Carbon Revolution Public Limited Company (CREVF) Earnings Call Transcript & Summary

Hello, and welcome to Carbon Revolution's business update for quarter 1 financial year 2022. I'm Andrew Keys, and I will be facilitating today's call. Please note the page you can see on screen is a landing page. There will be no presentation material today. In a minute, Carbon Revolution's CEO, Jake Dingle; and CFO, Jerry Buckle, will provide commentary and following this, there will be a Q&A session. [Operator Instructions] I will now hand over to Jake Dingle.

Thanks, Andrew. Good morning, and welcome, everyone, to Carbon Revolution's First Quarter FY '22 4C and business update. Firstly, in terms of highlights for the quarter, the first quarter revenue was $6.2 million and wheel sales were 2,100, both in line with the company's expectations. Customer orders and their forecast profile continue to support a much stronger weighting of annual sales in the second half of FY '22. Our first half '22 inventory build of work-in-progress with finished wheels, which is required to support the sales growth in the second half, is progressing to plan. The Mega-line project is on track with key suppliers contracted orders for long-lead items placed, and the detailed design is close to completion. And development work for customer programs that underpin the Mega-line are progressing very well and are on plan. On the revenue front, we're tracking in line with our expectations for FY '22, and the planned inventory build ahead is on track to support the second half weighting of sales. Quarterly revenue was $6.2 million, which is a 28% decrease on Q4 of FY '21. Revenue from wheel sales was $5.9 million. 2,100 wheels were sold in the quarter. This decrease on Q4 FY '21 was a direct result of the GT500 wheel sales for model year '21. That's the Ford GT500 model year '21, including earlier in Q1 FY '22 than would otherwise have not had been expected, and this was due to semiconductor chip shortages. Rationing of chips through the period across towards various plants led to this outcome. This earlier conclusion of that model year build accentuated the seasonal nature of the GT500 program, which seasonality, fortunately, isn't a feature of any of our other programs. Sales for the new Ferrari programs have commenced and are tracking to plan. We're seeing some good post-pandemic momentum building across all 3 of our Ferrari programs. Semiconductor chip shortages continue to impact the automotive industry generally. However, the shortages are not now currently impacting our sales. The model year '21 reductions, Ford, that I just spoke about are now behind us, and we're now building ahead for the model year '22 program in line with their orders. Customer orders and their forecast profile continue to support a strong weighting of annual sales in the second half of this financial year. We previously stated that this was our expectation, and we're now seeing this clearly in our customers' ordering systems. Programs remain on track with scheduled milestones. Launch activities for the program that's expected to enter production during this year are on track, and we anticipate an exciting launch of that vehicle in the near future. The production ramp of the Ferrari 296GTB and 812 programs are progressing well. The other OEM programs that are in development and include a number of electric vehicles and a premium SUV. Customer feedback on anticipated calendar year '22 demand for both new and existing programs is also really encouraging. Customer engagement and long-term demand of the higher volume programs has accelerated through the course of this year with both new and existing customers. In contrast to this time last year, customers are now focusing on future product planning and the global move towards electric vehicles is an added factor driving this increasing engagement. Our confidence in the adoption of our technology by these customers and its place in their strategic plans is rapidly increasing as they switch their development priorities over to EVs. We're finding an emerging theme in the desire to integrate our technology early in order to achieve the greatest benefits. Range extension and superior durability are 2 of the key drivers of adoption, alongside the styling and aesthetic benefits, that combined to drive vehicle sales. On the operational front, the production ramp of the 2 new Ferrari programs continued during the quarter. The sales for the model year '21 Ford GT500 program were completed. An inventory build is currently underway to support expected second half financial year '22 sales growth. We've now got good visibility of customer demand for all programs through this period. This is a helpful improvement on some other periods or prior periods where there was much less forward visibility of demand. Our inventory build strategies allowed more consistent wheel moulding activities, which is enabling the business to focus on delivering the continuous improvement that we need and achieving constant and consistent flow through the factory. This is very helpful as a foundation for delivering operational efficiency improvements, which are progressing to plan. The ops team, under Andrew Higginbotham, are doing a great job of delivering these improvements through the factory. The delivery of our first production cutting press or click press machine was a significant industrial milestone during the quarter. The production-scale machine is expected to be a step forward, both in terms of efficiency of ply cutting technology and automation. Machine was developed with a local equipment partner and follows on from all the learnings that we derive from the earlier prototype click presses, which have been in production for sometime. On the Mega-line front, the Mega-line combines automated manufacturing processes with automated part flow, which is expected to achieve step-changes to both capacity and in cost reductions through efficiencies. Mega-line project is on track and in line with budget. During the quarter, the detailed design progressed with key partners and is close to completion, all orders are now placed for long-lead time items. The design of the Mega-line has been further enhanced to incorporate an earlier inclusion of the existing high-pressure moulding equipment and certain other equipment. This is scheduled to occur during next calendar year and will increase operational efficiencies of the Mega-line production technology, and it enables earlier validation of new program parts on the Mega-line tech. This allows for timely installation of new capacity in line with new program requirements and affords a better utilization of all high-pressure module capacity as volumes grow. We're confident that this enhancement to the plan provides multiple benefits, including improved economics of existing programs and a smoother launch of the new programs underpinned the Mega-line investment. As expected to come into production from calendar year '23, as we previously stated. I'll hand over to Jerry now to talk through our cash position.

Thanks, Jake, and good morning all. We finished the quarter with $63.9 million of cash in the bank and $5 million in unused facilities. This is in-line with our plans and expectations. Cash flow from operations was a negative $11.8 million for the quarter. There are a few distinct parts to this cash flow to be considered. There's normal cash flow from operations, one-off items and inventory build, and I'll take you through those now. As Jake stated, our sales are second half weighted, and we are holding production reasonably consistent this year. Our strategy of maintaining consistent manufacturing is crucial to achieving the efficiency guidance that we have. This strategy results in a planned inventory build, the inventory build over this quarter has been $5.4 million. This inventory build will continue to grow in the next quarter and then it will reverse and unwind during the second half as those wheels are sold to our customers. Outside the inventory build, the remaining cash flow from operations was $6.4 million, which includes a one-off, $1.1 million accrued facility fee related to the finalization of the State of Victoria grant advance debt that was repaid at the end of June 2021. This lays about $5.4 million or more normal net outflow from operations for the quarter relating to operations, research and development and SG&A. In our financing cash flows, we spent $4.3 million on Property, Plant and Equipment. The largest component of this investment was in the Mega-line where we spent $2.8 million, and then we spent approximately $1 million on a combination of Diamond Weave assets and new program tooling. We've invested $2.6 million in the development of core wheel technologies and new development programs. Included in the financing cash outflow of $4.7 million is $1.1 million term loan debt repayments and there is a $3 million net repayment of our receptible financing. At the end of the quarter, we do have $5 million of unused receivable financing in our facility. The receivables financing net repayment of $3 million is a reflection of the reduction in sales, as sales grow that will reverse. In summary, I think it's worth noting that our net cash flow of $23.4 million for the quarter include $5.4 million of inventory build that will unwind in the second half, $3 million of repayment of the receivables finance, which will reverse in the second half as sales grow and a $1.1 million one-off payment of the facility fee. And obviously, that's a one-off and that doesn't go forward. That's $9.5 million of reversing or one-off items in this core cash flow, which leaves a normalized cash outflow of $13.9 million. Our cash outflow is in line with our plans at the end of this first quarter of FY '22. We remain funded for the Mega-line build and through cash flow breakeven. I'll hand back to you now,Jake.

Thanks, Jerry. In terms of outlook, obviously, we continue to monitor the local and global impacts and risks related to COVID-19. The ongoing shortage in the supply of semiconductors and global supply chain constraint generally also continued to impact global car production, and we're watching that closely. We're not providing sales outlook guidance for FY '22. However, in FY '22, our key focus areas continue to be on executing the production ramp of the Ferrari programs and the new program that enters production this year, delivering operational efficiencies through the factory with ongoing improvements in technologies, equipment and processes. Progressing the Mega-line project through the detailed design phase, which is just about complete through procurement and commissioning activities and advancing through the engineering design phases of the initial programs underpin Mega-line. At least the programs are progressing very well. We expect the second half of FY '22 to have significantly higher sales in the first half, as I've talked about, due to the introduction of a new program in the second half, the gradual ramp of the 2 new Ferrari programs throughout the year and the seasonality impact of the first half of the GT500 Mustang. So in summary, we're on plan, exactly where we thought we'd be at this point with sales and with our inventory build. So we're confident about delivering on the year ahead. Our customer engagement on existing programs and on programs that represent future growth is very strong. The operations team led by Andrew Higginbotham, is on track with delivering the planned efficiency improvements through our factory. And finally, our Mega-line is on track and with an enhanced plan to bring forward some of the favorable economics that it delivers for us. I'll hand back to Andrew for any questions.

[Operator Instructions] Hamish Murray from Bell Potter. Hamish, can you please unmute your line?

Can you hear me? Could I just -- a few questions from me. Can you guys provide any more color just around, I guess, the demand you're seeing for the GT500 Track Pack variant because if we look at Flat Rock assembly production for the quarter, I mean, they had 2 weeks where they were closed. I think, in totality, but they still managed to produce 15,000 cars, and it was only down 27.5%. And can you give us some color around how, I guess, Ford are managing their chip shortages? Because it seems like that the narrative of that been a higher margin, less elastic, high demand vehicle, particularly given it's a low percentage of that factory's quarterly production seems to not be coming through.

Yes, Hamish, they did stoppages during the quarter, as you've mentioned. We've been shipping to their releases and to -- and as you know, they were slightly more in the previous quarter than we had expected when we initially had to come out and say that we were going to be further impacted by chip shortages. What we do know is that they've finished -- so we obviously, we see freight to them now. So there is a fairly long pipeline between our production and what they receive. We know that the lost time that they've had throughout the year on that vehicle build is not -- has not translated to them catching up. That's why the model year '21 build is below what we would have originally expected it to be because they haven't been able to catch up and that's down to the rationing of chips across the various different users, which is not just Mustang, it's other users as well across the range where they prioritize. So what we understand very clearly from Ford now is the model year '21 bill is smaller than it was originally intended to be. We've got good visibility of demand at this point and are building to that demand for the model year '22.

And so does that mean that just for -- so my understanding is they have a mod shop that does the Track Pack variant at the end of the line. Does that been that for a couple of weeks there, I guess, that's been operating under full capacity or that's what we could read?

Below. You mean below full capacity?

Yes.

The [ Mazda ] [indiscernible] can only process the vehicles that are built at Flat Rock and sent to it. And so yes, that's essentially the -- one of the stoppages of Flat Rock was due to a fuel leakage. It was nothing to do with semiconductor shortages and that was in the public domain. There was some sort of a spill, which meant they shut the plant down for a couple of weeks that leveled. They're not obviously able to plan, and it would have had a direct ongoing impact on the center.

Yes. And just for a bit more color. You guys have mentioned in the past that, that program does have winter seasonality with the Northern Hemisphere winter. Can you guys provide any color on how many weeks production you'd expect that to be, usually?

So the shut down is how many work production -- of stopped production. Hamish, should you clarify your question? That's what you're looking for?

Yes. Just with the winter freeze, I mean the seasonality there how much -- how large an impact you guys would expect that to have?

Yes. They usually finish, I think, towards the end of October, Hamish, and then they don't start again until the end of February or beginning of March. Now again, we don't get full visibility and often get less than we would like. But the opportunity to extend that slightly is there because it's to do with weather conditions and to do with the tires. The fact that they haven't done that this year, I think, is driven by the shortage of chips. We probably anticipated that they would try to do that, but the chip shortage has meant rationing across the whole range, including across S-series and other things that they produce. As I said, we've got visibility at this point, reasonable visibility through a period of FY '22 or model year '22, whether they choose to try and catch up more through their model year '22 to compensate as chips coming through is yet to be something that we have visibility of.

A question from [ Lan Lou ] in regards to breakeven volumes that are required for sort of a breakeven position on EBITDA, what sales volumes does Carbon Revolution need for that EBITDA breakeven. Mark, how far away do you think that is?

Yes. Lan, it's -- we think about projections we think about gross profit positive first, EBITDA positive following that. So this sort of range, there's a mix. We've got wheels priced at different levels. Wheels we have used on manufacturing different technology. So there's different cost there. So there is a range, as you would expect. Gross profit positive somewhere in the 25,000 to 30,000 wheel sales on a per annum basis. EBITDA positive is in a 35,000 to 40,000 wheels range. That's based on our -- what our projections of cost reductions coming as we would expect in raw materials and labor and all the other business cases. The leverage that we have to volume across our fixed cost, that's factoring all that in and they're at the top of much we're looking at.

We have a question from Cameron McDonald Evans & Partners, he's raised his hand. Cam, can you please unmute your line?

Just sort of a rudimentary question. If I look at the product manufacturing operating costs of $11.4 million and divide that by the wheels of 2,100. I'm looking at a production cost of $5,432 wheel is like -- is that right?

No, no, that's wrong, Cam. It's -- that's a cash flow. So that's the bills that have been paid. It's not the actual cost of a wheel. So creditors that are sitting there, accruals are sitting there at the end of last quarter, they get paid during this quarter. So it swings around quite a bit. Our cost per wheel for the quarter is pretty similar to the last half. We don't publish that in our quarterlies, we'll publish that on a half year basis. But no, it's definitely not right. It's an accounting costing versus -- sorry accounting costing versus cash flow -- remembering in our cash flow as well, we've got the large inventory build coming through that line effectively of $5.4 million as well.

I guess, Cam, we disproportionately built more wheels than we've sold in this quarter.

Okay. So there's an inventory build of $5.4 million sitting in that number of $11.4 million?

Yes, that's right.

That's helpful. And the other thing that -- which you may or may not want to comment on, there's press reports coming out about new products launches for vehicles as early as next week, with pictures of what strangely look and reportedly look to be wheels that look pretty familiar. Are those -- that would be consistent with your expectations that there are new product launches prior to Christmas?

Yes. Thanks for the question, Cam. I mean, obviously, we always say we can't talk about launches of vehicles before they've actually been launched by the customer. But yes, we -- obviously, we have talked about a launch of a -- pretty exciting launch of a vehicle that we're on this year and in the fairly near term. So exciting times.

Mark [ Scotchich ]. Mark, can you please unmute your line, if you'd like to ask a question?

Yes. Thanks, Andrew. So can you hear me?

Yes.

This be of an ESG type question, but every company in the world seems to be jumping over itself setting net 0 emission targets with regards to the automotive sector and specifically, what do you think this actually means for the future of the aluminum wheel?

Yes, it's a good question, Mark. We're actually working through some of these elements at the moment because it's obviously what we're selling is effectively an efficiency technology for the transport sector, and that's -- or the transportation sector, and that's really how it's being received. The amount of energy involved in producing aluminum is obviously very high. There are some pros and cons in the 2 different technologies. But we're working very hard on recycling and reuse of carbon fiber materials, so that they really have an equivalent to aluminum in that regard. And then the energy to produce is lower. And then obviously, the in-use profile is significantly low, which is really our value proposition. So it is something that we're working through a very important and increasingly important to all of our OEM customers. And we think we've got a good advantage and a good position on that. So as I mentioned, at the start of the response, we are progressing our work in that area. And considering the sort of targets we should be setting ourselves as well. So yes, watch this phase through the rest of this financial year on that.

Question that's come through Q&A from Troy Cans. Please comment on cost per wheel trajectory into the second quarter and then into the second half of this financial year?

Yes. Troy, back in our annual results release, we're not giving guidance. It's a tricky environment at the moment with chip shortages, supply chain uncertainties and constraints. But we did say we expected sort of roughly 25% sales in the first half and 75% sales in the second half. That still looks to be holding for us. We've had a bit over 2,000 of wheel sales in this quarter. And it's probably along the same lines in the next quarter to the 25% 75% split for the full year.

I think you asked it. I think Troy's question was actually on cost per wheel trajectory. Is that right or?

Yes.

Sorry, sorry. We've just given you a bit of extra information as well there, Troy. Cost of real trajectory, yes, Troy, this -- it will be improving throughout the course of the year. So a few things. We have a higher weighting of Ferrari wheels in this quarter and next quarter and our wheels will be sold. They're low pressure, they take more time, so they are higher cost wheels, they're higher priced, so that certainly compensates. So the mix makes a big difference, high costed wheels in our first half and then really moving into a much stronger weighting of high-pressure wheels in the second half of the year. Volume will grow through the course of the year. So it will grow steadily. We will have more volume in the second half, so the leverage in the second half to the volume growth over our fixed costs. That will increase through the course of the second half and we will have new technologies like Jake spoke about the production click press. That will be coming through on wheels that come through in our second half as well. So reasonably consistent, Troy, with last half for this quarter, some improvement in the next quarter, but really then sort of bring the cost down in the second half of the year.

I think just as a broad comment on the initiatives like Diamond Weave, Troy, that we've been implementing, they knew their step-change technologies, and we're really into that bedding unit optimization phase now that they're across all of our major programs in the factory. So down at the sort of shop floor level, the actual direct costs initiatives that we've been running through are tracking well. And as I mentioned, Andrew, Higginbotham approach to that and how he's driving the team is proving really effective.

Thanks, guys. A good question for you, Jerry, from Justin Breese, why does Carbon Rev have a loan nearly $10 million from Export Finance Australia and paying interest on that when the company had $63 million in cash?

Yes. So we -- the Export Finance Australia loan, we entered into that loan back in the first half of the year. That loan replaced and expected an existing term loan that we had. So we had a loan from our largest shareholder, Renault, for a number of years. That would do for repayment in the first half of the year. So we've repaid that. And we've -- sorry, not the first at the end of the previous year. We repaid that. We entered to be arrangement with Export Finance Australia. So we have a term facility there 3 years, and we'll keep paying that over the course of the 3 years. We raised the Mega-line funding equity raising, we used it to build the Mega-line and see us through to cash flow breakeven. And that's factored in having that loan and repaying that loan over the course of that period. So we'll pay that loan. We'll manage our cash flows, we'll make sure we invest in the Mega-line, come through to cash flow breakeven, and we'll be paying that loan through the course of the next couple of years as we go.

Thank you. We don't have any more questions in Q&A or raised hands. So thank you very much to Jake and Jerry. Thanks to all the participants for dialing in today and the questions. That concludes today's call. Please have a nice day.