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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by. Welcome to the Fluence Corporation Q4 FY '23 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Doug Brown, Chairman. Please go ahead.
Thank you, and welcome, everybody, to our year-end call where we will review our performance in Q4 of 2023 and for the full year of 2023. We finished the year on a strong note. Revenue in Q4 was almost $28 million, and EBITDA was a positive $2.9 million. We had a strong year for bookings. We ended the year with a backlog of about $92 million, which is almost double the backlog we had entering the year. And then we had a successful capital raise where we raised $40 million in an equity placement and we used about half of those funds to pay down part of our debt, so we have a significantly lower interest burden. We have a significantly less leveraged balance sheet. And between the strong balance sheet and the strong backlog, I'm very optimistic that 2024 is going to be a very strong year for the company. At this point, I would like to turn it over to the CEO, Tom Pokorsky.
Thank you, Doug, and welcome, everybody. I appreciate your interest and your time you're taking to learn about our last quarter. This call, we're doing something a little different than we have had in the past. We are presenting some slides. So I will start off by going through some of the early slides in the deck that many of you may have seen before, but this is just an update on them. And if we go to the first slide then, #4. The executive summary goes through mainly some of the changes we made to the company in the last year with our reorg. Starting with the leadership. We, of course, brought in Doug as Chairman and Ben as CFO. And we have a strong leadership team now with strong water industry expertise. We also shifted our focus a bit, and I like to say we shifted it to high-growth markets that we are good at, in other words, technology we have that we are the best in the world with and areas that are growing markets. And we'll discuss a little bit more of that later. But the intent of the whole change, in addition to becoming more efficient as a company and more cohesive as a company, is to ultimately gain higher margins and growth. And we have changed the company to do just that. And I believe we've also made a significant effort to start improving our recurring revenue volume, which has gone up in the last year and is forecasted to go up even more in 2024. And I would make a point that our fourth quarter is starting to show the traction or the benefits of those moves. Ben, can you go to the next one? As many of you may recall, we broke our company up into 4 P&Ls, mainly by market segment except for Southeast Asia, where they sell all market segments, the municipal area, the industrial area for water and the industrial high-strength wastewater and biogas market. We feel these -- all these 4 areas have the most significant potential growth for our best product lines where we can get the highest margin. And again, I think some of the things we're going to talk to you about today will show that we are making strong progress on these things. One thing I would like to point out regarding these structures is in -- throughout 2023, the municipal segment, which is made up mostly of North American growth, although there are some Mid-East and some Asian areas that are growing in the municipal marketplace, we did not have a leader in the municipal business. We kind of led it by committee because we are sorting for the right -- or searching for the right leader. I am pleased to report that as of tomorrow -- or, excuse me, as of Thursday of this week, we will have a new VP of our muni segment in place. His name is Steven Sheidler. He comes to us with 30 years of water and wastewater experience, including the last several years as President of a North American water valve company. And prior to that, about 8 or 9 years experience running the entire North American municipal segment of the Xylem wastewater and water treatment division. That division actually is one that I started up for ITT back in my early part of my career. And Steve has run all the companies I ran in that area, so he clearly is experienced in our work, and we're very excited to have him onboard. And I might add that in his last 2 jobs, both the Xylem and the valve manufacturer, he led double-digit growth for both of them. And again, we're happy to have him onboard. And then, of course, we have the previous leaders for the other 3 divisions that we've had all year. Ben, can we go to the next one? Again, like I said earlier, our goal is to sell products and services in areas of high growth and higher margin. And this chart, again, one you may have seen before, shows that we're leaning away from the big projects, to what we referred to in the past as CES, into the more profitable areas of our NIROBOX, our Aspiral, MABR, our waste-to-energy areas and recurring revenue, and BOO. And that is our focus. That is our goal, and that's what we're going to continue to do throughout 2024. So getting the higher margin is what's going to drive our EBITDA obviously, so that's our goal to do. Ben, next one. Before I turn it over to Ben, I'm just going to point out that this slide shows the 3-year vision on where we're going, and it shows graphically what I just got done talking about. And I think you'll see some of the important points there with the higher margin, the recurring revenue and the more global focus instead of one area here or there. And with that, I'm going to turn it over to Ben before -- and then I'll come back. So Ben, do you want to take this detail and then go into the financials, please?
Absolutely. Thank you, Tom, and welcome to everybody that took the time to join our conference call today. Thank you. As Tom had alluded to before, we have a stated strategy of moving away and deemphasizing the historical Custom Engineered Solutions, CES, business to more SPS and recurring revenue, utilizing our technology. As noted and what's been communicated previously is we had a 2- to 3-year goal to achieve that transition. And we think we're making very good progress on that stated strategic goal. SPS and recurring revenue, in particular, were up 68% in Q4 of 2023, and 67% of total revenue in 2023 was made up of SPS plus recurring revenue. That's compared to 48% of total revenue in fiscal 2022. In addition and equally as important, maybe more important, is that SPS and recurring revenue backlog was up 52% on a year-over-year basis, setting us up well for continued transition into SPS and recurring revenue. And just as important, a lot of that growth is coming from North America and Southeast Asia, 2 geographies that we've placed a particular emphasis on selling into and investing for growth. As I walk into the Q4 and fiscal 2023 financial results, I just do want to remind everyone that both 2023 and any forward-looking information that's discussed on this conference call is on an unaudited basis. And everything that you see here, if it's not denoted otherwise, is in U.S. dollars. So as Doug alluded to off the top of the call, we had a very strong Q4. Revenue was $27.7 million, almost double any other quarter in 2023. And that included over $20 million of SPS plus recurring revenue, which was, as noted, 68% higher than the same quarter in 2022. We were able to achieve EBITDA of $2.9 million or 10.5% and that on the back of gross margin of 30.6% in Q4. And I think what it just represents is the -- what we have stated in terms of this business' ability to exceed 30% gross margins and 10% EBITDA margins. For the full year of 2023, the business was able to achieve $0.2 million in EBITDA, in line with our revised guidance, and that was on revenue of $70 million and gross margins of 27.8%. Those gross margins, I would note, are higher than the prior year's by 3.9%. In addition, we -- part of the reason we were able to achieve positive EBITDA this year was that fixed costs for the year were down by $6.8 million versus 2022, reduction of 26%. And when removing a onetime reversal, those savings were still $4.2 million and a 16% reduction. And these all reflect the impact of the restructuring that was announced in Q4 of 2022, increasing the efficiency in the business and eliminating excess costs. We finished the year with cash of $24.6 million plus $7.9 million in security deposits and collateral, most of which relates to the Ivory Coast project. Large part of that was due to the capital raise that we announced, and I'll discuss that in a little bit more detail on a later slide. But in Q4, we were able to generate $3.7 million of positive cash flow from operating and the release of some of those collateral deposits. That capital raised net proceeds USD 25 million, of which about $13 million was utilized to repay debt in the quarter. For 2024, we are guiding for revenue of $90 million to $100 million of revenue and EBITDA of $3.5 million to $4 million. We feel confident in these numbers in large part due to the strong orders that we were able to achieve in the second half of 2023 and the fact that we are starting the year with backlog of approximately $92 million, which is an increase of 92% from Q4 of 2022. $51 million of that is expected to be recognized in 2024.
And part of that, as I said, was the confidence that we achieved from the starting backlog and some of the orders that we were able to achieve in the latter part of 2023 and through January of 2024. So Tom, might ask you to talk a little bit about some of these recent orders and the confidence in our order profile for the first half of the year.
Sure, Ben. I think the first 3 you've seen before, those we announced in the third quarter, that was the big bump up we had in September, October. But the later ones are things that are -- have happened either in December or this -- in January, and that had some significant importance. The, I think, $1.5 million municipal project in Florida is a great start for our North American muni business this year. That order actually just came in, in January. And albeit a small one, we got our first operating contract for a municipal job in North America in Texas. This was a job we sold the equipment for in the past, and we followed up and negotiated an operating contract with them. We also got another order from Cabot St. Lucia. It's not a big one, but it's a repeat customer who already had our equipment they're adding on. And we're starting to see a little bit more of that going on with our business. There are some new projects that just came in, in Southeast Asia and China, including some MABRs in China, again, with repeat customers that we've had in the past. And one of the good wins we had just in January was a biogas and wastewater-to-energy project. It's a confidential client, but it's a chicken slaughterhouse in Italy and is $1.4 million. And then our South American group in Industrial Water got 2 more Coca-Cola projects totaling $1.4 million, which, again, repeat customers. In addition to this, we don't have them listed here, but there are -- we have been notified in the last 2 weeks or so that we have at least 5 projects of significant size ranging between $1 million and $2 million each that we signed letters of intent, and we're going through the final terms and conditions with, but they are not included in our backlog yet, but they will be available for shipments in 2024. So the activity is picking up, and the news is getting better each day. So we're happy to have a much better start for the year than we did last year. Ben?
Thank you, Tom. So for 2023, Fluence finished with just under $100 million in new order bookings, and this represented growth of about 130% over the prior year. In the second half alone, our bookings totaled $80.5 million, which exceeded our guidance that we provided about midway through the year of $70 million to $80 million. And again, as we talked about with the backlog, this allowed us to finish the year with $92 million of backlog, of which $51 million is forecasted to be recognized in 2024. It's a significant growth over the prior year and again, positions us well for strong growth in 2024. And we talked a little bit about this, but I just wanted to reemphasize, as part of the company's realignment, a large amount of focus has been placed in North America. Fluence made significant investments in leadership, sales and technical talent. 2023 alone, the company hired 2 new sales managers for the municipal group, a new sales manager for the Industrial Water & Reuse group, a sales manager for the Industrial Wastewater & Biogas group and 5 new technical team members. And that's in addition to the new leadership that Tom announced earlier on this call. Those additions are beginning to bear fruit, and where we see that first is in our growth and pipeline. That pipeline across pretty much every business unit more than doubled since the beginning of last year. And the highest growth is coming from our municipal group, but all groups are showing significant growth in our high-strength wastewater industrial group and our Southeast Asia business. And the majority of that -- those increases are coming from North America and Southeast Asia, where we are placing the investment and the emphasis. And with that, we are projecting that we can convert some of this pipeline in $40 million to $50 million in new order bookings in the first half of 2024.
So the last -- on this last slide, I wanted to review formally here, wanted to talk a little bit about where our balance sheet sits today. As everyone on the call will likely recall, on November 1, Fluence announced an equity offering to raise AUD 40.7 million, which was successfully completed on December 5 of this year. And in parallel to that capital raise, Fluence negotiated an amendment to its credit facility with Upwell, so among other things, repay approximately $13 million of debt using those capital raise proceeds and in the process dramatically recapping our balance sheet. The amendment and subsequent repayment of that debt had a number of benefits. It's going to significantly lower our interest burden likely to the tune of 80% or more on a year-over-year basis. It's going to -- it has already enhanced the flexibility with an improved covenant package, and it provides us with enough liquidity to be able to repay the term loan in full in July of 2024. So quite a dramatic change in our balance sheet, and as you can tell here, what we've tried to show is our net debt position, which is expected to, on a pro forma basis, be $6 million after the repayment of the remainder of that Upwell term loan. While we didn't put a slide together on this, I thought it was important to also highlight 2 other corporate updates that are relevant to the business. First, meaning that we are divesting of the Aeromix product line. We entered into an LOI in Q4 of this year to sell the assets of the Aeromix product line for undisclosed cash proceeds. The product line and operations were deemed to be noncore, and the transaction is expected to improve both liquidity and enhance profitability for our Municipal Water & Wastewater business in North America. The transaction has quite well advanced and expected to close in mid-Q1. Secondly, management had made the difficult but ultimately necessary decision to eliminate commercial operations, including production in Israel, which currently supports the Municipal Water & Wastewater business unit. This decision was made due to a lack of historical profitability, combined with the focus on the Municipal Water & Wastewater operations in North America, which is expected to be the primary driver of growth in this business going forward. This decision will result in headcount reductions in the elimination or reduction of 2 facilities in Israel and is expected to lead to significant cost savings. Israel, however, will remain an important hub for R&D and engineering in Fluence and will continue to support the Municipal Water & Wastewater groups, among others. With that, Tom, I may hand it over to you to answer any questions unless you'd like to wrap things up.
No, there's a couple of good questions here. I just want to point out that, that decision to take Aeromix and put it as a unit for sale was one reason of the drop in the revenue without a change in EBITDA, so just to point that out. That made a difference in revenue but not much of a difference in EBITDA, so -- in case that question would come up. But there are a couple of questions here, I'll address. There's one that just said competition, question mark. Valid question. We didn't discuss anything about competition. But real briefly, I will point out that we said before we are going to work in areas that we're good and our technology is the best at. Well, in the MABR, which is the bulk of municipal work, there's only 2 competitors in the MABR business. That's SUEZ and OxyMem, which is, I believe, DuPont now. Neither one of those processes are like ours. They're both hollow fiber membrane. Ours is flat sheet, which we feel have significant advantages. So that's our competition in that area. In the high-strength industrial waste and waste-to-biogas areas, I don't think there's a company out there that -- I mean, there are companies that do bits and pieces of what we do, but how we put a project together from waste treatment all the way through the reuse of the gas, I don't think there's a company that's geared up to do that just yet, at least not one that we've seen. So we think we have a competitive advantage in how we get that job done. In the industrial water area, I mean, there's a -- again, there's a lot of competitors in that area from A to Z. But again, it's our relationship with the customer and how we put a project together that gives us an edge on that. So that's a quick update on competition. There is another question here, and these are all -- Ben and Doug, if you want to chime in on my comments, fine, but they're all kind of general. So one of the questions is how do you see Fluence taking advantage of or being disadvantaged by government policy in the U.S.A. That's a very good question. We can take advantage of the fact that the Inflation Reduction Act put $25 billion in a pot for tax credits for wastewater to -- for waste-to-energy or biogas projects. So our customers and us, if we do a BOO, can take advantage of that. There are some disadvantages in the new EPA rules for Buy American that we have to deal with, and that will lead me to the next question, which is are there any incentives or customer requirements for U.S.A. production; and if so, what plans can I share. I'm not sure there's other than commercial incentives. But because of the Buy American cause, we do have to entertain more production in the U.S. And we have made a decision, and it's one reason to shut down the smaller membrane machine in Israel, we are going to build a membrane production facility in the U.S. And we have a project put together to do so, which not only will take away the disadvantages of some of the U.S. laws, but it will give us some advantages because the shipping costs and the import costs for that product are extremely high. So we will be much more competitive in doing so. So let's see if there's another question here. Is very interested in the status of the operation and maintenance contract on Ivory Coast. What's the status on that and the time frame? The status of that is that, until they can distribute water throughout their system, which will take some time because they're still finishing transmission lines, in fact, our addendum contract is part of that, they will not be needing the operations of the plant other than in idling. We expect to get a contract this year to do some idling of the plant for the rest of the year, but the actual O&M contract would probably not be in -- end up going into force in a great way until next year sometime. But we're -- by us getting the idling operation, if you will, when the plant's done, should give us a good standing to get the long-term contract.
And that leads to the next question that says what's the update on Ivory Coast. When is it going to be commissioned? Ivory Coast, as we speak today, is 99% complete from a standpoint of construction. We are 100% paid on the job. There are a few bits and pieces, a couple of sections of pipe that have to be laid yet. There are some electrical control checkouts that need to be done. Those are expected to be done in the next several weeks, and water will be introduced to the plant, which will then start commissioning of the plant, which is checkout of all the processes. So we expect commissioning to be nearly complete within the next couple of months. I think there's a couple of more questions...
There was one question, Tom. Is the Ivory Coast addendum in backlog? And the answer is, yes, it is because that's [ included to ] contract.
I'm sorry. Yes. In fact, we just started on that. So the status of that is the financing is just getting signed on, and so we're going to be moving forward. We have a question for you, Ben. Please clarify net debt 0 question.
Yes. So I may have been on...
[indiscernible] cash.
Yes. Thank you. I may have been unclear on the statement that I made, but we are currently in a net cash position by $6.8 million. And we expect, after the repayment of the remainder of the term loan from Upwell, to be in a positive cash position, as noted on Slide 12 of the deck that we reviewed. And so we have sufficient liquidity to repay the Upwell facility and continue to have a healthy cash balance on our balance sheet, to clarify there.
Okay. Thank you, Ben. Next question is any details on a potential large value MABR job in the U.S.A. The answer is, yes, there's 2 or 3 major projects we're working on. When I say major, we're in the 7-figure area of the projects. They are moving forward, and we are working on them. We can't say anything more at this point on those, but we are making progress. We just did book a smaller $0.5 million 1 for Indiana in January. So we are moving forward. There's one in Idaho, one in California and one in Maryland that we're looking at right now. So Ben, there's a question on cash flow for 2024. I think it's just -- are we going to be positive, cash flow positive?
It's our expectation that, from an operating cash flow perspective, we will be positive in 2024, and we will be -- however, we will be utilizing a portion of cash to repay the remainder of debt. So from an operating cash flow perspective, yes.
There's also a question about net profits. I think we made a positive in December. Do you have a comment for 2024?
Yes. So that is -- I failed to mention that in the update that we did have positive net income in December. It is our expectation, with the guidance that we've provided, that we should be net profit neutral or thereabouts for 2024.
Okay. And then the final question that I see here has to do with what kind of investment's required for the membrane plant in the U.S.
we are estimating somewhere between $1 million and $2 million, and that will depend a lot on how big we make it, how fast we make it and whether we phase it in smaller to bigger but between $1 million and $2 million. Yes.
Tom, there was one question on macro or micro reason for medium-term production in Southeast Asia and China. And I just wanted to address that as well.
Okay. Go ahead.
So -- yes. So we actually saw growth in Southeast Asia and China from 2022 of $9.6 million to 2023 of $13.6 million. So we did see a rebound in that business. And that was primarily from the efforts to grow the business outside of China. We are still seeing, I would say, slow activity in Mainland China that has been replaced by the work that we are doing in countries such as Vietnam, Cambodia. Taiwan, we had a large project sold there in Q4, and that's where we see the bulk of the activity going forward. And the majority of our pipeline that I highlighted before in pipeline growth has been outside of Mainland China. Anything you'd add to that?
No, I think the plant in China will always be there. It's capable of selling to Asia, but it's prohibited to ship from there to anywhere else, so we'll keep that in place. I don't see any other questions we can answer at this point in time. So with that, I believe we can end this call, and thank you very much for your attention and interest. And have a good day.
Thank you.