Carbon Revolution Ltd

ASX:CBR

Earnings Call Transcript 2023-Q4

[Andrew Keys, executive]

Okay. Welcome to Carbon Revolution's Q4 financial year '23 business update. I'm Andrew Keys, and I'll be facilitating the Q&A session a little later on.

In a moment, you'll be hearing from Carbon Revolution's CEO, Jake Dingle and CFO, Gerard Buckle. Please note this is an audio event only, there are no company slides. Over to you. Good morning, Jake.

[Jacob Dingle, executive]

Good morning, Andrew. Thank you. Good morning, everyone, and welcome to Carbon Revolution's fourth quarter activities report and foresee. There have been a number of significant highlights in the past quarter and since the beginning of 2023 generally. Revenue for the quarter was $13.1 million, delivering a quarter-on-quarter revenue growth of 84% and we saw strong quarterly wheel sales of over 4,500 wheels, which is up about 87% quarter-on-quarter. After a strong start to the year on the customer front, we've been awarded a further 2 OEM programs since quarter 3. That's 4 now for the calendar year-to-date, which is a much higher rate of rewards than we've ever seen in the past.

Our total awarded programs has now reached 17, with 6 global OEMs, including a new major European OEM group, which is a great addition from a customer diversification perspective, and it offers the potential for significant scale with that customer in the longer term. As a result of this progress, our backlog or our revenue expected from programs that have been fully awarded has more than doubled since November. It's now almost AUD 1 billion. Around 50% of this is for electric vehicles, and we'd expect this proportion to increase given the global shift to EVs and the great fit that we are for that segment.

Jaguar Land Rover or JLR as if now rebranded themselves revealed the 2024 Range Rover Sport SV, the first vehicle in the SUV segment, featuring Carbon Revolution' carbon fiber wheels. This has been a much delayed vehicle program due to COVID and other factors. So we're extremely happy to now finally see it launch a great response that our wheels are getting on that vehicle has also been very encouraging.

This made what happening in the factory as well with the successful commissioning of our mega-line and start of production on that all-important production asset. Also in the quarter, we completed a very important USD 60 million IP back loan, and Gerard will provide more details about this innovative debt facility in a few moments. In terms of revenue for the quarter, in the first quarter, we recorded just over $13 million, representing a very strong growth of 84% and that was driven by significant increases in wheel production and sales for both Z06 Corvette and the newly launched Range Rover Sport SV.

It was the second highest revenue -- quarterly revenue on record, and that was primarily attributable to wheel sales. As I said earlier, 4,500 wheels were sold in the quarter. So an almost 30% increase over Q3. Average selling price at $2,764 per wheel.

Our financial year '23 revenue of $38.3 million was 2% below FY '22 and below our original expectations. This is primarily due to the timing of the COVID program. COVID wheel sales were pushed back by approximately 6 months from early to mid-FY '23. After General Motors delayed wheel orders due to broader customer supply chain challenges that significantly impacted the production schedule of that vehicle in the U.S. Shipments resumed progressively for this program starting from January 2023. The Range Rover Sport SV Wheel was revealed by JLR, as I mentioned in May, and so FY '23 is included an initial revenue from this wheel program following [indiscernible] production in Q3. Initial production has also commenced on the Ford Mustang Dark Horse program and sales of that program are expected to progressively increase in FY '24.

In terms of programs, as I just mentioned, the Range Rover Sport was revealed with 23-inch Carbon Revolution' carbon fiber wheels, our biggest diameter wheels seen to date. It's the first public launch of our wheels on an SUV and it highlights an expansion of our lightweight wheel technology into a very strategically important and extremely large segment in the SUV segment globally.

Since the third quarter of FY '23, we've also been awarded a further 3 programs, as I mentioned in the highlights, that takes the total awarded in this calendar year to 4. And that is now taking our total awarded number to 17 wheel programs across 6 global OEMs, 5 are now in after sales, 6 are in current production and 6 are in various stages, leading up to the start of production. The new European customer, which is a premium brand within a major European OEM group represents a very exciting expansion of their customer base and another strong endorsement of the adoption curve that we are moving along with each of these new customer wins.

Recently awarded programs combined with changes to existing awarded programs have more than doubled our backlog since November '22. We've got projected remaining lifetime wheel revenue on a water programs of nearly $1 billion. And as I said, half of that almost is relating to electric vehicles. One great achievement we'll be very proud of from the back end of the last quarter was the award of GM Supplier Quality Excellence Award. This was in recognition of our performance an ability to supply at volume and quality. It's an endorsement of our ability to meet GM's exacting requirements and deliver on the high expectations that they based on their entire global supplier base. So to achieve exactly, it really highlights now that we've moved beyond just supplying a unique and exciting technology. We can now also claim to be a world-class Tier 1 supplier within the global automotive industry.

In terms of operations, the mega-line commissioning has progressed extremely well through the quarter with a continued focus on throughput rates of the unique equipment that our team has developed and training of the operations team whose role it is to run it on a daily basis. Throughout the quarter, the production rate has steadily increased. The 2 new mold stations and the associated resin delivery equipment and a third generation of Rim Layup equipment or ARL3, as we call it, have all been successfully tested and this equipment is now contributing in a significant way of increasing production rates and reducing our direct costs per wheel, given its level of automation ability to what's come before it.

Investments in improved quality and productivity delivered higher production volumes during the quarter as well. These improved efficiencies and production volumes resulted in a positive contribution margin for the quarter of $1.4 million or $317 per wheel sold, which is a very pleasing trajectory. We're very pleased with this progress. It's now demonstrating our path to profitability and how increasing volumes and production stability really drives our leverage over fixed costs. It also reflects the curation of an incredible amount of effort that the whole team has put into driving production efficiencies over a sustained period through a combination of new equipment, driving dramatic improvements in rates of quality, the speed of production lines and also the implementation of best practice lean manufacturing principles across the whole facility and the whole organization.

We've increased head count at the Australian facility by almost 200 people to over 560 during the second half of FY '23. This is primarily to support increased production levels as well as an increased level of engineering activities associated with our new programs. These roles are largely in advanced manufacturing and advanced engineering areas. I'm incredibly proud of the talented team that we continue to assemble here at Carbon Revolution. The team is delivering the unique technology that we've successfully developed with many others around the world have tried to do something similar with our success. I'll now hand over to Gerard to update on our new debt facility talk about the status of the merger transaction and our overall cash position for the quarter.

[Gerard Buckle, executive]

Thanks, Jake. First, I will touch on our new debt program. During May '23, we were pleased to announce the establishment of a new $60 million debt program. This innovative new debt program provides value for both the company's hard assets and a very significant intellectual property assets. With our upcoming U.S. listing on NASDAQ, we're able to source this new debt program from a U.S. provider, and we believe this is the first type of debt in Australia. .

The total [indiscernible] borrowed under new debt program is USD 60 million. Of this, USD 13.1 million in insurance and -- insurance premium and transaction costs was deducted from the proceeds. USD 9.9 million was used to repay amounts owed by the company to previous key lenders. USD 15.5 million was deposited into reserve funds, of which USD 5.7 million has been released to Carbon Revolution. And other the remaining USD 9.8 million, which is remaining in reserve funds, $5 million is scheduled to be released in November, if not required for covering cues in that period. USD 0.3 million was used for the initial interest payments and the balance of $4.4 million is held as a payment reserves.

And $7.3 million was used to pay creditors who assisted the company with its prior liquidity in shares. Under the terms of new debt program, we are required to complete the merger by the 31st of October and raise an additional USD 60 million in equity or unsecured subordinated financing on or prior to the 31st of December. Along with team Twin Ridge, we have engaged the U.S. Capital Markets adviser, Craig Helen, and we are progressing options in the U.S. to raise at least USD 60 million by the 31st of December to satisfy this requirement.

Now to give you a short transaction update. Our merger with Twin Ridge is progressing well. The merger process does take time as there are 2 sides to the merger process with both U.S. and Australian processes. In connection with the U.S. process, the latest version of the F4 document was lodged with the U.S. Securities and Exchange Commission on U.S. Friday night. We hope this is the final version, and we expect it to become effective in early August. With the Australian process, we are finalizing the scheme of arrangement booklet at present. The scheme booklet is the primary document for Carbon Rev's shareholders to consider when determining [indiscernible] scheme. Once complete, the book goes to Asset and to the Federal Court for their review and then to shareholders. We expect shareholders will receive the skin booklet in late August or early September and then voting on the proposal at the end of September or early October. We expect completion of the transaction to occur in October this year.

And I'll now review the company's cash position. As of 30 June '23, the company's cash balance was $34.3 million, which includes restricted cash of $14.3 million held in reserve funds related to the new debt program. New cash inflows of $29.6 million for the quarter was a result of net cash outflow from operating activities of $19.2 million, which was driven by the ramp in production and the repayment of previously deferred supply payments. Cash receipts from customers was [ $5.2 million ]. Net investing cash outflows of $6.8 million, supported the Mega-line milestones and investment in program development.

New cash inflow from financing activities of $55.6 million, arising primarily from the net proceeds of the new [indiscernible] programs and associated [indiscernible]. In addition, there was a new customer loan which supports the working capital growth related to a new program in production, and there were transaction costs related to the merger. New debt program, combined with ongoing liquidity improvement initiatives is anticipated to provide funding for the business through to the anticipated completion of the merger, which we assume occurs in October. On Friday, we made another ASX announcement titled, "Transaction Update and Cash Flow Projections" on the 28th of July '23.

This release provides further details related to the company's cash flow projections, liquidity, related assumptions and risks. This same information was detailed in the F-4 document that was filed with the SEC on U.S. Friday. I'll now hand over to Andrew for questions.

[Andrew Keys, executive]

Thanks, Jake, and Gerard. A reminder to participants, if you have a question, please drop it into the Q&A zoom function and I will facilitate it for you. And a couple to start with you Gerard. First one being in relation to the change of timing of U.S. listing initially was expected or anticipated to be in the second quarter of this calendar year and is now shifted out to the latest estimate being October, what causes in that change of time.?

[Gerard Buckle, executive]

Yes. There's 2 parts to that moving time. One part was the new debt facility that we put in place. We did just need to pull some of the work related to the F-4 and the scheme book in order to get that new funding in place, which we completed in May. It is a complex transaction as well. And as I said, there is 2 sides to the process. So is the F-4 side, which is like a prospectus that we need to go through a process there with the Securities and Exchange Commission. .

We're up to the third term. They've reviewed that. They give you back questions you need to answer those questions. and put an update on booklet back to the SEC. So we do believe that we're likely to have submitted our final booklet on U.S. Friday. So that process is running well and looking for that to become effective in the very near term.

On the Australian side, the scheme booklet, that's quite a process as well. It's going well. And hopefully, we're getting that into asset and the federal course in the very near term. So Andrew, it's just -- it's quite a complicated process on both sides, a lot of work to do, and it's taking a little bit more time than we originally anticipated.

[Andrew Keys, executive]

Okay. Next question for you, Gerard. The number of merged co shares being issued to CBR shareholders has marginally dropped since the initial announcement. Why is that?

[Gerard Buckle, executive]

In that original announcement, there is -- we did detail that there's a net debt adjustment. So the net debt of Carbon Revolution does impact. We have the equity value and then we have a net debt adjustment. That net debt of Carbon Revolution, it has moved. Obviously, it's locked in now. We've locked in as of that sort of in March, I think it was, and we've now got a final calculation there for our shareholders. .

[Andrew Keys, executive]

Thank you, Gerard. Jake, question for you. What is the current annual production capacity for the facility here and how long before we expect it to ramp up to full capacity? And then from the same investor, any comment around costs from current inflationary pressures as you go through the commissioning phase. .

[Jacob Dingle, executive]

Yes. So the first piece of investment we did with the Mega-line was to install the infrastructure. So that's now behind us, and we're now progressively adding capacity as our programs demand the capacity to be available. So it's a progressive filling of the line based on customer schedules. Broadly speaking, we expect to be producing about 50,000 wheels by the end of calendar '24, so the end of next year. The line would then continue to grow to 70,000 wheels per annum or thereabouts just based on current awarded programs.

In terms of inflation, so there is inflation, there have been inflationary pressures. Fortunately, we have installed a lot of the extensive infrastructure upfront. So we don't have exposure on that part of it. So proportionately to add the capacity, the capital spend is lower because we're really just adding modular units of capacity. And we're just managing that as we go is similar to raw material cost inflation, we're managing customers. We're obviously trying to limit it as much as possible in managing through pricing and other mechanisms as far as we possibly can, which is very typical across the industry generally. .

[Andrew Keys, executive]

Thank you, Jake. Question for you, Gerard, is the current cash position enough to get through the merger in October?

[Gerard Buckle, executive]

Yes. Andrew, in current cash position, we have a funding plan which gets us through to the merger. And then upon merger, there are transaction costs then we're looking at new funds coming in upon merger. Those new funds come from the SPAC and redemption rates in the U.S. have been dropping over the last quarters. So our outlook for redemptions has positively improved over the last quarter. Funds become available after merger from the committed equity facility, that's a $60 million U.S. facility. And we're working, as I said, we're working with Craig Helen to bring in new funds into the business, either upon merger or after merger, and we're targeting USD 60 million in new funds as well. So we've got quite significant new funding sources that either come in upon merger or after merger.

This transaction cost of about $20-odd million or so that we'll need to pay. We anticipate being able to pay those out of those new funds that come to the business through the merger process.

[Andrew Keys, executive]

Last question has come through. What is the level of redemption is expected from the SPAC?

[Gerard Buckle, executive]

The level, it's interesting. If we look at SPAC redemptions, they were very significant between about sort of October through March and a lot of SPACs we're seeing redemption in the high 90s. And I think the average was at that -- for that period of time, the average redemption rate was around 95%. You'll see all our disclosures. We've chosen that average rate of 95% as our expectation. Since then, in the last quarter, we have seen positive movement on SPAC redemptions. So the average back redemption over the last quarter, I think, is about 76%.

And if we were to have a SPAC redemption of something like that average of 76%. That will provide meaningfully more funds into the business over and above our forecast. .

[Andrew Keys, executive]

All right. One more question that's come through. So this will be the last question then we will close this morning's call. What level of dilution of current shareholders do you anticipate with the merger and subsequent capital raise?

[Gerard Buckle, executive]

Look, we really don't have an anticipated dilution at this stage. As I've said never for, the SPAC will have funds in it and exactly how many shareholders left and how much funds in it. We'll determine how many shares going through go to the SPAC. So that's something which we don't give an outlook on. And it's impossible to forecast. And scheme booklet, we will have quite a range of scenarios there. So depending on where SPAC redemptions are, we'll have calculations of what the shareholding of Carbon Rev shareholders will do.

[Andrew Keys, executive]

Thanks, Gerard. Thanks, Jake, and thank you to all the participants for tune in this morning. That's the end of the Carbon Revolution Q4 FY '23 business update. Please have a good Monday.