RedFlow Limited (RFX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Redflow Limited H1 FY '21 Results Briefing Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tim Harris, CEO. Please go ahead.

Thank you, Rachel. And good morning, everyone. Thank you for joining Redflow's half year call for FY 2021. I am Tim Harris, the CEO and Managing Director of Redflow. And I'm joined again today by Trudy Walsh, our CFO and company Secretary. Earlier this morning, we released our results plus an ASX release and presentation. You can find it on the ASX Announcements platform. We advise attendees can use this presentation as a guide to our commentary today and will also provide an opportunity for questions and answers. The last 6 months of 2020 had been a period of huge progress for Redflow. Despite the ongoing impacts of COVID, particularly in some of our offshore markets like South Africa, I believe we've navigated these waters well and have made significant advances across a number of fronts. We have combined prudent cost management while retaining the capability to deliver on immediate battery orders; as well as progressing our Gen3 program, which investors will know as core to our commercial success. We have combined core advances in our chemistry and battery performance understanding through our R&D program; as well as delivering on several innovations which have had a direct and relevant impact to our current value proposition, several of which were core to our recent Optus announcement. Finally, we delivered on an important series of customer wins, which underpin a strong order book for delivery in the coming months, along with a very exciting sales pipeline. Critically, these sales provide a new set of capabilities that will allow us to expand our offering into other customers and larger-scale markets. We're also seeing some of the underlying factors that will underpin growing demand for energy storage accelerate. This bodes well for the growing emergence of the need for longer-duration storage, which requires [ regular-cycling, hard-working ] energy storage systems such as Redflow. Various governments and government bodies, commentators, developers and end customers are recognizing this in their plans; and we're seeing growing recognition a lithium-based batteries are perhaps not the only solution. Overall, I believe the outlook for Redflow is very promising, and we are very excited about the prospects for Redflow in 2021 and beyond. Going to some of the key highlights that we achieved in the last 6 months, and that's on Slide 3 in terms of the presentation. On the sales side, revenue has been steady, but we are now in position to execute on a number of confirmed orders in the coming months. We now have an order book in excess of 100 batteries, which does not include the batteries required for the Optus rollout. We will go into the Semini grains and Optus work later on, but as I mentioned previously, these set us up for other sales opportunities we're working on for later in the year. As with any company at the point of commercial acceleration, COVID has meant that we needed to undertake a series of cost measures while seeking not to undermine our long-term opportunity which investors have spent so much time and effort in getting us to. We've been able to successfully access various government support measures such as JobKeeper, which have been extremely helpful. Combined with the successful $6.9 million capital raise we undertook in 2020 and the R&D tax rebate we secured in December, we have improved our cash position going into 2021. And so we believe that our investment thesis has unchanged, and I would also argue it has significantly strengthened over the last 6 months. We are one of the leaders in flow battery technology globally with an enormous depth of technical knowledge and practically knowledge around our chemistry and battery solution. We have a solution, the manufacturing capability and capacity as well as reference deployments and a growing set of blue chip customers to accelerate our market position in 2021 and beyond. As before I go into the future, I would like to take a few minutes just to provide a company overview for those who might be unfamiliar with our story. We are the global leaders in the design and manufacture of zinc-bromine flow batteries. Our headquarters are here in Brisbane, whilst our manufacturing facility is in Thailand. As an aside, while we all know the COVID situation remains dynamic, the [ code ] environment in Thailand remains pretty stable. One report that was highlighted in The Sydney Morning Herald earlier this week ranked Thailand 4th in top 10 countries in their assessment of handling the COVID-19 pandemic. Australia was ranked 8th. So [ despite ] our current position, we're quite happy, but we will continue to monitor the situation carefully. As you all know, significant effort and investment has been put into Redflow to where we are today, including by many people on this call, but I think we're now very well positioned to capitalize on the growing opportunity before us. As I noted, there are a number of dynamics that we believe provide a strong positive momentum for the prospects of the company, and these are noted on Slide 7 of the presentation. Despite variations with government policies to a green energy future around the world but I think accelerated significantly by the new U.S. administration, we believe that the private sector continues to set a leadership and a pathway to a green energy transition. Companies in the commercial and industrial sector account for around half of the world's in using electricity. The RE100, as highlighted on the slide, is a leading force for this and contains some of the largest companies in the world, with a number of leading Australian companies such as Woolworths, ANZ, Mirvac, Westpac and the commonwealth bank. Together, combined with new governance guidelines and regulators around assessing and managing risks and environmental factors, we provide strong impetus for new energy and vehicle energy storage. Secondly, the increasing amount of renewable energy in the energy system is having a profound effect on the shape and demand -- shape of demand and supply. An example of this is in South Africa, where the time where negative prices occurred during the day has increased by 100% since late 2020. This pushes the need and opportunity for energy storage solutions to shift this energy to where it's needed most. California, as an example of a economy that has very ambitious emissions reduction targets, has estimated that they will require between 45 and 55 gigawatts of long-term energy storage requirements by 2045 to address this need. And as we've noted, various government bodies have recognized this dynamic and are now actively seeking solutions as part of their technology plans, notably including the Australian Technology Investment Roadmap which was published last year. As such, we've seen renewed interest by potential customers and government bodies around flow battery technologies and the role of Redflow in the ecosystem. All these dynamics point to an acceleration of the underlying demand for energy storage systems but also a potential role of medium- to longer-term-duration solutions where flow batteries thrive. As we have talked about before, some of the fundamentals that we have around our core chemistry provides an important competitive advantage. Our zinc-bromine solution has a fundamental cost advantage over other chemistries; as well as having a number of operational benefits over other flow battery chemistries, including energy density and efficiency. And as we scale up that business, we think these fundamental cost competitive benefits will really come to the forefront. As investors will be familiar, we also have a number of characteristics to undermine our value proposition alongside a strong IP and trade knowledge portfolio that's been built up over 10 years. And a number of these, such as tolerance for high temperatures and thermal runaway and cycling characteristics, have been explicit reasons by customers such as Optus in their decision-making criteria. And so our target markets have not changed, including telco; remote area power systems; and commercial, industrial and utility, where we can focus on energy-focused applications that need frequent cycling [ and ] environmental climates that really reflects the key positives around our solution. I'd now like to hand over to Trudy to talk about the specific details of our financial results.

Thank you, Tim. Our half year FY '21 results do not actually reflect all the progress Redflow has made over the last 6 months. Revenues have been impacted by COVID with inability to travel, significant lockdowns in Australia and some of our target market. Despite these challenges, we have still recognized revenue of $431,000. At December 31, we also had orders on hand of 97 batteries. Delivery and revenue for these orders is expected to be before the end of this financial year. As Tim mentioned, this does not take into account any of the batteries for the recent announcement of Redflow's participation in the federal government's mobile network hardening program in conjunction with Optus. Other income was up last -- up from last year with the $1.6 million R&D rebate; $100,000 from the Export Market Development Grants, this is a reimbursement of a portion of our costs associated with export sales in FY '20; and $669,000 of JobKeeper payments. These were passed-on in full to employees. The JobKeeper support ensured Redflow was able to retain key employees and focus on our Gen3 development. Raw materials and consumables were down $1.1 million from the first half of FY '20. Raw materials and consumables are not only our costs of goods sold but also include the immediate expensing of a portion of the Thailand factory costs. Maintaining the facility with the ability to build our factories with scale that's required is essential to our growth strategy. It also includes materials used in our R&D programs and all freight costs, which are immediately expensed to the P&L. Other expenses are down approximately 12% mainly due to a reduction in business development and travel costs. Payroll expenses are on par with the prior corresponding period. This is due to an increase in the share-based payment expense resulting from the expansion of Redflow's long-term incentive program to all executives and some senior management in the second half of last financial year. It should be noted this is not cash out. And while the expense is recognized each year, there is still performance criteria to be achieved over the next few years before these shares vest. Professional fees, [ I will note ], are also higher. Again this is due to a noncash expense for options issued in consideration for investor relations advice during our recent successful capital raise. Moving on to the balance sheet. Redflow finished the financial year with $8.7 million cash at bank. This was boosted by the receipt of the R&D tax rebate of $1.6 million in December. In prior years, these [ files ] had been received after 31 December, generally in January. It should be noted finished goods include battery for orders on hand where the customer is not ready for delivery yet. Moving on to our cash flows. Our net cash outflow for operations is down 79.5% from the prior corresponding period, a result of a substantial increase in cash inflows from the prior corresponding period in grants. Once again, the R&D grant was received in December. And with a significant decrease in payments to suppliers and employees. Cash at bank was also bolstered by the $6.9 million successful capital raise in the second half of 2020. I want to again note some of the aspects of these results do not reflect the true progress Redflow has made in the last 6 months with the development of the Gen3 battery to trial stage, a number of orders on hand for delivery in the second half of this financial year and the recent announcement of Redflow's participation in the federal government mobile network hardening program with Optus. I'll now hand back to Tim.

Thanks, Trudy. Now on to a forward-looking view. Before I do that, I think it's probably worth highlighting a couple of elements around recent announcements and our view on their strategic importance. To start. The Semini grains project, we think, is a major milestone for Redflow, based on the announcement that we made at the end of December 2020, which is very exciting for us. It's very exciting because we believe that it advances our credentials in the agricultural space, again working with a fantastic partner like TIEC in Western Australia, but critically it also provides the groundwork and the capability for designing, installing and deploying large-scale, high-voltage battery systems to end-customers. We are currently working with TIEC on the final design of the system. And we will be targeting this rollout in the coming months, but clearly we're aiming to use this design for other customers that we see in our pipeline that we are currently engaged with. Secondly, we've made some real recent material progress in confirming our environmental position. As investors will know, our environmental credentials and product stewardship are important benefits and differentiator when we compare ourselves against other chemistries, notably lithium. We don't want to say -- solve today's energy problems only to cause one in the future. Our recent work with Ecocycle, a leading Australian recycler, has confirmed that we have a product that can be recycled using standard and established recycling pathways. When compared to the current costs and the technical challenges of recycling lithium, most of which we believe have to be taken offshore out of Australia to recycle, we believe this is an important proof point and differentiator around our solution. In addition to this work, we are continuing our own work on the potential to refurbish and reuse the electrolytes from our batteries. As investors will probably realize, this has the potential to significantly add to our value and a potential commercial proposition to our customers in the future. As we've flagged regularly over the last 12 months, the impact from COVID has also provided us with the opportunity to accelerate our work on our Gen3 product. Investors will be well aware that Gen3 is a critical foundation for our commercial success and a key stepping stone to the future where Redflow is employing volume manufacturing approaches to significantly further reduce costs. We're very happy with progress to date, albeit with some challenges around travel limitations to Thailand, but we achieved the first customer trial, which commenced in December last year in Mount Tamborine. We're delighted with the progress of the program to date. And that customer trial is providing us important feedback and information for any further iterations, and we look forward to keeping shareholders updated as we progress this critical initiative. Depending on the progress of our program and the shape and trajectory of customer demand, we currently anticipate commencing production in Thailand of Gen3 in the second half of this year. We would note to investors that we still retain the capability and capacity to manufacture our existing Gen2.5 batteries in material volumes. Lastly, I'd just like to speak about our announcement that we made with Optus earlier on this month. As investors will know, Optus already uses Redflow batteries in a deployment in the environmentally sensitive Daintree forest which has been deployed since 2019. We had a number of discussions with Optus over the last 6 to 12 months. And we're delighted, a couple of weeks ago, to announce our work with Optus to utilize our batteries in the mobile base station upgrades as part of the STAND program. And we were delighted to host the Honorable Minister for Communications, Urban Infrastructure, Cities and the Arts, the Honorable Paul Fletcher, to the Redflow offices a couple of weeks ago. So the first of those systems has now been deployed at a black spot site in Lexton, Victoria. And there are plans to deploy Redflow batteries in at least 56 other black spot sites as part of the Optus network. Critically, we believe -- critically, this leverages some of the innovations that we have highlighted previously, notably our Industrial Battery Housing unit; and the ability to work alongside existing lead acid systems, which was a great interest to the minister because that didn't mean that they had to throw away those assets that the government has already paid for as part of the black spot -- the original black spot program. So we're now working with Optus management to determine the rollout of that schedule and how many batteries per site, but this is we're very excited about this and believe it's a key groundwork for us for our engagement with other telcos around the world but other applications in other markets; for example, in California where people will be aware of the bushfires that, that state had received and had to battle with over the last kind of 12 to 18 months. But critically we believe that this announcement highlights our ability to deploy batteries at scale and extend the battery backup in the mobile space, [ endorsed not only by ] the federal government but also a blue chip customer like Optus. So in terms of our priorities looking forward, they're pretty simple. We want to, clearly, deliver on the Optus program, Semini grains; and also continue to progress our market -- our delivery and market opportunities in markets like South Africa. We have an exciting set of sales opportunities and business development activities in our pipeline that we'll be looking to progress over the remainder of 2021, but also as I've noted, we now believe that, based on some of the work we're doing with Semini grains, we can now explore and progress into larger-scale megawatt-hour-plus systems in 2021. Gen3 is clearly part of our focus. It's going along well, and we're focused on continuing that work for target production in the second half of this calendar year. And at the same time, we know and understand that we still need to manage our costs prudently while also positioning ourselves for growth. In addition, we still have a number of strategic investment and partnership discussions that are ongoing, and we look to -- forward to briefing investors at the appropriate time as these progress. So in summary. Like many other businesses in the world, the last 6 months of 2020 presented a number of challenges for us and our customers. I believe that we've adapted to this environment pretty well. And we've made real and significant and tangible progress across a number of fronts that position us well for accelerated growth in 2021 but also deliver long-term shareholder value beyond that. I believe that the last 6 months have strengthened our investment profile significantly. I'm very excited about the road ahead and I look forward to sharing our progress over the coming months. I'll now provide the opportunity for anyone on the call to ask any questions.

[Operator Instructions] Your first question comes from [ Peter Stevenson ], a private investor.

Congratulations on, yes, some very encouraging results. I just have a few questions, 2 about the Optus deal. So when are we likely to hear about the rollout plan? And what's the kind of broad time line of converting those 56 sites into revenue that's going into Redflow's [indiscernible].

Yes, good question, [ Peter ], and probably the same question that many other investors would like to ask. Look, we -- clearly the bushfire resiliency program is a key priority for the government and for Optus. We are due to sit down with them next week to go through that rollout and the prioritization in the progress and the total number of batteries, so I expect we'll have some clarity in the next -- within the next 3 to 4 weeks that we can provide to investors both in terms of the number of -- the total number of batteries that we expect, and that will -- probably will be a range, but also the timetable within which we expect to have that rolled out. But at a high-level view, at the moment, I expect a vast, a significant number of those rollouts will occur this calendar year.

Great, okay. [ We'll at least provide ]. And in terms of with Optus and other Australian telcos, I mean, this STAND project is great, but it seems very much like a one-off kind of opportunity. Do you see that this is going to lead to other forward sales growth opportunities with Optus and other telcos in Australia?

Look, we certainly hope so, [ Peter ]. I mean I think the -- there's a couple things about this announcement that I think are important for Redflow and our investors. One, it's not an immaterial number of batteries that gets rolled out for a critical customer program. And so it provides, I think, some legitimacy from a blue chip customer like Optus that has been using and watching the performance of our battery over the last 12 months based on that system that we've deployed into -- in the Daintree forest, as I mentioned earlier. Certainly, the network hardening program is not just confined to Optus. And we hope that we can engage with other telcos, around their own network hardening program in Australia, to demonstrate what we can do versus other potential battery solutions, but broader than that, I think even above and beyond the telco space. Fire resiliency is a key issue here in Australia for the agricultural sector. It's a key issue for the commercial and industrial sector, so we think the applicability of what we're doing has a broad application not just in telco but beyond. And I think, as I mentioned before, California even beyond Australia is a good example about that, where I believe they have a regulatory mandate to provide up to 72 hours energy storage backup for telco sites there that are vulnerable to bushfires. So look. We think this program and especially our participation in the government program provides a huge sort of stamp of support for our technology in applications in the telco sector in Australia but also beyond but, more -- broader than that, in other potential industries and applications where they are conscious of things like fire risk and need resiliency.

All right, okay. All right, it sounds good. And my last question is the Clean Energy Finance Corporation has just confirmed closing for the financing for Victorian Big Battery storage. I think [indiscernible] provided a loan of $160 million for 300 megawatts storage. I'm not sure of the exact numbers. So I know there's talk about looking at large-scale deployments in the megawatt sort of range. With opportunities -- in Australia, I mean given the sort of COVID and there's still a lot of uncertainty about travel restrictions [ internationally, as that ] impact on growth, I mean, do you see these sort of examples, the lithium-ion batteries with 300 megawatt hours of storage? But I mean, are we getting a look with these kind of opportunities? I mean, for example, do we put in expressions of interest for these kinds of opportunities? Or is it sort of still at an early stage, but on the radar there's growth opportunities within Australia?

Yes, good question, [ Peter ]. So look, certainly we have the ambition. And I think, as I mentioned before, we believe that our modular approach can scale quite easily to megawatt-hour type systems. And we're doing some tune-up work and work with other third parties to help to validate that. I think the question becomes our credibility to be able to go and target those large hundreds of megawatt hours from where we are today. And whilst I think we're interesting, the feedback we often get is [ needing ] a couple of further proof points at the megawatt hours size and scale. That means that we can be entertained as part of those discussions. And we also have to be prudent, I think, of -- being a small company, of being involved in some of those tender activities that can often suck up a huge amount of time and effort. So there's very much a risk-reward ratio in terms of our ability and willingness to participate in those based on our belief about winning, but more broadly, I think there is growing interest in Australia, in particular both in end customers and government bodies, about the growing requirement for medium-term energy storage solutions. I think, as I stated previously, South Australia had 4.5 hours on average of negative pricing this year, which really points to a massive influx of renewable energy into the system that has nowhere to go. So we think the energy storage market environment is shifting from a focus on frequency response, grid stabilization type applications, more to medium- to longer-term energy storage solutions because of that kind of duck curve that is now occurring in the Australian system and beyond. So we think that places us very well in terms of the characteristics of flow batteries [ and this type thing ] and performance characteristics that we have. And I suppose, over the next 12 months, a key thing for us is to build credibility into that megawatt-hour space, that we can go and target those larger, much larger, megawatt-hour systems that we think our chemistry is inherently capable of doing.

[Operator Instructions] Your next question comes from [ Norman Weiss ], a private investor.

Tim, it's [ Norman Weiss ] [indiscernible]. Just following up on the last question: When would -- when do you think Redflow will be in position to provide the Gen3 batteries for these large types of [ active ] projects that have been announced by recent -- Australian energy companies?

Look, as I said before to [ Peter ], we're a 10-kilowatt-hour 48-volt battery, so the key thing for us is to prove that we can operate and perform as required at larger-megawatt, large-voltage type systems. And I think, as I mentioned before, the Semini grain project is a really critical, important stepping stone for us to get to that point and to prove to our investors and customers that the battery performance characteristics of our battery, following our modular approach, has a value proposition at that megawatt-hour size and scale. So that's, I think, are some important proof points and validations that investors should look out for over 2021 as we hope to expand our presence in that larger commercial and industrial megawatt-hour type space that I think gives us the right to play in those larger systems. So that's the first step that we'll -- we're going to be focusing on over the coming months.

Okay. So you're saying we're still some short-term time away from that [ point ].

Yes. Look, I mean, I think, if you start to look at it from an end-customer point of view, many lithium systems are well used to doing, yes, hundreds of megawatt hours across a number of different deployments here in Australia and elsewhere. Outside of vanadium that does some selective large, large megawatt-hour type systems, other player batteries are really constrained at this kind of single-megawatt-hour type space. So we think that's the immediate focus for us, to go and target that market in terms of creating a number of reference customers and deployments at that kind of size and scale, but what I would say is that when -- as I referred to in my deck around some of the core raw material competitive advantages that zinc-bromine has as well as the performance characteristics against other flow batteries, when you combine that with the emerging recognition of new solutions which are required in the 4-plus-hour energy storage duration space, I think that sets us up extremely well from a strategic perspective.

Okay. So really we're just looking at single megawatts at this stage rather than 100 megawatts.