RedFlow Limited (RFX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Redflow Limited Half Year Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tim Harris, Chief Executive Officer. Please go ahead.

Thanks, Andrea, and good morning, everyone. Thank you all for joining Redflow's First Half FY '22 Results Call. I'm Tim Harris, the CEO and Managing Director of Redflow, and I'm joined as usual today by Trudy Walsh, our CFO and Company Secretary. As part of today's update, we -- earlier this morning, we released a presentation to accompany our financial results. You can find it on our website and the ASX announcement platform. And we'll use this presentation to guide you through our results followed by an opportunity for questions and answers. First of all, as listeners will no doubt understand, it has been a fairly challenging last 48 hours here in Brisbane as one of the largest storms and rainfall since 2001 hit our great city. As of 9:00 this morning, we are not seeing any immediate impacts from the severe weather on our operations here apart from access challenges to our site where there has been some localized flooding. We continue to monitor the situation carefully, especially with potential dam impacts with the safety of the Redflow team our top priority. Our thoughts go to our shareholders, friends and our family during what is a very challenging time for many people in this great place. Well, more broadly, I'm delighted to be addressing you today after what has been a very exciting 6 months for Redflow. We have made particularly and significant progress against our strategy, particularly in the United States. I'm also particularly excited to share with you the unveiling of our new look today. In the presentation, you'll see our new branding, as highlighted on Slide 3, and also urge those listening after the session to go and visit our new website. It contains some great materials, including a new video case study on a critical Anaergia site, and also a short video explaining our world-leading zinc-bromine flow battery technology. Critically, as a contemporary brand -- new contemporary brand and look that reflects our journey to date but also confidently sets out our vision to be a global leader in clean energy storage with some of the safest, most sustainable and proven energy storage technologies available in the market. It also reflects our role in helping [indiscernible] the largest challenge of our generation and accelerating a carbon-free future. We're still busy doing a wee bit of polishing on the site that has been impacted over the last [ 36 ] hours with no Internet connectivity for some of our team, but I'm really excited about how -- around this new positioning for us. And so before we dive into results, I thought it's worthwhile to highlight the 4 core messages around our market position, and this is contained in Slide 4 of our presentation. Firstly, we are an industry leader with proven technology and proven safety credentials. Secondly, we see an enormous market opportunity for Redflow in our core markets such as the U.S., which is growing at a very high rate. Thirdly, we have some great momentum behind us with our flagship 2-megawatt projects in California but also 180-plus deployments we now have around the globe, and that's driving some very exciting opportunities in our pipeline. And lastly, we're well positioned from a strategic perspective to capitalize on those growth opportunities through our Thailand facility but also through our core cost advantage and supply chain profile. Some of the core highlights in the first half of FY '22 are contained in Slide 5 of the presentation. They include strong top line growth with revenue up by 173% year-on-year; completion of our flagship 2-megawatt project with Anaergia; ongoing investments for growth on the back of a successful capital raise; delivery of a milestone 2-gigawatt hours of energy through our battery solution, which establishes a clear competitive differentiation to other companies targeting the medium to longer-term energy storage space. And at the same time, we've continued to diligently build some of the proof points and capabilities that our customers and our market is interested in, mainly around our safety credentials and initiation of UL certification. And as we can see from Slides 6 and 7 for the presentation, it is clear that we are in a high-growth industry. Renewables are increasing as part of the power grid, which is driving new opportunities but also challenges, and increasingly, we are seeing a larger focus on medium- to longer-term energy storage solutions, and this is leading to a market that is expected to be 36x larger in 2030 than 2020. Alongside this, we're also seeing a fundamental shift in the industry that is now actively looking beyond lithium. As seen on Slide 8, supply chain challenges; appreciation of supply chain risks, noting that Russia supplies 20-plus percent of Class 1 global nickel market, which is a critical component in lithium battery; and recent high-profile [indiscernible] in Australia and other markets have provided us with a major market opportunity. As a local example, the Tesla fire in Geelong, Victoria in August 2021 triggered a warning for toxic smoke across the region and took over 4 days for the site to be deemed under control by firefighters. In California, an energy storage facility owned by Vistra Energy in Moss Landing houses the largest lithium battery in the world. The only problem is that battery packs keep on melting. Earlier this month, the facility experienced another meltdown, the second in 5 months according to local broadcaster reports. These dynamics are providing us with opportunities to engage and position our unique and world-leading flow battery solution as a viable, proven alternative or complement to lithium-based solutions. In the U.S., these dynamics are front and center and are providing Redflow with the ability to meaningfully participate in the world's largest energy storage market. As highlighted on Slide 9 of the presentation, the momentum behind U.S. policymakers and other organizations to drive alternative energy storage solutions such as ours is growing significantly with material U.S. government support becoming available for technologies such as Redflow's. Having spent over 3 weeks in the U.S. over January, which included engagement with a great number of EPPs, partners, investors and end customers in California, New York, Kansas and Texas, I'm very excited around the opportunity there. And it's not just Redflow believing this changing dynamic to be true. We are seeing and given official recognition of Redflow as a leading nonlithium solution in the market. We are very proud to have been explicitly referenced in the Australian federal government's low-emissions technology road map, which was published in September 2021. Report highlights our other battery technologies, light and zinc-bromine batteries can play an important role in our future energy ecosystem. Our participation with the Long Duration Energy Storage Council has also been highlighted in the first half of the financial year. Our membership as a foundation technology provider allows us to be part of a community that is dedicated to Longer Duration Energy Storage alongside other technology providers and large multinational organizations like Google, Microsoft, BP, Shell and Siemens. It has allowed us to present on our perspectives and credentials to leading organizations such as the [ Australian Energy Capital ] alongside other members like Rio Tinto and knowledge partner, McKinsey, which I was honored to do last week. And we are also stepping up our market visibility and activities, and I was delighted to participate last week with the American Australian Association Forum on Commercializing Climate Innovation alongside senior U.S. industry executives from the U.S. Department of Energy and U.S. National Science Foundation. So all of this is allowing us to educate the market and position ourselves as a leading, proven energy storage solution with a number of unique characteristics such as extended performance, flexibility, safety and sustainability, as highlighted on Slide 11. And this is not just about comparing ourselves against lithium. One of the key takeaways I took from our U.S. trip was our core differentiation against our other peers focused on a medium to long-term energy storage market, and these are highlighted on Slide 12. We have one of the highest energy densities of nonlithium batteries commercially available based on our analysis of publicly available information. We have one of the largest deployments and amount of operation experience amongst our group, and we have world-leading agility in our performance through our hibernation and flexibility through our modular approach. We should be very confident that the many years we invested in our technology, experiences in the field position us very well in our target markets. And it's some of that operational experience that is enabling us to showcase our credentials to our current and prospective customers. Slide 13 of the presentation highlights some on the analysis on our deployment with Optus, one of Australia's leading telecommunication providers. Our system and the environmentally sensitive Daintree Forest in Queensland, which was deployed in 2019, has created great commercial value but has also generated a very meaningful impact on carbon emissions. That's an example of a real deployment with significant operational history working in real-life conditions to have a material, proven customer, commercial and sustainability impact. And the other things that we've been busy with over the last 6 months is validating some of our safety credentials. As seen on Slide 14 of the presentation, we have worked with some of the world's leading testing and engineering companies such as DNV who have validated the fire testing of our batteries around flash point and chips short-circuit testing. This testing and validation sets us up really well for our growth strategy, particularly in the U.S. market, where fire risk is a major concern for some of the customers we are currently engaged with. So our market strategy has continued to develop over the last 6 months and in particular has validated that we have a very strong solution and value proposition in the commercial and industrial sector. And our poster child for this is our 2-megawatt hour deployment for energy in California that we completed. We have already hosted a number of target EPC and end customers on the site with another hosted visit scheduled for next week. We continue to work closely with the Anaergia team around optimization of the system and configuration of site's operations and [indiscernible] micro grid controller, and we're also exploring how we can help with their growth plans and renewable energy strategy. Prudently, Anaergia is excited -- Anaergia provides us with a critical reference point from a megawatt-hour scale deployment who is working successfully at high voltage in the largest energy storage market in the world. As stated to investors, we have put significant time and effort over the last 6 months into our growth in the U.S. market. Momentum is building, and we believe it is the right time for us to actually pursue opportunities there and invest in necessary capabilities that will underpin and enable our success. A significant part of this growth strategy is building a world-class team, and I'm delighted to announce Mark Higgins is joining the Redflow executive team as our President of Americas as well as Chief Commercial Officer. Mark has been supporting Redflow as a strategic adviser over the last few months and has a deep history and experience in the energy storage and renewables industry. Mark is based in California and are joined by Paul Kelleher as VP of Project Engineering and Business Development. Paul's last role was with Primus Power, another zinc-bromine and flow battery company based out of California and also has deep experience in our industry and specifically in flow batteries. We've also recruited [ Brandon Bremer ], who joins us as [indiscernible] to support our strategy development and market engagement. All 3 of these gentlemen are based in California, one of the key target markets in the U.S., and having spent the best part of 3 weeks with the team, I'm thrilled to officially confirm their roles today and are very excited at what the U.S. market holds for us under Mark and his leadership. And so before I pass on to Trudy to talk through the financial results, I wanted to give everyone an update on Thailand and Gen3, as seen on Slide 19. There's little question over the last 12 months has drawn up a number of challenges for our Thailand time facility as a result of COVID-related travel restrictions and supply chain challenges. I'm pleased to say I believe many of these challenges are now largely behind us, and we can look forward with some more confidence and optimism compared to 6 months ago. Our team can now travel to Thailand with limited quarantine requirements, and a number of our Brisbane engineering team traveled to Thailand last week to begin preparations for Gen3 introduction. In parallel, we recruited [ Eric Sennett ] as a new General Manager of our Thailand facility in December. [ Eric ] is a Thai national with a sense of manufacturing and ramp-up experience. And we've also executed on a number of initiatives to increase our productivity through the introduction of automation, particularly with regards to our separate preparations, and we are actively analyzing facility requirements for potential demand beyond the Thailand capacity of 60-megawatt hours. We remain on track with Gen3 commercial manufacturing introduction in Q4 of FY '22. [indiscernible] presents a very positive and important progress. I would note that even with Gen3 launch, we will continue to have to navigate carefully the supply chain, freight and cost increases we have seen from COVID. This is affecting most companies in some shape or form around the globe. We therefore expect the supply chain and freight landscape, both in terms of potential delays, materials and potential costs, may continue to be challenging for the next 12 months and one we will need to carefully manage. I'll now hand over to Trudy to talk through the financial results.

Thank you, Tim. Our half year FY '22 results reflect ongoing growth of Redflow. Revenue's up 172% from the prior corresponding period, and this was supported by the completion of the Anaergia project, our largest deployment to date and a number of other sales in Australia. At 31 December, we also had orders on hand of 105 batteries. The delivery and revenue for these orders is expected to be before the end of this financial year. The other income accrual is for R&D tax rebate. It is lower than the prior corresponding period, which included JobKeeper payments and federal government cash boost payments. Raw materials and consumables are up $585,000 from first half FY '21. Raw materials and consumables are not only our cost of goods sold but also include the immediate expensing of a portion of the Thailand factory costs, materials used in our R&D program and all freight costs, which are immediately expensed to the P&L. COVID, as Tim mentioned, has adversely impacted freight costs for inward and outward goods. Other expense is also up. This is mainly due to the increase in payroll expenses and professional fees. Federal costs are higher due to staff returning to pre-COVID hours and pay rates. Staff took significant hour or pay reductions during COVID. We've increased staff in line with our growth projections and noncash impacting share-based payment expense for the Redflow's long-term incentive program. While this expense is recognized each year, there is still performance criteria to be achieved over the next few years before these shares vest. Professional fees are higher again due to a noncash expense or options issued in consideration for Investor Relations advice during the recent successful capital raise, increase in U.S. consultancy to assist with the increased interest from the United States and commencement of UL and other certifications necessary for further expansion into the U.S. Moving on to the balance sheet. You'll note that the 30 June balance sheet has been restated. This was a movement from trade and other payables equity and relates to the share placement agreements signed prior to 30 June. A change in opinion by our auditors in relation to the treatment of a portion of the transaction resulted in the [ requirement ] of this restatement. This restatement is purely balance sheet-impacting, does not impact the P&L and has no cash impact. Redflow finishes the half year with $14.5 million cash at bank. It should be noted our finished goods include battery for orders on hand where the customer is not ready for delivery. Our assets -- current assets includes the accrual for R&D tax rebate. In the prior half year, we had actually received the payment before 31 December. Moving on cash flow. Our net cash outflows from operations is $4 million higher than -- is up $4 million from the first half of FY '21 as a result of the nonreceipt of the R&D tax grant in the first half of this year. We will be receiving that in the next few months, and also the nonreceipt of JobKeeper payments; an increase in payments to suppliers and employees due to increased working capital requirements for increasing production, and this is partially offset by an increase in receipts from customers. Redflow has increased capital expenditure with the investment in new and additional equipment to ensure we can deliver on the growth opportunities that are in front of us. Cash at bank has been bolstered by the $10.9 million from the successful entitlement offer completed in August. Final payments for the Anaergia project were received after 31 December 2021. Our last 6 months have seen Redflow commence delivering on its growth plans and prepare to deliver on our future growth opportunities. I'll now hand back to Tim.

Thank you, Trudy. So looking forward on -- as contained in our presentation on Slide 25. We have a world-class solution with a world-class team and a market that is now actively embracing alternative energy solutions such as ours. We have the ability to rapidly scale based on our Thailand facility, and we see some exciting sales opportunities that we are targeting to move to close over the coming months. Some of the things that we want to focus on is clearly our Gen3 launch and move that in production in Q4, accelerating our U.S. presence to support our current sales pipeline and driving further growth while also investing for growth but maintaining the view that we need to prudently manage our costs. We have a number of strategic investment and partnership discussions currently underway, and we'll plan to extend those. And we continue to plan to extend our technology leadership with a focus on our electrolyte, our separator and also our supply performance as we look to ramp up our activities in the last half of FY '22 and look forward to FY '23. So I want to thank shareholders for their continued support, and we believe this is a good consolidated result that sets us up very well for the remainder of this year and into FY '23. And Andrea, I'll now hold the floor open for any questions that any of the audience might have. Thank you.

[Operator Instructions] There are no questions at this time. I will now hand back to Mr. Harris for closing remarks.

Thank you, Andrea, and I expect that everyone that's potentially slightly distracted this morning given the current situation in Brisbane. So again, thank you, everyone, for your support. We are very excited in terms of the future that's before us. We believe that we're investing in the right capabilities and strengths going forward to deleverage the huge opportunities that we see in the energy storage market, and we look forward to keeping you updated as we continue to make progress over the remainder of this financial year. Thanks, everyone, and please stay safe out there. Thank you.

That concludes our conference for today. Thank you for attending today's presentation, and you may now disconnect.