Carbon Revolution Ltd

ASX:CBR

Earnings Call Transcript 2022-Q3

[Andrew Keys, executive]

All right. Hello, and welcome to Carbon Revolution's Investor Webinar for the Quarter 3 FY '22 Business Update. I'm Andrew Keys, and I will be facilitating today's webinar. In a moment, you'll be hearing from Carbon Revolution's CEO, Jake Dingle; and CFO, Gerard Buckle. At the conclusion of their updates, there will be a Q&A session. Attendees are encouraged to submit their questions via the Q&A function in Zoom or by raising your hand.

Please note, the slide you see on screen is a landing page only, and there are no other slides accompanying today's update. Over to you, Jake. Good morning.

[Jacob Dingle, executive]

Thanks, Andrew. Good morning, everyone, and welcome to our third quarter financial year '22 business update and 4C.

Highlights for the quarter. So the Corvette program ramp -- production program ramp is now well underway for the facility here. The resin quality issues and thermal barrier coating issues that we experienced from November '21 through to February '22 and talked about in our last update are now largely resolved. And our net cash in operations, just over $2 million used in operations and the quarter ended cash position is just shy of $35 million.

In terms of revenue, quarter revenue of $7.9 million with 2,926 wheels sold in the quarter was in line with our expectations. The majority of the third quarter revenue -- third quarter sales related to the GT500 program for Ford. Shipments for that program are expected to be completed during the current quarter. We're steadily now ramping up production of the 2 new Ferrari programs and the Corvette program for General Motors.

Turning to the customer program update. After the launch of the Corvette in the last quarter, our focus has been on the successful delivery of that and our other 2 new programs, including the 2 Ferrari programs. Production continues to ramp up to meet the demand for the Ferrari 296 and 812 Competizione programs as well as the new C8 Corvette.

Ferrari just launched the 296 GTS variant. We have, up to this point, been on the GTB variant. The GTS is the spider version. That's been launched in the last few days. Both the video and the configurator for that vehicle and related to the launch feature our wheels very heavily. So Ferrari is actively marketing the technology by promoting it -- promoting our wheels on the preferred configuration for that new vehicle, which is a great sign of progress. I recommend watching the video of that car on the track with our wheels and driving around the switchbacks in the Alps. It's great viewing, and it certainly demonstrates how robust the wheels are.

The long-term sales outlook and pipeline for new programs continues to be very strong, with 15 active programs. We continue to experience good interest from current and new OEMs. Later on today, I'm heading off overseas for 3 weeks for face-to-face customer meetings with some of the world's largest car makers, both existing customers of ours and potential new customers. These will be the first in-person meetings for over 2 years. A lot of the OEMs are actually only just coming back to the office -- into their offices themselves and are making this possible. It's obviously a very important part of doing business.

We've got a well-developed dialogue with a number of them around how to progress more rapid adoption of our technology. And these are with some of the very senior decision makers in these organizations. The timing is good as they're looking at how best to position their new EV platforms to capture maximum share in this new and rapidly expanded market. So I'm certainly looking forward to getting back together with them in person in their -- on their home turf.

There are 4 programs that underpin the development of Phase 1 of the Mega-line. At the time of the raising in April last year, we've secured formal agreements to initiate design and engineering on these programs, with an expected volume of around 75,000 wheels per annum. The first of these is expected to enter production through the first half of calendar year '23 and then ramp up over the subsequent 12 months. Design for that program is now completely locked in and tools have been ordered. Prototype production is expected to commence in the fourth quarter of this year.

The other 3 programs that underpin the Phase 1 Mega-line development are EV, SUV and pickup programs with one customer. The expected start of production for the lead program in this group has been rephased by the customer to start -- and the start of production moved into the first half of calendar '24. The extra time that they've put into this program has been driven by their program team. And it's the first of this kind of program and application for them. So design and development time frames have been extended a bit just to make sure they get this right. Given this revised timing, we are managing Mega-line capacity implementation and related CapEx to match forecast customer demand.

In terms of operational progress, the production launch of the Corvette wheel is proceeding to plan and the gradual ramp in production is now well underway. Anecdotal feedback from the customer so far is very positive in relation to expected demand for their first carbon wheels as they hit the market. It's apparently a very sought after [ feedback ].

The unannounced awarded SUV program is in the production validation stage. Validation of preproduction wheels are now with the customer for testing and vehicle tuning, which is all going well. Production around this program is expected to commence in the last quarter of this year -- this calendar year.

Following a difficult start to '22, significant progress was made through the quarter in terms of operational performance. Key improvements were the thermal barrier coating equipment we talked about having challenges with is now materially improved since mid-February, and product is flowing well through that part of the process. Excess work-in-progress wheels that we were awaiting, this part of the process have been cleared. The Diamond Weave resin quality issue has been completely solved. The Diamond Weave operations have been running well since mid-February.

The supply status of some of our key raw materials is still being closely managed as global supply chains remains challenged and challenging. Lead times appear to have stabilized, and we're gradually getting safety stock levels back to where they need to be.

COVID-19 related absenteeism is still commanding our attention, similar to most businesses here, although it has improved significantly since the start of the year. The tight labor market that most businesses are dealing with is also a challenge, particularly for our shop floor team. But as a general comment on our operations progress, the organization is completely focused on delivering the operational and efficiency improvements that we need as we ramp up. I'm confident in our plan and satisfied by the progress we're making towards these important targets, and that we've put really the fundamental challenges of the TBC and the rest are behind us from late last year and early this year. And the team is working very well and very focused on getting these things delivered.

In terms of the Mega-line project. During the quarter, $2.5 million was spent on the Mega-line, mainly relating to the finalization of building works and installation of equipment at the start of the production line. New conveyors are being installed and commissioned, and 10 robots are in the commissioning phase as we speak. $9 million has been spent on the Mega-line project with remaining commitments of $8.5 million in place.

The original Mega-line plan detailed investment in capacity of 75,000 wheels per annum to support programs entering production in the calendar years of '23 and '24. This project is being managed to match forecast customer demand, including a later introduction of new equipment into the Mega-line. This results in capital spend being moved to some degree into FY '24 and '25.

I'll hand over to Gerard now to talk about cash and then come back and talk about the outlook for the company.

[Gerard Buckle, executive]

Thanks, Jake. Good morning, everyone. As of the 31st of March, the company's cash balance was $34.7 million. We had a net cash outflow of $12.8 million for the quarter, and that was in line with our expectations.

Net cash outflow from operating activities was $2.1 million. This was a significant improvement from the $7.6 million outflow in the previous quarter. Inventory increased by $1.2 million during the quarter, mainly due to customer tooling and raw materials -- bringing some raw materials back in line with where we left them from safety stock level perspective. Grant monies received during the quarter relate to the State of Victoria grant and the final payment for the Advanced Manufacturing Growth Fund grant.

Net investing cash flows of $7.8 million consisted of capital expenditure on property, plant and equipment of $3.2 million, which was mainly Mega-line and tooling spend related; and $4.6 million spend on research and development which was mainly related to development of new programs and some wheel asset development works.

Net cash outflow from financing activities was $2.9 million. This reflects a net reduction in receivables financing for the quarter of $2.2 million and the scheduled quarterly repayment of our term loan with Export Finance Australia of $0.7 million. Documentation of the new financing agreement with Export Finance Australia has progressed well and is in its final stages. The agreement provides the opportunity for $23 million of new finance capacity for Carbon Revolution.

This consists of a new $8 million supply chain finance facility with Export Finance Australia. And we'll be able to extend our limits for both receivables financing by $7.5 million and asset leasing by $7.5 million. And we are working with other financing partners to put these in place. Also, as a part of this agreement, we will have an extension of the amortization period of the current term loan by 1 year.

Jake, I'll hand back to you now.

[Jacob Dingle, executive]

Thanks, Gerard. So in terms of outlook for the coming period, clearly, there are ongoing COVID-19-related uncertainties and disruptions in the global auto industry in the near term and in the medium term. The shortage of semiconductors and other raw materials and general supply chain constraints are impacting car production. So we're navigating those as carefully as we can and staying very close to our customers, obviously, to try to understand what the impacts can be and will be. That relationship is going well, though.

In terms of key focus areas and where we continue to place all of our resources and focus, executing the production ramp of the Corvette program and supporting the increased production for the Ferrari programs, including the one I talked about earlier which has just come onto the market, is critical. A structured program of improvements to quality and machine performance to get the smooth flow through the factory that will dramatically drive down our costs and our throughput are fundamental, and we have a very good plan to deliver that.

Operational efficiencies through ongoing improvements in technologies, equipment and processes and obviously, the construction Phase 1 of the Mega-line continues. We're also advancing through the critical milestones of the initial programs that underpin Phase 1 at the Mega-line, even the one that has seen some rephasing. The teams are extremely busy and the progress on those is very strong. That, as we said, was a customer-related rephasing.

As a final comment, the team is highly focused. We've got a clear plan. Everyone understands what needs to be done to deliver that plan and achieve our profitability cash flow targets. So despite the challenging end to last year, beginning of this year, I'm confident in the robustness of the plan and the progress that's already been made, and that we certainly have the team and the right team to deliver it.

Thanks, Andrew. I'll hand back to you for questions.

[Andrew Keys, executive]

Okay. Thanks, guys. A reminder for participants. Please drop your question into the Q&A chat, and I'll facilitate that, or raise your hand, and we'll bring you into the call.

I have a question from [ Ryan Chaney ] that's come through, "How do the 15 wheel programs underway translate into production volumes over the next 2 years?" And the context being the -- mentioning the capacity of 75,000 wheels as part of the Mega-line. However, Ryan suspects this is not the projected production in the medium term.

[Jacob Dingle, executive]

Yes. So thanks for the question, Ryan. The 75,000 Mega-line is incremental capacity, and that's to cover the 4 programs, broadly speaking, that we -- that underpin the start of construction of that Mega-line. They won't all be in production in the next 2 years, you're right about that. But there are other programs that predate those that are ramping up, including the Corvette that we have in production. There's additional programs that will come onstream over the coming 2 years that increase our capacity as well.

So we're not giving a detailed volume forecast, obviously, but that Mega-line will be filled progressively over more than a 2-year period. But the pre Mega-line programs are also ramping up in that period as well.

[Andrew Keys, executive]

Thanks, Jake. Hamish Murray from Bell Potter has a question. I'm just going to bring you into the call, Hamish.

[Hamish Murray, analyst]

Guys, can you hear me?

[Jacob Dingle, executive]

Yes.

[Hamish Murray, analyst]

Just a quick one, just on, I guess, the discussion about pushing back or rephasing that lead OEM program that you're now saying will be pushed back to the first half of calendar year '24. Is the read on that, that lead program would be the first of the 3? And can you give any, I guess, rough date time lines around how incrementally the other 2 will be introduced after that?

[Jacob Dingle, executive]

Yes. Thanks for the question, Hamish. So it's not hard wired. Yet it will still be the first and it was always intended to be. The phasing is somewhere in the order of 6 to 8 months. We're trying to be conservative with these things now.

I'll actually be with the customer next week and then be talking about this in more detail. Really, it's -- because it's a new application, these vehicles are a lot bigger and heavier than their predecessors, and it's a very large wheel. They want to allow enough time to make sure we get that right. But it's a very similar theme to the ones that come after it. So I wouldn't come away from this thinking that everything just needs to be delayed in order to do that development, but we don't have a clear line of sight yet as to how quickly the others keep coming up. We are certainly working on subsequent programs as well. They're just not as far progressed as this one.

[Gerard Buckle, executive]

And Hamish, of -- for the 4 Mega-line programs, so one is well progressed, validation wheels later this year and in production next year. This one that's moved -- it was going to be the second one. So it was going to also be coming in during calendar year '23. It seemed to moved out to calendar year '24. The other 2 were always calendar year '24 and they haven't changed. So at this stage, we've got the one coming in, in calendar year '23 and then we'd have 3 coming in, in calendar year '24. Throughout the course of that year, obviously, they have their ramp. As the production of the vehicle has sort of ramped up, our production ramp goes as well.

[Hamish Murray, analyst]

And just one other, I guess, on the programs. You mentioned the timing of the SUV and you've got 2 programs awarded. One of those programs, to my knowledge, has been awarded since -- basically since you IPO-ed prior to the SUV. Can you give any rough time lines around that program? Is that, I guess, a 12- to 18-month sort of outlook as well in terms of it coming online? Or is it something further out?

[Jacob Dingle, executive]

Hamish, we'll just confirm your question. You're referring to the 2 programs that are sitting in awarded status?

[Hamish Murray, analyst]

One of the awarded ones, the SUV, which you guys in this said is coming into production in first half CY '23, and then the second awarded one, to my knowledge, has been awarded since the prospectus. So I was just wondering whether you could give us any vague sort of time lines. Is that something that we expect to come into production in the next 12 to 18 months? Or is it something further out?

[Jacob Dingle, executive]

Yes. It will certainly -- as far as all the planning is pointing to at the moment, certainly, it will be a feature of financial year '23.

[Hamish Murray, analyst]

And then just broadly, just on the cash quickly I know you guys are accessing more debt. This will just be the last one from me. But you've got $35 million of cash left on the balance sheet and $8.8 million in commitments to the Mega-line, and you just burned around $13 million.

Those Mega-line commitments after that, given that you're calling out some delays to the Mega-line investment, do you have any sort of clarity around how much, I guess, you need to spend in the medium term after that? Or is a lot of that expense going to be pushed out towards FY 2023, sort of first half '24?

[Gerard Buckle, executive]

Yes, Hamish, the next sort of stage of Mega-line, we will have some new molding equipment in under our sort of gantries with face live for the robots and Mega-line sort of up and running during the course of next year. The next stage is then moving our existing equipment into the Mega-line. So the sort of heavy capital spend actually pushes out really into '24, '25, and maybe even with some bills paid for some work done late financial year '25 and '26.

So the calendar year FY -- sorry, financial year '23 will be a much leaner spend on the Mega-line, and it will start again sort of '24 and '25.

[Hamish Murray, analyst]

And just one more. You guys mentioned that some of the issues that thermal barrier coating that affected COGS have largely been resolved as of Feb '22. Could you give us any clarity on where your COGS are at or your GP margin is at today in terms of an exit rate, or...

[Gerard Buckle, executive]

Hamish, look, we don't normally give COGS numbers during this call. At best we work through those in the half year and the year-end. But look, our COGS, we didn't see improvement in COGS in the third quarter. As we went through in our half-year release, look, we were certainly impacted by numerous things during the quarter. Absenteeism was very high in January, early February, as we noted. We come back to work in January with sort of 40% absenteeism. That really means a very tough January for us.

We had the resin issues. We had the TBC issues as well, which we resolved sort of mid-February. So we didn't get a good run at getting COGS reduction during the third quarter. We are into that now. We've got good solid plans around COGS reduction with resin up and running, with TBC up and running. We're getting flow through the factories. So we're actually able to have a good crack at all our initiatives to get COGS reduction in the fourth quarter. The third quarter, we didn't see any improvements in COGS.

[Andrew Keys, executive]

Thanks, Hamish. Harry Saunders from Evans & Partners has a question.

[Harry Saunders, analyst]

Can you hear me?

[Andrew Keys, executive]

Yes.

[Harry Saunders, analyst]

I might just start following on from Hamish's question on COGS. So I guess more specifically, looking at the cash sort of implied COGS, looks to have come down from about 2,800 in the first half to about 2,400 in the third quarter. I mean is that the sort of delta we're looking at in P&L terms, that sort of 400 [ veer upturn ] per wheel?

[Gerard Buckle, executive]

Yes. So Harry, what -- during our quarterlies, we don't go into detail around where our COGS are at. I think reading from a cash flow statement, there's timing of payments for suppliers. They can be sort of much larger in 1 quarter versus another quarter. That's just depending on ordering and shipping of raw materials and how that occurs.

Obviously, payments to employees is reasonably consistent, but there are larger quarters and slightly smaller quarters based on payment timing, payment runs. So I think, look at what we'll save at COGS today, we didn't see improvement during the third quarter in our COGS. We really were significantly impacted by COVID in January, will be in February as well in absenteeism. Resin and TBC issues, we didn't get those sold until mid-February. So it really wasn't until March that we started to see production sort of flowing through the factory as we would like.

We will give -- during the year-end results, we will give some quarter-on-quarter split, so you can understand through the half how we've tracked in relation to COGS.

[Harry Saunders, analyst]

That's great. So I mean you've already seen an improvement in the quarter and you still were impacted. So we would sort of expect another step down in the fourth quarter as well?

[Gerard Buckle, executive]

I did say though we haven't seen an improvement in the third quarter. So maybe what you're seeing, if you're doing some sort of analysis from the cash flow statement, just bear in mind there that there are a few -- payment to suppliers and employees is not necessarily all making its way through to COGS. COGS is more related to the activity of producing wheels rather than the buying of materials in a particular quarter.

[Harry Saunders, analyst]

Sure. Sorry, just to clarify, were you saying that there has been an improvement in COGS in the third quarter?

[Gerard Buckle, executive]

No, we haven't seen improvement in COGS, no, no. But we're looking for that, where we now have with resin resolved with the Diamond Weave fully up and running and with TBC running to the appropriate sort of standards now, we should be seeing COGS reduction in the fourth quarter. But no, we had our issues in the third quarter that prevented us from seeing COGS improvement.

[Harry Saunders, analyst]

Great. So a question on anticipated production sales volumes in the fourth quarter. Are you going to give any sort of guidance on that? Or are we expecting a step-up given the third quarter was a bit of a step down?

[Gerard Buckle, executive]

Yes. The fourth quarter, look, we're feeling quite positive about the fourth quarter. We've obviously got orders in the system and good clarity either what demand looks like. We don't actually give outlook, but there's just too many uncertainties with global supply chains, things like automotive chip issues. So we can't give an outlook. But we do have the Corvette program. It's ramping and it's really only getting sort of sales in this last quarter. We've had some development wheels which have been sold in the previous quarter. But production wheels, they start selling from this month onwards, so that's a real plus.

The Ferrari programs, they've been gradually ramping. And so we're expecting some more strength in the Ferrari programs in the last quarter versus the third quarter as well. So we won't give sort of numbers of guidance. We feel positive about the quarter, but we obviously just won't -- we won't give guidance at this stage because of global uncertainties.

[Harry Saunders, analyst]

Yes. Great. And you said this final sort of GT500 wheels in the fourth quarter, I mean have you actually got an idea of what that number is for those wheels?

[Gerard Buckle, executive]

Yes. And we've got most of them made in sort of boxes in storage, and those orders are coming through. So now we do -- it's been a great program for us, the GT500 over the last couple of years. It's been our largest production program. So it does finish by the end of this financial year. But replacing that is the Corvette, which is a stronger program. Again, it's more volume over and above the GT500. So the outlook is looking more positive as we sit here today versus earlier in the year.

[Harry Saunders, analyst]

Great. Sorry, and one last one for me. You referenced, I think, $2.7 million of government grants received in the quarter. Can you just outline what that's about? And are you anticipating any further grants to come in?

[Gerard Buckle, executive]

We have -- there was one of those grants, which was the AMGF grant, which was about $600,000 roughly. That was the last payment under that grant scheme that did go for a couple of years. The other one is the State of Victoria grant, which was $2.1 million. And that grant, we're about halfway through that. So there's another couple of years. That's an annual payment of that grant. We need to hit the milestones to achieve that. We hit those milestones, so that grant money was paid during the quarter, which was good. And there's another couple of years of that to come.

[Harry Saunders, analyst]

Great. And are there any other specific grants to go after in the pipeline at all?

[Gerard Buckle, executive]

Yes, there are. Jake?

[Jacob Dingle, executive]

There's a couple of significant ones, one federal, one state. So Modern Manufacturing Initiative, which we've talked about this before, we have an application in for that. It looks like that won't -- those -- this current round won't be announced until after the election now. That's the feedback we've had. But there's -- it's quite a substantial grant scheme for people to do pretty much exactly what we're doing.

And then Breakthrough Victoria is the other. It's not a grant -- a grant scheme. It's an independent organization that's looking to put capital to work from the state government for advanced manufacturing and other kind of sovereign capability opportunities. And so we're engaged with them as well. That's not a typical grant scheme, but it does have some real opportunity, we think. And it is designed to help commercialize and industrialize technologies that come out of collaborations with research institutions as well. So there are and we expect more. Probably coming out of the election, there will be more of that kind of thing.

[Harry Saunders, analyst]

That's great. And sorry, actually, one last one as well. Just have you got a cash burn outlook for the fourth quarter? Can we expect an improvement?

[Gerard Buckle, executive]

Yes. So Harry, we're not giving outlooks for sales or cash flow or anything. We've got solid plans around improving our COGS. We're hopeful we'll be able to update on that in our year-end results. That will obviously sort of reduce cash burn.

The Mega-line spend, that will be -- we've given the outlook there of what we still got committed. And as we discussed a bit earlier there before, there will be a lighter spend in FY '23 and then ramping up again sort of in FY '24 and '25.

Sales, we can't give the outlook on sales either, but we are expecting for -- with the Corvette launch and with Ferrari programs being stronger, when those sales do come through, we take those through our receivables financing facility. So this quarter, we've seen a reduction in our receivables financing facility. That can move sort of positively or negatively from quarter-to-quarter as well based on where sales are at.

[Andrew Keys, executive]

Okay. Thank you. We have a question -- another question from [ Ryan Chaney ] for you, Jake. "Is there an update on development efforts around the nonautomotive product opportunity?"

[Jacob Dingle, executive]

Yes. Thanks for the question. So we successfully completed the first phase of the aircraft wheel program, which was fully funded. That was -- and there is now demand. I think it'd be fair to say a strong interest and demand to complete that program, which would get it to the point where it's been prototyped tested.

We are now in the process of working with external parties to secure the funding to do that. We, again, want that to be fully funded. It's obviously not the core business that we're focused on, but it is a great opportunity to find adjacent opportunities for the technology. So not letting it distract anyone, but certainly, we do have people working on our behalf to find the right way to get the next phase of this done.

[Andrew Keys, executive]

Okay. Thanks, Jake. Thanks, Gerard, and thank you to all the participants for tuning in today and for the questions that come through. We don't have any more questions. So we will finish the webinar there.

[Gerard Buckle, executive]

Andrew, I think I just spotted a question that has come through on the Q&A.

[Andrew Keys, executive]

Okay. Troy Cairns, "Could you clarify if the thermal coating issue is resolved? Sounds like not quite yet."

[Jacob Dingle, executive]

So thanks for the question, Troy. So the issue that stopped us in our tracks has been resolved. We have what we call a breakpoint that we have successfully put in place to resolve that issue. What we are doing is now working pretty hard to get that equipment as stable as it needs to be as we ramp up volume. So we're being a bit measured in saying it's -- everything is completely fine with it because there are some optimization activities that we're doing to make sure we can get the volumes up.

But the issue that was creating the scrap and the fundamental challenge has been resolved successfully.

[Andrew Keys, executive]

Thanks, Gerard, for bringing that to my attention. I'll -- look, one more question, and then we will conclude. There's a final one from Hamish Murray, "The $8.8 million of commitments for the Mega-line, is that all coming through in the second half of this financial year?"

[Gerard Buckle, executive]

Hamish, that work is underway and that work will continue into next calendar year as well. So look, the exact split of that between sort of what comes through in this last quarter and what comes through in the first half of next year, look, I think if you're assuming sort of 50-50 split between coming through in this remaining quarter and then the rest of it into sort of the first half of next year would be reasonably safe.

The work is underway, [ miranda gear ], installing robots and doing a whole range a few things. So it will be sort of progressively throughout the remainder of this calendar year.

[Andrew Keys, executive]

Thank you, Gerard. As I was saying before, thanks to the participants for tuning in and the questions. We will conclude the webinar there today, and enjoy the rest of your day. Thank you all.

[Jacob Dingle, executive]

Thanks, everyone.

[Gerard Buckle, executive]

Thank you.