Fluence Corporation Ltd

ASX:FLC

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Fluence Corporation Quarterly Update Q2 FY 2021. [Operator Instructions]I would now like to hand the conference over to Mr. Richard Irving, Chairman and CEO. Please go ahead.

[Richard Irving, Chairman & CEO]

Thank you, Alex. We appreciate the kind introduction, and good evening to U.S. investors. Good morning to those in Australia. It's a pleasure to be able to chat with you again and answer your questions. I guess the first comment I would make is that, I have to say, I feel incredibly proud of the progress that this company is making amidst a situation with COVID, which I'm not sure is going to go away anytime soon. We are learning to live with this despite the fact that the quarantine's present in major headwind for our business in terms of slowing down orders, not losing them, but flowing them. And we are making, I think, very impressive progress.When you look at the revenue growth, whether you look at Q2 last year to this year, up 169% or last quarter Q1 to this quarter up 50%, very impressive growth, very impressive growth in China, 48% over Q2 of last year and a decent start on the year in terms of Smart Products revenue and also backlog for Smart Products. So we feel very confident about the business now and very confident that despite this very horrible situation that we're all facing in -- and particularly now in Australia, that it is not derailing our business. We are learning how to function amidst this COVID environment.At the same time, I think we're doing an excellent job executing the Ivory Coast project. This is really the project, which is bankrolling our transition to a business that will be dominated by Smart Products and recurring revenue going forward. And this project is on track and doing extremely well and cash flow positive overall. So that's a very positive situation for us as well.And at the same time, despite the fact that we're doing an off a lot more in terms of actual execution of the business, we're actually seeing the ability to continue to take cost out of the business from an operating cost viewpoint -- operating expense viewpoint, which is very encouraging because, of course, all of that helps to drive the fact that we were able to be EBITDA positive in Q2 and cash flow positive as well by $13 million. So pretty impressive in terms of operating numbers. But there's more going on behind the scenes. In the sense that, for those of you who've been patient enough to be with us for the journey of Fluence on the Australian AFX, when some of you came into the story back in 2015 and 2016, we were a wannabe. We were at least writing tech story with this wonderful innovation in wastewater treatment called MABR, and we just hope this is going to take the world by storm.Well, the interesting thing is, this little company is now not so little anymore, and that MABR technology is the dominant solution. If you want quality treatment of wastewater, you're going to be using our MABR. And not just MABR generally, but our MABR. We know we are massively more competitive than everybody else and in the presentations we filed with ASX, which we have on our website as well, really demonstrate those numbers quite clearly.And the proof is in the pudding. We've commissioned one of our largest plants now in Sihanoukville in Cambodia. Plant is treating the wastewater 60,000 people. So that shows we can scale this from those containerized Aspiral systems all the way up to things that can work at city scale. And also, we've seen plants sold all the way down to the micro size that can treat just a cluster of homes or a small restaurant, for example. And so going from that Cambodia plant, which is now operating at scale, down to what we've been able to achieve with the Aspiral units, I'm very happy to say that in Q2, we sold 15 MABR plants, 34 year-to-date, so now a total of 281 MABR plants worldwide.Now our same team competitor who we do respect very much, clearly, earlier on in the adoption of their technologies and we feel that this really does stay pretty clearly our dominance in this field of MABR and dominance in the field of quality wastewater treatment. So we're very excited about that. I'm very excited about what that implies for the future, where we now see more and more partners coming forward saying, we recognize where you are, we know this stuff works, that we really would like to work with what you have.We're also encouraged that in China, we've talked a lot about some of our earlier volume partners, Hubei ITEST recorders like Kaitian, Liaoning Huahong and China Rail. We're seeing repeat orders from all of those in the year-to-date, which is clear evidence that those partnerships continue to deliver. And at the same time, 5 new partners buying initial plants from us, to figure out broader deployments using our technology, to get the proven, in other words in their own local areas that this is the way to go. And this is what I think is helping to drive our China revenue, but also our reputation, I think, globally, for something that really does deliver.And beyond China and Southeast Asia, we're also seeing uptake in the U.S. now over 3 plants sold in Q2. In the U.S., we now have 10 MABR plants here, so this is now seeding the market in a very useful way as we seek to move on to water as a service, particularly the notion of treating and reusing wastewater for non-drinking needs. So we're talking irrigation, toilet flushing, air conditioning, for example, being great applications where we offer tremendous economic advantage over the competition.So for all those reasons, I feel we're in a very good situation. I think those of you who are very observant of our numbers and have tracked the story of our number of quarters and even years, if you look at our operating cash flows and you accumulate those over the time since we merged the 2 companies together in mid-2017, you'll notice there's been a change in the curve. And that change is something we certainly intend to keep using in an upward direction going forward. That doesn't mean every quarter, we'll be cash flow positive. But what it does mean is that, because we're being -- we're scaling the business, because we're successfully executing the Ivory Coast project, because we're continually improving our operating efficiencies, this is making a difference in terms of turning the quarter on cash. And I think all of those things together personally make me feel incredibly excited about where we are as a business, even, as I've said several times in this crunch of COVID, I just feel we have to learn to operate amidst that environment.So having said all of that, I'd love to turn it over to Francesco to give you a little bit more specifics on some of the numbers from this last quarter.

[Francesco Fragasso, Chief Financial Officer]

Thank you, Richard. In the second quarter of 2021, we had an audited revenue of $27.2 million, up 49% on Q1 2021. For the first half, the unaudited revenue was $45.4 million. During the quarter, we collected $40.4 million from customers, achieving operating cash flow positive of $13 million. Underlying EBITDA for the second quarter was positive, and we expect it will be positive for the 2021 financial year.Revenue from Smart Product Solutions are tracking in line with our expectations and are up 7% in the first half of 2021 compared to the same period of 2020. Our partners in China are continuing to help us grow our business in the region, and we expect that we'll continue to provide support to help us meet our guidance. Revenue in China in the first half of 2021 increased 45% compared to the same period last year. The booked revenue and the backlog of orders give us confidence to achieve our guidance in the Smart Product Solutions segment in 2021. We continue to focus on improving operating efficiency and prudently managing expenses.Our operating expenses were down another 7% during the first half of 2021 compared to the same period of 2020. We are pleased that after reducing operating expenses in the 2020 year as part of the response to the COVID-19, we continue to be able to take cost out and improve efficiency further.Fluence has a strong cash position with cash and cash equivalents of $23.7 million at the end of June 2021, up from $14.9 million at the end of March 2021. In addition, the company holds $34.8 million in short-term and long-term liquid investments that provide adequate operating reserves. Net cash generated from operation in Q2 was positive $13 million. The net cash inflow for the quarter included a $20 million payment for the third milestone under the Ivory Coast project as we communicated to the market on June 4.Fluence has a contract backlog of $175 million at the end of June, of which $134 million related to Ivory Coast project and $18.7 million to Smart Products solutions. Fluence expects to deliver Smart Products Solutions revenue in 2021 of $35 million to $50 million and to achieve another year of positive underlying EBITDA.I will now hand back the call to Richard.

[Richard Irving, Chairman & CEO]

Thank you, Francesco. So I think let's go to the Q&A here, and Lexie, would you mind reminding the attendees if they'd like to submit a question, how to do so.

[Operator]

[Operator Instructions]

[Richard Irving, Chairman & CEO]

Thank you. So I see a question here about Cambodia, and I have to say that our shareholders, our investors are very used to gathering information from local sources and some comment in regards to a follow-on project. We believe there are several follow-on projects to the 2 plants that we have built in Cambodia, where the first is commissioned and the second is pending commissioning in the coming -- certainly, in the coming days, if not a week or 2 subject to COVID lockdowns there. And yes, we are absolutely involved in conversations on those follow-on projects. I don't want to say more about it than that, but they are of a similar size to the ones you've tackled there and very meaningful proof points for MABR in that region. In cities and developments that are really being built from the ground up. In other words, you've got a state-of-the-art city with now state-of-the-art wastewater treatment in a country, that prior to our initial plant getting up and running, had no biological wastewater treatment on any kind. So we're very proud about that.I see also a question here in regards to -- I see a question here in regards to the 4C being filed in Australian dollars. I don't think that's correct, Francesco. I'm pretty sure...

[Francesco Fragasso, Chief Financial Officer]

I can...

[Richard Irving, Chairman & CEO]

We have this thing filed in U.S.

[Francesco Fragasso, Chief Financial Officer]

Yes. I can take this opportunity to answer your questions. Yes, the 4C is all U.S. dollar. There is one, I think, in the column that is in Australian dollar. All the figures are in U.S. dollars. I will answer a few more questions. There's a question about Ivory Coast cost and next milestone is expected. On the Ivory Coast contract milestone almost overlap with every quarter. So our billing -- next billing will be at the end of Q3 and payment will follow. This will continue for the 10 payable milestone under the contract of which we just received in this quarter payment of $9.3 million.There is a question on our bank deposit, if we can reduce our loan either invest in short and long-term investments. The term of the loan we have with Upwell, which is a hybrid working capital and project financing does not allow for early repayment. Therefore, we cannot reduce that debt that is also available for the project financing in water as a service type of concept.

[Richard Irving, Chairman & CEO]

Great. Thank you, Francesco, and I think there's some questions in regards to the U.S. market. I think the thing to bear in mind in the U.S., the plants that have been sold so far are people buying initial units to feel comfortable these things work. These are typically commercial buyers that are buying the plant. And remember that with commercial customers, our goal is to go for people who will buy water as a service not equipment. And consequently, we are still at a pretty early stage in the U.S. market, which the municipal level tends to be incredibly conservative. So we've had customers, for example, that are operators of rest stops -- highway rest stops here much like what we've done in China, the Hubei test and others. We had customers in the oilfield services area where they're providing water to the camps of workers that are in those oilfields. So these are commercial customers, but the target going forward is very much around initially at least resorts and other commercial players who would really want to just see their water bills and their -- go down and their water security improved in water-stressed regions, particularly where they're paying high-priced electricity, which tends to mean that your water cost will also be very high. So that's I think the goal in the U.S., a good pipeline of projects, but too early to talk about any specifics about those. See also a question here in regards to MABR. 5 MABR plants sold in China to new partners. I guess what we meant to say there is that MABR plants in China -- 5 MABR plants were sold in China to 5 new partners. So these are initial partners. Nevertheless, we have the 3 volume partners that you know about from the agreements signed previously. We have the national partner in 3 Gorges, national partner in China Rail. All of those are moving forward, but the pipeline of new partners continues to come on board because those provincial partners with which we have volume partnerships are only covering a few provinces. And there are new provinces coming online, both in terms of deploying wastewater treatment into so-called rural areas, but we're really talking pretty urbanized areas but not massive cities. So still very significant amounts of business. And so that -- as well as people who are more on the commercial side of things. So China Rail, what they're looking at is a deployment that would be more similar to ITEST, for example, where ITEST is building rest stops along highways. China Rail is building effectively rest stops in stations in long used or upgraded line. So we're very encouraged about the uptake of our technology in new geographies in new provinces in China as well as in other parts of the world. I see also a comment about the deployment in Israel. This was a very small opportunity for us even though SUBRE, has it got actually the capacity but it's only a few tens of cubic meters a day. But it's symbiotic with a very important site meaning that the quality level is imperative if there's an issue of potential contamination in a place where people are going to be getting into the water. So I think that's -- perhaps the message there is merely more about quality that MABR can produce and this being a commercially large win for us.

[Francesco Fragasso, Chief Financial Officer]

I don't mean to interrupt but just on the...

[Richard Irving, Chairman & CEO]

Yes.

[Francesco Fragasso, Chief Financial Officer]

Just on the EBITDA. So we have been EBITDA positive in Q2. We will be EBITDA positive for the full fiscal year. Year-to-date, for the first 6 months, you will see the audited financial EBITDA is still negative. We are trending towards the breakeven and turn positive in the second half. The driver is the revenue and the margin of this revenue. We disclosed that revenue in Q2 was $27.2 million out of the $45.4 million of total revenue for the first 6 months. So it's almost 80% more than Q1. So as we increase revenue and margin, we are trending towards breakeven for the fiscal year. And again, Q2 was already a quarter EBITDA positive.Yes, and I think, let's just see some of the other things I just -- question here about floods in Asia affecting us. Fortunately, the answer is no. We have not been affected by the flood, but they are certainly a major concern in some of the areas there. And not only there, of course, in Europe as well, but that has not been a challenge for us fortunately.So I have other 2 questions I can address. The reduction in operating expenses that is a great result considering that the benchmark in 2020 is a unique circumstances of the pandemic and urgency, that's still reducing our fixed cost. And this is due also to the transformation of the company, moving away from the traditional customized engineered solution towards standardized product, SPS segment and this naturally reduce significantly the overall, needed to support the business.

[Richard Irving, Chairman & CEO]

Yes, I see a couple of questions here. So one is about NIROBOX sales in the Middle East. We continue to see very strong demand for NIROBOX sales, where people care about decentralized sources of freshwater. In other words, lot of small plants versus a few big ones and the reason is partly, especially in the Middle East, it's about resiliency. In other words, do you have a robust infrastructure that can deal with various factors that might destabilize it. We are in the midst of a number of projects there. We built several plants on the Mediterranean Coast, on the Red Sea Coast of Egypt. A large plant for a new city in the Mansoura is in progress at the moment and quite a few more projects in the pipeline. So there is -- continues to be a lot of interest there. Desalination is a much more competitive market than MABR. MABR, honestly, we win hands down. If you care about quality then you will go with our MABR. Desalination, the question is, well, does it matter when you get the plant? Does it matter how much footprint it takes? If the answer is well, you don't really care is then we're not going to win, because you're not going to win on price. So if you care about the footprint efficiency, in other words, our NIROBOX is really, really high capacity for a very small footprint. But you care about the fact that we can deliver it and commission it fast then that's what we do very well. So those are the projects that we're really focusing on bidding on in the Middle East and indeed, in Southeast Asia, that's how we won the Taiwan order at the end of Q1 and potentially would anticipate further orders, particularly in the Philippines and Taiwan and Vietnam. Those are the geographies we're operating in at the moment, and we're exploring others to follow, because there are a lot of water stress issues in Southeast Asia.And a related question to that about SPS revenues in Q2 and deals being reported on market or not. So we did report bookings that came in at the end of Q1. Some of that is what translated into revenue, so some of that was announced at the very beginning of Q2. I guess it was announced on April 1st, because the wins came in on March 31st. And we really -- we -- our policy is basically to announce wins of a certain size. The threshold currently is $3 million or if we believe it has particular strategic value, right? Just so happened that the announcement we put out at the beginning of April was about 3 different deals, possibly, each of which we would have announced individually had they happened individually, because they were each of strategic importance, but this has so happened, they all came in on the same day. So we do tend to announce strategically valuable or deals that are sufficient sized, but we also feel that investors have given us feedback in the past that they don't want to have press releases every 2 or 3 days from us about every single deal. So we thought it was important to set a threshold for that.There's also a question here about China and company's exposure to China. We're obviously aware about the geopolitical situation and I guess, what I would say there is, in China, remember that from the very beginning, everybody who is working for our team in China is Chinese. And the technology that we're selling there, which is only MABR. We don't sale NIROBOX in China. MABR is an Israeli technology. Israeli technologies in many kinds are very well received in the China market and a Chinese team selling Israeli technologies is very much welcome. So we don't feel as though there's been any geopolitical backlash on us as a company for that reason, Israeli technology selling into the China market.There's a question about restructuring costs here, Francesco. I think the quick answer there is that I think you see most of what is likely to come from the restructuring cost. We took -- we gave a fairly large guidance number around that in Q4 or in November of last year. We're reserving some of that still but we've made some very good progress on that. So I wouldn't expect any major problems on that in the near future.

[Francesco Fragasso, Chief Financial Officer]

And in addition to that, Richard, most of those costs were accrued from a P&L point of view in 2020. So we are having some cash flow impact this year, but there's no impact on the P&L.

[Richard Irving, Chairman & CEO]

Yes. And I see a question here just about some of the language we've been using about quarters. We work on a calendar year, not the Australian financial year. So basically, Q1 means March 31st, quarter ending Q2. The one we're reporting on here is June 30th. And there's also a question about SPS as a percentage of '21 revenues. Well, we haven't given out revenues for the whole company. So that's a difficult question to answer specifically, but we have given out guidance that Smart Products revenues will be in the $35 million to $50 million range for the year. We still feel very confident that we can achieve that. And again, what we're aiming for just to go to the higher level is, again, the big Ivory Coast project is kind of a one-off for us, a very large project. I think that will give us a very good reference globally for the company, but we are not chasing those kinds of deals going forward, but it does spin-off a lot of profits and a lot of cash for the company, which can subsidize our shift to a revenue stream that's driven by Smart Products and by recurring revenue going forward.Now Ivory Coast project will end in Q1 of 2023, and so the goal is to make sure that we have a revenue stream, which is large enough to deliver sufficiently attractive EBITDA by 2023. And we've given out enough information to the market in regards to margins and operating cost, but I think it's pretty simple to do the calculation to figure out kind of the ballpark of where that revenue needs to be by that point in time before we're very much on track to doing that.And I see also a question here about what drives Fluence to profitability, revenue or cost savings? Well, I would say that it's higher-margin products, mainly Smart Products and recurring revenue and cost savings. And the cost savings is not just about doing more with less. It's about the fact that because these Smart Products are pre-engineered, what that means is when you get into a project, you don't encounter a lot of cost associated with that project from an engineering viewpoint and that makes a huge difference in terms of not just gross margins, but also your contribution margin, your operating margin for the company as a whole. And so that shift to Smart Products really accelerates the growth of profitability as well, of course, the growth of the top line in a much more sustainable way than custom projects, which are so difficult to project in terms of when they will happen and when the revenues will come in.We also have a question here about large orders coming in the future. We certainly hope so. I can't give you any immediate guidance on that, but there are some pretty exciting projects in the pipeline. You will obviously be the first to hear about them.

[Francesco Fragasso, Chief Financial Officer]

And Richard, there is a question about the revenue over the SPS, in particular, for the first half, recurring revenues for market and customized engineered solution. So for the first 6 months, the recurring revenue has been $4.2 million and when it comes to customized engineered solution, where we are not booking new orders. The total revenue for 6 months, excluding other cost was about $8 million.

[Richard Irving, Chairman & CEO]

Thanks, Francesco, and I see also a question about the site in Israel, where we will be installing the sewage plant. You get the name of it, but it is -- if you look upon with the PD the baptismal site of Jesus, that's where it is. It's on the Jordan River. It's -- I think, it's just east of the Jordon River. So it's a site that receives more than 1 million tourists a year. So that's, of course, one of the reasons for the whole wastewater treatment need there and a high quality solution.So I think, we've answered most of the questions. There's probably one, 2 more here. We may have missed out on, but really appreciate everybody being on the line. Remember, we are always here. We're always happy to answer your questions. We would be delighted to hear from you. You don't have to wait for the quarterly call to do that. So we very much appreciate your time and joining us. Thank you for a lot of excellent questions and we thank you also for your continued enthusiasm for Fluence, which -- for -- which we share very strongly.

[Francesco Fragasso, Chief Financial Officer]

Thank you.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.