VOLT GROUP LIMITED — Call Transcript 2011

Feb 27, 2011

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28[th] February 2011

The Company Announcements Platform ASX Ltd Sydney NSW 2000

Enerji Limited Investor Conference Call Transcript 22[nd] February 2011

Moderator (Glenn) : Good morning ladies and gentlemen, and welcome to the Enerji Limited Investor Conference Call. I am pleased to present Greg Pennefather as the host of today’s call. Throughout the conference, your alarms will be on listen only, with a question and answer session at the end. I’d like to advise all parties that this call is being recorded, and hand over to Greg.

Greg Pennefather : Thank you very much. As introduced, I’m Greg Pennefather, CEO of Enerji Limited. Thank you very much for taking the time to dial in and listen to our presentation today. The presentation will be very short, and will be dedicated after that to a question and answer session based on questions that we’ve received via email, as per the announcement of this conference. I will open it up to some questions at the end of answering the email questions, and I would ask that you submit your request to answer questions to the moderator, who will allow questions one by one.

So, the main purpose of this morning’s presentation is to talk about the Power Purchase Agreement that Enerji has entered into with Horizon Power, which puts us on a commercial footing and gives us a line of sight to revenue in the second half of this calendar year. We announced initially that we had a Memorandum of Understanding with Horizon Power that would lead to a Power Purchase agreement, and that was back in October 2010, and as you know on the 11[th] (February) we announced that we had entered into a legally binding commercial agreement with Horizon Power to deliver our heat recovery system based on the Opcon Powerbox to the Carnarvon power station, and supply power to Horizon Power there.

This is going to generate revenue for us in the second half of the year, and what I might do now is move to some of the questions that surround the Power Purchase Agreement, and the project that will be taking place at Carnarvon, at Horizon Power’s power station. So if I can read one of the questions:

“Can we have some concrete details of the PPA, or at least a range, so that we can make a judgement on the return on investment?”

I would like to disclose concrete details of the Power Purchase Agreement, but as you can understand, the agreement is covered by a good deal of confidentiality, and the confidentiality surrounds most of, in fact all of the commercial terms of the agreement. I can assure shareholders and investors that the agreement is on commercial terms, but I cannot disclose the price that we are charging Horizon Power, or the term, or any of the other, more detailed commercial terms. What we will be doing is in our next investor presentation that we will be presenting at the Cleantech Conference in Sydney at the beginning of next week, providing some revenue projections based on the roll-out of Powerboxes as we see going forward from the second half of this year. Shareholders and investors will be able to start to make judgements on return on investment, but I can’t disclose to you the specifics of the Power Purchase Agreements with customers, because they are sensitive and confidential.

Another question from the email:

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Suite A5, 431–435 Roberts Road, Subiaco WA 6008 Telephone: +618 9287 4000 Facsimile: +618 6380 2495

“What are the costs involved in the installation and commissioning, and are we likely to be involved in cost over-runs?”

As we’ve disclosed in our investor presentations, the Powerbox costs approximately $1.5 million to purchase and have delivered to Australia, and it costs between another $1 million and $1.4 million to install. Now, those installation costs are variable because of the different configurations of customer sites. Having prepared many proposals for many different potential customers, we have seen a range of installation costs, based on how many generators that they have in their powerhouse, or the costs of ducting the hot process water or air from the process in order to pipe it into the Powerbox. As you can imagine, if a powerhouse has ten gensets, then we require a heat exchanger on each of the gensets, and that is an individual cost per genset. If a powerhouse has 18 gensets, we require 18 heat exchangers and therefore the installation costs are going to be greater. Having said that, if there are 18 gensets, then there is probably more waste heat, and probably more Powerboxes required for the installation, which means we are generating more power, and therefore more revenue.

So, the costs are variable, will there be cost overruns is another part of the question. I wouldn’t expect that there will be. We have a good understanding of the costs required to implement a Powerbox, and have modelled those extensively. Having said that, the first few Powerboxes will also incur some detailed engineering costs, the output of which will be applicable to future installations of Powerboxes, and of course those costs will be defrayed across several customer installations, and not just attributed to the first few that we do.

If I move on to another question, a number of questions have had to do with the delivery of Powerboxes and when they’re likely to arrive. The focus back in late 2009, under the stewardship of our former CEO, there was a lot of emphasis on when a Powerbox would arrive, and as people know, the first one arrived and we decided that it was not prudent to modify it here in Australia to meet the standards required here. The third generation Powerboxes that are being manufactured at the moment in Sweden have been specified by us to meet Australian compliance standards, and parts of them have already been tested and certified. We are confident that when we go to install these Powerboxes they will have been certified.

The main thing with the Powerbox arrival now is that it is part of a project. The first Powerbox is part of the project being the Carnarvon Power Station. When the Powerbox arrives is somewhat immaterial, in that it just has to arrive in time to be installed at Carnarvon. If the Powerbox had already arrived, it would be sitting in a warehouse waiting to go to Carnarvon when the site is ready for it. We expect that we will be commissioned and generating revenue early in the second half of this calendar year, and that the Powerbox will arrive in time to be installed in the project. We have other long lead-time items in the project as well, which we are, having signed the agreement, in the process of specifying and ordering, those being cooling towers and the heat exchangers that go on the exhaust systems of the gensets. Our current project plan shows that the Powerbox arriving late in the first half or early in the second half of this year will fit very nicely in with the project timetable, and coincide with the lead times of the heat exchangers and cooling towers. What we will be doing, most likely, is taking advantage of that time to have the Powerboxes run up in Sweden, a facility that previously Opcon has not had, and that they will be able to actually run the Powerboxes prior to them leaving Sweden, so that they will have been proven up, and if there are any problems they can be fixed on-site by Opcon personnel in Sweden. That will give us further confidence that the Powerboxes will simply be a drop-in at, well, the first Powerbox will be a simple drop-in at Carnarvon.

Now, if I can move to some other questions, here’s another one:

“Given the Powerbox delays and the lack of information regarding Powerbox delays, how can existing shareholders- many of whom were mislead in the initial hype, gain confidence that sales, manufacturing, and installation processes can proceed at a satisfactory rate?”

Hopefully, I’ve already answered some of that question. We are trying to de-emphasise the arrival of Powerboxes. What we’re trying to do is explain to you, our shareholders and investors that Powerboxes have to arrive as part of a project. We are not selling Powerboxes. We are integrating Powerboxes into a system; a service that Enerji delivers to its customers. The cornerstone of that service is certainly the Powerbox, but it also has other critical components that I mentioned before, being heat exchangers and

cooling towers, and of course a good deal of engineering design that will go into the first few installations. The Powerbox delays have not caused the company any delay in reaching its first revenue. The delay, I don’t like to characterise it as a delay, but the constraint on reaching first revenue is signing the first customer. We have now done that successfully, and as shareholders will note, even from the MOU stage which was in October last year, to the middle of February this year, a Power Purchase Agreement does take quite some time to negotiate. The engagement with Horizon Power dates back to April of last year. So from April to October was the process of Enerji providing detailed proposals and going through Horizon Power’s due diligence process, to make sure that commercially, technologically, and from a risk point of view, that Enerji was a good bet to implement its service at one of Horizon Power’s power stations. The MOU was the first stage in passing their due diligence, from a technology point of view, and from a viability point of view, in that, would Enerji still be around to provide the service? That was a very big milestone for Enerji to pass the due diligence test of a state-owned utility. From there, it was a commercial negotiation from October to February. Given that we had the Christmas period in between, when the key Horizon Staff we were dealing with were on leave for periods of between 2 and 4 weeks; that did cause an additional delay. Sitting down with another prospective customer who is an independent power provider in Western Australia, the very day that we had signed with Horizon Power, they indicated to me that we should get used to that kind of time to negotiate a Power Purchase Agreement.

I think that now leads us into another question that has been asked about a comment that we often make in our announcements, and that is that we are in advanced negotiations with several other potential customers. The question asks that I go into detail on who these potential customers are, and how far along in the process are we with them? Again, this is commercially sensitive information that I can’t disclose. If I was to disclose it, I would have to announce it, and what that does to our negotiations with those parties is puts us in an inferior position, because they are then aware that the market has an expectation that we will sign those customers. That gives them plenty of bargaining power in those commercial negotiations. It may also result in them stepping away from the table and not being a potential customer anymore, because we’ve revealed who they are prior to any agreement being in place. At the moment, what I can say is that we are in negotiations with large mining companies, smaller mining companies, and independent power providers. I believe that we have engaged all of the independent power providers in the country that have installations that would be suitable for a Powerbox installation. With some of those we are a long way down the track in terms of we have identified sites that could use Powerboxes. We have gathered information about those sites and modelled them, and come up with commercial and technology models that work for those sites and put them in proposals and put them to the mining companies and independent power providers that we’re talking to. That’s what I mean when I say we’re in advanced negotiations. We are expecting that, and I said this in the Boardroom Radio Interview, that these negotiations will bear fruit, and by the time we have the Carnarvon system commissioned, that we will have another five Powerboxes placed with the customers that we are talking to at the moment. That’s covered off that question there.

These questions start to move off the topic of the Carnarvon installation and the advanced negotiations with customers to more generic policies on how we’re providing information to the market.

“Isn’t it a better policy to provide full detail; both good and bad news, rather than assertion and rhetoric, thus gaining shareholder confidence in the long term?”

The company in 2009 and early 2010 was providing very regular updates to the market. In my opinion, those updates were too regular, and started to become less substantial the longer time went on. The policy of the current board, and myself, and our advisors is that we will put out announcements and release news when we have something concrete to say. We’re not in the habit of trying to hype what we’re doing. We wish to keep the market and our shareholders informed with concrete information. Having said that, what we’re trying to do is achieve our business goals, so that we have concrete information to release on a more regular basis. What shareholders and investors can look forward to is a better news flow, but also be aware that when we are not releasing news, we are going about the business of selling our service, based on the Opcon Powerbox, to the potential customers that we see in this market. We are not sitting idly by and waiting for the business to come to us.

Another often asked question, and this one was emailed in as well;

“If these things” -I’m assuming this shareholder is referring to Powerboxes, “sell like hotcakes as anticipated, by utilizing high efficiency Swedish technology, what contingency plans are in place to ensure manufacturing can supply demand at the blistering pace needed to maximize a good return to long-standing shareholders?”

We are in constant contact with Opcon regarding the manufacture of Powerboxes. In fact, we will be visiting Sweden in March, to inspect again the manufacturing facilities that Opcon has in place in Sweden for producing Powerboxes. At the moment, I can tell you that a Powerbox takes approximately nine months to manufacture from date of order, until it is ready to ship. The rate of delivery of Powerboxes through the next 12 months or so will be one per month. So as soon as the first Powerbox arrives, we would expect the second Powerbox to arrive roughly a month after, and the third a month after that, etc. What Opcon is doing is then beginning to ramp up production, with a target of one Powerbox per week within the 12-18 months following the next 12 months. So, from the middle of 2012 to the middle to end of 2013, we can expect to see the Powerbox production rate go to approximately one per week, and then in the 12-18 months following that, Opcon is targeting a Powerbox a day. That will see the lead-time for a Powerbox drop from the current 9 months to approximately 5 months, and we would see that rate of production being able to meet the rate at which we can sell Powerboxes into the market. The other consideration is that the type of customers that we are talking to are well aware of the lead times required to manufacture this sort of equipment. For example a turbo-expander that would be used in a custom-made Organic Rankine Cycle machine might take 15 months from order to delivery, so a Powerbox being delivered within 9 months is well within the expectations of our customers. Having said that, we are also talking to Opcon about the probability of large, single orders coming in for Powerboxes, and their ability to meet that. What they have done then, and this was announced to the market back in early last year or late 2009, that they have engaged Partnertech, who is an industrial manufacturing expert, to set up production lines to deliver Powerboxes to Opcon’s customers. Partnertech has the capability to expand its production to meet larger orders, given sufficient notification. This will be part of what we do in Sweden when we are there next month, and that is go and inspect Partnertech and meet with the management of Partnertech regarding these potential large, one-off orders.

Another question via email:

“Has Opcon considered manufacturing in an Asian country?”

That is a question better asked of Opcon. I do know that they have a facility in China, and that they have toyed with the idea of building Powerboxes there, but at this point in time, my understanding is that they are using Partnertech to manufacture Powerboxes, and they will continue to be produced in Sweden for the time being.

Another question here: “When will the Powerbox be installed?”

I believe I’ve answered that, but again, within the Carnarvon Power Station Project, it will be installed and commissioned to provide revenue to the company early in the second half of this year.

I think I’ve answered all the questions that have been emailed into us at this point in time, so if I could open up the call to questions.

Moderator (Glenn): Thank you Greg. Ladies and gentlemen, if you have a question please press 0, followed by 1 on your telephone keypad. If you change your mind and decide to withdraw your question, simply key 0,2. Greg, the first question we have is from Hamish from Southern Cross, please go ahead.

Hamish : My first question, you obviously indicated that you’re not in a position due to confidentiality to comment on the commercial terms, maybe you might comment whether or not they’re in-line what you indicated with the case study in your investor presentation?

Greg Pennefather : Thank you for your question Hamish. The case study that we do in the investor presentation is based on a diesel mine site, where the price of generating power, burning diesel, depending on the efficiencies of the engine and how far the site is from the source of diesel is between 27 and 40 cents per kilowatt hour. The Carnarvon site is a gas-fired power station, using reciprocating engines, so the price of producing power there is a good deal cheaper than a diesel site. So the price is not in-line with a diesel

site, as per the case study in the investor presentation, but it is in-line with the price that we expect to get at gas-fired sites.

Hamish : Ok, just one further question, in relation to the six boxes, which I understand you are contractually required to acquire. I was just wondering if you could give us an indication of how much has actually been paid to date for those boxes, and how much is still owing, and whether or not there is a minimum time which those boxes have to be acquired within?

Greg Pennefather : I don’t have the exact figures off the top of my head, Hamish. I’m just trying to think while we’re speaking, we have made payments to Opcon in the order of $4.5 million. The total order of six Powerboxes is a $9 million commitment. In terms of do we have a minimum time to pay, Opcon have been very accommodating, they understand the stage at which the business is at in terms of commercialising Powerboxes and being a start-up business and they have been accommodating in terms of payment arrangements. As we’ve been at pains to point out, the Powerboxes are not paid for 100 per cent up front, there is a payment plan that stretches across the manufacturing and commissioning cycle of the Powerbox; the first payment due when we order, the second payment due when the factory acceptance testing has been completed in Sweden. The next payment when the Powerbox arrives, another payment when it’s commissioned, and then there is a defects liability period, after which there is another payment; the final payment is made.

The first two Powerboxes have had their factory acceptance testing payments made. The rest of the Powerboxes have had their initial payments made, and we’ve made a prepayment back in 2009, which was for long lead-time items and to assist in the design modifications required for the third generation Powerbox, which is designed and specified to Australian conditions and standards.

Hamish : Just further then I guess, in relation to the payment of the further boxes is, where I was really leading to was the drawdown of additional funds from your convertible facility, and I was just wondering, therefore, what the likely timing; based on your outlook with where you are in negotiations etc, what your likely outlook in terms of the requirement to draw down, so potentially say, another four or five of those are draw downs in the next period of time.

Greg Pennefather : Ok, so what we’ve done is we’ve been very upfront about when we envisage draw downs being made. That was offset a bit in time by the delay in the first draw down. We did anticipate the first draw down would have been in December or January, early in January. That was delayed by one of the conditions precedent of the agreement, that was out of our control. What we did on, I’m just having a look at our announcements, we disclosed to the market when we’d be drawing down and how we would be applying those funds in two announcements that were titled “ASX Listing Rule”, I’ll just get it for you off the ASX, “Grant of Waiver of ASX Listing Rule 7.3.2” on 17[th] December last year, we provided a table of when we saw the draw downs occurring. We went December last year/January this year, and then another draw down in March, and then another draw down in May. Now those draw downs have been offset by a month or two because of the delay in the first draw down, but I would refer you to that announcement so you can see the draw downs and application of funds. We also have in there a work schedule for the first nine Powerboxes, and that is the timetable that we are still working to, so I just refer you back to that announcement. Does that answer your question?

Hamish : Thank you.

Moderator (Glenn): Thank you for your question, Hamish. There are currently no questions in queue at this time, Greg.

Greg Pennefather : Ok, if I have no further questions, I have no further questions to answer from our emails. I may wrap things up then. I’ll just check the email one more time. At this time, I will take questions from anybody, Glen?

Moderator (Glenn) : Ok. Just a reminder to all parties, if you wish to ask a question please press 0, followed by 1 on your telephone keypad. And it looks like we’ve got Ben Rowe in the question queue. Ben, you’re now live.

Ben Rowe : Thanks Greg. Greg can you just comment, following on from your cash positions from the previous caller, can you tell us what your current cash position is. Obviously you’ve explained now the funding progress going forward, and can you also comment about the need to raise any further capital in the next 6-12 months?

Greg Pennefather : I won’t give you our exact cash position at the moment. We’re about to release our halfyear, and so it would be inappropriate for me to give you our exact cash position at the moment. We obviously keep a close eye on our working capital to make sure the company is in good shape. Obviously we need capital to fund the installation of Powerboxes and to continue to make progress payments on the Powerbox orders we have in train. Will we need to raise more money in the next 6-12 months? Most definitely. In terms of how much, I would refer you to our announcement of 17[th] December on the ASX Listing Rule Waiver. That details over the next 15 months, well, the 15 months beginning in December last year, the kind of expenditure we need to make, and it also provides the timing of that. The $25 million funding facility that we’ve put in place is designed to allow us to draw down as we need funds. Now, we need to do that in a judicious way, and the whole idea is that those funds will be required to purchase income-producing assets, being Powerboxes and the ancillary equipment required to provide our total heat recovery and power generation service. We will definitely need more funds over the next 6-12 months, the total that we have allocated, or that we have predicted in the announcement that I have referred you to is almost $9 million over the next 15 months, and that is to allow us to install a further eight Powerboxes, in addition to Carnarvon Powerbox.

Ben Rowe : Perfect, thank you.

Moderator (Glenn ): Thank you Ben. Our last question is from John Saunders, please go ahead.

John Saunders: Hi Greg

Greg Pennefather : Hello John

John Saunders : I’ve enjoyed the presentation so far, I think you’ve answered quite a lot of questions, and probably instilled quite a lot of confidence, so well done there. Now, one of the points that I wanted to make was that, because of the volatility that has occurred with previous events in ERJ’s history, without going into too much boring detail, that most long-term shareholders will be aware of, if the situation occurs where something happens such as, I alluded to, where a Powerbox is anticipated to be delivered and ends up being not delivered. If, although that may not seem very newsworthy because it is resulting from essentially a delay in negotiations, which I think most people would appreciate is the norm in these situations, a simple but short, informative release to the investment community just pointing out that there is a delay, that there is nothing to be concerned about, and the situation is continuing, may serve to allay fears that the investment community can develop from time to time, particularly when there has been previous volatility.

Greg Pennefather: Well, in the words of Tony Jones on Q&A, John, I take that as a comment and thank you for it. But yes, in terms of that sort of disclosure, if you can appreciate my point of view as I said before, we are trying to de-emphasise the actual delivery dates of Powerboxes and concentrate on acquiring customers and executing on projects to deliver our service to these customers. Now the Powerbox, as I said, is the cornerstone of that service, but it is not the only component that needs to be delivered. And of course, if we have delivery occurring prior to a requirement, what we have is a storage problem, so the first Powerbox that is destined for Carnarvon is going to arrive in good time. I can’t give you an exact delivery date at this time, but it is on schedule to be delivered in order for us to install it along with all of the other equipment that we need to get on site, and all of the engineering design work that has to happen prior to that. But I take your point, and it is very good to get that kind of feedback so that we’re aware of what sort of information shareholders and the market in general are looking to, from us.

Moderator (Glenn): Thank you for your question, John. There are currently no questions in the queue at this time. As a final reminder, if you have any questions or comments, please press 0 followed by 1 on your keypad.

Greg Pennefather : As a final wrap up, what I’d like to say is that Enerji see 2011 as a landmark year for us. 2010 we did a lot of tidying up, positioned ourselves to be in a very good position to commercialise our service based on the Opcon Powerbox and to deliver on the promise that Enerji has had since it was first floated to the market. So in achieving that, we have put in place our funding solution; a $25 million facility that should fund, from this point, approximately 11 Powerboxes, if we don’t take into account cash flows into the company, and we have our first commercial customer. The Power Purchase Agreement signed with Horizon Power is a legally binding, commercial agreement that puts us on the road to having revenue early in the second half of this calendar year. That for us is a very exciting milestone. It is assisting us with our negotiations with other potential customers, of whom there are many, and they are in the target market that we have always espoused, being mine sites that generate their own power, and remote town sites that generate their own power. We expect to announce more, initially MOU’s with potential customers, and then Power Purchase Agreements. The expectation that investors and shareholders should take from this is that these customers have a long sales cycle, and the commercial negotiations over a Power Purchase Agreement, which is a long-term agreement, can be protracted, but what we are doing is ensuring that the commercial terms are the best we can get, and that they ensure the future of our business. I hope that you will continue to be Enerji shareholders. For those who aren’t, that you will become shareholders, and that you will share the vision of the bright future that we see for Enerji. Thank you very much for your time this morning, and please feel free to submit more questions to info@enerji.com.au and we will always endeavour to answer bona fide questions. Thank you very much.

Moderator (Glenn): Thank you Greg. Thank you ladies and gentlemen. That concludes your call this morning. We thank you for your participation, and ask that you now disconnect your lines.

About Enerji

Enerji (ASX: ERJ) is an emerging green power utility specialising in the provision of 3rd Generation Opcon Powerbox waste heat conversion technology.

Enerji has the exclusive Australian sales and distribution rights to the proven Opcon Powerbox technology, which converts waste heat into green electricity, as well as options for Malaysia, Thailand, Singapore and Sub-Saharan Africa.

The Opcon Powerbox represents a significant commercial opportunity in Australia through application to industrial, mining and power generation operations.

Enerji plans to maximise this opportunity and generate shareholder returns through revenue from long term power purchase agreements.