ReFuels N.V. (REFL) Earnings Call Transcript & Summary

Good morning, and welcome to the ReFuels Investor presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to the management team of ReFuels, Philip and Baden. Good morning to you both.

Good morning, and thank you for that introduction, and good morning to those of you watching this live and to those of you watching it on catch up. We've got a couple of exciting things to discuss or present today. We announced a week and a bit ago, we've now closed a debt raising, which we'll touch upon, which means that we can now go into construction of more stations. And given that a bit of time has passed since then, we've also, just this morning, announced our October dispensing figures. So we'll also highlight that as we go through. And as per usual, please take this opportunity to submit some questions if you have any, and we'll do our best to get through those afterwards. So just a brief reminder, what we're doing. We are decarbonizing heavy goods vehicles here in the U.K. If you look at that segment, in particular, they make up about 1% of vehicles on the road, but they emit close to 20% of greenhouse gas emissions. So if you deal with that 1% of vehicle mass on the road, you are removing close to 1/5 of all greenhouse gas emissions from road transport. If we then take a look at the fuel that we are providing, which is biomethane, which is 100% sustainable and renewable fuel made from a waste feedstock. How does that compare? If you're a typical fleet customer in the U.K., how does that compare to running on regular diesel? And how does it compare to running on HVO, which is 100% biodiesel? Over the last 2 years, you've seen we've had approximately 25% savings of running a bio-CNG truck versus a diesel truck. If you then compare that to HVO, now on the left-hand graph here, you see that the savings over HVO have been in the 30% range and now they're powering north of 40%. So large savings there, cash-on-cash savings. If you then move on to the next one, you see that there's typically 85% to 90% greenhouse gas emission savings by running on CNG versus -- or bio-CNG versus diesel. There are also feedstocks and production methods that can take that negative, meaning you can get more than 100% savings by running on bio-CNG. And then there's a typical question we get, which is, okay, so how much feedstock potential is there for biomethane? Is this because everyone sort of knows that there is maybe a limited amount of feedstock to produce biodiesel. What is the situation for biomethane? We're only scratching the surface of the potential for biomethane, which you'll see on the right-hand side. We are aware or the industry is aware of close to EUR 30 billion going into that sector over the next 5 years, and we continue to hear of new projects pretty much constantly. So I presume that number is higher now. So there's a strong pipeline of growth for biomethane production going forward. If you then take a quick snapshot as to where we are today, we've got 16 stations. We've just announced the number 17 has gone into construction. We are refueling north of 2,100 trucks as of October, that's 2,130, 2,131, I think it is to be accurate. And we're very proud that we saved north of 220,000 tonnes of greenhouse gas emissions across our customer base, which has now grown to north of 170 customers. So this isn't anymore a niche application that a few select large PLCs are using. This is also now being adopted across a much wider spectrum when it comes to haulers in the U.K. In April, we announced a restructuring or an update, if you want, to how we have the business structure with Foresight, where we have essentially brought the two revenue-generating elements, which is what we do with biomethane sourcing and certificate generation and the station operations and therefore, the customer relationships we have with the downstream customers. All of that was brought in under CNG Fuels, which has put us in a very strong balance sheet position, which is one of the reasons or the main reason that we've now been able to raise debt through a process that Baden will touch upon, but at attractive terms. So what does a typical CNG station look like? This is Livingston up in Scotland, not that far away from Edinburgh, our second station up there. We opened this in May/June of this year. At full capacity, we'll be able to refuel north of 600 trucks a day. These are unmanned facilities, very, very efficient pieces of infrastructure when it comes to dispensing a renewable energy vector into vehicles. This is already seeing good adoption or good utilization already. Why? Because we've got Tesco just up the road with their largest distribution center in the U.K. If we then look at where we've come from with regards to market penetration and where we hope and think that we're going. Currently, about 10% of all so-called 4x2 trucks in the U.K., these are articulated trucks. 4x2 articulated trucks in the U.K. are CNG trucks that run exclusively through our network. There's 21,500 4x2s in the U.K. So there, by having a 10% market share or getting close to 10% market share now, we've taken that from basically 0 to 10% over the last 10 years. If you then look on the right-hand side, that is a 6x2 market or 6x2 truck. That is a 44-tonne truck application where the truck manufacturers haven't been producing a CNG truck up until basically the last 18 months. So what does that mean? Well, it's meant we haven't been able to penetrate that market. Those trucks are now starting to be seen on the road. Not only are we seeing very, very strong trial and demo demand for these trucks, we're also now starting to see a really good order book starting to fill. And if we can replicate the 10% that we've got on the left-hand side to the 4x2 market in the 6x2 market, well, then we've not only done a good job, but that's very meaningful, as you will see later on also for the potential earnings of the company. These are just two examples of large fleets that are now adopting CNG or bio-CNG at scale. Tesco already mentioned up in Livingston, and then we've got Co-op. Both of these fleets have got plans for further adoption over the years to come. And of course, both of these are supermarkets. And now we've got 8 out of the 10 supermarkets in the U.K., largest supermarkets in the U.K. are now running their trucks or some of their trucks on biomethane. And this is a trend that we expect to see going forward. And with that, I'll hand over to Baden, and then I'll come back in for a bit of a summary in a bit.

Thank you very much, Philip. So yes, just to reiterate our plan for the next 3 years is to take our current network of 16 stations up to 25 stations. Clearly, we're building #17 at the moment and to essentially double the capacity at us through the station network -- for the station network to 20,000 vehicles per day capacity. We are now fully funded from an equity perspective in the business. We do not -- we can't see any foreseeable requirement to raise equity for the time being. And we believe the station rollout will now be able to be fully funded via cash flow and debt facilities, such as the GBP 25 million 5-year debt facility we've just taken out with the Foresight Group. We also have the ability to dial up or dial down the speed of the rollout in the event that customer demand requires it and of course, certificates at -- certificate prices and general market conditions are favorable in the event we need more stations. To just have a couple of words on the debt facility we have. We've just recently taken out with Foresight. We conducted a comprehensive market exercise in the first half of the calendar year. We received a number of term sheets, which were very compelling. But Foresight Group, our existing funders came in with a very attractive offer, which we feel is the best -- was the best suited for the current state of the business. The rate on it is market tested. It is an easy one to repay early, if need be, which is attractive in the event that we want to upsize it or take on lower cost debt in the future. And also simple to draw down because this is, again, is an existing funder who understands the assets we're building, is already within the capital structure and can therefore be more flexible when considering how it's drawn down and how it fits into what we already have. Of course, this piece of debt coming in as a senior lender. And of course, we're very much aligned, which is fantastic for the growth of the business and the plans of the business over the coming years, and that enables another degree of flexibility when it comes to funding and the speed we want to continue the rollout. So altogether, we're very pleased with this and the faith that Foresight has shown to continue their investment in the business. So just to quickly touch on the station economics. Obviously, the change over time as we've developed the business. There are now more trucks on the road. We have faster uptake and expect adoption rates to continue to grow in the years ahead. But if you take a snapshot really of what we sort of see at the station now when we're thinking about building out the network and what we're looking for. Average CapEx on the station is around GBP 8 million and the payback period without RTFCs is about 5 years. If you include RTFCs at sensible prices sort of around they are now, where they are now, you can bring that payback period on the combined business where we are looking at both the station revenues and the RTFC revenues, and you can reduce that payback period by about 2 years. So very attractive payback periods on the CapEx invested. And -- but of course, these again will vary from site to site. We are now focusing our efforts on higher pressure tier sites. We have more available sites to choose from. We have more than 100 in our pipeline. So we can focus on those sites that have better economics that can drive adoption where customers can essentially roll out their adoption plans at sort of the most rapid way possible. And once again, the IRRs that we look at here, 25% to 30%, actually 15-year unlevered IRRs. And of course, as you've just seen, we intend to use leverage as well, so we can increase those IRRs from there, too. Thank you very much.

Thanks, Baden. So as Baden mentioned, if you look at the typical stations that we're now looking to fund through the debt facility, these are higher pressure tiered stations. That also means we get slightly higher capacity, potential capacity at these stations. If you look at Magor here, got into construction just a couple of weeks ago. So that will be in operation probably sometime middle of next year. We've got Swindon, another one in the high-pressure tier range here that we're looking to move into construction on pretty soon. And then the third one, we haven't selected yet. But we have a strong pipeline coming through with regards to sites that we can build, and we'll be very selective in order to make sure that we pick those that, of course, provide us with the best return, but also which are the most important with regards to our customers, which can provide us with the best loading and utilization -- early utilization of those stations. We operate under the so-called RTFO, Renewable Transport Fuel Obligation. That is a biofuel blending obligation here in the U.K. It's important to understand it's not a subsidy. It's a market-based mechanism on the principle basically the polluter pays. What we're seeing now and what we're going through and what you see here is a trajectory out to 2032, where the blending obligation is stepping up every year. The Department for Transport a couple of months ago said they are aiming to come out with a consultation early next year, where they want to consult on a range of aspects, but some -- one of them is to consult on whether that blending obligation uptick every year should be increased and should be taken further out than 2032. It's important here to understand this policy does not end in 2032. It is just the increase that as of today stops going up in 2032. This policy doesn't have an end date, which is important for people to understand. So certificates are an important part of what we do. They're an important part of our cash generation. And of course, by putting biomethane through the stations, we also are able to offer our customers running on 100% sustainable and green product. The certificate values have historically been volatile. We don't expect that necessarily to change in the future that all of a sudden it's going to become rock solid. But if you look at where we've come from and where we're currently trending, the average price over the last 7 years has basically been 25p. If you look at where we've been trading over the last 4, 5 months, we were sort of stuck in the range of 25p to 26p, maybe slightly below, slightly above. And then in the last 6 to 8 weeks, we've trended up and now the price is basically 27p to 28p per RTFC. Why is that? Well, we're seeing the overall biofuel market in Europe and globally starting to tighten, and that has an upward price pressure on certificates. So if you then look at how are we doing now with regards to earnings, it takes time to build what we've built. We've been doing this for 11 years. And we basically -- we are in the process of and we have turned a corner this year in the sense that the underlying business is now profitable. We are guiding -- we provided guidance at our earnings end of August with regards to GBP 8 million to GBP 10 million in EBITDA generation this financial year. We're on track for that, of course, because you haven't heard anything from us. But if you then look at what do we believe we can achieve between now and 2030, I know that's far out in time. But if you look at that, we are on track as of today of generating what we believe is an achievable target of GBP 100 million of EBITDA -- annualized EBITDA by the end of 2030. If you then look at where we're trading with regards to share prices, and I'll leave it up to you guys whether you believe we're undervalued, overvalued or we're at fair value for now. But this is just here to illustrate the potential that is there if we are successful in achieving what we believe is a highly achievable goal in 2030 of getting to that GBP 100 million EBITDA annualized threshold by then. Then, of course, that would, all else equal, require a fundamental repricing of where we are today, and then I'll leave it up to you guys to judge how we're doing and how we're delivering on that over the coming quarters. And then just to summarize, nice picture here of three Tesco trucks. What we're increasingly seeing is the fleets that need to decarbonize are increasingly coming off the fence. They can no longer wait. They might have ambitious targets to get to 50% decarbonized by 2030, 100% by 2035. That means they can't wait anymore. And we're increasingly seeing that biomethane for many fleets is becoming the preferred choice. When sourcing biomethane, I've just mentioned, we operate under the RTFO. As such, we're in a robust market-driven place. Stress again, it's not a subsidy. And as such, we are now in a good position with regards to balance in the overall biofuel market, which is now providing some upward pressure on certificate prices. And finally, we've closed a debt facility. Yes, in the future, we aim to refinance that out to probably grow the debt in the future. However, what's more important probably here is that we are fully equity funded. We cannot see a need for future equity that is required within the business. Of course, things can change, M&A activity, what have you not. But of course, if we were to go down that route, then we're looking at something that's value accretive. But if it is organic growth, and as of today, we don't see a requirement for a debt raise because as such, we are fully funded.

And with that, we will take some questions. Let's see what's come in here. All right. Will the debt raise cover the planned rollout to 25 stations?

Happy to take that one. Yes. So well, no, it won't cover the full rollout to 25 stations. What our plan is, is to essentially look at a combination of debt and cash flow from the business to fund the rollout to 25 stations. We have the GBP 25 million facility that we have currently plus some cash flow. We'll fund the next 3. And then we will have -- we have obviously a growing amount of cash being generated by the business. And that amount will dictate the speed at which we want to then bring on any additional debt facility capacity as well as the amount of cash flow we want to allocate to the remainder of that rollout. So as Philip said, no more requirement for equity when it comes to the organic growth of the business, but we'll look at a combination of cash flow, earnings and debt to complete the 25 stations.

Thanks, Baden. What impact will current RTFC strength have on your forecast? I can provide a bit of clarity on that one. First of all, we are presenting earnings at the end of the month. So I don't want to go in and provide any positive or negative commentary on where we are on our earnings guidance. We'll provide that then. All else equal, clearly, it is positive for us to see that there is strength in the RTFC market. That said, we do sell RTFCs forward. We do lock in spreads forward in time. So I just want to make it clear that you shouldn't always just look at the actual spot price of RTFCs for the last month. We will have forward sold RTFCs as such. But of course, all else equal, it is a positive for us. And more importantly, it's also a reflection of a strengthening biodiesel price, which as such, takes me on to the next question here, which is, is HVO your main competing fuel? And the answer there is yes. There is some, I think, misunderstandings, misconceptions out there that we are in fierce competition with LNG, bio-LNG or potentially electric or hydrogen. Hydrogen, we can park because we're not seeing that at all for now. So the main competition, if you are a fleet that wants to decarbonize, you today essentially have two options. Either you use biomethane and that will then be compressed, which we offer, or it will be LNG. And there, we're not seeing really a lot of direct competition from LNG. Why? Because you have certain fleets who want to go down the LNG route and they won't necessarily go CNG, and then you have an increasingly large portion of fleets that want to go on the CNG route. However, we are always being benchmarked to the alternative. So if a fleet manager sits down, they'll say, okay, I can run my current diesel truck on HVO immediately, meaning they can run it on diesel -- regular diesel on a Monday, on a Tuesday or Wednesday, they can run on 100% HVO. So that's, of course, what we're being benchmarked against. And what we're seeing now is that whilst HVO has had a 2-year period there or thereabouts, where it has been only marginally more expensive than regular diesel, regular fossil diesel, we're now starting to see that price spread blow out quite a bit, which, of course, makes us and bio-CNG a lot more attractive. And I can't remember which slide number it is, but Slide #3 or 4 or whatever it is, where we are showing exactly that, that the premium of HVO to bio-CNG is currently increasing quite considerably. Next one. A 6x2 is now in operation and what is happening with orders? Yes, they are in operation. We've now got north of 100 6x2s in operation out of the 2,100-plus trucks that our customers have got. So round numbers, about 5% of vehicles on the road currently are 6x2s. The order book is firming up nicely. The biggest thing that's really happened over the last year is two things. One, Scania have also brought out a 6x2 offering. IVECO did have a 6x2 offering, although it had maybe some perceived issues with it. Now IVECO has released a new model year of 6x2s and Scania have come to the 6x2 party as well, which they launched their first 6x2 CNG truck in June of last year. So we've now got two manufacturers. We've now got a fairly large fleet of demo trucks out there so that fleets can demo before they order. We're also seeing orders placed before some fleets get to or choose to demo them. So all in all, very strong and encouraging picture of the 6x2s. It's still early in the day, but give us a couple more months, we will have a lot more data points on that. But yes, it's looking good, and we're really encouraged by the interest and the uptake so far. Then we've got one here. Liquidity in the stock is very low. Is there a plan to fix it? I'll maybe just give that a tiny bit and then give Baden some airtime as well. Yes, we are acutely aware of that issue. We are looking at ways of fixing that. We will provide more updates on that in our quarterlies in the next 3 or 4 weeks. I don't know if you've got anything more you want to put in there, Baden?

Nothing more for me for the time being, but we'll provide an update at the end of the month for our quarterly.

You mentioned strong demand from fleet owners transitioning to bio-CNG. Can you quantify the expected customer growth and contract structure with major partners? So let's do the contract structure first. All of our customers have to sign a fuel sales agreement. You can't just turn up at a station and use your credit card. So these are corporate customers as such. Those contracts have a certain validity, locks in certain price points, but it doesn't necessarily lock in a fixed set of volume. But if you look at the uptake here, and I think this is an important one, is that we have historically been quite reliant on a small number of customers who've had maybe 80% to 90% of the volume has been allocated to a fairly small number of customers. And those have typically been in a couple of segments such as supermarkets, parcel retailers, et cetera. With the 6x2s now coming in, we're seeing a much broader range of customers here, which, of course, is good for us in a number of ways. We get to tap into a much larger market, which I showed previously on the slides, the 4x2 versus the 6x2 market. But also it gives us very good diversification with regards to sector diversification. If the sector in this part of the economy has a certain downturn, we don't get hit as hard. And of course, secondly, it's good to have a lot more customers. As such, we can have a greater spread with regards to where the volume sits. Anything else you want to add there, Baden?

Yes, probably. Actually, so as Philip says, we've obviously got a very strong position in the public access market. I mean, obviously, everyone knows if you watched our presentations before that very nearly all of the CNG vehicles in the country come through our network at the moment -- CNG vehicles specifically come through our network at the moment. And we're obviously planning -- we're trying to grow that network as quickly as possible to add more capacity for those customers to come to. But we're -- we design and build our stations near depots. We are fundamentally -- we're public, but act as a private -- act in a very -- as an important part of our customers' logistics by being so close to them. But we're also looking at different ways we can provide additional services to our customers. You may have seen our announcement a few weeks ago. We have now done the first fixed price contract for one of our customers, and we expect that to be really popular going forward as we continue to be a larger part of our customers' logistics. And then, of course, that has volume implications for fixing volume through our network over time. And we're looking at other contract structures as well, which can continue to add benefits and add services to our customers that are of a more long-term nature as well. So yes, we'll continue to update the market as those are rolled out.

Thanks, Baden. In addition, can you expand on the operational cash flows from contracts covering future expansion and how that factors into the modeling of new sites and payback periods? Well, let's take the last one first. New sites and payback periods is -- there are many, many factors that go into us deciding where going to build next. It, of course, looks at we do a financial model, which has CapEx plays into it. Are we on a high-pressure grid? What is the overall capacity, electricity usage need to have at those sites and so on and so forth. But more importantly, on the customer side of things, whilst if you looked at what we did 3, 4, 5 years ago, we might have needed to build stations in parts of the country to open up an entire new part of the country. So the first station we built in Scotland, Bellshill, was critical because, of course, you can't expect Scottish fleets to start adopting CNG when they can't trial a vehicle. They can't trial a vehicle until you have a station there. But of course, now with our second station in Scotland, you see we get good loading from day 1. So we are now beyond where we need to put a station in a certain geographical location in order to open up a key part of the geography, we can now be a lot more selective. And that will be -- that is how we're now thinking, and you'll see that come through in the economics of the next sites. With regards to the operational cash flows from those, again, that is mainly a function of utilization, both with regards to the earnings at that station and of course, the volume that, that station can contribute with regards to sourcing of biomethane. So it's about utilization, and that's why we're choosing the sites that we now are choosing because we are confident we will have good utilization there from early on in the life of those sites. Then we've got a final question here so far. And if there are anybody else who wants to send in, then please feel free to do so. How secure is the supply of biomethane? What impact do you think the development of the SAF, which is sustainable aviation fuel and maritime biomethane demand have on the business? Excellent question. So -- and it's one that's a bit hard to give an accurate answer to because some of these policies are early on in their life. So sustainable aviation fuel mandates came into force earlier this year, so 1st of January. We're not really seeing an impact there on biomethane demand because biomethane for now isn't really feedstock that is used to produce SAF. Maritime is slightly different there that there is a mandate that's coming in, in a bit of a setback with discussions going on at the IMO level, but we are starting to see demand from the maritime sector for biomethane. But is that going to be an issue for us in the future? We are confident it won't for a whole range of reasons, some of those commercially sensitive, some not. But if you look at the overall demand picture for biomethane, strong demand for biomethane, whether it's from the road -- only from the road transport sector or whether it's also from maritime sector or other sectors is good. That's going to mean that we're going to have a lot more investment going into biomethane production across Europe. On one of the slides, I can't remember it was Slide 3 or 4, we show that EUR 27 billion. These figures are probably now 6 months out of date, and we guess they're probably larger now. But let's use round numbers, close to EUR 30 billion is being allocated already for growth in the sector. I mean that's going to bring on a lot of new production. And we don't expect it to stop there. Why? Because the feedstock availability for going into biomethane is still largely untapped in large parts of Europe. So yes, there will be competing uses for biomethane in the future. But then again, there are swings around about it, all right? Having strong demand for a product such as biomethane will also incentivize new production. And it's also feedstock dependent. Certain feedstocks are better -- biomethane from certain feedstocks are better allocated to go to the U.K. Feedstocks from other feedstocks are better used for producing biomethane that might go to Germany, Netherlands, et cetera. So there's not a clear answer here other than that we are as confident as we can be at this point in time that we're looking at a healthy supply-demand balance for biomethane also into the future. And that was that. No more further -- no more questions. So thank you all for those questions, and thank you for taking the time in catching up on what we're doing. We have earnings at the end of November. No doubt, there have some interesting updates in there as well for you and look forward to seeing you again then. Thank you so much.

Fantastic, Philip and Baden, thank you for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of ReFuels, we would like to thank you for attending today's presentation, and good morning to you all.