RedFlow Limited (RFX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Redflow Limited H1 FY '20 Results Announcement Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tim Harris, Managing Director and CEO. Please go ahead.

Thank you, and good morning, everyone, and thank you for taking the time to join our investor call this morning. Today, I'll be providing you with an overview of our results for the first half of this financial year, covering our key operational highlights and priorities for the remainder of the year. I'm joined this morning by Trudy Walsh, our Chief Financial Officer. And before covering our results, I would like to talk about RedFlow's journey since we've communicated our decision to prioritize the telecommunication and commercial and industrial markets in our target geographies, these target markets being Africa, Australia, New Zealand and Asia, which all demonstrate potential strong demand for batteries that can operate in high ambient temperatures and still maintain 100% discharge without degrading storage capacity. In previous periods, our focus has been on investing and improving our manufacturing capabilities, developing strategic partnerships for growth and demonstrating the value that our technology brings to clients to provide a key reference deployments. I'd like to emphasize that having our services platform for growth, Redflow is at now critical inflection point. We're engaged with a number of telco and tower operators across South Africa, Australia, New Zealand and Asia, representing over 70,000 towers under management. We believe these customers all have a strong business need for a solution that Redflow batteries can provide and requirements and capabilities to drive material orders for Redflow. As we look ahead, we are confident that given the investment we have made over the last 2 years and over the lifetime of Redflow, we are well-positioned to address the growing opportunity and educate the market on the value proposition of RedFlow's unique energy storage solution. Summarizing our financial highlights. During the first half, revenue was up 282% to $1.4 million, which included orders delivered to strategically important telco end customers, including Vodacom, through our telco partner, Mobax, in South Africa and the Rural Connectivity Group through our partner, SBS, in New Zealand. We also had orders through our western partner -- Western Australia partner, TIEC. Pleasingly, revenue for the first half of FY '20 exceeded the total revenue generated by our business in FY '19. We ended the period with $5 million of cash and received an R&D rebate of over $2 million in January. We also implemented a number of operating cost reductions while preserving our sales and core engineering capability, which saved $900,000 on the previous period. In relation to operations, in H1, we're able to name Vodacom in South Africa as a key strategic end customer. We've been engaged with Vodacom since early 2019 and are delighted that they began using our batteries as part of their critical network infrastructure. Vodacom are important not only in terms of the potential for regular battery orders, but also the demonstration effect the deployment have had in accelerating our engagement with other telco operators and tower companies in our target markets. We are pleased to have delivered the order for 68 batteries through our partner, Mobax, for Vodacom during the period. We also hired an experienced sales director to promote Redflow and secure new customers in South Africa given the very attractive growth opportunities we see in the region. We believe the South African telco market provides a significant opportunity for Redflow, and we have invested significantly in developing a number of relationships there over the past 18 months. We also know that the opportunities we currently see in South Africa are replicated across the continent and other markets globally that share the same characteristics. We're also making good progress with our markets in Australia and New Zealand. We're delighted to announce New Zealand Rural Connectivity Group as a key end customer and with our partner, SBS, have completed the first installation with them in December. RCG are an important strategic partner of Redflow with the potential for regular battery orders and our relationship should serve an important reference for future deployments for the telco operators in rural locations. We are working on a broader commercial agreement with RCG and SBS, which we expect to finalize over the coming months. In Australia, we continue to engage and support our partners across the country. We completed the deployment of the Yallalong Station with our Western Australia partner, TIEC. This was a completely off-grid solution using 4 of our batteries and is forecasted to save at least $10,000 a year in diesel costs and represent a great example about how we have a solution that can be used by the Australian rural community who require a product that can survive in harsh conditions and without high risk unlike other products in the market. Australia's recent bushfire crisis highlights the need for energy storage solutions in these areas, and we have a unique technology that can help. In relation to our innovation and technology leadership, we continue to make important investments into R&D to maintain our leadership and improve the performance of our batteries. We've made material progress on key engineering projects and incremental productivity improvements that will reduce the cost of our batteries by a target of 30%. We've also developed the current hardware and software theft mitigation features in collaboration with Vodacom and our partner, Mobax, which directly meet the needs of our target markets. In addition, as noted, we recently secured a $2 million R&D tax rebate and will continue to have access to the scheme in future periods. I would like to emphasize our key value proposition to our customers. Our batteries are directly linked to improving power resilience and productivity, enhancing renewable integration and reducing diesel usage among other value-added features. We're uniquely positioned to provide our battery solution to address these strict requirements and the growing global shift towards renewables and reduction in the use of fossil fuels. I'd now like to hand over to our Chief Financial Officer, Trudy Walsh, to cover the financials in more detail, and I'll then provide a bit more color about our growing pipeline and priorities for the remainder of the financial year.

Thank you, Tim. We are pleased to have delivered substantial growth in revenue, which, as Tim previously mentioned, was up 282% on the prior corresponding period to $1.4 million. The uplift was underpinned by sales to multiple customers, including Mobax for Vodacom, TIEC, 720 and SBS for RCG. The increase in other income reflects the higher R&D tax rebate accrual, which was received in January. Due to the implementation of cost-saving activities and lower payroll costs, other expenses fell 17% to $4.7 million during the period. Raw materials and consumables used increased to $2.7 million. This relates to an increase in sales and includes the manufacturing overheads due to the moderation of production volumes and the expensing of all freight as it is incurred. In relation to our balance sheet, we have no debt and our cash position remains solid at $5 million at 31st of December. This was prior to the receipt of a $2 million R&D tax rebate in January. With $7.3 million of inventory, a combination of raw material, subassemblies and finished goods, we have sufficient raw materials for our current planned production and sufficient finished goods to immediately respond to any increased demand. In relation to cash flow, our cash outflows from operations reduced by 42 point -- 42% (sic) [ 42.4% ] to $5.5 million due to the combination of higher receipts from customers and the inventory build in prior periods. Having proven our manufacturing capabilities and the resulting inventory build, we were able to moderate our battery production and purchasing of raw materials. A lower headcount in this period also contributed to the reduction in cash outflows. Having made investments in prior periods into our Thailand manufacturing facility, we were able to reduce capital expenditure, and consequently, cash outflows from the investing activities fell to $235,000 in the period. I'll now hand back to Tim, who will provide more detail on our growing pipeline and priorities for the remainder of the financial year.

Thank you, Trudy. So in summary, we're very excited about the growing pipeline opportunities in our key markets. As noted in our presentation, the telco market for Redflow is very significant with major tower growth occurring in markets and geographies with weak or no grids in high-temperature environments. Critical network infrastructure for telcos requires reliable, dispatchable and increasingly green solutions, and industry association GSMA reports that 90% of over 1 million off-grid corporate towers are using expensive and environmentally challenging diesel as the main power source. At Redflow, we have an energy storage solution that can provide long-duration storage, can operate in harsh conditions and can mitigate environment factors sectors such as battery theft and diesel use. In the South African space, the key macro drivers of potential demand for Redflow batteries remain strong. The country remains significantly challenged by the performance of the national utility provider, Eskom. In December 2019, Eskom embarked on a Stage 6 load shedding where the power utility took 6,000 megawatts of power off the system due to breakdowns and other problems with provinces experiencing deep and sustained blackouts. The South African Council for Scientific and Industrial Research published a report in January that said that expected load shedding to continue for at least the next 2 or 3 years, and many commentators believe the situation in 2020 will be even worse than 2019. This is a major concern for the country and is underpinning increased demand for reliable, long-life, long-duration energy storage solutions. The issue of energy access, security and reliability is significantly compounded by the endemic issue of battery theft in the country. The Vodacom CTO, Andries Delport, reported last year that the company had 500 towers vandalized or had batteries stolen every month at their 14,000 towers under management, and as a result, Vodacom is due to spend AUD 25 million to AUD 30 million on batteries in 2019 alone. MTN, South Africa's second largest mobile operator, reported over 700 batteries at cellphone towers were stolen from its base stations in January 2020 alone. So having successfully demonstrated our batteries' combined -- compelling solution, some investors will now as part of -- also part of one of the world's largest telco operators is progressing engagements with other telco infrastructure providers in South Africa and other countries. We believe we are now positioned to receive follow-up orders and scale up sales in the future periods. We're also seeing a number of opportunities for us to deploy our technology to commercial and industrial sites in Australia, Africa and Asia. Last September, I demonstrated Redflow's 100-kilowatt hour battery system at the Zbest Power Haidong Transport Project site to a range of government and private sector participants. While the recent coronavirus outbreak has delayed business development opportunities in China, we plan to resume discussions with potential end customers and partners at the appropriate time and confirm there's no material impacts on supply battery components and materials to date. In relation to the residential space, we continue to work with our Australian local partners to deploy energy storage solutions on attractive projects. Now to our key priorities in the second half. We are focused on leveraging our strategic partnerships to drive sales growth and regular orders. We'll also continue to explore and progress new strategic partners, which we believe will drive a step-change in sales over longer term. Our sales and research and development will be focused on anti-theft solutions, which are in high demand from end customers, and cost-out programs, which are important as we scale our orders. From a financial perspective, it's important that we ensure Redflow is well-capitalized to execute on our growth strategy. And we'll note that in other times, our target is to secure further capital. In summary, we've made very good progress over the last 6 months with a good level of committed orders of batteries to be delivered over the second half. We are well-positioned to continue to scale our business and commercialize our technology. Our customers have a critical business need that our unique battery solution can address and have the ability to order Redflow batteries in material volumes, which we believe is a distinct change from previous periods. This brings us to the end of today's presentation. Thank you very much for your support and taking the time to join us this morning. I'll now open up the call to your questions.

[Operator Instructions] Your first question comes from [ Gary Frost ].

Tim, you mentioned about South Africa and the anti-theft program of Redflow. What's the tangible evidence at the moment that no one is actually taking those batteries? Or what's a metric for that at the moment?

Yes. Very good question, [ Gary ]. Look, we've seen evidence of one attempted theft of our battery in a rural location in South Africa where thieves tried to extract our batteries and essentially gave up during the process. That's an important proof point that we believe solidifies our argument that at 240 kilos, no residual value and anti-theft features that -- our belief that we can provide an important theft mitigation component provides a further proof point there. Look, proof will be further in the pudding as we put further batteries out there, particularly in some of those high-risk, high-theft locations, but certainly Vodacom seem to be excited about the opportunity that we can have to mitigate those theft drivers around some of the features we've been working on them that we think will drive that demand to mitigate that key -- really key business issue for the -- for telcos, not only Vodacom, but other telcos across the region.

[Operator Instructions] Your next question come from [ Norman Wise ].

I don't know whether you're in a position to answer this, but how many sales have you made this financial year? And how many sales are needed to breakeven?

[ Norman ], so we don't release exact numbers of sales of batteries, but you'd be able to see from the revenue what the general number of those battery sales actually are, given our sales price around that period of around USD 7,000. In terms of sort of breakeven point, we previously provided commentary that breakeven point for our batteries is around 270 to 300 batteries in terms of breakeven, and that depends on us getting further costs down and supply agreements in terms of supplier inputs into our materials. So I mean, I think, clearly, we're some way from that, but I think the big difference that we have now within our business that we believe is quite distinctly different from 12 months and even over the whole journey of Redflow where we got to now is that we are actively engaged with customers who have the ability to order our batteries in significant volumes. And so that line of sight to getting to that cash flow breakeven, we have a very clear line of sight and a plan to get to that point.

And when do you expect to be at that point?

Look, we're not giving a sort of forecast over that at this stage. [ Norman ], I think we all know that getting to that point requires a high degree of confidence in order starting to come through and convert. I don't think we're at that stage yet, but what I would say is that we remain confident that we're speaking to the right customers who have the right business need who can order our batteries in material volumes.

[Operator Instructions] Your next question comes from [ Bill Guthrie ].

Tim, I assume that your salespeople have been working quite closely with media and the opportunities that are -- may be presented with battery technology. What I wanted was, there's been quite a lot of, say, remarks in the media recently about people at Tesla and others that are actually deploying batteries that will be suitable for small whole townships within the [indiscernible] environment. Is Redflow in a position to cover that market? Or are they too expensive for that type of market? I'd like to know a little bit of the detail of that.

Well, thanks, [ Bill ], for the question. I think it's a really good and interesting one. I mean, look, I think, fundamentally, I think what you're talking about here is sort of a community establishing energy capability that it easily sits off the grid. And for the most part, that's true in terms of kind of microgrids. And we've been seeing, as you say, kind of an increasingly amount of activity in the microgrid space, not only in Australia but also globally. And also I think we've already provided a reference deployment for our role in the microgrid space based on the village deployment that we did in Thailand of last year. So fundamentally, if you look at what our battery is, we're very well suited to, it's operating in harsh conditions, and -- at 50 degrees centigrade, it's a long-duration, regular discharge-type battery. So fundamentally, when you're wanting to use your energy storage source in those type of conditions, we believe that we are very well placed. And we have a number of discussions in Australia in particular about the role that we can play in terms of some of those kind of microgrid projects that are starting to come through. So look, we remain kind of strategically excited about that opportunity. Some of the sales cycle around those, we found can be quite long. But on a strategic scale, we do see a key role that we can play in that market.

If I may just follow up. People are also talking to governments about, say, the government may be able to assist you because I'm sure that's been a strategic interest of the country in Australia for this type of technology to be developed, kind of.

Look, we would agree. [ Bill, ] as we said, we get access to the federal R&D grant that we noted before. We're still in discussions with a number of kind of government agencies about how we can support and help with that. And sometimes, the wheels the government run quite slowly, but we remain actively engaged with a number of government agencies in seeing how we can further their objectives and support a proudly Australian-developed technology in the energy storage space.