Rubicon Water Limited (RWL) Earnings Call Transcript & Summary

Good morning, and welcome to Rubicon Water's First Half of Financial Year 2025 Results Presentation. Up on your screen is the ASX presentation that has been released this morning. From the company, we have the CEO, Bruce Rodgerson; and the company's CFO, Andrew Bendall. Before I hand over to Bruce to go through the presentation, I'll just remind you that you can submit questions through the Q&A button at the bottom of your screen and analysts can also raise your hand to ask a question verbally. Bruce, I'll hand it over to you to get started. Thank you.

Thank you, Simon, and welcome to our first half FY '24 (sic) [ FY '25 ] presentation. It's an important milestone for Rubicon this year. So as of the 5th of May, we will be celebrating our 30 years in business. That's been quite a journey as we've revolutionized the operation of agricultural water here in Australia. And the journey we're currently on is to take that to the world, and we're achieving that at the moment with 70% of our revenues from outside ANZ, and that's where the big growth is going to come from. So I look forward today to updating you on our first half results and -- but also having a bit of a look at what's coming in the markets that we're operating in. Moving to the overview. So our business is -- our solutions combat the impacts of climate change and water scarcity by delivering intelligent technology to transform agriculture water supply systems. Over this last 6 months, I'm pleased to announce that we've been able to continue strong management on our cash flow. So $2.2 million operating cash inflow in the first half versus $8.5 million outflow in the prior comparable period. So that's on the back of positive cash flow in the first half of calendar '24. Also significant improvements in EBITDA and net loss after tax. So EBITDA loss of $1.2 million, which is $2.5 million up on prior comparable period and the net loss after tax of $1.4 million, which is $4.2 million up on the prior comparable period. Material growth in revenue and EBITDA versus the previous half which is revenue up 27% and EBITDA up 64% on the previous half, although to the prior comparable period on a very much a different mix of projects. We were down $1.3 million on revenue and $1 million on underlying EBITDA. We'll go through some more -- Andrew will lead through more detail on the financials. Our U.S.A. continues its positive trend. So that's a real positive for the business, strong first half. Revenue up 22% on prior comparable year on the back of what we previously announced as record signings in FY '24, and we'll lead you through the details, but those signings are continuing into FY '25. Our globalization strategy and the effort we're putting into and investing in these markets is continuing to pay dividends as we -- as we've signed contracts and progress contracts through our pipelines. Particularly exciting at the moment is the work we're doing in Egypt, Morocco and Kazakhstan and also India, where we're progressing into new states and larger contracts. We're going to talk today a bit about the near-term -- the momentum in the near-term major projects. I think we started talking about this at the full year presentation last year. So we want to talk about -- we've got a few slides diving deeper into not just our near-term pipeline, but the really significant projects in that pipeline that is the focus -- the key focus of management and our regional teams on delivering. With that, I might hand over to Andrew to start working through the financials.

Terrific. Thanks, Bruce. The first half of financial year '25 has been relatively strong. Revenue was slightly behind the previous corresponding period, however, materially stronger than all the other halves since financial year '22. The composition of the $32 million of revenue this half was heavily skewed towards the ANZ, U.S., South American and European markets. These sales helped drive the gross margin percentage back above 42%. The underlying EBITDA loss of $1.7 million was considerably stronger than the previous half, albeit lower than the period ending the 31st of December '23. A significant depreciation in the [ A ] dollar against most of our trading currencies during the half resulted in a fundamental turnaround of unrealized FX gains, leading to the EBIT performance being 67% above the previous corresponding period. The income tax result for the half was also positive, helping deliver a net loss after tax of $1.4 million being $4 million or 70% plus improvement on both the prior corresponding period and the previous half. Dissecting the revenue performance a little deeper, 87% of revenues were generated in ANZ, the U.S. and Europe compared with 68% last year. The U.S. market was up another 22% and Europe by 97% against the previous corresponding period, the latter result on the back of our signing of our largest Italian contract to date. Both the Australian and New Zealand markets remain strong with spare parts sales up again in the local market. Whilst the 2 Asian markets were slightly down during the period as we consciously slowed works down, allowing focus to be on cash collections and also to progress our operating structure in China moving forward as announced to the market in October '24. During the period, we were also able to renew a major software maintenance contract worth in excess of $4 million per year for the next 4 years. Generating an operating cash inflow of $2.2 million during the period versus an outflow of $8.5 million in the previous corresponding period was very pleasing. This was on the back of an operating cash flow positive outcome in the second half of '24, meaning a total of $3.7 million of cash have been generated over the FY '24 calendar year. The sales mix for the first half meant that strong collections in the Americas, ANZ and Europe were made during the period, along with some further material inroads into the Asian debtors, which we also expect to continue through this current half. We did start to see a little more spent on inventory builds than in previous years on the back of good contract wins. This had been anticipated and was one of the key drivers behind undertaking our successful capital raise of $16 million back in August, September last year. To finish off the financial overview, just a couple of balance sheet observations. Our current ratio has improved from 1.6x to 2.2x since 30 June '24. Overall, net assets have increased significantly on the back of the capital raise, which also had the effect of strengthening the balance sheet by lowering net debt from $31.3 million to $14.9 million and in turn, reducing our gearing from 57% to 21%. Thank you.

Thanks, Andrew. So I'll now go to some of the operational highlights and talk about the pipeline. One of the key operational highlights is our FarmConnect business, which is starting to pay real dividends to the business. So the shot here is of [ Fondomonte ], which is our largest ever FarmConnect order in the U.S. This is a substantial farming operation where we've -- we're in the process of delivering the first stage of what would be a 5-year program at around $4.7 million this year and similar scale for the next 4 years. So -- and that's really part of the highlights here of the U.S. business. So as we said in the overview, the market remains on track for another really strong year in the U.S., 200% increase in signings in FY -- on the back of 200% increase in signings in FY '24. We have not only that Fondomonte farm that I showed in the previous slide, but we've secured a $3 million contract to deploy FarmConnect across the first 620 acres of a 12,000-acre farm for the Gila River Indian Tribe in Sacaton, Arizona. So this is, again, gives robustness to this new business arm of Rubicon, which is automating the gravity-fed irrigation of these large commercial farms. These 2 farms that we're currently working on delivering the Stage 1 with are both multiyear programs that are going to deliver, if we're successful, tens of millions of dollars a year over the next few years. As I said previously, that North America signings have continued into this -- from last year have continued into this year, total to date of $13.7 million with a really strong pipeline of signings we're expecting in the second half. This graph we showed -- we began showing last year, which is, in summary, the blue is the Australian business. The orange and red is the U.S. business and the parallels between the U.S. and Australia when water price kicked off on the back of an active water market and extreme water stress. So at the right-hand side of that graph, you can see our first half results. If you double those, we're well on truly track to continue that trajectory in what is an exciting market for us. I think not only FarmConnect, but in the U.S., we are -- we have -- in our pipeline now are seeing really substantial core TCC, Total Channel Control system operations for some of the larger districts, and that's another exciting development there. We're not just delivering product. We're now quoting and expecting to deliver some large system solutions like we've done in Australia. Moving on to Latin America. So over the last 6 months, we've delivered the largest contract in Latin America, which is in Costa Rica. This project was just recently inaugurated by the Minister of Agriculture in Costa Rica. It is a -- it's again, the first stage of what will be a really large TCC network. The first stage is really pleasingly was contracted in June last year. It was manufactured, delivered, installed, commissioned and paid for by the end of December '24. So within 6 months, that whole project on the other side of the world, pulling together a whole heap of technologies and delivered and paid for. That's the first stage of a substantial TCC operation, and we are -- in our pipeline, we are expecting the second stage of that to be contracted in 2025. Latin America sales for the year outside of delivering on that project have been slightly down on expectations in the first half, although, again, we have a really strong pipeline of coming through for what we're expecting in this second half. Italy is another really positive story for us. So we announced the last -- in 2024 that we signed the -- our largest ever contract, which is a really ancient canal-based system south of Rome. It's a $5.8 million contract for the Stage 1 system there. That's quite a complex water delivery network. Not only is it requiring a lot of technology to effectively deliver water on time for the farmers and also to eliminate the normal wastage in the operations. It's also -- its outflows cause a significant environmental damage and to the point that there are large wastage -- large pump stations, which capture the overflows to pump out into the ocean. The aim of our technology will be to eliminate as much as possible, those wastage pumps as well as deliver our standard sort of business case of increasing water withdrawals by -- cut water withdrawals by 20%, irrigation efficiency of 90% and agricultural output by 20%. This is a fantastic project, not in terms of the Stage 1 scale of it, which is our biggest contract, but it also is going to generate a fantastic business case for us in Europe on a scale we haven't delivered before, not only for Italy, Spain, France, but also North Africa in that whole region. This will be a fantastic reference site. Beyond that contract, we have a really solid sequence of signings, particularly in Spain and also Italy, which sees our signings year-to-date of $8.4 million, which is again, by far, the highest 6-month signing in Europe for us. It is -- but we also have, again, some really exciting pipeline opportunities there, and we expect that signing trend to continue into the second half FY '25. An update on India. As Andrew pointed to in the finance report, due to the delayed cash collections on particularly our larger project there, we have been going slow in terms of delivery of new products to try and increase the pressure on the cash collections. We did have good cash collections in the first half. We certainly expect those cash collections to accelerate in the second half. And we're seeing good progress on that. We have in -- then we have also signed 2 new contracts totaling $3.5 million. That's the automation of the Narayanpur Dam in Karnataka and also a Chadchan Lift scheme, which is our first signings for -- in India for some period. But importantly, in India, the focus has really been to broaden our footprint like in the rest of the world. We're moving to new countries, new markets in India. We've got a lot of activity in the north of India, particularly Rajasthan and Maharashtra, where there are some substantial projects in our pipelines that we're working through. I'll then turn to talk about the pipeline. This is a slide we used in July last year, where we looked a bit deeper at our near-term pipeline. So rather than talk too much about the early entry pipelines of $1.8 billion of the projects that we're working our way through, really focusing on the stuff that's going to have a near-term impact on our revenues. And in July last year, for the first time, even within that near-term pipeline, we called out 12 major projects, which was really the focus of the business. So those 12 major projects with 65% to 70% of that near-term revenue and the business has been focused on delivering on those projects. So what I'd like to do now is sort of lead you through an update on those 12 projects in that part of the pipeline and also where we sit now. So looking at the -- a breakup of those projects. This is the $160 million of those major projects that we are targeting across those 12 projects. We separated -- we've separated those into close to signing, but likely to signing and possible and expected within sort of the 12 -- the next 12 to 18 months. So that color coding there sort of shows the time lines for when we're expecting and pushing for signings. If we look at what's happened since that -- since July '24, we've won 5 of the major projects totaling $15.9 million in the first 6 months. But we've also added another 7 major projects, which have come into that sort of near-term major projects program where we're really focusing as a business, so that those 7 major new projects totaled $31.6 million. And also, as we're reassessing the opportunities, one of the projects, which was an $11.2 million project in Central Asia, we've moved that back to the medium-term pipeline because of some expected funding release didn't come through in that market. And so we haven't lost the project, but we've just put it back into the medium-term rather than in the near-term. So if we look at what this chart looks like now, we've got $64 million in the -- across 13 projects. Importantly there, the -- what we're calling close and likely is $60 million of projects. So they're the stuff that the closest to signing for us. And that's on top of the $16 million that we've signed in the first half. So that -- those -- that $16 million is the Agropontino job in Italy that I've described, the Chadchan works that -- in India that we spoke about, Gila River Farms in the U.S., which is a FarmConnect job and also Sutter and Paloma in the U.S. Importantly, whilst those contracts have been signed already this financial year, the majority of those -- by far, the majority of those revenues are yet to be recognized and we will have a substantial impact on the second half earnings and revenue. So if we're summarizing all that, and then we can -- happy to take questions. We have had a strong start to our second half FY '24. So just updating from -- from December onwards, we've had a further $8.5 million in project signings. So that's on top of the standard sort of ongoing maintenance and support. These are project signings since December, and that includes Paloma in the U.S. and the Chadchan job in India. So that's a good solid start. And -- but our pipeline has -- as we spoke about in the previous slides, we have a lot of near-term projects that really have the potential to be transformational for the business, not purely on necessarily the scale of them, but the markets and the reference site and the technology that we're -- that they're going to deliver. So an exciting pipeline that we're -- of opportunities we're working through. We always -- recurring revenue is an important part of the business, and particularly these larger system sales once we get through the capital side, they're all adding long-term value in terms of the maintenance and support, as evidenced by, as Andrew said, the renewal of one of our largest software maintenance agreements for another 4-year period at around $4 million per annum. The globalization strategy, so the investments we're making to capture these international markets, we're continuing despite the tight financial conditions over the last 3 years. This is the future of the business, our globalization strategy to win these works across these key markets for us. That's starting to pay dividend. It's laid the foundation for the growth this financial year and beyond. Reemphasizing again the FarmConnect segment, really solid revenues now as part of the business, and we expect the scale of that business to grow. We'll start -- the focus at the moment has been some work in Australia, but typically, these large commercial farms in the U.S.A. Those -- we're now starting to take that technology into other markets and bid for work across other -- particularly the large commercial farms operating in surface irrigation areas around the world. And the final point is the U.S. market continues to be positive. It's a market 10x the size of the Australian market, pipeline is strong, funding is there, and we see that market continuing to grow. Also importantly, it's that and the European market is a very good market to work in. And on the commercial terms we deliver in those markets is also really positive. So that's the end of our formal presentation, Simon, and I'm happy to -- we're both happy to take questions here.

Perfect. Thanks, Bruce. Thanks, Andrew. First question is from James Ferrier at Wilsons. Was the growth in ANZ revenue all New Zealand related or some in Australia? And if the latter, is this software or support or an uptick in hardware installations associated with the replacement cycle?

If you don't want -- so it was definitely an uplift in both ANZ, both Australia and New Zealand. New Zealand was more project related and it was finishing off a large project that we signed last year, the Valetta project. And in Australia, I guess the most significant uplift is the amount of spare parts that we've sold in the first 6 months, which I guess we anticipate will continue because, I guess, as some of the older projects get older, they're requiring some new parts to be put into them. We certainly saw that in the first half.

Great. Thanks, Andrew. Another question from James. Within Rest of World, can you provide some color on the trajectory of transactional revenue versus larger contract revenue?

Certainly, in the -- that is -- the Rest -- our Rest of the World segment is quite broad. So the rest of the -- U.S. is part of the Rest of the World, which is predominantly or is probably -- there's a large part of transactional revenue in the U.S. So we have in excess of 100 irrigation districts buying our technology, and we have a really solid pipeline of just ongoing orders to upgrade projects and deliver technology. But we also have particularly the FarmConnect projects, 2 of the larger projects that we've delivered. So they're certainly project-based. And in our pipeline, we have an increasing number of larger system proposals like we have elsewhere in the world. So upgrading some of the deploying end-to-end solutions in some of the larger irrigation districts. The Rest of the World is predominantly project-based revenues with probably Spain, Italy having an underlying level of the transactional revenue because we've been operating there for a substantial period, and we have that -- the ongoing transactions with existing customers.

Thanks, Bruce. Maybe a question for you, Andrew. Gross margin at 42%, is a bit below the 44% on the restated FY '24 result. What were the major factors influencing margin in the first half of '25 versus full financial year of '24?

I think the absolute level of revenues impact directly on the gross margin level. So the first -- the very fact that there was another extra $1.3 million of revenue in the first half of '24 versus the first half of '25. That certainly translates into a movement in the gross margin percentages. Other than that, there's no real material differences between those 2.

Just a little bit below last year. That answers it. And just finally from James, could you update on the residual debtor collections in terms of quantum and expected timing?

Yes. So we did have -- we did have substantial aged debt payments in the first half, and we're expecting that to continue in the second half. Just overnight, we've had an update from the major debtor for us, which is the KBJNL project in Karnataka. And that gives us confidence of the near-term substantial unwinding of the remainder of that debt with -- in that contract is about $9 million remaining to be paid. Not all of that is aged, but we are expecting that payment to be unwound in the second half. Likewise, in China, China, we've been -- we are still working through our restructure and the new JV arrangements. But likewise, we're pushing there that the total debtor balance in China is less than India, but it's still an important part of our strategy to really tie those repayments to the future of our operations and our partnerships there. So...

Great. Thanks, Bruce. Just final question that's been submitted. How far away from profitability is the business? And what stops you from being profitable with a $60 million to $70 million in sales?

Well, from -- we are making the investment to be a much bigger business in this globalization strategy. So we have -- we're a manufacturing business with a sort of a cost base that we have to maintain to be able to deliver. And we are investing in the markets that are the future of the business. So overall, we need to get to revenues of around that mid-60s to $70 million a year to start becoming profitable. And that once we get across that figure, our gross margin really goes to the bottom line. Our overhead costs don't continue to grow with the scale of the business. So from our -- where -- as our revenues get into that $70 million, $80 million, $90 million, $100 million, that's when the profitability will come. That's the journey we're on. We're very confident that in the near-term, we'll get there. We're not making forecast -- releasing forecast yet of exactly when we'll get there. I think if you understand that pipeline, if you understand the base we've got, I think in that, the other core thing is the signings in this first half have left a -- there's a lot of revenue left to be recognized from the projects already signed this financial year into the second half, and that really healthy pipeline of program. Andrew, did you have anything more to add then or...

No, I think that's spot on. We've been fairly open in the sense that given our current operating expense base that we do need that $67-odd million of revenue. So therefore, the sums, we've obviously recognized $32 million in the first half. So I think to answer the question, what do we got to do? We're going to do about another $35 million to breakeven. And then everything above that goes to profitability at the underlying level.

It seems like there's a fair bit of operating leverage once you get to that level. And with that, Bruce, that concludes the Q&A segment. I might just hand it over to you for some quick closing remarks.

Yes. Thanks, Simon. So from our point of view, yes, I thank all the shareholders for their patience. We are making some real inroads now. And we are bullish about this business and the pipeline that we are working on to get us into that really profitable range of revenues. And we hope to be continuing to keep the market informed over the next months as we continue on that journey. So thank you on your time -- for your time today, and happy to hope to talk again soon. Thank you.

Thank you.

Thanks, Bruce. Thanks, Andrew, and thanks all for attending. Cheers.