Carbon Revolution Ltd

ASX:CBR

Earnings Call Transcript 2021-Q4

[Andrew Keys]

Hello, and welcome to Carbon Revolution's Fourth Quarter FY '21 Business Update. I'm Andrew Keys, and I am facilitating today's call. Please note the event is being recorded. In a moment, Carbon Revolution's CEO, Jake Dingle, will provide some commentary, and Jake will be followed by Carbon Revolution's CFO, Gerard Buckle. At the end of the commentary, there will be a Q&A session. [Operator Instructions] Good morning, Jake. Over to you.

[Jacob William Dingle, CEO, MD & Director]

Thank you, Andrew. Good morning, everyone. Welcome to our results announcement/4C for quarter 4 FY '21. It's been a tough quarter for the global automotive industry, which we're participating, given semiconductor chip shortages coming on the back of the challenges posed by COVID-19. Despite these challenges, the team has done a remarkable job throughout the year and in this past quarter to steer the business through these challenges and make significant progress on our strategic objectives. The highlights of the last quarter. We saw wheel sales in the quarter of just over 3,200 wheels, a 2.7% increase on the prior quarter. This is notwithstanding the negative impact of the semiconductor chip shortages, which particularly impacted one of our customers. We finished with a slightly stronger Q4 than previously advised with full year wheel sales around about 500 better than our previous guidance. We completed the implementation of what we are calling Diamond Weave Technology now, which we previously referred to as fascia technology. That's in place now for all wheels other than our smallest program. We successfully commissioned the next generation of our automated rim layup equipment. So this is highly automated equipment and now delivers further improvements in productivity and higher throughput. During the quarter, Ferrari launched 2 new car models featuring Carbon Revolution's carbon fiber wheels, the 812 Competizione and the 296 GTB. Both of these wheels now are -- or both of these programs now have wheels in production. We enhanced our management capability with ex-Ford manufacturing executive Andrew Higginbotham joining the business as Director of Operations. And finally, we completed the fully underwritten $95 million equity raise to fund the first phase of our Mega-line expansion. This sets us up well to execute the next phase of our growth and development. I'd like to acknowledge and thank those that support the business while participating in that raising. Progress has been made on the Mega-line design and implementation during the quarter. In terms of the details from a revenue point of view, our quarterly revenue was $8.7 million, a 3.2% decrease on the prior quarter and a 7.5% increase from the prior corresponding quarter of Q4 FY '20. 3,218 wheels were sold in the quarter, so a 2.7% increase on the prior quarter, a 6.1% decrease from the quarter 4, the corresponding period in FY '20. Full year revenue for FY '21 was just shy of $35 million, 10% lower than FY '20. And total wheels sold for FY '21 were 12,749, 8.6% lower than the prior financial year. Following the recovery in wheel sales during Q3 FY '21, the sales momentum continued to grow in the early stages of that prior quarter. However, unfortunately, it was impacted by the semiconductor chip shortages that have affected the global automotive supply chain. This directly impacted our largest wheel program currently in production and reduced the Q4 FY '21 orders. As we'd expected, the impacted customer program did resume production in late June. And subsequently, production was paused again for another couple of weeks. Customer is expected to recommence production from the last week of July. Wheel orders have resumed in recent weeks. So this short-term production disruption we have worked through, and it's not affecting our industrialization program. From a customer program point of view, as I mentioned in the summary, our wheels were featured on 2 Ferrari vehicles launched during the quarter, the Competizione and the 296 GTB. We're again -- we've again been fully recognized by Ferrari amongst only about 20 suppliers as a strategic partner. And in a press release, the reference was made to the weight savings of these wheels and what they deliver to that vehicle against what I consider the premium end or the most high-performing end of the aluminum wheel market, which is the forged aluminum wheel therein. That's a very significant statement, one we thought was worth reprinting. Those programs, as I mentioned earlier, are both in production. We've been engaged by a customer to build carbon fiber wheels for a new application that's within the SUV and pickup truck segment, which we've already entered. So this is a subsegment of that but an important one. This will involve the development of new off-road capable technologies. Development has already begun on this program, and this latest development really does demonstrate further how the automotive industry is understanding the durability and damage tolerance of this technology and its very broad applicability. As previously announced, the company has been working under a detailed design and engineering agreement on a low-volume, ultrahigh-performance vehicle program for an Asian OEM. The company was advised in June, along with the other suppliers and partners on this program, that this OEM would cease the vehicle program for reasons unrelated, certainly unrelated to Carbon Revolution or carbon fiber wheels, essentially for strategic reasons. The program would have been for less than 500 wheels per annum. And despite not proceeding to supply, the strategic benefit of validating the technology and establishing a working relationship with that customer has been achieved, in our view. And we're now in discussions with them to identify suitable higher-volume production applications for the technology. That's ultimately what our rationale was and is for undertaking -- when we undertake these low-volume initial programs, if it gets the valuation hurdles or gets over the validation hurdles to establish the technology into a new customer or on a new application. All our other programs remain on track with scheduled milestones. One awarded program currently under development is expected to enter production during FY '22. Programs under development include a number of electric vehicles and a premium SUV. To ensure the successful launch of programs and reflecting the increased scale of the business, we established a Program Management and Launch Engineering team within the Customer Excellence team during the quarter. And Jo Markham, who was appointed to the exec team last year from FCA and General Motors Holden, heads up that Customer Excellence function. And that has been a significant step forward in terms of the business and how we are interacting and servicing our customers. Our aerospace development program is continuing to progress in line with our expectations. In terms of operational progress, as I mentioned in the summary, we've enhanced our capability with bringing Andrew Higginbotham on board to join the executive team as Director of Operations. Andrew's appointment contributes significantly to the foundations for long-term success at a critical time for us. This Director of Operations role is a new position, has executive responsibility across manufacturing, supply chain and industrialization. Andrew has come to us after a 30-plus-year very successful career as a senior manufacturing executive within Ford in Australia and in offshore roles. And most recently, he was the Motorhome Divisional Manager at Jayco. So he brings a level of knowledge and experience and seniority necessary to deliver the operational performance requirements and improvements that the Mega-line construction and implementation will bring. We made significant progress during the quarter on implementation of what we're now calling Diamond Weave Technology, we previously referred to as fascia. This implementation is now complete for all wheels in production other than for the smallest program. It dramatically improves wheel aesthetic quality. It's really delighted our customers in that regard, and it enhances the conversion of molded wheels to sold wheels and drives sort of significant reduction both in labor costs and in product quality. There was progress on delivering manufacturing efficiencies during the quarter. We were successful in decreasing raw material and consumables stock by another 30% since the last quarter, and it's now at an appropriate level for current production. The chip-related supply issues did impact our ability to further drive down inventory levels and some elements of production costs during the quarter. These are getting back on track as things stabilize again now in the factories. A significant milestone was commissioning the first machine of our next-generation rim -- Automated Rim Layup capacity. This is ARL3. It further automates and increases throughput on the rim layup process, removes essentially all of the prior manual interactions with the machine. The manufacture of the first Production Click Press machine is near completion off site as well and is due for installation in the coming quarter. On the Mega-line, this Mega-line will combine automated manufacturing processes with automated part flow to achieve step changes both in capacity and cost reductions. The Phase 1 Mega-line project is on track. It's in line with budget, which is a total capital expenditure of $47 million. During the quarter, detailed design progressed with key partners. Orders for long-lead time items are expected to be placed in the coming months. I'll hand over to Gerard now to talk through our cash position and the financials.

[Gerard Buckle, Chief Financial Officer]

Thanks, Jake. Good morning, all. During the fourth quarter, net cash flow from operating activities were negative $8.5 million. The main items impacting our operating cash flow in the quarter were: Firstly, customer receipts were $5.5 million lower than expected due to a trading terms change with our largest current production program. This outcome arose from our customer moving their transport to sea freight. Unfortunately, the customer has been unable to pay within the contract terms of approximately 45 days due to their internal processes. Their internal process will not allow them to pay until the goods are received on-site at their warehouse in the United States and received into their ERP, and this has been taking up to 120 days. Commercial terms have been adjusted to reflect the additional working capital holding costs for our business. This is a timing impact only and will normalize during the current quarter when the plan is resumed. Secondly, administration and corporate costs were negatively impacted by $800,000, approximately $800,000, related to the expensing of the configuration and customization costs required for the setup of our new ERP system. The accounting standards changed in April and now require this previously capitalized cost to be expensed, and this is a one-off item. Finally, we did continue to run down our raw material inventory during the quarter, where we saw a $3.4 million reduction in raw materials. Raw materials are now at more normal levels as at 30 June. Net investing cash flows of $6.8 million consisted primarily of investment in research and development. That was $5.8 million. The increased spend in research and development activities relates to new programs, especially Mega-line programs, that were under development in the quarter and the implementation of the Diamond Weave Technology for current and new programs. The capital spend on assets for the Mega-line, we -- as Jake has said, we expect to place -- be placing orders over the coming months. And therefore, we expect the spending on the assets to increase from hereon in. The net cash inflow from operating activities of $89.2 million was driven by the completion of the $95 million equity raise, which resulted in $89.9 million net cash inflow net of transaction costs. During the quarter, we reduced our term debt by approximately $4.5 million by the repayment of the State of Victoria grant advance of $3.5 million and our quarterly payment of $1.1 million on the EFA loan. An additional $4 million was drawn on our receivables financing facility, which was used to partially mitigate the change to payment terms, as I detailed earlier. The company's cash balance at 30 June is $87.3 million. I'll now hand back to Jake for the outlook.

[Jacob William Dingle, CEO, MD & Director]

Thanks, Gerard. Just in terms of some comments on our outlook, the company continues to monitor the local and global impacts and risks related to COVID-19. So obviously, we've seen progress globally around vaccination programs, but uncertainties remain. And disruptions facing the global auto industry are still very real in the near term. The ongoing global shortage in the supply of semiconductor chips also continues to impact global car production, as we've seen. So due to these uncertainties, we're not providing sales outlook guidance for FY '22, but the key focus areas for us for this financial year are outlined here. So executing the production ramp of the 2 new Ferrari programs and the 1 awarded program currently under development that is entering production in FY '22 as well as obviously delivering on the other programs in production, including ramp-up in -- where appropriate. Delivering operational efficiencies through ongoing improvements in technologies, equipment and processes is a key focus area. The progress, as Gerard just talked about, with the Phase 1 Mega-line project through the detailed design, equipment procurement and commencement of commissioning activities within the financial year. And finally, advancing through the engineering and design phases and formal award for the initial programs that underpin Phase 1 of the Mega-line, and these are on track, as previously mentioned. We expect the second half of FY '22 to have significantly higher sales than the first half due to the introduction of that new program in the second half. The gradual ramp of the 2 new Ferrari programs throughout the year and then combined with seasonality impacts in the first half of an existing program all come together to make that second half higher than the first half. That concludes the overview. I'll hand back to Andrew now to take questions.

[Andrew Keys]

Thanks, Jake. To the benefit of attendees, please note that the screen you're looking at, if you are online, is a placeholder slide. We don't have any accompanying slide presentation today. All the information is provided in the 4C release, which was lodged with the ASX. [Operator Instructions] We have Cameron McDonald from Evans & Partners.

[Cameron McDonald, MD & Head of Research]

Can you hear me, guys?

[Andrew Keys]

Yes.

[Cameron McDonald, MD & Head of Research]

Just a couple of questions sort of from me. So the revenue you've quoted of $34.9 million, just to be explicit, that excludes the grant income that you've also received? That's just pure sales from -- revenue from wheel sales?

[Gerard Buckle, Chief Financial Officer]

Yes. Cam, that is wheel sales, its total revenue. So it's wheel sales and our ED&T income.

[Jacob William Dingle, CEO, MD & Director]

It does not include grants.

[Gerard Buckle, Chief Financial Officer]

It does not include grants. Grants come sort of lower down in the profit and loss.

[Cameron McDonald, MD & Head of Research]

Yes. Yes. Perfect. So yes, it doesn't include the grants you've also received, which you seem -- it looks like you've nearly received, what, $12 million.

[Gerard Buckle, Chief Financial Officer]

In grants?

[Cameron McDonald, MD & Head of Research]

Or thereabouts, $11-point something million.

[Gerard Buckle, Chief Financial Officer]

Grants...

[Cameron McDonald, MD & Head of Research]

Yes. $11.8 million, grants and other tax incentives, yes. So...

[Gerard Buckle, Chief Financial Officer]

Yes. Grants include JobKeeper for this year as well. So that was quite a strong contributor there through the course of the year up until the last quarter.

[Cameron McDonald, MD & Head of Research]

Perfect. And just to revisit the working capital movement with that 120-day sort of the balance blowout. What was the impact of that? I just missed the number.

[Gerard Buckle, Chief Financial Officer]

$5.5 million, Cam.

[Cameron McDonald, MD & Head of Research]

$5.5 million. And then if I can just move to the lost Asian OEM contract. Appreciate you've said it's got nothing to do with the wheels. I mean, I know that it was a small initial program for a specific car, but there was potential then for an expansion of that relationship into other vehicle models. So can you just talk through the OEM's thinking now? So they are not going to -- or what relationship have you got with them going forward? And is it still a possibility to have a broader relationship? Or is that relationship completely finished?

[Jacob William Dingle, CEO, MD & Director]

No. That's -- thanks for the question, Cam. That -- essentially, doing the program was effectively an activity that got us validated with them with the technology. The benefit of doing these very low-volume hypercar programs is the level of engineering focus to get them validated is very high. So that's -- as we said in the 4C, that's been achieved. The intent was always to move on to finding the right home at a more sensible level of production than a very small hypercar program. So we are working through that at the moment with them. It's been a fairly long process. These kind of high-profile hypercar programs take some time. They usually have a lot of new technology. Strategic decision was made that we -- obviously, we can't comment on, but was made to cease the program. But to answer your question, yes, the intent of it has been met from our perspective and their perspective as far as we're aware. And we are talking about where the technology can go within the sort of what we were aiming for in the first place, which is higher volume, meaningful production volume programs. And that's on track -- or that's underway.

[Cameron McDonald, MD & Head of Research]

Okay. Great. So -- and I suppose then that links then to the off-road product that you've spoken about. Can you just talk through with the Asian OEM and then the off-road tech that you're developing, how is that R&D being funded? Or have you've been -- are you having to fund that upfront or -- and/or have you had any recoveries from the investment you've made from that Asian OEM? How do we think about that?

[Jacob William Dingle, CEO, MD & Director]

So for the Asian OEM program, it was fully covered. So that was a funded program. The off-road program will be associated with a specific vehicle. There is some work that we're doing at the moment because it's applicable to more than one vehicle. It's actually a segment within that SUV and truck space, and it's a meaningful one and one that we think is -- has some real strategic merit because of its volume and because of the nature of the segment and the customer set. So it will translate into a specific one or more programs of a specific vehicle. There are some technology elements that we are just working through at the moment, which it's not a -- certainly not a [ tear up ]. It's just some additional elements that make the technology extremely capable for off-road use. And pleasingly, from our point of view, it means that the acknowledgment of how robust this technology is and how damage tolerant this is, is now being well and truly accepted, which is helpful because that's been one of the sort of common misconceptions.

[Cameron McDonald, MD & Head of Research]

Okay. So just to be clear, though, are you funding that R&D as part of the capital raising that was done to fund the Mega-line with the additional R&D costs and the business development costs? Or is the counterparty funding it?

[Gerard Buckle, Chief Financial Officer]

So Cam, this is another program. The extra technology for the off-road, we're funding that. And to a point where it gets proven up, then this would move to a normal type of program relationship where then from there, we look at the funding of development costs and tooling costs and all those different types of things.

[Andrew Keys]

Okay. Questions that have come through Q&A. From [ Daniel Bruin ], can you please give an idea of the likely scale of the program to start production in FY '22?

[Jacob William Dingle, CEO, MD & Director]

So it's relative to the scale of the programs that we have had up to this point and currently have in the business. It is at the larger end of that scale.

[Gerard Buckle, Chief Financial Officer]

Yes. And it -- that's when it's fully up and running. So [ Daniel ], we don't know, obviously, how the marketing is going to go. We have their start of production. So we know at this stage when they're planning to start production and what the ramp looks like through '22 and into '23. When it hits full production, we certainly expect it to be one of our larger programs as compared to our programs currently on foot.

[Andrew Keys]

Okay. Another question through Q&A from [ James Dowling ]. When is the Mega-line expected to be in full production?

[Jacob William Dingle, CEO, MD & Director]

Yes. Thanks, [ James ]. So first production from the Mega-line is expected to be -- all these new programs that we referred to earlier in the year, the first of those, we expect the start of production in the first half of calendar '23. And then it will progressively be commissioning capacity for the subsequent programs after that over the course of the next 12 to 18 months, we expect.

[Gerard Buckle, Chief Financial Officer]

Yes. The next 2 years. The -- we're expecting the last program in late calendar '24. So it's really not until '25 until that program's fully up and running that we will see all of that capacity being utilized. So it's the '25 calendar year, sometime during that '25 calendar year.

[Andrew Keys]

Okay. Hamish Murray from Bell Potter has raised his hand.

[Hamish Murray, Analyst]

I wasn't sure. You might have mentioned this, and I might have missed it. But those SUV, I guess, segment that you've been putting for a new design and engineering agreement. Is that a existing OEM?

[Jacob William Dingle, CEO, MD & Director]

Yes, it is, Hamish.

[Hamish Murray, Analyst]

Perfect. And just one other outside of -- I see you've repaid the Victorian grants that you'd said at the capital raise. Outside of that, can you give us any guidance on, I guess, how much of that use of funds you might have deployed for, I guess, the initial stages of this Mega-line and the use of funds and where you guys are with that deployment and what we expect in the next quarters, I guess?

[Gerard Buckle, Chief Financial Officer]

So we really haven't spent on the PP&E, Hamish. So that $47 million of CapEx, as Jake said, we're getting close to completing that design and long-lead time orders will be placed. So that spending will start reasonably soon. Tooling spend hasn't started yet. The development work is underway. So there was a lot of development work on a couple of those programs throughout this quarter. So the spending of the development costs is underway.

[Hamish Murray, Analyst]

Yes. And just with the shutdowns of that major customer factory that we've seen through this quarter, I know you guys are obviously on a smaller vehicle coming out of that factory that should be a little bit less elastic. Have you had any conversations about potential catch-up of those lost volumes in the coming half and just how that winter shutdown and seasonality might play out? Is there any more information you guys can provide about that or color?

[Jacob William Dingle, CEO, MD & Director]

Yes. We're working very closely with them, Hamish. Obviously, all these vehicles are sold or they're heavily forward sold. And clearly, they're a vehicle that generates good margins. So yes, the catch-up plans are underway. And we expect -- if things go according to plan, we expect them to be accelerating in order to catch things up. And how that falls either side of Christmas, this has traditionally been a seasonal program as well. So that's being looked at, just due to some quirks in the way they manufacture the vehicles. But yes, there's certainly a lot of focus on their side to catch the production back up. And clearly, we're positioning to be able to go with them on that plan. And hopefully, we will see that caught up through the course of this financial year. I see the question about the Stradale lap record. I can confirm that was done on our wheels, which is very pleasing, I think both the 0 to 100, time of 2 seconds and a lap record. So if anyone doubted the durability and capability of the wheels, they should have a look at that.

[Andrew Keys]

The context of those comments was a question that came through a Q&A that the SF90 Stradale just set the lap record at Indianapolis for a production car, was it the use on our wheels?

[Jacob William Dingle, CEO, MD & Director]

I was reading the questions, yes. No, absolutely, it set the lap record and it set a 0 to 100 time. And yes, it was using our wheels.

[Andrew Keys]

I was just providing the full context. Thank you. Question about competitors and that environment. Could you provide an update on Carbon Revolution's competitors? Have -- are there any competitors bringing wheels to market, anything that rivals your technology?

[Jacob William Dingle, CEO, MD & Director]

Since -- probably since the last update, it is now in the public domain that thyssenkrupp was selling the thyssenkrupp carbon composites division, which produced wheels. And that -- I think it's in the public domain as well that, that business is sort of slated for closure. So that's really the only business that -- or the only really direct competitor that we've seen that has put wheels onto OEM programs. We haven't seen the emergence of anything else that we can talk about that's in any way directly comparable to where we are up to at this point. There's obviously a learning curve and an investment curve to get to this point. So we're still comfortable we've got a leadership position. But as I've always said, we treat the market as if we do have immediate and direct competition because essentially, we are competing for space as a technology on new vehicles. Now we're well and truly competing in the space for technology on the new EV vehicles that are coming out. Our OEM customers and their vehicle program teams have to make decisions about what to -- what technologies to put on vehicles out of a whole suite of things, not just wheels. So we are in a competitive environment. I think that's progressing well. We're pleased with the progress on that front. But in terms of direct carbon fiber wheel competition that we would consider to be close to us, we're not seeing anything.

[Andrew Keys]

Another question through Q&A from [ Dan Bruin ]. Are there any plans to sell Carbon Revolution wheels to retail customers directly instead of going through OEMs?

[Jacob William Dingle, CEO, MD & Director]

At this point, we're not -- that's not part of our plan. That's not to say that in future years, if there are segments that are of a scale that warrants it, that we wouldn't consider it. Benchmark companies like Brembo who do high-performance brakes do have small aftermarket businesses. But essentially, we're setting and have set this business up to be an OEM supplier of high scale, high levels of quality. Everything about the aftermarket is quite different in terms of volumes expectations, in terms of the validation. And there are complete differences in the way it's distributed and the sort of distribution networks that are needed. So it's not a straightforward thing to switch on and off. So at this stage, no, it's not part of our plans. We're very, very focused on filling Mega-lines with scaled OEM programs and addressing the market that well.

[Andrew Keys]

Question from [ Thomas Manal ], any thoughts of going into motorcycle wheels?

[Jacob William Dingle, CEO, MD & Director]

Not in the near term, no. That's not something that we're prioritizing strategically as an adjacency.

[Andrew Keys]

All right. A question from [ William Levinge ] relating to the semiconductor supply issue, which you did provide comments on earlier, worth recapping. Could you please provide some additional color there on the current status of that supply issue and expectations going forward?

[Jacob William Dingle, CEO, MD & Director]

I think we've talked a bit about this one, and there's a lot in the public domain about how the various OEMs are dealing with it. We have a good close working relationship with the customer who has been significantly impacted, and we do see a robust plan for recovery. That's about all we could say about it at this stage.

[Andrew Keys]

[Operator Instructions] There are no questions in the queue. So we'll be looking to wrap the call up soon. Jake, would you like to provide some closing remarks?

[Jacob William Dingle, CEO, MD & Director]

Yes. Just briefly, thanks, everyone, for attending. I'd like to again acknowledge the team at Carbon Revolution and how they've coped with what's been a pretty challenging last 12 months for the various reasons that we've talked about. It's a very strong team and the right team to grow the business from this point. Also, I'd like to thank and acknowledge the people who participated in the capital raising earlier this year, which sets us up for the next stage of growth. And we're looking to FY '22 year as one which we'll see more stability than we've seen in the last 12 months. But thank you, everyone, for attending.

[Andrew Keys]

All right. Thanks. That ends the call. Have a good day.