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

All right. Hello, and welcome to Carbon Revolution's Half Year Financial Results for 2023. I am Andrew Keys, and I am facilitating today's result webinar. In a moment, CEO, Jake Dingle; and CFO, Gerard Buckle, will present their updates referencing the result presentation published this morning on the ASX platform visible on your screen. At the conclusion of the presentation, there will be a Q&A session. Jake, good morning. Over to you.

Thanks, Andrew. Good morning, everyone, and thank you for joining our results announcement and presentation for the first half of financial year '23. We'll also provide an update in relation to the other announcements that have just been released pertaining to the merger with Twin Ridge Acquisition Corp., that was announced in late 2022. The team has been very busy and focused on driving our operational performance to achieve targets, while at the same time, progressing the merger process. Both of these are essential to securing a great future for Carbon Revolution. We've been working very hard through the steps of the merger with Twin Ridge over the past months, including finalizing our re-audit and managing our funding through to the point of completing the merger and beyond. While this has been a complex and challenging process, we've made good progress and are pleased to adjust this morning announced the lodgement of our Form F-4 with the Securities and Exchange Commission in the U.S. This paves a way for us now to complete the merger in the coming months with the target end of June completion date. This will conclude the process that we embarked on 12 months ago to secure the best sources of capital for Carbon Revolution to underpin the growth that we're seeing coming through from our customers. Much of this acceleration is now being driven by the rapid transition to electrification by the world's automotive industry. I'll talk about that more in a moment. We have various forms of short- and longer-term funding in place and coming together as part of this overall process. Gerard and I will talk through some of the key pages in the update presentation that was launched on the ASX portal this morning, along with our half yearly results. But first, I'd like to run through the highlights for the half. Our first half revenue was $18 million, representing a 2.3% growth over the prior corresponding period, largely reflective of the higher average wheel price. Contribution margin increased by more than double to $1.5 million for the half. Operating cash flow improved by a significant $33.3 million to positive $5.3 million for the half. These outcomes were achieved despite a significant reduction in orders from General Motors for their Corvette Z06 and Z07 wheels in the first half. Production has restarted for this program as expected and has ramped back up since Christmas. So we're expecting a stronger second half for FY '23. Firstly, with Corvette brand and together with a new program in production, which is the premium SUV program. The Mustang Dark Horse will be coming into production and ramping up in the second half of calendar 2023. These programs are already utilizing Phase 1 of the Mega-line to further improve operational efficiency, and I'll talk more about that in a moment. Throughout the half, it's also been pleasing to see the award of new wheel program from global OEMs. This includes our first fully awarded EV program, which is the second of the initial 4 Mega-line programs. Commissioning of the first phase of the Mega-line is progressing well. Customer wheels have been in production on the line since January, and I'll provide more detail on that in the moment. We're making good progress towards completing the merger with Twin Ridge, which will result in a U.S. listing for Carbon Revolution. And the liquidity and funding initiatives that we've been working on to bridge to the merger are now anticipated to meet our funding needs up to merger completion. We've got a funding plan with both secured and proposed liquidity improvement initiatives and a proposed new debt facility of net $72 million, which should enable us to complete the merger in U.S. listing and to have sufficient capital beyond that point to be able to progress with delivering the growth that our customers are demanding of us. Gerard will discuss those various funding elements in more detail shortly. I'll now turn to the investor presentation that was launched on the ASX portal earlier today and draw attention to some key pages and points. Starting with Page 4 in the presentation. This summarizes a very large and exciting opportunity that lies ahead for Carbon Revolution. As the clear global leader with lightweight carbon fiber wheel technologies for the automotive industry, we're able to offer a unique solution to the growing challenges of weight and range, particularly in the rapidly accelerating electric vehicle segment. All major OEMs appear to be transitioning rapidly to EVs. As far as we're aware, no one is yet inside of us from a competitive standpoint. Our customer base is representative of the world's most support and influential car makers. And so, we're continuing to work hard to cement ourselves as an important part of their future plans. We believe that we are at the beginning of an adoption curve that will follow the trajectory that typifies many automotive technologies, entering at a niche or premium level and then permeating through into increasingly mainstream and disruptive levels. This is a growth opportunity that we're now seeing materialize for us. We've already secured programs with 5 of the world's major car makers. The majority of them have sourced multiple programs from us. The EV space is particularly [ fertile ground ] for the Carbon Revolution's technology, given the battle for improved range to appease customer range anxiety. And because our focus is on the OEM market, we have strong visibility of future demand given that it's based on contracts with major global car makers. Almost all of our expected revenues for the next 2 calendar years are underpinned by existing OEM contracts. Underpinning the increasing demand for our compelling lightweight wheel technology is our well-progressed industrialization plan. This will deliver significant improvements in efficiency and result in cost reductions due to our investments in automation over the past years. Phase 1 of our first Mega-line is a centerpiece of this strategy. And as I said earlier, it's already in operation in our Geelong manufacturing facility. From an intellectual property standpoint, we have a portfolio of over 90 patents with the majority being fully granted, forming an additional high entry barrier and source protection, what we believe to be a very clear lead over any potential direct competition. Turning to Page 5. As I've mentioned, our technology is a particularly good fit for the rapidly expanding EV market. The kind of step change in mass reduction that we're able to provide to our customers in a relatively low investment bolt-on application is of enormous value to them. As vehicles electrify they get much heavier, wheels continue to need to be bigger and the use of conventional materials appears to be hitting limitations. We have our first fully awarded EV program with a major North American OEM for an electric SUV platform. This is a very exciting phase for us to be entering. These programs are increasing in volume, therefore, vehicle platforms are central to our customers' electrification strategies, and they're in segments where we believe we can add very significant value and enjoy substantial growth. Switching to Page 6. I am pleased to be able to report that the installation and commissioning of Phase 1 of our Mega-line is progressing very well. Several processes are already in production, including the face lay-up, pre-heat, de-mold and the tool management systems. These systems are operating well, and we continue to systematically commission the overall line integration. On a cumulative basis, almost $15 million has been invested on the project and $3.2 million was incurred during this half. There's currently commitments for a further almost $5 million for the Mega-line project. This has been a well-planned and executed project and is already delivering on the major ambitions that underpin it. The Mega-line represents the culmination of numerous years of manufacturing technology development through the commercialization and automation phases. It represents the coupling of these discrete modules of large proprietary technologies that we've developed in-house. And that coupling is using state-of-the-art transport systems such as modern conveyancing and robots are controlled and sequenced by sophisticated digital control systems. This first Mega-line becomes the blueprint for further expansion as our customers entrust us with larger and larger programs. We'll then continue to add volume within our plant here in Geelong and ultimately add to that with plants in other parts of the world to meet anticipated future demand. Turning to Slide or Page 7. We certainly had a mix of outcomes in the first half, while our safety results are still significantly better than the relevant industry benchmarks, we experienced an increase in incidents following an incredible 0 lost time injury year in FY '22. But we continue to build the culture of working safely together. This is so incredibly important and must be top of mind, particularly during new plant installation and commissioning, where there are more disruptions to normal daily activities. Due to the Corvette delays that I mentioned earlier and that are now resolved, we saw a reduction in the number of wheels sold for the half relative to the prior corresponding period. Revenues were up, however, and our contribution margins were a pleasing 114% higher than the prior corresponding period. Cash flow from operations was up to positive $5.3 million relative to a negative $28 million in the prior period -- prior corresponding period. This is a fantastic result for us for the half and came despite the drop in Corvette volumes. It's been a great effort by the whole team to achieve these results. Our first EV program reached the full award stage and is followed by another 3 that are in detailed design and engineering stages. These programs are larger than our typical programs in the past and are for the popular SUV and pickup truck segments, which are the most popular platforms, particularly in the North American market. I'll now hand over to Gerard to talk in more detail about the financial results for the half and our funding initiatives leading into the merger, and I'll then come back and finish off with a discussion about our priorities and the outlook for the second half. Thanks, Gerard.

Thanks, Jake, and good morning, everyone. Looking at Slide 8. We achieved a 2.3% growth in revenue during this period. There were 2 different -- very different items impacting sales for the half. And they were: firstly, Ferrari sales was strong, almost double that of the prior period. Growth from new Ferrari programs that came into production last year drove this great result. Secondly, on the other hand, after a very good launch of the Corvette wheel from May to August, Corvette wheel sales in the last 4 months of the calendar year were below expectations. General Motors had supply chain issues with several parts of -- for this vehicle, leading them to curtail planned vehicle production during the short period. Our planned Corvette sales in the last quarter were impacted. To manage this, we paused production of this wheel, downsized our team and ensured we had tight control over costs. The good news is that, GM has sold their supply chain issues very late in the calendar year. And the order profile now looks very strong. The Corvette wheel is back in production at expected levels. We more than doubled our contribution margin as compared to the prior period, and I will cover this in more detail when discussing the next slide. Cost management has been a very significant focus in our business. I am pleased to say that our focus on cost control has delivered a flat cost outcome in the first half of FY '23 for our research and development and SG&A costs, which is difficult in a growing business and in this inflationary environment. We had $3.3 million of transaction costs in the period. These are non-recurring costs that relate to the announced merger with Twin Ridge. Other income increased due to the achievement of grant milestones in October for the state of Victoria grant as compared to achieving those milestones in February last year. Turning to Slide 10 -- Slide 9, sorry, which details our contribution margin results for the half. As I mentioned earlier, we more than doubled our contribution margin as compared to the prior period. This growth in contribution margin is a particularly pleasing result given our volumes were lower than the corresponding period, and we are also in a cost inflationary environment. Contribution margin growth was driven by a combination of product mix and productivity improvements. With the product mix change, our average price per wheel grew by $250 per wheel, and pleasingly, we're able to hold our direct cost per wheel reasonably constant, even with a strong weighting of our production on our low-pressure technology, which is inherently higher costs than our high-pressure technology, which was underutilized during the quarter due to product mix. We have managed through some increases in carbon fiber prices in the half and logistics costs remained elevated during that half. However, the international logistics costs appear to be easing early in calendar year '23. As our volume grows with the introduction of new programs, we do expect our contribution margin improvements to continue, and we expect to see the benefits of production on the Mega-line in this coming calendar year. Turning to Slide 10, where we'll look at our cost per wheel. Cost per wheel has increased in the half, and this is not unexpected, and for 2 very good reasons. Firstly, as described earlier, we had a strong mix of wheels produced on our low-pressure molding equipment. Low-pressure molding does have -- does not have the labor, resin or consumables, efficiency of our newest technology molding equipment. Therefore, we expect a higher cost per wheel from the mix we have seen in the last 6 months. Secondly, there is a volume impact here. We held our gross depreciation and indirect costs reasonably flat, but lower sales volumes in the half compared to the previous periods, the depreciation and indirect cost per wheel are higher. This will naturally reduce in the coming periods with the planned growth in wheel sales coming from the restart of Corvette and new programs. On Slide 11, we have an overview of cash flow. In the half, we had a strong improvement in operating cash flows coming from our continued strong cost control focus, from successful customer-related liquidity improvement initiatives that led to higher customer receipts of $11.5 million, lower receivables and improved working capital and higher operating grant. Grants advances included some grant assistance for our short-term liquidity, such as receipt of $9 million of the MMI grant in December '22, which was $4.2 million higher than initially expected. Investing cash flows were lower following peak investment in the Mega-line through FY '22. Net debt position, our net debt position increased due to 2 key reasons. They are a small movement in loans and borrowings, primarily due to the usage of supplier financing required for raw materials in preparation for the production restart of Corvette and the launch of the SUV wheel and a reduction in cash at bank compared to the prior corresponding period. Turning to Slide 12, where I'll talk about our funding plan through the merger completion. The highlight of this slide is that, we have a liquidity and funding plan that we expect will bridge the company through its merger completion. In the chart on the left-hand side of this slide, you will see we have made very strong progress with short-term bridging initiatives with customers, suppliers and lenders where we have secured $14.8 million of the initiatives, and we are in the process of securing another $12.8 million of initiatives. Our current lenders have been very supportive of our business through this period. We certainly appreciate what shown by our customers, suppliers, governments and lenders during this bridging period. Whilst putting the bridging plan in place, we have also been working our proposed new debt facility of approximately $72 million, net of upfront interest, fees and other costs that is anticipated to close in late April. This proposed facility would see the company raise term debt using the value of both our physical assets and our intellectual property as collateral. This top finance does not appear to exist in Australia, but it is reasonably common in the United States. Our [ tech sponsors ] have been instrumental in bringing this opportunity to us, and they are actively working on this opportunity with our team. We believe this demonstrates the capability of tech sponsors, their depth of knowledge and relationships in the U.S. debt and capital markets. The process to obtain this proposed finance continues. And if we are successful in completing this new debt facility, we will strengthen our balance sheet and provide sufficient funds for the company to complete the merger and deliver the growth projects in our pipeline. I'll now hand back to you, Jake.

Thanks, Gerard. Finally, our [ focus ] and priorities for the second half of this financial year. These include a combination of operational and transaction-related activities. With the restart of both Corvette vehicle production and General Motors early this year, we now anticipate a strong second half as this program ramps back up for us. This will be added to by the ramp-up in production wheels to the premium SUV out of Europe that we've previously spoken about. The new Mustang Dark Horse by Ford is working its way through and will also enter production in 2023, but that isn't expected to have an impact on our financial year '23 results. We are, however, increasingly optimistic about the volume for that program. Commissioning the Phase 1 of Mega-line is tracking well with production wheels now being manufactured on the first processes to be installed. The magnitude and extent of automated industrial equipment in the facility has now stepped up by a significant amount, which promises to deliver a big positive impact for our direct costs, in particular. Mega-line commissioning is continuing over the coming months as the additional elements of the line come on stream, and we expect all elements to be in operation and producing production wheels for customers by the end of this financial year. Finally, we're working hard on progressing the merger and associated processes to our expected completion in June. Along with finalizing the central transaction, as Gerard said, we're working through a series of short- and longer-term initiatives to ensure that we successfully bridged to the completion of the merger and then have a strong balance sheet to take forward from the point where our listing shifts over to the North American exchange. Before I hand back to Andrew for questions, I'd just like to acknowledge the enormous efforts that have been put in by the whole Carbon Revolution team to deliver both on our operational plan, as well as getting its complex merger finalized and completed within our target time frame. This really is a great effort. It's an example of how this team can work together to achieve things that haven't ever been done before. I'd also like to thank the shareholders, customers and our key partners who supported this merger and understand the benefits of the transition that we're undertaking to set Carbon Revolution up for a very strong future. Back to you for questions, Andrew.

[Operator Instructions] A question on the debt facility. The $72 million debt facility, the questioner has assumed that it is a very expensive facility. Is there any indication of the likely overall cost of the facility?

Look, not [ this year ]. So we're working through that process to firm up all those details and what the exact cost might be and then work through the completion in April. It is a little bit different to normal debt finance, which might be secured over physical assets. The security over the intangible assets includes insurance of the intangibles and the lending against those intangibles. So there is an extra cost and insurance costs of fees as compared to normal debt finance. So it definitely will be more expensive, and we will be able to provide -- as we work through that through the completion, we will be able to provide all those details when we hopefully complete that new facility.

That brings an end to the Q&A session and indeed the webinar this morning. Thanks, Gerard and Jake, for your presentations, and thank you to all the participants for tuning in. We will now finish the webinar.