to continue to execute its strategy to be a leader in the global decentralized water, wastewater and reuse treatment markets. Our focus will be on executing the Ivory Coast project to budget, increased sales of Smart Products Solutions, particularly in China, and securing further recurring revenue contracts. So to summarize, we are providing the following outlook for fiscal year 2020. Our Smart Products Solutions revenue is expected to grow to at least $32 million, a more than 20% increase from 2019. Our recurring revenue is expected to continue to grow by 30% to USD 9 million as compared to 2019 of USD 7 million. And we expect to be sustainably EBITDA positive in fiscal year 2020. With water scarcity increasing and having seen the impact of pollution, our conviction in the thesis that there will be strong and growing demand for decentralized, preengineered Smart Products Solutions for water and wastewater treatment has only strengthened. We believe our market position is very strong. There's growing acceptance of our proprietary MABR technology. We are well positioned to deliver on the high expectations we have for Fluence in 2020 and beyond, and thank you for your interest in Fluence and especially our supportive shareholders. Francesco and I are scheduled to visit Australia during the first week in March and look forward to meeting with many of you, hopefully, in person. I will now hand back over to the operator for the Q&A instructions. Operator, could you please repeat the instructions on how to submit questions?

[Operator Instructions] I will now hand back to Mr. Charrabé.

Thank you very much, operator, and thank you for everybody for submitting several questions I would like to address. First of all, we see some questions about the SPS guidance in 2020 as it relates to NIROBOX. We are continuously focusing very much on our increased capabilities and opportunities that we have with NIROBOX. We continuously look into finding new and better sales channels, and we continue to push that forward. Obviously, the biggest growth we see is with MABR opportunities in China. And as we mentioned on the call, so far, we have not seen any negative effect from the coronavirus in China. But currently, as all of you know, the Chinese people are celebrating the Spring Festival, and so the country is not active when it comes to pursuing business at the moment. But so far, we luckily don't have any negative repercussion from the virus itself.

There are few questions on the reduction in SG&A. We reduced this year, as we said, 12% compared to 2018 that was already reduced versus the prior year, and the trend is expected to continue in 2020. [ You've referenced ] the number in the 4C that it is a cash-based report. The total staff cost of about $27 million for 2019 includes also technical staff, manufacturing overhead, even in engineering is not related exclusively to selling, general and administrative expenses.

Thanks, Francesco. There are some questions about Australia. So obviously, we are very well aware of the water needs in Australia, given the recent fires and, in general, our MABR solutions. As we have mentioned in previous calls, in Australia, we have actually a exclusive distributor with Aquatec Maxcon, with whom we're working to promote Fluence's solutions locally. And Francesco and I are planning to be in Australia. We are also planning to meet with them and continue to further increase our visibility in Australia and promote our products.