Rubicon Water Limited (RWL) Earnings Call Transcript & Summary

Welcome to Rubicon Water's Investor Webinar to discuss the company's FY '25 Results. On today's webinar, we have CEO, Bruce Rogerson; and CFO, Andrew Bendall, who will go through the presentation released on the ASX this morning. [Operator Instructions] I'll now hand it over to Bruce.

Thank you, Ben, and welcome to our FY '25 results presentation. Really proud that this year, we're celebrating 30 years in business. It's been a journey over those 30 years, a journey in predominantly 2 parts, building the technology and automating the districts of Australia and achieving what were -- what are still world benchmarks in gravity feed irrigation throughout that first 20 to 25 years, was predominantly Australian revenues and business. We have -- Australia is only a small part of the world market for us. So, definitely, the growth of our business now is international, and that's where over the last 10 years, our focus has increasingly been and proud to say that 70% of our revenue again this year, more than 70% is international. That's where the big growth will come, and that's where the investments will be made. We're operating in 22 countries across 6 continents. The metrics on the amount of irrigation -- irrigated land that we're automating continues to grow as is our track record in delivering water on demand to increase agricultural productivity and water efficiencies to free up water resources. So that's what we do as a business and proud to say we're achieving that increasingly around the world. So, a brief overview of our highlights for the year. So strong cash flow, definitely a focus of us given our experience in recent years and some of the difficulties we've experienced across Asia. So, $5.4 million is our strongest operating cash flow -- cash inflow since FY '18, and that remains a priority focus of the business. On top of that, our highest revenue year since listing in 2021 is $69.1 million, up from $58 million in FY '24, again, driven by that growth in our Rest of the World segment, predominantly U.S.A. and Europe this year. Net loss of $7 million compared with $11 million last year. And that's on the back of some increased costs in freight and tariffs around the U.S., particularly, which we consider pretty much one-offs, as well as some continued the resolution of our China strategic review this year. So, 24% revenue growth in the U.S., another record year of revenues. And that is a really strong base for us now that we're building -- continuing to build and see that growth continuing. Landmark projects for this year. So, Mexico has -- we've got quite a history of doing work in Mexico, but the contracts this year have taken a significant step forward. We also delivered LatAm's largest single project, and we've previously announced the automation project in Italy. On the back of that, we still have a very strong pipeline of projects this year, and I've got some slides talking about how that strategic projects of focus for us has improved, and we can run you through some of those later in the presentation. So just going through where those highlights are for the year. So, in the U.S., we've got a slide coming up talking about Turlock Irrigation, one of our original contracts in 2005, really now implementing TCC. Mexico, I've spoken about Costa Rica with the largest single contract in Latin America. FarmConnect continues to be a big part of us in it -- a big part of our current and future operations. Agropontino in Italy is a signature project, very historic irrigation district where we're modernizing that in a large way. In Australia, Murrumbidgee irrigation, again, announced the completion of their automation program, but we're still very much on the journey for them for the years to come. And in India, our signature project continues to win awards and sets us up for significant growth there. If we look at, I suppose, why we're in business before we get on to the finances a little bit in detail, sorry. This slide is quite a strategic one. People may have heard me talk about it before. But if you break up the world's water resource -- freshwater resources every year and their consumption, about 1/3 is used in urban and industry and another 1/3 is used in the consumptive use of irrigated crops. The major part of the remaining 1/3 is lost in getting the water to those crops for consumptive use. So, that is the space that Rubicon deals in. That's why the opportunity around Rubicon as a business is so huge. 1/3 of the world's water effectively is lost in getting the water to the root zones of those crops. We have the technology that makes a material difference in the efficiency of doing that, but also the timing and allowing the productivity to come from that. So that's why we're in business to reduce that 1/3, free up that water resource and increase agricultural productivity. One point I'd like to expand on is in our finances, and I suppose in some of our reporting, we've spoken about hardware and software. Hardware is a term that underplays what we sell when we sell products. So, the smaller scale system we sell is a gate like pictured here. But that is a very smart device. At the base level, it's integrated into real-time data and connectivity for the customers. Even without our software, that product can integrate into third-party systems and can provide data and alarming. And our customer journey typically is -- starts with buying a few of those gates, seeing what they can do, utilizing the connectivity via the web and then slowly building up. And we've got a couple of examples to talk about today, which show that journey. The first is Turlock. So, I mentioned this in the introduction. You can see the map there of Turlock. So, we -- I actually commissioned the first gate in Turlock as an engineer in 2005. It was our first -- one of our first gates delivered in the U.S. And over that period since 2005, over the last 20 years, we've delivered 239 gates for around $16 million worth of revenue. And these are predominantly what we previously called hardware. These are smart devices that Turlock is buying to improve their operations. But over time, they all come together in a integrated solution. So, in 2015, for the first time, one of their really problematic channels was historically caused some heaps of trouble, and they contracted us to expand our footprint in that region, the 2015 install shown on the graph there, and we fixed those problems and showed what our software could do. And pleasingly, in FY '25, we won the first contract of the complete automation of the whole district. So that's the circled thing in the center there. So that's a $2.8 million program of providing additional gates plus $640,000 investment in our customizing our software for that solution. And we see this partnership now continue as we roll out those type of systems across the rest of the footprint there. So, a 20-year journey being profitable, but now starting to ramp up to automation and full system delivery. So, they're on the journey to automate and achieve the full benefits across their district. And then pleasingly, in Australia, we have Murrumbidgee irrigation, which this year announced the completion of their dedicated long-term automation program. So, over that period, we've rolled out 1,200 automated regulators. We've transitioned them from a 70% efficiency pre-modernization to a 90% plus efficiency, 2,300 irrigators getting the full benefits of our systems. So, we've completed most of the -- that automation, most of the hardware, but we're still on that journey with Murrumbidgee irrigation. So, the quote there from Brett Jones is now they've got this system in place. They still don't -- they still have probably only got 10% to 20% of the benefit they can get out of this system over the years to come. We engage with our customers, not just about selling the hardware and automating the systems, but on product developments and on systems and efficiencies and how we can improve their business together. So, we're on that journey with Murrumbidgee as we are with all our customers. So, that's a bit of an intro to what we do, why we do it and our long-term relationships with our customers. I might now throw to Andrew to -- I will throw to Andrew to start leading through the results of FY '25.

Thanks, Bruce. Before I make a comment in regards to the 2025 financial year results specifically, I wanted to talk briefly to this slide. It shows historically the last 15 years performance by the business. The stacked bar chart captures the revenue based on Australia, U.S. and the rest of the regions put together. We've got the operating expense line in the red and the gross margin percentage in pink across the top. And I think what -- the 2 points I wanted to make on this is that, firstly, captures the geographical revenue mix that has continued to an international transformation over the years. The Australian business delivers the $20-odd million of revenue each year that you can see and has done so for the last 7 years. But it's the U.S. that's grown to our largest contributor, representing 46% of this year's sales, whilst the other regions combined also totaled close to $20 million of revenue. The second point I wanted to make is that whilst we know there is considerable improvement still to be made, this year continues to trend in the right direction. On to the next slide. The business was relatively pleased with the increase in revenues to $69 million, up 18% on last year and the strongest top line since 2021. The gross margin percentage increased 1 percentage point to above 41%. This was despite being negatively impacted by large cost increases in international freight driven by global geopolitical tensions. It was also impacted by the introduction of the U.S. tariffs in the last quarter of the year, along with a negative product mix in our India business between the FY '24 year and the FY '25 year. It should be noted these are not permanent impacts and are already being eliminated as we reprice projects in FY '26. In concluding our strategic review of our China business, the decision was made to take up a $2.6 million impairment as a result of the separation from our previous joint venture. The lower-than-expected margin, combined with the impairment resulted in an underlying EBITDA loss of $4.6 million. Positive foreign exchange movements, lower interest costs on lower debt and an improved tax expense led to a $7 million loss after tax being reported compared to last year's loss of $11 million. The next slide talks about the revenue performance by segment and by type. I think we've kind of covered off by segment with my earlier comments, and Bruce ran through some of the pleasing wins in other geographies throughout the year. I will say this about the Asia segment. It's the second year in a row, it's been disappointing, but the China piece is all about clearing the decks for an unencumbered participation in a market we expect to return to pre-COVID activity. And whilst the full year India business contribution was not at historic levels, we did see some last quarter showing positive signs. Our reoccurring type revenues of software contracts, components and service continues to steadily rise, up 11% year-on-year. The business generated $5.4 million of operating cash during the year, a $12.4 million improvement on FY '24. This meant that we have been operating cash flow positive for the last 3 halves and the best cash results since 2018. We collected almost $11 million of our Asian debt, whilst just the ANZ and U.S. markets delivered $55 million, all within tight commercial terms. The business maintained its moderate but important ongoing investment in R&D. We continued our -- on to the balance sheet. We continued our strong focus on working capital and managed to reduce that by $12.7 million, representing an 18% reduction. A marginal increase in intangible throughout the year was reflective of our continued R&D investment outstripping amortization of previous spend. Our higher net asset position was a result of the capital raising, whilst also having the effect of reducing our net debt from $31.6 million to $14.3 million as of the 30th of June this year. This also lowered our gearing down from 58% to 22% this year. I will now hand you back to Bruce.

Thanks, Andrew. So, just moving on to our pipeline evolution. And just an update on this slide, which we've been reporting for a couple of periods now. So, this is the historical slide of the blue here is the Australian business and the orange to red is the U.S. business revenues. Pleasingly, with another record year of sales in the U.S. continues that trend of increasing business in what is a very important market to us. The U.S. business is 10x the opportunity that existed in Australia. The Australian business was about $750 million worth of revenue for us over that -- over the lifespan of our business. And so 10x that is a really significant opportunity. Australia, the yellow part of the yellow arrow on the graph for Australia was the price of water in Australia during the Millennium drought, and that's really the driver. Whilst a lot of the programs were government funding was all about returning water to the environment and the price that was paid for that water really drove the investment that was required to create the districts of the Murray-Darling Basin, in particular, all operating up around the 90% now on the back of our technology. Similar dynamic in the U.S., very different water law, but prices of water continuing to increase, and we see that continuing. Clearly, there was a change in government this year in the U.S. and that has had some impact on slowing as the government readjust to the new administration. There's been some programs have been a bit slower than what we would have otherwise hoped, including in FY '25, to be honest. But we are seeing signs of that -- those programs starting to come back online, and we're hopeful of another good year of growth in the U.S. this year. If I look at the broader sales pipeline, we started reporting last year rather than talking about everything in our in our customer relation -- every opportunity that we have in our CRM system, really focusing on the projects in our sales pipeline that are our major focus this year. So, the way we look at the business is we have sort of base business, which is combined existing sales and maintenance and spares and that sort of smaller projects that our customers like to like I explained earlier, for the last 20 years, year-on-year, they've been buying parts of our systems. The major projects are the new customers that are coming in that really open up new opportunities for us. We started last year with 12 projects of focus. And over the course of the year, we added in a further 21. Of the initial 12 projects that came in, we moved 2 back to the medium term, not because they were lost, but because they -- through various reasons, changes of government or changes of priority. They were -- we now determine their medium term rather than short-term projects. And pleasingly, we won 9 projects totaling $24 million. The total pipeline at the start of the year was $160 million. So, whilst $24 million is not bad number, it was not the scale of what the opportunity was and what we're focusing on going forward. So pleasingly, talking about this year, we're starting the year with 22 projects of a total value of $184 million. And I suppose this chart showing that without giving strict timelines, I suppose, close, likely possible and expected next financial year, we're seeing a significant increase in those projects that we determine as a management group are close to being signed. And these are the projects like if you quick scroll through the projects we didn't win last year, Italy, India and part Gila River a FarmConnect project, also in Mexico and Argentina, these big gravity fed irrigation areas of the world are all need that solution, that 30% -- a 1/3 of the water that's lost in getting the water to the crops. The whole world needs solutions for that, and that's what we're building a portfolio of markets where we're operating in that space. So, to sum up, I suppose, for this year before we start taking questions. We have that pipeline of major projects that we're really focused on this year. And that's what will give us the really significant growth as we sign those bigger projects. We have really strong market fundamentals. We're well positioned to capture the growth. Despite the stress of the last few years, we've continued to invest both in R&D and in the presence we've needed and the infrastructure we've needed around the world to be able to deliver on these opportunities. As I pointed out with that Turlock example, it's long-term relationships we have with our customers. Turlock 20 years, our Australian -- many of our Australian customers for the full 30 years we've been in operation and continued revenues. We continue to support them. We continue to sell them product. We continue to enhance our product to meet their requirements. Geographic expansion is critical for us. This last year, EMEA really on the back of that AgroPontino project and other opportunities in Italy, particularly, really was a significant part of our growth, and we do expect that to continue in Mainland Europe, but also in -- out of our European office, we run in North Africa, so the likes of Egypt, Morocco. Also Asia, after some difficult periods working through China and India, we're very optimistic about what that what that segment will do for us. On farm segment growth. So, on the back of last year, we spoke of the Fondemonte project, which was a first stage implementation of a large commercial farm in Arizona and California. We also run Gila River farms this year, which is another large corporate farm associated with the Gila River Indian community. And we see that FarmConnect market being an increasingly important and bigger part of our business. Point here just on India. We've had some difficulties over the last couple of years, but India is still the biggest potential market, 69 million hectares of irrigation as opposed to Australia's 2. And the need and the water problems there in India are just massive. Our large NLBC project continues to generate substantial interest from neighboring states and the irrigation community globally. So, we're optimistic about where that's about the opportunity in that market. So that's summing up, I suppose, where we -- FY '25 and a bit of a look at where we plan on getting this year. So, I might throw to Ben for any questions if we've got them.

Yes. Thank you, Bruce and Andrew. Just a quick one. [Operator Instructions] First one, what was the strategic rationale behind restructuring in China? And when do you expect to see revenue contribution resume from this region?

Yes. So, with China, we had a long-term relationship with LGY, which was our previous joint venture partner. That over the period of -- as we've been flagging, we've been doing a strategic review, which started in FY '24. Over the COVID period, it was a really challenging time in China as it was elsewhere. We saw the need with our partner to introduce 2 things. I suppose we needed -- ideally, we wanted a partner that was well connected in with government and academia in China, which is very influential. And we also needed a partner with a balance sheet that could support the growth of the business better than what we had with our existing partner. Our LGY was initially part of that -- those plans and certainly work part of pulling together what was going to be a 4-way joint venture between Rubicon, Tsinghua University Science Park. So Tsinghua University is the big Beijing world-class university, an investment arm from them, which looks at technology into this space. So, they're a key partner with us and a business out of Guonxin Runze, which is a -- which has the balance sheet and the project delivery capability to deliver projects on a bigger scale. What happened over the course of the year is LGY after initially being pretty keen on that arrangement was focused on trying to maintain the market for itself. So, it wanted to continue to be the sole representative and take the full benefit of our technology in China. That's on the back of some pretty big government announcements around proposed funding of our space. We -- that separation, I suppose the LGY taking a step back led to a fair bit of tension in the relationship, and we got to the point where we weren't -- we were committed fully to our 2 new partners, Tsinghua University Science Park and Guonxin Runze and LGY, after trying to force us into a situation effectively where we stayed with them, the relationship broke down to the point that we were no longer prepared to deal with LGY as a counterparty. That led to our decision to impair some of the contracts that we were delivering with LGY. And importantly, as at the end of June '25, there are no ongoing contracts in China through LGY. So, this -- that we've impaired against those contract assets. However, we do see -- we are still very optimistic about China with our new partners, and we are already in the process of moving towards recontracting some of those 3 contracts, which we impaired against, but we'll be contracting them under the new joint venture arrangement. So, we see -- we're optimistic with our new JV partners who've made a substantial commitment with us to building this market. It's the same dynamic as elsewhere. We've got the -- we've been dealing in China since 2008. We've got the track record, our products work, our systems deliver. We've now got a really good technology partner, a balance sheet partner, and we're confident in the growth that will come back again from that China region.

Thank you, Bruce. Next question. You highlighted strong interest in FarmConnect across Western U.S. Is there a scope to standardize or scale this offering more broadly across the region or other markets?

Yes. Thanks, Ben. So, our FarmConnect offering is very much targeted at large corporate farms. So rather than the geography of the U.S., it's really the reason we're operating and we've had the success we've had with Gila River and Fondemonte and several other large farms is that that's Southern California, Arizona, Texas, these are places where there's really significant large corporate farms. So, our technology is not really aimed at the mom and dad farmer around -- it's really about the big corporate farming businesses where we deliver the benefit. So, at the moment, the focus is the U.S., and that's paying dividends for us. That's where we have the infrastructure to roll out and support these customers. But the plans are to take that technology to the areas of large corporate farming. Now that's -- that's pretty broad spread around the world. Central Asia, for instance, is there the RLC Basin, Kazakhstan, Uzbekistan, the investment coming in there, the investment that's driving the projects in automating the canal-based infrastructure is coming from commercial farms. So there's opportunities in that, certainly in North Africa or in Egypt, Morocco as well as established markets like Chile, Mexico. So, yes, we see the evolution of our FarmConnect business to be wherever the large corporate farm investments are happening in gravity-fed irrigation around the world.

Next question. If we strip out $11 million of aged debtor receipts, operating cash flow would have been negative in FY '25. Given the business is currently loss-making, can you explain how does Rubicon return to sustainable positive cash flow? Please?