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Synthesis Energy Systems, Inc. (NASDAQ:SYMX)

F1Q13 Earnings Conference Call

November 07, 2012 8:30 AM ET

Executives

Matthew Haines - IR, MBS Value Partners

Robert Rigdon - President and CEO

Kevin Kelly - Chief Accounting Officer, Controller and Secretary

Analysts

Robert Smith - Center for Performance Investing

Operator

Good morning and welcome to the Synthesis Energy Systems, Inc. First Quarter 2013 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 Matthew Haines, Managing Director of MBS Value Partners. Please go ahead.

Matthew Haines

Good morning and thank you for joining Synthesis Energy Systems earnings conference call. Today management will discuss financial results for the first quarter of fiscal 2013 ended September 30, 2012 and will provide an update on corporate development. Following management’s prepared remarks, we will open the lines 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 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 to 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 and when available, the definitive proxy statement for free by visiting EDGAR on the SEC website at www.sec.gov. 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 for further discussion on risk factors. SEC’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 www.synthesisenergy.com.

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

Robert Rigdon

Good morning and welcome to our first quarter of fiscal year 2013 earnings call. With me on the call today is Kevin Kelly, our Chief Accounting Officer. Although it’s been a short six weeks since our last call, the company is moving forward aggressively on our key initiatives and we have some positive developments to report since our last call. To highlight a few, we recently closed important strategic equity investments from Hongye and Zhongmo, the details of which we released a few weeks ago. We also continued to make good progress in commissioning our Yima Joint Venture plan and have advanced the negotiations that are key to returning our ZZ joint venture plant to operational status.

In addition to the accomplishments and progress in China, we are also seeing increased interest in applying our technology in the fuel, steel and power segments, including renewed interest in the US, all of which have recently led us into new commercial discussions that we believe hold important potential near-term business for SES.

Before I go into more detail, I’d like to turn the call over to Kevin Kelly to review our first quarter fiscal 2013 financial results. Kevin?

Kevin Kelly

Thank you, Robert. Total revenue for the three months ended September 30, 2012 was $71,000 versus $2.5 million for the three months ended September 30, 2011. This continued to keep the ZZ plant idle since September 2011 due to non-payment of the capacity fees contractually owed to the ZZ joint venture. Consequently there were no product sales from the ZZ joint venture during the first quarter of fiscal 2013 compared to $2.1 million during the first quarter of fiscal 2012. We have been and are continuing to work diligently on new contract terms with the Shandong Weijiao Group which has recently acquired a controlling interest in Hai Hua.

Technology licensing and related services revenues for the three months ended September 30, 2012 were $71,000 versus $307,000 for the three months ended September 30, 2011. The technology licensing and related services revenues for the quarter ended September 30, 2012 resulted primarily from cold testing services for customers who are actively developing projects and may license and build plants using our technology.

The company’s operating loss for the first quarter of fiscal 2013 was $3.9 million versus $4.4 million reported for the first quarter of fiscal 2012. Decrease in the operating loss was primarily attributable to lower costs at the ZZ joint venture plant while holding the plant idle.

The net loss attributable to stockholders for both the first quarter of fiscal 2013 and 2012 was $4.5 million or $0.09 per share.

Regarding the company’s capital resources, as announced in September, the company received $8.7 million from the sale of common stock to Hongye. As of September 30, 2012 the company had $22.7 million in cash and working capital of $13.1 million. In October, we closed on the sale of additional $6.8 million of common stock to Hongye and Zhongmo.

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

Robert Rigdon

Okay. Thanks, Kevin. Our financials over the past year had been impacted most significantly by the lost revenue from our ZZ joint venture plant which is due to the customer’s failure to pay contracted Syngas capacity fees. As a result, the numbers do not yet provide a complete picture of the actual progress we’re making as a company. With the Yima project nearing first methanol production, along with our progress towards getting the ZZ joint venture operating again and in an enhanced restructured deal and new business opportunities that are close to fruition, we are expecting to see improving financial results over the next several quarters.

The completion of the Hongye and Zhongmo transaction is a good indicator of the progress we are making in demonstrating and communicating our value proposition in China. These companies understand the potential future value that exists in China from implementing our technology, especially in areas of China where we can gain positions in coal resources through leveraging our low quality coal conversion capability. These companies are very positive on SES, which is the primary reason they have insisted on investing at the parent level at this time while we earmark the proceeds for new investments in China.

Since Hongye has a strong business presence especially in the Chinese province of inner Mongolia, they feel confident in achieving a win-win business result that will boost their own operations while growing value for SES. We’re actively working together now on developing the new opportunities for SES China that can quickly make a positive financial contribution to the company.

We believe that ongoing projects such as Yima and ZZ combined with the new Chinese opportunities we’re exploring with Hongye have the potential to generate meaningful operating cash flows for SES China business. In turn, we’re hopeful that this recent strategic investment is the first of what will be a series of new partner investments that would be made directly into our SES China business platform.

I would like to thank the SES China team, along with Crystal Vision Energy partners for their outstanding efforts in working with us to complete this important strategic investment and cooperation. Now, related to this, we have appointed two representatives from Hongye to our board. Mr. Gao Feng, chairman and president of Hongye, who has assumed a non-executive role of vice chairman of the SES board and Dr. Yang Guang, executive vice president of Hongye, In just a very brief period of time, these gentlemen have become actively involved in helping us develop, plan and implement our path forward for accelerating the business in China.

Our Yima project is a major step forward for SES and we are excited to see it so close to completion. The final stages of construction and commissioning are progressing well. Utility section of the plant is essentially complete and commissioned and has been operating on and off since this summer as we commission the other sections of the plant. The gasification island is about 90% to 95% complete. There are three identical gas fire systems to be commissioned there. The Syngas purification section is also more than 90% complete and is being commissioned now.

The methanol section of the plant currently stands at about 70% complete and as previously reported, the engineering on the methanol section was delayed for several months in 2010 while the Yima joint venture considered the building of glycol production with methanol. Methanol unit is a top priority of the JV and is coming together very quickly now. The joint venture continues to forecast first methanol production to occur in December of this year. We welcome you to track this progress through the latest pictures of the plant on our company website.

I believe that the significance of the Yima joint venture to SES and its shareholders cannot be overstated. In addition to generating important financial results for SES, the plant is being closely watched by our potential customers and partners in China as well as globally and we expect the Yima project to be a major catalyst for securing much of the new business we have been developing over the past two years. In addition, we’re already looking forward to beginning work with Yima on the planned expansion phases of the Yima site, which in total are intended to roughly quadruple the production capacity of the facility.

Now shifting to ZZ, I’m cautiously optimistic about the progress we’re now seeing at the ZZ joint venture plant towards reaching a resolution with Weijiao, the new owner of the Hai Hua facility that buys our Syngas. Achieving such a resolution will get the plant operating again and making a positive financial contribution to our China business. Weijiao has spent several weeks completing a third party engineering validation of the technical case which we developed for integrating the two facilities in a way that creates improved financial performance for both parties. The results of this evaluation have come back positive.

Weijiao has assigned a senior level leader to work with us to complete the commercial terms for a successful operating case for both parties and we’re also looking to receive compensation for unpaid capacity fees owed to the ZZ venture. As of the end of the quarter, these unpaid fees amounted to approximately $5.7 million. The negotiations have the goal of providing operating improvements to Weijiao’s facility that will enable both plants to maximize operating capability and revenue. Based on the progress with Weijiao today, we remain hopeful that ZZ will return to operational status in this fiscal year 2013.

Additionally, we continued to develop opportunities to convert and further expand the ZZ plant into a bio master fuel operations or potential glycol production at the facility. We are actively working with a gas and fuels company with large operations in China that is interested in partnering with us on the conversion of ZZ to this potential first of a kind, renewable operation in China. The local Shudshang [ph] government is also strongly encouraging us as well, which will prove helpful as we progress the development of this alternative. We believe that ability to demonstrate a successful bio master fuels for chemical operation in China has the potential to position us with a product offering which we can replicate for the emerging renewable businesses now in the early stages of the development in China.

Finally for China, discussions regarding the potential strategic investment of ZJX China Energy into SES remain active as ZJX continues to structure the funding of China Energy with other possible investors. We will continue to keep you posted on the status of this transaction as developments occur.

Now I’d like to review some of the highlights of our business outside of China. First, our SES Resources joint venture has made good progress this year and is ready to move to the next step of development through raising external funds that will be used for early stage definition of projects needed for securing positions in low quality coal resources that have been tested and validated for our technology. Although the JV has received increased interest from potential investors, the timing does not appear optimal for many of these investors due to the current dip in coal commodities pricing and related economic sluggishness. The JV is now contemplating the proper timing for raising the funds and is considering delaying the step until early next year when markets may improve. In the meantime, the JV will focus on a limited number of potential high value opportunities including advancing the study signed by Ncondezi and will hold off post to a minimum.

As noted in the last call, we are actively developing a number of technology and equipment sales opportunity, including partnerships and collaborations around various market segments outside of China. Over the two previous quarters, we have seen a move toward the development of multiple business opportunities in market verticals like steel, transportation fuels and power and regional verticals like green chemicals in the US based on waste as a fuel for our gasifiers. We have advanced these opportunities to where we are now hopeful we’ll be entering into definitive agreements during this fiscal year.

Additionally, India remains a strong strategic growth area for us and we have our first license agreement pending there. The execution of this license and related services agreement is anticipated once a customer has received clearance on their coal resource from the government. All combined, these developments outside China have the potential upon closing to generate important financial results for us this fiscal year and our team is focused on delivering these new opportunities.

We remain optimistic about the near term prospects for the company with Yima coming online soon. The prospect of improving ZZ and returning it to operating status. New business potential from our partners Hongye and Zhongmo and the significant set of advanced opportunities outside of China that we have in front of us. We are working diligently to bring these opportunities across the goal line quickly. In order to deliver improving financial results this fiscal year while securing very important opportunities that can contribute to our long term growth and ongoing financial performance.

The future is looking bright here at SES and the growing excitement for your potential is reflected in our staff’s enthusiasm and work ethic towards accomplishing our goals.

I look forward to reporting on all of these developments and successes for our next call and not before. And with that, I’d like to open up the call for questions. Operator?

Question-And-Answer Session

Operator

We will now begin the question-and-answer session. (Operator instructions). At this time we will pause momentarily to assemble our roster. And our first question will come from Robert Smith, Center for Performance Investing. Please go ahead.

Robert Smith - Center for Performance Investing

Good morning. It’s good to have some electricity and heat back in New York and at least in our home. So, let me start with Yima, and can you tell me when – how long will it take for full production of the methanol units. So the startup would be sometime, you are looking at some time in December. And what’s the timeline to full production?

Robert Rigdon

We’ll, when we look at our planning Robert, these projects will typically ramp up relatively fast to full production probably over at least 30 to 60 days but then there will – what we are seeing in my experiences is then there will be a lot of tuning and continued work with the operators to ultimate full production. So in our planning we look at really achieving steady stake full production on an ongoing basis within the first six month period of startup.

Robert Smith - Center for Performance Investing

Okay. And in the press release when you speak of near term. Is near term counted in days and weeks and say a few months rather than quarter?

Robert Rigdon

We’ll, in the case of what we are looking at; we’ve got several things going on. In the near term and regarding things like Yima, and ZZ which as I was indicating in the call will be coming online. Yima now and ZZ later in this fiscal year. Some of our other business opportunity is working outside of China; they are on a variety of timeline track. So we are anticipating those being able to reach fruition over the next couple of quarters. Very much expecting to see some of those closing in this fiscal year. Sooner than later is going to be expectation of the team at the moment.

Robert Smith - Center for Performance Investing

So when you say that you may have announcements to make in -- before the next quarterly conference call. I mean that is what you are referring to?

Robert Rigdon

Yeah. We are very hopeful that we will Robert. Correct.

Robert Smith - Center for Performance Investing

How important is to have the new Chinese leadership in place to facilitate the arrangements and deals. Here in the States, the business community is saying that they can’t move until they have some clarification on the political front so to speak. So are there any similarities in China or it doesn’t work that way?

Robert Rigdon

It’s a little different actually. The way we see it in China, China actually implements a five year plan. There in the early stages of the 12-five year old plan now. And that sets the direction for industries like ourselves and in the industries where we actually compete in China. So that’s pretty well set. Now there can be some distractions. There are distractions now as I think with what they call the 18th Congress is coming together and there’s meetings that go on and a lot of high level government activities that go on over a few weeks. But other than just a few weeks, it’s not particularly disruptive for us, it only may tie up some of the senior level leaders that we work with in our business for a few week period but not for a long period altogether.

Robert Smith - Center for Performance Investing

Okay. I have other questions but I’ll get back in the queue if there’s someone else around.

Robert Rigdon

Okay. Thank you Robert

Operator

(Operator instructions). Mr. Robert, please continue with your question.

Robert Smith - Center for Performance Investing

Okay. So I guess – could you add some updates to the other projects that you’ve mentioned in the past in Australia, in Africa and other areas that in event you might have mentioned in the past as to what might be happening since the last update.

Robert Rigdon

Right. So let me give you a little bit of – in terms of let me start with India for example. In India, we have actually a fairly robust pipeline that we’ve developed over the last couple of years. As I have just mentioned we actually have one license that is essentially complete and is just pending waiting the customers call allocation. I’d love to be able to announce who the customers is but we are in a nondisclosure agreement at this point in time until that definitive agreement is actually released to us. But here are other projects in India as well that are pretty well advanced by us. In the Steel and Ammonia sectors and these projects are also with companies who are primarily working to get their coal allocations in India sorted out. And if you’ve been following India much I don’t Robert, you would probably aware that there has been a lot of focus over the last few months on how the coal allocations are being made and they are sorting through that at this moment.

So we anticipate once they get through sorting that out and this is as a government to business relationship on how coal is allocated in the country and once they sort that out and the coal allocations are locked in, we actually are expecting to see these projects start to move forward. And actually think that India in the bigger picture, on a longer term has the potential to build many projects based on our technology similar what – in the gasification space. Similar to what China has done. And India has coal that is uniquely well suited for processing. Now, that’s India. So other projects we can – just briefly I mentioned Ncondezi and South Africa. That is a coal resource, a very large coal resource that a company that we are working with who desires to employ our technology there in helping make that coal mining operation, potential mining operation that we are developing in Mozambique much more efficient and profitable because we can convert a lot of the overburden and coal mining ways to various products that are under consideration.

So the study that we are actually to perform for Ncondezi is partly feasibility study on implementing project there around those coal resource and supporting them and that continues to progress. The – probably I would say the most exciting thing that’s developed here over the last two or three months is some of the renewed interest in the United States that’s coming back in and we have, we are actively working now with companies here, multiple companies in a couple of different market segments. One, is we are looking at projects for converting waste coal, for mining waste into transportation fuels and utilizing the carbon dioxide off of these projects as a product that we would sell, that would be utilized to enhance all recovery. A very powerful economic preposition as well as the politically attractive for the States and government because it utilizes our own domestic resources both coal and oil.

And then secondly, we are working very actively, there is a renewed interest believe it or not actually in the chemical space of having access to what we’ve sort of termed green chemical such as methanol that we can enable through the conversion of municipal ways to refuter fuels and auto shredder fuels in our gasifiers and these projects are starting to get – it looks like development funds through our customers are coming together and these are some of the ones that we are hopeful that we are going to be able to move forward with and here in the U.S. So that’s a quick overview of the projects Robert.

Robert Smith - Center for Performance Investing

The results of the election. Would that put any kind of damp on those projects moving ahead?

Robert Rigdon

No. Actually, I don’t think so in both cases. In the case of the projects we are looking at utilizing, coal in the U.S. are actually coal mining waste, an incredibly environmentally friendly projects that take a problem on the coal side, the mining waste actually make coal mining more efficient because we can utilize the waste. And have a very good clean solution where we have a home for CO2 at the same time using it in a very profitable way for enhance or recovery. So that’s very positive and then on the other side, the projects that would be utilizing the municipal waste, refuter fuels and auto shredder flop would be renewable projects. So those all fall in the category of clean energy technology, both of these projects do, that’s what our technology is all about. And regardless really which political party, the outcome of the results here. We see these projects moving forward.

Robert Smith - Center for Performance Investing

Robert, with respect to ZZ, when you say you are cautiously optimistic. So what are the factors that tend to on the cautiously?

Robert Rigdon

Okay. The reason is frankly is because it’s taken us – nobody is frustrated with the time it’s taken us to return ZZ to operation as I am. And so now that we see real good progress with Weijiao, I am just cautious because I am on pins and needles and I want to get this thing completed as quickly as we can and get this plant up and running. Like anything it’s not done until it’s done and I am pushing the teams very hard to get this completed very quickly. Now, Weijiao is doing all the right things, they’ve got the financial capability to do this, they’ve got the will now and so that’s why I am optimistic.

Robert Smith - Center for Performance Investing

And Oppenheimer’s work is that going forward and can you just give us some information about that?

Robert Rigdon

Yes it is. That Oppenheimer’s work was what I was referring to on the SES resources portion and it’s actually going quite well. Now we are at the stage here where the joint venture needs to raise additional funds. There is a lot of interest. It’s been quite a bit of market testing by the joint venture in raising those funds but the timing is a little bit off. And this is just a cyclical now that I think we are going to get whichever – we’ve got some certainty coming back in because we’ve got an election behind us, we’ve got hopefully and expecting to see, we are already starting to see some early turnaround in the coal, our commodities market that the timing for going out and financing that would be more appropriate earlier next year. So we are just going to go onto a slow roll which is appropriate I think decision by the joint venture now to do that. There’s a couple of very high value opportunities that they are continuing to work that do not require additional financing at this point and then we are going to come back out early next year and test the market again. And hopefully it will look better and we’ll go head in and go forward and raise the funds to take this joint venture to the next step.

Robert Smith - Center for Performance Investing

And how important do you think the global macro picture is to –if they all to endeavor so to speak but bring forward.

Robert Rigdon

I think it’s important particularly the – it’s important that we continue to see these large developing economies grow. Although I am very excited to see a return of – what it looks like a return of the business here in the U.S, I actually believe the vast majority of our business in the future will be in Asia and also around the developing economies that are hungry for energy and chemical products. And so to the extent that those economies continue to grow at a healthy pace China, India and other parts of Asia is very important. And China’s growth has slowed a little as of late as I am sure you very well aware but still even after the 7% to 8% growth level, that’s a significant amount of growth, China remains hungry for energy and chemical will continue to build. So I feel pretty good about that. I think overall though we will be in a much stronger condition as we get certainty back into the overall developed world, financial markets both in Europe and the U.S. and see these economies start to grow again will be helpful for just us for everybody of course.

Robert Smith - Center for Performance Investing

And as you are moving forward is the key protection of our IP still very much key? I mean…

Robert Rigdon

Absolutely. That’s something I haven’t talked about much as of late. We’ve got 41 patents I think the number is now in process of getting the patents completed. So we are growing quite a healthy IP portfolio here with what we’ve learnt at ZZ and implementing the Yima project. So it’s a big focus we have a lot of control on intellectual property here inside the company and the way we manage the business to make sure we protect that.

Robert Smith - Center for Performance Investing

Okay. We’ll, thank you and I wish you good luck and anticipate the next call.

Robert Rigdon

Very good. Thank, you Robert.

Operator

(Operator instructions). Having no further questions, this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Rigdon for any closing remarks.

Robert Rigdon

Okay. Thank you operator, and thanks to everybody that’s listening in on the call this morning and for your questions and with there being no further questions, we’ll be ending the call now.

Operator

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

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