Carbon Revolution Ltd

ASX:CBR

Earnings Call Transcript 2022-Q4

[Andrew Keys, executive]

Hello, and welcome to Carbon Revolution's Q4 FY '22 business update. I'm Andrew Keys, and I will be facilitating today's call. In a moment, CEO Jake Dingle, and CFO Gerard Buckle will share their updates on the fourth quarter. Please note, there is no accompanying presentation today. At the conclusion of Jake and Gerard's updates, there will be a Q&A session. Participants may ask a question either by raising your hand or using the Q&A function.

Good morning, Jake, over to you.

[Jacob Dingle, executive]

Thanks, Andrew. Good morning, everyone, and welcome to Carbon Revolution's Fourth Quarter FY '22 Quarterly Update and foresight. The business finished off the financial year with very good momentum, both in sales and in operations. This was after a year of challenges, both for our team and for our entire industry. The ongoing impacts of the pandemic affected supply chains and factories around the world. We've recovered well that and are back on track with our operational plan, and we've built a strong foundation for executing our plan to profitability.

In terms of highlights, we've seen our highest quarterly wheel sales ever delivered with record revenue of almost $15 million for the quarter, up 70% on the final quarter of FY '21 and up 87% on the third quarter of this year. This brings full year revenue to over $40 million for the first time.

We achieved a successful production launch of the Corvette program and strong sales of this wheel through quarter 4. There's been a huge step-up in our launch performance, which is enabled by the investment we've made in our customer excellence team, which was critical for this first program with General Motors.

Two programs have been awarded since the last quarterly update, including full award of the first of the 4 programs that underpinned Phase 1 of the Mega-line. We saw an exceptional safety performance across the whole team, finishing the quarter with a 12-month rolling lost time injury frequency rate of 0. And we were awarded a $12 million Commonwealth modern manufacturing initiative grant for the Mega-line project, providing additional future financing for our expansion activities.

So on revenue, we saw record quarterly sales of $14.8 million, driven by the highest ever quarterly wheel sales volume, 4,776 wheels. That's up 63% quarter-on-quarter. The growth in the fourth quarter FY '22 was driven by the ramp-up of the Corvette program and very strong and consistent demand from Ferrari across the quarter. Average pricing also improved by a significant $206 per wheel over the previous quarter, which helps to offset input cost increases.

Increase in our average price is a good signal that our product is not considered to be a commodity by our customers, and we don't expect it to be considered that way for many years to come. The chart that we provided shows how our fourth quarter sales compared to the prior 4 quarters, demonstrating a strong upward trend despite the challenges we and our customers have faced due to the pandemic-related factors.

Production output ramped up throughout the quarter to meet demand for the new C8 Corvette Z06/Z07 Program and with Ferrari's 296GTB and the 812 Competizione programs. We're now also offered on the 296GTS, which is a spider of that particular Ferrari model.

The team has done an exceptional job getting the Corvette program ramp underway. And in fact, we're a little ahead of demand, which is exactly where we wanted to be. This is also a demonstration of the maturity we're now seeing in our product development and our manufacturing processes. So FY '22 revenue of $40.3 million is an increase of 15.5% from the prior financial year '21, which was around just shy of $35 million.

During the quarter, our Vice President of North America, Ron Collins, and I traveled across North America, the U.K. and Europe, meeting with existing and potential new customers. Customer interest and engagement was very strong. Meetings held with senior leaders and decision-makers across the key areas of those organizations. These meetings involve many of the world's leading vehicle manufacturers, both the traditional and some of the pure electric EV OEMs sort of coming to the market more recently. Particularly for their electric vehicles, OEMs are looking for new technologies that deliver weight savings to help the range extension and bring noise vibration and harshness benefits.

What's become very clear to us now, though, is that the drivers for adoption of our technology no longer adjust to very significant step change improvements in efficiency and performance that we can deliver. What we now understand a lot better is that our customers are facing a couple of major problems with delivering the new and much heavier EVs, first appear to be regulatory issues relating to overall vehicle battery that they're seeing with the EVs.

Second relates to the fact that the design studios have continued to increase wheel sizes, and for these new and much heavier vehicles, there are major structural issues and these carbon fiber wheels are now emerging clearly as the only feasible way to achieve the outcomes that they are after. So to take a retrograde step back to small wheels is just really not a consideration for them.

Following this road show, we are experiencing record levels of customer engagement and inquiries. The team is very busy with program quoting and initial design and feasibility discussions. These are great lead indicators of the growing demand for our technology.

So consistent with this, the long-term sales outlook and pipeline for new programs continues to be very strong with 15 active programs, including 2 programs awarded in the last quarter. During FY '23, 2 programs are expected to commence production, including our first premium SUV program and our first Mega-line program. And 2 existing programs are expected to conclude as planned. Combined, the 2 programs entering production are expected to deliver significantly strong volumes as compared to those concluded.

There were 4 programs that underpinned the development of Phase 1 of the Mega-line. As announced in April 2021, we secured formal agreements and kicked off detailed design and engineering on these programs with an aggregate expected volume of around 75,000 wheels a year. The first of these was awarded, meaning it reached the final formal award milestone in the June just passed and is expected to enter production in the first half of next calendar year, so first half of 2023 and ramp up over the subsequent 12 months.

The other 3 programs that underpin the Mega-line are EV SUV/Pickup programs, and the wheel design and sourcing process is well underway for those. These are moving along well. Teams on our side and our customers' side are putting in all hours to get through these key development milestones, but they're on track and we're very confident about those.

In terms of operational progress, as I mentioned in the introduction, we're very pleased with the production momentum the factory delivered across the June quarter. June '22 annualized run rate for boxed wheels was around 25,000. On an annualized basis, this is a new record level output for us. The improved production momentum follows resolution of 2 previously announced production issues in relation to the thermal barrier coating or TBC process and a resin quality issue. Pleasingly, the improved performance in the factory has been achieved with stability and consistency. This is not only the result of having implemented the Diamond Weave Technology and resolving the TBC and resin quality issues, it also reflects the enhanced leadership that we've had in the past year.

So we're starting to feel a lot more maturity in the plant and now have strong foundations to driving real improvements to our cost of goods sold. Production momentum in the factory also demonstrates that we're managing the ongoing challenges caused by COVID-19 and the related absenteeism and global supply chain disruptions, particularly the supply of raw materials.

We have been able to begin reducing direct labor cost per wheel through that quarter, although this benefit is somewhat offset by the increased cost of inputs, especially carbon fiber. So the stronger average sales price for the quarter partially offsets these input price increases.

As mentioned in the introduction, I'm very pleased to be able to report a 0 lost time injury frequency rate on a rolling 12-month basis ending June 2022. This is an outstanding result by the team, particularly given the level of new equipment installation and the commissioning that's been underway during that period.

In May of this year, we welcomed the announcement of the Commonwealth Modern Manufacturing Initiative grant of $12 million for the Mega-line project. This helps us develop wheels and capacity to meet the future demand for our range extending technology, particularly in the rapidly expanding EV market. We have been advised that the new minister is undertaking a review of all funding approved by the previous government. We're waiting for confirmation and the next steps from the department.

But we're an advanced manufacturing business and we're based in regional Australia. As such, we feel very confident that this MMI grant is aligned with the Albanese Government pledge to invest $1 billion into advanced manufacturing. We're therefore confident of a positive outcome. I think it would be hard to find a company that's a better fit.

In terms of the Mega-line project update, Phase 1 of the Mega-line has progressed rapidly towards first of 3 commissioning phases. Significant building installation progress has occurred with new robots, conveyors and tool handling equipment installed and configured. From late July, this month that is, the wheel face assembly section of the Mega-line has entered the commissioning phase and the wheel face production will shortly begin moving from these original facilities to the Mega-line. This commissioning will be followed by the integration of existing rim-build machines and 2 new high-pressure molding units late in this year.

Existing high-pressure molding units are currently planned to be relocated to the Mega-line over the upcoming Christmas break. And then first production wheels are expected in quarter 3 of this financial year.

CapEx for the quarter on the Mega-line was $2.6 million and for FY '22, it was $11.6 million overall, with commitments for another $6.5 million for this phase of the Mega-Line project. As mentioned, in the third quarter Activities Report, the development of the Mega-line is being managed to match customer demand, including a later introduction of new equipment into the Mega-line. So it results in capital spend being moved out into the '24 and '25 financial years. Overall, we're very pleased with the progress of the Mega-line project.

I hand over to Gerard now to talk about our cash position.

[Gerard Buckle, executive]

Thanks, Jake, and good morning, everyone. Looking first at our net cash outflow from operating activities for the quarter, where we have a $10.6 million outflow of funds. Included in this outflow of funds from operations is a $10.7 million growth in receivables during the quarter. This growth in receivables has occurred due to the ramp in sales of the new Ferrari programs and the Corvette program during this quarter. And now that these programs are both ranked in sales, we do not expect to see growth in receivables in the coming few quarters.

Due to global supply chain issues, we've also increased our safety stock holding of some of our raw materials during the quarter, and we funded most of this through an offsetting reduction in the value of our work-in-progress wheels and some growth in our trade creditors.

In our investing cash flow is $3.5 million spend on plant and equipment mainly relates to the Mega-line, and $4.2 million of costs related to development of our new programs. The R&D costs reflects the development activity that is underway in our business, and this relates to the 9 programs we have in development, and the finalization of the development related to the Corvette program, which has moved into production.

Net cash flow from financing activities is a positive $6.1 million, which includes the drawdown of $4 million from the new line of credit facility we have with Export Finance Australia. This new facility helps fund our raw materials and our work in progress.

A net increase in receivables finance of $3.1 million. This funds part of the growth in receivables during the quarter. Noting that we've not yet put any Corvette sales through our working capital facilities, we do expect to start doing this from Q3.

These inflows are offset by a quarterly term loan repayment. At the end of the quarter, we have $23.4 million in cash and facilities in place. During FY '23, we do expect to add another $20 million of new funding, which consists of the first tranche of the MMI grant of $6 million, which we are pursuing, as Jake discussed earlier, the drawdown of the remaining $4 million of line of credit facility, which we do have in place with EFA. There are business growth milestones required to achieve this additional $4 million of funding, and we do expect that business to meet these milestones in the coming 6 months.

An expansion of our working capital facility by $7.5 million, which can be used for receivables and inventory finance. We have the security arrangements in place with Export Finance Australia for this additional facility, and we're in the process of reviewing the most appropriate provider for now, and for the future, considering our business growth that is expected over the coming years.

And new asset leasing of $2.5 million. This is in progress. We've selected a provider and would expect to have this in place in the coming quarter. For the longer term, we also expect to have a second tranche of $6 million of the MMI grant and additional capacity of $7.5 million of asset leases.

Along with that, we are managing our spending very tightly. We have an intense focus on the reduction of current operating costs, and we have the following controls in place. Research is only undertaken if it is grant funded. Development spend is confined to contracted wheel programs, which will lead to future wheel sales unless an OEM has paid upfront for development activities.

The Mega-line project and related spend has been reset. Expansion of capacity outside of this current phase will only be brought on when existing capacity is fully utilized and customer forecasts clearly support additional capacity. Our other growth capital spend, which is mainly related to tooling programs, is being matched very closely to growth in customer demand.

Now I'll hand back to Jake.

[Jacob Dingle, executive]

Thanks, Gerard. I'll finish off and talk about the outlook. So there's increasing customer demand for our wheels, and we're now gaining an increasingly clear understanding through direct engagement with our customers as to what problems our technology is able to solve for this. This is no longer just about offering a step change in efficiency or performance, we're now quite clearly seen as a means to achieve an outcome with the next generation of vehicles that is feasible with conventional technologies.

So I'm increasingly confident that we are in a strong position to deliver on this potential and on our purpose. We do continue to monitor the local and global impacts and risks from COVID-19. There are ongoing COVID-19-related uncertainties and disruptions facing the global auto industry. What we remain focused on is capturing demand for carbon fiber wheels from current programs, including the Corvette program. We're focused on successful launches of the premium SUV program and the first Mega-line program that are coming up through this coming year.

The phased Mega-line commission that Gerard just referred to is a high priority for the business, as are the development activities for the contracted programs and getting to the final formal award of the remaining Mega-line programs. We're obviously focused on securing the additional financing expected in FY '23 and managing this city to extend our runway to fund the growth phase that we're experiencing.

And finally, minimizing operating and capital spend and managing that very carefully, delivering our well-planned operational improvements and efficiencies to materially reduce cost per wheel.

In summary, we've had a really positive finish to the financial year with the plans that we put in place being actioned and implemented well by the team to set the business up now with a strong operational foundation to deliver the growth that we're experiencing and expecting over the coming years.

Thanks, Andrew. Back to you.

[Andrew Keys, executive]

Okay. We do have some questions that are coming through Q&A. The first is from Andrew Moller of any updates on the potential for further government grants?

[Jacob Dingle, executive]

In terms of further government grants, there's nothing that we can specifically update on. Obviously, we're engaged with the government, particularly around the MMI grant. I mentioned the $1 billion advanced manufacturing fund that's being set up by the new federal government. I think by any measure, we're an extremely good fit for that. So obviously, there's the immediate work that we're doing on the MMI grant award that we were announced for in May. And then beyond that, we expect that this government, based on what's been said and what's been put forward in terms of these programs, will be very supportive of businesses like ours.

[Andrew Keys, executive]

Thanks, Jake. Cameron McDonald from Evans & Partners.

[Cameron McDonald, analyst]

Just a follow-up to that question, if I can, Jake. I think at the half year, you guys talked about the potential for breakthrough Victoria. Where are you with that process?

[Jacob Dingle, executive]

Yes. We're engaged. Cam, nothing we can update formally at this point. But obviously, we spoke about it because we were in discussions and engaged with them. So I can't actually provide any definitive updates at this point.

[Cameron McDonald, analyst]

Okay. Great. And can you just talk about the cost per wheel? So that was a bit of a blow out in the half year. And if we have a look at -- and I know this isn't exactly right. But if you look at the last year's number, just on the production, and I know that's not a fully costed number, but if we just look at the production per wheel, it was sort of $2,800. That blew out by sort of $1,000, and it looks as though you've made some pretty strong headway, particularly in the fourth quarter. It looks -- that production per wheel cost looks like almost down at $1,500 a wheel. Can you just talk through some of those dynamics, please?

[Jacob Dingle, executive]

Yes. In terms of the -- so we'll give more of an update on COGS obviously at the full year's coming up, Cam. But obviously, a chunk of COGS is driven by fixed costs, and with volumes increasing, you have a favorable impact on that. The issues we had with thermal barrier coating and resin and absenteeism and those sorts of things created some significant headwinds in terms of the variable cost components of it. And gaining stability there has certainly seen us drive improvements, particularly through the second half of this quarter, or the latter part of this quarter.

Stability and order and maturity in processes is such a significant part of then being able to drive the efficiency plan that we have in place that. Yes, that's the element that tends to lag. Getting stability and getting things into an orderly fashion or into an orderly state enables you to then drive that. So yes, we are seeing positive moves in that regard, and we'll talk more about COGS, obviously, in the full year.

[Cameron McDonald, analyst]

And my final question, just in terms of the 2 contracts that you've brought across the formal awarding, one for the Mega-line and one for the normal processes. When do you think those can be formally identified?

[Jacob Dingle, executive]

So Cam, obviously, there's the SUV program that we've talked about that's coming into production through the year. So that's a separate one as well. And then the first of the Mega-line programs is in production in first half of calendar '23. So essentially, when those enter production, they're going to be launched at some point, either then or a bit before then. So we would expect to see them hopefully not too much later than halfway through this calendar year, but also there were launches -- sorry, halfway through this financial year, I should say, but there were launches early in the year. But certainly during this financial year we'd expect to see them.

The second of the programs that we've talked about is a little bit further out, the one that's just been awarded. So no certainty about when that will be actually announced.

[Cameron McDonald, analyst]

Sorry. So just to be clear, is there 2 or 3 that's been awarded?

[Jacob Dingle, executive]

No, sorry, I don't want to confuse you there. So the SUV program comes into production, that hasn't been announced yet. I know your question was largely around announcements, I think, wasn't it?

[Cameron McDonald, analyst]

Yes. Okay. So there's 3 coming in sometime this year is what you're saying? One of them has previously been awarded.

[Jacob Dingle, executive]

Yes, 2 programs start production this financial year. Neither of them have been announced. So I would say they have to be during the financial year. The other one that's been awarded won't be in production this financial year.

[Cameron McDonald, analyst]

Right. Okay.

[Jacob Dingle, executive]

Obviously, the first Mega-line -- and it sort of, I guess, supports what we've often said about these things. The formal final award step is not really directly connected to the work that's going on. So whilst that one has just been awarded -- or we just announced that it's been awarded, it's in production in the first half of next calendar year. So it's a pretty short time frame. It's a little bit arbitrary with these things.

The other Mega-line programs are tracking along pretty quickly. We've said they're close. The next one is very close, but we can't be definitive until they're announced -- sorry, until they're inked. And then when they're announced is obviously some time before they're launched, and that can vary a bit as well.

[Cameron McDonald, analyst]

Yes. And just the ones that are rolling off, can we just confirm that that's the GT500 and I'm assuming the other one's Pista.

[Jacob Dingle, executive]

I should say, the Pista already rolled [indiscernible] is obviously a very small program. And the GT500 Ford program. So we're pretty confident to say that the things that are coming on are going to be a lot more volume.

[Cameron McDonald, analyst]

And have you actually produced the last wheels for them or not?

[Jacob Dingle, executive]

Not yet, no. But they haven't rolled out of the factory yet. So they're still going. These things have been tendered from time to time. But I think we're coming to the end of them. They're really tall, I mean, particularly with things like Mustang [indiscernible] reached to the assembly plant for the new vehicles that have to start at some point.

[Andrew Keys, executive]

Question from Troy Cairns. Making the observation that you're now doing about 25,000 wheels per annum. Do you expect to sustain and/or increase that into FY '23, and is 30,000 wheels, that run rate still the gross margin breakeven point?

[Jacob Dingle, executive]

Yes. Thanks, Troy. So we've typically talked about gross profitability or gross margin breakeven between 25,000 and 30,000. We expect reasonably steady volumes. We're not going to forecast and put out projections, obviously, as we've said before. But obviously, there is growth in the business, but we've got some stability for a period now, and then things will keep moving up.

So yes, getting the stability in the factory gives us that ability to start to move through these profitability points, gross margin and EBITDA, and then to cash flow breakeven, which are all sort of steps in volume that we've talked about in the past, sort of 25,000 to 30,000 for gross profit; 35,000 to 40,000 for EBITDA; and then 45,000 to 50,000 for net cash flow breakeven.

[Gerard Buckle, executive]

And Troy, during the course of this year, we'll see just the remainder of the GT500 wheels being sold, that will conclude [indiscernible]. They come out -- we continue with the Ferrari and the Corvette programs. And then in the back half of the year, then we see some step-up because we've got 2 new programs coming into production, 1 earlier in the second half of the year and 1 likely in the second half of the year.

[Jacob Dingle, executive]

And there's another of the awarded programs in the following year.

[Gerard Buckle, executive]

Yes, that's right.

[Jacob Dingle, executive]

[indiscernible] that's progressing well through the factory.

[Gerard Buckle, executive]

Yes. We're just very, very focused on our operating costs, as I discussed there, right across the business, and certainly, the operating cost and keeping the run rate of operating costs reducing month by month is really important. Those breakeven points, as Jake talked through, are certainly evolving.

[Andrew Keys, executive]

Thanks, guys. Question about government grants, assurance related to MMI. Doesn't specifically say that. But what is the plan if that grant is not realized?

[Jacob Dingle, executive]

Look, we've talked about managing our funding very carefully. I remain confident that this is something that we're going to be able to work through for a whole range of reasons. But obviously, we're managing our capital situation carefully. So I think the indications are good, though, and if anything, the new government has put more of a focus on manufacturing, particularly advanced manufacturing. And we're in fact using a sophisticated product on sophisticated equipment and exporting it and creating a lot of skilled jobs and investing heavily in the local region, because that's where we prioritize the partnerships to help us grow out the factory. So we think that there's -- we're confident there's a path forward here.

[Andrew Keys, executive]

Okay. We have time for one more question, related to milestones, again. Gerard, what are future -- thinking about future your cash flow projections? When is Carbon Rev expected to be cash flow positive?

[Gerard Buckle, executive]

Okay. Thanks, Andrew, and thanks for the first part of the question. Look, profitability, cash flow, cash flow thresholds are really clear for us in the business. We touched on 1 earlier in response to Troy's question where 25,000 to 30,000 wheels per annum is the point where we see ourselves becoming gross profit positive.

Obviously, we need to deliver our wheel cost reduction. Actual planning to get there. The next set is 35,000 to 40,000 wheels, and that's where we see ourselves becoming EBITDA positive. And then 45,000 wheels to 50,000 wheels is a free cash flow positive range for us, and that's assuming no more sort of sustenance CapEx.

[Andrew Keys, executive]

Thanks, Gerard. We have no more questions, and we're on time. So we will conclude the webinar here. Thank you to all the participants for dialing in or connecting in. And thanks Jake and Gerard. Everyone, have a good day.