Phoslock Environmental Technologies Limited (PET) Earnings Call Transcript & Summary

2022 results and outlook weather. My name is Greg Slade, I'm Investor Relations Consultant of Phoslock. Shall I hand you over to CEO, Lachlan McKinnon; and its CFO, Matthew Parker, to take you through the presentation. At the conclusion of the presentation, I will return to us both woke and Matt, a series of questions that were submitted by shareholders and other interested parties as part of the registration process of this webinar. I will also monitor the Q&A text box at the bottom of your screen for any questions that are submitted while both Lachlan and Matt are speaking this morning. Now without any further ado, I'll hand over to CEO, Lachlan Mckinnon.

Thanks, Greg. Good morning, ladies and gentlemen, and welcome to the webinar. Thanks for joining us. We have a few topics to cover today. Obviously, we'll have a look at 2022, the financial year 2022 in review, looking at financials, key impacts on the business, both financial and other. We'll have a review of the legacy issues we're dealing with. We'll talk about the distribution and commercial components of the business as that's an important platform on which we're building. We'll have a look through the project summary page and discuss that, talk a little bit more about the opportunity with Follow, and we'll also touch on R&D and manufacturing updates through the financial year 2022. And then we'll finish with some commentary about the 2023 outlook and on to the future of the business. So I'll now hand over to our CFO, Matt Parker, to just talk through some of the financial numbers. Thanks, Matt.

Thanks you, Lachy, and good morning, everybody. 2022 was a period of reset restructure in most key geographies. Revenue for the year was $3 million. It was down 52% on the 6.3% generated in 2021. We need to remember, though, that 2021 revenues were positively impacted by the Kralingse Plas application. The business did continue to face headwinds in 2022 as a result of project delays and the continued priority by government authorities in managing the Covid-related health initiatives, particularly in China. Gross profit was $1.4 million for the full year was down 6.1% on the prior period. The margin -- gross profit margin was 45%, was down on 2021 as a result of higher freight costs, which I'm sure everybody understands and everybody knows, but it was partially offset by favorable pricing and slightly lower project application costs, particularly in Croix that I mentioned previously. Underlying EBIT for 2022 was a loss of $9.1 million compared to a loss of $7.9 million in 2021, a lower sales revenue, as I mentioned before, flowing to gross margin and higher operating costs contributed to that result. The operating expenses were higher in the reporting period, as I mentioned. This is as a result of expenditure on restructuring costs in China, ongoing legal and consulting expenses, government lobbying to a product registration in Canada. And we did allocate resources to the company's manufacturing supply chain strategy that Lockheed mentioned throughout the year. NPAT for the group for the full year amounted to a loss of $11.2 million. A key explanation for that result versus prior period in that 2021 did include a favorable nonrecurring noncash gain on lease liabilities of about $3.3 million, and that was as a result of us modifying the leases and reducing our footprint in China in particular. Moving to operating cash flow for the full year was a cash outflow of $7 million. Cash payments to customers for the year was $5.1 million compared to $8.8 million in 2021. The big difference there is obviously Kralingse, as I mentioned. As a variance. Payments to supplier employees for the full year were $13.5 million. Receipts from customers came primarily from the settlement of BHZQ in China and [ Kingo ] or KQB as we refer in China also, which, after a very protracted legal negotiation and they did agree to partially pay the majority of the outstanding before the new year, and they did pay the balance in January quite recently. The cash outflow -- the cash outflow relates primarily to employee payments as a result of the aforementioned restructure in China, ongoing legal and consulting fees and resources allocated to government lobby in Canada, and we did do capital works in China, which I think Lake will mention in the presentation. So with that, thank you to all, and I'll hand back to Lachy to take you through the remainder of the presentation.

Thanks, Matt. And as Matt just described, financial year 2022 was a disappointing year for us, all things considered. We saw a number of challenges for the business in terms of slow sales as global economies took time to recover and turn attention back to environmental issues, no doubt, still impacted by COVID issues. And as we know, China was specifically, the lag from COVID impacts was quite late until the end of 2022. The company is in a rebuilding phase. We're rebuilding on a new distribution model, which I'll touch on and additional product platforms. And obviously, that is taking some time. We have some ongoing legacy issues, which still cost time and money. We are reducing as much as we can, the expense on those, but everyone should note that those issues still need addressing. On a more positive footing, Brazil performed very well throughout FY 2022, and that growth is expected to continue in the future years. We launched Foz Flow in the second half of 2022, which opens new market segments, not only just for Fozf low but for Phoslock itself as we move into different segments of the water treatment markets. Our distribution platforms are largely in place, and I'll talk some more about that in a moment, and that strategy is delivering results. We made some key appointments of personnel in a number of geographies around the world throughout the year. As I mentioned, we identified and actually commercialized some of the new segments in the water treatment market. So that was very pleasing. The project pipeline continues to build. I'll discuss that a little more as well. And of course, we're relisted on the ASX in September 2022. And just a bit of a call out to Matt, and thanks for all the effort that he put in to make that happen. It was a significant amount of workers as everyone knows. Thank you. So just updating on the legacy issues. I know many of you want to hear us talking about forward, not backward. But as I mentioned just then, we still do have to deal with a number of issues. So it's important that we update you on them. Internal reviews have largely been completed for all staff, suppliers and in agents with a number of training exercises undertaken throughout the year. We have new systems and processes implemented to strengthen risk management and governance. Matt touched on the outstanding receivables were pursued with success with the KB receivable, which did involve quite a protracted legal negotiation or legal process, I guess. Jim, unfortunately, after winning the court order, we have not received payment for that receivable. So that continues to be pursued with all Vega, as you would expect, and we'll keep updating you as we go with any action out of that particular receivable. We also restructured the China business completely throughout the year. particularly the latter part of the year with distribution focused sales model, which has a number of effects, which we've touched on before, certainly decreases risk, particularly around receivable, as we've just discussed. It's a significant cost saving as we've moved to a distribution model, which involves less direct salespeople. We also achieved a relisting in September, as I mentioned, on the ASX. We continue our cooperation with regulators in a number of areas, which we've previously talked about. We've also previously mentioned any legal proceedings with individuals or against individuals will be reviewed after those regulatory investigations are completed, which is an important point for some that some of you asked me about reasonably regularly. Thank you. If we just talk the distribution business model for a minute. I really would call this more a commercial business model discussion. But as you know, the previous focus of the business was largely on large lakes. And as we know, they can be quite lumpy and reasonably hard to predict. So we've changed the focus or we added to the focus of our commercial strategy, our go-to-market strategy of a distribution model, which fundamentally means we have agreements with partners in various parts of the world geographies that where they're connected with their agents and their likes and their models and they can get us into smaller, more repeatable water treatments much quicker and as I said, much easier. So that's been a key component of the focus. And I'm pleased to say we've already seen sales from the U.S. and Europe and Australia and New Zealand through this model. So the strategy is working. It -- the securing of Foz Flow allows us to open up new market segments as well through this distribution model through the flowable water remediation access. And it enables our sales guys in the U.S., in Europe and here in Australia and New Zealand, particularly to focus on those larger lake projects, which, of course, are still very important to us and very important that we turn those opportunities into contracts, as I'll talk about in a little bit more detail. So that's a very important component of the business and of the strategy and pleased to report that is starting to show results already. Thanks. If we look at what we've done with the distribution network around the world. So firstly, in the U.S., multiple agreements are in place with retail and water application companies. Most of the companies we're dealing with in the U.S. are involved in aquatic product supply. So they're already in this space. They may sell to applicators or they may sell directly to the water body involved. But either way, as I said, this gives us a much quicker repeatable access to those water bodies. Also in the U.S., a number of these distributors are involved in large lag applications, and it gives us the opportunity to work with them or work on our own directly with these larger lakes and a number of opportunities that we already come through on the larger lakes through this distribution platform. So that's very pleasing. In Europe, again, we've mentioned a number of these agreements. We have retail -- sorry, we have agreements with retail and application specialists, SSI in the U.K. I'm sure some of you have looked them up. They're a significant player in the water space in the U.K., aquatic solutions as well. I am data in the Netherlands and Belgium and Unioiin Germany, all distribution agreements in place. And we have more discussions ongoing in the U.K., Netherlands, Ireland and Switzerland for further agreements. In China, we have identified 5 key regions. I have talked about this before, but I'll just reinforce it 5 key regions with a number of distributors in each, and those contracts are under negotiation as we speak. South America, Brazil, Hydroscience. -- you're well aware of those or that distribution agreement or license agreement highly successful for us and continues to build the business there. And we've appointed -- or we did appoint last year a distribution agent in Uruguay, Fresco's for tows. And while we haven't seen any direct business yet, there is a reasonable project that we expect will happen very soon. In Australia and New Zealand, not as formal agreements in place, but we have a number of partners, both here and in New Zealand. So that's a bit of an update on the distribution program and platform around the world. If we now move to just a general regional update, both what happened in FY 2022 and some of the future looking opportunities for in the geographies. So starting with Canada in the top left of your screen. We still see significant interest in Phoslock in Canada and with a number of projects on pause pending the resolution of the regulatory issues that we've discussed previously. We have made some progress in this area, albeit slow. We have had a number of discussions with the regulators that are involved in the Canadian registration. And while we're making progress, as I said, we have to point out that is slow, and I expect it to still take some time. However, the Board and all senior management has identified Canada as a significant opportunity for us, and we should continue to pursue this registration in Canada. In the U.S., I touched on the distribution expansion, which is well with orders received towards the end of 2022 and again, early in 2023. We did enhance the U.S. team with a couple of appointments through 2022, which has been terrific and again, already showing some results for us in that part of the world. A number of larger lake opportunities have been engaged and are being developed in the U.S. on the back of the appointment of these people and the engagement with distribution in New Jersey, in Washington state and in Florida. So. we'll keep you updated on how those projects progress. In Europe, we did 2 further smaller treatments around the Cristal in Rotterdam. We monitored the creates throughout the year with exceptionally good results throughout the year, which is very important because it sets up other potential applications in Europe with a lot of focus on the Rotterdam project. And so, we're pleased to say we have a number of projects that we're hopeful to complete through 2023, and possibly that will be spring in 2023. It should really say, hopefully complete rather than finalized because they've still got some work to do. But there in the U.K., the Netherlands and in Finland. And we obviously have the potential to roll out other lakes, particularly in Finland and the Netherlands in -- as a consequence of what we've been able to achieve in Rotterdam. The distribution platform, as I said, is progressing well, and we have a number of trials across a number of regions going on to test fFozflow in a whole lot of different segments than we've ever really operated in before. So -- but particularly wastewater, both domestic or domestic utility and agricultural. So quite exciting opportunities look like they're being developed through the European network. In South America, I've already mentioned, Brazil had an outstanding year last year for us, continue to treat a number of projects annually but also developing new projects, which are new opportunities. So that particular country does very well for us under the stewardship of Hydroscience. We're seeing opportunities develop, as I mentioned, in Uruguay and in Ecuador in shrimp farming. So again, they're in the projects page and their projects and opportunities under development. In China, I mentioned already the business has been restructured and reset. We've overhauled the manufacturing plant in Changxing and our channels to market. We identified the distributors, as I've already mentioned, in the 5 key regions. We do expect a significant uplift in the economy in China as a result of the COVID controls ending in the latter part of 2022. We do expect that to have some positive flow into our business as the Chinese economy and the businesses in China start to get going again after some pretty significant lockdowns, which we all know. In Australia, through FY 2022, we completed works in WA and in Queensland. We also did a reasonable -- well, a treatment in Auckland in October 2022 with outstanding results in the Chelsea ponds, which are at the sugar refinery mill right in the center or not in the center, but very close to the center of Auckland. -- outstanding results. However, we do operate in a natural environment. And as you know, Auckland earlier this year had massive floods and that has impacted that water body, which is obviously a concern now is we have to manage and the managers of the water body have to address what's happened through that flooding. So that's just what happens in a natural environment that we work. There are a number of projects being developed in both countries. New Zealand distributors and agents are helping us in that part of the world and here in Australia similar with both new e-new segments being opened in -- for follow but also for Phoslock and our first sales into the mining industry occurred earlier this year, which we -- again, is a new segment for us, but nevertheless exciting. And we hope will grow into obviously bigger and better opportunities as we go forward. Thank you. So this is the page from the website. Hopefully, you're all reasonably familiar with it. It's our opportunities page, if you'd like to call it that or our open projects page. It comes with the caveat, and I need to say it that they're not guaranteed. These are projects and opportunities that we're working on. There's many of them and they grow in number pretty regularly. The trick for us or the key focus for us is to convert these opportunities into sales. And that's the key focus of the sales team. But as you know, many, many impacts and many, many variables occur, which either delay these, and that's typically what happens, delay them or sometimes they drop off. So sometimes, and I have had feedback that some of the projects don't seem to have moved much in terms of time and I understand that, but that's the nature of the business. Some of these projects can take some time to get from start to contract signing or application. And obviously, we advise as much as we can about what's happening, but I hope you understand some of these can take time. And we will update this every month so that you're informed of any significant progress that happens through these. But there's a number there with over 70 projects around the world, and you can see where they are. I'm certainly not going to go into each one of them. But you have a good geographic spread of many projects and opportunities, and we'll keep those updated. And I hope you can get a chance to have a look at them on the website as we go -- thank you. I did want to touch on full flow for many reasons, but significantly for us, it was a key focus of our R&D efforts of the last few years was to have a flowing water product for phosphorous capture. So we achieved that with the agreement with the water warriors in the U.S., which is an exceptionally good relationship that we're working with those guys with. But Foz Flow brings not only opportunities in itself, but it opens up new opportunities for Phoslock -- and that's some of these new segments that we're talking to and involved with as a result of talking to them about Foz Flow. So it's a really important component of our strategy and of our business. There are -- there is work to do. It's going to take some commercial effort and trial work and proving of concepts to meet all the markets that we hope to, but where the potential for follow and the knock-on potential to Phoslock is significant for the business. And I wanted to just to reinforce that. The last point there is that it's potentially can be used as a slow-release fertilizer, which again, is a really exciting opportunity and one that gets customers when we talk to them very, very enthused about having something that has such a good environmental profile. There is some work to do to understand exactly how best to use it as a slow release fertilizer, but that is certainly part of our ongoing strategy. Thank you. Just to give you a little more flavor on full flow and the opportunity we see, and I don't necessarily need to go through all of these. But you can see, most importantly, the different segments that we're operating in. So wastewater from domestic and commercial, we haven't been operating in that space before, but I was lucky enough to be in Europe a couple of weeks ago in the U.K., and we had some terrific meetings with people involved in waste water, both at a commercial level and, let's say, at an industrial level. municipal treatment plants, for example, -- we're talking to people in agriculture, particularly dairy runoff. For those of you who would understand that's a significant issue. -- recreational water, swimming pond applications and landfill leaching, which is actually something we're doing across many geographies, including Australia. So there's lots of different segments that we're talking to, both in Europe and the U.S. that are all good potential for this product. And as I mentioned earlier, often that leads into the knock-on effect of being a good potential market for Phoslock depending on what the application is. We're also seeing as slow and some of the meetings we've had with Lake managers around follow, particularly in the U.S., leading to Phoslock opportunities. So I'm hoping you're getting the feeling of how these 2 products work together and how a total solution for bosperous capture in both flowing and still water is what we've been aiming for and now what we have. So in the ANZ region, we've also looked at mining, municipal waterways and inflows, landfill again and fish farming. So there's multiple segments that are opening up as a consequence of these projects. We achieved some moderate or modest, I think, is the right word sales at the end of last year and early into this year, obviously, expecting those sales to build throughout 2023 and beyond. So just changing gears here a little bit update on the manufacturing and supply chain piece. We spent about $360,000 so far and expected $640 million to upgrade the Chinese facility to get it to a capacity of 6,000 tonnes. We previously advised that might be closer to $1 million. So that's come in under budget or under expectations, which is obviously -- which is pleasing, and that is completed. And now that production facility is a level that we would expect of the business and a capacity of 6,000 tonnes the Xenon Lake project, which I touched on the receivable, but shareholders and stakeholders should note that we also received just over 1,000 tonnes of our stock that was returned throughout 2022, which was very important, obviously, and that is return and is safely now in the warehouses of ours in Changxing. We also have previously advised and just to update you on the potential second manufacturing production plant in the U.S., which we identified a site in Casper in Wyoming. And during 2022, we began and completed what you would call the initial phases of design work. So that was done. We have discussions ongoing between the Wyoming Business Council, the state government of Wyoming and Advanced Casper, who are under like partners and promoters of business in Casper who have been very helpful to us. But the discussions ongoing about various government support packages and grants that are available. And I know some shareholders have seen this. Those discussions are ongoing. Obviously, we'll advise if there are favorable outcomes for those and what they mean. But if you see discussions, that's what they are, their discussions going on between various government entities about potential grants, et cetera. We've paused the Casper project, as we've said previously, based on development of acceptable business case, which, of course, would be based on increased volume demand and sales. So we continue to work on that business case and we'll obviously advise as we go. The sales and operations planning process is implemented in the business now. So we have a good forecasting and demand forecasting process and obviously trying to drive supply chain efficiencies through those processes. Thank you. In R&D, our focus is really twofold. On the right-hand side of the slide, a heavy focus on flood flow and all the various validations and field trials we're doing in a number of new segments, which is critical for the growth and development of Fastflow, -- so that's a very important component of our R&D efforts throughout 2022, and we'll continue into 2023. And we're focusing now into nitrogen looking for potential products that can help us remove nitrogen. It's more complicated due to some science and technical things we don't need to get into, but we've engaged work with the water Warriors and the USEPA and the PXD project here in Melbourne, with Monash, which will commence in the first half of '23, exploring those opportunities for nitrogen capture. We're also looking at different uses of Phoslock and different combinations of Phoslock, which we think is really important, particularly around the ease of use of Phoslock, but also around some of the other combinations that can be used in treatment of the problems in likes. We want to advise that we're not continuing with Zip. We have been assessing the performance of Zain it hasn't met our expectations or requirements. So that work will discontinue. And we continue to test some other technologies around absorption of nutrients from wastewater in various geographies. So that's the focus of the R&D of the group. Thank you. I think this is the last slide. So -- thank you very much for that. Our outlook slide, FY 2023 expectations. So we do expect 23 to be another challenging year as we rebuild the pipeline as we continue to execute the growth and diversification of our market segments, but of that strategy. We do expect positive sales growth through the year with the US and Europe being the major drivers. We do expect some legacy issues and costs to continue throughout 2023. We are budgeting to make a loss and continued cash burn through FY 2023, which may continue -- potentially could continue into FY '24. I -- the key focus areas of the business and the senior management and Board of the business, so enhancing and executing of the strategy. As I mentioned earlier, conversion of the projects in our pipeline in the genuine contracts and sales, and that's a very, very important and key focus of the sales team in all the major regions. We have engaged corporate advisers to look at all options for the business and to look at realizing the maximum shareholder value we can. So we're also doing the Canadian regulatory work, our R&D work that I talked about developed in the identified areas I just mentioned. -- secure the manufacturing efficiencies and supply chain efficiencies, as I discussed, and the litigation and legacy issues managed and obviously, where possible, concluded. The confidence basis for the business for the future of the business, we are operating in a large and growing market. We have a large pipeline of opportunities, which is increasing. Our distribution strategy is working. Our applications without fail are highly successful, and the customer feedback is exceptionally positive to every application we do. And the company at the end of last year, 31 December 22, had $14.5 million in cash. So with that, Greg, I will hand it back to you, and Matt and Mike can handle any -- or answer any questions that come forward.

Thanks, Lach. No, I did -- we did have some questions that came in to -- as part of the registration process for the webinar, which we'll go through now. So first of all, what's the status of the $7 million worried from the Xinmin Lake project in China, notwithstanding the Chinese court order for follow to be paid in full. What's the prospect of us receiving at least some of what we're owed.

Yes, that's a good question. We touched on it or I touched on it briefly. So I did, Matt, I believe. As I said, we were granted the court order. We talked about it at the time, there was no dispute with the Zinman Lake people. And the court order was for payment, including interest in the -- I think it was around the middle of October of 2022. Unfortunately, nothing has come through despite multiple conversations, I'll say, many promises of money coming through, albeit not the full amount ever was discussed by them, but they did commit to some degree to be paying. Now we haven't seen any of that. So we continue to engage with the authorities. We continue to look for all avenues and different, I'll say, different avenues, if I might call on those to receive this payment. Most recently, we wrote a letter or I wrote a letter to the UC government, which is the -- or the time -- sorry, I'll rephrase that. The mayor of the UC City, which is the city responsible for the inline Lake application and payments. And I haven't had a response yet. But obviously, we will continue to do everything we can. It's a very important component for us of the business and our cash and back flow. So we'll continue to buy shares holders as we proceed. It obviously remains a high priority, extremely frustrating, as you can imagine, for -- or by us and I'm sure shareholders and everyone involved. And this is despite what you would call good conversations with the group. Nothing has come forward at this point.

Okay. You've stated that another loss is expected in 2023 when we continue to rebuild the sales pipeline. No more specific guidance has been given, but can you comment if you expect the loss and associated cash burn to be lower or lower than 20...