Thank you for standing by, and welcome to the Fluence Corporation Quarterly Update Q1 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. Richard Irving, Chairman and CEO.
Please go ahead.
Thank you, Harmony, and good morning to those in Australia. Good evening to those joining from the U. S. As you will have seen, we are happy to have filed our business update and 4C within the last hour or so, and we're very comfortable with the results that we've been able to share with you for the Q1 of the year. We see that we're making strong progress on repositioning the business and we also have a healthy pipeline of business in all of our key geographies, which is a reminder, our China, Southeast Asia, North America, around water as a service, and the Middle East.
We've now sold 250 MABR plants. Those of you who remember the early days back in 2017 when we sold our first plant and it was very much a brand new technology. And in the water space, that can often take a decade or more to become more widespread, Achieving sales in 2 50 plants in the intervening years is quite impressive to say the least for a new technology and we seem to be absolutely the dominant player in this particular technology space. So it's no longer new tech and it's really time for us to find and build very strong partners just like the kind of volume partners we already have in China. This is how we'll drive our growth rather than trying to sell one plant at a time.
All of our 3 existing volume partners that we had prior to this quarter are ordering more plants from us. So all are actively ordering. And we're extremely pleased to welcome the China 3 Gorges Corporation, their environmental subsidiary, because of the fact that they are such a well known company nationally and internationally and indeed active on a business front throughout China and in many countries around the world. So this is a we think is the next phase in our growth as we go from the continuing provincial partnerships that we have to national scope partnerships. And we're very pleased too that we were able to receive additional orders from China Rail indicating that they're beyond testing the initial plans and it's about broader deployment.
We're also very pleased to be able to achieve our desalination win that we did in Taiwan. This really does once again prove that our ability to deliver our narrow box containerized desal solutions in such a rapid time is one of several reasons why we continue to win orders in a very competitive space. With MABR on wastewater treatment, we stand far apart from the competitors. With narrow box and desal, it's a closer fight, but we do have some critical advantages and time to delivery is a key one. The Ivory Coast project is executing very well and we're very satisfied with progress there.
And most importantly, we were able to submit all of the paperwork and get all of the work completed so that we were able to build the next milestone on time on April 2. And indeed, the plants we're building in Cambodia are also progressing very well towards commissioning in the near future subject to COVID restrictions. These will treat wastewater for about 100,000 people and are at the center of the new cities. This will be a very attractive reference for MABR throughout Asia. As Francesca will describe in a moment, cash is on plan.
And you'll notice that there was significant cash outflows in Q1 after some substantial cash inflows in Q4. Francesca will cover in more detail, but what I'd like to say is that remember that one of the reasons we're pushing hard towards smart products and recurring revenue is because these are much higher margin businesses for us. So with a large project like Ivory Coast, which is a very profitable project for us, the margins are in the mid teens. And so as we execute that project over the next 2 years, let's say for the sake of argument, the margin is 15%, that means you have 85% in cost. What that means is for every dollar that you receive, dollars 0.85 goes back out the door.
So you can expect some cash up and down on that project. But the most important thing to say is that the work is because of the work we've done, because of the payments we've received, the project remains overall cash positive and will be profitable and a good reference to us as we transition over to smart products and recurring revenue dominating our revenue mix. And finally, I'd like to comment on COVID. COVID headwinds do remain. And what I mean by that specifically is the fact that in the number of geographies, particularly in Asia, travel means quarantine.
Going from one country to another often means 2 weeks in quarantine. This has certainly not stopped us from doing business as
you saw last year. We were able to hit guidance despite the COVID lockdowns and quarantines, but it is slowing down the
pace of face to face meetings. And so this is something that we need to do whatever we can to work our way around. But I also feel personally a sense of optimism that with the dissemination of vaccines that the situation will alleviate over time. So with all of that in mind, we continue to reaffirm guidance. And now I'd like to offer Francesco the chance to make some comments about the financial details of Q1 for you.
Francesco, please go ahead.
Thank you, Richard. Fluence had strong revenue growth in key areas with unaudited revenue of $18,200,000 for Q1 2021. Revenue from Smart Product Solutions is building nicely. It was up 28% compared to Q1 of 2020, while China revenue showed strong momentum, up 38% on Q1 2020. The future revenue focus of the business is on Smart Product Solutions, and new orders in this segment were up 36% compared to Q4 2020, including $5,000,000 in China.
Fluence Management continued to focus on efficiency and on managing expenses carefully. On this note, our operating expenses were down 10% on Q4 2020. We are pleased that after reducing operating expenses in 2020 fiscal year, we continue to be able to take the cost out and improve efficiency further. During Q1 2021, we received $10,400,000 of payment from customers with net cash used in operating activities of $20,900,000 in the quarter. This is in line with expectations and reflects the large inflow received by the company in Q4 2020 related to the Ivory Coast project.
These inflows are funding the outflows in Q1 2021 and after as work on that project proceeds in the normal course of events. Fluence has a strong cash position with cash and cash equivalents of $14,900,000 at the end of March 2021. In addition, the company holds $27,400,000 in short and long term liquid investment that provide adequate operating reserves. Finally, Fluent had a contract backlog of $191,000,000 at the end of March 2021, including $23,000,000 for Smart Product Solutions. Looking ahead, the guidance for Smart Product Solutions sales for the coming year is underpinned by existing strategic partnership and the potential for further bulk orders in China.
Fluent's expect 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 Richard.
Thanks, Francesco. And before we go to Q and A, Harmony, may I ask you just to remind our audience about how to submit questions.
Thank
you.
Great. Thank you. So I see, I think, 3 questions here regarding China, which I'll kind of group into a single answer and invite you, Francesco, to make any remarks as well. What we saw in China, if you look at the progression from 2017 to last year, some of which was captured in the slides we shared at the last quarterly update, you'll see there was a pretty steady ramp in progress, some growth in 2020, but not as much as we anticipated because of COVID. COVID definitely slowed down the number of orders.
Nevertheless, we're continuing to see business moving forward because of the fact new partners like 3 quarters are coming on board. The situation in terms of timing of orders in China is always a little difficult to know ahead of time. The Q1 generally for our business, China and elsewhere, tends to be slower in Q1 in China. That's in particular because of the spring festival holidays, which is typically about a 2 week period when people are off and a lot quietens down before that. And in the case of Q4, for example, is also a big quarter in China because there's a rush to get to use our budgets before the end of the year.
But there's no question that as we progress from provincial partnerships, the national partnerships, the potential for large orders is strengthened. And we're from a pipeline perspective talking about quite a few large projects, but I really couldn't give an accurate estimate of time frame. I just feel that we're seeing very strong demand in China because we continue to believe that our technology, MABR, delivers the required Class 1A or even higher standards of wastewater treatment at a lower cost, both CapEx and OpEx, less chemical use and less energy use than any other alternative approach. And that's why if people care about quality, they will come to us. And that's why we're even in a competitive market like China, we're doing very well.
The production facility continues to operate, sometimes going to multiple shifts, sometimes a single shift is what's required. And remember too that in addition to our production line that makes the MABR module, we also have 2 assembly facilities in 2 different provinces that can build the spiral containerized units if we run out of capacity in Changzhou in our main plant. I don't know, Francesco, any follow on comments to that?
No additional comment on that. I see a question about the cash flow in Q1. As we said, it's been negative about $21,000,000 This reflect is mainly driven by the cash flow profile of Ivory Coast. You will see that if you combine the last two quarters, the overall operating cash flow is positive by more than 13 $1,000,000 This is due to the fact that we are incurring cost and collecting in 2 different quarters on this project that has been the case of Q1. Q2 might be positive.
It depends how we negotiate some term with subcontractor that we are still finalizing on Ivory Coast and how the work allow us to get delivery of equipment and pay related suppliers. The project overall is positive and will continue to be positive from a cash flow point of view. Also, we are perfectly on schedule, on time. And today, we don't anticipate any delay or unexpected problem in the future.
Great. Thanks, Francesco. And I think there's a question here about what's the basis of our confidence in delivering on guidance. And specifically, I'd comment around guidance for us has in Smart Product Solutions, in order that we would hit something between $35,000,000 $50,000,000 depending on how quickly the COVID headwinds go away and also be EBITDA positive for the year. So on the smart products, as noted in the business update that we released on the market this morning, you'll note that our contracted backlog is $23,000,000 for smart products.
So if you add that to the I believe it was $3,700,000 that we sold in smart products in Q1, so there's $27,000,000 towards that $35,000,000 there because we do anticipate that backlog will playing out within 2021. In addition to that, as we've commented previously, the 3 volume partners that we've signed agreements with, namely Kaityan iTest and Tangent, all three of those, we estimate and it's only an estimate, but we estimate that there's still about $50,000,000 more in business that should come in from those contracts. I don't believe all of that will come in, in 2021, although it was originally anticipated that when those agreements were signed because of the delays of COVID. So I suspect that will be this year and next. But that's really the basis of our confidence on smart products.
And when you combine the profit we make from that with the profit that we will make on Ivory Coast this year, that's what stands behind our ability to deliver EBITDA positive, bearing in mind that we continue to make good progress on operating efficiencies. I see there's a question on what would our target application areas be in the U. S. Market. This is something we haven't actually talked that much about in the past.
The situation in, let's just say, North America generally, so that for us would include certainly the U. S. And the Caribbean, is that in many areas there's a water scarcity issue and water or wastewater treatment is surprisingly expensive. Indeed, the same is true in Australia. And for example, in the Caribbean, where you may pay an average of about $3 or more per cubic meter U.
S. That is for fresh water, frequently resorts in the Caribbean are actually using desalinated seawater to irrigate their landscaping. Well, with MABR, you can get very high quality treated wastewater that you could use for the same purpose at a fraction of the cost. And so for those kinds of customers in a water stressed area where the prices are high, which certainly applies to the Caribbean and quite a few parts of the U. S, the proposition we can make to customers is that we can potentially save them as much as 50% on their water bills and all they would need to do is pay us for the water or for the wastewater treatment.
So we could sell both MABR and Mirabox into those kinds of projects, but on a water as a service basis. So we don't charge for the capital equipment. We simply have a long term take or pay agreement with them, just like we currently do with the Hilton in the Bahamas, which is based on desalination. That's a 15 year agreement, take or pay agreement to buy water. That can be very attractive from an IRR perspective, often in the mid-20s or higher.
But that's where and what we really believe that at least in the near term, commercial customers is a secret. So that would be resorts, for example, but it could also be commercial buildings or managed real estate. And all of those are opportunities we have in the pipeline. Can't make predictions on how quickly those will close, but certainly, there seems to be a strong interest.
Richard, there is a question about the backlog. If the €23,000,000 we mentioned on SPS includes the 3 bulk partnership we have in China, It does not include the expectation from those partnership. What we include in the backlog are firm committed order to the company to deliver. So those $23,000,000 does not include that.
I see one also, Francesco, in regards to cash outflows relating to restructuring.
Yes. Let me take that. The question is if we expect additional outflow related to the restructuring. Yes, we expect additional outflow. The restructuring, to be clear, is related to repositioning the business and accelerate the transformation to a product based organization.
This process, as you know, started in November with Richard taking the current position as a CEO and will continue during the 2021. Most of those costs have been accrued from a cost and financial reporting point of view in 2020, profit and loss. But the outflow happened in Q1 will continue for the most of 2021. It might even be that there are additional costs that we will incur in 2021 that have not been accrued as we reallocate resources globally to accelerate the transformation to from CES to SPS.
Great. Thanks, Francesco. And I see a couple more questions here in regards to Three Gorges. So the discussions and the relationships we have with Three Gorges goes back several years to initial exploratory interactions during that time period, as we understand it under the various 5 year plan provisions, both the last one and in particular the current one that just started this year. The Free Gorges Group, as we understand it, has been given the central role in basically sorting out the Yangtze River Basin in China.
And we've seen some sources that have been translated from Chinese that say that they will be spending literally 100 of 1,000,000,000 of dollars on that. Now let's be very clear, that's not on just wastewater treatment. It's on a lot of things, including soil remediation and pollution cleanup and so on. But the opportunity that they would have we have as a major part with them is very real, but still in the relatively early stages. We did sell them a project some time ago.
That was really kind of a test project for them. That went extremely well. The results were excellent. They were not only impressed with what we were able to do, but how thoroughly we were able to document the amount of data that we were able to collect. And I think it's really projects like that with them that convinced them, okay, this passes all the tests.
And now that we've gone on to this new project where we're talking, I believe it was 29 spiral units in 14 different towns and villages. That's the kind of volume project that we would hope and anticipate for going forward from them in many more cases. Because they're active nationally, they can engage with a lot of local partners and thereby tackle a lot of projects in parallel. The manpower limit is not on their side. So we're very excited about that, but it's very early days and very hard to predict volume.
I see also a question on municipal opportunities for MABR in the U. S. I have to say that the municipal market in the U. S. Is incredibly fragmented, because I understand that there are about 55,000 water utilities, the average one of which connects to fewer than 3,000 connection points.
And typically, these are very conservative and very, very slow to move to new technology. And so we feel that this is not an early adopter market and that frankly we can far better look for leads with commercial customers around water as a service, as I mentioned a few minutes ago. We think that's the right target for us in the near term. Longer term municipalities certainly make sense because MOBR is such a high quality solution and because we believe the world will go to fully decentralized water and wastewater infrastructure. What that means is lots of plants and those pipelines that you spend so much money on just basically don't go away, but there's far, far fewer of them.
The consequence of that is plants will be in neighborhoods. And if plants are in neighborhoods, nobody's going to want to see, hear or smell them. And with MABR, that's what they get. You can disguise the plants with foliage and so on. Most importantly, they don't produce odor.
They're extremely quiet and they have very, very little maintenance requirement, so they can be automated, which is what you need in that world. We think that therefore is a very, very powerful door that is open to us, but again, not in the municipal market in the near term.
So Richard, there are a couple of questions that I will address. One is in relation at cost control going forward. As I said, we'll continue to improve our efficiency to integrate operation. And naturally, as we increase our business in term of standardized solution, we are driving down our overhead associated to CES. But also we need to be aware that we are growing in specific region like China.
So we have strict control of cost, but at the same time we are growing. So we expect 2021 to be slightly less probably than 2020, but we think we achieved an optimum level of efficiency and integration at this point. There is another question in relation to what is excluded from the underlying EBITDA. What we normally exclude are non operating, non recurring cost. Those could be restructuring costs, for instance, or where the write off of the San Quintin asset in 2020?
Great. Thanks, Francesco. I think, yes, there's a question here in terms of the Taiwan order, how quickly this is going to be up and running. The units are on their way by ship to Taiwan at the moment. So that's all happening in real time.
We would anticipate that in the near future, that plant will be up and running because commissioning of a desal plant when you use neuro box is very rapid. And there's also a question on Australia and possible sales in Australia. It certainly is true that MABR and for that matter, Neurobox could be incredibly useful in many, many applications in Australia to communities and to potentially to commercial and industrial customers. The concern that we have at the moment is simply that we need to go where we see not just a door that's open, but where we're almost being sucked into a market because of the amount of energy that is in terms of deploying technology. So China, of course, you know the story well about the higher standards that really came into effect in rural areas in the last 5 year plan and are being continued in this one.
That's incredibly a powerful market for us where we can sell tens of plants in one order as we just did. But at the same time, we're seeing similar situation in Southeast Asia. That Cambodia plant is the 1st wastewater treatment plant of any kind in Cambodia, and it's going to treat wastewater for 100,000 people, but it's a smart product and it's based on the Subray MABR. And then finally, in the Philippines, much stricter water standards and the threat basically to non compliance plants, you better get compliance. This is a great opportunity not only for a spiral horse, but also using Subray in some cases to upgrade plants that are not compliant to bring them into compliance.
And that's why already recently we have 8 MDR plants in the Philippines and anticipate a lot more. So we have to go where the doors are open to us. And unfortunately, we are limited, but to the extent partners can help with that, we're very, very open for that. Well, I think we're running out of time here. There's a question here about why I got involved in the business and is that thesis still intact?
Absolutely, definitely. My fund invested in what was then MSC when it 3 people and MABR was a glimmer at someone's head. And now we see that playing out. And at the same time, the accelerating adoption of strict standards, the fact that those are being enforced and there's a very strong trend for decentralization. We think these are all incredible opportunities that are directly relevant to the products we have.
So thank you all very much indeed for joining. And we look forward to speaking with you again at our AGM, which is coming up in May. You should have received a notice of meeting for that in the last few days. If not, it's on its way. That's on May 27, and we hope that some of you can actually be there in person.
Thank you all very much. Good morning and good evening. Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.