VivoPower International PLC (VVPR) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to VivoPower International PLC FY22 half-year results conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would like to turn the conference over to your host, Mr. Kevin Chin. Please go ahead.

Thank you, and welcome, everyone, to the half-year results presentation for VivoPower.

Let's jump straight to page 4, the executive summary. So headline is we've made good strategic progress over the last six months, but our results have been affected by extended COVID lockdowns in our key markets, particularly Australia. So the six-month revenue decreased 11% year on year to $18.9 million, reflecting the lockdown regime that we had to contend with, principally in Australia, which extended from July 21 and really just has finished now in February 22, and that's caused delays to scheduled works for the Aevitas business units as well as significantly curtailing kit deliveries' [drop].

Our gross profit and GP margin both declined as a result of the revenue drop. And in addition, we incurred a $1.1 million one-off COVID driven loss on the Bluegrass solar projects in Australia. That was principally due to the Queensland border closure, which prevented us from sending staff up to Queensland, and, additionally, had a COVID outbreak on sites, unfortunately, in January as well.

EBITDA-wise, our adjusted EBITDA declined to minus $4.9 million versus positive $1.2 million in the previous corresponding period. Operating loss increased to $7.3 million versus $0.4 million for the prior year. So this reflects the drivers I mentioned before. And in addition, we've also increased corporate costs and invested in the growth OpEx to support the scaling up , in particular, of the Tembo business.

In terms of balance sheet cash, that's declined from $8.6 million to $3.3 million, reflecting the investments, the Bluegrass loss, as well as the increase in OpEx costs, but that has increased post-balance date as we've started to see data collections come in, as well as some strategic funding that we've received from the major shareholder.

As mentioned, key strategic initiatives. We have executed upon a number of those over the last six months despite the disruptions that we've had to deal. We've expanded our distribution partner network to six continents, and recently established a subsidiary in the UAE, which is the largest off-road market in the world. We've also prioritized the development of the 72 kilowatt-hour battery kit, which is a significant upgrade of the previous 28 kilowatt-hour, and we've achieved full control of our US solar joint venture.

And as foreshadowed at the full-year results presentation in August last year, we have now entered an LOI to launch a renewable-powered digital asset mining business, Caret Decimal. We have contributed an initial 206.5 megawatts DC from our solar portfolio at a valuation of $20 million, which is materially above the book value of $12.1 million for the entire portfolio.

Last but not least, and importantly, we have been recertified as a B Corp. That's a difficult process. So following the mandatory reassessment review, we're pleased to have been recertified, and happy also to have been recognized again as a top global impact company for the second year in a row.

Moving on to page 5. So I wanted to also go through some updates from January 1. So personally, on the Aevitas front, as mentioned, difficult last six months. But pleasing news is that our head of work is actually up 72% year on year versus this time last year, reflecting pent-up work and additional projects in the solar, data center, and infrastructure sectors. Our cash flow is also improving with material cash inflow since mid-January, as mentioned.

On the Tembo front, so we've secured a new facility, so we'll be moving to an expanded facility next to Eindhoven airport on May 1. The new facility comprises just under 30,000 square foot of space, which is more than double the current facility, and can potentially accommodate assembly of up to 5,000 e-LV kits per annum. That is, however, subject to the microfactory strategy that we're working on at the moment in relation to how best to scale up assembly on a global basis going forward.

On a couple of the collaborations that have been outstanding, TMCA, Artic Trucks. So first around TMCA. That collaboration has experienced delays, but negotiations of an agreement with TMCA for the exclusive supply of LC kits focused on the mining sector in Australia remain ongoing. The Artic Trucks LOI has been extended to the end of June to allow time for further assessment of the next generation batteries.

We continue to work on non-dilutive funding workstreams and have made good progress in that regard. So the key ones there, firstly, in the UK, R&D tax offsets worth up to 33% of R&D spend. And there are other, UK government mobility, automotive, innovation, and green grants that we qualified for. So we're going through a process there in terms of getting access to those funds. In the EU, we have access to the European Innovation Council grants of up to $2.8 million. And there's also potential equity investment, so it's fund scale up costs of up to $17 million.

And last but not least, on a global scale, and this is the most important aspect of funding, which is working capital. There are numerous facilities, debtor finance, supply chain, trade finance, some of which we've already secured. But we continue to look to build that up. So as I mentioned last year, funding through the equity markets is not something we will look to do, especially given where current share price levels are at and market sentiment is at. And there are other levers, being these ones I talked about, that we're primarily focused on.

Next item, the GB Auto LOI is being extended for now. There's been disruption on our end since December. It's caused delays to the due diligence program. So that extension is expected to provide a buffer for any further disruption.

And last but not least, Caret Decimal has also executed an LOI to acquire Decimal Digital, which is our partner on the digital asset mining side, and that will deliver over 1,000 latest-generation mining rigs. That will be for initial consideration of $14 million, and will accelerate the path to revenue generation for Caret Decimal. So fundraising has already commenced at the Caret Decimal level -- again, this is not at a VivoPower level -- with capital raising advisors engaged to raise $50 million for us on that front. And as mentioned last year, ultimately, you'll see this business potentially spinning off and outside of VivoPower.

Going on to the next slide, these were the objectives we set out back in August last year, when we announced our full year. The green items are what we've completed; the orange are still in progress. We remain on track despite disruptions to date, to -- in particular, there's many of these objectives done before the end of our fiscal year in June.

So now moving on to the specific business units, and I'll take you to page 8, which is Tembo electric vehicles. Our September revenues were up versus last year, $0.9 million, however, impacted and lower than budget due to operational disruption and delays in the assembly and delivery of kits. Underlying EBITDA loss of $2.3 million, as mentioned, reflects primarily growth in OpEx investments. And work is progressing on the next-generation 72 kilowatt-hour battery platform.

Moving on to Critical Power on page 9 and unpacking the numbers a bit more. So the Aevitas business itself recorded $18 million revenue, which is down 14% year- on year, really due to sort of the effects of a very long and hard lockdown in Australia. Our gross profit was down to $0.8 million versus $3.3 million in the prior year. That does, however, include a one-off of $1.1 million for the Bluegrass solar projects. So excluding that, it would have been $1.9 million. Underlying EBITDA, excluding Bluegrass, is $1.3 million. We remain very positive on this business going forward, given the head of works that I mentioned, and given that Australia, for all intents and purposes, is now open. There are no more inter-country and inter-state lockdowns of note except for Western Australia, which has announced that is finally reopening in early March. And also, international borders are now reopened. That took effect from Monday, the 21st, so three days ago.

We've been awarded the electrical works for the 119 megawatt Hillston Solar Farm. So that's been a very positive development in the last few weeks as well.

Moving on to page 10, with respect to SES. This is obviously a newly established segment, so revenues are immaterial at this point, and have not incurred any significant cost to date. We are on track with Tottenham, with respect to what they want to do at their training ground and adjacent to the stadium. In addition to that, we've commenced dialogue with major mining and port infrastructure companies to commence feasibility studies for whole-of-facility electrification projects that could lead to not just vehicle kits being ordered, but also microgrids, charge stations, et cetera.

We also signed MOU with Relectrify, a leading supplier of battery energy storage systems utilizing second-life EV batteries. And we are collaborating further to explore redeployments of Tembo batteries with Relectrify. And last but not least, we now have developed tools to allow Total Cost of Ownership and ROI to be assessed at a more sustained level for our customers.

Going on to page 11. This is Caret Solar, which is the new name for our solar business in the US, and so that's been rebranded. Our Power-to-X strategy, which very much foreshadowed last year, is being progressed. --We've, as mentioned, contributed 206.5 megawatts of our more advanced projects out of the 682 megawatts that we have to Caret Decimal at a valuation of $20 million. We've also commenced reassessments of previously mothballed projects for a total of about 1.1 gigawatts. And so we're reevaluating the development.

What we're seeing across the US is a very strong interest in renewable power sites, including from crypto hosting companies, who, at the moment, is facing lead times of 12 months plus to accommodate future customers wanting to mine crypto on their platforms. So they are looking for more sites. We've had a number of third parties approach us, but we're very much focused on the Caret Decimal opportunity and fundraising at that level at the moment.

The next few slides, slides 12, 13, 14, 15, show you some schematics of the three initial sites that we are looking to develop; they're all in Texas. There's TX 145, TX 144, and TX 165, all relatively close to each other. One of those sites also has the opportunity to significantly upsize the load, which creates incremental value. On page 13, 14, and 15, you can see the design schematics of these sites. So they -- practically, we are ready to build, subject to financing being completed, and we would look to commence construction later this year. So these sites primarily comprise the solar array that you can see, as well as data centers to house [rigs], and all very strategically located.

Now moving on to the financial review, I'll take care of that as well, so going on to Page 17. This unpacks the P&L further. So you can see the numbers that I've sort of shared before in terms of both critical power and electric vehicles. And so all sort of cascading down into the group gross profit level of $0.5 million. That is after the $1.1 million one-off drops attributable to Bluegrass, and compares to $3.3 million in the prior year. And so that cascades down into the underlying EBITDA of negative $4.9 million versus $1.2 million for the previous corresponding period.

So again, as mentioned, looking for a rebound now, in terms of the -- particularly the Aevitas business and being unshackled on the EV side as well. What we will have to, however, navigate is supply chain issues. So just like everyone else, we're starting to see that really come to the fore. So that is something we will need to navigate.

Next two slides are really just the reconciliation of adjusted EBITDA and adjusted EPS to IFRS financial measures.

And then on page 20, the last slide, is set up with the balance sheet. So as mentioned, the first line actually, the project investments, that represents principally Caret's, for which there's $13 million of carrying value. And the unrestricted cash , $3.3 million as at the balance date, as mentioned, that's now increased.

And with respect to borrowings, that's increased slightly as of the balance date. So translating into a net debt figure, that is now $21.9 million versus $14.5 million. Important to note that there is practically no external debt per say. This is all shareholder loans from the largest shareholder who has been very supportive of VivoPower for a number of years.

So on that note, I think key takeaway, it's been a tough six months. We really felt like we've been running against the hard winds, but I'm very pleased now to have border restrictions and lockdowns removed in our key markets, and some positive developments in the post-balance date period in terms of pipeline, in terms of cash, in terms of funding, and in terms of the strategic developments.

I'll end on that note, and happy to open it up to Q&A.

Thank you all for tuning in.

Thank you, Mr. Chin. (Operator Instructions) Jeffrey Campbell, Alliance Global.

Hi, Kevin.

Hi, Jeff.

I noted the Tembo roofline expansion in the Netherlands [of interest]. I wonder if there's still interest in creating Tembo facilities closer to Southeast Asia, Australia?

Definitely, definitely is. I think I've mentioned that Thailand was one market that we have looked at in the past. We're very close to and have good relationships with some of the leading families in Thailand as well as various government officials. Thailand's got a very good automotive ecosystem. So the Thailand has also been closed, and they are just starting to reopen again. So definitely, we'll look at a microfactory strategy close to our key markets. And we see the United Arab Emirates as another potential location. So Netherlands is not the only site that we would be looking at.

Great. Thanks for the color. I'd like to ask a couple Caret questions, and then I'll be done. The Caret Decimal press release indicated that the primary endpoints for developing the 206 megawatts of solar power was cryptocurrency mining and other power intensive blockchain computing applications. Could you add some color on these other blockchain applications that that's referring to?

Yes, no problem. So we actually see Caret Decimal as principally an infrastructure business, underpinned by the renewable sites that we have and the data centers that will be built on them. And in future, this will accommodate not just crypto mining. And if you look at blockchain, it's really the blockchain and the process of cryptography that is very energy intensive.

And the way I look at it, that there are basically three C's in terms of segments of blockchain. So one is crypto, as in crypto mining; two is content, and you can include NFTs in there, you can include VR, AR, the metaverse, and all products that are being developed, they're all very energy intensive; and then last but not least, contracts. So three C's: crypto, content, contracts, contracts being smart contracts. And you have numerous Fortune 500 companies and [major] corporates globally now getting into smart contracts in a big way, so that is also very energy intensive.

So what we're looking to do is to create an infrastructure that goes beyond just crypto mining, that is able to effectively be a HPC facility, that accommodates other applications, such as what I just mentioned.

Okay, great. And finally, bearing in mind that crypto has undergone increasing US regulatory scrutiny lately, and I refer to Meta's recent failed effort, as an example, how does your strategy -- your current strategy take this into account? And should something untoward change, what do you think of as the best backup uses for the infrastructure that you're developing, should crypto somehow become uneconomical or regulated in some way that makes it less attractive than it is now?

Yes, good question, Jeff. So our own view is that crypto will be regulated, and that's not necessarily a bad thing. However, to your point, there is a risk that renders it uneconomic for mining. But that sort of goes back to our strategy, which is, really, this is infrastructure that's designed ultimately for blockchain applications and related high energy-intensive computing applications as well.

So you can see from the designs there that there are data centers in place adjacent to the solar arrays. And so these sites are very strategic. As you can see, one of them is very close to Tesla substation.

Ultimately, our view is -- our strategy is to do these things so that they're not dependent on crypto mining. It just so happens that crypto mining is the highest and best use for now. But there are multiple use cases for these sites, even without crypto. The trend here is the -- the megatrend is not just crypto mining, but blockchain and other high energy-intensive computing applications.

No, I appreciate that color, and I'm not sure that a lot of investors really appreciate that. Blockchain is actually quite mature. I mean, offshore drillers are using blockchain to pull together all the disparate parts that to go onto a drillship, or onto a production platform four or five years ago. So yes, I appreciate that answer very much. Thank you.

I mean, you're spot on, Jeff. And today, the quality -- the computing or high-performance computing industry contributes to 3.7% of global emissions as compared to, say, the mobility, including the auto industry, which is north of 11%; that's the highest. And production of steel and iron ore is number two.

I think HPC computing is going to be the fastest growing in terms of emissions. And with the amount of content that's being generated for online consumption, whether it's the metaverse or even with Netflix, and with sort of the computing power associated with that and the energy intensity of that, that's not sort of widely understood.

Yeah, that's a great point. I mean, we didn't really hit our question that way, but I'm certainly seeing increasing ESG scrutiny of computing in general, data centers in general, and crypto, and the rest. So what you just said makes perfect sense. Thank you for the color.

No worries. Thanks, Jeff. Happy to take other questions as well.

(Operator Instructions) I'm not seeing any further questions at this time. You may continue, Mr. Chin

Thank you. Well, again, thank you, everyone, for joining. I know there's a lot going on in the world at the moment, so I appreciate the time. And I wish you all well, and we'll close this meeting now. Thank you.

Thank you, everyone. This concludes today's conference call. You may now disconnect.