De.mem Limited (ASX:DEM)
ACN 614 756 642
Registered Office Level 4, 96-100 Albert Road South Melbourne, Victoria 3205 (e)investor@demem.com.sg
MARCH 2022 QUARTERLY ACTIVITIES REPORT:
RECORD CASH RECEIPTS, FOCUS ON EBITDA BREAK EVEN
Key Highlights
Best ever March quarter in Company history with approx. $5.142m in cash receipts, approx. 49% above prior corresponding period (pcp)
Growth momentum continues with 12 successive quarters of cash receipts growth vs pcp
High-margin recurring revenue segments continue to drive growth up to approx. 78% of total cash receipts (70% in CY 2021)
Strategic acquisition of Stevco Seals & Pumps Victoria Pty Ltd announced during the quarter, continuing to leverage De.mem's outstanding acquisition track record with all three bolt-on acquisitions since 2019 growing substantially post-acquisition
Robust balance sheet with approx. $6.7m in cash and term deposits to support strong growth prospects
Strong outlook for further growth in CY2022, with focus on recurring revenue segments
Recurring cash receipts of $16.5 - 19m expected for CY2022, growth of 20 - 38% vs CY2021
Focus shifting towards profitability, with quarterly EBITDA break even expected by H1 2023
28 April 2022: Industrial water and wastewater treatment company De.mem Limited (ASX: DEM) ("De.mem " or "the Company") is pleased to report strong March Quarter 2022 results.
Best March Quarter in Company History - Up By 49% Vs. PCP
De.mem is delighted to report cash receipts of $5.142m, the Company's highest ever cash receipts in a March Quarter. Cash Receipts are up by approx. 49% vs. $3.461m in Q1 2021.
With the record cash receipts, De.mem continues its exceptional track record of top line growth. De.mem has now recorded 12 consecutive quarters of cash receipts growth vs. pcp - despite the extremely challenging macroeconomic environment due to the Covid-19 pandemic in CY2020 and 2021. Importantly, margins have also grown in conjunction with the top line revenue growth.
Record March Quarter 2022 cash receipts provide a strong foundation for further significant growth in the full CY2022, given the historical seasonality observed within the Company. The March Quarter typically accounts for approx. 20% of annual cash receipts only (Q1 2021: ~18%; Q1 2020: ~20%).
CHART 1: REVENUE GROWTH SINCE 2019 - STRONG START TO CY2022 (IN A$ MILLION)
$18.1
$14.2
$10.1
$5.1
CY 2019
CY 2020
CY 2021
Q1 CY 2022 (cash receipts)
1
Strong Organic Growth vs. Industry Average
In the March Quarter 2022, De.mem has also delivered strong organic growth well above industry average.
De.mem generated organic growth vs pcp of approx. 23%. This organic growth rate is more than 3x the average annual growth rate of 7% for the overall global water and wastewater treatment market, forecasted for the period from 2021-2028; following a temporary decline of -7% in CY 2020 due to the Covid-19 pandemic (source: Fortune Business Insights, "Water and Wastewater Treatment Market Size, Share & Covid-19 Impact Analysis", published in June 2021).
The organic growth rate is calculated as follows:
March Quarter 2022 cash receipts of approx. $5.142m, less the contribution of the recently acquired Capic business (= Capic's pre-acquisition / stand-alone cash receipts of approx. $0.9m per quarter); divided by
$3.461m in cash receipts recorded by De.mem in the March Quarter 2021, which excludes any revenue contribution from Capic as the acquisition was completed on 1 April 2021.
Growth of Recurring Revenue Segments Continues - 78% Recurring Revenue
In line with the strategy communicated to the Company's shareholders, growth initiatives remain focused on De.mem's recurring revenue segments.
De.mem has successfully evolved its business model over the past three years, by growing the share of cash receipts from recurring revenue segments vs. total cash receipts generated from 38% in CY 2018 to approx. 70% in CY 2021, and now approx. 78% ($4.0m) in the March Quarter 2022.
De.mem's recurring revenue is not only very predictable, importantly it generates gross margins above the industry average, and recurring revenue growth has been driving gross margin growth for the Company (gross margin up from 17% in CY 2017 to 34% in CY 2021).
The strategy results in a high-quality revenue/business model, which is unique within the water treatment industry. It results in long-term, stable customer relationships, which provide a strong opportunity for cross selling of other De.mem products.
CHART 2: RECURRING CASH RECEIPTS VS. TOTAL CASH RECEIPTS
78% 70%
54% 38%
58%
CY 2018
CY 2019
CY 2020
CY 2021
Q1 2022
Recurring revenues segments include:
Build, Own, Operate ("BOO") and Operations & Maintenance ("O&M") contracts.
As well as revenues related to goods and services which are essential to the operations of our client's water and wastewater treatment facilities and recurring in nature, these include:
Regular maintenance work on water treatment equipment.
Membrane replacement sales into existing facilities.
Specialty chemicals sales.
Sales of pumps and related services.
Sales of small equipment and consumables.
While the Company's recurring revenue segments generate repeat orders, some minor seasonality may apply in between individual quarters subject to, for example, the timing/receipt of single payments, payment terms with individual customers and/or holiday periods.
Zero Churn in the BOO and O&M Segments
De.mem is pleased to advise that it has never lost a material contract with respect to its BOO and O&M agreements since the Company's inception to a competitor (material contract defined as annual revenues above $100k). The Company's BOO and O&M business currently generates approx. $4 million in revenues per annum, including the sales of consumables to the respective client sites.
These respective segments due to their stickiness and high predictability in revenues are thus a key focus point for the Company moving forward.
De.mem Forecasts $16.5-19m in Recurring Cash Receipts and/or Revenues in CY 2022
For CY2022, De.mem forecasts recurring cash receipts and/or revenues of $16.5 - 19m, resulting in a growth rate between 20% - 38% vs. CY2021. Chart 3 illustrates the strong growth of cash receipts from recurring revenue segments since 2018.
CHART 3: RECURRING CASH RECEIPTS IN A$ MILLION
19.0
CY 2018
CY 2019
CY 2020
CY 2021
CY 2022 (e)
Reduced EBITDA loss in Q1 2022
For the reporting quarter Q1 2022, the Company reports an underlying EBITDA loss of approx. -$470,000 (unaudited; prior to share based payments and business acquisition cost). This is an approx. 15% reduction to the underlying EBITDA loss of -$550,000 per quarter recorded on average during CY2021 (calculated as the underlying EBITDA loss in CY2021 of -$2.2m divided by 4 quarters; see the Director's Report within the Annual Report for CY2021, lodged to the ASX on 28 February 2022, for the detailed calculation of the underlying EBITDA).
Net operating cash outflows of approx. -$916,000 during the quarter exclude late customer payments received after the end of the quarter, in early April, of approx. $450,000. Adjusting for the late payment the net operating cash outflows would have been approx. -$465,000. Outgoing payments to suppliers for the respective projects were already made prior 31 March and are included in line 1.2b in the Appendix 4C. Cash outflows also include payments made during the quarter for annual insurance and audit fees (approx. $100,000), which are included in line 1.2f.
Strategic Focus Shifting Towards Profitability With Clear Pathway to Break Even
The strategic focus of De.mem will now shift towards achieving EBITDA break even. Based on the current Company structure and strategy, EBITDA break-even is expected to occur at approx. $26m in revenues.
De.mem advises that further substantial improvements in EBITDA are expected for H2 2022 with the addition of two important previously announced BOO contracts beginning to generate revenue. The Company expects to achieve EBITDA quarterly break even by H1 2023. Operating cash flows are expected to converge towards the EBITDA over the coming quarters.
De.mem has a strong cash balance of approx. $6.4m plus an additional $0.3m in term deposits as at 31 March 2022, which supports the prospects for future growth as it enables the Company to provide larger Build, Own, Operate ("BOO") contracts to its enterprise level clients.
Two Important BOO/BOOT Contracts Near Commissioning
During the quarter, De.mem has been progressing with the manufacturing of a waste water treatment plant under a Build, Own, Operate and Transfer ("BOOT") contract which was announced to the ASX on 15 September 2021 (see ASX release,"New contracts in move to service-based business model"). The water treatment plant has been shipped to the customer site in late March. This contract is worth approx. $400,000 in revenues per annum and is expected to generate cash receipts beginning from the end of the June Quarter 2022. The system incorporates De.mem's Ultrafiltration membrane technology as the key treatment process.
Another important Build, Own, Monitor & Transfer contract with the Selwyn Snow Resort in New South Wales, Australia, is in the final stage of manufacturing and expected to be shipped to site in June. The contract has a term of 5 years with a total value of approx. $1,000,000 in revenues. Detailed information about the contract can be found in the ASX release dated 8 December 2021,"First water treatment contract with Australiansnow resort". It marks De.mem's first contract ever with a snow or ski resort.
Both contracts are expected to start generating revenues/cash receipts from the end of the June 2022 quarter onwards, which will contribute to De.mem's revenues and margins from the 2nd half of the CY2022.
Containerized Waste Water Treatment Plant for Australian BOO Project at Client Site | De.mem Ultrafiltration membranes as the key component of treatment process |
Further Orders Received During the Quarter Underpin Growing Pipeline
During the quarter, the Company received further important orders:
The award of a framework service agreement related to the servicing of pumping stations by a client from the Australian East Coast. The actual work will be based on individual orders received under the agreement and is expected to be worth in between $100,000 and $200,000 in revenues per annum.
Purchase orders for water treatment infrastructure upgrades worth approx. $180,000 by an existing customer from Queensland.
Purchase orders for the supply of specialty chemicals worth approx. $150,000 to a customer from the lithium mining industry in Western Australia.
Build, Own, Operate with Industrial Clients as Unique Service Offering
Under a Build, Own, Operate ("BOO") scheme, De.mem rents out water treatment equipment, typically based on the Company's proprietary membrane technology as the key technological feature, to a client. Following the commissioning of the plant, De.mem then operates and maintains the equipment on behalf of the client, also providing all required replacement membranes, chemicals and consumables.
The BOO contracts typically come with a fixed term of several years. The offering enables the Company to generate stable, recurring revenues streams from a reputable client base, and to build strong customer relationships.
The BOO offering combines De.mem's extended range of capabilities, from its advanced, proprietary membrane technology to the provision of operations & maintenance services and the supply of in-house Australian-manufactured anti-scalants and other chemicals required during operations of membrane-based water treatment plants.
BOO services require some upfront capital to finance equipment leasing. The projects can be funded through the issuance of debt instruments.
De.mem is pleased to advise that it has never lost a material contract with respect to its BOO and O&M agreements since the Company's inception to a competitor (material contract defined as annual revenues above $100k).
World Leading Membrane Technology Provides Strong Competitive Advantage with Development of Next-Gen Graphene Oxide Membrane Progressing
De.mem has a unique competitive advantage of proprietary and/or patented technology, underpinning the Company's unique portfolio of hollow fibre Microfiltration, Ultrafiltration and Nanofiltration membranes. The Company commercializes its membranes as the key component of its integrated water and wastewater treatment systems or its Build, Own, Operate and service contracts, and in combination with the Company's wide range of specialty chemicals, pumps and consumables that are typically required by clients during operations of membrane based water treatment plants.
On 7 September 2021, De.mem presented its "next-gen" membrane technology, based on Graphene Oxide ("GO") enhanced polymer membranes, with substantially improved membrane characteristics such as 20-40% higher water flux (throughput), leading to significantly reduced operating cost for the water treatment process.
During the quarter, De.mem has initiated a process to obtain approval for use of the new technology for potable water treatment applications by the NSF (National Sanitation Foundation, the American regulator for drinking water related products). De.mem intends to launch this membrane initially into domestic point-of-use and point-of-entry water purification applications, which is estimated to be a US$82.6bn global market by 2027 (source: Market Research Future, study on the Water Purifier Market, May 2021). The launch of the technology into the industrial market will be following.
Acquisition of Stevco Provides Strong Basis for Cross Selling into Victorian Customers
On 22 March 2022, De.mem announced its acquisition of Stevco Seals & Pumps Victoria Pty Ltd ("Stevco").
Established in and operating since 2004, Stevco is a well-known supplier of pumps, small water treatment equipment and related operations & maintenance services to industrial and municipal clients in Victoria. Stevco has a reputation of supplying highest quality products and services.
Stevco's long-term customer base includes leading industrial players from the food & beverage, agricultural and heavy industrial sectors, as well as a number of municipalities in Victoria.
Stevco generated approx. $2.3 million in annual revenues during the past 3 business years (on average) prior to the transaction. It generated approx. $330,000 in normalized EBITDA (adjusted for one-off items). Revenues are largely recurring and a significant percentage is generated from the rendering of operations & maintenance services.
De.mem paid $1.25m in cash plus $250,000 in DEM shares for 100% in Stevco's shares, which values the transaction at approx. 4.5x EBITDA.
The key rationale for the transaction is as follows:
Stevco brings an extensive, well-established industrial customer base in Victoria into De.mem group
Substantial opportunity to cross-sell De.mem's wider product range and advanced membrane technology into Stevco's customer base
Strong operational synergies between Stevco and the De.mem-Pumptech business in Tasmania
Completion of De.mem group's Australian-wide footprint with nationwide service & support capability
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