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

Hello. Thanks for joining in. My name is Graeme Newing, and I am the Chief Executive Officer of Phoslock. Over the next half hour or so, I'm going to give the same speech as I gave at the AGM held on Friday, the 20th of December. That audience is only 10 or 12 people. So hopefully, the audience for this version of the presentation will be much larger. I will now slip through the first few slides, including the disclaimer, which you should all read and move on to my presentation. First few weeks. The 3 nonexecutive directors appointed 18th of January, Fred, Shawn and myself were in for a shock. The company had been gutted. Most employees have been terminated in the last quarter of '23, with just 2 remaining outside China, being the Financial Controller, Cherry Wang; and the General Manager, U.S.A., Bush Heathman. They had been kept on only to facilitate the transfer of the 2,600 tonnes of inventory to SePRO and to manage the company closure. Both Lachie the Chief Executive Officer; and Matt too, Chief Financial Officer, departed early in March, failing to serve out their notice periods, at which point Cherry was promoted Chief Financial Officer. There was no one running the company. No one left in Europe, no one running global operations, no marketing, R&D, Investor Relations, nothing. In China, although there had been no production since November '21, there were still 15 employees, including finance, factory, warehouse and sales. The general manager in China had been terminated, but otherwise, it would seem a decision on cutting back further had been deferred. In addition, customers had been informed that the company was closing, so we're considering and indeed taking action on other options. Also, competitive lanthanum-modified bentonite products, which had emerged over the last year or so, were making inroads. Phoslock no longer had to field to itself. In the U.S., SePRO's subsidiary [ Nutrafix ] was marketing products with a lanthanum content of 10%. In China, Eastern Node, founded by 2 former Phoslock employees was marketing Ziofixer with lanthanum contents ranging from 5% to 20%. These products were taking significant market share from Phoslock. And we discovered that in the December quarter, water Warriors had pulled out of the agreement that had given Phoslock the exclusive rights to their product, which we had rebranded as Phosflow for removing phosphorus from flowing water. It was a minor part of our business, but even so. Rebuilding. Pretty soon after coming on board, I became involved in operations because there was no one else to do it. I was on a steep learning curve. It started with 1 or 2 things and quickly escalated until I was basically running the company outside of legal and financial issues. So I became a paid consultant, although remaining as a nonexecutive. My expanded role was recognized later in the year when I became Chief Executive Officer, and I should add, at a very low salary. Meanwhile, Shawn is covering the company's secretarial responsibilities, including legal and Cherry, the financial. I'm now doing the job of several of the previous employees being the former Chief Executive, plus the former Executive Manager, Operations, plus the former Manager of R&D and Australia and New Zealand sales. Plus someone on functions such as Investor Relations, website maintenance, et cetera. I'm doing all of that. Those individuals and the previous 2 Chief Financial Officer, costing the company more than $2 million annually. What has been achieved? Outside of legal fees, we have lower costs because there are fewer Board members and employees who are generally paid at lower rates and because we have terminated the services of some consultants. To give you an idea, general and administrative costs, excluding noncash abnormal items in the 3 years 2016 through 2018 were $3 million, $4.3 million and $6.7 million. Then there were some years of dramatically higher costs under the previous management with the 5 years, 2019 through 2023 being $11.6 million, $11.9 million, $12.2 million, $11.5 million and $10.3 million. In 2024, not much more than $3 million, including legal fees. Also, we have cut prices to increase demand and better compete with the other products. Sales have resumed in Australia. Bus Heathman is continuing in his role of General Manager U.S.A., albeit experiencing slower sales at present. We rehired Damian Whelan in July as General Manager, U.K. and Europe. So things are picking up there. Six employees in China were retrenched. The R&D team in China who had been -- who had departed in 2019 were rehired last month to work on new products. Organizational structure. Here is a diagram of the current organizational structure. It includes the entire workforce of 18, including Shawn van Boheemen, the Company Secretary, who divides his time amongst several companies. I think previously, the company had more like 25 to 30 employees. We have one in the U.S.A., where we used to have 3, 1 in the U.K. and Europe, where we used to have 3. In these regions, we have access to third-party applicators, scientists and distributors as required. It would be nice to have them in-house, but we are not there yet. The 13 in China comprise 5 in the finance and logistics team headed by Alan Sun, 5 in the production team headed by Tony Chen, 2 in R&D, headed by Peter Cao and 1 on sales being Will Li. Although there is now no general manager in China, the key personnel, Alan, Will and Tony and now, of course, Peter, work well together. And I'm in constant contact with Will and Tony in particular. My Chinese is zero and their English is poor, but we seem to do okay with translating each other's e-mails. Not shown on the diagram, we also have retained third-party accountants in the U.K. and the U.S. In addition, not shown, but very important, nonetheless, we have our distributor in Brazil, Hydroscience, whose principal was Tiago Ferreira. Sharp decrease in 2024 sales. As you can see, sales this year are much reduced. Last year, Brazil accounted for over 900 tonnes or 72% of our total sales. Most of it was in the second half year as Hydroscience scrambled for product in the wake of Phoslock's decision to cease operations and sell its remaining inventory to SePRO. Until this month, Hydroscience has not needed to purchase product as it ran down its excess inventory, and now they are relatively low. We agreed earlier this month on a shipment of 5 containers, 105 tonnes, but there may be insufficient time to deliver it onboard, ship and issue an invoice by the end of the month. If it doesn't happen in time, sales to Brazil would be 0 and the global figure of 331 tonnes I have penciled in would be 226 tonnes. In the U.S., there were sales of 67 tonnes in February, probably as distributors were keen to add to their inventory in case the company close, but they have been slow subsequently. It could reflect lingering uncertainty over whether Phoslock would stay in business. And SePRO is probably making some headway, although I am told it is not well liked by a segment of the market. In the U.K. and Europe, Damian had been terminated in October last year and only resumed in July, so not much was expected for this year. However, 23 tonnes were sold in October and a further tonnage was agreed in recent weeks, but due to tight logistics, deliveries and thus sales have been deferred until January. In Australia, sales are higher than in 2023, thanks mainly to an application on the Gold Coast and another in Perth, in both cases to long-standing customers. This performance was not all due to my efforts. The assistance from independent consultancy, LSI was helpful, including from Nigel Trail and Andrew Winks, who both had at different times being General Manager of Operations for Phoslock, but I coordinated everything. China has been disappointing. Economic growth has slowed and central and provincial governments have other priorities. Competitive pressure has not helped. There's also a feeling among Chinese customers that the previous staff were harshly treated and/or that the whole imbroglio was mishandled. Sales to recover in '25 and beyond. Next year should be much improved. Our Brazilian distributor, Hydroscience, should return to its normal level of purchases of over 500 tonnes. Its main project is, of course, Lake Pampulha in the city of Belo Horizonte on which Phoslock applications occur every year. Every year, there are also other water bodies treated. And we understand from Tiago that there are a couple of larger ones that could come to fruition. In the U.S., we expect an increase as customers and distributors embrace the return of Phoslock as a going concern. To cater for this, we recently completed the shipment of 105 tonnes from China to our warehouse in Savannah. The U.S. market is dominated by a myriad of distributors buying product from suppliers, including lanthanum-modified bentonite from SePRO. But the structure of the market is changing with a new distributor strategy emerging, and we are working towards ensuring this is to our advantage. In the U.K. and Europe, Damian has hit the ground running after an absence of 9 months or so, resuming work on projects that had been in the pipeline previously and adding new ones. It seems that every month, more water bodies requiring remediation are added to the list. There are now more than 30 projects on the books through the next 3 years at various stages of advancement, most in the tens of tonnes, 7 in the hundreds of tonnes, 2 in the thousands and in the tens of thousands. And several businesses have come forward in various regions seeking to become distributors for smaller projects. The drivers for this increased interest in the U.K. and Europe include relief that we are still in business, the cut in prices that we implemented and tightening regulations on water quality. Damian calculates a possible 2,700 tonnes for '25, which he risk weights to 700 tonnes, including 400 tonnes in the first quarter. That takes into account the probability that some of these projects could be deferred and some may not occur at all due to a lack of funding or competitive pressures. To be extra conservative, I have taken his risk-weighted 700 tonnes and dropped it to 500 tonnes. But the outlook appears encouraging. And right now, I am arranging a shipment of 17 containers, 357 tonnes from Shanghai to Antwerp. In China, there is potential for large sales, but funding is the difficulty. So I have allowed for 50 tonnes only. Among the possible projects is a further application of more than 1,000 tonnes, one might be seeing one, which was, of course, treated some years ago and remains by far the largest project ever done by the company. Of course, payment to us was severely delayed because at that time, as it turned out, the customer did not have the funds. And also it has thought there might have been some irregularity over us being awarded the contract. But in terms of water quality, the results were excellent. That should not be forgotten, and that is why we have a chance there that funding becomes available. And I thought I would throw up a figure for global sales in 2026 at well over 2,000 tonnes, allowing for further large increases in the U.K. and Europe. It would mean we would have to resume production in China. I should add that the figures for '25 and '26 are speculative. They are indicative only, may not be realized or may be exceeded and should not be relied upon by investors. Production. Production at the Changxing factory ceased in November '21 due to a buildup in excess inventory and the factory remains closed. However, as suggested in the previous slide, production might have to resume in a year or 2, perhaps in 2026. Annual production capacity is 3,000 tonnes on 1 shift and 6,000 tonnes on 2 shifts. Most of the plant can operate at much higher rates, but the bottleneck is the wastewater treatment plant installed in 2022 at a cost of $640,000. We have examined what might be required to restart the plant and have concluded that most of the equipment is fine, but the mixing tanks will need replacing for a relatively minor expenditure. We have completed an analysis of what operating costs would be, and it seems they'd be comparable with the previous costs. Some costs have increased naturally enough, but lanthanum chloride prices are much lower now. Research and development. The R&D team consisting of research scientists, Peter Cao and his assistant, commenced work on the 1st of November. Their selection was not difficult because they had previously worked together at Phoslock between 2017 and 2019 and were well regarded and known by both Will and Tony. There has been no research carried out at the factory since 2019, but the fully equipped laboratory was still intact and just needed some minor items replaced. Their task is to improve and expand the product range to include products with greater capacity to lock up phosphorus. Also on the agenda for down the track is a product to capture phosphorus in faster flowing water and a product to capture nitrogen. In their first few weeks, work by the team to develop an improved product has been very encouraging. Three new products with much improved performance have been developed, albeit only at laboratory scale at this point and work on patent applications is in progress. I should add that within the industry, Phoslock has the superior global brand because it has been extensively researched and used over many years. And the newer players have still to prove themselves. But for the long term, we must innovate. It is possible that the new products could be developed in time to be included in the restart of factory production. Class actions. In July, Phoslock was served with a demand for documentation by legal firm, Levitt Robinson on behalf of a shareholder as part of their work to determine whether to commence a class action suit against respondents, Phoslock, Laurence Freedman, Robert Schuitema and auditor KPMG. The claims mainly concerned whether the company was in breach of its continuous disclosure obligations in the months leading up to its suspension and announcement on 17th of September 2020 over the possible accounting irregularities and fraud in China. Of relevance is that directors sold a significant portion of their holdings in October 2019, and the company completed a placement and shareholder purchase plan at $0.50 in April, May 2020. The class action is still in the preliminary discovery phase and Levitt Robinson have until the 28th of February to file their claim to the Federal Court of Australia. In November, another class action emerged, this one handled by the legal firm, the Banton Group against the same respondents, making broadly similar claims, but further advanced because the proceedings have already been filed to the federal court. It is thought that the justice hearing the matters would recommend that the 2 groups merge their claims. Phoslock denies any liability and will vigorously defend any proceedings brought against it. We understand that is also the view of Freedman and Schuitema. Phoslock has an indemnity agreement with all key personnel, past and present, as a matter of course, and that includes with Freedman and Schuitema. So the reasonable cost to these individuals will be met by the company. Phoslock has directors and officers insurance cover with AXA for $5 million and has already paid in excess of $45,000. But there's also a retention of $1 million built into the policy, which has now been triggered, and it effectively remains the [ excess ] payable is $1 million. So in one form or another, the company will be paying high legal bills for a while yet. Other legal and regulatory matters. The AFP investigation commenced in November '21 when Phoslock voluntarily reported the irregularities in China, including possible bribery. Costs are not covered by insurance, but the indemnity agreement with key personnel still applies. The AFP is still in the process of making investigations and no entity or individual has been charged as yet. There's been no communication with AFP since '23, and we can only presume the investigation is ongoing. Likewise, there's been no recent communication with ASIC. It is not clear whether or if an investigation will commence. The company will apply to the ASX to have the suspension lifted post release of the half yearly financials. Quarterly cash flow. The blue line shows the cash receipts from customers, while the orange line illustrates the cash flow deficit from operating activities. It can be seen that the March quarter suffered a large cash flow deficit. It amounted to $1.8 million. This was partly because of relatively low sales receipts, but mainly because of high operating costs. The size of the operating cost is, of course, broadly represented by the distance between these 2 lines. In the March quarter, it included the annual lease for the China factory and legal fees associated with the AGM. During the June quarter, the situation improved dramatically. Sales receipts increased somewhat and costs more than halved. So the cash flow deficit from operating activities fell to around $390,000. The September quarter saw a much more significant increase in sales receipt to $940,000, but costs rose substantially. Thus, the cash flow deficit of $360,000 was scarcely reduced. During that quarter, legal fees were $152,000, $45,000 was paid to AXA for the excess triggered on the insurance policy and a fee of $250,000 was paid to our auditor. These 3 items totaled $448,000. Without them, cash flow would have been positive. Refer to the green line on the graph. Profitability. In September, Phoslock released its annual report for 2023, disclosing a loss of $2.1 million on revenue of $3.4 million. Our thinking is that the loss in the current year could exceed $3 million. Evidence for this is that the loss for the half year to 30th of June has not yet been released, but internal unaudited figures are for a loss of $1.1 million on revenue of $0.6 million. Beyond that, unaudited management accounts estimate that a loss of $600,000 was made for the September quarter on sales of $70,000 and that the loss will increase in the December quarter. The years '25 and beyond are difficult to forecast. What I can say is that general and administrative costs could approximate $3 million, excluding legal costs and the gross profit margin could approximate 45%. On that basis, sales of perhaps 4,500 tonnes would be required to break even, again, excluding legals. We are working hard to lift sales and are optimistic on that front, but legal costs are outside of our control. What if? In theory, Phoslock encaptured 11 kilograms of phosphorus per tonne of product, and we provide quotes to customers on the basis of 10 kilograms. So if the product is priced at, say, USD 2,000 per tonne, it would cost the customer $200 to remove each kilogram of phosphorus. We are developing new products, including one with the same capacity to capture phosphorus, much cheaper to produce and 2 further products with several times the capacity to capture phosphorus at a production cost that is broadly similar to the existing product. If that is confirmed, we can boost gross profit margins and at the same time, cut the cost to customers of capturing phosphorus and thus become considerably more competitive. Our revenue would be boosted and the factory's production capacity would increase. It would transform the company. Industry background. There is a very large and growing need to reduce phosphorus levels in water bodies because excess phosphorus is the main cause of toxic bluegreen algae burns. The problem is getting worse each year. Funding for such projects is largely the pursuit of governments, whether they be central and federal or state and provincial or municipal. Most governments are currently constrained on environmental spending due to other climate emergencies, not to mention increased military spending, low economic growth and large and growing budget deficits. At some point, there will have to be a substantial increase in spending on water bodies, but timing is uncertain. Conclusion. Phoslock is putting in place policies to grow the business. Development of new products is an important part of our plans in this regard. Legal issues relating to the past are a problem for our image and cash flow and could prove difficult to manage. They're largely out of our control, and all we can do is deal with them as best we can. That's the end of my presentation. Thank you for viewing it. I hope you found it interesting.