RedFlow Limited (RFX) Earnings Call Transcript & Summary

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

Thank you, Kylie. Good afternoon, everyone. Thank you for joining Redflow's full year results call for 2020. I'm Tim Harris, the CEO and Managing Director of Redflow, and I'm joined today by Trudy Walsh, our CFO and company Secretary. As usual, earlier today, we released a presentation to accompany the financial results. You can find it on our website and the ASX announcement platform. We'll, therefore, use this presentation to guide you through our commentary on our results today. Our commentary today will be followed by an opportunity for questions and answers. Overall, it is clear that as with many companies, the financial year ending June 2020 has been a game of 2 halves for Redflow. After a positive first half of the year and growing momentum in our target markets, particularly in South Africa, where we had invested significant effort, the impact of market conditions and COVID-initiated restrictions had a significant effect on our full year results. In response, we have taken a number of measures that we believe have increased our resiliency to manage the next 12 months and put us in the best possible position for a strong recovery. Before we get into the details of our results, it's worth noting and just reiterating our core value proposition and strategy. Redflow is an Australian-based headquartered company with wholly owned manufacturing operations in Thailand. We design and manufacture zinc-bromine flow batteries. As many on the call will know, there was a global shift away from fossil fuels towards the greater adoption and use of renewable energy. Consumers, companies and investors are increasingly demanding to see green energy commitment credentials as well as profit. Energy storage sits at the heart of this transition, and the market is slowly but surely starting to appreciate there's more to energy storage than lithium-ion, particularly in harsh conditions and longer-duration requirements. One of the unique features of our battery is the fact that we believe we're the smallest production level flow battery in the world. Our battery has a number of unique features that's shown on Slide 7 of the presentation. And our 10-kilowatt form factor and modular approach allows us to target and play in markets and applications that are not naturally suited to other flow batteries, which are traditionally much larger in system size and dimensions. Significant effort and investment had been put in to getting Redflow to where we are today, including by many people on this call. There is no doubt Redflow and our investors have had to endure a number of painful learning experiences over the years. Fundamentally, however, it has provided us with what we believe is a clear global leadership position in the zinc-bromine flow battery space. The last 2 years have, therefore, been about how we leverage this investment and our technology leadership in re-establishing a core set of capabilities, including manufacturing, and then executing on a well defined, clear and focused commercialization and sales strategy. We've been clear around our target market focus and priorities, as shown on slides 8 and 9. This is in the telco industry and adjacent opportunities in the weak grid, off-grid markets and the commercial, industrial, remote area power systems and selected high-end residential space. As we've emphasized to investors on a number of occasions, we believe the sales cycle in the telco space is longer but provides us with the best commercial opportunity over the near term for regular volume orders that have the best reason to buy our battery. Furthermore, whilst we continue to see strong opportunities in developed markets like Australia with some excellent partners like 720 Electrical in Victoria and TIEC in Western Australia, the broader markets like South Africa where businesses and individuals have to contend with poor electricity infrastructure, harsh conditions and other factors such as battery theft. A long-life battery like Redflow's, which enjoys regular and deep cycling and can operate in harsh conditions, is ideally suited to these environments. When we look at the last 12 months, there's little doubt that the world and business environment which we operate is a fundamentally different place. After a very strong first, the second half was materially impacted by the COVID pandemic. Restrictions on travel made it hard and challenging to progress key sales opportunities, end customers became more risk averse and the ability of our customers and partners to deploy batteries and provide critical proof points for future sales became challenging. In response to this changed environment, we have taken a number of actions to reduce our costs and manage our resources effectively. We have further reduced production and used materials in Thailand, made some difficult decisions to reduce personnel in Thailand and Australia, and management and directors have chosen to take ongoing material reductions in their remuneration. We've been able to secure support through JobKeeper in Australia and a number of other measures. As investors will know, we have also narrowed our focus and priorities to accelerate our pathway to a volume product and commercial success. Notwithstanding these headwinds, Redflow made progress against a number of areas over the course of the year. These include 144% increase in sales, with revenue being the highest since 2012. A growing ecosystem of high-quality partners in our target markets and geographies with a number of new partners to be announced in the coming months. A set of the high quality end customer and current engagements with new customers that are very interested in our value proposition and are capable of ordering batteries in volume. We now have nearly 100 active deployments, which is a 40% increase over the previous 12 months. These reference deployments are critical to showcase the value of our solution across our target markets and applications. Whilst hard to verify, we have reason to believe this is one of the highest number of flow battery deployments of any flow battery company in the world. We also now have a quality manufacturing facility that achieved an ISO 9001 accreditation last year that's been proven capable of manufacturing batteries in volume at high quality that has the ability to scale to get Redflow into a cash flow positive position. We have further proof points of our operating performance through Australian federal government-sponsored independent testing of batteries, and we've continued to work on a number of additional features around our batteries that adds to the end customer value. This includes a new feature launch this year called standby power service mode, which allows users to charge our batteries to 100% and then effectively put it into hibernation to be ready when needed. We can now do this across multiple Redflow batteries, which provides an improved customer proposition for larger-scale deployments. I'll now hand over to Trudy to talk about specific details around our financial results.

Thank you, Tim. My commentary will relate to Slide 13 to 15 of our presentation. Our financial year 2020 results had some very pleasing elements, with revenue just shy of $2 million for the year, our highest revenue since financial year 2012. The COVID-19 pandemic did impact our revenue for the last half of the year. Other income was also up for the year with a $2 million tax rebate, up $250,000 on last year. This reflects Redflow's ongoing focus on continuing to be world leaders in the zinc-bromine flow battery space. We also received a $70,000 Export Market Development Grant reimbursement of a portion of our costs associated with the export sales efforts, primarily in South Africa and Asia. Our raw materials and consumables include not only our cost of goods sold but also the impairment management and Board decided was prudent on the current ZBM2 finished goods and some raw materials due to the acceleration of the new Gen3 battery, also includes the immediate expensing of a portion of the Thailand factory costs. This is due initially to the moderation of the factory production, and moderation was further increased once the COVID-19 pandemic occurred and impacted customer sales, the resulting decision to focus the factory on retooling and supporting the development of the Gen3 battery. Maintaining a facility with the ability to build our batteries when scale is required is essential to our growth strategy. Raw materials and consumables also include materials used in our R&D program, and all freight is currently expensed immediately to the P&L. Our other expenses were down 17%, mainly due to the reduction in payroll costs. This is a reduction of employees, implementing reduced hours for most employees for the last quarter of FY '20, executives accepting a 25% pay cut while still working full time, the Chairman of the Board reducing his director fees by 57% and other Board members reducing their fees by 27%. These reductions were partially offset by an increase in the share-based payment expense due to the expansion of Redflow's long-term incentive program to all executives and some senior management. It should be noted, this is not cash out. And while the expense is recognized each year, there are still performance criteria to be achieved over the next few years before these shares vest. Moving through to the balance sheet. Redflow finished the financial year with $3.4 million cash at bank. This was boosted by the $5.3 million funds received in July and August from the entitlement offer. Inventories are lower than last year, particularly the finished goods. This is partially due to the impairment of finished goods and the moderation of Thailand production, reducing our ZBM2 finished goods in anticipation of the Gen3 battery. Note, finished goods also include a number of batteries for orders on hand where customers are not yet ready for delivery. Moving to our cash flow. Our net cash outflows from operations is down 52% from the prior corresponding period. A substantial increase in cash inflows from the same period in both receipts and grants and also a significant decrease in payments to suppliers and employees. I'll now hand back to Tim.

Thanks, Trudy. Now on to our commercialization strategy on Slide 17. As I highlighted previously, the immediate future of Redflow is predicated on accelerating Gen3, ongoing cost management and advancing our sales pipeline. As investors will know, in July 2020, Redflow raised $5.3 million in capital as part of an entitlement offer and subsequent shortfall placement. This capital injection, in conjunction with the cost savings measures outlined, has positioned Redflow to execute further on its growth strategy, as we note on the slides. I would like to thank those shareholders who participated and/or supported our broader efforts during the raise. We will continue to prioritize our focus on telco, off-grid and poor grid environments with extensive use of renewables, diesel generators and issues such as battery theft. We'll continue to support our great partners in Australia. Key markets for us will be in Australia, New Zealand and Africa. We will also continue to support a selected number of attractive current opportunities in other markets. Critically, we have told the market about our acceleration of our Gen3 battery program. This includes a major advancement of stack technology, tank architecture, improved cooling and a new electronics control system. As a result of these changes, the Gen3 battery will produce the same level of performance as the current ZBM2 battery, 10-kilowatt hours, 5-kilowatt peak, but will deliver manufacturing cost reductions of at least 30%, including supply volume benefits we have recently negotiated. This builds on the 40% cost reduction that our Thailand facility achieved on Gen2.5 batteries compared to the cost profile when we were manufacturing through a third party. So this is a fundamental capability in the journey of Redflow being able to offer commercially competitive products in our target markets while driving a reasonable commercial margin at target sales volumes. For those interested in finding more about our Gen3 program, please go to our website where our Chief Commercial Officer, Richard Aird, recently made a comprehensive video on all of our key Gen3 engineering projects. As of today, we've now produced a number of Gen3 stacks, which have undergone extensive performance testing at our labs in Brisbane with very encouraging results. Critically, as we note on Slide 18, our new Gen3 battery will allow us to be more competitive in telco and small distributed energy systems. But it will also allow us the potential expansion into larger systems over the medium term through a new Gen3 stack, which is designed for volume manufacturing. Imagine a 40-foot shipping container with a megawatt-hour plus system that has multiple Gen3 stacks and a large tank, which is ideally suited to large-duration energy storage needs. I would emphasize this is not our priority in the near term, but our Gen3 program fundamentally sets us up for a potential expansion into larger systems as a part of our strategic future. Alongside Gen3, we intend to continue with our activities to increase the value of our battery. One of the key innovations we've been working on is our new industrial housing box, which will allow our ZBM2 battery to be deployed in outdoor environments for our telco and commercial customers. This will enable stacking of batteries outdoors and the ability to endure harsh conditions and will also allow us to send batteries from Thailand without additional containerization. This innovation is based on direct end customer and partner feedback and had been iterated over the past 6 months. We expect to deploy this on customer sites in the coming months. One of the key aspects of our focus is to ensure we manage our cost line and business impact. As a result, we have made some changes to our management team to reflect our cost focus and required capabilities over the next 12 months. Steve Hickey will be joining us as our new Chief Technology Officer at the end of August, replacing Mike Giulianini. Steve worked for Redflow back in 2012 and is deeply experienced in our technology, and I'm very excited about Steve joining us. I'd also like to thank Mike for his significant contribution to Redflow over many years. Ben Shepherd, our current Chief Commercial Officer, will leave Redflow at the end of October. Ben will continue to support Redflow in our commercial efforts in an advisory role. We'll be looking to appoint a new commercial officer in due course alongside the recovery in our key markets and Gen3 progress. So on to our priorities on Slide 20. Redflow is committed to prudently investing and prioritizing its current resources where it provides the strongest shareholder return. To reiterate, this will mean we have to narrow our focus to support key markets and applications, progress Gen3 and position us to be ready for demand ramp up. We will continue to maintain the cost containment measures currently in place and pursue all other cost-saving measures where it's prudent to do so. We do note, however, that alongside our cost-containment measures, we have sought to retain critical technical R&D capability, operational and manufacturing capability to support current sales, sales recovery and growth. In parallel to commercial activities, we will continue to explore and progress strategic partnership and investment options, including licensing deals in specific markets where credible opportunities exist. In summary, like many businesses around the world, the financial year 2020 has been a challenging one for Redflow after establishing very good momentum in the first half of the year with promising volume sales prospects. We've had to adapt to these changed conditions whilst positioning ourselves for recovery to normal business activities in the future. I believe we've got the balance right, which is reflected in our results, and we have the right strategy. Redflow has a bright, positive future, and we look forward to sharing our progress with you over the coming months. Kylie, I'll now hand it back to you for questions, please.

[Operator Instructions] Your first question comes from Dean Mellers with Morgans.

Just want to ask, what's your -- you just raised a pile of cash. So where does that get you? What's your burn rate? And it's hard in these times to predict, but how far out does that get us now? I mean, just a rough idea.

Yes. So I'll -- maybe I'll answer that to start with Dean, and then I'll pass it on to Trudy for any additional comments. So look, as of the 30th of June 2020, we had $3.4 million in the bank. We secured, as we noted, a $5.3 million through our entitlement offer. And in addition, we continue to expect an R&D grant that we expect in the coming months of between $1.5 million and $2 million, which is consistent with the previous R&D grants that we received. When we start to look at our sort of cash burn position given our need to have continued capability as I think I mentioned before, our current kind of cash burn is between sort of $500,000 to $600,000 per month. So from where we are today, with ongoing prudent cost management and what we hope is a steady but sure ramp-up in sales, we think that gives us a reasonable runway to ramp up sales and drive the business forward. Trudy, any comments?

No. That covers it very well, Tim.

How much inventory do you have, Tim? Batteries you have?

Inventory at the moment is, just a moment, we've got about $2.2 million of finished goods and $3.4 million of raw materials.

I think on a broader comment, Dean, I think what we can say is that we have a good healthy level of current batteries in stock to fulfill, I think, increasing demand and sales as we prepare for Gen3. So we're quite pleased with the position that we've got now, even with us reducing a lot of that activity in Thailand to support Gen3. So we believe that we do have stock to support sales and then allow for a good ramp-up of sales before we bring Gen3 on in terms of production.

Okay. And do you find you've got inquiry to sell current Gen2 batteries or is everyone going to wait for Gen3 now?

No, I think we're actually continuing to receive very good inquiries around Gen2.5. I mean, people are aware of Gen3, but what we have emphasized, as I said before on the call, in terms of the end customer, there's really no difference in terms of performance. So the customer should be reasonably agnostic in terms of whether they received a Gen2.5 or a Gen3. What we are doing is where we see opportunities, we will continue to aggressively price those Gen2.5 batteries to make sure that we don't have any overhang of stock as we start to ramp up on Gen3.

Do you actually cover your costs in selling them or is it a bit of a loss leader still?

I said, Dean, to bring it down to what we believe is our net realizable value of those batteries, so we will keep assessing that. But it's also keeping in mind where we see the Gen3 being priced as well going forward.

There are no further questions at this time. I'll now hand back to Mr. Harris for closing remarks. Pardon me, we have a question from James Hansen with JCD Hansen Super Fund.

Okay. I wish you well. I'm very happy with the progress you're making. But from a worst-case scenario point of view, if this COVID-19 situation continues for 12 months or more without a satisfactory vaccine and a large number of the populations and markets potentially affected, to what extent is the operation in Thailand able to be automated and to be upscaled at short notice to a significant increase in volume without necessarily being restricted because of personnel restrictions because of COVID?

So James, perhaps I can answer that question across a number of ways. In terms of the current COVID situation in Thailand, the country seems to have managed that reasonably well over the period. There's no real restrictions today in Thailand versus what we might be seeing, unfortunately, in Victoria today. So we think those conditions hopefully will continue for as long as we can. With regards to Gen3, I think the real challenge that we see navigating Gen3 and the launch of Gen3 is just the restrictions on international travel that we now see. But we have a number of contingency plans, and our current assumption is that travel with some of our engineers up to make sure that the retooling of that is done appropriately will not happen until at least early next year. So that's part of our planning. I think in terms of your broader question about the COVID situation in Thailand and/or globally getting much worse, look, I don't have a crystal ball within which that we can judge that. And certainly, we keep a very strong eye on both dynamics. And if we have to make some further adjustments to our business strategy to make sure that we can endure a longer period than we currently believe, then we'll continue to do so. What I would say about the current situation on COVID is that our sales and sales opportunities seem to be quite resilient. Particularly in telco, I think you would have seen the bandwidth requirements in some markets has gone up exponentially because everyone has been working from home that are still driving demand in the telco sector. And in some markets like Western Australia and Victoria, we still continue to see some very exciting opportunities working with our partners there. So it's one of those situations, I think, James, that we're continuing to keep a close eye on, and we'll adjust our strategy to reflect if the situation continues to deteriorate in the future.

All right. One more question, if I may, please. In terms of your much improved production in Thailand, roughly what's a comparable time for producing a unit as it was previously in Mexico or wherever compared with producing 1 unit in Thailand?

I don't have those specific numbers to me, James. But what I can say is that the productivity of that line is a light years ahead of where it was with our third party in Mexico. I think in addition to that, the quality metrics that we start to see in the reject rates are very, very pleasing from our side in terms of our ability to produce quality batteries. The key thing that we believe now is, it's really all about volume and scale and efficiency. So we have the capability now. We have the facility to be able to ramp up. And so part of that calculation of that kind of additional 30% down is based on further productivity improvements that we think that we can achieve with Gen3 from today's Gen2.5 battery because quite simply -- excuse me, it's going to be a much simpler battery for us to manufacture and get further production efficiencies through that factory.

Your next question comes from [ Kris Chandra ] with Chandra Investment.

I was just wondering what the plans are in relation to integrating the Gen3 batteries in the ZCell product and what the likely time frame for that would be?

So going back to Gen3, overall, Kris, I think as we've noted, we're targeting partnering in customer trials by the end of this calendar year. Furthermore, we expect a moderate ramp-up in production than where we are in the first 6 months of 2021. So with regards to ZCell and/or kind of high-end residential customer opportunities, we'll be scaling up from that time frame. So I hope that answers your question.

Your next question comes from [ Chris Kasper ] of JD Isaac Livestock.