Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Thank you all for joining at short notice for what I think is an important call in the journey of Fluence. Good morning to those of you in Australia, and good evening to our U.S. listeners. My name is Richard Irving, now Chairman and CEO of Fluence. Please 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 announced a strategic repositioning of Fluence, prioritizing Smart Products Solutions that focus on the growth markets of China, Southeast Asia and the the Middle East. I'd like to recap the key elements, the rationale for this and then give you the opportunity to ask questions. As usual, please submit these at any time via the web interface. The recent completion of conditions precedent on EUR 165 million or approximately USD 194 million Ivory Coast project supports strong revenues and cash flows over the next years. This provides an ideal pivot point to transition the remainder of the business to focus on achieving more rapid, consistent and profitable growth, particularly in strategic markets for our Smart Products Solutions. We see significant opportunities in China, Southeast Asia and the Middle East where we can capitalize on our technology strengths with MABR, NIROBOX product. Looking first at MABR, this remains Fluence's most important asset. And China remains the market with the greatest near-term potential. We're very proud indeed we now have over 200 MABR installations either in operation or in construction globally. Given MABR's commercial introduction only 5 years ago, this is an unusually rapid adoption rate for a new technology and a very conservative industry. It reflects the unique combination of the technologies performance, cost of treatment and compliance with the U.S. and most stringent performance requirements globally. Our initial MABR deployment started in 2016 with a smaller to medium-sized plant. Now our submerged MABR technology called SUBRE, serving larger plants, has been successfully deployed, and the Aspiral Micro serving smaller clusters of homes is seeing initial adoption. These products further expand our MABR market potential and position the Fluence brand as a market leader with a pipeline of differentiated solutions in the fastest-growing segment of the wastewater treatment market. The traction in this [Technical Difficulty] market segment and increasing demand for our MABR family of products inside and more recently outside of China. The Fluence board believes we must increase our focus and effort to further grow MABR adoption in China and neighboring geographies, in Southeast Asia. This later region's potential is evidenced by contracts already won in the Philippines and Cambodia. China and Southeast Asia will be our market priorities, the MABR family of product. We've formed several key partnerships in China, but in various stages of volume deployments. We anticipate our primary channel of the market will be via these partnerships as well as new channel partnerships, some of which may be national or perhaps even international in scope. While China and Southeast Asia are the priority, we are also developing further MABR deployment channels by a potential strategic industry partners in the U.S. and elsewhere. And now turning to NIROBOX. Fluence's NIROBOX family of drinking water solutions offer what we believe to be the industry's fastest path to provide freshwater after the most urgent need. NIROBOX is also very footprint efficient. One 40-foot NIROBOX mega unit to meet the full freshwater needs of 10,000 people and multiple units can easily be installed as an integrated solution to meet greater needs. Southeast Asia again presents a proven market for NIROBOX as evidenced by our recent deployments in the Philippines and Vietnam. And with warming ties between Israel and other Middle Eastern countries, along with Fluence's existing joint venture in Egypt, we believe this region with its urgent need for water security presents an excellent target market for NIROBOX. Accordingly, from now on, Middle East and Southeast Asia will be our priority market in NIROBOX. Third limb to our strategic repositioning is the successful delivery of the Ivory Coast project. We are committed to completing this important water treatment plant in a timely and profitable manner. Once the complete plant will provide -- once complete, the plant will provide sufficient water for at least 1 million people, providing a valuable new water-source to the people of Abidjan, Ivory Coast, economic capital. I'd now like to say a few words about the change in CEO. After more than 3 years at the helm of Fluence and a total of more than 10 years with RWL Water and Fluence, and having merged a technology company with execution capability, the Board of Directors and Henry have reached a mutual decision that this is the right time for him to transition. The Board is most grateful for Henry's significant contributions, dedication to the company and wish him the very best of success in the future. I also acknowledge the hard work of the executive team and Fluence management across the global business. The narrowing of our strategic [Technical Difficulty] will allow us to transition to a leaner, more cost-effective corporate structure. Having been involved with Fluence and its predecessor, Emefcy, as Chairman since 2010, I'm greatly honored to be invited by the Board to take on the additional role of CEO. I've been involved in growing young technology businesses for 30 years, both in top operating roles and as an investor and board member. I'm proud to point to successes in the semiconductor, software and energy efficiency sectors, each of which has relevance to Fluence. And of course, I have more than a decades experience in the water industry. I have every confidence that with the continued efforts of a strong team, innovative technology solutions and the right business focus, Fluence can sustain profitable growth and deliver strong investor returns. In view of my new dual role of Chairman and CEO, Board has resolved to appoint Paul Donnelly, based in Melbourne, as the lead Independent Director in keeping with global governance standards. Today, we again reaffirmed guidance for fiscal 2020. Fluence continues to anticipate achieving published guidance for the current year, comprising EBITDA positive for the full year, excluding any onetime costs, USD 32 million in SPS sales and USD 9 million in recurring revenue. As noted in the recent business update, in the event that global economic conditions an/or COVID-19 related business restrictions deteriorate beyond what the company currently anticipates, it is possible that some of the forecast 2020 revenue may be delayed into 2021. The company estimates its strategic repositioning costs to be up to USD 7 million, although the cash impact will be spread over a number of quarters and total charges to be considerably less than this. I'd now like to invite your questions, and we'll hand back to the operator for a Q&A instruction. Operator, would you please repeat the instructions on how to submit questions.

[Operator Instructions]

Thank you, operator. So let me start going through some of the questions. There are quite a few. So there's a comment about what about the U.S. business given the amount of time and effort invested in that? I think the truth of the matter here is that the U.S. is a very, very conservative market. It's a very balkanized market in the sense that you're trying to sell to municipalities. There are something like 57,000 water utilities in the country, with most of them serving fewer than 3,000 connection points. Therefore, it's a very hard place to use as one's initial beachhead market. When you contrast that with the rate of adoption that we've seen, for example, in China with MABR, we really want to emphasize the Chinese market without walking away from the U.S. that we will maintain a [ Brexit ] here, and we believe partners are the best way for us to access that business and then we can scale the organization as business growth demand. There's a comment about issue of governance in terms of the Chairman and CEO being resting in 1 person. And I guess you may have heard I, a moment ago, mentioned that Paul Donnelly, our existing Board member, will be the lead independent director. So he is there, among other things, to break that time, ensure that there is a proper governance in the company. There is a question about whether my appointment is temporary? No. I am the CEO and Chairman. And I intend to run the business. And I know the team very well. I'm really looking forward to working with [ the team ] on a day-to-day basis. There's a question also about the strategy around Smart Product Solutions. Was already our strategy. What has changed? And the issue is one of the emphasis. If you look at what Fluence has been doing up to this point, it's been involved in many areas. And what we're saying is without necessarily abandoning some of those areas, we want to put more resources into the place where we know we have the greatest competitive advantage, the nearest-term opportunity to ramp the market, highest gross margins and the ability to engage in repeat businesses where we can, to put it bluntly, crank out lots of the same thing as opposed to engaging in the kind of custom projects, which are very resource-intensive that can therefore do pretty low margins, and where the cash flow and the revenue is so extremely hard to predict. There is a question also in regard to what about custom engineered project post Ivory Coast? The way I mentioned, Ivory Coast remains a top priority for the company. We have an outstanding and very committed team to get that project tackled and successfully implemented. But we are not looking to pursue custom engineering project at this point for beyond Ivory Coast. We really want to emphasize sales of standardized product, much better margin, much more predictable. There's a question, let's see, about the onetime cost of restructuring. We mentioned an estimate. I just mentioned an estimate of USD 7 million to achieve. This is our, I would say, very conservative view of what the upper end would likely be of that. This may end up being more than the charge we would take in this quarter. In other words, we may choose to take less. We just need to analyze those costs and then provide the right amount by the time we reach the end of the year. And of course, that will involve us having to get down some more detail as to exactly what would be involved there. There's a question about San Quintin. The -- that remains in discussion and in negotiation. And we've been pretty clear, I think, in the business update about where that is. There's no change in the status of that project at this time. There's a comment about the political situation in Ivory Coast. As we understand it, at the moment, the government remains fully committed to this from the highest level. It's a major requirement to get more water for Abidjan, a city of almost 5 million people. And consequently, we don't believe that any of the minor disturbances that happened last fall will present an issue for us, to the best of our current knowledge. There's also a question about whether there will be a further reduction in overhead? Absolutely. We are always looking for ways to improve our operating efficiency, certainly on a percentage of a revenue basis. Going forward, that's definitely on -- our intention. I think that's basically all the questions I see here. So I just would like to thank you all very much for joining, and I look forward to interacting with all of you in the future, particularly around the quarterly business update calls, and everyone hope that vaccines for COVID work and that we can all travel again. I would be delighted to visit you in person for those of you that are in Australia. Thank you again for joining, and goodbye.