Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Fluence Corporation 3Q FY '22 Business Update. [Operator Instructions] I would now like to hand the conference over to Mr. Tom Pokorsky, CEO. Please go ahead.

Good day. Thanks all of you for calling in. We really appreciate it. As the moderator said, I am Tom Pokorsky, the CEO. And along with me are Richard Irving, our Chairman; and Natalya Medinina, our VP and Corporate Controller. As you will hear a little bit more from Natalya later, we had a solid third quarter and every number was virtually higher than last year year-over-year as Natalya will get into. We had a particularly strong September from an EBITDA standpoint, and that brought us to a positive EBITDA state year-to-date. Of particular interest in the third quarter, we made an announcement earlier that we booked our first wastewater project as a service. We sold an MABR system to a resort in Jamaica, which will be giving us -- when started up, will be giving us $175,000 a year recurring revenue for up to 10 years. We do continue to see some slowdown in China as many of our projects are being delayed due to the COVID restrictions. We do not expect this to change much before the end of the year and are just keeping track of it. We are, however, redoubling our efforts outside of China and Southeast Asia and building a significant pipeline there. On the Ivory Coast project, we continue to progress on schedule. While we will basically meet the revenues planned for the year in euros, due to the exchange rate of euro to dollar, our revenue will be lower in dollars as well as the EBITDA, and Natalya will detail that for you in a bit. We're pleased to announce that the Board of Directors has approved taking Italy off the assets for sale list in our company. We are going to start marketing the Italian product actively immediately. Over the year, we found an increased interest in high-strength wastewater treatment systems and waste-to-energy systems. The Italian products are well-suited for that marketplace and in fact, they have a significant installation list as referenced. We expect some significant opportunity from that area going forward. Finally, I'd like to announce that we have hired Ben Fash as our new CFO. Ben will be joining us around the end of the year, and Ben comes to us with significant experience both as a CFO and in the capital market sector. Ben spent over 7 years as CFO for Newterra, a water company very similar to Fluence. I personally was Chairman of the Board while Ben was CFO. So I've had the pleasure of working with him for a number of years. I'm pleased that he will be joining us. Before I go, I just want to point out that I want to thank Natalya for the wonderful job she's done in the last several months filling in for the duties of the CFO. She's done a great job and she'll continue to do that through the end of the year and then be Ben's right-hand person to get him moving and transition into our company. Thank you, Natalya. And with that, I will turn it over to Natalya to report the numbers.

Thank you, Tom. Let me start my section with saying that in October 2022, the company made the decision to retain its Italy high-strength wastewater treatment solutions business. Accordingly, the Italy business is no longer being classified as an asset held for sale. The third quarter results as well as the prior period results that we are reporting today include Italy business unit results. In the third quarter of 2022, we had an additive revenue from continuing operations, including Italy of $29 million, which is up 33% comparing to third quarter 2021. In third quarter year-to-date, the unaudited revenue from continued operations was $93.2 million, which is 39% higher than the revenue in the same period in 2021. The revenue from Smart Products Solutions for Q3 was $10.9 million, which is 95% higher than the prior period Smart Products Solutions revenue of $5.6 million. The year-to-date revenue is $25.1 million, which is up 22% from the $20.5 million in the prior period. We continue to focus on improving operating efficiency and prudently managing expenses, while supporting the growth of the business. Our operating expenses in Q3 year-to-date continue to be reduced on a percentage of revenue basis, falling to 21% of the group's revenue comparing to 25% in the prior period. The weakening of the euro relative to the U.S. dollar exchange rate during Q3 resulted in a reduction of reported revenue and profit from the Ivory Coast project. Fluence continues to have a strong cash position with cash and cash equivalents balance of $25.8 million at the end of September 2022. In addition, the company holds 13.8 million in short-term and long-term liquid investments that provide adequate operating reserves. Net cash flow used in operations in Q3 was $7.2 million, mainly due to Ivory Coast project vendor payments being higher than Ivory Coast collections received in the current quarter according to the Ivory Coast milestones collection schedule. Fluence reported a contract backlog of $62.6 million at the end of September, of which $27.4 million was related to the Ivory Coast project and $23.5 was related to Smart Products Solutions project. Due to the negative exchange rate variations between euro and U.S. dollar, the 2022 revenue guidance is being adjusted from $144 million to $123 million; the SPS revenue from $45 million to $38 million; and the positive underlying EBITDA adjusted from $3 million to $2 million. I will now hand the call back to Tom. Thank you.

Thank you, Natalya. There are a number of questions on here regarding both the Ivory Coast, exchange, the CFO, and Italy. And I think we've covered all those issues. So I'm going to kind of skip by those questions. There's one question that says, during the update 3 months ago, we said we'd have a major announcement from the Caribbean. Well I think we covered that, too. The major announcement was Couples Jamaica. And the question was, are there more to come? I can only say we are working on a number of projects in that area. A good question here. As the company's executives and major shareholders are based in America, considering that has sufficient influence in the market, why we have made so little progress in the U.S. Well, we are making progress in the U.S., and there's a situation where we have to get salespeople in the U.S. and the sales cycle is quite long. It could be anywhere from 6 months to 2 years once we get a start of a project. That's just the way the U.S. market is, because they design your equipment into a job. It gets designed, put out to bid, so it takes a while. We are in the process of increasing our staff significantly in sales in the U.S., hiring new agents, and we are working diligently to get more orders coming in, in the U.S. It just takes a little time. Let me see here. Another. Okay. What are the barriers to securing contracts in the U.S.? The barriers are, basically, you have to have working equipment, which is not a problem for us, but you have to get in the early stage of a project to get it designed in. And like I said, sometimes designs take 12, 18 months. So even if you get your equipment designed into a project, you may not get an order for a couple of years. But we're working on that, and we expect to improve on that significantly. There's a question here. What is the interest in Taiwan at the moment? And can I provide more detail. Yes, we have a great deal of interest in Taiwan. As our Chinese people were busy looking at places in Southeast Asia outside of China, we found that there's a significant interest in MABRs and our desal systems in Taiwan. I think we might have mentioned in the past, one particular instance is all the chip companies there are being told they have to reuse their water instead of discharging to wastewater plants, which means each one of these places will have to put a reuse system, which is a perfect system for our MABR followed by an MBR. So we do have a growing pipeline in Taiwan and expect some major success coming out of there in the very near future. Another question was, the Caribbean, and the Couples, is that just the start basically. Yes, there's a lot of work in the Caribbean. We're working on a number of projects. You are correct that Couples has a number of resorts in Jamaica. I'm not going to speculate on the future. But we do feel we have some significant opportunity going forward in the Caribbean in a number of areas. In particular, a lot of resorts. Okay. The question is, has the process for the O&M relating to Ivy Coast commenced. The process has commenced in that the Ministry of Water has asked us to prepare a quotation and basically a proposal on our capabilities to go after the job. So they've just started the process of going through and we are working on it. So it's moving, but it's in the early stages yet. Okay. The next question is, are we still looking for a CFO? And what's with the sale of the Italian operation. I think we've answered that. What is the strategy for penetrating the U.S.A. The strategy is getting high-qualified salespeople and agents to work with the design engineers and the state approval agencies to specify our products, in particular, the Aspiral and the SUBRE. I think the major wastewater plants that are being upgraded is where the SUBRE would fit in, and a lot of the decentralized plants that have to be replaced is where the Aspiral. We are continually working. In fact, we just had a show in New Orleans, the WEF Show, the Water Environment Federation, which is the biggest wastewater show. We had a lot of interest. And in that, for example, we even had regulators from states coming and asking about our products, so they could approve it for specifications on projects. So our strategy is to penetrate the U.S.A. just like every other water company has penetrated for the last 40 years, is to get with the engineers and the regulators, show our product, and get it specified into a job. Let's see. Okay, there was a question about production capabilities in North America. We are working on that very diligently. We believe we can do all the desal work in the U.S. at this point. We can do steel tank manufacturing. What we don't have is the membrane operation yet, and we are going to work with the Chinese operation to transfer the knowledge and the technology, so we can build the membrane in the U.S. But we are well into that path, and we are working diligently on it. Okay. There's a question. When is Ivory Coast expected to be complete. And the answer to that is sometime between April and June of 2023 for the base project. And the O&M cannot start until after the project is complete and some other things are done. So the O&M could not possibly start before mid to late next year. I guess that covers pretty well all of the questions one way or another. Richard, do you have anything you'd like to add to it?

Just a couple of quick comments. I think that there are some questions regarding Ivory Coast. We certainly anticipate the Ivory Coast project will continue to be profitable. It has been and it will continue to be. It's also been cash positive, cumulative to date, and that doesn't change. Even though there's a revenue shortfall as a result of that euro-dollar exchange rate dropping, because the expenses of Ivory Coast are also in euros, there's very little cash impact from that. So that's not as bad a situation as it might appear to be. Also, I think, when you were talking about the U.S. and the length of time it takes for orders to come through, that's particularly true in the municipal space, where there are tenders and it's a lengthy process. But with the commercial customers, both in industrial and resorts, for example, the progress can be a lot quicker. And I think also, as Tom has articulated in various contexts over the past months since he joined us, we are very, very actively building the U.S. sales and support team to really get out and do a much better job of covering the market and getting the message out there. In fact, Tom, I think why don't you also give people a little update on the recent major trade show that we were exhibited at just last week in New Orleans.

Okay. Yes, I did allude to that. Two weeks ago in New Orleans was the WEF show. This is a show that is the biggest by far in the U.S. and in fact, I believe, globally for strictly wastewater treatment. It doesn't deal with water, and it doesn't deal with any other environmental like waste removal and things like that. It's strictly wastewater. Generally, the show gets 15,000 to 20,000 people attending it with hundreds of exhibitions. And this year, I have to admit, I've been to a few. I've been to over 40 of them. And this was one of the biggest one that I've ever seen. I think part of it because there was a 2-year hiatus and people were anxious to get back to it. But there's also a lot of interest and a lot of activity in the wastewater market. We have made a number of contacts with reps, with partnering companies anywhere -- I mean, we've made meetings with regulators, and it was probably one of the most positive shows I've been to in a long time. And I'm expecting some great things out of it. We are currently working on a number of leads, some very short term, some more long term. And that is going to really -- one thing we did notice, and I'll say it, our name was not that well-known, but there's a lot of people that looked at our technology in the book description and sought us out to ask us questions about it. So we made a giant leap forward with our name recognition and our product recognition at that show. I was very pleased with it. Let's see. I think that's about it. So with that, thank you all for calling in. We really appreciate your interest and until next quarter, go on.