Synthesis Energy Systems' CEO Discusses F3Q 2011 Results - Earnings Call Transcript

May.10.11 | About: Synthesis Energy (SYMX)

Synthesis Energy Systems, Inc. (NASDAQ:SYMX)

F3Q 2011 Earnings Conference Call

May 10, 2011 08:30 AM ET

Executives

Matthew Haines – Managing Director, MBS Value Partners

Robert Rigdon – President and Chief Executive Officer

Kevin Kelly – Chief Accounting Officer

Analysts

Eric Madison – Reveille

Robert Smith – Center for Performance Investing

Jeremy Sussman – Brean Murray

Operator

Good morning and welcome to the Synthesis Energy Systems Third Quarter 2011 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Matthew Haines of MBS Value Partners. Please go ahead.

Matthew Haines – Managing Director, MBS Value Partners

Thank you. Good morning and thank you for joining Synthesis Energy Systems’ earnings conference call. My name is Matt Haines. I’m a Managing Director at MBS Value Partners, SES’s Investor Relations firm. Today, management will discuss financial results for the fiscal 2011 third quarter ended March 31, 2011 and will provide an update on corporate developments. Following management’s prepared remarks, we will open the line for your questions.

Before we begin, I’d 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 for the year ended June 30, 2010 for a further discussion on risk factors. A copy of the filings can be found on the Securities and Exchange Commission’s website at www.sec.gov or on the company’s website at www.synthesisenergy.com.

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

Robert Rigdon – President and Chief Executive Officer

Thank you, Matt. Welcome to our conference call to discuss financial results and corporate highlights for the third quarter of fiscal 2011. I’m on the call today from the SES office in Shanghai, China and joining us on the call from our Houston headquarters is Kevin Kelly, our Chief Accounting Officer.

We’ve had a very active and productive third quarter during which we have witnessed two events that we believe are impacting the energy landscape and bringing a renewed focus on call and with that a growing interest in clean coal technology. First, the unrest in the Middle East which has been driving uncertainty and higher oil prices and secondly the tragic earthquake in Japan and the resulting nuclear power plant accident. Both of these events are pointing out the importance of coal in the future of global energy and we believe we offer a unique and competitive alternative to enable the clean and efficient conversion of the world’s low-cost low-grade coals into energy and chemical products.

Against this backdrop, our recent announcement of the collaboration with China Energy and ZJX has been especially timely and fits in well with our three-pronged strategy of sales of technology equipment and engineering services, developing and participating in coal and biomass gasification projects, and integrated new gas technology coal resource project investments. And this strategy is implemented through regional and functional business platforms.

Our agreement with China Energy and ZJX is based upon China Energy making a strategic equity investment in SES and working jointly with us to develop multiple new opportunities to extend the commercialization of our U-GAS coal gasification technology in China.

As a reminder under the terms of the agreement, China Energy will make a cash investment of $83.8 million in exchange for 37.3 million shares of our common stock, which represents a 43.4% equity stake in the company. Additional information concerning this transaction is available in a preliminary proxy statement filed with the SEC.

Upon shareholder approval of the transaction and other customary closing conditions, China Energy and SES will formally launch a joint broad-based business development effort that we believe over time can result in large scale and strategically significant additional projects in China. Together with China Energy, we have conceived a development of four major business platforms in China, consisting of SNG, transportation fuels, power and chemicals such as ammonia. We expect our early focus will be on the large scale SNG project opportunities that exist in China today where our technology can bring significant value creation benefit from its ability to operate cleanly and efficiently on low cost, low grade coals.

China Energy in addition to helping facilitate the more timely development as such projects also plans to assist us by obtaining project level equity and financing debt together with our partial ownership of the project can create important value for us. This is a major goal of China Energy since once this step is completed and our share price is trading at or above $8 per share, China energy will receive additional shares of our stock to bring their total ownership in SES to 60%. We and China Energy will also be focused on accelerating our Zao Zhuang expansion and the completion of our Yima project. In addition to accelerating Yima and ZZ expansion together with China Energy, we expect to explore synergistic coal mine opportunities where earnings could be generated in the short-term and further value creation achieved in the longer-term with the application of our technology.

Before I go any further with my business update, I would like to turn the call over to Kevin Kelly to review our financial results with you. Kevin?

Kevin Kelly – Chief Accounting Officer

Thank you, Robert. Total revenues for the third quarter of fiscal 2011 were $3.1 million an increase of $0.5 million or 19% from $2.6 million in the prior year third quarter. Product sales revenue from our ZZ joint venture plant increased $0.3 million to $2.6 million compared to $2.3 million for the third quarter of fiscal 2010 due to higher plant availability and higher energy fees due to increased coal prices.

Plants availability for production was 100% for the third quarter of fiscal 2011 compared to 96% in the prior quarter and the plant operated for 71% of the quarter compared to 78% in the prior quarter resulting from our customer shutdowns for their maintenance.

Technology licensing and related services revenues for the third quarter were $0.5 million versus $0.3 million for the third quarter of 2010. The technology licensing and related services revenues for the quarter ended March 2011 resulted from the recognition of previously deferred revenues received under a license agreement entered into in April 2010 related to a U.S. biofield project. We have completed the initial engineering work and since terminated this license agreement due to the customers’ inability to continue funding the project.

Cost of sales and plant operating expenses were down 13% to $2.4 million for the third quarter 2011 versus $2.7 million for the third quarter of 2010. The decrease was due to further improved plant efficiencies at the ZZ plant and other plant operating cost reductions. G&A expenses were down slightly to $3.3 million for the third quarter of fiscal 2011 compared to $3.4 million for the third quarter of fiscal 2010. We improved our operating loss by 31% to $3.6 million for the third quarter of fiscal 2011 compared to an operating loss of $5.2 million for the third quarter of fiscal 2010.

The $1.6 million improvement in the operating loss was primarily due to improved operating margin at our ZZ joint venture plant, the increase in licensing and related services revenue and various expense reductions. Overall, our financial trend has continued to show improvement for the past several quarters due primarily to continued margin improvements that have been achieved at the ZZ plant and our technology licensing activities. We will continue to closely monitor and control our operating and overhead expenses in order to meet company’s key objectives.

As of March 31, 2011 we had cash and cash equivalents of $29.4 million and working capital of $27.2 million. With that I’ll turn the call back over to Robert.

Robert Rigdon – President and Chief Executive Officer

Okay, thanks Kevin. Now, I would like to move onto an update on our ZZ and Yima joint ventures. We're very pleased with the performance of our U-GAS technology and our ability to continue gaining further performance improvements has demonstrated once again during the past quarter. There were several important developments of note, first, our new FMS, fines management system at ZZ demonstrated a substantial improvement in carbon conversion rates versus last year, achieving a sustainable rate above 98% and the plant performance status shows we are continuing to improve the overall efficiency of the facility resulting in lower costs.

We are now achieving over 90-day continuous runs on each single gas supplier, which we believe is equal to or better than other mature and well-established coal gasification technologies in China and allows us to achieve very high availability of syngas due to our spare standby gas supplier configuration. These are significant technological accomplishments that speak to the quality of our technology and the strength and commitment of our team on the ground in China.

During third quarter and through April, the ZZ plant was available for syngas production in 100% of the time. As a result of the continuing strong performance of our technology, we have completed negotiations for another important coal test at ZZ involving 2,100 tons of low quality coal. We are conducting this coal test which began yesterday as part of our ongoing business development effort related to a Chinese company that is considering new gas for a large scale project in China for a total capacity of 4 billion normal cubic meters of SNG per year to be rolled out in phases with Phase I capacity yet to be determined. Coal tests such as this also help our ZZ economics while at the same time getting us closer to new projects and partners not just in China, but around the world.

Concerning Yima, I’m pleased to report that progress on the construction of the utilities and gasification portions of the plant are on schedule and expected to be completed by December of 2012. The utilities plan for delivering water and power to the project has been completed and the foundation and buildings for the project are essentially gone. Equipment installation is now underway in the boiler area, so that steam can be available for the rest of the plant as commissioning activities began. With respect to the gas suppliers, the gasification structure is in the last stages of construction and the gas fire reactors are now in shop fabrication.

So you can view updated photos of the Yima construction progress on our website at www.synthesisenergy.com. Lastly, we have begun a three-month operator training session for the facility and this was kicked off with approximately 60 operating personnel from the Yima joint venture though we are now undergoing extensive training at our ZZ plant.

Before I discuss business development activities, I wanted to mention that we participated in the World CTL 2011 Conference in Paris this past March and made a presentation regarding the advantages of our technology enabling new coal-to-liquid or CTL developments. CTL is a process that allows coal to be utilized as an alternative to oil to produce ultra-clean gasoline and diesel fuels as well as synthetic waxes, lubricants, chemical feedstocks, and alternative liquid fuels such as the methanol and dimethyl ether.

We believe CTL can become increasingly important as demand for transportation fuels continues to grow over the coming years. We believe there is a significant business opportunity for CTL using our gasification technology and we are pursuing potential opportunities in this area.

And with respect to business development, highlights of our latest efforts in China include an agreement we signed in late January with a Chinese company to provide the feasibility study report for a medium scale, 360 million normal cubic meters per year SNG project. This project is currently planned to be implemented in two equal phases using our U-GAS technology. Should the project go forward, it would supply SNG to the gas loop of a fairly large city which has a shortage of natural gas.

Separately in January, we were engaged to prepare preliminary technical proposals for an ammonia plant that is interested in using our syngas to replace its existing coal generation fixed bed gas suppliers.

With respect to our business development outside of China, we continue to advance our discussions with potential partners in other countries such as India, where our U-GAS technology could contribute significantly to the development of clean coal-based energy and chemical projects using India’s abundant low-cost low-rate coal as the primary feedstock. As in China, partnerships with large local companies that bring influence in resources to the table will be the key to advancing the broad commercialization of our technology in this region.

As I have previously described, our strategy is a three-pronged approach that include sales of technology equipment and engineering services developing and participating in coal and biomass gasification projects and the integrated U-GAS coal resource project investments. We continue to work towards executing our strategy through the formation of strong regional partnerships that will enable us to grow more rapidly.

With respect to our ongoing efforts with Midas to leverage SES’s U-GAS gasification technology in Eastern Europe, South Africa as well as Indonesia and Australia, we are continuing to make progress in identifying the right opportunities. Our goal is to leverage our technology to create value from low cost, low quality coal resources that would otherwise remain untapped and in cases where current prices for those resources are particularly attractive actually own them for the long-term and include this low cost resource as an important part of the value created by our projects. Examples may include SNG projects in parts of Asia, ammonia projects that would supply fertilizers in developing countries and smaller scale power projects that fill the need for distributed power. Together, we’re identifying such project development opportunities that we believe will advance our strategic interest and financial objectives through bringing a total fee to product solution to customers who previously would have not considered gasification. We look forward to providing you with additional information as these opportunities develop.

This concludes our management update for our fiscal third quarter of 2011. We would now like to give our callers a chance to ask questions.

Operator, you may open up the phone lines.

Question-and-Answer Session

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from [Eric Madison of Reveille] Please go ahead.

Eric Madison – Reveille

Yeah, hi. I just wanted to understand a little better. Right now there is a 40% ownership of the Chinese Investment Company, but it looks like they’re going to be going to 60% which is an effect given the majority control of the company to this investing company. Can you speak more to that, please?

Robert Rigdon

Sure, I would be happy to, Eric. Yes, the way our collaboration agreement is established with the ZJX is that the initial investment step does represent a little over 40% of the company. And at this time and under that first step of investment, ZJX and SES together in China will be focused on delivering these four business platforms that I just mentioned related to SNG, fuels, power and chemicals with a milestone established for ZJX of exercising their best endeavors to establish a fully funded RMB 20 billion business platform for one of these product segments in order to achieve, along with the $8 per share price, in order to achieve the additional shares for 60% of the company. So essentially what we have established, Eric, is a pathway to create shareholder value here through growing large-scale project share in China.

Eric Madison – Reveille

What is the shareholder vote?

Robert Rigdon

Kevin, do you want to address that part of the question?

Kevin Kelly

Sure. We filed the preliminary proxy and we have received comments from the SEC on that preliminary proxy and we are in process of responding. So until we finish with that process, well, once we’re finished with that process we’ll be setting the meeting date and mainly our final proxy materials.

Eric Madison – Reveille

Thank you.

Kevin Kelly

Sure.

Operator

The next question comes from Robert Smith of Center for Performance Investing. Please go ahead.

Robert Smith – Center for Performance Investing

Hi, good morning. Could you brief update on the license negotiations with Ambre Energy?

Robert Rigdon

Sure, Robert. We've had over the past quarter we’ve been in contact with Ambre Energy. The licensing negotiations, there is not any new news there with Amber from the standpoint of moving forward with a definitive agreement. I know that Amber continues to, desired to develop their projects and move forward with that. But we are just sort of coordinating with their own project development timeline at this point.

Robert Smith – Center for Performance Investing

Are you actually in negotiations or not?

Robert Rigdon

We started our initial negotiations, Robert, but the negotiations now are moving slowly. Ambre is doing their own development work on their side of the project and they have to complete some of their tasks around the project development there before they are going to be ready to continue aggressively moving the license negotiation.

Robert Smith – Center for Performance Investing

Was there any mitigating circumstances due to the (indiscernible) increase at all.

Robert Rigdon

That question did come up earlier. To the best of my knowledge I don’t believe that really had a major impact on Ambre or this project. This particular coal area had not been opened up yet that’s part of their plan. So, I don’t really believe that was. It did impact a lot of other businesses though.

Robert Smith – Center for Performance Investing

Okay. And what is the timeline for the closing of the ZJX.

Robert Rigdon

Well, as Kevin was saying that the definitive date yet hasn’t been set, but we are expecting sometime in the mid summer. Although it continues to go well as it has been we would expect sometime in mid summer, possibly in July.

Robert Smith – Center for Performance Investing

Okay. And that timeline for the six month begins to count at that point.

Kevin Kelly

Yes. That’s correct.

Robert Smith – Center for Performance Investing

Thank you very much. Good luck.

Kevin Kelly

Sure.

Operator

(Operator Instructions)

The question comes from Jeremy Sussman of Brean Murray. Please go ahead.

Jeremy Sussman – Brean Murray

Hi, good morning everyone.

Robert Rigdon

Hi, Jeremy.

Jeremy Sussman – Brean Murray

With your focus in China I have kind of a broader question. Obviously the markets have been a bit concerned about slowdown in commodities over the last month or few weeks I guess. I guess first in the project level, anything that you are seeing over there that has you concerned. And then secondly just kind of from a bigger picture standpoint can you give us kind of one or two things that you are seeing out there, which give us a sense of maybe what things really are, have there really acting over there in China right now?

Robert Rigdon

Sure. I guess Jeremy what we are seeing here is China has recently issued their 12 five-year plan and under this plan, China continues to focus on energy growth. And I think part of that what we are seeing is that China is shifting to more efficient application and cleaner application of technology, which certainly favor gasification and our technology. China is also in this area moving towards larger scale projects. A lot of the bigger energy projects that are coming hove down the pipe regarding fuels and SNG are going to be built in phases, but it will ultimately end up being much larger scale than what we have seen in the past. And you are beginning to see that in some of the notes that I have made here on our call related to projects being built in phases.

I think in terms of the government is still very much clearly communicating here, the types of projects that are encouraged such as SNG project and glycol project and is actually now not encouraging some of the much smaller scale projects that the older type chemicals productions that have been built out in small scales. So we are seeing China wanting to I think of a more efficient application of these larger industrial part instead of a lot of small spotting projects that are built around the country side. An example of that, as what we are doing at Yima, which is actually the first project in an industrial part for that province in Henan, which will be a very large scale industrial build out. And that’s an example of these industrial part centers that we are seeing China moving towards. In terms of energy, you know, China is a huge growth area and I don’t see any really slowdown in that. It’s such a big need for this country to continue its growth.

Jeremy Sussman – Brean Murray

That’s very helpful. Thank you very much.

Operator

(Operator Instructions)

This concludes our question-and-answer session. I would like to turn the conference back over to Robert Rigdon for any closing remarks.

Robert Rigdon – President and Chief Executive Officer

Okay everybody. Thank you for your questions and should you have any additional questions, please feel free to get in touch with us. Andrew, you can close the call.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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