VivoPower International PLC (VVPR) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to VivoPower International PLC FY '22 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 6 months, but our results have been affected by extended COVID lockdowns in our key markets, particularly in Australia. So the 6-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 business units as well as significantly curtailing kit deliveries as well. 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 project in Australia. That was principally due to the Queensland border closure, which prevented us from sending the staff up to Queensland. And additionally, we had COVID outbreak in south unfortunately in January as well. EBITDA wise, our adjusted EBITDA declined to minus $4.9 million versus positive $1.2 million from 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 additionally, we also increased corporate costs and invested in growth OpEx to support scaling of, in particular, 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 started to see data collections come in as well as some strategic funding that we've received from the next shareholder. As mentioned, we have two strategic initiatives. We have executed upon a number of those over the last 6 months despite the disruptions that we've got to do it. We've expanded our distribution partner network to 6 continents and recently established a subsidiary in the UAE, which is the largest off-road market in the world. We've also prioritized the developments of the 72-kilowatt hour battery kits, which is a significant upgrade on the previous 28-kilowatt hour. And we've achieved full control of our U.S. solar joint venture and has foreshadowed at the full year results presentation in August last year. We have now entered an LOI to launch renewable-powered digital asset mining business, Caret Decimal and it 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 post 1st January. So firstly, on the mix front, as mentioned the difficult last 6 months, the 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. Cash flow is also improving with material cash inflows since mid-January, as mentioned. On the Tembo front, we've secured a new facility, so we'll move into an expanded facility next to Eindhoven Airport on the 1st of May. 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's been outstanding, TMCA and Artic Trucks. So firstly on TMCA, that collaboration has experienced delays, but negotiations of 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 and to allow time for further assessment of the next-generation batteries. We continue to work on non-diluted funding work streams and have made good progress in that regard. So the key ones there, firstly, in the U.K., R&D tax offsets were up to 33% of R&D spend. And there are other U.K. Government mobility, automotive innovation, and green grants that we qualified for. So 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 investments to 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 that. And there are other levers being these ones I've talked about that we're primarily focused on. Next item, the GB Auto LOI has been extended for now. There's been disruption on our end since December. That'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 LOI to acquire Decimal Digital which is our partner on the digital 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 r Caret Decimal. So fundraising has already commenced at the Caret Decimal level. Again, this is not at VivoPower level with capital raising advisers engaged to raise $50 million for us on that front. And as mentioned last year, ultimately, we see this business potentially spinning off and out of VivoPower. Going on to the next slide. These are the objectives we set out back in August last year when we announced our full year. The green actually is what we've completed. The orange are still in progress. We remain on track despite disruptions to date and to clear as many of these objectives are 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. So Tembo 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 Aevitas businesses itself recorded $18 million in revenue, which is down 14% year-on-year, really due to sort of the effects of a very long and sort of hard lockdown in Australia. 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 project. 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 business purposes is now open. There are no more intercountry and interstate lockdowns of note except for Western Australia, which has announced that it is finally reopening in early March, and also international borders are now reopened. That took effect from Monday, the 21st, 3 days ago. We've been awarded to electrical works for the 119-megawatt Hillston Solar Farm. So that's been very positive development in the last few weeks as well. Moving on to Page 10. With respect to SES, this is obviously a new established segment. Revenues are immaterial at this point, and we've 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 Australia. And 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 Reelectrify. And last but not least, we've now developed tools to allow Total Cost of Ownership and ROI to be assessed at a more sophisticated level for our customers. Going on to Page 11. This is Caret Solar, which is the new name for our solar business in the U.S. and that's a rebrand and Power-to-X strategy which then was foreshadowed last year is being progressed. We've, as mentioned, contributed 206.5 megawatts of more advanced projects out of the 682 that we have to Caret Decimal at a valuation of $20 million. We've also commenced reassessments of previously discontinued projects of total about 1.1 gigawatts. And so we're reevaluating the developments. What we're seeing across the U.S. is a very strong interest in renewable power sites, including from crypto hosting companies who at the moment are facing lead times of 12 months plus to accommodate future customers wanting to mine crypto on their platforms. So they're looking for more sites. We've had a number of parties approach us, but we're very much focused on the Caret Decimal opportunity and fundraising at that level of the markets. The next few slides, Slide 12, 13, 14, 15 show you some schematics of the 3 initial sites that we are looking to develop. They're all in Texas. So there's TX-145, TX-144 and TX-165, all relatively close to each other. One of those sites also has the option. It's significantly upsized the load which creates incremental value. And on Page 13, 14 and 15, you can see the design schematics of these sites. So they're practically 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 leaks 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 there the numbers that I've sort of shared before in terms of Critical Power and Electric Vehicles and all sort of cascading down into the Bluegrass profit level of $0.5 million. That is after the $1.1 million one-off loss attributable to Bluegrass and compares to $3.3 million in the prior year. And that same cost goes down into 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 then 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 full. So that is something we'll need to navigate. Next 2 slides are really just a reconciliation of adjusted EBITDA and adjusted EPS to IFRS financial measures. And then on Page 20, the last slide is set out with the balance sheet. And so as mentioned, the first line item, the project investments that represents principally Caret for which there's $13 million of Caret value. And unrestricted cash of $3.3 as of 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's 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 tough 6 months. We really felt like we've been running against the hard wind, but very pleased now to have border restrictions and lockdowns removed in our key markets and some positive developments in the post balance state period in terms of pipeline, in terms of cash, in terms of funding and in terms of strategic developments. I'll end on that note. So I'm happy to open it up to Q&A. Thank you all for tuning in.

[Operator Instructions] The first question comes from the line of Jeffrey Campbell from Alliance Global.

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

Definitely is. And 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 with government officials. Thailand has got a very good automotive ecosystem. So 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'll be looking at.

Great. I'd like to ask a couple of 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 is 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 this. 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, they are basically 3 Cs in terms of segments of blockchain. So one is crypto, as in crypto mining. Two is content, and you can include NFTs in that, you can include VR, AR, the metaverse and all that sort of products that are being developed. They're all very energy intensive. And then last but not least, contracts. So 3 Cs, crypto, content, contracts. Contracts being smart contracts. And numerous Fortune 500 companies and leaders globally are now getting into smart contracts in a big way. So that is also very energy intensive. So what we're looking to do is create an infrastructure that goes beyond this 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 U.S. regulatory scrutiny lately, and I refer to metas 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 adapting. 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 design 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 these sites are very strategic and we can see one of them is very close to Tesla substation. And ultimately, our views and 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 that -- the mega trend is not 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 were using a blockchain to pull together all the disparate parts that go onto a drillship or onto a production platform 4, 5 years ago. So yes, I appreciate that answer very much.

I mean, you're spot on, Jeff. And today, call it, 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 #2. 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 metaverse or even with Netflix and the sort of computing power associated with that and the energy intensity of that, that's not sort of widely understood.

Yes, 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. Thank you. 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. Let's close this meeting now. Thank you.

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