Thanks again so much to the fellas who attended the meetings and posted your notes. You were either scribbling away or have remarkable memories because after going through the recording you have covered just about everything! We're very lucky on this forum to have people with a passion for this company. It comes through strongly.
Always good to hear straight off the bat that our fearless Chairman hasn't sold a single share and isn't planning on it. I'm comfortable he is the type of loyal patient long-term holder that he brought Emefcy to the ASX to find.
He noted that the reason Pond went in on Emefcy was because the tech wasn't just new and different, but it is "highly differentiated" and is set to replace the incumbent tech globally. Again the comparison to mobile telephony is used. No lines, equals no pipes. It's a good, as well as exciting comparison.
July/August are slow months, but there has been a lot coming in through Sept/Oct. They are negotiating first commercial contracts in China and expect movement after Oct holiday (which I think ended on the 8th?). The Africa MOU, 3 WTE projects in Ecuador, and the first SUBRE contract happened in this time. They're intention is still to over-deliver on expectations.
US$90m is still the target. One contract has $11m of work already performed so they can invoice, however it requires the legislature to sign off. This is an example of a situation where, outside of their direct control, revenue can slip from one Q to another. They emphasised strongly (leading me to believe that this is pertinent and we should go right ahead and expect it) that when this happens the revenue hasn't disappeared. It is delayed only, it is in backlog. With large industrial and municipals as clients, we should probably understand that this is just the way of it. However, saying all that, bookings performance is actually above expectations.
The cash already in hand will take us all the way to profitability in 2019. No more capital raising. Even if a highly desirable investor came along now, they'd seek to somehow satisfy that interest from the existing register. Speaking as the second largest holder Richard said that no-one wants to take on any more dilution.
The word on India was "no time soon" and "too much to take on at the point". In addition "too unpredictable and corrupt right now" if I heard them right, but all open in regards to the future "if the riggt circumstances arise". To me, this speaks to focus, which they were very strong on later. Only imo but India, especially post the Presidential announcement last week is a compelling opportunity. However, our prime focus right now is correctly China and if we can successfully launch MABR there - I think India will come to us in the years ahead. I was surprised to hear corruption mentioned. India is a portrait of disorganisation and disarray, but we've made a point of presenting ourselves as a go-anywhere firm, and while keeping it on the back-burner as we focus on our primary territories is fine - I question that reasoning especially now that there seems to be solid intent and political will to address and fund water reform there. In the meantime they "want to focus on where we know we can score for the company". The next board meeting, end of November, will be held in China, incidentally.
On China, Richard said something which I think is worth quoting verbatim. I rewound a few times and I think I have this right although parts were muffled...
"And what you can expect to see coming from China are initial commercial contracts. We have moved beyond the demo phase. We have the certification from Wuxi, which is a national institution / design institute. The partners are ready to move forward. We're of course going through crucial (or was it 'brutal'?!) endless Chinese negotiations because they'll whittle us down to the last penny. But they are talking commercial deployments, so we'll be booking those, we'll be shipping those from our China plant this year, and then see the ramp beginning in 2018."
Nirobox: hopefully 40 shipped this year, and ready if the demand is tgere to increase that to 100 next year. They must be $700k a pop, as revenue expectation this year is $28m. That's $70m potential next year from Nirobox alone. This also must have been the expansion of the Argentina production facility mentioned at EGM and Aug business update. Each Nirobox has a 25% gross margin rate and provides fresh water for 10,000 people, and it doesn't take years (Melbourne and Carlsbad desal plants were mentioned), but months - and in future - weeks, to install.
MABR has 50% gross margin, with 35% for CMABR. "People in China don't want to buy modules, they want solutions, and they are going to buy thousands of plants over time."
SUBRE: retrofits only, so we are not getting into centralised bidding processes. There are thousands of plants around the world which aren't compliant with current regulations and need upgrading. SUBRE can do that by adding 20% treatment capacity, for lower opex, and no need for chemicals. The Israel test case will be crucial as we will us that data for sales from 2Q18. It is worth noting that SUBRE goes directly head to head with SUEZs Zeelung and Oxymem. The two MABR competitors. As far as I know, neither of those iterations have actually been deployed in the field in a containerised form yet, never mind hit production in that fashion to rival us in places like China (although there is a photo of an Oxymem containerised plant online, so the intent is probably there for them). SUBRE provides 50% gross margin.
There is zero collection risk on the African MOU (which sounds like a fait accompli to be honest).
Fluence wants to sustain 20-30% growth year on year on year. This doesn't include demand from China, just growing the business in the markets we currently get our revenue from. We have the team, and the cash to reach profitability in '19 and the global leader in the decentralised water market.
Q: RaaS, is it still in the plan?
A: It's a new concept for many, so it's taking a while. We are currently in negotiations on a 15y lease or recurring revenue contract with a customer which we hope to close in the coming months. We have won the San Quintin BOT project, a 30y recurring revenue project. We are negotiating a lease contract in Europe. We are, however, not doing this in China. Richard mentioned that in the Emefcy days we used to talk about RaaS, and that it is still an opportunity we will address, however these BOT projects can deliver much bigger chunks or recurring revenue more quickly, and we can bring in finance partners for longer-term off balance-sheet debt. The team are off to Brazil on Sunday for the IDA (desal) conference. They have lots of service and maintenance contracts (which are recurring revenue) in LatAm and will be pushing for more. They are also having their semi-annual strategy meeting with the Fluence leadership team there.
Q: When are the other China production lines coming in?
A: "When we get the demand. Very simple."
People laughed, but this is just brutal honesty. The orders aren't there yet for another line.
A new line will take 90 days, and cost $1.5m from the green light. Henslow just visited the production facility (to make sure it exists, they joked). Has been mentioned, and a little concerning maybe, that other provincial governments have approached us to say they will provide orders but they want them produced in their region! Eh?
Again, coming back to MABR being a replacement for the two incumbent technologies, activated sludge and MBR. AS often doesn't meet the heightened nitrogen removal requirements that China is now extremely hot on. MBR is beaten by MABR on both capex and opex. MABR is the clear best tech going, but it's problem is that it is new. Henry said that a client might have 100 plants, but they are cautious and might order 2 or 3 MABR units and keep the other 97 as the old technologies, especially since we are a foreign company. However, this is our way into the market. This is how ramps start. It takes time, but our tech is king. The Chinese want proof. Would you like to be an SOE explaining to the Chinese Central Govt that you bought a bunch of shipping containers that have stopped working? Neither would I. They want proof, and we are going to work with them like this. The scale of the issue, and the mutual benefits dictate this as the best policy.
Q: What keeps you awake at night?
A: Henry answered this, and it sounded like he'd seen it coming. There were no potential icebergs or anything.
1. Not trying to do everything everywhere all at once. The pipeline is so hot they need to focus and stay on strategy.
2. This was muffled but I think it was around projects. He mentioned Carlsbad taking 17 years and that he can't afford to get bogged down in something like that.
3. Talent recruitment and retention.
Stock standard stuff.
Richard added that we are not the blue sky Emefcy anymore. We are now a growth story. We are on a path of steady growth over time. Then Henry mentioned that people who know the water industry, and know where things are headed, like what we are doing, but we need to keep telling our story and building the business.
Q: What needs to happen to before the market recognises FLC for what it is and the sp can rise?
A: (Richard) Not to be patronising, but more buying and less selling. We need to encourage the instos and create more buying.
A listing in New York is on the cards in a couple of years but only if the market cap warrants it. They don't want it to be a junk stock, they want proper coverage by analysts etc. They would prefer a dual listing.
People have asked them in regards to China, "when will it all start to happen?" and the honest answer is they don't know exactly. They have their 5YP "which is 5-7 years in China speak". So, we just need to ensure we keep spend under control and build the business. $100m Africa MOU isn't the only of that kind of opportunity in our pipeline.
Q: SUEZ, what is the big boys view of us?
A: Henry knows a lot of the top GE guys (who merged into SUEZ recently), and me some in Chicago (WEFTEC) recently. They are a cruiseliner, whereas we're currently a motorboat. Henry said he presumed the question related to potential takeover but there is no talk of that - however we are getting a lot of attention. They are a bit envious tgat we already have MABR commercially available and running perfectly in the field, as Zeelung isn't yet widely available (my note: we'll get even more attention if SUBRE starts being adopted to retrofit SUEZ plants before Zeelung is ready. That'd be fun). We (RWL I presume) have partnered with SUEZ for a project in Belarus, and are bidding with them for something in the UK. We've also told them that we'll take projects they don't want and purchase membranes from them.
Regarding announcements, they are worded strategically. Industrial players often don't want their name on them. They don't necessarily want to be in the news for the levels of waste they create. Even when we can mention the client, as in the Africa MOU, it's a double-edged sword. It might make for a better announcement and impact on SP however it wakes up all of the competition. A Spanish competitor was straight onto Henry after the Africa announcement wanting to be involved as a partner and seeking details of the govt in question. What helps the business perform best will remain Henry's priority - not the SP.
Finally, the IP question. We are well protected by patents outside of China, but they will develop MABR one day. However, whilst the central govt is red hot on class 1A effluent we are currently the best player in town with significant first mover advantage on this gigantic one-off opportunity. We keep updating to next gen versions of MABR making them better, more adaptable, and cheaper. Henry says he cannot see a copier catching right up to us on MABR.
That's it from me. Some new bits. Some we should all be very familiar with by now.
Subsequent to these meetings, great to see that article and the reiteration that 10's of modules are ordered/booked. Hopefully that's the SOE's and hopefully it translates to double-figure CMABR packaged plants making their merry way into the field in China in the coming months.
Til the next news.
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