Switching off the lights goes beyond saving money to creating income

Sam Marks is Managing Director of Vivid Technology

Vivid Technology is a listed microcap (ASX: VIV) which creates smart light systems that not only satisfy corporate social responsibility but improve bottom lines. In addition to turning on and off when activity is detected, the lights have sensors that adjust brightness depending on surrounding light for efficiency.

Sam Marks tells Alan Kohler, that they're yet to turn a profit and they don't issue guidance, but the sales coming down the pipeline in the next 18 months make this an exciting time.

To begin with, can you just describe Vivid's technology.

Sure, Alan. Vivid Technology is a microcap Australian listed company, which is really made up of two parts. One is a commercial and industrial energy efficiency business, which is generating revenue. The second is an investment in a technology out of Israel, which converts carbon dioxide or CO2 to fuel. We own a third of that investment known as New CO2 Fuels or NCF.

So Vivid Technology, the energy saving, lighting technology, tell us about that?

That business, we've got two businesses to it. An industrial arm and a commercial arm. Vivid Industrial is the industrial piece and Vivid Ilumalite is the commercial piece.

What's the difference between industrial and commercial?

Industrial is focused around heavy industry. Manufacturing, warehouses, ports, intermodal, large space. Commercial would more be around office space, universities, hospitals, that sort of space.

But both are lighting.

Correct. And really around energy efficiency.

So what's the actual product?

So the industrial and the commercial product are slightly different. But the industrial product is where I'll probably focus on and then give you more context. And I can walk you through some examples.

The industrial business, we've developed the technology in Australia, it’s designed and manufactured here. We've actually partnered with CSIRO on some of that tech development. Where we are effectively putting smart systems into our customers warehouses or manufacturing or port facilities, that’s seeing energy savings pretty consistently north of 80% and quite often these days, north of 90% on lighting energy costs. To put that into perspective, for a standard warehouse, probably 80-90% of the energy costs for a warehouse is lighting. So if we can save 80-90% of that 80-90%, it's a pretty big chunk out of their P&L, that we can add to the bottom line.

The technology is made up of various different sensors. So we effectively get about 86 pieces of data per second out of every light fitting. So we are able to monitor where and when people are going, on behalf of the customer, to only put the light where they need it, when they need it. So it's really looking at saving any which way we can, to just give them the light they need.

And so you install lights. Are they LED lights?

They are. We can do LED lights and non-LED lights. We're actually seeing savings on our non-LED lights higher than a lot of people's LEDs. But the fact is these days LEDs are more efficient and we're pretty much only selling LEDs going forward.

So you install these LED lights in the warehouses and you collect data from them. How do these lights pick up the data?

We can use a different array of sensors. Usually we will put in a daylight sensor. We can measure the daylight coming in to the space. We will have motion sensors, so we can understand where the forklifts are going, where the people are going, so that we can actually ensure that they have the light they need.

We can have temperature sensors. Infrared. The list goes on. There is no shortage of type of sensors. It depends on what the facility is used for. By the data coming through from those sensors, we can then measure and manage how much light we actually put out, which is only the amount required by the customer, so that we are not using more light than we need. And so the lights are turned off when they are not required. And hence why we start to get fairly deep savings for our customers.

So this all implies that you are continuing to manage the lighting of the warehouse. You don't just sell lights and leave it at that. Is that correct?

That's correct. Well effectively, we've got two models. One is we sell to the customer straight up front and they buy the system and it's theirs. But the system is smart, much like most automated systems. It will maintain and run itself and then we'll train up the customers to effectively be able to repair and maintain as required. If they get alerts through the system or generate reports as required for themselves as well.

When you sell a normal sized warehouse system like that to them, what does it cost?

Each warehouse is different, each system is different. We usually talk to customers about our cost per square meter. We wouldn't go out and say the system is going to cost you a hundred dollars. We might say the system will cost you, let's say somewhere between 10 and 20 dollars per square meter for a warehouse.

Is that the real cost?

Yes. Say we're doing a 20,000 square metre warehouse, it depends on what's required in the warehouse, but the cost could be between 200,000 and 400,000 dollars to them for that warehouse. Where is gets real interesting is the return on investment for the customer, then it becomes quite attractive. We usually say a payback period of between 12 months to 36 months for those sites. So if it's costing them, let's say $300,000, then we're probably on average saving them between a hundred to two hundred thousand dollars per year on energy savings.

And those are real numbers.

They're real numbers.

Okay. So the other model is where you continue to operate it as a software as a service kind of business?

We actually call it lighting as a service. Similar to the software as a service business model. But the conversations that we are having with a lot of our customers now is that their job is to get as many components made or boxes out the door as possible. So they don't need to worry about the forklifts or worry about the air conditioning or they don't have to worry about the lighting. So, if they pay us to maintain the lights for them, service them and ensure that they always have a required lux level that meets a certain standards, then we're incentivized to generate as much savings as we can for them and take a percentage of those savings.

How much do you charge for that service?

We take a percentage of the savings. So it will depend on a case-by-case basis. It will be somewhere between I guess 50-85% of the energy savings that we keep.  And they get 100% of the maintenance savings. Although that sounds potentially a little different from the first conversation – why do they get the maintenance savings? To maintain some of these systems, a $300,000 system could cost between twenty to sixty thousand dollars a year just to maintain lighting for large warehouses. So if they are getting 100% of the savings, it's actually pretty beneficial.

Right. With a big warehouse, they are saving 100,000, you are getting what, 80,000 a year in subscription or fee for that?

That's correct.

What sort of margin do you get on these products?

They differ. Relatively good. I probably don't want to go into all those details, but from our perspective it's set up in a structure that is fair for both parties.

Tell us about your pipeline of sales?

Alan you and I have obviously met before and spoken about this historically. We really have spent the last 18 months to 2 years proving what we do and how we do it to some of the biggest customers or biggest companies in the world.

The way our business model has worked is initially, people didn't believe you could get such large savings and see the productivity gains as well. So we started off by proving an aisle in a warehouse. Or a part of a manufacturing facility and then we moved on to the whole warehouse or the whole manufacturing facility and proved that. We're now at a stage where we've proven this with some pretty large blue chip customers here and internationally.

We're seeing a pretty strong pipeline coming through, for the next 6 to 18 months of proven customers, with sites who are now saying, "Great, let's look to roll this out across a multiple number of sites" now whether that is 5, 10 or in some cases north of 100, it's becoming pretty interesting.

Well give us some examples of who you've sold it to?

Sure. We've worked with LinFox over the last 2 to 3 years. I can't go into all the details of what we are doing with them, but we've now done north of 10 sites for LinFox. The results have been positive. And we continue to talk to them about what we are doing and how we are doing it. We've also recently done, I think it's the 2nd or 3rd site for the Goodman Group here in Melbourne.

There's some other customers across the property management area. So Stockland is another example that we've done quite a bit of work with, in the shopping centers. We've also done some work down here in Melbourne in the ports areas for Dubai Ports. We're seeing some really great results across all those customers.

Are there any global businesses that you are working with in Australia that could take you global?

There are. I can't really go into all that detail at the moment. But there is absolutely a number of global businesses we're working with in Australia. One that we probably can talk about that our commercial businesses we've worked with, is a group called Honeywell out of the US. Their businesses upgraded the RMIT site in Melbourne for the Bundoora Campus for lighting. We've done some other good projects with them and we're doing some other projects with them here as we speak and we're looking at opportunities further afield. There is no shortage of opportunities outside of Australia, but we had to prove it here first.

What's your patent protection globally?

We've got a combination of IP and effectively what we call the secret sauces. Patents are very expensive and my experience in a prior life, in a different business, is that patents are very good, but once you've patented it, everyone can read it and then you have to hope that people respect patents the same way that Australia does. And if not, you need a large wallet to be able to chase those down. So we've worked out what part we want to protect and which parts we just don't want to talk about. It's probably the simplest way to put it.

Some of the work we're doing with CSIRO has been really interesting. That's been built in a way that for some of the hardware, if someone was to try to pull that apart, it would be very, very difficult. I'm not going to say impossible. But very, very difficult to work out what was done and how it was done.

So there's a combination of ways we protect our IP. Part of that is not giving away everything of what we do and how we do it.

Is anyone else doing what you do anywhere in the world?

In relation to the level of smarts. There is probably one group out of Boston that we look to as a similar sort of business called Digital Lumens. They've got some very good technology. They probably sell their business model quite differently to ours. But from technology and savings-wise, probably similar. It's always hard to know what the competitors are doing. But they are probably the only ones that we would look at as a similar product, that we would compare ourselves to. The rest of the market is really selling what I would consider substitute goods. Which is lights. So yes we can be compared to a light fitting but it doesn't have the data. It doesn't have the smarts and won't get the same savings.

So how's Digital Lumens doing out of Boston?

Good. Hard to tell. They are private. They were funded probably 12 or 18 months ago by a round through Goldman Sachs. So the question is when do they go public. But at the moment they are private, so it's hard to know exactly what they are doing.

Are you bumping into them when you look around? I mean are they, I presume they're only in the US, are they?

They're outside of the US now. We've come across them a few times here in Australia. So far we've been successful as far as we know on all the times we've come up against them but it's hard to tell. You don't quite know.

Anyway, it's okay. You can make good money in a duopoly anyway.

I think there is more than enough requirement for lights around the world that we can both succeed.

So tell us a little about your financials within this business. What sort of revenue are you making at the moment?

So we had our half year results came out. We made just over $1 million revenue for the first half this year. Last year, we did about $2.3 million. We're certainly turning in the right direction. I'd say it's still probably a little bit lumpy as we move from proof of concept on the smaller sites to large scale roll outs across multi-site customers. But it's certainly headed in the right direction.

What are your costs?

First half of the year was around $4 million, I think, which was mainly made up of employee expenses. The bulk of that around sales, marketing, development. If we look for the whole half of last year, it's around $6.5 to 7 million dollars for the whole of 30th of June 2016

There does seem to have been a big increase in your cash burn in your last 12 months. Is that because you're ramping the business up now?

Correct. So the ramp us has been really around employees, marketing, and sales. We've grown the business by an extra 20-25% on sales and business development people over the last 6 or 12 months. Now that we've proven it. It's a matter of rolling it out. I wouldn't call it an arms race. But effectively trying to get this out there as soon as possible to as many customers as we can.

So when are you budgeting to break even?

Firstly, to be very clear, we don't give guidance. So we haven't given that out to the ASX, as I said we're listed. We recently got some pretty tight time frames internally and if we see the revenue coming through that we are hoping moves from the pipeline to sales, in the next 6 or 12 months, things are looking good.

Do you think that investors should basically look at you as a private company at this point? I mean you are listed and you've got all that requirement on you for continuous disclosure and so on, but do you think you should be listed and that investors should look at you as a trade-able stock?

What do you mean

I suppose I often tell people that for microcaps, you should invest in them, but don't think you can get out in a hurry. You should see them as venture capital almost. As startups and not look to trade them.

Yeah. I think that's probably a really good summary.  We've got a very strong top 20 shareholder base, if not top 50. That is pretty stable. Our stock is traded on a daily basis, but not in large amounts. Which to your point, makes it hard to get in, but pretty hard to get out. A lot of the people that we talk to who get in and sort of come in on an investment level in the top 20, top 50 are looking at a 2 to 5 year plan.

We received an award from Frost & Sullivan for our innovation of our lighting systems and our service model. And one of the interesting things were three other companies that got awards at the same time. One was called Catapult, that you may know on the ASX. Another one was Mesoblast and there was a few others.

The interesting story from my perspective listening to their board or CEO, depending on who was talking, was that these are the overnight successes that take 10 years. They were listed early and then put extensive runs on the board, but there was a lot of work done before those runs came through to make them a highly profitable world recognised Australian company. And the rush into Catapult, Mesoblast is on the right track but still has a way to go.

I think that's probably the right way to look at it. We're not there yet. I would say the next 2 to 3 years are looking very exciting. The next 12 months are looking very exciting. But to get in get out every few days is not the way that I would be looking at this.

Okay let's talk about your Israeli investment of CO2 to fuel. What fuel does it turn into?

NCF, or CO2 fuels effectively takes carbon dioxide or CO2 and water, H20 and using waste heat or solar energy, turns it into syngas. Syngas is the precursor to methanol or diesel fuel. You can also turn it into urea plastics. The list goes on. If you wanted to, you could take syngas and blend that with natural gas. It's got a higher calorific value than natural gas. So therefore is arguably worth more.

Right. So how is this going to turn into revenue? And how close is that to happening?

So that business is probably 2 to 3 years away from actually generating revenue. It was a technology investment. We've got some really exciting things happening with a company called Sinopec.  Sinopec was the second biggest company in the world. I don't know quite where it's at today. I think it's market cap was north of $700 billion. We've currently signed a term sheet with them to commercialise the technology in China, which is probably 40-60% of the market. That's progressing very well. Watch this space in relation to the final commercialisation agreement, but once that happens, that's probably 12 months of building and developing the demonstration plants in China before it's formally rolled out.

Does it clip on to or attach to a plant such as a power generation plant, that generates CO2 and it just takes that and turns into fuel? Is that the deal?

Pretty much. It's a modular system. So it's very malleable from that sense. You can effectively develop the number of modules you need for the size of the plant. What it does is it takes all of the waste products, being the CO2 and evaporation of H20, along with waste heat. So if you look at a coal fired power station. When the power station's running, you've effectively got CO2, H20 and 1000 - 1500 degrees of waste heat and quite a few other nasties that are coming out through the flu stacks. They have to scrub the nasties anyway. And then the C02 and the H20 evaporate into the atmosphere. And waste heat is literally pumped up through the flu stack.

So we would take the CO2. We would take the H20. And we would take the waste heat and turn that into liquid fuel. Now they could choose to either put that back into the coal fired power station in this example or they could sell it or bottle it or do something else and pump it down the line. It's not perpetual motion. It won't just keep churning through the coal fired power station but that's one example of how it could be used. I think there’s many other ways we are working with many other companies at the moment. One is gas wells. When you drill a gas well in the middle of Australia, three things come to the surface. CO2, H20 and natural gas.

So we would take the CO2. We would take the H20 and by using solar in the middle of Australia, we could make syngas which is more natural gas. So it reduces all the emissions into the atmosphere, but it makes that fuel well, a substantial gas well, substantially more profitable. There's no shortage of ways on which it could be bolted on, whether it is a concrete plant. Whether it's a steel manufacturing plant, it continues to be very interesting for a lot of different heavy industry players.

So are you at the point, or are they at the point where you know that it works?

Yeah. So it's been proven at scale in Israel. In both a solar field and effectively within the Weizmann Institute, is the partner we're partnered with. The Weizmann Institute are effectively a similar party to the CSIRO, but in Israel. So it's been proven there. What we now need to do is scale it up. So that's what the demonstration plant will be in China.

So you don't really know that it works at scale because you haven't done it.

That's a good question. One of the reasons I really liked the technology when I first saw it, probably 4 years ago was what they've built it at a modular level. So to build a glass is very easy. To build a glass that you can drink out of the size of the Rialto, here in Melbourne is very difficult. What they've done is actually built a modular system. So they've proven the glass and now they just need to make more and bolt it onto a live operating facility. Which is the demonstration plant. So we're reasonably confident. I can't sit here and tell you it will be a walk in the park but it's certainly proven at a scale that gives us confidence. And obviously Sinopec wouldn't be at the stage that they are at if they didn't believe it had the potential either.

Yep. Great to talk to you Sam. Thanks very much.

Thank you. Appreciate the time Alan