Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Thank you, Zoey, and welcome to all of you on the line. Good afternoon and evening to those ones in the U.S. Good morning to those in Australia, New Zealand and Asia. So a pleasure to be able to bring you our third quarter activities report. As you've been hearing now from me for a long time, it seems, too long, we continue to experience COVID headwinds in the business. And what I mean by that is the quarantine that our teams have to go through, particularly in Asia. It's a major obstacle to face-to-face meetings and does tend to slow down business, it's slowed down the execution of some projects, et cetera. Nevertheless, through a tremendous amount of persistence on the part of our team, we are delivering as expected on the business so far this year, as evidenced by the numbers. I think you are seeing strong revenue growth. You're seeing strong bookings, backlog on smart products. So it's really confirming a shift to smart products that is happening, and we're seeing continued cost down improvement despite the fact that we already had cut a lot last year, we're continuing to see good progress there. And we're looking forward to a pretty strong Q4 for the current quarter. I mean the quick summary there would be revenue growth up 46% over the same quarter last year and Smart Product revenues in the quarter bring us to a total for the year-to-date through the end of September of $18.9 million. Now when you combine that with Smart Products backlog of $16.2 million, which includes the recent Cambodia order and the amount of that, that's going to turn into revenue this quarter, you can see that we're already very close to our guidance range of $35 million to $50 million for Smart Products for the year, which is what gives us confidence that we will achieve that. We're also continuing to see strong adoption of our MABR technology for wastewater treatment, not just the distributed or decentralized plant that is more in scale, but now with the very large plant that we just won in Cambodia, which will be the largest MABR plant from any vendor in the world when it's complete next year. So we're very pleased with that recognition, which came to us as a result of the strong success of the first 2 plants that we built there. And between those 3 plants, when that new one is finished, we'll be able to treat wastewater for over 0.25 million people just in that one city with those 3 plants. So very pleased with that. 44 MABR plant for year-to-date brings the total of 290 so far this year. Cautiously say that we're optimistic of passing the 300 mark by the end of the year. And backlog generally looking strong. And then again, looking at costs down, what we've been able to take out of our operating expenses seeing a 14% improvement in Q3 versus the prior year and year-to-date, also seen operating costs down 11%. So continued very good progress. So feeling very good about all of that as well as some of the nonnumerical achievements of the quarter. Talk about these in the release. But let me just say, winning our initial MABR wastewater treatment project contract in Dubai. It's a very important one for us, even it's a relatively small order, it's with a partner. We signed an MOU with a large industrial group, Alshirawi that we signed some months ago. And the UAE and the Gulf for us is very important because they recycle about 40% of their wastewater, and there is a trend towards decentralization. So that's a very good, should we say, beachhead for us in that region. Also very importantly, winning an MABR sales in St. Lucia and the Caribbean. As we've said many times, winning recurring revenue projects in the Caribbean, particularly around wastewater reuse as a service is a very important priority for the company, and having that local reference will help to accelerate orders in that area. And then finally, although we didn't announce it on ASX because there weren't any specific numbers associated with it, we're extremely pleased to have signed a joint development agreement with Beijing Enterprises Water Group out of China. BEWG operates 1,115 wastewater treatment plants. So you can imagine they have tremendous reach, not just within China but internationally. And we're talking about a joint development that does not in any way compromise any of our core intellectual property. So feeling very, very positive about that indeed. So with no further ado, I'd like to hand it over to Francesco, who can show you in a little bit more detail of the numbers. But again, I think just to summarize, we're feeling just very -- I think very positive about the business despite, as I say, continued COVID headwinds just slowing our business down more than otherwise, Francesco?

Thank you, Richard. In the third quarter of 2021, we had unaudited revenue of $20 million, up 46% on Q3 2020. For the first 9 months of 2021, the unaudited revenue was $59.7 million. Underlying EBITDA is expected to be positive for the 2021 financial year. Revenue from Smart Products Solutions are tracking in line with our expectations. SPS revenue up $7.4 million in Q3 2021, bringing the 2021 year-to-date SPS revenue to $18.9 million. Our partners in China are continuing to help us grow our business in the region, and we expect today as well as other customers will help us meet our guidance. The booked revenue and the backlog of orders give us confidence to achieve our guidance in the Smart Products Solutions segment in 2021. We continue to focus on improving operating efficiency and managing expenses. Our operating expenses were down another 14% in Q3 compared to the prior quarter and down 11% for the first 9 months of 2021 and compared to the same period of 2020. We are pleased that after reducing operating expenses in 2020 as part of the response to COVID-19, we continue to be able to reduce our fixed cost and improve efficiency further. This is mainly due to the continued shift towards selling SPS products which are preengineered and therefore, can be sold with better margins and less SG&A expense. Fluence has a strong cash position with cash and cash equivalents of $16.3 million at the end of September 2021. In addition, the company holds $35.7 million in short-term and long-term liquid investments that provide adequate operating reserves. Net cash used in operations in Q3 was $2 million, down from the $5.9 million in Q3 2020. Fluence had a contract backlog of $158.5 million, which $119 million related the Ivory Coast project and $16.2 million to Smart Product Solutions. We expect to deliver Smart Products Solutions revenue in 2021 of $35 million to $50 million and to achieve another year of positive underlying EBITDA. I will now hand back the call to Richard. Richard? Richard, I think you are on mute?

Oh, I'm sorry, Francesco, I was on mute. Thank you for the reminder. [Operator Instructions] And I see the first one pertains to how much of the $26 million we received this quarter and operating received how much with Ivory Coast? Well, I don't know Francesco in terms of received...

Yes I can...

Certainly in revenues, it's about $13.2 million.

Yes, we collected in Q4 about $15 million on Ivory Coast, but that was also a significant payment.

In Q3, right?

That was actually significant.

Yes.

Yes, $15 million, 1-5 collection on Ivory Coast, but that was a match with payment to subcontractors. As we said in the past, we have back-to-back terms with our main subcontractor on the project. We don't expect any additional payment before the end of the year at this point.

Great. I see a question, a couple of questions on the BEWG partnership. This is not in any way going to touch our MABR core intellectual property. The purpose of this partnership is to take the Aspiral product family and apply more localization expertise for that in specific geographical areas or specific applications. So it's really about mixing and matching the nonfluid components that would go inside that Aspiral unit. And it's really, the way I would see it is the way for BEWG to create some, should we say, ownership in the outcome of not just the project itself but excelling that product within their target geographies, which, as I've mentioned, extend well beyond China. As to the timing of introducing a product configuring and Aspiral system doesn't take a very long time, I certainly would look for something to happen, next year, but we don't have any definite time frames or commitments from them for introduction of the product.

Richard, I see two questions, a couple of questions on Ivory Coast on the impact of the delay. So first, let me say that the reason of the delay is just part of the evolution of the project as the execution is unfolded with the client, that subcontractor, there are more efficient engineering solution that result also in the extension of the schedule. This is the main reason for the delay. In terms of impact on profit and revenue, so this might impact revenue -- might defer some revenue from '22 to 2023 with a related deferral of some gross margin. Overall, there is no impact on the profitability of the project.

Right. I see a question on the new MABR contract in Cambodia. I see that, that contract, as you'll recall from the announcement, was for $8.5 million that was the bookings achieved this month. We do anticipate approximately half of that will be recognized as revenue during the current quarter. In other words, during calendar 2021. So that does help us get to our guidance range. And I think there's also a question in regards to our cash position in the Ivory Coast payment. I think the thing that's really important to bear in mind in regards to the Ivory Coast project is that, as Francesco mentioned, for the current -- for the prior quarter Q3, we tend to get payments and a good portion of those payments go back out again. But we don't find ourselves in a situation where we have huge outlays and then there is something being received to more than offset those. So they're pretty lined up back to back. In other words, we subcontract a lot of the work that's going on there, a lot of the heavy lifting on the ground EPC work to our partner, and we basically pay them out of what we receive rather than us taking a financial lift. So we're comfortable with our current cash position with the current level of order. There's also a question about the Philippines, and how our progress is moving there. We are in the process around the final phases actually of opening a subsidiary in the Philippines. And this is very important for our pipeline of projects there because so far, we've only been a rep office where you have to work with a local partner, and the local partner is the one that did some directly on the project. Once the subsidiary is up and running, which we anticipate it in the very near future, we can now pursue projects directly, bid directly on those projects. That certainly will expand our pipeline and build on the 10 plants that we've already implemented in the Philippines, including 8 MABR plants. We see a lot of demand for decentralized wastewater treatment, also wastewater reuse for irrigation purposes, particularly at resort and indeed for freshwater where extra drinking water is required. There is a question in regards to quarantine conditions in China in 2022. What I can say is your guess is as good as mine. I think there's been a tremendous amount of concern in China, should we say at the city and provincial level of not wanting to have outbreaks get out of control, not surprisingly, which just tended to make people err on the side of being conservative with lockdowns and so on. But these things, we've seen go into place and then get removed relatively quickly. And we have a substantial team in China, more than 60 people now, including quite a few salespeople. So we can basically move people around within the country, to some extent, to get around quarantine requirements that they are in place. This is -- and we're also doing more business via video conferencing and online, which was unthinkable before COVID, but been forced by necessity to happen.

Richard, I see there is a question on what is the typical margin on SPS versus Ivory Coast. Have been reported this in the past or corporate presentation that SPS product has a range of margin that goes from 25% on desalination up to 35%, sometimes 40% on MABR-based product. While Ivory Coast, let's say, the typical APC project or customized engineered solutions at an average margin of 15% In the case of our -- our project margin right now is expected to be in the high teens.

Yes. There's also a question about the Ivory Coast delays in creating a situation of penalties. That's not something that we currently anticipate. As Francesco said, the reason for the delay is finding ways to do value engineering, which actually improved the gross margin of the product -- of the project. But that sometimes means that it takes a little longer to complete, because you're spending a bit more time getting the engineering optimized up-front before actually executing that particular phase. So I would take this as just something that's very much in the normal course of executing the project to this side. Also a question about development of water as a service or selling water in the U.S. and the Caribbean. We have a good pipeline of projects. These do take a little longer to close than a typical plant or that because of the fact that you're typically looking for something on the order of a 10-year take-or-pay contract where the contract tends to be quite complex. But since we've hired Dario Perez, he's based in Miami to head that effort. He's covering the region very effectively. We have built a very meaningful pipeline. So we hope to have news on that in the not-too-distant future.

There is one more question in relation to the delay on Ivory Coast, more specifically on 2021, if there is any material impact on the revenue for this year? There is no material impact on Ivory Coast revenue in 2021. As I said, is this delay on the schedule will defer some revenue from 2020 to 2023.

Excellent. I think, yes, there's also a question about are we looking at offering Cambodian style MABR plant to the U.S. market? Absolutely, and not just those, but also Aspiral. We see, I think, in the U.S. with commercial customers where we would be selling reused or recycled water as a service, a better fit with the Aspiral unit, but we believe that China and Asia generally have proven our MABR technology abundantly well, given the 250-plus plants that we have there of size ranges all the way down from a cluster of homes to treating 100,000 people wastewater and also in equatorial climates all the way to the frozen north of China even at different altitude, which is a major factor in wastewater treatment. And that becomes a tremendous asset, that operating data we've collected over the last 4 or 5 years that we can leverage internationally. So we very much are looking for the right partners to enter the U.S. and Europe. And really, again, think about how we've built the business in Asia. It's been with customers who've come to us and said, "We don't want one plant, we don't even want 10, we want lots," to have either lot of small plants or a handful of very large ones. So one customer relationship can be grown into a lot of repeat business over time. We need to pursue that same model, whether we're selling recycled water on take-or-pay contracts or whether we're selling equipment, we need those kinds of partners. And so those are some of the discussions that we have going on at the moment in preparation for entering the North American and other markets. I think that looks like about all of the questions that we have time for at the moment. Really appreciate everybody joining and look forward to you -- if any of you didn't get your questions answered, we will endeavor to follow up by e-mail with some of those. And also happy to take that calls as appropriate to explore things in more detail, but we're very appreciative of your continued support and belief in the company. We believe that the picture is turning out well for us. We anticipate hitting our guidance again this year as we did last year and therefore, remain optimistic for the future, not just in China and Asia, but globally. So thank you all very much for joining.

Thank you.