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Synthesis Energy Systems, Inc. (NASDAQ:SYMX)

Q2 2014 Earnings Call

January 29, 2014 4:15 PM ET

Executives

Susan Roush - PR

Robert Rigdon - President and CEO

Charlie Costenbader - CFO

Analyst

Robert Smith - Center for Performance Investing

Operator

Good afternoon everyone and welcome to the Synthesis Energy Systems Incorporated Fiscal Second Quarter 2014 Financial Results Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note today’s event is also being recorded.

At this time, I would now like to turn the conference call over to Ms. Susan Roush. Ma’am, please go ahead.

Susan Roush

Thank you. Good afternoon and thank you for joining Synthesis Energy Systems’ conference call. Today, SES’s management will discuss the financial results of the Company’s fiscal second quarter ended December 31, 2013 and will provide an update on corporate developments. Following management’s prepared remarks, we will open the line for questions.

Before we begin, I would like to remind you that during this call, management will be making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements.

Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Although the Company believes that in making such forward-looking statements, its expectations are based upon reasonable assumptions such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. There can be no assurances that the assumptions upon which these statements are based will prove to have been correct.

Please refer to the Company’s Annual Report on Form 10-K filed on September 25, 2013 for a further discussion on Risk Factors. The SES’s 10-K and other SEC filings are available on the Securities and Exchange Commission’s website at www.sec.gov or on the Company’s website at synthesisenergy.com.

And now, I will turn the call over to Robert Rigdon, President and CEO. Robert?

Robert Rigdon

Thanks Susan. Good afternoon everybody. Welcome to our fiscal 2014 second quarter financial results call. I am joining the call today from our U.S. headquarters in Houston. Also with me here on the call is our CFO, Charlie Costenbader.

Our fiscal second quarter was a turning point for SES. We have made considerable progress on our key objectives since our last call. First, at ZZ we successfully achieved our objective for assuming operating control of Xuecheng Energy’s methanol plant assets and we are now generating significant revenues. The ZZ plant’s methanol production and sales from operating in the last two months of the quarter brought in $4.4 million in revenues. Additionally, we met our target of returning to ZZ syngas facility to operation in December and demonstrated our ability to meet and even slightly exceed the expected daily methanol production capacity in syngas plus coke oven gas mode.

Second, in the distributed power market vertical, our ongoing joint marketing collaboration with GE has made good progress. Together with regional project development partners, ISTROENERGO GROUP, or IEG for short and TUTEN, we have entered the next stage of this business with the execution of a letter of intent with Karachi Electric Supply Company. The LOI lays out the time steps for completing feasibility engineering and financial evaluation of a coal gasification power project with a capacity between 90 megawatts and 200 megawatts, which would be constructed near Karachi, Pakistan.

And third, we’ve made very good strides towards securing our China partnership, which is anticipated to extend our market reach and ability to secure gasification project and equipment orders that will further expand our regional installed base of the gasifier systems and bring value to our shareholders.

Before Charlie proceeds with a review of our quarterly financial results, I would like to underscore the point that we’re making solid progress and we remain focused upon the key paths that we believe will create value. Successfully delivering financial results from our existing operations and working with partners to grow our business for the future is providing good positive momentum. In a moment I will explain this in more detail and provide additional insight into what to expect from SES in the near-term.

Now let’s turn the call over to Charlie for the financial results. Charlie?

Charlie Costenbader

Good afternoon everyone. As Robert pointed out this quarter marks a return into meaningful revenues and cash flow to SES. The Company reported 5.9 million of revenue for the three months ended December 31, 2013 versus 13,000 for the three months ended December 31, 2012.

The Company’s ZZ joint venture operation generated 4.4 million of revenue from sales of 10,127 metric tonnes of methanol produced using Xuecheng Energy’s coke oven gas supply as a result of our assuming operational control of Xuecheng Energy’s methanol plant assets on October 31, 2013. Using this coke oven gas supply, the daily methanol production was consistent and in accordance with our modeled expectations.

During December, we operated the gasification equipment for approximately two weeks, and achieved a maximum of 320 tonnes on December 22nd, which slightly exceeded our modeled expectations of 312 tonnes per day. In addition, approximately $1.5 million of advances paid to ZZ from Xuecheng Energy were recognized as revenue during the quarter due to settling amounts due to ZZ under the prior syngas purchase and sale agreement.

The Company’s operating loss for the second quarter of fiscal 2014 was reduced to 1.3 million versus an operating loss of 3.9 million for the same time period in 2013. The decrease in operating loss was primarily due to the margin on ZZ’s revenues, including the 1.5 million of prior advances recognized during the quarter and a 1 million or 30% reduction in general and administrative expenses primarily related to reduced consulting costs and royalty expense offset in part by an increase in non-cash stock-based compensation expenses.

The net loss attributable to the stockholders for the second quarter of fiscal 2014 improved to 1.4 million or $0.02 per share versus a loss of 4.4 million or $0.07 per share for the prior year’s second quarter. As of December 31, 2013, the Company had cash and cash equivalents of 12.4 million including 2.6 million held by the ZZ JV. The ZZ JV made its last principal payment due under its ICBC loan of approximately 1.2 million this week. The ZZ JV also has a short-term loan of approximately 3.3 million due in September 2014 which the JV intends to refinance.

We continue to tightly control our expenses and monitor our cash flows and we are evaluating various means to improve our overall financial position. We expect additional revenues and cash flows from the ZZ JV methanol operations during the next several quarters and we are working to realize potential new cash inflows and savings from our strategic partnering initiatives. I would also like to point out that our G&A expense burn rate declined this quarter.

Continually focusing on our key objectives has enabled us to deliver revenues in the near-term and we believe this focus establishes the roadmap for future growth in our key markets. And that completes the financial review portion of the call. Robert?

Robert Rigdon

Okay. Alright, thanks Charlie. Our focus on key objectives for this fiscal year is continuing to yield results as we have demonstrated this past quarter. Our primary objective of delivering financial results is two-fold; assuming control of ZZ for generating revenues and earnings and partnering our business in diversified industrial sectors and geographic regions for our next stage of growth. This past quarter we have made significant progress on both fronts.

Now I’ll reveal the ZZ operating results and the outlook in more detail now. As Charlie reported, during the months of November and December, ZZ generated significant revenues from methanol sales based on operating ZZ primarily in coke oven gas mode. We also achieved a daily maximum methanol output of approximately 320 tonnes during the ZZ syngas startup in December.

This slightly exceeded our expected daily methanol production capacity for the facility. And this gives us added confidence in our ability to achieve our overall production capacity goals for the calendar 2014. Additionally, the ZZ scheme has made progress towards a new income source which may fully materialize in the near-term.

This past weekend, the ZZ joint venture signed a commitment letter with a local company for an additional source of the coke oven gas supply. This new source is from a company which is located about eight kilometers away from the facility and is independent of Xuecheng Energy. ZZ has also secured access to existing pipelines to transport the coke oven gas and only needs to add one short section of pipeline.

After the Chinese New Year holiday, which is commencing now and concludes on February 6, the ZZ JV will be working to finalize the pricing and sales contract. This is a favorable development which has a potential to lift the production levels of ZZ from an annual amount of 90,000 tonnes to about 120,000 tonnes of methanol. With this incremental production adding to overall operating margins of the plant, we believe that ZZ has the potential to increase its methanol production margins across calendar 2014.

Now I want to point out that the margins of ZZ are highly dependent on methanol pricing plus coal and power pricing. Although we cannot influence methanol and power prices we are however expecting to perform a number of coal tests this year related to customer projects under development. This effort has potential to secure several weeks of zero cost coal feedstocks across the year. Overall ZZ is poised to be a significant value contributor in 2014.

So moving on to Yima, the Yima joint venture operated about 80% of capacity for the quarter. The refined methanol section of the plant was fully commissioned is now operational. We have been pushing hard on the Yima joint venture to speed up its ramp-up and get the plant running efficiently. During the past quarter Yima replaced the JV’s previous General Manager with a new GM. We will be closely monitoring his impact on the operation and we are looking forward to the possibility that his leadership can take full advantage of the facility’s capability. The new GM is charged with a responsibility of increasing production and financial performance from the facility in 2014.

I also want to report that the Yima Coal Company is in the process of being merged with a much larger provincial coal company Henan Coal. We are watching this development closely and we see this as an overall positive development with potentially more focus being brought to there on achieving good operation performance at our JV. From a financial standpoint we do not consolidate the Yima joint venture into our financials, but we will be reporting income from the JV when dividends are paid.

Now, I would like to make a few comments about our China partnering efforts. Through securing partnerships, we are in effect bolting our technology and engineering expertise on to industry-leading large and well capitalized companies in different business verticals and regions where we can bring value, a win-win proposition. We have made significant progress in late 2013 and throughout January towards securing a Chinese partner that meets our key criteria we initially established. We believe completion of this objective may now be within reach and that we could soon have a strong partner with a Chinese capability we have been seeking.

However I want to be clear that there still remains work to be done on this objective and although our confidence is growing that we will achieve this goal, it’s not done until it’s done so to speak.

In the past, I have discussed the massive scale of the Chinese market opportunity and of our technology’s importance to this market. I will not boulevard this point any further other than to say that our China partnering work is targeted to propel our technology into the big Chinese opportunity much faster and in a more much value creative manner than we could do alone. I hope to offer more definitive news in the near-term.

And Charlie, would you now provide the update on our power business vertical.

Charles Costenbader

Sure, Robert thanks. With our co-marketing partner GE and regional partners IEG and TUTEN, we are discussions with several prospective customers who have expressed interest in small to medium scale coal gasification based distributed power plants, which can deliver critical electricity needs to regions that suffer from electric capacity shortfalls and extremely high prices for power.

As Robert mentioned earlier, we are currently collaborating on the LOI contract deliverables for Karachi Electric in Pakistan to complete development of the first coal gasification distributed power plant utilizing our technology and GE’s aero-derivative gas turbines power system. Near-term deliverables include, drafting the preliminary syngas power plant design, discussing suitable site locations, identifying potential coal sources and determining the coal supply logistics with our partners. We will be reporting progress to Karachi Electric in the coming weeks.

Once completed the feasibility study would serve as the basis for further discussions and negotiations for the coal gasification based power plant. Under the terms of the LOI, SES will supply our proprietary gasification technology and equipment into the project, as well as provide ongoing engineering operations and technical support. IEG, an engineering, procurement and construction company based in Levice, Slovakia intends to provide turnkey EPC services for the entire project.

TUTEN is assisting with the feasibility evaluation and project development and GE our partner will supply power generation equipment and technical services. This is one of the several international distributed power projects that we anticipate. We believe that together with our project partners GE, IEG and TUTEN, we have the optimum implementation consortium organized to not only secure the first order, but to move forward with other customers as well.

Robert Rigdon

Okay, thanks Charlie. We believe our power business vertical has a strong business model with upfront earnings potential from the initial projects and long-term holds game changing promise for our business. So, it’s an exciting time for SES. Our advanced syngas technology has proven on the foundation of our two commercially operating gasification facilities in China. We are now generating significant revenues from ZZ and we are moving forward quickly to establish key strategic partnerships.

We have made a significant improvement in our reported financial results and we are tightly controlling expenses. Together this has created an inflection point where we can now focus on further increasing profitability of ZZ along with securing cash inflows and savings from partnering and the new business initiatives underway such as distributed power.

Now proven on a commercial scale, our proprietary gasification technology’s ability to create high value in products including power, chemicals, fertilizers, natural gas, fuels, DRI steel from low cost and abundant feedstocks is being met with enthusiastic response in many regions of the world and across global business vertical markets. With strategic partners, we intend to build on the significant progress of this quarter to bring our advanced technology to commercialization on a global scale and continue to deliver financial results.

All of us at SES both in the U.S. and in China have worked hard to bring us to this point, it is time take advantage of what we’ve built, and we believe we have a credible path forward plus we have momentum building. I look forward to providing you with continued progress updates on our next call, if not before.

And with that, I would like to open up the call for questions, operator?

Question-and-Answer Session

Operator

At this time, we’ll begin the question-and-answer session. (Operator Instructions) And our first question comes from Eric Roush. Please go ahead with your question.

Unidentified Analyst

Good afternoon, Robert.

Robert Rigdon

Good afternoon.

Unidentified Analyst

I was wondering, if you could provide some clarity on the timing and frequency of the Yima dividend payments?

Robert Rigdon

Sure. Look where we are with the Yima right now as I mentioned is, the plant is essentially running at near capacity. We’re trying to push the joint venture to get the plant running more optimized and efficient. And at this stage right here internally we’re not anticipating or planning for dividends coming into us this calendar year. However, we intend to continue to push the joint venture which they control the operations there as I think you know and to just speed up.

And so we’re hopeful that to these two new developments with the new General Manager coming in which we hope will have a new focus on pushing faster and harder along with Henan Coal which is a much larger and probably somewhat more sophisticated company there will have a positive impact on that and hopefully we can see dividends coming in even sooner.

Unidentified Analyst

Okay, thank you.

Operator

(Operator Instructions) Our next question comes from Robert Smith from the Center of Performance Investing. Please go ahead with your question.

Robert Smith - Center of Performance Investing

Yes, hi, congratulations on such a productive quarter and the prospects going forward, it’s refreshing to see the stockholder block and I’m optimistic as I have been in the past. So once again congratulations Robert. The ZZ joint venture when will that reach full operating capacity?

Robert Rigdon

That’s likely going to happen just in the next few weeks, Robert. It’s sitting there ready to go right now and the only reason we haven’t really cranked it up all the way is we have -- during this really cold months they’re diverting some of the coke oven gas at the adjacent facility to heating needs for the local community. And that will stop they believe shortly after Chinese New Year. That’s a phenomenon so it’s here with Chinese New Year with all the influx people that come in from the big cities it’s sort of a Chinese phenomenon.

And when that happens then we will be able to start cranking up more syngas production to combine it with coke oven gas and really start kicking up the rates on this unit pretty good. The reason is just for everybody on the call, so they understand, we have to, to make methanol you have to blend syngas and coke oven gas at a certain ratio. So coke oven gas rates far below at a certain threshold point then it really doesn’t make sense to run off gas, so we just campaign the syngas unit and that’s what we’ve been doing, so we anticipate to crank it up here within the next few weeks.

Robert Smith - Center of Performance Investing

Thank you. And with respect to Hongye Glycol Plant and the Hulunbeier Tianfu Energy City Gas project, can you put some numbers as given that you make progress and what numbers can we be kind of looking at that these projects will throw off?

Robert Rigdon

Okay, let me give you as much as information as I have on those projects, right now. Both projects are in full all out development. The Hongye project obviously being developed through one of our large shareholder’s efforts there and into Magnolia and the Hulunbeier Project is in full development as well.

What I actually anticipate is going to happen here because it takes several months to really develop a project. Our scope in these projects is going to be to supply technology and gasify our systems, meaning a suite of equipment that along with technology and that would be we’re not investing in these projects and I think I’ve said that before but I do want to say that again to be clear, so this will be technology equipment sales and my view of where this is going to end up is I believe that this will get connected up with our overall China partnering efforts where we’ve made a lot of progress there as I just got through explaining.

And I think that we’ll have, there is some, there is a lot of detail I cannot go into at this point in time but I believe that this will actually get all linked up with that in the long-term and we, together with other partners that are not finalized right now, would be supplying and providing equipment and services into those projects, overall giving the projects -- giving us a much stronger position in both.

Robert Smith - Center for Performance Investing

So is there any way to look at what’s the dollar value of these particular inputs would go off for the Company?

Robert Rigdon

So look a gasifier system it depends on the scale of these projects. And when I get more information from when they nail down how many gasifier systems they are going to be looking at, I believe right now roughly speaking that the Hongye project and this is sort of very preliminary information is going to utilize somewhere between three and five of our gasifier systems. And depending on how much of the equipment scope we decide to supply out of that that can range from $20 million to $50 million per system.

And so there is a lot of that you can see variability in that and how much equipment we supply now a lot of that equipment that would have to be done in conjunction with other equipment supply partners because obviously we don’t manufacture the equipment ourselves. So it gets to be difficult at this very early stage to give you a real definitive answer on all the bottom-line impact that that would have, we’ll be able to do that as we get closer towards the actual license agreement and commitments.

Robert Smith - Center for Performance Investing

Robert, do you feel that the progress I think you’ve made very recently will foster an increasing amount of increase to you for projects?

Robert Rigdon

It already has, Robert. It’s -- yes, absolutely. We have -- what's happening to because that we’ve had a really good quarter and we are working hard to get where we are. And the ZZ for example has sort of removed the bottleneck that we had particularly in that part of China ZZ was our customers wanted to see ZZ running again, so this is good that we see that and that’s opening things up some of the work that we had been doing, some of the projects that have been in development, some of the ones that where we’ve announced MOUs and support in the past, they wanted to get ZZ running again. So I think that’s going to help all of that, all of the above.

And then when you look outside of China, for example the work we’re doing on the distributed power piece of the business is also bringing us to attention of more parties that what we’ve been exposed to in the past and we’re starting to see our inquiries ramp-up now, a good problem to have.

Robert Smith - Center for Performance Investing

Are you going to be making any presentations to ZZ JV in the near future?

Robert Rigdon

We’re out often making presentations. We’ll be announcing that we’re looking at some conferences now we haven’t made final decisions on but as soon as we do we’ll announce our attendance there.

Robert Smith - Center for Performance Investing

And of the projects that have been mentioned in the past which seems to have been on the back burner or not really close to a solution there, is there anything new to report on any of the ovens?

Robert Rigdon

Nothing material Robert, look what we’re doing is we’re focusing really hard on getting the financial results like from ZZ and making sure Yima gets into a good spot and getting these partnerships done. And we’re letting our partners who are developing those projects just continue to pursue those. So we’re focusing our resources on things that have the most impact for us right now.

Robert Smith - Center for Performance Investing

Thanks again and good luck and I appreciate the encouraging results.

Robert Rigdon

Thank you.

Operator

(Operator Instructions) And at this time I am showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks.

Robert Rigdon

Okay. Well, everybody, thank you for attending the call. And we will continue to work and progress things here. And we look forward to updating everybody on our next call if not before. Operator, at this time, we can sign-off.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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