Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Fluence Corporation Q1 2020 Business Update Conference Call. [Operator Instructions] I would now like to hand the conference over to Henry J. Charrabé, Managing Director and CEO. Please go ahead.

Thank you very much, 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 the Managing Director and CEO of Fluence. I'm joined on the call today by Francesco Fragasso, Fluence's Chief Financial Officer. To start off with, I would like to thank Fluence employees around the world as well as our Board of Directors for the outstanding work they have done during these extraordinary times. We have taken the necessary steps to ensure that all our employees are safe. We are continuing to work with local governments, partners, suppliers and customers to ensure our business can continue to operate as smoothly and safely as possible. As we are a global company and are operating in many different jurisdictions, our employees are experiencing different cycles and effect caused by COVID-19. We will continue to do everything we can to ensure their well-being. I would like everyone to know that all financial references today are in U.S. dollars and that we will make forward-looking statements, which are protected under the safe harbor provisions of Australian Securities Law. Further details are provided in the ASX release. Also, we look forward to answering your questions submitted through the online portal towards the end of this call. As you may have read in our quarterly activities report published this morning in Australia, we have eliminated all nonessential business travel and encouraged all communications with customers and partners to be conducted via telephone or video conferencing in all of our markets. We implemented these changes in February for China, and for the rest of our organization in March. During this call, I will provide some more color about the potential performance -- I'm sorry, about the operational performance in Q1 2020. Importantly, despite the global economic slowdown and challenges, Fluence achieved a significant milestone of becoming EBITDA positive in large part due to the financial close of the Ivory Coast project announced on January 8. The expected gross profit from the project will result in Fluence being EBITDA positive in Q1 2020 and the full year. Becoming EBITDA positive has been a goal for Fluence and achieving this goal now opens a new chapter for the organization. In addition, currently known information, we are confirming our previously announced guidance for fiscal year 2020 with Smart Products Solutions revenue of at least $32 million, recurring revenue of $9 million and sustainable full year positive EBITDA. Total company revenue for Q1 2020 was more than $47 million. During the quarter, Fluence recognized $34 million in revenue from work already completed and delivered for the Ivory Coast project and payment is expected in Q2. Further good news we can report is that based on current contract and the anticipated collections from the Ivory Coast project, provided remaining conditions precedent for that project are met, Fluence also expect to become cash-flow positive in Q2 2020. Reduction in overhead costs continue to be on track. We have already reduced SG&A by more than 10% in Q1 2020 compared to Q1 2019. These reductions are on top of considerable SG&A cuts in each of the past 2 years and are proof, that as we move our product mix towards SPS sales, we can continue to improve our operating efficiency. These reductions occurred prior to any measures taken subsequent to the COVID-19 outbreak. With regard to the impact of COVID-19 on future business, we anticipate some of the first half forecast 2020 revenues will be pushed into the second half of this year. While these shifts have not had any material impact on our day-to-day business to date, we are staying 1 step ahead and have been implementing prudent cash conservation strategies in all jurisdictions. Further, Board has decided to defer any directors' fees for the time being and almost all other management team members in the headquarters have deferred salaries 30% as well. COVID-19 highlights fundamental need for safe water supply and wastewater treatment, and we anticipate that in the long term, demand for our products and services will only increase. Being a globally diversified company the distributed supply chain and different opportunities in different impacted countries makes us an agile global player in the decentralized water and wastewater industry. This allows us to adapt rapidly to changing economic situations around the world. Moving on to more specific milestones achieved this quarter, I would like to start with our largest SPS order outside of China to date. As announced on March 2, we received an order for a SUBRE greenfield project to treat 15,000 cubic meters a day of wastewater in Cambodia. This project is a stepping stone for Fluence in the region as it will be an excellent reference point for future partners and customers who are interested in biological wastewater treatment. We are continuing to see strong demand from our partner ITEST located in Wuhan, China, alongside other established orders. And with potential partnerships, we anticipate demand for our solutions to continue to rise throughout the year. As a result, we have taken the necessary steps to ensure assembly capacity at our factories in Yiyang and Panjin available so as to be able to deliver our MABR product in a timely fashion to all of our current and future customers and partners in China and around the world. We are pleased to have achieved the first Aspiral sale in Inner Mongolia in China. This initial contract with Beijing China Railway Science New Technology is strategically important for Fluence. Once the technology is proven to the customer, we anticipate that we will see additional commitments in the near term. I would like to once again highlight that our Smart Product Solutions save an average of 19 gigawatts per hour annually compared to conventional technologies. This is equivalent to saving approximately 13,500 tons of CO2 emissions per annum. In addition, with this pollution reduction, Fluence's waste-to-energy installations around the world produced biogas from biomass and generate approximately 120 gigawatt hours annually of clean energy rather than energy generated from fossil fuels. We are committed to continuing our work to provide products and strategies which align with United Nations' Sustainable Development Goals. Turning now to recurring revenue. Unfortunately, the current COVID-19 situation has delayed the construction of our Peru BOOT project as the country has been in a total lockdown since mid-March. Originally, we estimated that this project was to be completed in the first half of 2020. We are still focused on trying to complete the project this year despite this unanticipated delay. Once completed, the Peru BOOT project will provide recurring revenues of at least $3 million per year for 10 years. Regarding the San Quintin project in Mexico, during the quarter, we have held several videoconferences with the State Water Commission of Baja California, CEA, which were originally intended to be held in person regarding the requested changes to the project schedule and other contractual amendments. Despite the complications of having videoconferences rather than face-to-face meetings, these discussions have been very productive, and we continue to be optimistic that we can reach agreement to restart the project. However, due to the impact of COVID-19, the final decision was not reached in Q1. We will continue our discussions with CEA and the local municipality and expect to receive guidance on this matter during Q2. Once received, we should be able to start construction very shortly thereafter. I would now like to turn over the call to Francesco Fragasso to discuss our Q1 2020 revenue and cash flows.

Thank you, Henry.

Francesco?

First quarter -- Henry, can you hear me? Hello?

Yes, please go ahead.

Thank you, Henry. First quarter unaudited revenue of $47.3 million was positively impacted by the financial close of the Ivory Coast project. However, the delay in the San Quintin project had a slight negative impact on overall expected revenue. During the first quarter, we recognized $34 million in revenue from the Ivory Coast project for work already performed that we expect to collect in Q2. Additionally, the collection of advanced payments related to the project are also expected during the second quarter. Expected gross profit from the project will result in Fluence being EBITDA positive on a full year basis for 2020. SPS products will continue to grow. And as we stated at the end of Q4 2019, we anticipate sales of $32 million in the segment during 2020, largely underpinned by the continued strong growth in China, leveraging the existing 3 partnership and recently announced SUBRE sale to Cambodia. SPS sale in Q1 2020 were $2.9 million, and we had $22.7 million in SPS backlog at the end of the quarter. Alongside our SPS revenue, we anticipate recurring revenue to grow 30% in 2020 to a total of $9 million. As Henry stated earlier, we have fast-tracked some of our cost-saving goals for 2020, and have already achieved more than a 10% reduction for SG&A costs in Q1 2020 compared to the same period of last year. We will continue to implement our cost reduction strategies in the following months. Fluence continues to invest in R&D with Q1 spending in line with prior quarters. We are committed to providing the best technology and economic value-add in the market. So while cutting cost is a key focus, we are ensuring this is done sensibly. Cash and cash equivalents were $16.9 million at the end of March 2020. Net cash used for operations was approximately $7.9 million. This net cash outflow was $2.1 million higher than forecasted in the Q4 2019 Appendix 4C, due primarily to the COVID-19 related delays in cash collections. However, based on current contracts and the anticipated collections from the Ivory Coast project for work already executed, subject to condition precedent, Fluence is expected to be cash flow positive during Q2. Our contract backlog of $228 million at the end of the quarter underpins our revenue base for the rest of this year and next. I will now hand back the call to Henry. Henry?

Thank you very much, Francesco. Now despite the current market volatility, the difficulty this brings to everybody, we are very glad to report that Fluence's plans for 2020 remains intact and that we are able to reaffirm our 2020 guidance. We will continue to execute on our strategy to be a leader in the global decentralized water, wastewater and reuse treatment markets. Another key focus is to deliver the Ivory Coast project on budget and on time. Further, we will also focus on increasing sales of Smart Products Solutions, particularly in China in the near-term and securing further recurring revenue contracts. Water scarcity continues to increase. And we believe that the outbreak of COVID-19 may only strengthen that need. This reinforces our core thesis that there will be strong and growing demand for decentralized, preengineered Smart Products Solutions for water and wastewater treatment around the world. Fluence's proprietary MABR technology continues to gain traction in key markets, and with the financial close of the Ivory Coast project in January of this year, and the Cambodia order in early March, we are confident that we are well positioned to deliver on the expectations we have for Fluence in 2020 and beyond. I will now hand the call back over to the operator for Q&A instructions. Operator, could you please repeat the instructions for our listeners as to how to submit the questions.

[Operator Instructions]

Thank you, operator. So as we are all working remotely, even Francesco and I are in different locations, so Francesco and I can see your questions. There are several questions, Francesco, that relate to our financials as well as to the conditions precedent for the Ivory Coast project. Could you please answer those?

Yes, I will. Let me start with the 4C. I want to point out that the 4C change its format, so we are not reporting anymore on quarterly basis the forecast for the following quarter in terms of payment and receipts. That section has been replaced more with a ratio of available cash. This ratio needs to be above 2 before giving more detailed information. There are several questions about $2.1 million higher use of cash in operation than for asset. This is mainly driven by delay in collection. The vast majority is related to the global emergency of the COVID-19 and we partially offset that by some delay in payment and receiving goods from suppliers. That is a net effect of $2.1 million higher use of cash. Then there was also a question in relation to the $5 million reported in Section 2.2 as investment. We invested at the end of the year in short-term cash deposit, those $5 million. We sold those investments in Q1, so that is the positive figure that is reported there. Now going to -- there are several -- the other points, there are several questions on what are the condition precedents and where are we with meeting those? I want just to go back a little bit and remind everybody. We signed the commercial agreement in the first half of 2019. We signed and in the case, Fluence was a party in signing that agreement with the customer, the Government of Ivory Coast. Then we had the financial close on January 8. Fluence is not a party. That is the financing between the Government of Ivory Coast and a commercial bank. Now there are several conditions that needs to be met in order to release this financing. There were 2 items responsibility of Fluence, which were acquiring the land for the project and producing all the process and procedures to comply with environmental law and labor law, and we already did that. What is left at this point is several representations between the parties and legal opinions mainly from the Ivory Coast Government to prove that the contract was executed and authorized according to the local law. On one hand, we don't see any major problem in meeting those conditions; on the other hand, we are dealing with the bureaucracy and of the government, and that is an unknown time frame. But we are very close to achieve those and we expect also the release of the fund to happen in the month of May.

Thank you, Francesco. There are some questions that I find online regarding what the delays have been from COVID-19 and how we're handling those. So as we mentioned in the call and in the release, there have been delays. The first half year -- have mostly been the first quarter, I should say, have mostly been in China that certain revenue is expected to be caught up, as we said in the second half. And obviously, as all of you know, Italy was hit pretty significantly by the virus. Only historically $10 million to $15 million of our annual revenue comes from Italy. However, these are long-term contracted projects. So even if there is a delay, normally that will not have a significant effect. However, you obviously are seeing all around the world that there is a general cash crunch and people are delaying payments, which is one of the reasons that we wanted to be prudent and have implemented the cash conservation methods all around the world as well, including obviously deferral of certain payments to ourselves and salaries. So we see obviously an all-around effect of COVID-19. However, as we are in the lucky position, those have not had any material impact on our guidance. Let me just reiterate why. The guidance we have given for this year was the EBITDA profitable, which mainly depends on the Ivory Coast, which we explained. We received financial close. Secondly, at least $32 million of SPS revenue, Smart Products Solutions, which we also believe is mainly based on China ramping back up and increasing recurring -- increasing Smart Products Solutions outside of China, and we have currently over $22 million of backlog for Smart Products Solutions. The third is the $9 million of recurring revenue, which is also long-term contract. In the first quarter, we already recognized $3 million of recurring revenue, and it's obviously only 1/4 of the year. So based on those 3 principles that we are guiding to, we feel that based on currently known information, we can and we can easily confirm guidance not affected by COVID-19. However, as we all know, EBITDA and revenue do not always play hand-in-hand with cash flow, which is why we are taking the measures we are. We don't think in any other way around the world, whether it's United States, Latin America, the Middle East, we will have a long-term -- currently, not a long-term material impact of COVID-19. So I'm looking through other questions that are recurring, so one other question that we have received and that we were asked previously, is obviously potential sources of funding. We have previously mentioned that we are looking for non-dilutive ways of debt financing. We are continuously exploring these avenues. And as you can see, we are with almost $17 million on the balance sheet at the end of Q1 and expect to turn cash flow positive in Q2, ending the conditions precedent and the payments coming from the Ivory Coast project. Francesco, do you see other financial questions that are addressed to you?

Yes. I want to address one. We mentioned several times that we continue to reduce our fixed cost. There is a question on giving more detail about that. So what I would say is that with reference to the SG&A reduction, there is the table at the end of the business update, Slide #4, that shows the progressive reduction over the last 2 years on G&A. And -- so we continue to plan for SG&A reduction, mainly driven by 2 aspects: One is, as we move towards a more higher-margin segment, SPS and recurring revenue, those require less overheads. So that drives, as we increase or we move the business towards those segments, a reduction in overhead. But also, we are improving our operating efficiency globally and we are implementing more and more service sharing initiative inside the Fluence group. Traditional actions we've been taking to respond to the COVID-19 emergency is accelerating this process. As we said in Q1, we already achieved more than 10% reduction compared to the same period of last year.

Thank you, Francesco. There's a question about our competitive landscape, where we are? So we ask -- whether our competitors are private or public and how long it takes to win certain contracts? So with the Smart Products Solutions offering, the book-to-bill has vastly reduced. So normally that would take anywhere from a 1 year to 1.5 years for a large project or in our case, with Ivory Coast, we are now 3.5 years between the initial contract and -- the initial contact and the contract in February of last year, so that's one of the reasons where we are focusing so much more on Smart Products Solutions because it's a much faster turn. Secondly, we believe we are the leaders in Smart Products Solutions around the world and especially in MABR, way ahead anybody else who's offering a unique IP. We have grown, as many of you know, from the initial plans, 1 or 2, 24 months ago to now over 160 MABR plants globally. So we are, I think, in a very good position of how we are strengthening our position compared to our competitors. Other questions, Francesco, you see? There's a question about the debt collection. I think right now there is no belief that there is any collection issues that we have to fear. Any of our current contractual parties will not be able to pay us. There are delays. And I think in the current environment, that is to be expected; however, we don't anticipate there to be any ability for us to collect in full and be in a position where we can ultimately receive that cash. Another question is, where do we see the main opportunities of Smart Products Solutions outside of China? So Southeast Asia is a tremendous area for us to continue to explore. Other areas, so-called developed countries like the United States or Europe, is also a very good opportunity for us, for Smart Products Solutions. The problem in so-called developed countries is that there are many existing ways, and I would call the old boys' network, where people have the opportunity to not change the way they've always done business. And as Fluence is a newcomer and is disrupting the environment, obviously there it's a little bit more difficult to convince the customers to look at better opportunities. Compare that if you would have offered somebody a cellphone 30 years ago when everybody had a landline, as long as nobody thought 30 years ago, they needed a cell phone, they would have never bought one. Today, it's a no-brainer. I believe that Smart Products Solutions will go the same route. Ultimately, it is the way to go and the old way of building large oversight plans is not going to be the way we continue. Another question I see is about the growth and the partnerships in China. So China, as we have announced, we have currently 3 arrangements with customers: that's Hubei ITEST, that's Kaitian and Yiyang, and there's been Panjin in the Northeast, who we can consider to get bulk orders and booking more and more revenue from. Having said that, these have obviously -- also been delayed in the first quarter as China was largely shutdown. And beyond that, we've announced that we have the strategic relationship with the China Railways, where despite the March difficulties in China, we went ahead with the project, and we see others that we're negotiating with as well. So the potential in China remains very high. The question ultimately always remains how fast can we turn those opportunities into contract, then recognize that revenue from it? Francesco, do you see other questions?

Yes, there is a question to summarize the SPS booking and revenue. I think we covered that before, but I will repeat it. We booked $8 million in order for SPS in Q1. So the total backlog at the end of Q1 is $22.7 million. We recognized in Q1 -- and the booking, the $8 million booking is 60% higher than the same quarter last year. And the revenue, as we said, has been $2.9 million for Q1.

Another question I see is about the NIROBOX opportunities elsewhere in the world. So everything in the first half this year, I think, we can expect slow down. That I think will also be the case in some new opportunities that we see; however, especially in the Middle East and the decentralized opportunity with our NIROBOX, which is the seawater containerized system, we continue to believe that, that is a great product that has a large amount of demand. And as very large projects these days where, especially in the Middle East, oil prices, as you know, decreased, and it becomes more and more costly to build large plants and to sustain the power for those plants. Decentralized options, we believe, will become more and more an option in that part of the world. And our NIROBOX, we believe, is very, very strongly situated to make a big inroad there. But again, we all hope that as China starts to coming back to business, and some areas in Europe, that the rest of the world will ultimately get onto the same path as well. Francesco, anything else you can tell?

I see a question -- yes, I want to answer the question about payment on -- in Q2 expected from Ivory Coast. So we delivered work for $34 million that we recognized as revenue in Q1. Those will be paid as soon as condition precedents are met. We expect that to happen in the month of May. In addition, we will receive advanced payments that are customary in those type of large projects, and generally those are in the 10% to 15% of the total value of the contract. Of course, as we receive this money, we need to start deploying advance payments to our supplier and contractors as well as several bank guarantees. But the overall net cash impact will come Q2 to be cash positive.

There's a question, as always, about our IP and the comments you made about our assembly lines. So just to confirm and to emphasize again, we are the only ones that have the ability and the right, obviously, to produce our own MABR system in our wholly-owned facility in Changzhou, which is in Jiangsu Province in China. That's our manufacturing line, our team and our supply chain. Beyond that, we have these assembly lines in Panjin and in Yiyang, where we ship our MABR and then we assemble them potentially into super modules or into containerized spirals. In any event, all 3 facilities are ours, in our supervision. When it comes to copying our technology, we have a very strong patent portfolio. But we also make sure that we always improve and invest in R&D in order to stay ahead of the curve, so that if somebody ultimately will decide to copy our MABR, that we have a better, newer model out there. And lastly, there's also some trade secret in how to operate the system, so that ultimately it doesn't only become a reengineering effort, but if you misoperate the system, obviously, the membranes either won't work or they will cause system to clog. So the combination of the 3 strong IP portfolio, improved and continuous R&D as well as trade secret, we believe allows us to be protected. And the fact that we receive bulk orders in China, we believe, is a commitment to that because if you could obviously easily copy it, then people won't be booking from us. I don't see any other questions. Francesco, is there anything that you see?

There was 1 question from before about our R&D spending, if it will get impacted by this cost-cutting action that we're taking. And we explained that we keep our R&D in line with what has been historically the spending. We are not reducing, therefore, in technology development. So when we talk about cost reduction, we are really referring to SG&A. And as I said before, if you refer to the Slide #4, at the end of the business update, that has been a breakdown between what is R&D and what is other fixed cost.

Fantastic. So we would like to thank all of you again for taking the time to join us on the call today. We really hope that all of you and your families stay safe and healthy and well during these unprecedented times. And -- but together, all of us around the world will come out of this current challenge only stronger and better than before. But as I and, I imagine, all of you, look forward to having the chance to meeting in person again in the near future. And thank you for your continued support and interest. Thank you. Have a good day in Australia, good night in United States. Operator?

Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.