Interview Transcript

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UXC Limited (ASX: UXC) recently announced an $8 million Share Purchase Plan (SPP) to enable eligible shareholders to purchase up to $10,080 worth of shares at $0.42 per share, a 12.6 percent discount to the volume weighted average price (VWAP) of UXC shares traded over the last ten trading days prior to the announcement. Why raise capital when your share price is at relatively lows?

Executive Chairman Geoff Lord

We’re raising capital to ensure we’re not capital constrained in pursuing our opportunities in the environmental space. We’re also giving holders of an unmarketable parcel of shares the opportunity to top up before a potential compulsory sale, whilst giving all of our existing shareholders an opportunity to take advantage of the historically low share price and support our future growth. Clearly we’d rather raise capital at a better price in terms of the dilutive effect, and we’ve capped our offer at $8 million as we don’t need much. But if we don’t have sufficient capital to take advantage of the opportunities we see, we will have done our shareholders a disservice.

The opportunities I’ve mentioned include those for our Fieldforce solar hot water system installation services. We’re doing over 300 installations a week and have ambitions and the capability to more than double that. The federal and state government rebates available and Renewable Energy Certificates (RECs) we can generate from providing these services give householders an affordable means to swap their electrical hot water heater for a solar one, reduce their utility bills and create green energy. Fieldforce is fast becoming the largest player in that market and we’ve just started.

There are also opportunities relating to the insulation rebate starting from 1 July included in the federal government’s stimulus package, and we’re positioning ourselves to be involved in that market. There are other programs the government has announced in energy assessment and other energy conservation initiatives that we’re also in preparatory stages for. These opportunities are in addition to those we see in the carbon abatement area that we’ve been in for a while and in other energy conservation measures by state governments and utilities.

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In the SPP announcement you’ve indicated a high level of confidence in achieving previous revenue guidance of $700 million for FY09. You’ve said you’ve started work on about $130 million new contracts in the Environmental Solutions area and about $40 million new contracts in the Business Solutions Group. You’ve indicated a strong pipeline of additional contracts. What is driving this growth?

Executive Chairman Geoff Lord

Environmental Solutions and infrastructure spending, which is part of our Field Solutions Group, are the main drivers. Other parts of our Field Solutions Group are more stable, for instance our contract work for utilities, whose capex and opex are on three-year cycles, is less prone to disruption.

We’ve also had some good wins in the Business Solutions Group which is reverting to a “business as usual” demand environment in terms customers needing to continue their investments in IT to reach their strategic initiatives. Many of our customers view IT as core to their business and not a discretionary expenditure item.

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To what extent are the new contracts more capital intensive than your existing contracts? What level of return would you expect from the new contracts?

Executive Chairman Geoff Lord

The capital intensity isn’t invested capital, it’s working capital, which is what we’re looking for in this capital raising. For example, when we’re putting a solar hot water system together we have to buy the solar panels and other pieces of equipment.

We expect returns to be in excess of our current levels.

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You expect EBITDAC in the current second half to equal or exceed the $28.9 million achieved in the previous corresponding period. This compares with EBITDAC of $18.9 million in the first half. What impact has the Ingena Group, acquired in December 2008, had on second-half performance and how is it performing versus your pre-acquisition expectations?

Executive Chairman Geoff Lord

Ingena is on track for the earnings forecast it had before we acquired it. We’re impressed that in this environment Ingena is delivering what it said it would. It will add about $4 million profit before tax to our results in the second half, which is entirely incremental to the first half when there was no contribution made by Ingena.

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In the first half, UXC was in breach of two of its bank covenants as a result of its reduced earnings. How are you positioned versus these covenants at the EBITDAC level expected in the second half?

Executive Chairman Geoff Lord

Our banking facilities are in place to November 2010, and our covenants are reported on a quarterly basis. We were back in compliance with our covenants at the March quarter, and our forecasts indicate we’ll remain in compliance and increase our headroom in the current June quarter. This capital raising will also be a guarantee against any slippage in our earnings that would otherwise affect the covenants.

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At 31 December 2008, UXC had net debt of $82.8 million and gearing of 39.7 percent. Has there been any significant change to the balance sheet since December 2008? What is the expected impact of the SPP on the gearing level?

Executive Chairman Geoff Lord

The SPP will improve our gearing level but by how much will also depend on how we utilise our working capital facilities going forward. Right now, too much of our working capital is being tied up in accrued income – most of it relating to carbon abatements we’ve produced that are awaiting audit certification before they can be invoiced and collected. We’re exploring innovative ways to clear this backlog. Doing so will have a big impact on our working capital drawings, and thus our gearing. Our long-term debt levels are reducing – we’re making quarterly repayments on our long-term debt and haven’t had any acquisitions for cash this year. Our income is increasing so our debt service cover is also improving.

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UXC has announced that it has entered into contracts for the supply of RECs valued at $28.7 million as an integral part of its solar hot water offering. What impact will the RECs have on UXC’s revenue and EBITDAC over the term of the contracts?

Executive Chairman Geoff Lord

The RECs supply contracts we’re entering into with large energy retailers hedges our price on that part of the revenues that we can get from our solar water heater installations. RECs are a means for us to generate revenue from a solar installation that allows the householder not to have to pay us for that component of it. They allow us to fix a part of our revenue stream against our pipeline of solar jobs. From a cash perspective, the $28.7 million will be paid by the energy retailers we’ve contracted with.

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What is the state of the REC market and what drives growth of this market? Can UXC sustain a contribution from this segment?

Executive Chairman Geoff Lord

On the installation side, the net of the cost of the installation less the RECs and state and federal government rebates is the householder’s cost. The more value we can get from the RECs by selling them forward and fixing our price, the lower the cost we’re able to offer to the householder. We’re getting about a 50 percent conversion rate on our calls into households to provide quotes, and of that we have a take-up rate of about 50 percent. As long as these installations remain affordable to the householder, then we don’t believe REC supply will be a problem for us.

We sell the RECs to the major energy retailers who need them to fulfil their regulated targets for renewable energy. Demand from the energy retailers is robust. The fact that we’re able to sell them forward helps us to the extent that we’re hedging our future production of RECs. If we don’t hedge all of the RECs we anticipate producing and the price collapses because demand is no longer there, then our product would become more expensive for the householder. This wouldn’t affect our margins but would affect volumes.

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Do you have any indication of the level of shareholder support you can expect for the SPP?

Executive Chairman Geoff Lord

We’re underwritten for the first $4 million, and we expect about 15 to 20 percent participation from our register. We’ve conducted some analysis of our share register and are confident we’ll get a take-up between the $4 million underwritten amount and the $8 million cap.

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Thank you Geoff.