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

Okay. Good morning, and welcome to Carbon Revolution's Investor Webinar for the release of the FY '23 financial results. I'm Andrew Keys, and I'm facilitating today's webinar. In a moment, you'll be hearing from Carbon Revolution's CEO and Managing Director, Jake Dingle; and CFO, Gerard Buckle. After their updates, Jake and Gerard will be taking Q&A. For participants, you can please ask your question using the Q&A function. Good morning. Over to you, Jake.

Thanks, Andrew. Good morning, everyone, and welcome to Carbon Revolution's full-year results presentation. I'll be referring to material and slides in the presentation that we put up on the ASX platform. I won't be covering every point in every slide that will allow some time at the end for questions, obviously, to cover anything else. Financial year '23 certainly has been a transformational one for Carbon Revolution. Operationally and strategically, we've made significant progress on our path to becoming a major player in technology disruptor as the world transitions to electric vehicles. In the last 12 months since August last year, we've been awarded a record 5 programs with some of the world's largest and most important car makers. These include our first 2 programs for electric vehicles. Both of these are significant. Both strategically and from a volume perspective, the size of these programs is -- has now really stepped up a notch. You can see on Slide 6, our total awarded program tally has now reached 18, with 6 global OEMs presented across this mix. Awarded program backlog, which represents the remaining lifetime gross program revenue that these contracted programs represents, has more than doubled over the course of the last 12 months, now stands at $970 million, with an expectation of more to come in the coming months. Also in a sign of what's to come, around half of this backlog is now accounted for by those EV programs, again, reflecting their size relative to what we've previously been awarded. These are highly strategic program awards, with significant and influential customers. In the course of the last year, JLR, previously known as Jaguar Land Rover, revealed the 2024 Range Rover Sport SV that was back in May. This was a much anticipated program, and it's the first time that our wheels have been showcased on an SUV application. This demonstrates the applicability and the relevance of our step-change technology in what is a very popular and a massive segment of the global market. Ford also revealed the Mustang Dark Horse featuring our wheels during the course of FY '23. This represents a major step with our first-ever OEM customer as we move into the world of core vehicle programs with Ford, again, reflects the evolving status of our technology towards broader and higher volume applications. General Motors Corvette E-Ray model will also feature Carbon Revolution's wheels, as announced early in the second half of the financial year. The E-Ray will be the first Corvette to use electric power in addition to its V8 engine. You'll see on Slide 7, back here inside our facility in [ Jalan ], the Mega-line has taken shape over the course of this year. This has demonstrated the capabilities of these teams and not just deliver a globally unique product technology but also to engineer and deliver a world-first set of processes within an integrated production line to industrialize and scale up our manufacturing activities. Commissioning has progressed well, and we're now reaping the benefits of this highly sophisticated equipment as the production team work to optimize the various elements that make up the [ Mega-line ]. We continue to break records in terms of throughput and labor efficiency on a regular basis as it continues to ramp up. We exited FY '23 with strong production cost improvements and increasing throughput. We're now supplying the majority of our customers with product that's made on this first phase of the Mega-line. Our merger with Twin Ridge, which was announced late in 2022, is progressing and will provide us with the access to international capital markets that we've deemed necessary to enable our expected growth trajectory over the coming years. We expect the transaction to complete in October or November this year, subject to regulatory and shareholder approval processes both here and in North America, as you'll see our listing move to the U.S. A USD 60 million debt facility was secured in the fourth quarter of this [ last ] financial year in the lead-up to us completing the merger. This refinanced our previous debt facility and secured by Carbon Revolution's assets, including our intellectual property. It's an innovative form of financing, it suits a business like ours very well, and it reflects the kind of financing solutions that are available in North America and that we can't access here in Australia. Turning to Slide 8, our overall performance for the financial year. While it was disappointing to see our revenue acted by the 6-month delay in General Motors Corvette production kickoff, our results do show that there was a great deal of operational progress through the course of FY '23. Our ramp-up in Corvette wheel production was delayed from August '22 to start in January '23. And given the size of this program and its significance to our overall volumes, this was always going to have an impact. We exited the financial year with strong sales momentum and production increasing month-on-month for both the Corvette and Range Rover Sport SV programs. You see on Slide 10, our contribution margin is now responding well to the improving production efficiencies and increasing volumes, has been assisted by increased average pricing, and we have negotiations still ongoing with some customers to recover raw material cost inflation. We delivered $2.5 million of contribution, which is 33% higher than the prior year, despite the slight drop in revenues and volumes. Again, the momentum at the back end of FY -- of the financial year was strong. In light of the ongoing merger activities, we've continued to manage our overhead and R&D costs very carefully. R&D costs were flat relative to the prior year. SG&A is also relatively flat, in spite of the inflationary environment that we've experienced through FY '23. We also worked very closely with our customers and suppliers on various liquidity initiatives. Throughout this process, we ensured that we can maintain [ operational ] deliveries to customers, so their own [ building ] programs remain on track. So we certainly started to see clearly where our profitability can get to its volume increases through our Mega-line that generates greater production efficiencies and leverage to our fixed cost base. I'll hand over to Gerard to talk about our new debt program and funding in general, and then I'll finish off with a summary and our focus areas for the current financial year '24. Thanks, Gerard.

Thanks, Jake. Good morning all. And looking at Slide 12, you can see financial year has been a very significant year for us from a cash perspective. Now operating cash flows, we have a significant improvement in our customer space with growth of $12.1 million. This improvement comes primarily from customers paying us in advance of normal [ value ] terms. Our customers are very supportive of our business and have demonstrated that support as they brought forward [ payments ] in order to reduce the working capital burden on our business during this challenging year's. Government grants increased by $11.7 million in financial year's [ growth rate ] . We have a new MMI grant in both federal and state governments advanced grant funds earlier than would otherwise have been planned in order to continue -- in order to support the continued growth of our business. We appreciate the support of governments. And as we now have over 500 team members, we feel we are certainly delivering on our promises. In terms of debt, this was a significant year for our business, as Jake has already pointed out. We refinanced our existing term loan and our working capital facility and brought on a new USD 60 million IP-backed debt facility, which allocated significant value to our extensive intellectual property -- intellectual portfolio. This type of funding is typically not found in Australia. And with the assistance of our [ respected ] partners, we were able to put this refinance together. Borrowing costs of $20.7 million primarily reflect the cost of refinancing and the cost of the new debt program, including insurance. Investing cash flows were slightly down in FY '23 due to the reduction from peak Mega-line capital spend in FY '22. And we also enacted a couple of like growth plans during FY '23. Financing cash flows showed net [ $66.5 million funds ] in cash inflow, primarily from the debt refinancing, which is a result of bringing in that new debt program of paying off existing debt. Turning to Slide 13. We've already discussed the new $60 million debt program, and you can see that coming through in net debt. Working capital reduced by $9 million for two key reasons. Firstly, we reduced our work-in-progress inventory and consumables by more than $4 million as our operations team delivered manufacturing inventory flow efficiencies throughout the year. And secondly, we've reduced our receivables during the year, which is related to a combination of the timing of sales, where in the last quarter of financial year '22, we contained the final sales for the GT500 program and we have a very strong initial ramp of the Corvette program. And as mentioned before, it also shows a strong commitment by our customers who organized advanced payments in support of -- in advance of standard payment terms to support our business. And I'll now hand back to Jake.

Thanks, Gerard. Now just to round out with a summary of the focus areas for the current financial year FY '24, a very clear priority for the team is to continue the current ramp-up of Corvette Z06 and the Range Rover Sport SV wheels to meet our customers' growing demand. We're seeing great responses to these programs in the market and are pushing hard to produce at our maximum capacities. . Production of Ford Mustang Dark Horse wheels are now also starting to ramp up in line with Ford schedules. We have 7 awarded programs in various stages of development and preproduction activities. So this is keeping the product development, the program management and the launch team very busy. Executing these program launches on time and seamlessly is critical to ensuring that these important programs are a success for our customers. The Mega-line is the first of its guide, and our steep learning curve on that set of assets is delivering great insights as to how more throughput and efficiency can be derived using smart and lean practices that the team are deploying as well as further technical enhancements as we learn more about the line. A focus on driving these further improvements is going to drive our contribution margin trajectory, and it's the key to us reaching our all important profitability milestones as volume increases. Finally, we're on the home stretch with the completion of our merger and growth funding initiatives. This has been a highly complex process and transaction, stretched our team, our partners and our advisers. Achieving this listing on the U.S. exchange will give us critical access to funding to continue our growth trajectory without being constrained by a lack of capital availability. Just in closing, financial year '23 has been transformational for the company in a number of ways. Our program pipeline and our operational progress and performance are all pointing to a very promising future for Carbon Revolution as we deliver on the growth that our customers are increasingly demanding from us. And finally, I'd just like to acknowledge the incredible efforts and the resilience that every member of the Carbon Revolution team demonstrates on a daily basis. This is the character and culture that's enabled us to achieve what we have and overcome the inevitable challenges associated with being the first in the world to do something as significant as this. Thank you, and I'll hand back to Andrew for questions.

Thanks, Jake. Thanks, Gerard. [Operator Instructions] We've got a couple of questions through. The first one, Jake, fast forward 10 years, what do you see as the demand or the need for carbon fiber wheels?

We've seen an acceleration really driven by the transition of all of the major automakers to predominantly electric vehicles, which are typically considered to be at least 30% heavier than conventional vehicles, but expected to deliver the same attributes on the same -- the same kind of outcomes albeit sort of somewhat restricted by what range you can generate from an EV. So the pressure on weight saving and efficiency technologies is huge. It's a massive market, though, so almost 100 million vehicles, of which the premium segment is between 10% and 15%. So you're talking a premium segment that's between 40 million and 60 million wheels. That premium segment tends to be at the top end of weight classes for each of the different platforms. So while we're seeing strong uptake with large vehicles at the moment, the SUV and pickup truck segment where weight is a really significant premium for various reasons, both structural, regulatory and also the size of wheels, we're starting to see that, that will play out in each of the weight segments really trickling down from the top end where the most margin is made and the most premium vehicles are and then a typical adoption curve that will move its way down into more mainstream applications. But just the sheer size of the market would suggest that over the next decade, we'll see most of our growth coming from that first sort of 10% or 15% of what is a massive market, and it is very much driven by an acceleration in the need for efficiency technologies like this.

Thank you, Jake. A question for Gerard. Can you please comment on the status and timing of the merger transaction?

Yes, sure. Look, it's -- the transaction is taking some time. We initially kicked this off late last year. So there's two parts to the process. There's a U.S. side and obviously an Australian side. . U.S. side, we've had a number of F-4 registration statements, which have gone to the SEC for their review. That review is being completed each time, and we've responded. We have got one version in with a couple of small updates in with the SEC, at the moment, under review. So we feel like that is nearing completion. On the Australian side, it's the scheme booklet is in very good shape and going through a review process as well. So we do feel like both -- on both of those sites in the coming months, we'll be getting those documents [ by that, therefore ] schedule in the scheme to our shareholders for review and voting. We see that there's mandatory periods there. There's a couple of weeks that the F-4 needs for shareholders, and there's been a month in Australia that we would have that [ in the scheme book ] to shareholders. So on the conclusion of those negative periods, then we have the voting in the next quarter.

Thanks, Gerard. Another question for you. Previously, it has been forecasted that there could be a 95% redemption rate from the stack. Has there been any estimate or change to that forecast?

There hasn't been any change to that forecast, but we have seen material movements in average stack redemption numbers in the U.S. in the last quarter. So we [ monitor them ] closely from about October, November last year, through to the end of March. Average stack redemption rates were 95%, and that's why [ owe their ] 95% assumption. In the final quarter, so from April through June and into -- and also into July, average stack redemption rates came down to 76%, which is quite a quite a significant change. They're all different. Some specs will still have by 90%, and some have 70%, so they are all different, and they need to be taken on a case-by-case basis. Financial markets have improved in the middle of this year in the U.S. And we -- that does reflect on those average stack redemption rates, some seeing improvement. We're holding at 95% assumption. We're not going to know actually where that is until the voting occurs in the U.S. So we'll hold that assumption, and we'll just see where that comes up.

Thank you, Gerard. There are no more questions in the queue. So I thank you to participants for tuning in this morning. Thank you to Jake and Gerard. We will conclude the webinar here. Have a good day.