Carbon Revolution Ltd

ASX:CBR

Earnings Call Transcript 2023-Q1

[Andrew Keys, executive]

Hi, everyone. Welcome to Carbon Revolution's Q1 financial year '23 business update. I'm Andrew Keys, and I am facilitating today's call. At the end of the updates from CEO, Jake Dingle; and CFO, Gerard Buckle, there will be a Q&A session. Please note, there are no slides accompanying this update. The slide you see is a placeholder.

Good morning, Jake. Handing over to you.

[Jacob Dingle, executive]

Thank you, Andrew. Good morning, everyone, and welcome to Carbon Revolution's First Quarter Financial Year '23 4C and Business Update.

Starting with highlights for the quarter. Revenue was $10.4 million, representing strong growth of over 66% over the prior corresponding period. Ford launched a new Mustang, a core vehicle program featuring Carbon Revolution's wheels, which is the first time the company's wheels are pictured on Ford core program. Disappointingly, there was limited production of Corvette Z06 wheels during the quarter after supply chain challenges at GM led to the temporary reduction in wheel orders. Our current cash position is $10.7 million, following committed expenditure during the quarter on new wheel programs and the Mega-Line project. We will talk more about this and the related challenges with securing short-term financing in more detail shortly.

Our $12 million MMI grant was approved by the new federal government, with the first tranche of $4.8 million expected at the end of this year, November and December. And significant progress has now been made with strategic partner to underpin the business' long-term growth potential and funding needs, again, provide more detail on this shortly.

In terms of revenue; our first quarter FY '23 revenue, as I said, was $10.4 million, a growth of over 66%. Wheel sales volume of 3,739 delivered growth of 78% over the prior corresponding period. So almost $2,800 price per wheel. We achieved a relatively high average selling price again.

Following strong sales from May to July, Corvette Z06 wheel sales were much weaker than expected in August and September, due to General Motors experiencing supply chain issues with other components, impacting the production ramp-up of the Corvette Z06 vehicle. Eyeing a strong launch of this wheel program in the fourth quarter of FY '22 was very disappointing from our perspective to learn of this unexpected delay. The outlook for that program for the remainder of this half remains relatively subdued, ahead of the forecast resumption of more normal sales volumes in the second half of FY '23. The long-term forecast order profile for this program remains very strong.

Final production wheel sales for the Ford Mustang GT500 program were made, as that nears program completion, it's now entering the after sales stage. While sales to Ferrari continue to be strong across all 3 of the programs that we have with Ferrari.

The company announced during the quarter, that it will supply the Carbon Fiber wheels to feature as an optional fitment on the next-generation 2024 Mustang Dark Horse, launched by Ford in September. This will be the first time that we've supplied the core vehicle program at Ford. Being part of the core 4 vehicle program is an important milestone and is an enabler of wider adoption of the company's lightweight wheel technologies, within Ford's portfolio.

From an operational point of view, in response to GM temporarily reducing orders for the Corvette, we suspended production of this wheel through the quarter, and the manufacturing team was downsized during August through reducing the temporary labor hire staff. Based on the current order profile, production of this wheel is expected to resume in January '23 and build to expected levels over the second half of FY '23. We expect growth in the manufacturing workforce and team through the second half of '23 to support the resumption of production. And also, we're seeing the start of production for 2 other programs that are currently finalizing and going through the preproduction stage.

The reduced Corvette volume was partially offset by continued strength in all Ferrari programs throughout the quarter, but in particular, the ramp-up in the 296-GTB program. Final production deliveries were made for the Mustang, as I mentioned earlier, other than the after-sales product still to come. All plant facilities are running well, and the team is focused on quality, throughput and efficiency improvements. Contribution margin of $205 per wheel for the quarter was negatively impacted by the disruption to the operations team early on in the quarter, in particular, related to the necessary downsizing. Even with this disruption in September, our operations delivered direct cost per wheel that was in line with how we closed out the last quarter and the business delivered an improved contribution margin of $481 per wheel for the month, which was pleasing.

Further operational improvements targeted through the financial year; these relate to the expected growth in volume, coupled with the ongoing focus on quality improvements and efficiency initiatives that are now being implemented.

Commissioning of the Mega-line, face layup line, the demolding cell and the tool return system is all progressing well. The validation bills for these parts of the line have now been completed successfully. The ARL3 machine has been relocated to its position on the line in preparation for the next phase of commissioning. We have new high-pressure injection equipment on site and ready for installation in the coming months. 2 new mold stations are in factory commissioning at our suppliers facility and are expected to be installed during the second quarter and third quarter of FY '23.

Plant and equipment for the Mega-line are now substantially in the building. A further $2.6 million was spent on the Mega-line during the quarter, which brings it to $14.2 million on a cumulative basis.

I'll now hand over to Gerard, to review our cash position.

[Gerard Buckle, executive]

Thanks Chuck. As of the 30th of September, the company's cash balance was $10.7 million. Net cash outflow of $12 million for the quarter, as a result of net cash outflow from operating activities, including government grants, improved up to $0.5 million compared to $10.6 million in Q4 FY '22. The growth in receivables spending in Q4 FY '22 and contributed to the ramp-up in the new Ferrari and Corvette programs contributed $16.9 million in customer receipts for Q1 of FY '23.

Net investing cash flows of $8.4 million consisted of capital expenditure on property, plant and equipment of $4.5 million and investment in research and development of $3.9 million. This is related to new programs and development. This investment related expenditure was largely all committed prior to the quarter, or critical to the progression of new customer programs, and therefore, could not be delayed or reduced, despite our aggressive focus on cash management.

Net cash outflow from financing activities of $3.2 million, primarily reflected the repayment of the EFA term loan of $0.7 million, and a net cash flow from receivables financing of $2.3 million due to reduced customer invoicing at the end of the quarter.

As we've detailed in previous announcements, we have planned sources of new funding for FY '23. The funding table and related footnotes in our 4C, details the current progress and expectations of those planned sources of new funding.

In summary, our process to source new funding remains in progress. However, our confidence in securing this new funding has reduced for 2 key reasons; the suspension of production of Corvette wheels, as Jake explained earlier, has meant the level of receivables and finished goods that can be used for asset-backed financing, is well below the expected level when the funding process commenced, and asset valuations received were lower than anticipated. I would like to stress that we are yet to receive final offers, and we are continuing to engage with financiers on these facilities.

I'll talk through each of the key items in the funding total; our cash balance at the end of October is expected to be $11.1 million. We continue to manage cash very tightly. We've only committed for business-critical expenditure being improved. Our final submission for the MMI grant has been completed, and the final documentation is in progress. The grant will be paid in 3 tranches, with the initial tranche being 40% of the total grant, which is $4.8 million. The most recent guidance from the government is the final documentation and the initial payment of $4.8 million is expected during November or December '22.

The second tranche of the export line of credit is approved and potentially still available upon reaching certain program award hurdles. However, we are conservatively assuming that this will not be able to be drawn at present, due to our current liquidity position. We have been working on expanding our working capital and leasing facilities, with $10 million of new funding having been planned. We have a [ broad ] process that's delivered 3 suitable -- initial term sheets from our asset -- from asset backed lenders, which was subject to the completion of asset valuations.

While discussions with financiers are ongoing and final offers have not yet been received, the company's current expectations at level of additional financing, previously indicated under the initial asset-backed term sheets, will not be available until late in FY '23 or FY '24. This is due to the lower-than-anticipated asset valuations and the suspension of the Corvette Z06 production and sales, having negatively impacting the [Technical Difficulty] receivables and finished goods inventory in the short term.

In addition, our currently drawn to $4 million of BFA export line of credit is due to mature at the end of November '22. We would normally expect this to successfully roll over this facility and extended its maturity. There is nothing that we'll be able to do so, given our current liquidity position. We will determine final position on this roll over during November.

Given the above liquidity and balance sheet pressures, the company is in active discussion with key stakeholders to improve short-term liquidity. These discussions include, engaging the state or federal governments to bring forward previously announced grant payments, and also for further assistance, engaging with key customers to seek more favorable payment terms, including accelerating payments. While these discussions are currently [indiscernible], the impact is currently unknown at this time.

Jake, I'll hand back to you now.

[Jacob Dingle, executive]

Thanks, Gerry. I'll now cover our important announcement regarding the proposed merger with the U.S.-based special purpose acquisition company. As stated in our FY '22 full year results presentation, the company has been actively pursuing a range of strategic opportunities to unlock value and capital. We're pleased to announce that over the weekend, we've signed a nonbinding letter of intent, with a North American listed special purpose acquisition company, relating to a proposed merger with Carbon Revolution. This is a very exciting development for the company and its shareholders and provides a number of significant benefits.

The executed LOI is nonbinding, with the exception of certain agreed provisions, including exclusivity. In terms of the benefits that the proposed transaction brings to Carbon Revolution. For this transaction, the company is being valued at a pre-money enterprise value of USD 200 million, which is approximately AUD 313 million. This describes the notional and current share price of AUD 1.49 for the company's issued shares. It unlocks critical investment capital to support commercialization and accelerates our path to profitability.

A minimum of USD 50 million is being put in place through a committed equity facility, CEF, which is expected to provide capital for the Mega-line expansion and to bring new programs online. It will demonstrate balance sheet strength to customers, which is an important enabler to winning large programs in the future, and it will convert carbon evolution to a U.S.-listed company, providing access to much deeper sources of capital to support our plans for significant future growth, to meet accelerating demands of our major customers.

The further deal parameters are as follows; upon finalization of the merger, Carbon Revolution shareholders will own approximately 67% of the merged entity, assuming that USD 50 million of cash is available in the SPAC Trust account post redemptions. In addition to cash already held by the SPAC that's not subject to redemption, a minimum of USD 50 million of cash will be available to the company post merger, by a committed equity facility that I just mentioned. The company will delist from the ASX as a result of this transaction and commence trading on a U.S. exchange. The Board would be expanded by 2 directors. These are expected to be experienced directors based in North America.

There is a significant amount of further detailed information on this proposed merger in the 4C a business update document that's being launched this morning on the ASX portal. There's a number of key workstreams now underway to progress the proposed transaction. Given our current cash and liquidity position and given the transaction is not expected to complete until the second quarter of calendar '23, we will require short-term bridge funding to meet cash flow requirements until the proposed transaction closes. The amount of funding is currently being assessed and will be a function of business requirements on the success of ongoing discussions that Gerry has just talked about, with key government and customer stakeholders to improve our near-term cash flow.

Turning to the timetable for this transaction; the parties are currently working towards an expedited timetable, with a view to announcing a binding transaction by late November 2022. The company intends to reschedule its AGM to Wednesday, 30th of November to allow further time to progress the merger documents and will update shareholders at the AGM on this. As noted above in the LOI, the company and the SPAC have agreed to binding exclusivity arrangements. Obviously, further details in relation to the proposed transaction will be announced at the time of signing a binding scheme implementation deed, and as I said, that's targeted for later in November.

I'd just reiterate that we believe this announcement of partnership opportunity represents an extremely exciting means for the company to deliver on its very significant medium- and longer-term potential.

I'll hand back to Andrew now to take questions.

[Andrew Keys, executive]

Okay. Thanks, Jake. [Operator Instructions] Cam McDonald from Evans & Partners is on the line.

[Cameron McDonald, analyst]

Can I just delve into the cash position and how the Corvette is anticipated to impact that over the second quarter? So assuming you don't have the $4 million from EFA doesn't get rolled. That's -- you've got to -- to be clear, you're going to have to repay that. Is that the way I should be reading that?

[Gerard Buckle, executive]

Yes, that's right, Cam.

[Cameron McDonald, analyst]

So it's a $4 million outflow. And then you've got commitments of just over $4 million for CapEx between now and when for the Mega-Line?

[Gerard Buckle, executive]

They go right through until the [ current ] work is fully commissioned, Cam. So some of the payment there is not going to happen until the first calendar quarter of next year, so through sort of January through March. So sort of that $4.6 million remaining is going to stretch really from this month through to, say, March when it's all fully commissioned sort of running in anger.

[Cameron McDonald, analyst]

Okay. So third quarter FY '23. And then just on the sort of the -- so how do we then think about the operational cash burn between now -- and so the end of the financial year? Because the -- I mean the quarterly cash burn that you've just produced is like $12 million, but presumably, you're going to bring that cost down, but your revenue is actually also going to fall, in particular in the second quarter, is what you're saying with the Corvette?

[Gerard Buckle, executive]

Yes, that's all right, Cam. So Corvette -- the cease in production of the Corvette really sort of started to [indiscernible] in September, and getting back up and running for the Corvette, it's probably likely that we won't be up and running until sort of late December or early January. So we will have very limited Corvette sales as we -- as the current orders stand down through the course of this quarter.

As Jake said, Ferrari sales have been going strongly, and we see that sort of continuing, demand on that side is really quite good. So we're managing cash flow, Cam. We took a large reduction there in the workforce during this last quarter, to keep our costs as low as we possibly can. And where our -- any spend outside of -- certainly outside of [ people ], where we're watching very closely, only committed expenditure for committed capital projects or business critical spend. So we're just trying to minimize spend as much as we possibly can.

[Cameron McDonald, analyst]

And how much -- how many sales have you booked this quarter that you have not been paid for? Because if I'm looking at the revenue of sort of $10 million, but you've received $16 million in receipts, what was the working capital sort of movement in all of that at the end of the fourth quarter, versus the end of the first quarter?

[Gerard Buckle, executive]

We still -- I guess, what if we cost sales -- your question on what sales are booked that haven't been paid for? At the end of September, we got nearly, $15 million of receivables. Part of that, there was a couple of million dollars of the State of Victoria grant, which that money was received in October. So that was good. So from customers, there's sort of $13 million there of receivables at the end of September, that will be collected as we go.

[Cameron McDonald, analyst]

Okay. Sorry, I can -- but what was the receivables balance at the full year?

[Gerard Buckle, executive]

I have to go back. I don't have the full year results...

[Cameron McDonald, analyst]

Yes, I've got it here. So it was about $20.3 million? Yes. So okay. So that has some way, and that's -- $6 million or $7 million.

[Gerard Buckle, executive]

Yes, absolutely. Yes. I mean, if you remember in the fourth quarter, we had very low receipts from customers, from memory, it was sort of between 3 and $4 million. So that -- and there was a strong growth in receivables. So that has unwound during the quarter because those -- that sort of strong sales we saw, turned into receivables and now is turning to cash in this quarter.

[Andrew Keys, executive]

Okay. A question through Q&A from [ Owen Potter ] relating to the value ascribed to the SPAC transaction at the moment, what's to stop this SPAC? With that value being dropped, as you go through the details and conversations?

[Gerard Buckle, executive]

Yes. Thanks for the question, Owen. The LOI has the amount nominated in there. So that $200 million U.S. is very clear in the LOI. And we've been working on this project for really some time. So it's been a competitive process. This is where we're at now. We think we found one really good solution for the company going forward. And that $200 million is based on valuation work done by advisers, and to agree with the other party, and that is in the LOI.

[Andrew Keys, executive]

Okay. A question from [ Patrick Cody ] regarding the proposed transaction. Have you had any feedback or do you have a sense of how maybe strategic shareholders will feel relevant?

[Jacob Dingle, executive]

Well, obviously, we haven't talked about any of this. Obviously, we've announced that we are looking for strategic partnerships. So we won't speculate other than that, there's a lot of advantages in doing this, including from the point of view of somebody like Renault.

[Gerard Buckle, executive]

And with Renault, [indiscernible] been with the business for a long time. They're -- like all shareholders, disappointed where share price is and they have been wondering what is the long-term solution for getting the balance sheet corrected for Carbon Reg, so we can grow. So we do imagine that they'll be very happy with what we're proposing here today, but we'll engage with some -- and now that this has been released, will engage us [ a bit ], they've certainly been like other shareholders, looking for what the long-term solution is. And we feel like we've got to really [indiscernible].

[Andrew Keys, executive]

We do have another question that's been dropped in from Troy Cairns. Can you expand on how the mechanism for SPACs -- what are the mechanisms for SPAC holders to redeem? How does the pricing of that work?

[Jacob Dingle, executive]

Yes. So redemption -- all SPAC holders have the ability to redeem before the close of the transaction, and we've got a rough understanding of what the redemption rates are running at, and they've typically been relatively high recently across the board. But what that's been allowed for the -- putting in place a committed equity facility, really does allow for high rates of redemption, even though the target would be to try to minimize that. But yes, in terms of pricing, it would not affect the pricing that we've talked about or the valuation, as we understand it, that's been placed on the enterprise value of Carbon Revolution.

[Gerard Buckle, executive]

Yes, that's it. The pricing of the redemption, the way SPAC works is, the money is held in trust, and when the opportunity comes for the SPAC to investing its acquisition, the SPAC investors got to have a look at the [ businesses ] they would like to continue or redeem. So they basically sort of pull their money out of production costs, [indiscernible] money at. It doesn't impact on the ongoing share price. To our knowledge, it's just the $200 million sitting in a trust and we'll go through the marketing process. So there will be an extensive marketing process to all of those investors in the SPAC and in the trust, Jake and I will be involved in that and then the redemption -- they'll decide on their redemptions -- after that process is complete.

[Andrew Keys, executive]

Thanks, Gerard. I think we have another question for Cam McDonald. Is that right, Cam?

[Cameron McDonald, analyst]

Sorry, just on a follow-up from that question, just so I've got the mechanics right? You enter into the SPAC agreement. The unitholders in the SPAC either choose to stay or can redeem, let's assume the 75% is correct, and then -- and there's $50 million of cash sitting in there, then they've got to pay costs, et cetera. And then the committed equity facility is that is -- like that's a drip feeding of equity into the market over what sort of time frame? And presumably, the dilution on that is unknown, because we don't know what the share price at the time is going to be. Is that the way to think through that?

[Jacob Dingle, executive]

Yes, that's correct, Cam. So it's something that's committed ahead of the close, and it's part of the LOIs that will be put in place. And then it's drawn as required at a sort of minimum level on -- as required, so sort of maximum level per week. But we're very -- I mean, that's an important part of this, it really insulates against redemption rates and provides a certain -- a good level of certainty.

[Gerard Buckle, executive]

Yes. That's why the CEF Cam, for us in looking through this transaction, was a really critical component of it and having that there upon closing. So no matter where the redemptions end up in, if the redemptions are at, so 75%, and as you say, it's USD 50 million in costs, there's quite a bit of funds there upon opening, and we wouldn't be drawing upon that CEF release there, wouldn't be drawing upon for some period of time. As Jake said, there's a weekly draw that's allowed under -- that will be allowed under CEF as it's proposed, so it can be drawn upon quite quickly as needed. And if the redemptions were really high, we'd be drawing on that CEF over the initial weeks. If the redemptions aren't that high, then there's going to be a lot of cash sitting there upon closing.

So it's a great tool to make sure that Carbon Revolution is funded straight away for current needs and future growth.

[Jacob Dingle, executive]

It's a very important part of this proposed transaction, Cam. So it's a key part of what we've been all been working through.

[Cameron McDonald, analyst]

But there's a balancing item here, right, in terms of you needing either to get the funding or delay that capital raising, but the longer you delay that CEF drawdown, the more overhang there is on the shares, right? Because it's committed -- it's a committed issuance of stock into the market to raise a certain dollar figure, not a certain number of shares.

[Jacob Dingle, executive]

Yes, but it is not an obligation to do it, Cam, if the redemption rates are lower than that's -- it's a pullback, and it's a very important one.

[Cameron McDonald, analyst]

Sorry. So it's not a commitment -- so when you say committed, it's not -- it's an option at your discretion?

[Jacob Dingle, executive]

Yes, that's a non-obligation.

[Cameron McDonald, analyst]

Right. Okay. Sorry. So the way that was described, I thought it was meaning it was -- you had committed to do this regardless. So it's...

[Gerard Buckle, executive]

No, it's committed to us. It's committed to us. so it's a great balance. I mean depending on where the SPAC redemptions stand up, we might not need to draw on that committed facility at all, but -- just stay there, but if the SPAC redemptions are really quite high, we know this USD 50 million there that we can draw upon over a number of weeks.

[Andrew Keys, executive]

Okay. Thank you. There are no more questions. Thanks, Gerard. Thanks, Jake, and thank you to all the attendees and participants for dialing in this morning. We'll finish the webinar there. Have a good day.