Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Doug Brown. I'm the Chairman of the Fluence Board, and I will be chairing the meeting today. It is my pleasure to welcome you to the Annual General Meeting of Fluence Corporation Limited. We advise that we have complied with the relevant requirements for convening this meeting and that a quorum is present. I therefore declare the meeting open. I would like to introduce my fellow directors who are present online today: Tom Pokorsky, the company's Managing Director and CEO; Paul Donnelly, the company's Lead Independent Director and the company's Non-executive Directors, Richard Irving, Ross Haghighat, Mel Ashton and Nikolaus Oldendorff. I would like to also introduce our Company Secretary, Melanie Leydin. Our auditors, Kathy Robertson and Zaryab Hyder from BDO are also in attendance online. As the notice convening this meeting was sent to all shareholders on the Fluence Corporation Limited register in accordance with the company's constitution, unless there are any objections, I intend to take the meeting -- the notice of the meeting and explanatory statement as read. As previously advised, this is a virtual meeting, and shareholders will be able to participate and view a live webcast of the meeting, ask questions and cast votes at the appropriate times whilst the meeting is in progress. The format for today's meeting will be a presentation of the operations of the business from our CEO and CFO, Ben Fash, followed by a Q&A session on the company's operations, formal consideration of the business on today's agenda, each resolution will be considered at today's meeting will be voted by a poll, followed by a Q&A session on the formal items of business, and finally, completion of the poll on the formal items of business. Our company Secretary Melanie Leydin will now outline the Q&A as well as the voting procedures for today's meeting.

Thank you, Doug. As mentioned earlier, shareholders will be able to participate, ask questions and cast direct votes at the appropriate time whilst the meeting is in progress. Visitors are reminded that whilst we welcome you at this meeting, it is a shareholders' meeting, and you may not comment or ask questions. Shareholders may ask questions by sending us a text or request audio to speak. Please note that we may experience some time lag and this may cause some delay in your text, questions or comments coming to our attention and we encourage you to lodge them as early as you can. Shareholders wishing to ask questions via text, please select the Q&A icon located at the bottom of your screen. Type your name and who you represent, along with your questions in the Ask a Question box and press the send arrow. Your questions will be addressed at the appropriate time. Shareholders wishing to speak and ask a question an audio questions facility is available during this meeting. Please select the raise hand icon located at the bottom of your screen. You'll be placed on queue and authorized to speak when we reach the Q&A session. Prior to asking your question, please state your full name and who you are representing. Regarding voting on today's resolutions, all shareholders, proxy holders and corporate representatives who are entitled to vote will be able to do so via the webinar poll. It is important to note that if you have lodged a proxy form and voted prior to the meeting, you do not need to vote again at this meeting unless you wish to change your proxy instructions. For those proxy holders, shareholders and authorized corporate representatives who have not yet voted prior to the meeting, please cast your votes on each of the resolutions when the poll is opened. For proxy holders, you will have a summary of proxy votes, which detail the voting instructions, if any, for the items of business. By completing the voting via the webinar poll when instructed to vote in a particular manner, you are deemed to have voted in accordance with those instructions. Where the Chair has been appointed proxy on behalf of the shareholder, the Chair of the meeting intends to vote these in favor of all of the resolutions. For shareholders, proxy holders and authorized corporate representatives who intend to vote today, please observe the following voting instructions. When the poll is declared open, a poll window will appear. To vote, simply select the direction in which you would like to cast your vote. The selected option will then be marked. To submit your vote, simply click on the submit button, and you'll have the ability to change your vote up until the time that voting is closed. Thank you, Doug. Are you on mute, Doug?

Sorry. Thank you, Melanie. At this point, I'd like to turn the meeting over to Tom Pokorsky to talk about the operations of the business.

Thank you, Doug. Good day, everybody. Welcome for -- welcome to the meeting, and thanks for dialing in. I thought I'd go over a few pertinent points of where we are in our strategy and highlight some things that have been going on over the last 6 to 8 months or so. This screen many of you may have seen before. But about 18 months ago, we went on a journey to reorganize the business so that we could operate more efficiently like a global company instead of a number of small regional companies, which allowed us to reduce our overhead costs significantly. We also strive to highlight or concentrate on growth markets that could get us decent amount of work where we're good at doing the work, in other words, our expertise, and not getting into areas that are not our specialty. In addition, we were looking to get higher margins instead of the large construction type projects, and we're looking to get higher recurring revenues. Finally, we are trying to develop a culture in the company with cross coordination where one unit works together with another unit, and we are starting to see the fruits of that labor now. Basically, this realignment is virtually complete with some minor changes still going on, especially in the municipal water and wastewater business unit. As you may recall, we did not have a business unit leader to run the municipal section until January of this year where we hired a man named Steve Scheidler. Steve has taken the municipal group and put his own touches on it and is now organizing it to meet our strategic goals. Steve comes to us with several decades of experience in the water and wastewater treatment equipment business, having run a number of divisions of Xylem's business and also being CEO of a smaller water treatment valve company. So Steve has taken on a task this year to do all kinds of changes to benefit the company, not the least of which is to build out his operations team, his sales team in North America, in particular, and production facility in North America. All of those projects are in process. The one significant change we made this year that affected positively our SG&A was that we eliminated the operations group in Israel. We still have our strong R&D and engineering team there. Israel still manages, is a central place where the Ivory Coast project is managed, but we no longer do production and operations in Israel. It was just a cost decision, and we are probably replacing most of that production in North America and in a few other locations, like South America. We'll do the RO stuff in some of these places. So the strategy to realign the company is now largely complete with a lot of fine-tuning going on. And we are starting to see dividends as we'll get into in a second. Down below there, you see the -- all the competitors that we face. And these are competitors, not all of them in the business, but the ones we mainly see. And I will point out that there are other people in the business, but in the markets, in the areas, in the size range we deal, these are the main competitors. In particular, that goes for the operations in the BOO area. There are certainly other companies that do it, but not in the areas and level we do it. So we didn't put them as competitors. So with that, we can go on to the next slide. Okay. What is the intent of all this strategy and revisions? Well, we have a vision to make the company a global company, more diverse in multiple geographies, selling products that we're good at and have higher margin and we'd like to have a more broader mix of the end markets. And as you can see, the 2022 pie charts, without going through every individual number, you can look at that on your own, but you see the large light blue, if that's the way it's showing up on your screen in 2022. That represents a highly -- mainly the Ivory Coast project, and that represents a lot of revenue at very low margin. You can see our movement in 2023 already made some significant strides to change the dynamic of the company, and we're well on our way. And our pipeline gives us comfort that the vision we have for medium term on the far right is the way it's going to look. If you look at our pipeline, you look at what we're doing, that's -- that gives us validation that we're on the right track. And this far right column of pie charts shows a strong diversity with geography, products and end markets. And that's the ideal place you want to be. You will hear Ben sometimes talk about his old company was in the oil business only. And when the oil business had troubles, the company had troubles. So we are diversifying so that if one sector has trouble, we can maybe pick it up in the other sectors. Anyway, this is our medium-term vision, and we feel we're well on path of achieving it. Next slide, please. This is the latest update of our pipeline. Now, I'm going to point out that we use the term pipeline as projects we are working on that have not been quoted or not being negotiated for orders. They're projects that will become orders somewhere sometime and likely in the next 3 months to 3 years. But pipeline to us means available work. And what's important is this isn't just pick 10 MABRs in a certain province in China. These actually have names, dates and places on the project. So they're real projects we're actually working on. But pipeline doesn't mean anything else other than opportunities. I do believe some places in Asia, they use the word pipeline for actual booked orders, but that's not us here. That's what we refer to as backlog. But the importance of this slide, I think, is -- has a multiple bit of importance. One, we are growing the North American municipal market. We are growing the 2 industrial segments, the Industrial Water Group and the -- Water Reuse group and then the Industrial Wastewater and Biogas group. They're growing dramatically. And these are typically really nice projects. One important aspect of this pipeline, I think, is really a positive and very good. You'll notice that there's over 350 projects, which that gives an average of less than $2 million of project. The importance of that is, if you lose 10 of them or 20 of them, you're not losing -- you don't have 100 projects with 2 $40 million projects and a bunch of $1 million projects. You lose 1, you lose your whole pipeline. These are all really nice sized projects, easy to produce, low risk, and typically higher margin, which is exciting to me anyway. I've looked at pipelines for way too many years to count, and I've never seen one this diverse and broke-up. So I'm really pleased with that. In addition, I think it shows that our strategy is really working, getting across to every unit. I'd like to use an example here of one thing that's really kind of nice is, as you well know, we started in the last 18 months to put in staff in the North American market for all business units, including the 2 industrial units. And recently, we found that where one of the sales team is working with an industry, say, a dairy or a slaughterhouse, they will bring in the counterpart from the other industry, the water side, and see if they have water work. And we're starting to get multiple projects by combining the 2 resources and looking at just -- not just wastewater, but the water side of it, too. And that's all part of the strategy to work together and grow the business. The final note on this slide is quite simply that as we've shown this before, that our backlog January 1 was of shippable product for the year was quite high, and that we had planned to book a significant amount in the first quarter. It says here projecting $40 million in the first quarter. I think that may end up being projecting $40 million in -- excuse me, in the first half. I think that's going to end up a lot in the second quarter, and it's going to be more than $40 million for the first half at this point in time. We're on track to continue on that pace. So everything is looking good from that standpoint. Next slide, please. So what have we done this year? And I've just highlighted a few key orders because they all have some significant meaning. If you saw the announcement come out this morning, on Monday we actually signed our most recent order of $4.8 million demineralized water for a power facility in Brazil. This is a very, very nice project, good metrics all around, and we're quite excited about it and we have more like this coming. But that order was just entered, probably yesterday. So we sent out the press release this morning. We also got another waste-to-energy project in Italy this year, a $2.3 million one for a paper mill. We got another smaller one for a chicken slaughterhouse in Italy. And if you recall, last year, we announced in September, we got 2 fish processing orders in Mexico. We actually got a third order on one of the facilities for another $800,000 to add to their waste treatment facility, an area where we were just doing the digester, and now we're going to do the waste treatment upgrade also. So again, recurring orders from the same customers, and that's always a positive, especially in these industrial jobs where they have multiple plants. One of the bright sides is in the first quarter, we booked $3.3 million in our municipal group just in North American orders, which we started last year, getting salesmen on the ground. We -- in the first quarter, we eclipsed what we booked all of last year in the municipal North American market. And again, it shows our -- and then some of these projects, you can see they're all -- they're all a little bit different, and they're all decentralized type plants. There's $1.5 million one for a country club in Florida, a small MABR for a homeowners association in Colorado, a small MABR for an elementary school in Indiana and it goes on. We also got our first operation and maintenance agreement in the U.S., which was for a small municipal plant we furnished last year in Red Bluff, Texas. And finally, although China is still giving us concerns, we added another MABR system to another highway system that we've been working on in these highway rest areas in China, but we've added a new province. I believe this is either our third or fourth province. So this order is important because it starts another province that typically buys multiple projects. So we think our success early this year, albeit delayed a bit because of a lot of bureaucracy, and I said this once to an investor call that while we live with the regulations and get higher market potential because of regulations, we also have to live with the bureaucracy of those regulations and that takes time to get these projects signed, sealed, delivered. We have -- in a very short time, I hope to show you another sheet just like this, very similar with the number of orders and dollars on projects that we are just waiting to get the final signatures on. So there's a lot of work that's moving forward. And they're all waiting for some sort of permit, although I did receive word just before this meeting that we have a couple of our stalled projects for the biogas systems in North America that were waiting for [ home ] permits, both received the permits this week. So those 2 projects will be set loose and moving forward. Next slide. Okay. As we get into the financials, I'm going to turn it over to Ben Fash to handle the 2023 financials and some of the highlights and a few other things. So, Ben, do you want to take it over?

Yes. No, thank you very much, Tom and welcome to everybody to our annual general meeting. I appreciate the opportunity to present our financial results for 2023. And I'm also going to highlight a couple of points of the continued momentum that we've seen in Q1 of 2024. We finished 2023 with just over $0.2 million in adjusted EBITDA, which was in line with the revised guidance that we provided at the end of the year. In Q1 as well, we continued on that progress of profitable revenue, where we finished Q1 with $1.2 million of trailing 12-month EBITDA. I think it's particularly important to highlight the success that we had in Q4 specifically, where we recognized $27.7 million of revenue, of which $20.5 million of it was from SPS and recurring revenue, which is exactly the type of revenue that our strategy is designed to grow. And that did represent 68% growth versus Q4 of the prior year of 2022. That momentum continued in Q1 where we show -- where we had 50% and 82%, respectively, in terms of growth in SPS and recurring revenue. Additionally, that $27.7 million was almost double any other quarter in 2023 and drove positive net income in December of 2023. I think what it really just represents is when we are able to drive the volume that we -- that our pipeline is expected to drive in the future, how profitable this business really can be. Additionally, as the segmentation of that revenue was made up of far more high-margin work in SPS and recurring revenue, those gross margins grew to 27.8% in 2023, which was growth of almost 4% over the prior year. And in Q4 alone, margins were up over 30%. Again, that momentum has continued into Q1 of 2024, where gross margins were 33.9%, a growth of 14.1% over Q1 of 2023. Additionally, as a result of the restructuring and realignment that Tom talked about earlier on the call, the company recognized fixed cost savings of $6.8 million, or 26% over 2022, reflecting the impact of, like I said, the restructuring that was announced in late 2022. And finally, the company finished -- and I'm going to talk about Q1 as that was the most recently reported balance sheet, company finished Q1 in a net cash position with total cash of $16.8 million, plus $7.7 million in security deposits as of the end of the quarter. And additionally, we've continued to make progress on reducing debt. As everyone will recall, in Q4 of last year, we repaid a substantial amount of the Upwell credit facility. And the -- as of the end of Q1, we continued to repay in the first 3 months of the year. And that credit facility ended or finished Q1 under $15 million as a total balance. For the full year of 2024, we are guiding the market for $90 million to $100 million of revenue and EBITDA of $3.5 million to $4 million. I think at this point, I'd ask you to flip to the next slide. So, in the context of the strategic update that Tom provided earlier, I think it's important to put 2023 in the context of where we see this business going. As you can see from the top left graph, 2023 was really a year of transition. As the business moves away from and deemphasizes Custom Engineered Solutions or CES, revenue did come down for the year. But what we're replacing that with in 2024 and into our medium-term targets is higher-margin SPS and recurring revenue in the business segments that we've talked about. And you can tell from the progress that we've made in terms of pipeline growth, we see a bright future selling those higher-margin projects. As that occurs and our revenue segmentation looks more like the pie charts that Tom highlighted earlier, we expect to see our gross margin grow over time. This graph shows 2024 gross margins of 27% and a medium-term target of 32%. I can say that we are outperforming those so far in 2024, and we expect that as we continue to bring in the higher-margin revenue, we think that, that is a minimum target and we should be able to exceed it. And ultimately, as we bring in higher-margin revenue, we've continued to lower fixed costs to the point where this business can scale and scale quickly. We believe that there's significant and substantial operating leverage in this business, meaning that as we grow revenue at the higher margins that we're seeing in the top right, that will lead to very strong EBITDA growth very quickly and strong EBITDA margins, ultimately to the point where in the medium term, we expect that to be greater than 10%. But in the longer term, we believe this business can be a 15% EBITDA plus business. I think with that, Tom, I'm going to turn it back over and have the next slide come on up and you can close things out for us.

Okay. Thanks, Ben. We threw this slide in here just to say why Fluence, why invest in Fluence. And these are a few of the highlights. While -- the company has been around and is experienced in doing the projects, we have a new highly experienced Board and management team that have been there and done that before and that to me is very critical. Even the addition of our new Muni Director, we have added significant experience to the P&L management of a water business. And that to me is irreplaceable. That's the first important step of having a decent company, is having a management team that knows what they're doing and knows how to get it done. While the company's track record has been somewhat suspect over the last several years, the recent additions to the Board and management are all people with strong track records and of delivering significant shareholder value. So again, we see that as a strong plus going forward. The Board and the management together are aligned on the idea of growing and making the shareholder value higher. And this can be attested to the fact that every single executive, as well as all of, if not most, if not all of the Board members, significantly contributed to the last cap raise. That's meaningful. We are going through a transformation and we're underway, but it's taking some time. And once those pipeline projects start coming through, I don't think there's anything that can stop us. We do have much better financial strength with the recapitalization. Our balance sheet is much better. And we pick markets that are growing significantly, certainly growing faster than the water business industry is itself. North America is a growing market, and it's well funded. The industrial projects are driven by regulations that are coming out that give them no choice. The industry has got to spend the money. And that's -- so we have an opportunity in a market that's going to grow faster than the entire water market in general. We are -- well, we talked about the markets and customers. And let's not forget, while maybe some of the profits haven't been there, we have successfully completed over 880 projects. As Fluence technology and with our equipment, we know the equipment works, we know how to build it and this is just a matter of sales and execution going forward. And finally, without ignoring -- without ignoring it, we have a great ESG footprint. And just our industry alone is a great ESG industry. And for those investors interested in the ESG side of the investing, we are a key player in that area. So why Fluence? I think we got things lined up that portend a very bright future for us. Ben, any additional comments from your side?

No. Thank you, Tom. You summarized it very well.

Okay. With that that's, I believe, the end of our operating brief presentation. And I guess, we have questions and answers now, Melanie.

Yes. Before we begin the formal business for today, we will address any questions that shareholders may have on operations or the business in general. Shareholders are now invited to ask general questions in relation to the operations of the business.

Thanks, Doug. Yes, we do have a question that's come through. Just be mindful of being able to provide forecast or share price predictions here. So what is the price earnings ratio do you expect for this business in the medium term?

Ben, do you want to handle that?

I think that you and I can probably take that and answer more broadly. But I think without -- with the statement that Melanie made earlier with -- we don't have the ability to forecast the future. What I would point to is the water industry in general, focuses on total enterprise value to EBITDA as its main valuation metric. And what you tend to see in this business is as companies start to show double-digit growth in the margins of 35% to 40% and 10% to 15% EBITDA, you start to see double-digit EBITDA margins. And you can look at comps such as Evoqua, Veolia, various transaction metrics that have occurred over the past number of years that would support that. So I'd say, broadly speaking, again, successful companies that show growth, strong gross profit, and then ultimately delivering strong EBITDA margins, those tend to get premium multiples in the low to mid-teens in terms of total enterprise value to EBITDA. Tom, would you add anything to that or Doug?

I would just point out that the last 2 companies I was involved in I sold for over 15x EBITDA, with Ionics and AquaVenture.