Huge thanks again to Scot for organising a recording of this presentation. I find these recordings the single best way to gauge sentiment of management, as opposed to the carefully curated announcements. My side of the bargain was just to go through it and write some notes, which i've done below. Alternatively, it's hosted on my Soundcloud, which I don't think i'm supposed to link to, but it's pretty easy to find using my HC username. Or
@SEAH will send you the dropbox link I think, if you email him.
Anyway....
Emefcy was a blue-sky story about tech development, but with Fluence, that has now changed. In reality, to bring Emefcy's potential to market we needed the execution piece which the merger has delivered. We are now transitioning into being a real-world growth story.
It is important to remind ourselves that Fluence is not reliant on a binary outcome. It is not just about China. I would say that this seems to be how the market still views us, but yes, it's clearly true we have added some quite exciting products also focussed on the decentralised and middle-markets which have de-risked us. However, China was again the major topic of this presentation and the questions of the attendees. Until a level of success is confirmed, it's simply inescapable as the elephant in the room topic due to it's enormity.
CMABR is the result of 4000 hours of engineering. This has been done up front, and now the product is ready to be mass-produced. There is still some on-site engineering input required to maximise the location of each plant, however it is miniscule compared to what would need to go into designing and building individual plants for something of the scale of the China opportunity. This is the huge advantage of containerised MABR (CMABR) and other SPPs.
The theme regarding China/MABR I got from this recording was that the ramp, as we've previously been told, will be slow and deliberate. This is dictated by the approach of our partners, which reflects an appropriate level of caution around a new technology. However, a strong message from this presentation was that it is not a case of 'if', it is a case of 'when'. They cannot predict the timing of when the partners will jump. That's just a reality. However, their intel on the ground in China (our teams there are in constant touch with the partners and the local municipal authorities) is that things continue to move.
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We said we would sell 10's of modules this year - there happens to be a couple of plants that we are on-target to reaching - to 100's of modules next year, which means 10's of plants next year and then we will see that S-curve starting. When does that happen? I don't know. That really depends on how fast the Chinese feel they have to fulfill that - but the question is not 'if', the question is 'when'." - Henry Charrabe
This confidence comes from the simple facts that, "compared to other technologies we are better, cheaper, faster - that's important".
Richard went through the phases of the China/MABR engagement to date:
1) Chinese visits to Emefcy in Israel
2) MOU's and Partnerships
3) Demo Plants and Certification / the Wuxi Design Institute tick is local proof that it works, adding to the US EPA approval and the consistent Class 1A from every single MABR installation.
4) Commercial Contracts
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There will be one or two more before the end of the year, you know, a steady pipeline of those coming through....the next phase after that is not 'one or two' orders but 10 or 20, whatever, from each individual partner."
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That's where fast delivery from order, to get it to the customer and get the customer up and running is so important because as soon as they see it's working, then we can get serious about those negotiations on repeat orders." - Richard Irving
We know that the China factory has space for 4 lines, which can produce 7500 modules ($75m each line, $300m total for modules). However, we are now focussing on selling CMABR plants - not modules. The modules alone had a 50% margin. CMABR comes in at double the revenue of the modules alone, it has a 35% margin, but happens to be 40% more gross profit. As noted by Richard, with all 4 lines operating, and selling only CMABR - the potential revenue from the fully operational (4 lines) China factory is now $600m per year.
Out of our China partners, it is the private enterprises which are moving first (as highlighted by QSY), and the SOEs wait. The private partners will have tens to hundreds of concessions, whereas we know the SOEs could potentially order thousands, even tens of thousands, in time. However, the fact that this was mentioned makes me think that we may have to wait longer for movement from the SOEs. I might be wrong, just something i'm reading into it. I'll now be pleasantly surprised if CGGC, Wuxi Guolian, Sinorichen or Jinzi order anything before the end of the year.
China is a straight sale. To mitigate collection risk we are aiming in negotiations for a 50% down-payment before the units leave our factory, a further 20% when it reaches the site, another 20% when it is commissioned, and the remainder when it begins producing Class 1A effluent which Henry says is normally about a month later (not sure why). It will surprise no one that they are finding the Chinese to be very good negotiators. Just my opinion, but I think this is a very good sign.
In terms of competition in China, it's MABR, Activated Sludge (A2O) or MBR for rural / distributed deployments. We've heard all the pro's and con's but basically MABR is the best. There is clear daylight. A2O's big problem is that it can't guarantee Class 1A effluent, which is what China has become extremely hot on. That makes it a loser. MBR has a way higher capex and opex than MABR. Richard points out that sometimes relationships in China can trump the numbers in terms of plant performance, and Henry says that "if you are making a decision on a rational basis, there really is no reason not to have MABR." However, it's not as simple as that. We are the newcomer, and such is the scale and importance of the wastewater component of the 5YP, proof is required despite the clear temptation of the IRR opportunity the SOEs and private partners see in front of them. And proof takes time. We will have to share this market, to what extent remains to be seen, but we believe we will get a significant slice and it is a vast opportunity. Even a single-figure % of the market could propel us to a major re-rate, and why should we expect that worse technologies will win 90%+ of this market? They were asked if we'd noticed any competitor technologies winning significant contracts yet, and the answer was no. Seems the rural opportunity is still all to play out. Is the wait due to MABR testing? If they wanted MBR or A2O they could roll that out now, that tech has been present in China for some time already.
Nirobox: As we've been told we are getting ready to produce up to 100 of these little beauties in 2018 - should demand be there. We currently have a couple being shipped to North Africa and the Middle East for a subcontractor. It struck me that this supply circumvents some of the concerns about Arab regions dealing with an Israeli company. We can subcontract. If i'm a municipal authority in an Arab country, am I checking where every bit of material is sourced? Anyway, the fact that Niroboxes are winging their way to these regions suggests it's an issue we can work through. Aside from the Middle East and North Africa, South Africa is a major opportunity. We expect to see strong demand from Malaysia, Indonesia and Thailand soon too. We'll continue to sell direct, but selling to subcontractors helps expand our sales reach. Richard noted that you expect industrial equipment to be ugly, smelly, unpleasant - but that Nirobxes have the feel of a new car. VINCI were pleasantly surprised and bought 3 off the shelf for Mayotte. They won the project, but came to us for the tech. I like this.
AD / Waste-to-Energy: "It's a nice business". Only 4 global companies who do what we do, although lots of regional competition we can often expect to be able to beat them on cost, time to deploy, and with better tech. Growing into a leader in fish, meat, poultry wastewater processing and main supplier to Coca-Cola in South America.
SUBRE: Retrofits only. Instantly adds 20% capacity to a large/centralised plant, eliminates odour, no need for chemicals to achieve nitrogen removal compliance. There are currently 9,000 plants that we are aware of which do not meet the nitrogen removal requirements where they are situated. Also, if a large or centralised plant wishes to expand physically it is often restricted by space or the extreme capex (multiples of SUBRE) of new construction / engineering etc. There are other direct competitors in this market (Zeelung, OxyMem, assuming they are actually good to go), and other methods such as Granular Sludge (which wasn't expanded on). However, SUBRE is fuss-free and with clear benefits. The Israeli deal is for a very small plant and therefore only $500k. Normally, the average retrofit will net us $4-5m and SUBRE has a 50% margin. It can be built in our China plant using the existing line, and it's shaping up as a really interesting piece of kit.
Recurring Revenue: San Quintin, final approval from the local government in Baja California expected in 1Q18 which will trigger revenue recognition. It was $14m of slipped revenue from 2017, however total revenue recognition from this deal expected in 2018 is $24m. Of the $44m capex, 75% is funded by the North American Development Bank. The remaining 25% id equity funded, 51% of which is from us, and 49% from our local partner. After construction we get recurring revenue of $11m per year for the next 27 years, and then a % on the operation and maintenance of the plant. BOT is just one model. We are also offering Lease / Buy Back options for MABR and Niroboxes. We offer standalone service an maintenance contracts, and recurring contracts for spare parts and chemical treatments. Anyone think these guys won't close with their exclusive position to negotiate the $100m African drinking water plant? I don't.
Stanford highlights how things can be delayed. It's the same for commercial customers. It can be unpredictable, and very difficult to know when a customer will say "ship it". However, importantly, we have so many irons in so many fires that, at any given time, we know one of them will come in.
One of the most interesting pieces of new information was on a number of tenders in South Africa which "are on the street now" to use Henry's phrase. Crucially, written into these tenders is a requirement that the winner needs to be able to deliver on their solution within 7 weeks. This gives the advantage to packaged plants, and we are one of only a few companies who can actually deliver on this. Henry reckons that even if these tenders are won by others, they might well come to us for Niroboxes, just like VINCI did in Mayotte. We apparently have a very competent partner in South Africa who have very strong local relationships, and we already have a Nirobox reference in Richards Bay South Africa. Currently there are 6 or 7 of these projects being tendered, and they would require between 5-10 Niroboxes per site. There's also a new tender coming on the 1st December which would require the winner to produce 50,000 cubic metres of desalinated drinking water per day within 6 months. We can achieve that, and it would total 35 Niroboxes (remember we are aiming for 40 total sold in 2017). Whoever can produce the most apparently wins that tender. Presumably, as Niroboxes are scalable, we can produce as much as they want. "I would think that's a great tender for us." says Henry.
The Share Price: Back to the Emefcy blue-sky, but in Richard's view we now have a less speculative, more bankable growth story. It feels like we are in a transition period and it will take time to get the insto's on board. We need to keep getting the word out, because some institutions don't even know about us yet. The numbers from the Canaccord report are very credible ($1.37 base case) according to Richard, although do not include the African MOU.
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We need to start putting out more guidance, other than just revenue", said Richard right at the end. This is something that I think we might have Scot to thank for, because I know he suggested it to Richard directly. We can therefore expect some visibility on future bookings and pipeline expectations. Some guidance is possible, but Richard was frank when he said that the really difficult thing is knowing exactly what quarter the revenue might fall into. Still, nice to have the headlights on.
That's it from me. Thanks again to Scot for the recording. Seems you even got the ok from management to make it, and it is very much appreciated. Well done.
(20min delay)