Thank you for standing by, and welcome to the Fluence Corporation Quarterly Update Q2 FY 2021. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Irving, Chairman and CEO.
Please go ahead.
Thank you, Lexi. 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 quarantines present a major headwind for our business in terms of slowing down orders, not losing them, but slowing 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 Mexico, particularly now in Australia, then 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 awful 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. This of course all of that helps to drive fact that we were able to be EBITDA positive in Q2 and cash flow positive as well by $13,000,000 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 ASX, when some of you came into this story back in 2015 2016, we were a wannabe. We were a blue sky tech story with this wonderful innovation in wastewater treatment called NABR, 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 treatments 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 the presentations we've had 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 Siamo Dzil in Cambodia, plant that's treating the wastewater for 60,000 people. So that shows we can scale this from those containerized spiral 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 rest stop, for example. And so going from that Cambodia plant then, which is now operating at scale, down to what we've been able to achieve with the Aspile unit, 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 esteemed competitors who we do respect very much are clearly earlier on in the adoption of their technologies and we feel that this really does state pretty clearly our dominance in this field of MABR and dominance in the field of quality waste water treatment. So we're very excited about that and very excited about what that implies.
But the future where we now see more and more partners coming forward saying, we recognize where you are, we know this stuff works, 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, Huberti Test, 3Gorges, Kaikian, Leon and Huahong and North 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 proof, 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 with 3 plants sold in Q2. In the U. S, we now have 10 NAVR 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 over a 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-twenty 17,
you'll notice there's been a
change in the curve. And that change is something we certainly intend to keep moving in an upward direction going forward. That doesn't mean every quarter will 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 corner 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 amidst the scourge of COVID, which 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.
Thank you, Richard. In the Q2 of 2021, we had an audited revenue of $27,200,000 up 49% on Q1, twenty twenty one. For the first half, the unaudited revenue was 45,400,000. During the quarter, we collected 40,400,000 from customers, achieving operating cash flow positive of 13,000,000. Underlining EBITDA for the 2nd 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 twenty twenty one 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 continue to provide support to help us meet our guidance. Revenue in China in the first half of twenty twenty one 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 twenty twenty one 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-nineteen, we continue to be able to take cost out and improve efficiency further. Q1 has a strong cash position with cash and cash equivalents of $23,700,000 at the end of June 2021, up from $14,900,000 at the end of March 2021. In addition, the company holds €34,800,000 in short term and long term liquid investments that provide adequate operating reserves. Net cash generated from operation in Q2 was positive $13,000,000 The net cash inflow for the quarter included a $20,000,000 payment for the 3rd milestone under the Ivory Coast project as we communicated to the market on June 4.
Fluorance has a contract backlog of $175,000,000 at the end of June, of which $134,000,000 related to Ivory Coast project and $18,700,000 to Smart Product Solutions. Fluence expects to deliver Smart Product Solutions revenue in 2021 of $35,000,000 to $50,000,000 and to achieve another year of positive underlying EBITDA. I will now hand back the call to Richelio.
Thank you, Francesco. So I think let's go to the Q and A here. And Lexi, would you mind reminding the attendees if they'd like to submit a question how to do so?
Thank you.
Thank you. So I see a question here with Cambodia and I have to say that our shareholders, our investors are very producing 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 we'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 treatments in a country that prior to our initial plant getting up and running had no biological wastewater treatment of 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 4 C being filed in Australian dollars. I don't think that's correct, Francisco. I'm pretty sure that
I can Yes.
The land is being filed in U. S.
Yes. I can take this opportunity to answer your question. Yes, the 4C is all U. S. Dollar.
There is one heading in the column that is, let's say, the Australian dollar. All the figures are in U. S. Dollar. I will answer a few more questions.
There's a question about Ivory Coast when 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 milestone 3. Percent.
There is a question on our bank deposit, if we can reduce our loan instead of investing in short- to 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 project financing in water as a service type of contract.
Great. Thank you, Francesco. And I think there are some questions in regards to the U. S. Market.
I think the thing to bear in mind that 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 at the municipal level tends to be incredibly conservative. So we've had customers, for example, that are operators of rest stop, highway rest stops here, much like what we've done in China, the Kuze AI test and others. We've 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 improve in water stressed regions, particularly where they're paying high price for electricity, which tends to mean that your water costs will also be very high.
So that's, I think, the goal in the U. S, good pipeline of projects, but too early to talk about any specifics about those. I see also a question here in regards to NABR, 5 NABR plants sold in China to new partners. I guess what we meant to say there is that NABR plants in China, 5 NABR plants were sold in China to 5 new partners. So these are initial partners.
In other words, we have the 3 volume partners that you know about from agreements signed previously. We have a national partner in 3 Gorges, a 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 just 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 along new or upgraded lines. 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 is a very small opportunity for us. Even though it's Sudre, it's I forget actually the capacity, but it's only a few tens of cubic meters a day.
But it's symbolically, of course, 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 NABR can produce than this being a commercially large wind
We've seen several questions on the EBITDA. So we've been EBITDA positive in Q2. We will be EBITDA positive for the full fiscal year. Year to date, for the 1st 6 months, you will see in the OIBDA financial, EBITDA is still negative. We are trending towards the breakeven and turning positive in the second half.
The driver is the revenue and the margin of this revenue. We disclosed that revenue in Q2 is 27,200,000 out of the €45,400,000 of total revenue for the 1st 6 months. So it's almost 80% more than 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 as a quarter EBITDA positive.
Yes. And I think let's just see some of the other things. I've asked a question here about floods in Asia affecting us. Fortunately, the answer is no. We have not been affected by those floods, but they are certainly a major concern in some of the areas there, 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 a pandemic emergency, but still reducing our fixed costs. And this is due also to the transformation of the company moving away from the traditional customized engineered solution towards a standardized product, SPS segment. And this makes really the use significantly deauthorized needed to support the business.
Yes. I see a couple of questions here. So one is about near box sales in the Middle East. We continue to see very strong demand for narrow box where people care about decentralized sources of fresh water. In other words, lots of small plants versus 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've built several plants on the Mediterranean coast, on the Red Sea coast of Egypt, a large plant for a new city in Uman Sura is in progress at the moment and quite a few more projects in the pipeline. So there 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, then we're not going to win because we're not going to win on price. So if you care about the footprint efficiency, in other words, there are narrow boxes really, really high capacity for a very small footprint. If 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 exploring others to follow because there are a lot of water stress issues in Southeast Asia. And a related question to that about SBS 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 1 because the wins came in on March 31. And we really our policy is basically to announce wins of a certain size, the threshold currently is $3,000,000 or if we believe it has particular strategic value. It just so happened that the announcement you 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 it just so happened they all came in on the same day. So we do tend to announce strategically valuable or deals of sufficient size.
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 companies' 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 sell Mirabox in China. MABR is an Israeli technology. Israeli technology is of many kinds of 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, where Israeli technology is 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 costs. We took a 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.
Yes. And in addition to that, Richard, most of those costs were accrued from a P and L point of view in 2020. So we are having some cash flow impact this year, but there's no impact on the P and L.
I. Yes. Yes. And I see a question here just about some of the languages we've been using about quarters. We work on a calendar year, not the Australian financial year.
So basically, Q1 means March 31 quarter ending Q2, the one we're reporting on here is June 30. And there's also a question about SPS as a percentage of 'twenty one revenues. Well, we haven't given out revenues for the whole company. So that's a difficult question to answer specifically, but we know we have given out guidance that smart products revenues will be in the $35,000,000 to $50,000,000 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 it 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 that 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 costs that 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 product, 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 or 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, as the growth of the top line in a much more sustainable way than custom projects, which is so difficult to project in terms of when they'll happen and when the revenues will come in. You 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.
And Richard, there is a question about the revenue order than SPS, in particular, for the first half, recurring revenue for market and customized engineered solution. So for the 1st 6 months, recurring revenue has been €4,200,000 And when it comes to customized engineered solution, where we are not booking new of The total revenue for 6 months, excluding other costs, was about $8,000,000
Great. Thanks, Francesca. And I see also a question about the site in Israel where we're installing the Silbury plant. I forget the name of it, but it is if you look up on Wikipedia, 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 Jordan River. So it's a site that receives more than 1,000,000 tourists a year. So that's, of course, one of the reasons for the whole wastewater treatment need there and the high quality solution. So I think we've gone to most of the questions. There's probably 1 or 2 more here we may have missed out on, but really appreciate everybody being on the line.
Remember, we're 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 very much appreciate your time in joining us.
Thank you for a lot of excellent questions. And we thank you also for your continued enthusiasm and fluence, which for which we share very strongly.
Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.