Fluence Corporation Limited (FLC) Earnings Call Transcript & Summary

Good morning and welcome to the Fluence Corporation Q2 2026 Results Briefing. My name is Andrew Angus, the Investor Relations for the company. Joining us today are Ben Fash, CEO and Managing Director; and Ozzie Llanes, CFO. Ben, over to you.

Thank you, Andrew. Good morning, everyone, and welcome to the Fluence Q2 2026 Conference Call. Thank you all for attending and your continued interest in Fluence. You'll notice today a slightly different structure to the quarterly presentation this time around. This was based on feedback that we've received after prior quarterly presentations and the fact that we've been having a number of conversations with folks that are relatively new to the Fluence story. So we wanted our quarterly materials to provide a little more context and completeness for those that are still getting up to speed on the business. We also have included an appendix that has some additional details on the company, but we won't cover that today. Before we walk through the Q2 numbers in detail, it's important to frame the financial results through the first half of 2026 as a reflection of the 3-plus year strategic transition that has been ongoing and that is now showing up in the results. 3 years ago, Fluence set out to become a diversified, profitable pure-play water treatment platform. That meant recapitalizing the business, restructuring operations and deliberately shifting our revenue mix away from large, lumpy, custom engineered projects toward higher-margin smart product solutions and recurring revenue services. What you'll see in the financial update is an illustration of -- that this transition is working and delivering results. We had our best first half in terms of EBITDA in more than 5 years. Our margins are expanding, and our order book and backlog support the growth targets that we set for ourselves. Just as importantly, the focus of the company has now shifted from fixing and repositioning to building a foundation that can grow and scale. And you'll see a very tangible example of that this week with the appointment of our new Chief Operating Officer, which I'll touch on a bit later. So with that, let's get into the numbers. Just a quick reminder that this presentation contains forward-looking statements and unaudited financial information. Past performance and pro forma financial information in this presentation is given for illustrative purposes only. It should not be relied on and is not an indication of future performance. And finally, this presentation should not be considered as an offer or invitation to subscribe for or purchase any shares in Fluence. So let's start with the financial highlights. And these numbers tell the story of the transition a little more directly. First half revenue was $37.6 million, up almost 15% on the prior year. But the more important point is the quality of that revenue. SPS plus recurring revenue grew nearly 35% compared to the first half of 2025. That mix shift is exactly what drives the next number. First half EBITDA of $3.4 million. That's our best first half in more than 5 years, and it's up more than $3 million on the same period last year. Gross margin also came in at 35.5%, nearly 9 points higher than the first half of 2025. On orders, we booked $16.1 million in Q2 and $23.6 million for the first half overall. Q2 was ahead of last year by 54% and the first half was up by 5%, respectively. The quarter was highlighted by large strategic wins in Southeast Asia and our industrial water reuse business. Backlog currently sits at $59.8 million, and we expect to see that grow through the second half of the year with increased order activity. And on cash, we closed the quarter with $10.9 million plus $4.1 million in security deposits and positive operating cash flow of $1.8 million. One thing to note because of the timing of receipts and vendor payments, especially those related to the Ivory Coast addendum project, we expect Q3 operating cash flow to be negative, but we do expect that to reverse in Q4. So the underlying trend is strong and improving across almost all metrics. This slide gives you the shape of the platform behind those numbers. What makes Fluence unusual for a mid-market water company is our breadth, both in technology and in geography. We operate across 4 core business units, municipal water and wastewater, industrial wastewater and biogas, industrial water reuse and Southeast Asia and China, all supported by our global water services offering. Each of these serves a distinct end market with a real growing problem in drinking water shortages to industrial wastewater, wastewater to energy, and in each, we bring a genuine competitive edge anchored by proprietary technology and a modular building block approach that lowers both capital and operating costs to our customers. One important point to note is that each 1 of our 4 core business units are generating gross margin of 30% or higher and had been EBITDA positive over the last 12 months. This was certainly not the case 3 years ago, and we expect that profitable growth to continue. The breadth matters as it supports the double-digit organic growth that we are targeting while also derisking the overall business. We're not dependent on any single market or any single large contract. And as you can see from the trailing 12-month financials, they're all profitable, growing business in their own right. This diversified base is the foundation we're now scaling from. So I wanted to spend a quick moment updating everyone on the Ivory Coast project because I think it really bookends one chapter and represents the opening of the new one. The addendum project is nearing completion, and the majority of the work should be completed by the end of Q3, while completion of some of the remaining swamp stabilization and Bridge works is expected by the end of the year. Through the end of Q2, we've collected 7 milestone payments totaling roughly EUR 42 million or approximately 90% of the project, and that includes EUR 6 million milestone that we received in Q2. As we successfully closed out this large CES project, it's important to recognize that the cash that it has generated has helped fund the shift toward higher quality SPS and recurring revenue. On that transition, Fluence continues to advance negotiations of a long-term O&M contract for the plant we designed and built. Signing that agreement would mean the successful conversion of a one-time mega project into exactly the kind of recurring high-margin revenue stream we're building this business around. In Q2, we booked $3.5 million of O&M fees from services provided in 2025, which we believe is just the start of where we can take this O&M opportunity. Negotiations are ongoing, but moving slower than we'd like. But we continue to remain exclusive at the table with the client and are strongly positioned to be awarded this long-term strategic contract. On new orders, despite a softer Q1, the growth trend is very much intact. Q2 orders were $16.1 million and first half orders were $23.6 million, up 54% and 5%, respectively, compared to the prior years. Q2 was highlighted by large strategic orders in Southeast Asia and China, and our industrial water and reuse group with their first significant order in the U.S., plus $3.5 million of the Ivory Coast O&M fees that we discussed earlier. Importantly, trailing 12-month order bookings within our core business units are now at the highest point in the company's history, and we expect the second half to deliver significantly higher orders than even the first. On backlog, we ended Q2 at $59.8 million. Within the core business units, backlog is up $6.8 million or more than 18% versus a year ago. That combination of strong trailing 12-month orders growing backlog and rising recurring revenues is what underpins our confidence in the full year revenue growth targets. Through Q2 and into July, we secured a range of orders that show both the diversity and the quality of the pipeline, a $3.7 million water treatment plant for a steel producer in the U.S., which represents our first win for our industrial water reuse group in the U.S. followed very quickly by a second one with the [ Red Bluff ] project, the water treatment plant for $600,000. We also had the $3.5 million Ivory Coast O&M fees secured and seawater desalination plant for a customer in Vietnam. What I draw your attention to is these orders are spread across geographies, across end markets and obviously weighted toward our standard product solutions rather than one-off CES projects. And that's the diversified repeatable order profile we've been building toward and what makes our revenue base far more resilient today than it was 3 years ago. And I think this slide is really the heart of the story I opened with, so I'll spend a little time here. 3 years ago, Fluence was a concentrated business dependent on a small number of large CES projects that heavily weighted to a few high-risk geographies. Today, we're a diversified profitable pure-play water platform and the data shows how deliberate that shift has been. Look first at products. Smart Product Solutions now make up 53% of revenue, up from 29% in fiscal 2022. Recurring revenue is now 21% of the total, more than double its contribution from 3 years ago. That's a fundamental change in the quality and predictability of our earnings. Geographically, we're diversified meaningfully as well with strong growth in South America and the Middle East and a clear focus now on growing our North American presence toward our medium-term targets. And by business unit, the growth of our core units has derisked the business by providing a healthy level of diversification. So when we talk about a successful strategic transition, this is the evidence of broader end market mix, higher quality revenue and a platform that no longer rises or falls with any one contract. That's the foundation we built to put ourselves in a position to scale. Having repositioned the business, the question becomes how we scale it. And this slide lays out some of the growth drivers. The water and wastewater market is obviously enormous and highly fragmented, which plays directly to our strengths. Our primary engine will be through organic growth, expanding our sales presence and our agent network across each business unit geography, deepening penetration in our high-growth -- high-growth geographic markets like Brazil, the U.S. in Southeast Asia and driving broader acceptance of our MABR technology, particularly in North America. Alongside that, we're working to grow our water services revenue, rentals, O&M, parts and consumables, which is high margin and recurring. And selectively, we'll use M&A as a lever to accretive strategic tuck-in acquisitions that enhance and support the organic growth story, prioritizing O&M service and strong recurring revenue businesses as our balance sheet improves. The common thread is scalability. Every one of these drivers is designed to leverage the modular, standardized platform we spent 3 years building. This slide connects the improved revenue mix shift to the bottom line because ultimately, that's what this is all about. As SPS and recurring revenue grow across our core business units, profitability rises quickly. SPS plus recurring revenue has grown by more than 50% over the past 3 years. And overall gross margins are expanding as those higher-quality revenue streams become a larger share of the total. But the operating leverage story is just as important. We've reduced SG&A and R&D costs by 25% since fiscal 2022. That means a leaner cost base that can absorb significant revenue growth without a proportional increase in cost. So incremental revenue drops through to EBITDA at a much higher rate. You can see the trajectory in the numbers from negative EBITDA in fiscal 2024 to positive and expanding with 2026, expecting significant EBITDA growth and a medium-term target of double-digit EBITDA margins. We continue to expect double-digit revenue growth in fiscal 2026 and combined with margin expansion and disciplined cost controls, we're increasingly confident in our ability to meet our fiscal 2026 EBITDA targets. Well, the strategy is really only as good as the team that's executing it. And this is a management team, the deepwater industry experience, almost 100 years, in fact, and a track record of value creation for shareholders. Further, our team has experience in both turnarounds as well as building businesses to grow and scale. The appointment I really wanted to highlight today is that of our new Chief Operating Officer, Jeremy Dayment, who just started with us this week. Jeremy is an outstanding addition and his appointment is itself a direct reflection of where the company is today. He joins us after a 25-year career at Newterra, most recently as President of Engineered Solutions and having previously served as their Chief Operating Officer and Head of Sales and Marketing. During his tenure, he helped grow iterant one of the highest-performing mid-market water companies, delivering strong growth, top-tier EBITDA margins and contributing to 2 successful exits. And critically, from 2012 through 2021, Jeremy and I worked closely together, driving industry-leading operational and financial performance. I'm really excited to welcome Jeremy to the team and work with him again. Working closely with our senior leaders across Fluence, Jeremy's responsibilities will include leadership of the municipal water and wastewater business unit, enhancing global execution capabilities with a particular focus on global cross-border projects, global project management, procurement and safety. The reason why this matters to this audience is simple. For the last 3 years, the priority was resetting and repositioning the business. Now the priority is operational scale, running the platform efficiently, driving execution across our business units and converting our growth pipeline into disciplined profitable growth. Bringing in a Chief Operating Officer of Jeremy's caliber at this exact moment is a deliberate signal that we are shifting from transition to scaling and that we are investing in the operational leadership to execute at a really high level. Two corporate updates that I wanted to provide to round out this quarterly update. First, in July, we reached an agreement to extend our $20 million revolving credit facility for a further 12 months through July 2027 on substantially the same commercial terms as before. The rate remains variable and linked to the U.S. prime rate currently 6.75%. And the existing covenants, conditions, precedent and security arrangements are all unchanged. We'll seek shareholder approval for the extension at an Extraordinary General Meeting expected on or before September. This is an excellent outcome from our key shareholders and long-term supporters of the business. Second, following an extensive review of the future potential of our IWS business in Egypt, we made the difficult decision to pursue a suspension of operations with the ultimate goal of closing and liquidating it. Going forward, we will be reporting IWS as a discontinued operation in our consolidated financial statements. This is a deliberate step to sharpen our focus on higher return markets where we believe we can be more successful. Let me bring this presentation to a close by summarizing some of the more compelling investment highlights of the Fluence business. First and foremost, the focus has shifted to growth, following the 2023 recapitalization and operational restructuring, the business is now primed for scaling profitable growth, and that's the true line of everything we've covered today. We have an experienced, highly aligned leadership team and Board with over 30% ownership in Fluence. We have a diversified portfolio with proprietary technology addressing a very large market, a global water and wastewater market approaching $950 billion by 2032. We have deliberately shifted our sales mix toward higher-margin SPS and recurring revenue. which has grown more than 50% over the past 3 years and is driving improved revenue quality and margin expansion. We have disciplined cost management with SG&A and R&D down 25% since 2022, which gives us real operating leverage. Put simply, much of the hard work of the transition has been done. The foundation is built and the team, the technology and the market opportunity are all in place to scale from here. I'll close by saying management continues to expect double-digit revenue growth in fiscal 2026, and we are increasingly confident in our ability to meet our EBITDA targets. So with that said, we'll conclude here and the formal part of the presentation and pause for questions. I want to thank everyone again for your time, your attention and your interest in Fluence. Okay. With that, I will open it up for questions and do my best to answer the questions as they come in.

Okay. So the question has come in. Has IBC 2025 O&M fees of $3.5 million for maintenance services provided in fiscal 2025 been included in this quarter's cash flow and revenue? The answer is it has been included in this quarter's revenue. However, we have not received payment yet. We are forecasting to receive that at some point in Q3. Next question, a very good one actually. Could the ongoing conflict and worsening water scarcity in the Middle East lead to increased demand for Fluence's water treatment and desalination solutions across the region? Short answer is absolutely. We believe that the ongoing conflict in the Middle East in the long term, is -- will be a positive demand driver. Some of the themes that we're starting to see with our customers, both in industrial and municipal is and renewed focus on securing their water security needs that has directly led to new opportunities in our pipeline and, frankly, some new orders, including the order that we pulled in for a steel manufacturer in the U.S., our first industrial water order in the U.S. Just a little bit of detail behind that. We were the only company that bid for this customer that required us to deliver a very sizable water treatment plant, frankly, within 6 months. Our ability to meet that requirement so rapidly which will be fulfilled out of our facility in Argentina was the key driver for us to be able to win that business and win our first order in the U.S. Okay. There is someone who had a few questions here. Question was, when do you envisage the lumpy Ivory Coast addendum project to stop affecting the quarterly cash flow, i.e., when will this be out of the picture? Well, we expect that the cash flows from the Ivory Coast addendum will continue through the balance of fiscal 2026. We are expecting 2 additional milestones at this point in Q4. We do have a number of payables we need to settle in Q3. Once the addendum contract is complete and we transition that project to a long-term O&M agreement, our cash flow picture should be less lumpy and smooth out to a more normalized level. So the question is, in Q1, you mentioned the signing of this contract in Q3. The language has changed to say as soon as possible. Does this mean you could be signed in Q4 or Q1 2027? And why are you providing O&M services before both being paid and/or signing a contract? It's a very great question. So the reality is the Ivory Coast O&M negotiations are quite dynamic. Our team has been working extremely hard. But we're working with a government which is quite bureaucratic. There's a negotiating committee upwards of 15 people, and that process takes longer than expected. We believe that the government has a practical deadline in many ways where they are under pressure to be producing water on this plant that they spent $200 million on and the pressure to get that plant up and running will push this to a conclusion. We hope in Q3 still. But given the bureaucracy of the client could slip as well. But that continues to be our target. Question around why are we providing maintenance services. The decision was made to continue to provide maintenance services as we are still on site provide -- with the addendum contract itself. And it positioned us for the opportunity to have the exclusive negotiations for the long-term O&M contract. So that's why that decision was made. Do you still expect double-digit revenue growth for the full year 2026 in both MWW and IWR units? We do still expect double-digit revenue growth in those business units despite the slow start to the year. In the case of municipal water and wastewater, there's a significant amount of backlog on projects that are accelerating in the second half of the year. And with industrial water and reuse, we have visibility on a strong pipeline that we expect to convert in the second half to drive revenue growth. When do you envisage double-digit EBITDA margins will be achievable, 1 year, 3 years, as we've talked about our medium-term targets are sometime over the next 2 to 3 years? It is our focus to get to double-digit EBITDA margins within that time frame. Are you actively building a rental fleet? We have actively built out a strategy and a plan to execute a rental fleet rollout, and right now, are actively seeking sources of capital to fund the build-out of that rental fleet. Any costs expected to be incurred in closing the IWS business, both impairment and cash? There is a relatively small amount of cash around closing that business to the tune of, we expect around $300,000 to close that business out. And in terms of an impairment because this business will be taken as a discontinued operation, when it's reported in our consolidated financials, it will be stripped out as a discontinued operation and be a separate line in those financials. Is your EBITDA target strong growth from fiscal 2025? Yes. As we communicated at the beginning of the year, we continue to feel confident with our ability to deliver significantly strong EBITDA growth in 2026. Question here is you've mentioned the data warehouse business opportunity, any update here? I suspect what this means is data centers related to AI. What we've talked about is that the AI opportunity has actually bled into several other industries where, frankly, they are heavier water users than these data centers themselves. It's not to say that the data centers themselves don't present an opportunity, but where we've seen it in terms of new opportunities in our pipeline have been in power generation, where we've won 6 to 8 projects over the last few years and in semiconductor fabrication, both of which are high, high energy and water users, and we've won a number of projects in both of these industries over the past couple of years. Fluence managed to directly benefit from the power and water requirements and data centers build up in the U.S., power and water. Yes, as I just mentioned, the power generation market is frankly exploding right now with significant shortages, frankly, to support these data centers and frankly, other industries as well. So there is a massive build-out of new power generation in the U.S., in the Middle East and in South America. And we are absolutely involved in many of those opportunities and have a fantastic reference list to bring to those opportunities. Question, there was 2 questions around FX. Is it primarily U.S. dollar-based? We are a U.S. dollar reporter. So any dollar figures that we mentioned in our presentations unless, I say otherwise, are U.S. dollars, yes. And can you remind us again how you're managing the FX and what is the outlook? The FX is managed, frankly, for the most part, through we -- wherever possible, we are trying to contract in U.S. dollars even in foreign markets or at least in stable currencies such as U.S. dollar or the euro. Where possible once we earn those dollars, we try to convert them as quickly as possible into U.S. dollars to manage that FX risk. Okay. I don't see any additional questions coming in, so very -- oh, one more. Could you remind us what the EBITDA growth target for fiscal 2026 is we have not provided specific guidance for 2026. What I would suggest is to -- I'll reference the language that we used at the beginning of the year, which is that we are expecting double-digit revenue growth for the full year, expanding gross margins while limiting our SG&A cost growth. So we are expecting significant EBITDA growth in the business. There are -- that we do have research coverage broker-led research coverage that can give you an idea of what -- where they are projecting our EBITDA forecast to be. Okay. I think with that, we will wrap things up. I want to take the opportunity again to thank everyone for tuning in your time and attention and engagement. Lots of good questions today, and we always appreciate that. So like I said, we're excited about the opportunity in front of us. 2026 is shaping up to be a strong year as we anticipated, and we look forward to talking to you again soon. Andrew, I think we'll close things out there.