Rubicon Water Limited (RWL) Earnings Call Transcript & Summary

Good morning, and welcome to Rubicon Water's Investor Webinar to discuss the company's first half FY '26 results. On today's webinar, we have CEO, Bruce Rodgerson; and CFO, Andrew Bendall. They'll go through the presentation that was released this morning on the ASX. [Operator Instructions] I'll now hand it over to Bruce.

Thank you, Ben, and thanks, everyone, for attending our half year update. In May this year, we're going to come to the end of our 30th year of operations. Across that period, we have delivered $1.2 billion worth of infrastructure and services globally to modernize around 2 million hectares of the irrigated land globally. Big numbers, but it's only 1% of the market we're tracing. And the effort we've made in recent years in setting ourselves up to pursue that bigger global market will come to fruition, and we're excited about the future. So in terms of last financial year, revenue of $29 million was down about 9% on the previous year, and that was impacted by a number of factors. We are now an export business. So we are exposed to the Australian dollar exchange rate. And whilst that does move up and down, the first half this year was disordinately impacted by movements in the exchange rates. And that's because a lot of the contracts -- many of the contracts that we signed last year, we had progress last year in terms of costs and revenue recognition. Those contracts were paid for this year and the gap between incurring the costs and recognizing the revenue and getting paid for that incurred a real appreciation in the Australian dollar, and that impacted not only revenue but that impact was also felt directly into the bottom line. The bigger impact though for us was the government shutdown in the U.S. and the funding freeze in the U.S. So that impacted more than just -- our target was not to -- not the $32 million of the last comparable period. Obviously, we were planning and expecting significant growth on that and the major contributing factor to not achieving our goals was that U.S. funding. So as I said, those impacts come across the gross margin and underlying EBITDA, Andrew will delve into that. As an example of the U.S. market impact, 4 projects in the U.S. that had been approved by the previous administration remain approved by the new administration, but because of the funding freeze, have not been given the funding allocations to allow the notice of proceeds to be issued. So we -- those projects remain approved. We expect them to come through. And what we are hearing is positive news as we enter the new financial fiscal year in the U.S. that funding is starting to be allocated. We're hopeful that we'll see that come through. Offsetting the project funding in the U.S. is the significant number of major projects we've won around the world, particularly Chile, Costa Rica and Italy, totaling $11.9 million in the first half. We'll dive into a bit more detail in those in the coming slides. Significantly, though, we have tenders underway for our major projects of focus of a combined value of more than $30 million. And we expect those tenders to be won in time for us -- for them to make a material contribution to FY '26 results. So that's a real movement in that pipeline from -- to the final stages of tendering and some of those tenders closed in March, and we remain very strong in our position on those. Added to those pipeline of jobs, particularly those large priority projects coming through, we had a really strong start to the second half. January, February are traditionally low order months for us, post Christmas, startup of fiscal years in other parts of the country. But this year, it's been strong, notably strong, $9.3 million of new contracts signed since January 1 and that compares with $3.9 million in the prior comparable period. So that $5.4 million obviously is albeit orders rather than revenue, but it compares with the $3 million undershot on revenue from prior comparable period. Also really importantly for the business, and we do spend a bit of time -- we're going to spend a bit of time talking about corporate funding. This is a fast-moving space. And we have won our first direct contract from corporates looking to achieve water savings for their ESG goals, but there's a lot happening in that space. We also recently were awarded a $2.7 million contract in Australia. for our offering into floodplain management, not a space we've really been in in Australia before, and it's really quite exciting for us in that market, both in Australia and globally. So why are we confident when we talk about those tenders in the market? Why are we so confident in our ability to secure that contract? It's because of our unique end-to-end value proposition. So when a customer or a tender enters the market looking for an end-to-end solution to modernize an irrigation district to save water and increase agricultural production across a gravity-fed irrigation district, we really don't have competitors. We've got the -- and not only don't we have live competitors, we've got the demonstrated track record and reference sites that deliver that solution around the world now. So that's why that unique value proposition is why we express so much confidence that when the tenders get to that stage, we're very well placed to win them. We're going to go through a few of the global highlights now that we did achieve this year, and I'll go through those one by one. As I said, the United States negatively impacted by the funding freezes and the record shutdown. It's fair to say we did not anticipate that there'd be -- the biggest funding we have for our projects in the States historically has been U.S. Department of Ag and USBR. We did not anticipate at the start of this financial year that we'd be sitting here in February with no funding release from either of those agencies into our place. That's not been in our history that -- in the U.S. that has happened. Obviously, it's a unique situation in the U.S. We are hearing budget allocations now that in the new fiscal year, things will start to move. So -- and we're looking forward to that. But importantly, our base business in the U.S. has remained strong. So we have achieved year-to-date $9.2 million across -- of signings across 81 separate orders from our existing client base. So that is not -- it underpins the business, not just in the U.S. but elsewhere, when we have -- when we deliver our solutions to a customer, there is ongoing work. And that $9.2 million in the U.S. across those 81 contracts is from existing clients, either enhancing, extending or maintaining their existing systems. Total year-to-date signings in the U.S. $11.6 million, but that includes a privately funded project around ESG water savings, and we'll talk about that soon. Importantly, as well, with the reference sites continue to build, particularly in the U.S., Chaffin Farms has implemented our system over the last 12 months, and we've made some really impressive results there. So Chaffin Farms in the areas we've modernized has increased the yield by 18% while decreasing their water use by 35%. That's nearly a doubling of the productivity of irrigation water for that farm. I encourage you to have a look at our website. There's a video detailing the work we've done at Chaffin Farms. Grant Chaffin himself talks to the benefit around our technology. Also, Turlock Irrigation is the one of the largest and the oldest irrigation districts in the Central Valley, California. They've been a long-term customer of ours, and they're now moving to full automation of their system, right from farmers ordering all the way through to the delivery and measurement of the water. First part of that is the Ceres Main, which is going live as we speak. Irrigation is about to start over the next few weeks. The system is live, farmers ordering their water through our technology, and that's a fantastic reference site for us. In Europe, continues to be really strong for us, $6.9 million in contract signings in the first half and $8 million year-to-date. A big -- a good part of that is Spain, $2.4 million. Importantly, though, that is 2 customers there, Bardenas and Riegos del Alto Aragon, which are 2 of the largest districts in Spain. So entry points into 2 of those very large districts for us. So we see that as a good opportunity. But by far, the most exciting part of our EMEA business is Italy. On the back of Agropontino last year, our largest ever European contract, we've had really solid signings building on a $5.5 million of contracts secured so far, and that is expected to continue to flow. And additionally, they're getting reference sites. So Angeli-Cerese, Ganaceto and Ottomulini, these contracts we've delivered are delivering significant water savings in an audited sense, which provide fantastic reference sites. The other really equally or probably more exciting about Italy is the funding. So Italy itself is investing huge funds into their national recovery and resilience program. EUR 880 million of that is aimed at reducing water loss in distribution networks. So in that space, and we are already seeing that come to the fore in tenders in our space and contracting in our space. So that secures the funding over the next few years for a continued expansion of our business in Italy. LatAm as well has been an exciting space for us. Costa Rica, we've spoken about that a few times. So we've -- last year, we won Stage 1 of the project in Costa Rica. This year, we secured the second phase, and we are in the process of delivering that. Importantly, though, the third phase now is being fast tracked on the success of the first 2 phases. The third phase is a much larger phase and deals with our core technology. So Phases 1 and 2 about dealing with the headworks, automating the storages and the main feeder canals with our technology. So it's our software, it's our comms networks, it's our instrumentation. And Stages 3, 4, 5 and 6 over the next few years are then dealing with the broad scale deployment of our core technology and much larger projects. Chile as well, our largest ever project in Chile, importantly, with the Department of Hydraulic Works, Francisco Rivas is the contract. Department of Hydraulic Works is the federal funder in Chile for the large infrastructure projects. And this is the second of our projects with the Department of Hydraulics and sets us well up for the future. We've also been deploying the project we won last year in Argentina. And despite the economy in Argentina, we do see that as a growing market for us as well. Now with the -- particularly in the Italian and our Florida markets, there's an opportunity around the dual use of these canals. So in Australia, the canal systems are pretty much around delivering water to farm for irrigation, and that's a primary use in, say, the Po Valley in Italy. However, though in places where -- that are susceptible to flooding and heavily urbanized areas, that same infrastructure is used then to get rid of flood waters. And in Italy, the summer storms, particularly the increasing number of summer storms with climate change, these systems have to very quickly flip from delivering water for irrigation to getting rid of flood waters. And so we've been working to develop solutions and business cases around what our technology can do. And part of that has been we've developed a new product called the FloodGate. So it's a dual acting gate that allows overshot flows for irrigation deliveries and then can remove itself completely from the waterway to get rid of flood waters. That product has been instrumental in us winning the project in Australia for -- in the Murray-Darling Basin for environmental water across priority floodplains. That's as part of the Murray-Darling Basin plan, the better use of the Commonwealth environmental water allocations to strategically apply to floodplains. So that's -- we see that as a really strategic win for us here in Australia as well in a growing market, but with global applications. So if I move on to corporate funding. as I said, this is an exciting space. And this is where corporate entities are making ESG commitments, not just about carbon credits and energy, but around their water use and sustainability. So making -- there's -- around the globe, but particularly U.S. entities, we're seeing a major move in this space. So corporate funding in the states, as I mentioned in the summary, we received a contract this year where we were directly funded by a corporate entity to provide a solution for Glenn-Colusa Irrigation District to modernize part of their network, save water and then provide the audited results of those water savings for 10 years. Importantly, that project was different, in that it contracted Rubicon directly, which these funders are keen to rather than fund various entities and individual irrigation districts, they're looking for vehicles like Rubicon that can deliver technology to be more efficient in the rollout of their funding. But we did have 2 other projects as well, which were funded -- where the funding from corporates went directly to irrigation districts who then contracted us for the work. That's in Arizona in Gila River Farms and Bear River in Utah. Those 2 contracts over the last year have been funded by corporates. We are engaged with several of the top 30 U.S. companies by market cap as they look to increase their investments to meet the water stewardship goals. Importantly, when we say engaged, we are not talking about swapping business cards or a pitch at a conference. As an example, one of the world's -- the GM of Sustainability for one of the world's largest company has requested us to provide details of what -- of the projects that -- where our technology can make a material difference to water savings across the Colorado River Basin, and they're requesting us to provide that summary by the end of March. So this is a fast-moving space for us. This chart here really shows the history of that water stewardship commitments. Coca-Cola back in the early 2000s was one of the first to come on board. You can see by this chart the number of corporate entities that are signing up. And there are initiatives and guidance and standards and commitments that are being made, first stage of which many organizations are saying 2030 is a critical period. And that's what -- and obviously, at 2026, we're getting close. We have one of our -- we have a business development executive dedicated to this space now. He's been in the States for a week-long conference called GreenBiz in Phoenix, Arizona last week, where he has been engaging with many of these corporates. Importantly, that conference, GreenBiz, did a field trip to Gila River Farms to view our technology making water savings efficiencies. So it was one of the few field trips that was actually able to demonstrate and visualize exactly the water savings that they're chasing, and it's Rubicon technology for Gila River Farms. So that's a bit of a summary, and I might throw to Andrew now to lead through the results.

Thanks, Bruce. Yes. Look, I'll make a couple of brief comments around the financials for the first half. The top line reduced $3 million period-on-period, $1.7 million of this shortfall was as a result of the stronger Australian dollar on translation of our offshore revenues, particularly against the U.S. dollar and the Indian rupee. The other $1.3 million was the net effect of lower volumes in the U.S. and Australia, partially offset by Europe. The gross margin percentage was down 6.7 percentage points compared with the first half of FY '25. 4.8 percentage points of this gap was attributable to the revenue shortfall, of which the FX translation impact at 100% gross margin was 3.6 basis points and 1.2% for the volume impact. A further 1% was as a result of the lack of new price contracts in the U.S. in the first half to fully absorb the tariffs impost. Operating expenses were $1.2 million higher during the period, predominantly on the back of higher employee costs. The business also incurred extra legal services as we resolved a number of issues in exiting our old joint venture in China and setting up the new one. As a result of the impact of the gross margin and operating expenses, the underlying EBITDA was $4.2 million less than the previous corresponding period. The A dollar strength also generated an adverse unrealized FX impact on the revaluation of our intercompany loans of $2.1 million versus the first half of '25. The bottom line loss for the period was $6.4 million, $5 million less than the previous corresponding period. On to the cash flow. Despite receivables being reduced during the period on sold collections, including the last part of the Indian LBC project debt, overall operating cash flow for the period were an outflow of $2.9 million, driven by the lack of sales and ultimately the negative profit result for the first half. The business has kept up its investment for the future by maintaining spend on our next-generation software NeuroFlo. Key movements on the balance sheet since 30 June were reduced cash and receivables, whilst stock and contract assets were stable, combining to see a reduction in current assets of $6.4 million, an increase in the deferred tax assets on the back of the loss increased noncurrent assets and net debt rose by $5.2 million to $19.5 million as a result of the operating and investing cash outflows. Now on to the projects pipeline. This slide captures the progress of our major projects of focus. The pie chart on the right represents our project pipeline as of today. The chart on the left was as of the date of our AGM the last time we showed our pipeline. The one segment being the left -- the light green has shown -- has grown by the inclusion of the Chilean project and an expansion in the scope of the Italian Villoresi project. As has been mentioned earlier in the presentation, we now have a number of priority projects that have entered the tender phase and, as such, are within our close category, the purple, which has now grown to $61 million from $42 million. Some of the projects in our likely impossible categories have moved to close whilst others, as we would expect as the year progresses, move up to the gray next year category. Overall, we believe our pipeline still looks very healthy with 18 priority projects totaling $189 million in our sites. Back to Bruce. Thanks, Andrew.

So in summary, we are confident in H2 FY '26 and FY '26 in general. That's based on improved market conditions and conversion of several of these near-term projects we're talking about. But also importantly, our base business, that's -- we have Australia as our base business. And as I spoke about, those $9.2 million year-to-date on 81 different customer orders from our existing customer base in the U.S. That base business that we rely on is solid. The new funding avenues, as I've spoken about, are quite exciting for us, moving away from government funding to more corporate time lines and decision-making is obviously a positive for the business, not replacing, but supplementing and extending. The proven customer outcomes become really compelling. The results of the work we've done in the U.S. -- in Italy are seeing the amount of interest in our projects and tenders and our pipeline expand there. And that is the case around the world. What -- the examples we've got in the U.S. now with Turlock and Chaffin Farms and Fondomonte are really powerful in driving the pipeline. This near-term pipeline is very strong. As I said, we've got tenders about to close to in excess of $30 million that we expect to materially impact FY '26 results. The contract signings we have around the world as well, demonstrating relatively small countries in terms of the global scale of our opportunity in a country like Costa Rica is only small, but the opportunity there for Rubicon is close to $30 million over the coming years, and we're embedded in there now with Stages 1 and 2, and that will flow on. We've obviously been spending some time here talking about corporate funding, that's new and additional, but the government funding, the reform as was done in the Murray-Darling Basin, as we're seeing in the U.S. with the Colorado Basin and the reforms happening there. And as we're seeing in Italy with the need to achieve water efficiencies and that EUR 880 million dedicated to improving the efficiency of these broad distribution networks. So all that goes to our optimism about the future. And I thank you for your time, and I'll throw back to Ben to take -- happy to take any questions.

Thank you, Bruce. [Operator Instructions] First question here, the prior strategy to reach profitability required growing to a certain level of sales, which would cover OpEx at constant gross margins. Given growth has faltered, is there an opportunity to be more assertive on pricing and capture higher gross margins?

Yes. Bruce. I'm happy to answer that. I guess there's a couple of points I'd make. The prior strategy is still our strategy. We do intend on growing our sales line. Certainly, the first half is not where we want it to be. And like all listed companies, we have a hard close at 31st of December. I don't think our growth has faltered. As we -- if you were to extend it to an 8-month period from a 6-month period, we're actually ahead of the same time last year. So some of those markets which were slower than expected like Australia, in fact, in the first 6 months, in the last 2 months, picking up the FloodGate work along with a whole lot of base spare parts type of business, that's back ahead of where it should be. And then the priority pipeline that we spoke about of some $61 million in the close. We're still very much targeting growth this year. In terms of the gross margin, look, there's always going to be elements that are going to be outside of our control and the currency piece on translation does have a big impact because, obviously, you reduce your revenues, but nothing happens to your cost base, and therefore, it becomes quite effective. But we have said before, and this absolutely holds true that volume, and this is because not all of our cost of goods sold are truly variable. So volume certainly will pick up that margin from where it is, and we're expecting to have higher volumes in the second half. On top of that, and whilst it wasn't in the question, we are taking a number of operating cost measures across the business to be able to reduce costs in the second half also, so we can return to profitability.

And I think the only thing I'd add there is pricing as well. So that uniqueness does allow us some flexibility in pricing or a good amount of flexibility to increase prices. The environment in the U.S. does facilitate that at the moment with tariffs and a range of things. The one thing, it's not an immediate effect on pricing for us because we're building these opportunities that are contracted, we're setting the price and the business cases sometimes -- always months, but sometimes years ahead of when we -- the works are actually contracted. So -- but we are -- we continually look to use our advantage in being unique to be able to push our pricing to the extent that's practical as long as we're meeting the business case objectives with our customers.

All right. I've got 2 separate questions here. One -- both along the similar lines, one for India and one for Egypt. Just wondering what the situation in those 2 regions are and whether there's any update.

Yes. So India, we still have large projects being delivered in India, the right bank canal and several other contracts in Karnataka of a smaller scale. And there are significant pipeline opportunities. So we're still very bullish about India in terms of it being -- as those who have heard me speak before, it's the largest opportunity for us globally in terms of the scale of the infrastructure and the investment that's being made. And we hope to be able to -- or we expect to be able to make some announcements on the next stage of our growth in India. And we expect India to be a material part of the near-term revenues coming to Rubicon. Egypt, we're still well engaged. We have our -- we have an office in Egypt, and we have a manager for that North Africa region. The -- there was a project in our near-term pipeline, which is a substantial part of our pipeline. That's been pushed back a bit, mainly because we've had to change partners for that project. And we are engaged with -- still engaged with the future of the Egypt Authority, which is a government authority around what our technology can do. And we are working through that. So again, we see Egypt as a big -- still a big part of our future. And we will hope to be making announcements in the medium term around the scale of what Egypt will mean for us.

Thank you, Bruce. Next question, how are you managing FX risk given the rising Aussie dollar, which has impacted the first half results?

Andrew, do you want to go?

Look, we're always looking into what we could do differently in terms of the foreign exchange piece. It's certainly front and center in this last half because of the impact it's had. And I guess with FX management and hedging, hindsight is always a wonderful thing. We will look at it. It's not by the nature of transactional hedging, which typically allows you to be more specific about volumes and timing. Translation is an interesting one. And it's effectively unrealized, if you like, until something is actually transferred back in terms of the intercompany loans. We will look at it and work out whether there's not some sort of hedging that would not put the business in more risk rather than less risk.

And the other fact that -- the primary weigh on the foreign exchange is pricing, I suppose. Again, as I said, timing sometimes that is difficult. But clearly, as an Australian business, we're pricing these projects internationally based on our expected exchange. So over time, we get to flex that pricing in line with exchange rates and other things like tariffs and so forth.

Right. Thank you. Just regarding the corporate water stewardship. Can you tell us why Rubicon is positioned to be the technology partner of choice for the major corporates?

Yes. I think it comes -- for those that have seen previous presentations, I suppose one of the things I've gone to in previous ones is 1/3 -- if you break up pie chart of the world's water use in any year, so 1/3 of the water is used on urban and industry, 1/3 of the water is used by -- consumed by irrigation crops and most of the remaining 1/3 is lost by getting the water to those crops. So that's the biggest opportunity. When we're engaged with these corporates, some of the investments are being made things like leak detection in urbans. The scale of the water savings they can get out of that is a fraction of what they can get out of investment in irrigation efficiency. The GreenBiz conference that visited Gila River Farms saw a scale of water savings that is not achievable by other investments. So if you're looking at the big opportunities for creating new water globally, it's diesel, which comes at high energy costs and pollutant cost or it's fixing that link between supply and the root zone of irrigation crops, which is Rubicon's business. We're established, as I say, not only with the unique technology IP protected but with the reference cases and the customer base that's demonstrating that. So I think there's been -- the level of engagement we've got now is about -- and if I can getting -- briefing from our business development manager that was at GreenBiz, the jaws drop when we're talking to these corporates around the scale of water savings we can achieve. One of the metrics there is the dollars per 1,000 cubic feet of water. And compared to what they're achieving in the urban side of things like leak detection or enhancement of parks and gardens, we're less than 10% of the cost per 1,000 feet cubed across many of our projects. So yes, it's just a compelling case. If you want to save large amounts of water, you go to where the biggest inefficiencies are and you look at the company that's got the best record in demonstrating improving those efficiencies.

All right. Thank you, Bruce. That concludes the Q&A segment of the webinar. I'll now hand back to Bruce for closing remarks.

Yes. Thanks, Ben. Yes, clearly, $29 million is -- and the underlying results below that even more so is not where we wanted to be for the first half. However, I hope this presentation has shown the confidence we have in the future and in the future being H2 FY '26, that corporate funding, as I've spoken about, these contracts that are in the market that are of scale and are going to make a material difference to H2 FY '26. And also that government funding, it will come back in the U.S. It is there in Italy. It's there in places like Costa Rica and around the world. So yes, we remain very confident on where we're going as a business, and I thank you for your time.