31 January 2013
Cashflow Report and Trading Update for the December Quarter
Ceramic Fuel Cells Limited (AIM / ASX: CFU) a leading developer of high efficiency, small generators that use fuel cell
technology
to convert natural gas into electricity and heat for
homes and other buildings, today released its quarterly cashflow report for the period ended 31 December 2012.
The cashflow report is available at www.cfcl.com.au.
Highlights
-- Strong political support in Germany & the UK
-- North-Rhine Westphalia (NRW) introduces a capital subsidy scheme - the Company expects this to reduce the installed cost of a BlueGen unit to commercial customers in NRW by EUR 10,000
-- UK Government increases the feed-in tariffs applying to mCHP units like BlueGen
-- The Company targets the significant UK social
housing market - appoints the energy services company iPower as distribution channel for this market.
-- The Company is expanding its sales resources in Europe whilst also realigning its operational activities to reduce overhead costs.
-- Marketing communications now fully managed in Europe. Investment in marketing being increased to support projected sales growth in Germany, UK and Benelux
-- BlueGen receives a number of prestigious awards in Germany
Operations Review
Market Developments
The Company continues to see favourable market developments in Europe and is focusing its resources on Germany, UK and the Benelux markets
Germany
There is strong political support for micro Combined Heat and
Power (mCHP) in Germany and in particular for high efficiency fuel cell based mCHP. This flows from the German vision for a low carbon, non-nuclear economy and their understanding that high efficiency distributed mCHP, which can react quickly to the variable demands on the grid, increasingly being imposed by the deployment of intermittent renewables, is a highly important element to achieving the country's low carbon ambitions. In addition to the European 2020 targets (to reduce CO(2) emissions by 20%, increase energy efficiency by 20% and to have 20% renewable energy) Germany has also a stated target to reach 25% of electricity generation from CHP by 2020. We expect mCHP to play a significant role in reaching this goal.
In late October the German State of North-Rhine Westphalia announced a subsidy scheme for mCHP products. Under the new scheme the North-Rhine Westphalia Government will pay a capital subsidy to commercial customers and Energy Service Companies who install highly efficient mCHP products of less than 50 kilowatts. Ceramic Fuel Cells' BlueGen and integrated mCHP products are strongly positioned to take full advantage of this scheme.
Based on discussions with the relevant Government bodies, the Company believes that its BlueGen and integrated mCHP products will be classed as highly innovative cogeneration systems, and therefore eligible for a subsidy of 45 percent of the extra cost of the product compared to a conventional reference product. The subsidy is increased to 55 and 65 percent for small and medium sized businesses.
While the precise subsidy amount will be determined by the relevant Government department, and may vary between customers, the Company believes its products are likely to be eligible for an initial subsidy of approximately EUR 10,000 per unit. The first applications by customers have been lodged with the department and it is expected that the first determinations will be made by mid February.
The subsidy program is due to run until the end of 2017. It is part of a North-Rhine Westphalia Government funding program of up to EUR 250 million to support CHP deployment. The subsidy is in addition to the Federal Government feed-in tariff for mCHP products. We believe that these benefits will bring the net price of a BlueGen unit to a level at which high energy, commercial users can achieve an attractive commercial return and, as such, we expect this subsidy programme to be popular and to be a significant driver of sales.
Also in October there was the opening of Germany's first commercial, virtual fuel cell power plant which will see the deployment of 25 BlueGen units. The opening was undertaken by Mr Peter Altmaier, Germany's Federal Minister for the Environment, Mr Johannes Remmel, Minister for the Environment in the state of North Rhine-Westphalia, together with Mr Bernd Wilmert, Chairman of the Board of the municipal utility network Trianel, and Sven Becker, CEO of Trianel.
A virtual power plant is a cluster of distributed electricity generation units, controlled and operated by a central entity using integrated software systems. A virtual power plant allows power generation to be modulated up or down to meet peak loads and balance intermittent power from wind or solar, with higher efficiency and more flexibility than large centralised power stations. Producing energy where it is needed eases the burden on electricity distribution networks and prevents distribution losses, which can amount to as much as 10 percent from large power plants using conventional generation methods.
At the opening Mr Altmaier declared that distributed electricity generation and energy efficiency, along with a coordinated expansion of renewable energies and electricity grids on a national level, are central elements of the electricity market of tomorrow.
United Kingdom
On 1 December the UK Government increased the feed-in tariff that applies to mCHP units that are accredited under the UK's Microgeneration Certification Scheme (MCS). The feed-in tariff that applies now is 12.5p per kilowatt-hour (kWh) for all electricity generated (this represents a 25% increase on the previous rate) plus an additional 4.5p per kWh for electricity not used on site and exported to the grid (a 50% increase on the previous rate). The increased tariff applies to the first 30,000 mCHP appliances installed. BlueGen is currently the only fuel cell based mCHP appliance accredited under the MCS and hence the only fuel cell eligible for the UK feed-in tariff.
During January 2013 the Company entered into a distribution agreement with energy services company iPower to take advantage of the increased feed-in tariff and deploy BlueGen into the social housing sector. A key target for housing associations is the reduction of fuel poverty and iPower installations of BlueGen will offer tenants a guaranteed discount on their electricity tariff.
Sales
Although the increased government support was very welcome, the North Rhine Westphalia capital subsidy scheme was originally planned for introduction in May 2012 but was delayed until November 2012 due to the holding of the state election. Consequently it caused a delay in purchasing decisions by customers as they awaited the implementation of the scheme.
Sales of 43 units were booked to revenue for the December quarter which brings the year-to-date total to 90 units.
Unit sales booked to revenue
-----------------------------------------
Quarter Qtr unit FY unit
sales sales
------ ------------ --------- --------
FY10 9
-------------------- --------- --------
FY11 61
-------------------- --------- --------
September
2011 8
------------------- --------- --------
December
2011 59
------------------- ---------
March 2012 26
------------------- ---------
FY12 June 2012 76 169
------ ------------ --------- --------
September
FY13 2012 47
------ ------------ ---------
December
2012 43 90
------------------- --------- --------
During December the Company began supplying units to E.ON-UK (in sub-assembly and component format) under Phase II of E.ON's Joint Technology Initiative (JTI) fuel cell demonstration programme. (E.ON has previously deployed 41 BlueGen units under Phase I of the programme in 2012). In Phase II E.ON will deploy 60 integrated mCHP units that will be developed and built by the UK boiler maker Ideal Boilers Limited in co-operation with CFCL. The Company supplied 30 units in December and will complete the balance of the order early in the first quarter of 2013.
Total cumulative orders received to the end of December were 661 units (394 BlueGen units plus 267 integrated mCHP units). Of this total, orders for 329 units have been fulfilled and the remaining open order book of 332 units is expected to be supplied across 2013 - in accordance with customer's requested delivery timing.
In response to the growing sales opportunities in Germany and the UK, the Company is expanding its sales resources.
In October Mr Andreas Ballhausen joined the European management team as Commercial Director. Mr Ballhausen is responsible for leading the business development, sales and customer service activities in Germany. He joins the Company from leading German energy utility EWE, where most recently he was in charge of establishing and running EWE's business unit selling energy services and contracting solutions for households, industry and communities. Mr Ballhausen has extensive experience with fuel cells and mCHP products and is also a member of various committees in the energy sector, including the German Fuel Cell Initiative (IBZ).
The Company has decided to augment its sales channel strategy in Germany with the implementation of a direct sales force to focus on the opportunities presented in North-Rhine Westphalia. In December the Company recruited 6 new sales staff to commence this activity and plans to expand this number to address the sales opportunities in that market. In addition to this the Company is also increasing the number of indirect sales channels that it has in the German market.
In the UK the Company is focusing on a number of key market sectors. One of these is the social housing sector where the benefits of using BlueGen are particularly strong. This week the Company announced that it had entered into a distribution agreement with the energy services company (ESCo) iPower (see - www.ipoweruk.com) that focuses on this sector. In the UK this sector accounts for approximately 4.0 million dwellings or 17.5% of the UK housing stock of approximately 22.8 million dwellings as at 31 March 2011 (source: Dept of Communities and Local Government).
iPower is a social enterprise and ESCo. iPower's principal aim is the provision of energy services to the benefit of social stakeholders and its primary customer base is social housing landlords and their tenants. Social housing tenants are those who typically pay the highest prices for electricity and hence are the most attractive target market for BlueGen in the UK. iPower plans to work with housing associations to sell discounted and low carbon electricity and heat to social housing tenants by using BlueGen and other technologies embedded at a building level over private wire networks.
In addition to this the Company is marketing BlueGen units to housing associations, premium
residential and small business customers across the UK through specialised installation, sales and service partners. To date these comprise:
-- Be Green Systems for London and the South East;
-- Ace Energy for the South Coast and South West;
-- Green Buy Energy for Yorkshire and the North Midlands;
-- Richard Irvin Sustainable Energy for Scotland; and
-- World Heat and Power for the North West and North Wales.
In December the Company expanded its indirect sales channels by appointing its first distributor to service the Belgium market.
Marketing
The marketing communication function is now being fully managed in Europe. The Company is increasing its investment in this area to raise the profile of both the BlueGen and Ceramic Fuel Cells brands in the key product markets of Germany, UK and Benelux. This investment will be used to drive and support projected sales growth in these markets.
Manufacturing & Accreditation
In December the plant in Heinsberg, Germany successfully underwent its annual accreditation review for the UK Microgeneration Certification Scheme (MCS). The successful completion of this audit review is necessary to ensure that BlueGen units made at the plant are allowed to carry the MCS Certificate which in turn is required to earn the feed-in tariff in the UK.
Also during the quarter the Company obtained CE certification for a number of different fluing installation options for units in the European market which will allow for a reduction in installation costs and provide increased flexibility for customers.
During the quarter the Company continued to work with its supply chain partners to reduce costs and to increase production capacity to meet the expected requirements for 2013. The outsourcing of cell production from the Company's Noble Park R&D and pilot manufacturing facility to Chaozhou Three-Circle (Group) (CCTC) in China has resulted in a significant reduction in cell costs and production levels are being increased whilst maintain high quality.
Corporate Restructure
In October the Company realigned its corporate structure and operational activities to reduce overhead costs and to focus resources on the German, UK and the Benelux markets. The Company has reduced its direct sales investment in Australia, Japan and North America, and transferred a number of corporate activities to Europe.
As a result of outsourcing cell production to CCTC and the above restructure activity, the company's headcount has been reduced by 56 full-time equivalent positions (FTEs). In a full year this is expected to result in a cost saving of approximately AUD 5m (GBP 3.3m) although in the current quarter it has led to an increase in cash payments of approximately AUD 0.8m (GBP 0.5m).
Awards
In October at the f-cell conference in Stuttgart, Germany the company was awarded the prestigious f-cell award sponsored by the Baden-Württemberg Ministry of the Environment, Climate Protection and the Energy Sector. The jury's citation noted "BlueGen as the most outstanding technology for 2012 with a high potential for practical application".
Also in October the Company was awarded Spirit of
Innovation award at the Dutch "Energie 2012" exhibition.
In November the Company was awarded the prestigious Innovation Prize of the German Gas Industry. This prize is awarded every 2 years for the most innovative product and service in the gas industry. The awarding of this prize is seen as very significant in the German market.
Financial Review
Net operating cash outflow for the September quarter was AUD 4.6m (GBP 3.0m). This is in line with the last quarter and includes AUD 0.8m (GBP 0.5m) of redundancy related payments flowing out of the restructuring of the business discussed above.
Receipts from customers were AUD 2.2m (GBP 1.5m) which was up by AUD 0.5m (GBP 0.3m) from the previous quarter.
The net cash outflow from financing activities includes AUD 0.5m (GBP 0.3m) of payments relating to costs of the fund raising undertaken in September 2012.
Unrestricted cash on hand at 31 December was AUD 8.6m (GBP 5.7m).
The quarterly cashflow report is also available on the Company's website at www.cfcl.com.au
