Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Fluence Corporation quarterly update conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Henry J. Charrabé, CEO. Please go ahead.

Thank you, Caileigh, and good morning to those of you in Australia, and good evening to our listeners in the United States. My name is Henry Charrabé, and I'm the Managing Director and CEO of Fluence. And I'm joined on the call today by Francesco Fragasso, our Chief Financial Officer. I would like everyone to note 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. This morning, we released our Q3 quarterly activities report and ASX Appendix 4C quarterly cash flow report to the ASX in Australia with an accompanying presentation, which I will briefly go through on this call, and we will then happily address any questions you might have. As I have done previously, I'd like to thank Fluence employees around the world once again as well as our Board of Directors for the work they have done during these extraordinary times. Life and the operations of our business has been challenging with restrictions placed on our ability to travel and interact with customers, colleagues and partners, while prioritizing everybody's health and safety. We, along with many of our industry colleagues, have learned to operate in these changing conditions. But at Fluence, we continue to make significant progress towards achieving our strategic goals. I plan on adding some further context and commentary to the operational performance in Q3. And importantly, I'm happy to confirm that the group remains EBITDA positive for the year-to-date. The global economic slowdown caused by the outbreak of the coronavirus has affected Fluence in all of the regions we operate. Despite these challenging circumstances, I can reaffirm our previously announced guidance based on presently known information and the latest available forecast that for fiscal year 2020 with Smart Products Solutions revenue of at least $32 million, recurring revenue of $9 million and sustainable full year EBITDA positive. I want to begin with a recap of our achievements in the first 9 or 10 months of 2020. Firstly, as announced yesterday, all conditions precedent have now been met on the Ivory Coast project. We have received formal notice to proceed and are commencing construction for this EUR 165 million project, which we have to erect within the next 24 months. Further, we have also already received today the first advanced payment amounting to EUR 23.1 million and are expecting additional milestone payments in this quarter. During Q3, Fluence reported $15.6 million in revenue, up 13% on the previous corresponding period and up 50% on the June quarter. We continue to see an expanding footprint for our Smart Products Solutions worldwide with a growth of 41% for the first 3 quarters of this year compared to the same period last year, including growth in China of 39%. Finally, recurring revenue, including aftermarket sales and BOOT projects, has increased strongly with 63% growth for the first 9 months to September and compared to the same period of last year. Looking ahead, new order bookings of SPS are up 22% year-to-date in China and the rest of the world, reflecting a balanced and diversified profile for our group. Our backlog, including the Ivory Coast project, is at $215 million at the end of September, providing strong revenue visibility for the business going forward. A few other things to mention include R&D, costs and cash. We have continued to invest in research and development, with nearly $7 million invested since the start of 2019. These investments look to broaden our MABR and water treatment portfolio with new packaged water and wastewater treatment solutions developed for our customers. On costs, we have maintained a very disciplined approach with a further 22% reduction year-to-date in SG&A. This reflects our continued goal to shift the organization towards more Smart Products Solutions and reduced focus on CES. And finally, cash in hand at the end of September was at $31.1 million, which, of course, has since further increased with the advance payment just received from the Ivory Coast project I mentioned just earlier. Now turning to the September quarter specifically and recent events. This Ivory Coast government finance facility has already begun to fund the contractual payments to Fluence. This significant water treatment facility located outside of Abidjan will supply much needed, safe, reliable and fresh drinking water for this large community, and we are very proud to be associated with this project and our clients in Ivory Coast. With this announcement, we have achieved yet another significant and important milestone, and we can now focus on continuing the momentum we are seeing in the rest of our business. The revenue and cash flow from this project allows us to bridge the transition of our business to truly become focused on decentralized Smart Products Solutions, further leveraging our innovative MABR technology. From our perspective, the current pandemic draws attention to the need for safe water supply. And as we have previously shared with you, we see demand for our products and services continuing to increase over time. Our core strength as a globally diversified organization with a diverse supply chain, providing solutions in a wide range of countries makes us an agile global player in the decentralized water and wastewater treatment industry. Sales of our innovative MABR solutions continued to increase in China by more than doubling sales on the previous corresponding period or up 40% when compared to the last 9 months for the same period last year. The pandemic has added additional challenges, but we are confident that we are on track to meet our targets in this region. Other successes in the period include securing a $3.2 million contract in Egypt with a semi-government utility company to rehabilitate and upgrade a 12,000 cubic meter a day seawater reverse osmosis desalination plant in Sharm El Sheikh. The system is expected to be completed and operational by late summer 2021. Together with the $7.6 million NIROBOX Smart Products Solution desalination plant ordered in October 2018 and our $20 million order for the New Mansoura desalination plant in Egypt awarded in March 2019, this latest contract further reinforces 2 key elements of Fluence's growth strategy: a focus on desalination solutions for geographies urgently addressing water shortages and providing innovative water treatment solutions to help build sustainable communities. Turning now to recurring revenue. Total recurring revenue of $1.7 million was recognized in Q3, up 70% on the previous quarter with year-to-date recurring revenue of $5.7 million, up 63% on the prior corresponding period. Now regarding the San Quintin project in Mexico. Fluence and the State Water Commission of Baja California, called CEA, continued to hold regular meetings. Whilst constructive negotiations take place, it is the view of the Board and management that this project may not proceed as previously proposed with all parties considering a range of outcomes, including mutual termination. As previously shared, the Board and management of Fluence have set targets for expected returns on invested capital and only pursue projects that meet the strict criterion and add to shareholder value. We will update the market as soon as final resolution with CEA has been reached. Turning to Smart Products Solutions and recapping. Fluence recently installed 22 units of NIROFLEX systems in Ghana to provide drinking water to rural villages with each system delivering clean, safe drinking water with capacities ranging from 20 to 90 cubic meters an hour. Also to recap, Fluence has secured a contract for the first Aspiral system in South Africa, which includes our proprietary MABR wastewater treatment technology. This Smart Products Solution will be a pilot project installed in cooperation with our local partner, MEB, and at one of the eThekwini wastewater treatment plants to process wastewater from effluent to various levels of usage, ultimately allowing for reuse to potable water levels. Finally, on product development, we have had some new exciting product launches, further adding to our SPS portfolio. The Aspiral Micro is the newest member of the Fluence Aspiral family. It is a small scale, packaged MABR wastewater treatment solution with the capacity of 5 cubic meters a day, sufficient capacity to serve approximately 10 to 20 homes. Its footprint is only 3.8 square meters, and it is designed to be installed semi-underground, allowing it to be easily concealed in a neighborhood. Aspiral Micro was presented at the IE expo event in August in Shanghai. The product will serve decentralized wastewater treatment applications and can be combined into multi-unit solutions. And for you to know, we are very proud to announce that the first pilot order for Aspiral Micro was already received in October from China. Secondly, our standardized Dissolved Air Flotation system was developed by Fluence, Italy and is a new and improved version of a very well-proven technology and is now a fully preengineered product. The global launch took place in September and we received very positive customer feedback. Now I would like to turn over the call to Francesco Fragasso to discuss our Q3 2020 revenue and cash flows. Francesco, please go ahead.

Thank you, Henry. Third quarter unaudited revenue of $15.6 million was up 13% on the prior corresponding period and for the year-to-date is up 95% on the same period in 2019. Smart Products Solutions will continue to grow, and we anticipate sales of $32 million in the segment during 2020, largely driven by the continued strong growth in China, leveraging the existing 3 partnerships. Smart Products Solutions sales in Q3 2020 are $7.6 million, and we had $23.1 million in Smart Products Solutions backlog at the end of the quarter. Alongside our Smart Products Solutions revenue, we anticipate recurring revenue to grow 29% in 2020 to a total of $9 million. As Henry stated earlier, we have been disciplined in respect to operating cost with significant reduction in the period with SG&A costs down by more than 16% on the prior corresponding period and down 22% year-to-date on the same 9 months of 2019. Fluence continues to invest in R&D with Q3 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 the investment in R&D is done sensibly. EBITDA is positive for the 9 months of 2020. And based on current contracts and the commencement of construction in Ivory Coast, our expectation is to be EBITDA positive on a full year basis. Cash and cash equivalents were $31.2 million at the end of the Q3. Total cash flow in the quarter was positive $11.1 million after a net operating cash outflow of $6.4 million and the drawdown of $20 million from the debt finance facility with Upwell Water. Based on current contracts and obligations with the large cash receipts related to the Ivory Coast project expected in the quarter, our expectation is to be operating cash flow positive in Q4 and on a full year basis for 2020. Finally, our contract backlog of $215 million at the end of Q3 bolster our confidence in future revenue growth and achieving our strategic targets. I will now hand back the call to Henry.

Thanks, Francesco. So looking ahead for the remainder of the year and as has been the case historically, we expect the fourth quarter to be our seasonally strongest of the year. We are confident about the future as we have observed our customers and partners adapting to the new global working environment amidst this pandemic. We also believe that in this final quarter of 2020, we will continue to book new orders in China, United States, the Middle East, Latin America and other areas around the world. We are excited about Fluence's position. We are commencing construction in Ivory Coast and focusing increasingly on Smart Products Solutions globally, and despite all the challenges, can reaffirm our 2020 guidance based on presently known information. In closing, I want to reiterate what makes us unique and what problems we are solving for our customers. As water scarcity further impacted by the recent pandemic continues to worsen, our approach to offer fast-to-deploy, energy-efficient and smart packaged water and wastewater treatment options is the quickest and most effective way to provide real-time solutions. Our decentralized, preengineered smart products for water and wastewater treatment are in strong and growing demand as those address this global challenge wherever it may occur. I will now hand back over to the operator for Q&A instructions. Caileigh, could you please repeat the instructions for how to submit questions?

[Operator Instructions]

Thank you very much. I would like to take the first question about the bulk order agreements we're seeing for NIROBOX going forward. So we're expecting, obviously, with NIROBOX and MABR and any other business in our company to have a much, much stronger first 10 months than we were anticipating in January, not knowing, of course, that this pandemic would hit. As I mentioned, the pandemic has had an impact on reduced order bookings, reduced execution of projects with travel restrictions. And although we work very effectively with our partners through video conferencing and other things, obviously, erecting or executing a wastewater treatment plant via Zoom is not an option. So we are still expecting bulk order agreements for NIROBOX and other systems to come through, and we are confident that going forward, by the end of this year, hopefully, early next year, we see more and more of an uptick. Francesco, there's a question about the Ivory Coast advance payment. Do you want to take that?

Yes. Thank you, Henry. So I will combine a few questions on the cash flow. The first one is the payment we received, the advance payment, the EUR 23 million that we mentioned, is not included in the cash position of the EUR 32.1 million at the end of September. This was really received this morning U.S. time. This advance payment will be part of the collateral that will be used to issue related performance guarantee and advance payment guarantees to the client and to the main subcontractor and will be released as we progress on the work, including the collection -- at the time of the collection of the first milestone that we announced in the past is being delivered in Q1. And we expect the payment to be received in the next few weeks.

Thank you, Francesco. The next question I see is about an update in China. So our China operations continue to be very, very strong and work around the limitations, as all of you know, several weeks ago, there was a lockdown in Beijing, and then there was a lockdown of Qingdao province. And all of this, of course, has an effect on how we can operate. Notwithstanding that, we just were able to celebrate with our partner, ITEST, their 10th anniversary, and we see continued progress in China and believe that, as we said, the Q4, we'll see some very significant China activity. And then, of course, some of it would obviously slip over to Q1 of next year as well. Another 2 questions I see are regarding New Mansoura in Egypt. The New Mansoura project is tracking well. But also that, as Egypt went through a lockdown, is -- has been delayed. However, as I mentioned earlier, we don't believe that these execution delays so far, thankfully, based on the information we have, have any effect on our 3 principles that we guided for this year, which continue to be EBITDA positive, the $32 million in SPS and $9 million in recurring revenue. So we are in a happy and strong position when it comes to meeting that. One other question I see is regarding SACE, the Italian export credit agency, that has been announced as part of this financing facility. So SACE has been involved for actually quite some time, but differently than the Israeli export credit agency. When we first made the announcement, SACE was interested not to be publicly mentioned until this deal was ultimately signed, which as all of you -- and thank you for the positive feedback we've received from many of you, highly appreciated, that we were able to close yesterday. So SACE was involved, but did not want to be in the front until they knew this is ultimately going through. Francesco, before I hand back over to you, 1 more question I see about the future about the SPS and the biggest market. Yes, China, Southeast Asia are certainly, I think, the near-term biggest market opportunities, but we see some very nice changes in the United States in our favor where we are negotiating partnerships and where we believe that decentralized Smart Products Solutions will have a very significant role to play in the future. But in the near term, we still believe that for MABR, China and Southeast Asia are the main markets. And for desalination, North Africa and the Middle East are the main markets where we can see a lot of potential. Francesco, do you see a question that you want to take?

Yes. So more on Ivory Coast in connection to the Upwell facility. The financing we drawdown on the Upwell loan facility is not related directly to the Ivory Coast contract. That one is a 3-year term loan for working capital that can be converted to project financing, replacing the role that was played by Generate Capital. In term of the collection, there is more question on the collection on Ivory Coast. We collected today, so at the end of October, the advance payment of the EUR 23 million. So that is not included in the 4C for Q3. It will be part of Q4 and will be part of turning -- will play a key role in turning the cash flow positive for Q4, together with the collection of the work already done and delivered in Q2, which is about EUR 31 million, which is expected in the next few weeks. There is a question on the 4C, which I will continue, asking about the fabrication cost higher -- more than usual and the relation to the China activity. So Q2 was a relatively very low quarter due to COVID, both in term of execution of projects and booking new orders. So the payment for fabrication reflect that situation. But at the same time, for China specifically, Q3 compared to Q2, China payment for fabrication were 3x higher in Q3 than in Q2. That also is mainly driven by the Cambodia order that was received in Q1. We collected an advance in Q2. We are executing the project in Q3 and should be delivered in Q4.

Thank you, Francesco. So I see some questions again relating to -- 2 actually, political situations. One is the Ivory Coast election on the Sunday, and then there's questions about whether Fluence will have a benefit depending on who becomes President in the United States. So I think Ivory Coast, we believe and hope that they will go through a peaceful transition on Sunday through the election, and either the current President will be reelected or they have a new President, but we believe that we are with our partners there in a strong position, and that one way or the other will not have a negative effect on the project, and we will continue to be able to promote this socially responsible project. Everybody wants the project. And of course, now we have export credit insurance, and that is political risk mitigation insurance as well, but we are very, very strongly under the opinion that we will continue to execute that project and that the elections will go well, and there's no issue. When it comes to the United States, I don't think that either President will have a large impact on -- or whoever of the 2 men will become President, will have a significant impact on our near-term goals for SPS in the United States. There's a question about how many people does the micro -- Aspiral Micro serve. As I said so, between 10 to 20 homes. So if you take an average of 4 heads per home, so you can see the math between 40 to 80 people. Francesco, do you see other questions?

I think we addressed already the export credit insurance role. There was a specific question, what is the breakdown between what is covered by ASHRA, the Israeli export credit agency and how much is the Italian export credit agency. And I would say the breakdown is about 1/3 for the Italian export credit agency in term of ensuring the credit to Israeli Discount Bank and 2/3 is insured by ASHRA, the Israeli export credit agency.

Thank you. Let me just address 1 more question about San Quintin. So San Quintin, as we just said, we are under negotiation, so we cannot forecast what the outcome will be, but we have very good relationships with the customer, and this is a 5-year contract that has gone through many different iterations as well as different governments. And if there may be a chance, as we said that there could be a mutual termination, we are discussing a potential for Fluence to still provide water treatment systems for San Quintin in Baja, California, just maybe not part of this contract. But that if we were to decide to mutually terminate this contract, that still there would be an opportunity for Fluence to sell water treatment systems in Mexico to the customer, but maybe under a different construct that would be negotiated. So any other speculation of what might or might not happen in Mexico is at this point premature other than, of course, we are almost daily engaged with the customer, and we'll find a solution and inform the market accordingly. I don't see another question right now. Francesco, do you see anything else?

No. I think we covered everything.

And if we miss one of your questions, I again ask you to please e-mail us or e-mail the market -- our Investor Relations team. But for everybody in Australia in the morning, I hope you have a great rest of the day. In the United States, thank you for listening, and we want to thank you again for your time and your continued support. We are, however, most importantly, hoping that all of you are -- and remain healthy and stay safe during these unprecedented times. And in normal circumstances, of course, we would have hoped to be able to see everyone in person in Australia. But given this year and the current situation, I think it's rather unlikely that we can make that happen. So we hope all of you stay safe. We look forward to being in touch with you again. Thank you for your continued support and kind words on achieving the conditions precedent for Ivory Coast, and we look forward to being in touch again soon. Thank you very much.

Thank you.

That does conclude our update for today. Thank you for participating, and have a great day.