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Thank you for standing by, and welcome to the Fluence Corporation Q2 Business Update. [Operator Instructions] I would now like to hand the conference over to Mr. Henry Charrabé, Managing Director and CEO. Please go ahead.
Thank you very much, operator. Good morning to those of you in Australia, and good evening to our listeners in the United States. My name is Henry Charrabé, and I'm Managing Director and CEO of Fluence. I'm joined on the call today by Francesco Fragasso, Fluence's Chief Financial Officer. I would like everyone to note that all financial references made in today's call are in U.S. dollars, and that we will make forward-looking statements, which are protected under the safe harbor provisions of Australian securities law. Further details are provided in the ASX release. As you may have read in our Quarterly Activities Report published this morning in Australia, we continue to work in a challenging global economic environment. We are very pleased to have been able to achieve positive cash flow in the second quarter, which included a net positive operating cash flow of $2.7 million. This is a result of our continued commitment to streamlining our operations while also being helped by timely collections during this period. During this call, we will provide additional background to the ongoing operational performance and challenges in today's market. Based on presently known information, Fluence is pleased to reaffirm our 2020 public guidance for the year, comprised of achieving positive EBITDA for the financial year, $32 million in SPS revenue and recognizing recurring revenue of $9 million. We continue to see a growing interest for our Smart Product Solutions in China as well as in other geographies around the world. Our assembly plants in China in Yiyang and Panjin, in conjunction with our partners, are up and running and we continue to exclusively manufacture our unique MABR technology in our wholly owned factory in Changzhou. The current floods have caused some delays at our customer sites with respect to the required local civil work in China, but we continue to see an increasing amount of MABR references commissioned all around China. Given our recent successes in China and Cambodia, we are putting more business development efforts into our other countries in Southeast Asia, and hope to start seeing additional sales from the region once the current pandemic allows for fewer travel restrictions. We are very pleased to have received orders in Africa, providing Aspiral units to ARSI University in Ethiopia and partnering with Sky Links in Ghana, where Fluence will provide 11 preengineered standardized surface water treatment systems to rural wood villages. We continue to build the Fluence brand through references and finders in Africa, and the overall interest on the African continent is increasing as we see the great potential for our Smart Product Solutions. Our approach to the decentralized solution to solving the freshwater and wastewater problems continues to gain traction areas where large, centralized and expensive water and wastewater solutions are not viable options. With an estimated 800 million people in Africa enduring clean water scarcity, our decentralized, low-cost and energy-saving solutions offer a high value to potential customers in this and many other regions around the world. As we continue to grow our strategic relationships in China, we are also diligently working on establishing channel partnerships for our Smart Product Solutions in other geographies. We hope to be in a position to announce at least one partnership outside of China later still this year. As you may have heard, we also secured a contract with a meat processing plant in Argentina, only the second anaerobic digester ever to be built in this country, with the first one also being provided by Fluence. Argentina continues to be one of the largest meat exporters in the world. And by adding this plant, we continue to have a positive impact on this industry as well as contributing to the conversion of biomass to biogas, resulting in more clean energy. Other successes during the quarter include receiving a repeat order from Vucico in Vietnam for a NIROBOX MEGA, which will desalinate 1,500 cubic meters of seawater per day, and therefore, provide over 1.5 million liters per day of fresh drinking water to the local population. While we see continued interest in our products, the COVID-19 pandemic continues to cause disruptions in all of the geographies in which the company operates, slowing down new order bookings as sales conversion have become more difficult without face-to-face meetings. On a positive note, however, while running a business and negotiating over videoconferencing presents additional challenges, all of our team members in Fluence are adapting to this new environment, as are our customers. An important accomplishment over the past 3 months was to negotiate and secure the non-dilutive debt facility announced yesterday to the market for $20 million from Upwell Water. This facility will replace the projects loan facility with Generate Capital and provides approximately $15 million for general working capital. I would like to thank Generate Capital for their continued support during the recent years. Upwell Water is assisting water companies and provides project finance for water projects all around the world. This facility helps us transition towards a more capital-light business structure, as we are in the position to obtain the equity financing for our BOOT projects from Upwell. This is a more flexible financing facility, as it provides us additional working capital to continue to grow our Smart Product Solutions, particularly MABR. The working capital facility has an initial 3-year term, whilst the project subfacility loans will have maturities aligned with the underlying project revenue contracts. The facility can be upsized to as much as $50 million at Fluence's request and at Upwell's discretion. The facility provides us with greater optionality in our growth ambitions and allows us to support customers in the financing of their projects. Now moving on to the Ivory Coast project. I would like to first acknowledge our condolences as we were saddened by the sudden death of Prime Minister Amadou Gon Coulibaly in July. He leaves a legacy of strong leadership behind him and big shoes to fill. He was a widely respected statesman and worked for a long time in public service to help grow the country to what it is today and was instrumental in laying the fundamentals for a very strong positive outlook. The Prime Minister was laid to rest this past Friday in his hometown in the north of Ivory Coast. Unfortunately, our project for the construction of the water treatment plant in Ivory Coast has been delayed. I want to emphasize that Fluence and the Ivory Coast government are continuing to eagerly support the project and both parties are looking forward to seeing the plan constructed and to delivering freshwater to the residence of Abidjan as soon as the last administrative requirements have been completed. Together with the Ivory Coast government, we are working to complete the last outstanding matters have been delaying the completion of conditions precedent for the receipt of the first payments, which are limited to the completion of legal reviews and opinions by our financial partners. We expect that these last conditions precedent will be completed during Q3 and cash will then be received in the same quarter. The return of our project management team to Ivory Coast just in July, more than 3 months after departing from Ivory Coast, and now that travel restrictions have been lifted, will greatly assist us in pushing these last remaining items over the line. Moving on to the San Quintin project in Mexico. Recently, there has been some media speculation about this contract being suspended or even canceled stemming from a local Mexican Internet platform. However, we have continued to have an open dialogue and ongoing negotiations with the State Water Commission of Baja California, called CEA. There is a change in government in Baja California following the elections last year. Subsequently, there was a request from the new government to change some of the project schedule and other contractual amendments. At this time, we have provided the local authority with revised terms consistent with the original contract that was awarded to us. The Board and management of Fluence have set targets for return on capital and will only pursue projects that meet such criteria and increase shareholder value. If we can reach agreement on these revised terms with CEA, then this will be a good project for Fluence, and we believe would be greatly appreciated by the residents of San Quintin and Baja California. As soon as a definitive position has been reached, Fluence will update the market accordingly. The travel restrictions and lockdowns are continuing to push out our BOT projects in Peru. The development works have been completed. However, at this point, Peru remains in partial lockdown, with restrictions being phased out only slowly. Assuming no further setbacks, we expect this project to be completed in the later part of the second half of this year. Once completed, the project will provide $3 million per annum over a 10-year period, significantly adding to recurring revenue for Fluence. I would now like to turn over the call to Francesco Fragasso to discuss our Q2 2020 revenue and cash flows. Francesco?
Thank you, Henry. We had unaudited revenue of $10.1 million in the second quarter, bringing the unaudited first half revenue to $57.4 million, doubling the revenue of H1 2019. The delay of conditions precedent in Ivory Coast and the delay of the San Quintin project has had a negative impact on expected revenue in the first half. During the quarter, we received $15.7 million of payments from customers with operating outflows of $13 million. We have not received any payment in relation to the $34 million revenue recognized in the first half of the year for work performed and delivered to Ivory Coast, which is expected to be collected in Q3, soon after meeting the remaining conditions precedent. EBITDA in the first half of the year is positive and expected to be positive for the 2020 financial year. While new SPS sales in China are tracking at a slower pace than we anticipated, the backlog of orders will likely see us achieve our guidance of $32 million in this segment globally during 2020. We still have clear visibility on orders through March of 2020 and into 2021. Our partners in China are continuing to help us grow our business in the region and other projects, such as the second order from Vietnam, and will continue to provide support for meeting our SPS guidance. As part of the response to COVID-19, we fast-tracked some of our cost-saving goal for 2020 and achieved 25% lower cost for SG&A in the first half of 2020 compared to 2019. While travel restrictions are having a negative effect on sales conversions, we do receive some offsets with travel costs being lower in quarter. While we have been reducing cost, we are ensuring that we have the capacity to ramp up production if needed. And our investment in R&D is ongoing. An example of this is the launching of the Aspiral Micro during the quarter, a highly efficient wastewater treatment plant with a treatment capacity as low as 5 cubic meters per day. Cash and cash equivalents were $20.1 million at the end of June 2020, up from $16.9 million at the end of March. Net cash generated from operations was approximately $2.7 million. The net cash inflow for the quarter was in line with what we forecasted in the market update released on July 10. With the anticipated meeting of conditions precedent of the Ivory Coast project in Q3, we expect Fluence to be cash flow positive in Q3 as well. At the end of June 2020, Fluence had a contract backlog of $234 million. I will now hand back the call to Henry. Henry?
Thank you very much, Francesco. So despite the current market volatility and the difficulty it brings for all of us, we are glad to report that Fluence's plan for 2020 remains intact and that we are able to reaffirm our 2020 guidance. Our ongoing commitment is to provide sustainable operating solutions to help solve the water and wastewater crises that many millions of people face around the world. We are continuing to strive to meet the several of the United Nations Sustainability Goals, and our Smart Product Solutions don't only help provide clean water, but also reduce energy consumption, contribute to resource conservation, and can help generate energy from wastewater. I will now hand back over to the operator to please repeat the Q&A instructions. Operator, could you please instruct -- repeat the instructions how to submit questions?
[Operator Instructions]
Well, thank you very much for attending the call and for the questions. One question I see is how come China sales have slowed down when there are no travel restrictions in China? Well, that is, unfortunately, not the case. As many of you have paid attention to what's happening in China every so often, as we had a couple of weeks ago, there have been new travel restrictions for Beijing. And even the travel within China from our team, whether they are in Beijing, Shanghai or Changzhou are dependent upon the local restrictions put upon each province and each city, sometimes delaying the attempt to get out of quarantine, being quarantined for a longer period of time, and even last-minute cancellations of meetings because somebody was -- on the other side, may have been exposed to somebody who had been infected with the virus. Therefore, travel restrictions and overall COVID-19 restrictions do have an effect on our ability to have face-to-face meetings. Another question I see is about -- there have been a report about the plan for the Egyptian government to spend about USD 2.8 billion for about 48 new desalination plants to be awarded. Fluence, as many of you know, has a strong representation in Egypt with a joint venture, and we are certainly interested and hope to be participating in some of those tenders and hope that some of those 48 new desal plants to be awarded will also find their way to Fluence in our local joint venture. Francesco, I just don't want to go over you. Do you see questions that you want to address?
Yes, there is a question of what happened to the revenue in San Quintin that we recognized in the past. As Henry mentioned, we are negotiating with the local water authority. It really depends on that negotiation. The treatment of that revenue are really linked to the project moving forward or on the term of the mutual termination.
Thanks, Francesco. Another question I see is about the replacement of Upwell and Generate Capital. So it is not that Generate Capital, like the question he has posted was not going to provide -- or is not providing any financing, but the Upwell facility really allows us enormous amount of flexibility as some of the funding can be used for project finance like the Bimini and the Peru projects. But as we mentioned, a significant portion of the funding could also be used for general working capital needs to grow our Smart Product Solutions and MABR business. The Generate facility only allowed us to use proceeds for project finance. And so it was, I think, better for both parties to find a replacement. And I think we have a great partner with Upwell that allows that facility to be used for working capital and project finance and build our business accordingly. There are questions about the fund, 15 -- sorry, go ahead, go ahead, Francesco.
No, there was few questions on the foresee on the cash flow related to the lower production payment compared to prior to Q1 to the prior quarter. And there are 2 questions. Why lower? And is this due to deferring payment or to actual savings or lower payments? So the majority of that lower payment is not related to the federal. Like, as you know, most of the management is deferring a portion of their compensation like the Board of Directors. But that reflects the slowdown in Q2 on some activity, especially in the CES segment, where goods have not been delivered or have been delivered late. And therefore, payments have been delayed as well. In terms of revenue, most of the CES segment recognize revenue as a percentage of completion. So delaying the receipt of goods and booking of cost delay revenue as well. And as you might notice in the business update, out of the $10.1 million of revenue in Q2, $7.7 million are related to SPS. So there is a major slowdown in Q2 in revenue from CES, and lower payment to vendor reflects that slowdown.
Thanks, Francesco. There's a question about our new Aspiral Micro and the details. That is almost a home unit as low as 5 cubic meters per day of treatment that we are, especially in rural areas in China requested by customers to provide for villages and -- where they don't have necessarily a wastewater treatment network. If you, the person asking that question about the details about MABR, want to dive into the details of what the potential is and what the applications are, then I would invite you to check out our revised and updated website where we talk about it. And if you have detailed questions about the ability of what MABR can provide, then please e-mail us, and we will obviously give you -- get you in touch with the right technical experts to give you these answers. There are obviously several questions relating to Ivory Coast, some of which I think we've answered in the briefing as well as with Francesco. But in short, we expect, again, to get to conditions precedent within Q3 and get payment cash flow in Q3 as well. Beyond that, the next step would be then to receive notice to proceed in order to actually start with the construction and start recognizing additional revenues as we then construct the plant, of which we have 24 months after notice to proceed to be fully done. Several additional questions also about San Quintin. We are in good relationship with San Quintin, continued discussions. However, as we also made clear, there are some outstanding items that we think we will get to a conclusion within the next weeks in order to see whether there is a viable project for both parties to proceed with. Francesco, do you see other questions you want to address?
There is a question on the reduction of G&A. How much that is due to contingent situation in Q2 and how much is the permanent savings? In Q2, yes, the lower SG&A has been also driven by several measure we took around the world to reduce our cost and be ready to the worst in the emergency of the COVID-19. But the majority of action that we were planning to implement any way that we decide to implement ahead of time, and so most of the savings will be carried on forward in the next months.
And one other question I see about Ivory Coast that I'd like to address, which is why we are confident on meeting these conditions precedent in Q3. And the answer here is, as we try to explain in the details in the script that both parties, especially Ivory Coast and Fluence, are incredibly interested and demanding in getting this project off the ground. The customer wants to get it done. We want to get it done. We want to start, obviously, the last several months, not having a project team on-site and other delays have not helped, but there is a tremendous need for water. There is a tremendous cooperation from the highest levels of the government to work with us. And projects like these are very often, especially as they are export credit finance, which means they are sovereign banks and state sovereign banks and credit agencies from sovereign countries involved sometimes extend a little bit of what we otherwise would have assumed can be possible. But we are pretty confident that there is a tremendous amount of interest and eagerness to provide this water and go forward with it. So I don't see any additional questions. Francesco, do you see anything else?
A question about...
Go ahead.
Sorry, go ahead. There was a question or more detail on the term of the Upwell financing. We are not disclosing -- we don't have -- we are not authorized to disclose the detail of term. What we can say is that this facility, the term of this 3-year facility with an option to a sub-facility for project financing is comparable to similar facility for this type of financing in the market.
Thank you, Francesco. And the last question I see that I'd like to answer is a question about our guidance that this guidance does not include top line revenue, and whether there's a change. I'd like to reiterate that the 3 items from the very beginning of the year that we guided to were to be EBITDA profitable for the fiscal year 2020, reach at least $32 million in sales in SPS and have at least $9 million of recurring revenue. All 3, based on presently known information, we believe we can achieve. And those are the 3 guiding principles that we have made public to the market that we still think we can get to. So with that, I would like to thank you again for your time this morning and evening in the United States. We are hoping that all of you are healthy and safe during these unprecedented times. In normal circumstances, we had hoped to be able to see everyone in person in Australia in the second half of this year. But given the current conditions, this is unfortunately highly unlikely. We hope all of you stay safe and we look forward to speaking with you soon, and please reach out with any additional questions that you may have after the call. Thank you very much. Operator, please take over, and have a good day.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.