Synthesis Energy Systems' CEO Discusses F4Q2012 Results - Earnings Call Transcript

| About: Synthesis Energy (SYMX)

Synthesis Energy Systems, Inc. (NASDAQ:SYMX)

F4Q2012 Earnings Conference Call

September 25, 2012, 08:30 a.m. ET


Matt Haines - IR, MBS Value Partners

Robert Rigdon - President and CEO

Kevin Kelly - CAO, Controller and Secretary


Robert Smith - Center for Performance Investing


Good morning and welcome to the Synthesis Energy Systems, Inc. Fourth Quarter and Fiscal 2012 Financial Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions)

Now I’d like to turn the conference over to Matt Haines from MBS Value Partners. Please go ahead.

Matt Haines

Thank you, Emily, good morning and thank you everyone for joining Synthesis Energy Systems earnings conference call. Today management will discuss financial results for the fiscal 2010 fourth quarter and fiscal year ended June 30, 2012. And will provide an update on corporate development. Following managements prepared remarks we will open the lines for 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 assumption. 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 they have been correct.

Please note that in connection with the proposed ZJX China Energy transaction, SES has filed a preliminary proxy statement and intends to file a definitive proxy statement with the SEC and intends to mail the definitive proxy statement to the stockholders of SES. SES and its directors and officers may be deemed to be participants in the solicitation of proxy from the stockholders of SES in connection with the transaction. You may obtain the preliminary proxy statement when available, the definitive proxy statement for free by visiting EDGAR on the SEC website at Investors should read the definitive proxy statement carefully before making any voting or investment decision because that document will contain important information. Please refer to the company’s Annual Report on Form 10-K for the year ended June 30, 2012 to be filed in the next few days for further discussion on risk factor. SEC’s 10-K and other SEC filings are available on the Securities and Exchange Commission’s website at or on the company’s website at

And now I’d like to turn the call over to Robert Rigdon, President and CEO.

Robert Rigdon

Good morning and welcome to our fourth quarter and fiscal year 2012 earnings call. I’m speaking to you today from our office in Shanghai, China. And with me on the call is

Kevin Kelly, our Chief Accounting Officer, who is at our Houston headquarters.

This is an exciting time at SES. We spend the last year focused on advancing our business centers and opportunity pipeline in China and elsewhere in order to position ourselves for revenue growth and profitability. Our technical capability to cleanly and economically unlock value and low quality coals and biomass is unmatched.

Through our accomplishments in China and significant efforts commercializing our technology, our technology is now under consideration by more projects in more regions of the world than ever before. The opportunities for SES to form valuable partnering arrangements in large market segments such as the power, gas, transportation fuel and steel industries are now materializing and being developed.

Our eyes are on our large Yima project currently in the commissioning stage. We anticipate interest in our technology and follow-on business results to increase more rapidly once the Yima project has reached a steady state of operation. We have now put the investment and technology facilities, commercial development and world class resources such that we have created a foundation upon which we believe can transform us from a development stage to an operating stage company in the near future.

Before I continue with the progress update, I’ll now turn the call over to Kevin Kelly, who will review our fourth quarter and fiscal 2012 financial results. Kevin?

Kevin Kelly

Thank you, Robert. Revenue for the three months ended June 30, 2012 was 284,000 versus 2.5 million for the three months ended June 30, 2011. As we have discussed on previous calls, Hai Hua has not paid the capacity fees owed to ZZ joint venture under terms of the syngas purchase and sale agreement since April of 2011.

Before September of last year, the ZZ joint venture plant idle the syngas production. Subsequently there had been no product sales from the ZZ joint venture during the fourth quarter of fiscal 2012 compared to 2.3 million during the fourth quarter of fiscal 2011. It has been and are continuing to work diligently to collect the money owned to ZZ. The amount of unpaid capacity fees due to ZZ has grown to approximately $4.7 million as of June 30, 2012. Robert will have more on this topic at this moment.

Technology licensing and related services revenues for three months ended June 30, 2012 were $284,000 versus $231,000 of the three months ended June 30, 2011. The technology licensing and related services revenues for the quarter ended June 30, 2012 resulted primarily from coal testing reported provided to customers proactively develop new projects and new license and build plans using our technology.

The company’s operating loss for the fourth quarter of fiscal 2012 was $4.2 million versus $4.7 million reported for the fourth quarter of fiscal 2011. The decrease in the operating loss was primarily attributable to reduced loss on the ZZ joint venture plant and to the decrease in stock based compensation expense. The net loss attributable to stockholders for the fourth quarter and fiscal 2012 was 5.0 million or $0.10 per share versus 4.6 million or $0.09 per share for the prior year's fourth quarter.

For the fiscal year ended June 30, 2012, total revenues were 3.1 million versus 10.2 million for fiscal 2011. These results included a $6.8 million decrease of product sales for the ZZ joint venture plant due to (inaudible).

Technology licensing and related services revenues this year was 0.9 million versus 1.2 million for the year ended June 2011, and includes coal testing, feasibility studies and other technical services provided in association with our technology licensing business.

The operating loss for fiscal 2012 was 18.3 million compared to the operating loss of 15.7 million for fiscal 2011. The 2.5 million of additional loss resulted primarily from the ZZ joint venture plant. The net loss attributable to stockholders for fiscal 2012 was 19.9 million or $0.39 per share versus 15.5 million or $0.32 per share for fiscal 2011. The increase in the net loss includes the increased operating loss from the ZZ joint venture plant and to plant expenses associated with the startup of the SES Resource Solutions joint venture business and the Yima joint venture project.

As of June 30, 2012, SES had cash and cash equivalence of $18 billion and working capital of 9.9 million. As a reminder we have agreements with Hongye and Zhongmo to sell a total of about 10.4 million shares at $1.50 per share or total proceeds to SES of about $15.5 million. As announced yesterday we closed on the sale of approximately 5.8 million shares of SES common stock to Hongye for approximately $8.7 million. Hongye is expected to pay the remaining 596,000 of the aggregate first prize for their shares and receive a balance of their shares at the closing of the Zhongmo transaction. The agreement with Zhongmo is for an investment of approximately 6.27 million or approximately 4.2 million shares of SES common stock.

And now I’ll turn the call back over to Robert.

Robert Rigdon

Okay. Thanks Kevin. Let me continue now by addressing our China business. First at a high level, China continue to be and is expected to be for decades become the coal based energy economy which runs largely from its current proven coal reserves. China also has large quantities and much cheaper low quality coal resources that can be readily transformed into energy and chemical products through deploying our technology.

We believe that China continues to offer significant growth potential for our company with excellent opportunities to leverage our technical capability in opening new coal resources and to monetize those resources through building and operating projects based on our technology. In addition, China offers us the opportunity to partner with highly skilled Chinese firms and creating fully engineered equipment and system product offerings based on our technology that can used to retrofit old style and expensive to operate gasification units which are widely prevalent today in China.

And we believe that our business model positions us to participate in the full value chain of low quality coal, technology and equipment operating to downstream product sales. And based on our investments and accomplishments to-date combined with the large opportunity that we believe China affords us. We initiated the formation of SES China, the business platform for accelerating and realizing our full potential in the region. We believe the formation of SES China will enable us to attract financially strong and highly skilled Chinese partners who desire to invest in the growth of China’s clean energy space and to recognize the large financial opportunity afforded by our technology, capability and business model.

Over the past several months we have significantly strengthened our team in China through our engagement of Colin Tam and his team at Crystal Vision Energy. Today Colin and the tam are actively working to secure the life partners who can bring resources, manufacturing capability and local skills along with the necessary financing to SES China in order that we more quickly achieve profitability from our investments and accelerate our opportunities and the development. We are already seeing positive results including the $15.5 million combined strategic equity investment from Hongye international investment group and Shanghai Zhongmo investment Management Company.

As you may have seen in our recent press release last Friday we have completed the financial close of the $8.7 million investment from Hongye. The team is working closely with Zhongmo to complete the financial close of that $6.3 million transaction as soon as possible. The proceeds of both of these investments are year marked for SES China business.

Hongye is one of the top 100 private enterprises in Mongolia. Hongye operates businesses in energy and natural resources along with finance and biopharmaceuticals. Together with SES, Hongye is looking to aggressively expand its coal resource footprint and coal gasification projects currently under development as well as assisting SES China with our focus on quickly generating financial results. We are very pleased with our new partnership with Hongye and look forward to our mutual success together.

Now let me turn to progress on our Yima project. Our Yima joint venture plant is now commissioning and early start of stage with expected methanol production first sales by the end of this year. We have started testing portions of the gasification system even as construction to winds down in certain parts of the facility. We believe the Yima project will be a meaningful contributor to our bottom line and our business in China beginning in 2013, and will further our business development efforts in China and globally where we have many potential opportunities waiting on the successful startup of the Yima project.

Additionally, the development plan for this site includes building two new expansion phases soon after the current phase is operating smoothly. And these two new phases are expected to affectively quadruple the total capacity for the facility. For now we have all hands on deck at the plant preparing for a successful startup and smooth transition to commercial operations.

I must also say that this project has been a large and aggressive undertaking for SES and is quite impressive to see now that is in near completion. You can visit our website at to see the latest construction photos of the plant.

I’ll move on now to provide an update on our Zao Zhuang joint venture or ZZ. We continue to idle our ZZ plant due to Hai Hua’s non-payment of the capacity fees which now total approximately $4.7 million owned as of June 30. The crux of the issue has been the financial weakness of the Hai Hua joint venture. Although this is taking much longer to resolve than we initially anticipated, we are now becoming more encouraged that a timely solution will be reached. This is because the controlling interest of Hai Hua was recently acquired by the Shandong, Weijiao Group. Weijiao is one of the 500 largest privately owned enterprises in China and has purchased the majority share of the Hai Hua joint venture.

We met with Weijiao several times recently and we are encouraged by their willingness to work with the ZZ joint venture to reach a solution. Our discussions today continue to center around both parties entering into a definitive agreement that will combine our ZZ operation with a Hai Hua methanol plant. Well this combination has a potential to greatly improve the financial performance for both parties. Because of the strength of Weijiao and their apparent willingness to work with us, we will continue to develop this mutually beneficial solution.

In China, it's usually best to seek a friendly solution to these types of matters and I can assure you that collecting the monies owed to us and getting our ZZ asset operating again, and delivering profitable results is a very high priority for us.

Now I’ll provide a brief update on our previously announced $84 million strategic equity investment from ZJX China Energy. The discussions are active and ongoing. ZJX is currently working through their agreements with potential partners that would bring the necessary funds to China Energy to complete the transaction with SES. We believe that all the parties involved are sincerely motivated and engaged to complete this transaction and are working to do so and this why we had continued to maintain the agreement with ZJX. As a potential for SES from this partnership can be large, that we want to give it every opportunity to successfully close. We will continue to update you on the progress on this transaction as it develops.

And I will turn to some of the highlights of our business outside of China. We have a number of global opportunities in development for licensing and equipment sales as well as potential partnerships for collaborations in market segments. These opportunities are primarily centered in India parts of Asia and the more recent renewed interest in the United States where our technology capability to cleanly convert coal mining waste into energy such as transportation fuel is gaining interest.

In addition, we are actively working with prospective customers in the U.S. chemical industry on green chemicals derived through our technology operating on renewable waste such as (inaudible). In India, we believe the market for coal gasification plants is now forming due to large infrastructure growth demand and an increasing need for a variety of basic chemical and energy products. We have build a solid pipeline of opportunities for licensing and equipment sales and we are in advanced discussions with one large Indian industrial company where we are hopeful that we will soon close on our first licensing transaction there.

Additionally, we have been evaluated in two separate and thorough technology comparisons completed by engineering companies hired by our prospective Indian customers. Our technology was selected as the best fit for their projects which would operate on high ash Indian coal. Because of the quality and characteristics of Indian coal, we do not believe that their emerging coal gasification market can be developed using traditional gasification technologies.

Our SRS coal resource joint venture with Midas was formed in June of last year. SRS has the goal of acquiring ownership positions and low quality coal resources around the world and converting them into proven reserves through our technologies capability of gasify the coal and make high value energy and chemical products.

SRS is progressing well in several fronts including a joint study with Ncondezi where we validated the suitability of its coal resources in Mozambique for our technology. SRS is also actively engaged in commercial discussion related to securing investment partners for the next tranche of funding necessary for development. This funding is planned to be used independently to infinitely advance the coal resource integrated project development without further startup cost on SES. The potential for SRS is to transform coal resources into proven reserves through application of your technology as large value creation potential is part of our overall strategy for our participating in the full value chain.

Now I’ll wrap up the call with some closing comments. I’m excited about the prospects for SES; this is because we have an important proven technology that can provide superior economics combined with the commercialization progress we have made at the company. Today our focus is squarely on achieving profitability from our investments which we believe is now (inaudible). With our Yima project in the process of coming online now, our work in progress to achieve profitability at our ZZ joint venture plant in partnership with the new owners of Hai Hua.

The establishment and funding of SES China, the planned funding for SRS thereby eliminating further startup cost, and our advancing global technology licensing opportunities, we believe we are at the turning point where we can start to generate meaningful operating cash flows. We are affectively meeting and addressing the challenges of commercializing this important technology and we are growing our set of opportunities that will create value for the company now and into the future. Our focus is on achieving profitability, ensuring we are adequately capitalized to grow and delivering financial results.

So, with that I’d like to open up the call for questions. Operator?

Question-and-Answer Session


(Operator Instructions) And our first question will come from Robert Smith, Center for Performance Investing. Please go ahead.

Robert Smith - Center for Performance Investing

I have several questions, could you discuss the next phases or two phases to quadruple the capacity of the Yima and when that what kind of current line do you have for that?

Robert Rigdon

Let me go ahead and address that one for you now. Actually always been planned together with our Yima partner that we would initially build three phases at this site. This one that we are in the process of starting out now is the first phase and it has the capacity of nominal 300,000 tons a year of methanol. The two later phases that have been in planning since the beginning here have been to build a second phase of the same sizes what we just built, 300,000 tons a year of methanol equivalent capacity and then the third phase would be doubled that, 600,000 tons a year of methanol equivalent capacity, thereby quadrupling the total capacity of the entire facility. Now just to clear, I’m saying methanol equivalent because the actual products that would be produced there maybe methanol or maybe methanol plus some of its derivatives such as going to chemical change such as olefins or fuels or other chemical products that are in under review.

The plan has been in terms of timing is once this project was up and running smoothly to take what we have learned here and benefit from the construction and engineers work that we have done here and move forward quickly into starting the second phase. We haven’t set a startup date for this yet, but we are actually since I have been here in China, we are starting to discuss the prospects of when we will be able to move forward and start working diligently on the phase two section of Yima.

Robert Smith - Center for Performance Investing

Coming to Weijiao and Hai Hua, could you give me some color as to when they purchase Hai Hua, what is their obligation to for the debt that they owe you?

Robert Rigdon

Well, that’s a pretty straight forward answer Robert, because they bought that facility that we sell the syngas to and they bought of all of the contracts that go along with that along with the sales purchase agreement obligations that exist between the facility and SES. And certainly Robert they were very aware when they did their due diligence. We have known for a while now that Weijiao was in the process of moving to buy the Hai Hua joint venture there. And they were aware that these issues existed. And because of that we have already started the discussions with Weijiao, so let me just add a little bit of more information to your question, is that Weijiao is actually interested in the prospects of increasing the methanol capacity delivered from the unit that’s on their side of the fence. We have provided a technical plant to achieve that which gets our Zao Zhuang plant back running again.

We have provided that commercial plant which allows for the because of the integration different type of technical integration of the two plants and the increased methanol capacity there, it increases the overall financial performance of the facility and Weijiao has agreed in concept in our discussion now sharing in the downstream methanol product sales. And because of that that type of structure hence what we have discussed in previous calls in integrating these two facilities provide it's actually a very good win-win for both Weijiao and ourselves. We believe from my interaction with this whole thing Hai Hua also can see the benefit there but didn’t have the financial strength to actually carry that forward. We are actively talking with this group right now and we are seeing active movement right now and I’m really encouraged that we are going to go and get this thing wrapped up.

Robert Smith - Center for Performance Investing

So, in the case that there would be a payout overtime of the 4.7 million or would it be in lump sum or how would that be?

Robert Rigdon

It's not a done deal yet, Robert, but just my best guess here is that it will all get rolled up into one deal probably not paid out overtime but I don't know that for sure yet until it's all finalized.

Robert Smith - Center for Performance Investing

When you say rolled up into one deal would there be?

Robert Rigdon

One great deal where we can collect the fees that are owed to us.

Robert Smith - Center for Performance Investing

At one time?

Robert Rigdon

At one time and that’s what we want to accomplish, and that’s what we are discussing with them it's just not done yet.

Robert Smith - Center for Performance Investing

And the ZJX negotiation, I know it requires a lot of patience on your part, from the point of present negotiations forward, is there some kind of timeline that you would not wish to go beyond?

Robert Rigdon

Look, I want to get this thing done as quickly. And what s happening now is that ZJX is working very intently with the shareholders that are potentially making up the China Energy Group. And they are making good progress, we are monitoring that, we are in discussions with them, we are watching what’s happening, we are assisting when we need to. The idea is that once that’s done then that group will come back and move forward with the deal that we put in place. That’s what we have been discussing. We see progress, it's not an easy deal for ZJX to pull together here but they are doing it. It appears that they are doing it. And we want to keep, we want to give this (inaudible) because we see a lot of value potential with this particular arrangement.

Robert Smith - Center for Performance Investing

Do you have any source about the coming leadership change in China itself?

Robert Rigdon

No. I don't really have any thoughts I can offer now for watching and thinking I do believe that China will stay on the track that will be amenable to our business, growing a large energy business here in China which we are focused on. Based on the platform of our technology I know that China is I believe will stay very focused on utilizing its domestic coal resources. And because of that we are important to the country here, that’s one of the reasons why we get a lot of attention while we are in China. We unlock a lot of coal it's only locked up here because of the low quality and I know that China because of their plans is going to grow their focus on renewables and we are seeing activity I actually did mentioned it in the script. But we are seeing activity now, Robert, where companies in China are talking to us now about doing work in the bio fuels and renewable side of the equation and I believe that if China moves forward with that to build projects they will and we have a very good product offering for that.

Robert Smith - Center for Performance Investing

And you mentioned India and the prospect that you feel that the country as a whole is ready to move ahead in this area as well. Can you just give me some of this comment about what leads you to believe that?

Robert Rigdon

Sure. Look I have been working in the gasification for a number of years now and India has over for decades, like to move forward with gasification has done some projects not based on coal, because coal was always a technology barrier for Indian coals. Now we have been on the ground there, commercializing our technology and we are really well suited for Indian coal, it's a good heating value coal with high ash content though that becomes a problem for other gasification technologies for a lot of many way that are out there today. And we are seeing the development of project actively by Indian customers now like I’d never seen before in my new experience of my career. I personally firmly believe India will be building projects. India is not a place that traditionally moves fast in the business environment. I think probably most people recognize that. We have been diligent, we are not spending a lot of money in India but we are working smartly and we have developed some deal opportunities here with one of them that I mentioned we believe is getting very close to converting to a license.

Robert Smith - Center for Performance Investing

And Robert did I hear you say that there were some domestic opportunities?

Robert Rigdon

You mean domestic in the U.S.?

Robert Smith - Center for Performance Investing


Robert Rigdon

Yes. We are seeing a bit of a renewed interest in the U.S. believe or not. And I think it's primarily driven by two things, it's been interest or a while on the clean renewable fuel side where we have been responding to enquiries for couple of years two year's now. We haven’t talk a lot about it because I really haven’t seen that really to a point for I thought it could turn into a real viable opportunity for us. However, I’m seeing that change now on the renewable side, we have got some very much more advanced discussions with one of the chemical players in the U.S. we are seeing more interest in chemical companies frankly and looking at having some amount of renewable chemicals in their portfolio. That’s one of the items. I think the most interesting one though is not necessarily that one, it's due to the continuous high price of oil and gasoline and fuels. We have a very good offering for really low quality U.S. coals. And in some places in the U.S. We are able to cite plants where we can run low quality coal mining waste and actually sell the CO2 off of our plant into pipeline systems for enhanced oil recovery at a profit on the CO2. And the overall economics on these facilities looks very robust and there are parties and discussion with us right now about that particular opportunity, type of opportunity in the U.S. There is enough traction and momentum in this now that I felt it was time to bring it back up and let you guys know that we are seeing this and we are working very hard to get something going here again in the U.S. Something that would be very helpful for us.

Robert Smith - Center for Performance Investing

And just finally do you feel that the economic advantages of what you offer supersede the question of slowdown in the global economy?

Robert Rigdon

Definitely in certain regions of the world it does. I think the global economy slowdown on the financial crisis that we went through certainly has impacted the set of opportunities I think in the industrial space, but the growth we see in Asia is still there, even though it may not be the double-digit growth we have seen prior to the 2009, it's still very significant. The growth in energy and chemicals and infrastructure that drives that is still very prevalent here. The planning that goes on in China and actually in India is there. So, I do think we are going to continue to rich in opportunities and so that’s one of the reasons why we are very optimistic about the outlook here.


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

Robert Rigdon

Okay. Thank you, operator. And thank you everyone that’s on the call listening today. We look forward to providing you with more information and updates here in the near future. Operator you can now disconnect the call.


The conference has now concluded. Thank you for attending today’s presentation, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!