Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

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

Thank you, Bernadette. Appreciate the introduction. And good morning to those of you joining from Australia, and good evening to those of you in the U.S. We spoke to you about a month ago with a Q2 update, our quarterly activities report, that I think shares a fair amount of what we'll say in this call. But there are a few things that we wanted to make sure that you have the opportunity to hear from us directly and have the opportunity also to ask questions about. I would say no major surprises, just executing the strategy that we've laid out, namely, that we really have a core focus since the realignment at the end of last year around shifting our revenue to Smart Product Solutions and recurring revenue and away from custom engineering projects. And this is really a transition that's supported by profit and cash flows to come from the very large and very interesting Ivory Coast project. So as we look at revenue, in the first half of the year, we see that this continued strong adoption of the MABR product, now 34 plants sold in the first half of June 30, 2021, bringing the total worldwide to 281 plants in 11 countries. China revenues in the first half of '21 were up 45% on the prior period, and we see overall also increase in Smart Product Solutions revenues in the first half to 12% higher than last year. And I'd say also, I'm sure you will notice that overall for the company that our revenues as a total were lower in the first half of '21 than 2020. And the reason for this is because we recognized in Q1 of last year a very large amount of revenues at very high margin that came from the Ivory Coast project, but that work has actually been done over many prior quarters. And in the first half of 2021, the Ivory Coast project was executing on budget but recognizing revenue on a percentage of cost incurred. In other words, the basis of recognition is different. We're not recognizing things we did in prior quarters. It's only what we've done in the first half of the year. Because the project was just starting in the first half, those revenues are relatively modest. We would anticipate those would be considerably higher in the second half of the year and for the remainder of the project life until its completion in approximately the first quarter of calendar 2023. Also, when we look at margins, it's very important to recognize that we talk about the focus on smart products and recurring revenue. Every dollar that we bring in from smart products and recurring revenue is worth approximately twice as much as every dollar that we bring in from custom engineering projects because of the fact that the margin is so much higher, approximately double. So this is very, very important as we anticipate in '23 the Ivory Coast project going away and we're not going to be chasing custom engineered projects as our business focus is about smart products and recurring revenue, that really rebuilding the profitability base [ as a smaller mountain to climb ], which we believe we're making good progress on. In other words, we don't have to get to the same revenue in order to deliver the same or greater profitability. We see strong backlog, $175 million of contracted backlog of which smart products is $18.7 million. So this continues to see strong smart products momentum. And we're seeing also, I think, significant progress in terms of cost down. You've heard this now from us for over the last year or more. We continue to improve operating efficiency. We're seeing that in the savings in SG&A down 9% for the first half of this year versus last year. And very importantly, too, we're articulating for the first time in this report that our Italy business is an asset that is being held for sale along with our Peru project. Peru, we've talked to you before about something we were thinking about does this meet our return objectives. We decided that it was not going to. In the case of Italy, these are smart people and doing interesting things but really not in the core direction of where Fluence is going. These are generally not smart products and recurring revenue around our flagship MABR product and also our NIROBOX desalination product. Consequently, we've decided that it's time for us to make that an asset held for sale. We anticipate that we'd find a good investment partner or buyer elsewhere, and that will improve the operating efficiency as well as, of course, our focus on strategic objectives. And then let's talk finally about cash flow. I think if you look at our 4C and 4D and the various other filings that we've stated cash -- operating cash flow during each quarter, during the year, you will see that there was a sad story, but in the prior year, a fairly steady downward trajectory. In other words, quarter-after-quarter, it's accumulated operating cash flow losses. I believe that story has changed. I'm not predicting the future, but I am saying that if you look back 12 months from June 30, 2021, you'll see that we're operating cash flow positive by $19.6 million, and we've seen the cash balance increase from June 30 of last year to this year. So I'd suggest that this very likely means we are turning the corner on cash flow. This does not mean we're going to be operating cash flow positive every quarter because we still have this very lumpy Ivory Coast project where sometimes we get big payments and other quarters, we have big payments going out. But overall, that project is profitable and cash flow positive and is a major driver for our transition to Smart Products Solutions. So for all these reasons, we believe -- we feel a great strength, a sense of confidence in the business. We're seeing tremendous interest in customers, very strong pipeline, anticipate a good second half. And with that, I'd like to turn it over to Francesco for some more detail on the financials.

Thank you, Richard. Our total unreviewed revenue from continued operation for the first half of 2021 is $39.6 million. Revenue from Smart Products Solutions was $10.4 million, up about 12% over the first half of 2020. Recurring revenue was $3.5 million, and Custom Engineered Solutions was $25.7 million, including $21.6 million from the Ivory Coast project. Our partners in China are continuing to help us grow business in the region and will continue to provide support for meeting our guidance. Revenue in China in the first half of 2021 increased 45% compared to the same period in 2020. Fluence management has continued to focus on efficiency and was able to reduce operating expenses by 9%. During the first half of 2021, management decided to exit businesses that are no longer in line with the long-term company strategy. Accordingly, operations in Italy and BOOT project in Peru are now classified as assets held for sale and are being reported as discontinued operations. We anticipate this will help to further improve operating efficiency going forward. Fluence has a strong cash position with cash and cash equivalents of $23.7 million at the end of June 2021. In addition, the company holds $35 million in short-term and long-term liquid investments that provide adequate operating resource. Operating cash flow in the 12 months prior to June 30 was approximately [indiscernible] the first half [indiscernible] [ the collection of $20 million ] as the third milestone under the Ivory Coast project as we communicated to the market on June 4. Fluence has a contract backlog of $175 million as of the end of June, of which $134 million related to Ivory Coast project and $18.7 million related to SPS. We anticipate that the booked revenue and the backlog of orders will allow us to achieve our guidance and deliver Smart Products Solutions revenue in 2021 of $35 million to $50 million and to achieve another year of positive underlying EBITDA. While audit procedures have been completed due to COVID-related circumstances beyond our control, certain internal procedures remain to be completed by our external auditor before the reviewed financials can be released by the company. The company utilize the relief offered by ASIC and extend the deadline for lodgment of auditors reviewed half-year accounts. Expect the auditor to release the reviewed financial in the next 2 weeks if no material change to the 4D and the half year financials that are being released today. I will now hand back the call to Richard. Richard?

Sorry, I was on mute. Operator, would you mind, please, reminding everybody how to submit questions online before we go to Q&A.

[Operator Instructions]

Thank you, operator. So yes, I see a question here and I'd love to actually pick it up. Francesco, I think, just commented on this, so I want to be very clear. The fact that our auditors have delayed completion of the review of our accounts has nothing whatsoever to do with the quality of our accounts and everything to do, unfortunately, with an illness on their side of the fence. And I think I shouldn't say any more about that due to privacy concerns, but this is entirely due to that reason. There's nothing in issue in the accounts. And I think you can expect no changes, certainly no material changes of any kind in regards to the accounts, so I think you can assume that the unreviewed accounts we filed today will be the same as the ones that will be confirmed shortly. Okay, I also see another question, in regards to overall revenue in -- is less in the first and second quarter for '21 versus the prior year. Is this due to assets held for sale? No. It's due to Ivory Coast. As I mentioned earlier, we got a significant amount of revenue in from Ivory Coast. I think, Francesco -- so you have the numbers at your fingertips for what we incurred in the first half of last year versus what we incurred in the first half of this year. And this has to do with the way revenue is being recognized from an accounting viewpoint. In other words, last year, 2020, we were recognizing accumulated engineering work in Q1 that was accumulated over many prior quarters, whereas in the first half of this year, we're recognizing Ivory Coast revenues on the basis of costs incurred, not on a basis of work we may have done in the past.

Yes, Richard. If I may add to what you just said that the contract with Ivory Coast from an accounting point of view is treated as 2 different obligation. One was the engineering package. The other one is the construction work. In Q1 2020, and you will remember, we delivered the first obligation, the engineering package. It was about $34 million of revenue. And construction, on the other hand, started in January 2021. And in the first half, we are still reflecting the start-up of that construction, which is expected to achieve a more sustainable level of cost and related revenue starting already in Q2. [indiscernible] question also...

[ I see a question here also about ] -- yes. Go ahead, Francesco.

On the backlog and revenue in relation to Smart Products Solutions, the question is if the level of backlog compared to the revenue is low. This is an important point. Part of the benefit of transitioning the organization to a standard products-based business, as opposed to project-based which is the Ivory Coast project, for example, is that also the book-to-bill cycle becomes significantly shorter. Just as a reference, I want to mention, last year, the order we received in Cambodia that was received was about $7 million, received in March. We completely delivered before the end of the year. So on smart products, order don't stay in our backlog for years, but we -- in average we are able to deliver MABR or desalination solution within 5 to 9 months from the order. This justifies a lower level of backlog compared to the expected revenue.