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

Hello, and welcome to Carbon Revolution's Investor Conference Call for the Second Quarter Financial Year 2022 Business Update. I'm Andrew Keys, and I am facilitating today's call. Shortly, you'll be hearing from Carbon Revolution's CEO, Jack Dingle; and CFO, Gerard Buckle. At the conclusion of their updates, there will be a Q&A session. For those online, please refer to the market update the company released through the ASX platform earlier today. I note there is no presentation today. The page on screen is a landing page only. Good morning, Jake, over to you.

Thanks, Andrew. Good morning, everyone, and welcome to our second quarter FY '22 business update and 4C. In terms of highlights for the quarter, we had a strong quarter of wheel sales, almost 4,400 wheels sold, so more than double the prior quarter. Our wheels were announced on the new C8 Corvette Z06 and Z07. This is the company's first program with General Motors. Great to be able to out another major global OEM as a C8 customer. We have a strong growth pipeline with 2 new engineering agreements signed in the second quarter, taking the total number of active programs to a record of 15, and our Mega-line project is on time and on budget, infrastructure design is complete, and construction is now well underway, so great progress there. In terms of revenue for the quarter, our revenue was $11.4 million, an 82 -- nearly 83% increase on the prior quarter. This is the most that we've ever shipped and sold in a single quarter. The lower average price per wheel reflected a change in product mix towards the GT500 wheels. Proactive engagement with the Ford team in Detroit enabled the GT500 sales to be put forward to manage longer transit times, which contributed to a lower than projected inventory build during the quarter. The higher sales in Q2 reflects a stronger first half weighting of FY '22 sales than anticipated. Production of the 2 new Ferrari programs steadily ramped up as well in that second quarter. In terms of customer programs, as I mentioned, General Motors announced the C8 Corvette Z06 and Z07 featuring Carbon Revolution's carbon fiber wheels. Production for that program has now commenced. During the launch of that program, our wheels were a significant element of the GM publicity and were also identified by the motoring press and forums as a very prominent feature of the vehicle. We're really proud of this and the statements made by GM's Corvette Chief, Tadge Juechter. I won't read out the quote, but we're reproducing the announcement today because you can see that there. But I do want to provide some perspectives on why this kind of statement from a leader within the global OEM community is so important to us and how it's helping to drive this technology further into the rapidly emerging EV segment. What Tadge pointed out in his comments is not just that our wheels take off 1.5 seconds a lap on the track, which is now a fairly well-understood benefit. But a real significance is the statement that we made about daily driving and how much difference can be felt and seen just out on the road. As we've consistently said, this is an efficiency technology. The benefits of this efficiency are now expanding from delivering performance to delivering attributes on the road, such as range. So it's a true triple down technology. It's what supports the view that this will be a disruptor, particularly as the world transitions to EVs. The production ramp is proceeding to plan for the Ferrari 296 GTB and the 812 Competizione programs after the launches in the fourth quarter of FY '21. Following our recent investment in creating the internal launch team, the business has, for the first time, successfully launched 3 programs concurrently, being the Corvette and the 2 Ferrari programs. This really demonstrates how we're successfully growing and scaling the company up to be able to keep up with our customers as their demand accelerates. We're talking about more and bigger programs that drive carbon fiber wheels further and further into the global market of more than 400 million wheels per annum. Pleasingly, our existing customer programs are on track with scheduled milestones. Customer feedback on anticipated calendar year '22 demand and beyond is very encouraging. Engagement on new programs and longer-term demand is very strong. This is the case with both existing and new customers. The global transition to electric vehicles is driving demand for our technology, in particular, with customers looking to benefit from the 40% to 50% weight savings of carbon fiber versus traditional metal wheel equivalents. This saving is a very significant amount as they strive to deliver range extensions on their EVs. Range has emerged as a primary battleground amongst the major global OEMs competing to lead the EV race. In fact, just overnight, another announcement by a major OEM group, the Renault-Nissan-Mitsubishi alliance, announced they'll spend over EUR 23 billion over the next few years on the development of 35 new EV platforms, becoming more and more competitive and technology-driven marketplace, which is a great foundation for providers of supporting technologies like Carbon Revolution. Detailed design and engineering agreements for 2 new programs were entered during the quarter, which included one premium EV SUV program. These 2 new agreements are in addition to the 4 programs that underpin the Phase 1 Mega-line investment. The long-term sales outlook and pipeline of new programs is now very strong, with a record level of 15 active programs, 8 awarded and 7 in the detailed design and engineering phase. Of these 15 active programs, 4 are now electric vehicles. Four programs that underpin the Mega-line investment are progressing well, with formal program award of 2 of the 4 programs is expected in the near term. Noting, of course, that these formal award milestones are really quite independent of the actual work that's taking place by ours and our customers' teams at a very rapid pace to hit program launch milestones. So the very strong progress over the past quarter points clearly to the growing demand trend for our technology that we've been pointing to, driven hard by the move to EVs. In spite of COVID-related interruptions, our technology is rapidly gaining awareness and acceptance amongst the major OEMs as an important enabler in the EV space for range and other key attributes. On our aerospace program, a key milestone was reached during the quarter with the current grant-funded virtual design phase completed in line with expectations. Work is now ongoing with our program partners planning for the prototype production and testing phases. In terms of operational progress, the production ramp for the Corvette wheel commenced in late December. This gradual -- the gradual increase in production of the 2 new Ferrari programs and relatively steady production for the Ford GT500 Mustang program enabled molding -- a consistent molding through the quarter. Overall wheel production has been increased during the first half of FY '22 as we planned. Production was impacted late in the quarter as a result of increasing levels of COVID-19-related sick and isolation leave. This has continued in the new year, and the team is actively managing allocation of resources during this difficult period. Locally and internationally, it's a major issue for industry in general. The company experienced some raw material shortages and additional air freight costs as global supply chains continue to be disrupted as a result of the pandemic. Frustratingly, the slow provision of service and spare parts for our thermal barrier coating equipment from its equipment -- its European supplier has also impacted some wheel production during the period. In terms of our Mega-line project, during the quarter, the Mega-line infrastructure design was finalized, and construction commenced. The mezzanine for the Mega-line, which is a key part of the structure, was installed by a team of over 70 comprising our team members and our construction and equipment partners. A number of large items in the plant were also relocated to create more efficient part flow through the production processes as we scale. Using the Christmas break enabled these major works to be completed very safely and without major disruption to daily operations. The focus in the next quarter will be on the finalization of building works and installation of equipment at the start of the production line. I'll hand over to Jerry now to discuss the cash and financial positions.

Thanks, Jake. Good morning, everyone. As of 31st of December, the company had a cash balance of $47.8 million. Net cash outflow of $16 million for the quarter was in line with our expectations. The net cash outflow from operating activities was $7.6 million. In these operating cash flows, customers -- customer receipts remained relatively stable. As the majority of our sales occurred late in the quarter, these receipts are expected to flow into Q3 FY '22. The earlier-than-expected sales for the Ford GT500 program that Jake talked about resulted in a lower inventory balance at the end of December. Total net inventory reduced by $3.3 million compared to the last quarter. And during the quarter, our Diamond Weave Technology project concluded its development phase, leading to $2.5 million of product, manufacturing and operating costs related to this technology being capitalized into R&D expenditure. Net investing cash flows for the quarter were $10.6 million, which include $4.7 million spent on property, plant and equipment, which relates to the investment in the Mega-line assets and tool, and this $5.9 million investment in research and development. The research and development expenditure in the quarter consists of $3.4 million relating to a significant amount of work on program development, work that's being undertaken in relation to new programs, and the $2.5 million in wheel technology project costs, this time with technology, as I said, has been concluded the development stage. It's been implemented across all of our programs, and the capitalization of that as start -- has now been completed. Net cash inflow from financing activities of $2.2 million for the quarter reflected the higher sales in the quarter, financed via our receivables financing facility. This resulted in an inflow of $3.4 million, and we paid our quarterly repayments of $1.2 million in debt repayments. Jack, I'll hand back to you for the outlook.

Thanks, Jerry. In terms of outlook, we continue to monitor the local and global impacts of COVID-19. There are ongoing uncertainties and disruptions facing the global auto industry in the near term. The ongoing shortage in the supply of semiconductors, other raw materials and general global supply chain constraints also continue to impact global car production and the industry in general. On a more local level, the pandemic and related sick and isolation leaves since the start of production on the 10th of January -- or with our restart of production on the 10th of January is high, but it's in line with the prevalence of the disease in the Victorian community, which is currently impacting throughput efficiency and overtime levels to some degree. But we're actively managing staffing levels to optimize production and to do what we need to do to maintain the deliveries to our customers. While we're not providing sales outlook guidance for FY '22, we are really pleased with the short-term order book across our existing customer programs. So for FY '22, the key focus here is continue to be executing the production ramp of the Corvette program and the increased production of the Ferrari programs that we see; delivering operational efficiencies and improvements; progressing the Phase 1 Mega-line project through its detailed design, equipment procurement and commissioning; and advancing engineering and design phases and the formal award of the initial programs that underpin Phase 1 of the Mega-line. So in summing up the past quarter and our current status, we're really happy with the strong sales delivered through the quarter and the very positive trends emerging on the demand side with our existing and new customers, particularly as the EV momentum builds globally. Inside the factory, our Mega-line implementation is on track and really taking shape with a lot to see as the industrialization of our manufacturing activities progresses, now at a rapid pace. Thanks, Andrew. I'll hand back to you for questions.

[Operator Instructions] Cameron McDonald from Evans & Partners is on the line and wanted to come through with the question. Cam, unmute your line, please?

Can you hear me, guys?

Yes, we can.

Guys, well done on the quarter. Just a couple of questions. Just regarding the 2 new contracts that you've highlighted, are they with an existing OEM? Or is that a new OEM? Or are they both with the same OEM?

They're not with the same OEM, Cam, but these are with OEMs that we're already working with, yes. Not all of them are announced OEMs, or they're both not announced OEMs.

Okay. So the 2 OEMs unannounced, though. Okay.

[indiscernible]

Yes, I get what you mean. And then -- and you've said one is an SUV. Is the other one -- what's the other one? Is that a performance sports car? Or is it a -- like, what sort of vehicle is it?

No, it's a larger vehicle, Cam, with a slightly different application. So there's development work in our application as well.

Okay. And am I right in thinking that the $3.3 million is about 1,250 wheels down on inventory?

Cam, we've got $3.3 million is -- sorry, what was your number?

About 1,250.

Yes, yes, around that mark, yes, combination of finished goods and work in progress.

Yes. Okay. And then are you -- where are you in terms of, if you can -- if you're happy to talk about it in terms of your operating cost per wheel? What's the trends on that given the increased volumes?

Yes. We'll talk about it quite fully in our half year result, Cam, just finalizing sort of all that analysis we've been awarded underway. So it will be best to wait for half year result. But look, it's been -- the trend -- it's been difficult. This COVID has been difficult, as Jake talked about there, absenteeism increasing during December. We had more -- quite a bit more air freight costs throughout the quarter. And just some finishing -- wheel finishing issues there. So throughput of finished wheels was as quite as what we would have liked because of that issue we've talked about with our thermal barrier coating machine given the servicing parts for that. So the trend will be a little bit against this, Cam, related to those issues, but we'll give full scope of that during our half year materials.

I think reasonable to say, Cam, we prioritize getting wheels to customers to make sure we serve their needs and have managed as best we could, obviously, with personnel, raw material and external sort of servicing-type issues that were all really pandemic related.

Yes. And Gerard, can you just reconfirm the spend on the Mega-line to date?

Spend on the Mega-line today, Cam. So our spend, just give me a sec, mate. So Cam, I think the spend in this last quarter was merely all Mega-line related and a few million dollars in the last quarter. We're around sort of $7 million spend on the Mega-line.

Yes. Okay. So I mean my question, therefore, then becomes your original plan was to spend $71.5 million on equipment and engineering tooling and everything else. You've only spent $7 million to date, and your cash balance is $47 million or $48 million. So you're anticipating in moving reasonably quickly into an operating cash flow positive position.

Yes, Cam, the $71 million was not all Mega-line-related spend. So we have $47 million, which was the Mega-line assets. On top of that, we raised money for operating costs. We raised money for R&D expenditure, some expansion of our selling activities overseas. So there's quite a bit there. We're spending into that money. This year, Mega-line spending, throughout the course of the year, it's on track with where we are with that program at the moment. That continues through the course of this year but will go into next year as well. So the Mega-line spend from when we did the raise, it's probably going to phase out over another year. We talked about that in our last sort of 4C that we're able to bring in some of our productive assets that we currently have, molding assets onto the Mega-line earlier that allows us to have more capacity on the Mega-line earlier and spend and push that spend over the next -- roughly the next few year. Yes, there is not all that -- I think look at the components, not all that $71 million is Mega-line related. We're on track with our Mega-line program. With those programs, we're on track with the build of that -- all of that infrastructure, the productive equipment. We'll start bringing that in through the sort of later in this half and during the next half of the year. And we've got the cash in the bank to keep that work underway. The other things we're doing, Cam, look we knew, obviously, volume increase is a key component to us becoming cash flow positive, obviously, GP positive, EBITDA positive and cash flow positive. The volume increase is a big lever there. And we're seeing our volume improved in this last quarter, and we've got a strong pipeline to increase. Part of that equation is sort of back on track and tracking on quite well. We need to see our costs reducing. We've got action plans around that. Some of that is Mega-line related. So the Mega-line does help us reduce our cost per wheel. Some of it's raw materials, consumables and then other efficiencies through the plant. So we need to keep delivering. We need to deliver on those through the course of this calendar year. We're working with our funding providers, Cam, on additional funding facilities as well, which we did mention back when we did our [ rights ]. So we're working through that as well. We've got nothing to announce at this stage, but there's actions in place there.

Next question is Hamish Murray. Hamish from Bell Potter, can you please unmute your line?

Guys, can you hear me?

Yes.

Nice result. Just a quick couple of questions from me. Cam covered some of them. But I will -- and we sort of thought this might happen at some stage, but in the table on Page 2, you've disclosed that the Ford GT500 will be completed by the end of June '22. That's going to create a sort of headwind, particularly given you guys have pulled forward some sales into that program in this quarter. Can you discuss, I guess, as best you can, just how much of that program you put forward in this quarter, what the effect that would be on the next half? I think you said that at the last quarter, the second half is going to be significantly up and then how that looks so, I guess, going into the first half of '23.

So yes, so just to pull forward, Hamish, our sales team working with the Ford procurement team were able to just really work through that -- the supply chain difficulties we're saying. We thought they were best not to leave their order profile as it was, which was more January-weighted rather than December-weighted. So we're able to get containers out in December that would have otherwise been going in January. So there's simply there's no movement for the whole year. There's a shift. It's good for our balance sheet and our sales, and it does reflect that Ford are moving forward and on plan with that program overall for the year. So that's really just tracking normally the weighting of sales into our second half. We've had a thought it might be something like 70% or 75%, 25%. That won't be the case now because we -- some of these sales have been put forward, so that will be more -- a bit more even-weighting, still stronger in the second half but a bit more even-weighting between the halves than what we were thinking might play out, difficult as it is to be forecasting in these times. Again, the Ford -- so the Ford GT500, it's been a good program for us, Jake, but we've got COVID kicking in. You might want to pick that up.

I think -- I mean we always knew this was rolling out during this year. We see it coming to an end this side at the end of the financial year, but it was always going to be there or thereabouts. The Corvette program ramp-up and the ramp-up we're saying -- everybody keeps saying cut through for Ferrari were always what we were expecting to take us into FY '23. So as Gerard said, there's really no particularly material change there.

We're expecting a new program to be heading into production in the second half of the calendar year as well, Cam. So Corvette, there's only a couple of wheels, so I think at the moment, that will really ramp up and then a new product coming in calender year, all on track.

And just I know you guys don't control this, but just I noticed that pricing, I don't think, has been released for the Corvette to date. Is there any risk that there could be delays to that? Or is this just standard that I guess you guys are doing? I know there's waiting list with dealers over there anyway but that you guys do preproduction and you're pretty confident that this can ramp up over the half as you expect.

Yes. The only factor to be aware of, Hamish, which is in the public domain is the Bowling Green plant where they make Corvettes was hit by a tornado in November and caught fire. So there's been some disruption there, but they're working very hard to get back on top. Although it's -- you're not talking about major delays, but they're -- they've been impacted by that. But the order book is from what we understand is very strong, and so we're proceeding on the basis of the launch of the ramp-up. And the expectation broadly, I think, in the industry is that there is strong demand for the car. And as I said, there's been a lot of publicity around the wheels, and a lot talked about with the wheels more so than we've seen on other launches. There maybe many more like that. But that's giving us reasonable level of optimism.

And just going off where Cam left off on the Mega-line, you guys had pushed some publicity pieces to your social media platforms, just discussing where you're at with the Mega-line, some of the progress you've made and how you're expecting commissioning in CY '22. Could you talk us through, operationally, what that means and what that actually -- theoretically, where that equipment is going? Is that going into the current line and will increase -- decrease your COGS because just trying to reconcile how that looks compared to saying to Cam that you pushed out a lot of that expenditure out an extra year?

Yes. So the what we've got on the shop floor now is effectively the infrastructure, what we call the mezzanine, the structure, and then the elements of the Mega-line progressively come in around that. What we're trying to manage here is program launches around implementing this new technology on the shop floor and then getting the economic benefits of it as those programs come into production and as we can transition existing programs on to it. So the first priority is to make sure we don't disrupt day-to-day production of existing programs. And then implement the expansion under the Mega-line throughout the course of this calendar year. So yes, it will certainly have an impact on costs. But the implementation through the course of this year is being managed by side with the existing day-to-day production.

And so by the end of the year, Hamish, a visit to the plant in December, we're expecting to see the Mega-line -- the infrastructure that we've got now underneath that. We'll have the [ phase lifeline ] leading into that. We'll have the combination of new molding equipment and existing molding equipment, all there together with wheels from current programs flowing through that.

And then just one final one, just on the GP. I understand. Obviously, it's been a bit of a struggle the last 18 months. But what confidence do you guys have as these volumes come in you will be able to extract a positive GP? Because, I mean, with the cash balance where it is, the money committed to the Mega-line, we're at a stage where you do need to -- as chicken and egg, right, the more wheels you sell currently at this GP, the more money out the door. So I mean, what visibility you have that the work you've done and the volumes coming through are going to push this positive GP? And can you give us any color around timing?

Yes. On the plans to deliver that GP positive and beyond, Hamish, we are confident. We have a great team. We understand. I mean what we do here is it's a complex advanced manufacturing environment. We have very robust plans and the right team in place to drive the improvements. And, yes, they don't all happen overnight either, and some of them relate to new equipment coming in. Some of them relate to more basic improvements such as the re-layout that I referred to earlier as the back-end processes to get better flow and just better basic efficiencies through that back end. So we're confident that we're on track with those. You always like things to move quicker. It's always nice when you don't get disrupted by things external. As I mentioned earlier, not being able to get service from offshore suppliers because of issues related to the pandemic are somewhat frustrating, but we are on track, and we've got the right plan to do this. I don't know, Gerard, if you want to talk about time frames, but I think we're still pretty comfortable with the milestones in terms of when we -- at what levels were at gross profit positive, EBITDA positive and cash flow positive but still consistent with what we've been talking about.

Question through Q&A from [ Andrew Beatty ]. When are we likely to hear announcements like make and molds regarding new vehicle projects referred to, so that's beyond Corvette and Ferrari.

Yes. Thanks for your question, Andrew. And obviously, this comes up regularly. We would like to be able to announce the customers we're working within the molds that we're contracted to put wheels on, but we obviously can't do that before they announce and launch their vehicles. And one of the benefits of what we're supplying to them is that they go on high-profile vehicles typically, but that means that they protect those launches really carefully. So we just don't have the ability to sort of break that news, breach confidentiality and those sort of things. That's not something that we would be able to -- or can consider doing or would ever consider doing. We would always like for them to announce earlier than they do, but we don't have control over that. That's why launches like the Corvette are very important.

[Operator Instructions] So [ Andrew Beatty ] to follow that up, Jake. Do you know when the manufacturers are going to announce?

We usually have a reasonable indication of when they're going to announce. Traditionally, it was based around automotive shows, but the pandemic has pushed a lot more virtual launch activities. We don't have any influence over it. We do have an understanding of when it's going to happen, basically, but that can be subject to change as well based on their own time frames. And we're one supplier of many, and there are many things that need to come together to get it be launched. So yes, we usually have forward indications, but I don't have any thoughts over that.

All right. No questions and issues. So we will conclude today's call there. Thank you very much to all the attendees for participating. Thank you, Jake and Jerry. Everyone, have a good day.