Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Fluence Corporation Quarterly Update Q1 FY 2021. [Operator Instructions] I would now like to hand the conference over to Mr. Richard Irving, Chairman and CEO. Please go ahead.

Thank you, Harmony, and good morning to those in Australia. Good evening to those joining from the U.S. As you all have seen, we are happy to have filed our business update and 4C within the last hour or so, and we are very comfortable with the results that we've been able to share with you for the first quarter of the year. We see that we are making strong progress on repositioning the business and we also have a healthy pipeline of business in all of our key geographies, which is a reminder, our China, Southeast Asia, North America around water as a service and the Middle East. We've now sold 250 MABR plants. Those of you who remember the early days back in 2017, when we sold out that plant and it was a very much a brand new technology. And in the water space, that can often take a decade or more to become more widespread. Achieving sales of 250 plants in the intervening years is quite impressive to say at least for a new technology, and we seem to be absolutely the dominant player in an investor technology space. So it's no longer new tech and it's really time for us to find and build very strong partners just like the kind of volume partners we already have in China. This is how we'll drive our growth rather than trying to sell one plants at a time. All of our 3 existing volume partners that we had prior to this quarter are ordering more plants from us. So all are actively ordering. And we are extremely pleased to welcome the China Three Gorges Corporation, their environmental subsidiary, because of the fact that they are such a well-known company nationally and internationally and indeed active on the business front throughout China and in many countries around the world. So this is a -- we think is the next phase in our growth as we go from the continuing provincial partnerships that we have to national scale partnership. And we're very pleased to that we were able to receive additional orders from China Rail, indicating that beyond testing the initial plans and it's about broad of the plan. We're also very pleased to be able to achieve our desalination win that we did in Taiwan. This really does once again prove that our ability to deliver on NIROBOX containerized desal solutions in such a rapid time is one of the several reasons why we continue to win orders in a very competitive space. With MABR on wastewater treatment, we stand far apart from the competitors, with NIROBOX in desal, it's a close fight, but we do have some critical advantages and time to delivery as of Q1. The Ivory Coast project is executing very well and we're very satisfied with the progress there and most importantly, we were able to submit all of the paperwork and get all of the work completed, so that we were able to build the next milestone on time on April, the 2nd. And indeed the plants we are building in Cambodia are also progressing very well towards commissioning in the near future subject to COVID restriction. These will treat wastewater for about 100,000 people and are at the center of a new city. This will be a very attractive reference for MABR throughout Asia. As Francesco will describe in a moment, cash is on plan and you'll notice that there were significant cash outflows in Q1 after substantial cash inflows in Q4. Francesco will cover in more detail, but what I would like to say is that, remember that one of the reasons we are pushing hard towards Smart Products in recurring revenue is because these are much higher margin businesses for us. So with a large project like Ivory Coast, which is a very profitable project for us, the margins are in the mid-teens. And so as we execute that project over the next 2 years, let's say for the sake of argument, the margin is 15%, that means you have 85% of the cost. What that means is for every dollar you will see, $0.85 goes back out the door. So you can expect some cash up and down on that project, but the most important thing to say is that the work is done -- because of the work we've done, because of the payments we've received, the project remains overall cash positive, and will be profitable and a good reference growth as we transition over to Smart Products in recurring revenue dominating our revenue mix. And finally, I'd like to comment on COVID. COVID headwinds do remain and what I mean by that specifically, is the fact that in the number of geographies particularly in Asia, travel means quarantine, going from one country to another, often in 2 weeks are in quarantine. This has certainly not stopped us from doing business. As you saw last year, we were able to hit guidance despite the COVID lockdowns and quarantine. But it is slowing the pace of face-to-face meetings. And so this is something that we need to do whatever we can to work our way around, but I also feel personally, a sense of optimism that we've got the dissemination of vaccine that the situation will alleviate over time. So all of that in mind, we continue to reaffirm guidance. Now I'd like to offer Francesco Fragasso, the chance to make some comments about the financial details of Q1 for you. Francesco, Please go ahead.

Thank you, Richard. Q1 had strong revenue growth in key areas with an audited revenue of $18.2 million for Q1 2021. Revenue from Smart Product Solutions is building nicely, it was up 28% compared to Q1 of 2020, while China revenue showed strong momentum up 38% on Q1 2020. The future revenue focus of the business is on Smart Product Solutions. New orders in this segment were up 36% compared to Q4 2020, including $5 million in China. Sewage management continue to focus on efficiency and on managing expenses carefully. On this note, our operating expenses were down 10% on Q4 2020, whereby the cost of reducing operating expenses in 2020 fiscal year, we continue to be able to take cost out and improve efficiency further. During Q1 2021, we received $10.4 million of payment from customers, with net cash used in operating activities of $20.9 million in the quarter. This is in line with expectations that reflect the large in flow received by the company in Q4 2020, related to the Ivory Coast project. This inflows are funding the outflows in Q1 2021 and after, as work on that project proceeds in the normal course of events. Fluence has a strong cash position with cash and cash equivalents of $14.9 million at the end of March 2021. In addition, the company holds $27.4 million in short a long-term liquid investment, that provide adequate operating results. Finally, Fluence had the contract backlog of $191 million at the end of March 2021, including $23 million for Smart Product Solutions. Looking ahead, the guidance for Smart Product Solutions sales for the coming year is underpinned by existing strategic partnership and the potential for farther bulkholders in China. Fluence expect to delivers Smart Product Solutions revenue in 2021 of $35 million to $50 million, and to achieve another year of positive underlining EBITDA. I will now hand back the call to Richard.

Thanks, Francesco. And before we go to Q&A, Harmony, may I ask you to sort of remind our audience about how to submit questions?

[Operator Instructions]

Great. Thank you. So I see, I think, 3 questions here regarding China, which I'll kind of group into a single answer and, by you, Francesco to make any remarks as well. What we saw in China, if you look at the progression from 2017 to last year, some of which was captured in the slides we shared at the last quarterly update, you will see there was a pretty steady ramp in progress. Some growth in 2020, but not as much as we anticipated because of COVID. COVID definitely slowed down the number of orders. Nevertheless, we are continuing to see business moving forward because of the fact new partner like 3 Gorges coming on board. The situation in terms of timing of orders in China is always a little difficult to know ahead of time. The first quarter generally for our business in China and elsewhere tends to be slower in Q1, and China that in particular because of the Spring Festival holidays, which is typically about a 2-week period when people are off, and a lot quietens down before that. And in the case of in Q4, for example, is often a big quarter in China, because that's a rush to get to use up budgets before the end of the year. But there is no question that as we progressed from provincial partnerships, the national partnerships with potential for large orders is strengthened and from a pipeline perspective talking about quite a few large projects, but I really couldn't give an accurate estimate of timeframe. I just feel that we are seeing very strong demand in China because we continue to believe that our technology MABR delivers the required to Class 1A or even higher standards of wastewater treatment at a lower cost, both CapEx and OpEx, net chemical use and less energy use than any other alternative approach. And that's why if you care about quality they will come to us and that's why we're even in a competitive market like China, we're doing very well. The production facility continues to operate, sometimes going to multiple shifts, sometimes of single shift is required. And remember 2 is an addition to our production line that makes the MABR modules, we also have 2 assembly facilities in 2 different provinces that can build be Aspiral containerized units if we run out of capacity in Changzhou and our main plants. I don't know, Francesco, any follow-on comments to that?

No additional comment on that. As your question about the cash flow in Q1. As we said, it's has been negative about $21 million, this reflect is mainly driven by the cash flow profile of Ivory Coast, and you will see that if you combine the last 2 quarter, the overall operating cash flow is positive, more than $13 million. This is due to the fact that we are including cost and collecting in 2 different quarter on this project that has been the case of Q1. Q2 might be positive. It depends how we negotiate some term with subcontractors that we are still finalizing on Ivory Coast and how the work allow us to get delivery of equipment and pay related suppliers. The project overall is positive and will continue to be positive from a cash flow point of view. Also we are perfectly on schedule, on time and today, we don't anticipate any delays or unexpected problem in the future.

Great. Thanks, Francesco. And I think there is question here about what's the basis of our comfort -- confidence in delivering on guidance, and specifically a comment around the guidance for us in Smart Product Solutions, said something in between 35 and $50 million depending on how quickly the COVID headwinds go away. And also the EBITDA positive for the year. So on the Smart Products as noted in the business update that we released on the market this morning, you'll note that our -- its contracted backlog is $23 million, the Smart Products. So if you add that to the, I believe it was 3.7 million that we sold in the Smart Products in Q1 to the 27 million to about 35 million there because we do anticipate that back level playing out within 2021. In addition to that, as we've commented previously, the 3 volume partners that we've signed agreements with namely Kaitian, ITEST and Panjin, All 3 of those we estimate and it's only an estimate, but we estimate that there is still about $50 million more in business that should come in from those contracts. I don't believe all of that will come in 2021. Although it was originally anticipated that it would when those agreements were signed because of the delays of COVID, so I suspect that will be this year or next. But that's really the basis of our confidence on Smart Products. And when you combine the profit we make from that with the profit that we will make on Ivory Coast this year, that's what stands behind our ability to deliver EBITDA positive bearing in mind that we continue to make good progress on operating efficiencies. I see there is a question on what are our target application areas be in the U.S. market, and this is something we haven't actually talked that much about in the past. The situation in, let's just say North America generally, so that for us would include, certainly the U.S. and the Caribbean is that, in many areas there is a water scarcity issue and water or wastewater treatment is surprisingly expensive in the -- the same as here in Australia. And for example in the Caribbean, where you may pay an average of about $3 or more per cubic meter U.S. that is, for freshwater, frequently resorts in the Caribbean are actually using desalination seawater to irrigate their landscaping. Well, with MABR, you can get very high quality treated wastewater that you could use for the same purpose at a fraction of the call. And so for those kinds of customers in a water-stressed area where the prices are which certainly applies the Caribbean and quite a few parts of the U.S., the proposition we can make to customers, so we can potentially save as much as 50% on their water bill and all they would need to do is pay-offs for the water or for the wastewater treatment, so we could sell both MABR and NIROBOX into those kinds of projects, but on a water as a service basis. So we don't charge for the capital equipment, we simply have a long-term take or pay agreement with them just like we currently do with the Hilton in the Bahamas, which is based on desalination, that's a 15-year agreement, take-or-pay agreements to buy water. That can be very attractive from an IRR perspective, often in the mid-20s or higher. So that's where -- and -- but we really believe is that at least in the near-term, commercial customers is a secret. So that would be resorts for example, but it could also be commercial buildings or managed real estate, and all of those are opportunities we have in our -- the pipeline, can't make predictions on how quickly those will close, but certainly there seems to be a strong interest.

Richard, there is a question about the backlog, if the $23 million we mentioned on SPS includes 3 bulk partnership we have in China? It does not include the expectation from those partnership. What we include in the backlog are from committed order to the company to deliver. So those $23 million does not include that.

I see one also Francesco in regards to cash outflows related to restructuring.

Yes. Let me take that. The question is if we expect additional outflow related to the restructuring? Yes, we expect additional outflow. The restructuring, to be clear, is related to repositioning the business and accelerate the transformation to a product base organization. This process, as you know started in November with Richard taking the current position as a CEO and will continue during the 2021. Most of those costs have been accrued from a cost and financial reporting point of view in 2020 profit and loss, but the outflow happened in Q1, it will continue for the most of 20 -- in 2021. It might even be -- there are additional cost that we will incur in 2021 that have not been accrued, as we reallocate resources globally to accelerate the transformation to -- from CES to SPS.

Right. Thanks, Francesco. And I see a couple of more questions here, in regards to 3 Gorges. So the discussions and the relationship we have the 3 Gorges goes back several years to initial exploratory interactions during that time period, as we understand it under the various 5-year plan provisions both the last one and in particular the current one, that just started this year. The 3 Gorges Group, as we understand, it has been given the central role in basically sorting out the Yangtze River Basin in China. And we've seen some sources that has been translated from Chinese that, I can say that they will be spending literally hundreds of billions of dollars on that. Now let's be very clear, that's not on just wastewater treatment, it's on a lot of things including soil remediation and pollution clean up and so on. But the opportunity that they would have -- we have as a major part with them is very real, but still in the relatively early stages. We did sell them a project some time ago, that was really kind of a test project for them, that went extremely well. The results were excellent. They were not only impressed with what were able to with what we were able to do but how thoroughly we were able to document that the amount of data that we were able to flag. And I think it's really -- projects like that with them, that convince them, okay, this is possible but -- and now that we've gone onto this new project, where we're talking, I believe it was 29 Aspiral units in 14 different towns and villages, that's the kind of volume project that we would hope and anticipate for going forward from them in many more cases. Because they are active nationally, they can engage with a lot of local partners, and thereby tackle a lot of projects in parallel. The manpower limit is not on their side. So we're very excited about that, but it's very early days and very hard to predict volume. I see also a question on municipal opportunities for MABR in the U.S. I have to say that the municipal market in the U.S. is incredibly fragmented. As I understand that there about 55,000 water utility is the average, one of which connects to few of the 3,000 connection point. And typically, these are very conservative and very, very slow to move to new technology. And so we feel that this is not an early adopted market and that frankly we can far better look for leads with commercial customers around water as a service as I mentioned a few minutes ago. We think that's the right target for us in the near-term. Longer-term municipalities certainly makes sense because MABR is such a high quality solution, and because we believe the world will go to fully decentralized water and wastewater infrastructure. What that means is, lots of plants and those pipeline that you spent so much money on just basically don't go away, but they are far, far fewer of them. The consequence of that is plants will be n neighborhood and if plants were in neighborhood, nobody is going to want to see, hear or smell them, and with MABR that's what they get, you can disguise the plants with foliage and so on. Most importantly, they don't produce odor they're extremely quiet and they have very, very little maintenance requirements, so they can be automated which is what you need in that world. We think that therefore has a very, very powerful door that is open to us, but again, not in the municipal market in the near term.

So Richard there are a couple of questions that we'll address. One is in relation at cost control going forward. As I said, we'll continue to improve our efficiency to integrate operation. And naturally, as we increase our business in term of standardized solution, we are driving down our overhead associated to CES. But also we need to be aware that we are growing in specific regions like China. So we have strict control of course, but at the same time we are growing. And so we expect 2021 to be slightly less probably than 2020, but we think we achieved an optimum level of efficiency and integration at this point. There is another question in relation to what is excluded from the underlying EBITDA. What we normally exclude are non-operating, non-recurring cost, those could be restructuring cost for instance or where the write-off of the San Quintin asset in 2020.

Great. Thanks, Francesco. I think, yes, there is a question here in terms of the Taiwan order, how quickly this is going to be up and running. The units are on their way by ship to Taiwan at the moment, so that's all happening in real time. We would anticipate that in the near future that, that will be up and running because commissioning of the desal plant when you use NIROBOX is very rapid. And there's also a question on Australia and possible sales from Australia. It certainly is true that MABR and for that matter, NIROBOX could be incredibly useful in many, many applications in Australia to communities to potentially to commercial and industrial customers. The concern that we have at the moment is simply that we need to go where we see, not just the door that's open, but where we're almost being sucked into a market because of the amount of energy that is in terms of deploying technology. So China, of course, you know the story well, about the higher standards that really came into effect in rural areas and in the last 5-year plan and then being continue till this one, that's incredibly a powerful market for us, where we canceled tens of plants in one order as we just did. But at the same time, we're seeing similar situation in Southeast Asia, that Cambodia plant is the first wastewater treatment plant of any kind in Cambodia, and it's going to treat wastewater for 100,000 people, but it's a Smart Product and is based on mostly SUBRE MABR. And then finally in the Philippines, much stricter water standards and the threat basically to non-compliance plan, you better get compliance. This is a great opportunity not only for Aspiral for us, but also using SUBRE in some cases to upgrade plant that are not compliant to bring them into compliance. And that's why already we have 8 MABR plants in the Philippines and anticipate a lot more. So we have to go where the doors are open to us. And unfortunately, we are limited, but to the extent partners can help with that, we are very, very open for them. Well, I think we're running out of time here. There's a question here about why I got involved in the business and is that thesis is still intact? Absolutely, definitely. My funds invested in, what was then MSD, when it was 3 people and then MABR was like glimmer at someone's head, and now we see that playing out. And at the same time, the accelerating adoption of strict standards, the fact that those are being enforced and this is very strong trend to decentralization. We think these are all incredible opportunities that are directly relevant to the products we have. So thank you all very much indeed for joining and we look forward to speaking with you again at our AGM, which is coming up in May. You should have received a notice of meeting for that in the last few days. If's no, then it's on its way. That's on May 27, and we hope that some of you can actually be there in person. Thank you all very much. Good morning and good evening.

Thank you.

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