Carbon Revolution Ltd

ASX:CBR

Earnings Call Transcript 2023-Q2

[Jacob Dingle, executive]

Thanks, Andrew. Good morning, everyone, and welcome to Carbon Revolution's 4C business update and an update on our merger and bridge funding activities. In terms of highlights for the preceding quarter, our merger with Twin Ridge Capital Acquisition Corporation that was announced on the 30th of November 2022 is progressing. The registration statement on Form F-4 is to be lodged with the U.S. Securities and Exchange Commission or the SEC as soon as practical. Once the reorder process is completed, this requires certainty of bridge funding and discuss this in detail below, full in a moment.

Our cash position was $14.1 million at the 31st of December '22. We have around $28 million of liquidity initiatives or bridge financing needed to be secured prior to the completion of this merger. This is assuming the merger occurs by the 30th of June 2023. We already have $10.3 million of initiatives towards this amount, well progressed with the relevant stakeholders.

One program entered production in early in this quarter and production of the Corvette ZO6 wheel has recommenced in January 2023. Our Mega-line commissioning is also on track. 2 new moulding stations are in place and being commissioned now.

Now a detailed update on the merger proposal and U.S. listing process. On the 30th of November 2022, we announced with Twin Ridge, a binding business combination agreement and a company scheme implementation deed to effect the transaction. And which -- both companies will be acquired by Irish entity that's now being renamed Carbon Revolution Limited. Subject to completion of the transaction, Carbon Revolution Limited is expected to trade on either the New York Stock Exchange for the NASDAQ by the middle of 2023.

This transaction is expected to unlock critical investment capital to fund operations, capital expenditure and strategic growth opportunities. It's also expected to support our industrialization activities and accelerate our faster profitability. Since signing of the binding agreements in November, the company has been progressing actions required for completion of the transaction, including preparation of the registration statement, which is required to be lodged with the SEC.

A key part of these preparations is a re-audit of the company's FY '21 and FY '22 financial statements. This re-audit is and will remain incomplete until the auditor is satisfied that sufficient bridge funding has been secured for the company to reach the completion of the transaction. Gerry is going to provide more detail on this in just a moment.

Next steps include completion of the re-audit finalization and lodgment of the registration statement and completion of the extension of Twin Ridge's business combination deadline. The remainder of the conditions to completion of this transaction set out in a merger announcement also require satisfaction or waiver, on the assumption that this is achieved. We still expect to complete the merger by the 30th of June 2023.

I'll hand over to Gerry to outline the progress with liquidity improvement initiatives and the bridge funding.

[Gerard Buckle, executive]

Thanks, Jake, and good morning all. In the merger announcement, we stated that we were pursuing a range of liquidity initiatives and also reviewing a number of bridge financing options, which are to $30 million of bridge financing potentially required. We've made good progress since November 30. The current status of our funding needs is we estimate, we require a total of $27.8 million of bridge financing or liquidity initiatives to be secured, prior to completion of the transaction, assuming this occurs by 30 June '23.

We have identified potential liquidity improvement initiatives of $10.3 million, and we are working on securities from relevant stakeholders. Assuming these potential liquidity improvement initiatives are achieved, we then required $17.5 million of refinancing to reach completion by 30 June '23. We're investigating a range of short-term bridge financing alternatives, to meet this cash flow requirement. There's nothing locked in at this stage. Should any delays to completion occur, which will require additional bridge funding of approximately $5 million, assuming a 1-month delay to the 31st of July '23. Over to you, Jake.

[Jacob Dingle, executive]

Thanks, Gerry. I'll now briefly summarize our operational progress for the previous quarter. Quarterly revenue of $7.6 million was in line with our lowered expectation, representing a reduction in revenue of 33% over the prior corresponding period. Wheel sales volume was 2,442 wheels and a relatively high average selling price of $3,121 per wheel was achieved as reflected in the product mix during the quarter.

As we discussed in our last 4C limited production of Corvette wheels, was seen during the quarter after supply chain challenges at GM led to the temporary reduction of wheel orders. The Corvette wheel is now back in production. The order profiles has returned to expected levels, and forecast customer demand for the wheel from this third quarter onwards is strong, which is very positive. Very positive development following supply chain issues faced by GM in the latter half 2022. Final sales of production wheels for the relatively low volume Ford GT program were made as that vehicle nears program completion and now enters the after sales stage as expected.

And next wheel program, with Ford to be in production will be the 2024 Mustang Dark Horse, with wheel production expected to commence in the middle of 2023. Sales of Ferrari continued to be strong in the second quarter across all 3 Ferrari programs. With the initial pipeline fill of the 2 newer programs having now been achieved, we expect a moderation of wheel sales to some degree to Ferrari in the second half of FY '23.

In terms of an update on customer programs. General Motors announced the fitment of Carbon Revolution's carbon fibre wheels to the 2024 Corvette E-Ray of the vehicles launched during January. The E-Ray will be the first Corvette to utilize electric power in addition to its V8 engine, and the first all-wheel drive Corvette. It's the second Corvette model to feature our wheels, and it's another exciting indicator of our progress with a major strategic customer.

These 5-spoke carbon fiber wheels, which we manufacture here in Geelong will be available as an option on the 2024 Corvette E-Ray. This additional vehicle variant, forms part of our existing 5-spoke Corvette wheel program. So we don't actually consider it to be or classified as a new program. We currently have 9 awarded programs, so that's 5 in production and 4 in development with global OEMs and a further 5 programs under engineering contracts.

At the start of the third quarter of this financial year, we commenced production of the premium SUV wheel program, that had previously been working its way through the final pre-production stages. We expect the further 2 programs will transition into production across the next 18 months.

From an operational perspective, the product engineering and program management teams worked to very tight deadlines, leading up to Christmas to deliver wheel designs in conjunction with our customers to kick off long lead time tooling ahead of the break period. The technology team has also progressed well with changes to processes to drive efficiency and quality improvements in our manufacturing environment. We expect to implement a new mould release agent for the company's Diamond Weave process and the step change improvement in addition to that in surface preparation prior to paint. We also continue rolling out rejection process improvements in the Diamond Weave area and implemented a new lower-cost paint masking process and more reliable thermal barrier coating process.

These initiatives are all part of our continued drive to refine and optimize our manufacturing efficiency and, therefore, thereby reduce our unit costs and improve our quality as we grow. Plant facilities continue to run as expected during Q2, with the team focusing on quality, throughput and efficiency improvements, albeit with a lower level of production due to the delays in Corvette wheel production that we've spoken about.

Significant planned maintenance activities took place over the Christmas break, paying particular attention to the paint line ahead of the introduction of new wheel designs and paint finishes. We're preparing to the increasing production levels expected during '23, including the resumption of more normal wheel production for Corvette and the new wheel program launches for the 2024 Ford Mustang Dark Horse and the SUV program, that I mentioned earlier. Development and launch activities for development programs are also all progressing well.

A brief update on our Mega-line projects. So Mega-line commissioning has recommenced following the Christmas shutdown. At present, the Mega-line using the face lay-up, pre-heat, demould and tool management system in production. These systems are operating well, and we continue to systematically commission the overall line integration. Rim lay-up and moulding are completed outside of the Mega-line at this stage in commissioning, using existing equipment. Integration of these processes into the Mega-line is currently underway. Key Christmas shutdown activities for integrating these processes, processes including adding a further rim processing machine into the Mega-line configuration, which complements the fully automated third-generation layup machine and planned to be in production by April. And we show that it will be running at expected rate by '22 and in the middle of this calendar year, 2023.

We've added 2 new high-pressure mould stations, and these are now in locations the Mega-line, commissioned -- in the Mega-line configuration and with the associated tending robot that manages these 2. This moulding cell is now enclosed, electrical and all services are being installed, and that will commence commissioning in February while the rest of the line runs.

Further $600,000 was spent on the Mega-line during the quarter, which brings us to $14.8 million on a cumulative basis. There are commitments for a further $4.8 million for the Mega-line project. I'll hand back to Gerry to finish off the update with an outline of our cash position. Thanks, Gerry.

[Gerard Buckle, executive]

Thanks, Jake. As of 31 December '22, the company's cash balance $14.1 million, net cash inflows of $3.2 million for the quarter is a result of: Net cash inflow from operating activities improved to plus $0.2 million. Operating cash flows for the quarter were bolstered by the receipt of government grants $4 million .

Net investing cash flows was $6.3 million, arising primarily from the receipt of $9 million on the federal government's MMI grant. It was offset by $1.4 million investment in property, plant and equipment and $1.3 million investment in intangibles. The relatively low level of investment related expenditure was largely due to the timing of Mega-line milestone payments falling outside of Q2 FY '23, along with high control of new investment spending. Net cash outflow from financing activities was $3.3 million, consisted primarily of $3.1 million of costs related to the proposed transaction.

We did make a second announcement yesterday, titled re-audits of the FY '22 financial statements for inclusion in the registration statement on U.S. Form F-4 and update on bridge financing. In connection with the SPAC merger. In this announcement, we noted the company's existing auditor, Deloitte, is undertaking re-audit of the FY '22 and FY '21 financial statements in preparation for the listing of MergeCo on a U.S. Stock Exchange, using the prescribed auditing standards of the U.S. Public Company Accounting Oversight Board, PCAOB.

During the re-audit, 3 items have been identified for restatement in the company's financial statements for the financial years FY '22 and FY '21. These 3 items are identified as follows: First item relates to the capitalization of development costs, where all the detailed support required for the intangibles was not to the required extent to meet all of the recognized -- recognition criteria. The net impact of the restatement on written down value of intangibles at 30 June '22 is a write-down of $20.5 million on the previous report -- previously reported total written-down value of $34.9 million. The side has no impact on CBR's cash balance, total cash flows or operational performance.

The second item is related to the reclassification on the supply chain procurement arrangement, with the logistics company classified as trade payables, which was $5 million, at 30 June '22. It will now be classified as short-term borrowers, impacting the statement of financial position and the statement of cash flows. Once again, this item has no impact on CBR's cash balance, total cash flows or operational performance. The last item is the recognition of revenue for 2 customer contracts will be changed to an overtime basis of recognition from a point-in-time basis of recognition.

Revenue that is recognized over time that is not yet invoiced will be reclassified as a contract asset from receivables. This is a classification item only. There is no impact on actual revenue recognized all cash flows. We intend to release an amended financial report for FY '22, along with an independent audit report to be issued by Deloitte following the completion of the orders. I'll now hand over to Andrew for questions.

[Andrew Keys, executive]

Thanks, Jacob. Thanks, Gerry. A lot of content there. [Operator Instructions] All right. There are no open questions. So we will finish the briefing there. Thank you for all attendees for dialing in this morning. Thank you, Jake and Gerry. Have a good day, everyone.