Here's my notes from the latest Webcast, for anyone interested.
Henry started:
Revenue for 2018 to nearly double. FLC is on course for EBITDA profitability in 2019. Good visibility of revenue for this year makes management confident they will not have a repeat of 2017's missed guidance, and will be able to achieve this target in the near-term and drive growth into the future.
Key financial results will be forthcoming by the end of February, with final audited results published by the end of March. However, revenue will be around US$58m with margins between 24-26%. This means that revenues were essentially flat against 2016 figures (US$61m) with a pro-forma gross margin improvement of 6%.
SUBRE will become commercially available next quarter, and opens up a giant new market for Fluence.
South America: The December '17 quarter saw several new deals in South America, which will help drive growth in '18. PDVSA has "re-initiated" their contract with Fluence which is of course fantastic news. This should provide up to US$18m of '18 revenue. A small (US$600k) 2nd contract for Eurofish shows that we are developing customers into repeat buyers. There was the US$1m SmartAerator deal in Argentina which we first read about in the InFluence newsletter (which also included info on an operations contract with Dow), plus a deal with a Dutch company in South America. To meet rising demand in the region we are expanding production capability in our Argentina plant which will be fully operational by Q2.
Africa: Desalination momentum is building in Africa. In the Dec quarter we won a US$4.1m contract for Niroboxes. Like a couple of the South America deals above, this was not announced to the market. It is pretty clear that the deals are going on as normal, even if we don't get an announcement for each one. We have previously (only a few months ago) announced much smaller deals than this - the VINCI deal for 3 Niroboxes for Mayotte was US$2m for example. We are discussing several Nirobox contracts in North Africa (Henry said 'North America' in the webcast, but i'm fairly sure he meant North Africa since he was summarising Africa activity at the time - so I think he just mis-spoke here). These contracts are expected to close in Q2. Despite seemingly missing-out entirely on the first round of Cape Town tenders in South Africa (which at the time, i'll be completely honest, rattled my confidence in Nirobox and our claim that our fast delivery vastly differentiates us) we have, apparently, submitted several other tenders for desal solutions with decisions to be made no later than Q2. This situation in Cape Town is now highly politicised, and there is a strong theme of local operators winning the tenders. Will some of them use Nirobox? Potentially, but who knows, maybe not. We know Henry was heading to South Africa (maybe he's been or is currently there), so they clearly don't think it is a time-waste. One thing to remember is that quite aside from the highly scrutinised and politicised desalination plant tenders for public drinking water supply - there is also now an enormous push from the private sector to purchase their own on-site desal plants now. Their operations are under huge threat and they need to ensure their own supply. Anyone who has followed this crisis also knows that there is a strong understanding in South Africa now that this is the new normal. Water recycling and reuse discussions at all levels will inevitably be discussed after the emergency of providing adequate drinking water is (hopefully soon) negotiated. Hopefully Henry can bring MABR and SUBRE into the discussions as longer-term imperatives.
USA: The Stanford MABR plant was shipped and deployed in January and is now fully operational. It will allow faculty and students to test and verify MABR's compliance with California's "Title 22" requirements for water reuse. Our MABR unit will undergo "system start-up" and "process optimisation" testing for 3-6 months. This will be followed by "steady-state" operations and testing for 6-9 months. I guess this means that stage 1 will be about how we get deployment of MABR units up and running and maximise operational speed and efficiencies (biofilm formation, where to position plants, elevations etc), and stage 2 will be about when the unit is settled and doing it's job - what sort of things might affect it's performance and can we improve it etc? That's my basic understanding of this anyway. During this period, however, we will be able to demonstrate the unit's performance to prospective customers "and are looking to enter into potential contracts". Might we get our first California sale in 2018?
China: China remains a major focus. We've been able to develop distribution channels, production capability and market presence. Management believe we are well positioned to capture an incremental share of the rural wastewater treatment market when it is rolled out. 18 months ago we had zero footprint in China. Now we have 3 operational bases and a growing team (Beijing and Shanghai offices, plus the Changzhou plant - WillChang recently posted an advert showing Fluence are currently recruiting a management role to cover Sichuan Province, might there be a new office coming to expand our local China operations?). We also have:
"A number of deals in various stages of negotiation through our 9 partners, who together are active in provinces covering over 70% of the rural population. We expect to close some of these deals right after Chinese New Year and into the 2nd quarter of 2018."
"Our confidence in China, and the opportunity, has never been higher."
Henry then turned the call over to CFO Bob Wowk.
The higher pro-forma margins in 2017 reflect an increase in "smaller, higher-margin projects". Presumably this is smart packaged plants like Nirobox, Ecobox, Tipton and will include CMABR - but smaller projects might also refer to Waste-to-Energy contracts in the Food & Beverage industry which we are growing rapidly in Italy and South America. I'm not sure we've been given much info on the margins for those kind of projects. The increase from 19% in 2016 to 24-26% in 2017 is a direct result of that better revenue mix, according to Bawb. Therefore, this should continue to expand and if/when MABR eventually becomes a prime revenue generator, it could explode. US$105-115m guidance for '18. This includes San Quintin.
A little bit from me on the San Quintin situation: As mentioned in another post, the December '17 congressional sitting in Baja California which approved public money for 3 desalination plants (including our San Quintin plant), prompted complaints from 11 members of congress (or deputies) who oppose the funding. They complained to the SCJN (Supreme Court) that they were not given adequate notice of the debate (they claim as little as 30 mins) and therefore the sitting needs a "do-over". The Supreme Court have admitted the complaint, and are now investigating whether this was , in fact, unconstitutional and whether there has to be a "do-over". This is local politics. However, it seems like the Governor (who is in favour of the plants) tried to be a bit sly and rush the decision through, but it has ended up producing a delay. The best information that I can find from Mexican press is that this delay could be anywhere between 2-6 months (the complaint was admitted in early-January). If a "do-over" is required, opponents of the Governor may rally and vote against the public funding. This would spell real trouble for us. However, it is important to understand that this is assumed to be all posturing and fighting-dirty by the opposition as it is an election year. They do not have any alternative proposals instead of the desalination plants, Baja California is in a lengthy and ongoing drought, and it is widely understood that desalination is their only way to provide relief to people and the local economy. Henry speaks on this later in the webcast.
Back to Bawb on San Quintin: "There is some contingency built into the revenue and gross profit forecasts in the event of any delays beyond the company's control". Perhaps this is built into the $105-115m range, or perhaps they have an additional buffer - hinting at a nugget of upside to these figures should San Quintin be fine. Based on "backlog, pipeline profile and historic experience" the company expects 2018 bookings and revenue to be more weighted to the later part of the year. Based on our "historic experience" we know this could result in "slippage". However, my gut feeling is that they have taken this into account now, and forecast accordingly. "Positive EBITDA during sometime in 2019" says to me that we shouldn't necessarily expect this in 1Q19. US$33m in cash.
Richard Irving then took his turn.
Fluence Corporation is still aiming to be the global leader in the market for decentralised treatment. No equivocation. Despite flat revenues from 2016 ($61m) to 2017 ($58m), if we look at 2016 - 2018 (forecasted revenue of $105-115m) it represents >30% CAGR. Richard is a born salesman lol. He's right though. Assuming they hit more than $103.1m this year, he's right. He emphasised that (as we were first advised on 31 August '17 Business Update) it is improtant for everyone to remember that the ramp in China will be gradual. We can expect 100's of modules sold in 2018. By my count Jinzi and QSY orders would have been around the 200 mark in 2017 (where, from 31 August, they told us to expect 10's of modules sold in 2017). So, perhaps we are looking at Jinzi-sized orders or smaller from the other partners in 2018. Back to Richard, "the big ramp will occur in the 2019 - 2020 timeframe". More on China later in the webcast. He mentioned that it was positive to be moving forward with both San Quintin and PDVSA and that we "indeed have additional large opportunities in the pipeline". Whether this is in sole reference to the Africa MOU, or whether that plural suggests more - i'll leave up to you. We continue to target increasing our recurring revenue. On BOT and RaaS "You can anticipate more news on these things in the year ahead". Richard wants us to be a lean organisation and so we will continue to streamline operations. Along with topline growth, that's the key to profitability during 2019. Sound like they are aiming to run a tight ship, and I think Henry previously spoke of the aim to bring cash burn down to around $1m per month in 2018.
Questions....
Africa MOU: This is not counted in the backlog or 2018 guidance. Henry says we are "making some very nice progress in the negotiations and we still anticipate we will get to some sort of contractual agreement - as we initially hoped - in the second quarter of this year"
Cash: $33m in cash, excluding the substantial balance for PDVSA contract. However, for recurring revenue projects like BOT or RaaS "we're very interested in securing off-balance sheet finance which we believe will substantially expand our ability to book new business without requiring an equity-based capital raise. That is absolutely our top priority." Henry has previously mentioned they've been in a Catch 22 with financiers where we are saying 'give us $100m finance and we will bring you the projects' while the financiers are saying 'bring us the projects, and we'll consider the financing'. Surely Ronald Lauder knows a guy in banking.
South Africa: Henry wanted to remind everyone that we built the only existing 10ML desal plant in South Africa (Richard's Bay). He is off to SA (may be there, or left again by now) "to help our chances". He is very hopeful we will be part of the successful bidders in Q2 "depending on what the political situation will be in SA". I'll be pleasantly surprised if we win any municipal potable water tenders in SA, but that's only the tip of the iceberg now for water infrastructure spending in this region. Any market share we can secure will add to the high praise Richard's Bay has received and help establish Fluence there.
Forecast: (Richard Irving) Due to revenue slipping in 2017, we believe our guidance needed to be "pretty conservative".
"We anticipate booking business this year not only to meet and beat the guidance we've given, but also to carry strong momentum into 2019."
Expecting new business bookings to grow year on year.
China Forecast: 100's of modules in 2018 "however the actual revenue number we are counting on this year is still in the single millions", says Henry before he gets all "tremendous"...
"It is a tremendous ramp beyond that." They are planning to provide quarterly guidance, or at least more colour on China MABR and Nirobox sales. The expected 2018 China MABR numbers "are without that tremendous hockey stick which again - just like the Africa MOU - would be tremendous upside if that occurs faster than we are currently forecasting....because, again, the idea is to be on the conservative side."
Stanford: (Richard Irving) This plant will verify that we comply with "Title 22" requirements for reuse in California. It is to give research staff enough time to observe the behaviour of the unit and publish work which we believe will have international impact. It is also a reference site because we really needed one in California. We don't, however, think we have to wait for results or research to be published before we can book contracts locally.
SUBRE: Israeli plant will act as a great data reference site for initial sales efforts.
San Quintin: (Henry) "I'm of the very strong opinion that there is almost no chance that this project will not go ahead." Happy to hear him put it on the line like this. He has met with the Governor, he has a signed contract. He thinks it's politics. I've read the Governor himself quoted saying very similar things about the 3 desalination plants he wants to build. However, from my reading, i'm not sure they should be sticking to the expectation of first disbursement of revenue in Q1. This may likely push out to Q2 at the earliest imho.
Certification in China (I can't believe people are still caught up on this): We don't feel there are any certification obstacles for us to clear now in China. We are in the commercial phase. We have the Wuxi approval, we have multiple reference sites, and there is now no doubt that MABR works. We're seeing customers become more and more comfortable with MABR and also with Fluence as a company. This is because we have an established China team in place which shows us as a local operator, backed by leading Israeli technology, and a global company with a growing reputation.
Before they signed off, Bob Wowk noted that there will be a disconnect between the "receipts from customers" line item and recognised revenue. He just seemed to want people to be aware that these will be different. I've been told by someone that knows a lot more about running businesses than me, that this is normal and nothing to worry about.
Henry finished with "We want to make sure that we meet and exceed our target."
Us too, Henry
FLC Price at posting:
51.0¢ Sentiment: Buy Disclosure: Held
(20min delay)