RedFlow Limited (RFX) Earnings Call Transcript & Summary

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

Thank you, Amy, and good morning, everyone. Firstly, thank you all for joining this morning's FY '22 results call. As usual, this morning, I'm joined by Trudy Walsh, Redflow's Chief Financial Officer and Company Secretary. Earlier today, we released our full year results and accompanying investor presentation, which I intend to refer to regularly during my address. The format of this call will follow the structure of previous results calls. I will run through a summary of the business, including some of our achievements and key highlights. Trudy will then run through the financial results, and I'll then summarize what we see ahead of us for FY '23 and beyond. We will then provide an opportunity for questions. So the last 12 months have been very important for Redflow. We have continued to execute on our growth plan that we outlined to shareholders last year and made some significant progress against these goals. Our position can really be broken down into 4 key pillars. Firstly, our addressable market is accelerating dramatically and can be measured in the tens of billions of dollars, which is growing at a double-digit rate. Critically, the shape of the market is changing as customers, developers and other market participants look for lithium alternatives with increasing recognition of the role of flow batteries. Secondly, we remain confident of our position as one of the global leaders in medium-duration energy storage and flow battery technology. That position has its foundations across core technology advantages conferred by our zinc-based chemistry, our long history of battery development, a modular-based approach and our deep operational experience. When we look across the landscape of stationary energy storage, we don't see many other companies that have this combination. And we know well from our own journey that, that experience is difficult to replicate easily or quickly. Thirdly, we now have a platform for scale. With a combination of our transition to our Gen3 product that we launched in July and our Redflow Thailand facility, we have a low-risk ramp-up trajectory that we can execute against immediate opportunities and also drive economies of scale into our business. We have selectively invested in key manufacturing, engineering and sales capabilities that we consider critical to achieve our growth plan. Lastly and most importantly, we've been working hard to develop and execute on a customer sales pipeline that as we convert this pipeline into orders will allow us to achieve a rapid growth trajectory and confer a new level of industry systems for our solution. So on Slide 5 of the investor deck, we have listed a number of achievements over the FY '22 financial year and some more recent highlights. These include customer sales of $1.6 million and cash receipts from customers of $2.6 million in FY '22 as we focus on commissioning our flagship 2-megawatt-hour project in California, Gen3 launch and strategic sales opportunities. A confirmed order backlog of 173 batteries as of the 28th of August 2022. This includes the recently announced orders with the Australian Bureau of Meteorology and the iconic Southern Ocean Lodge in South Australia. Following on from the successful installation and commissioning of our largest single global deployment to Anaergia in California, we also signed a letter of intent with Anaergia for a second 5.8-megawatt-hour battery project with target completion in 2023. We've also made ongoing progress against some of our other key customer opportunities in our pipeline, which if successful have a potential to generate material battery orders. Critically, we launched our Gen3 battery into production in early July 2022. This has been a multiyear project for Redflow and is a cornerstone of our growth strategy. We also achieved a milestone of 250 active deployments globally. Over 2 gigawatt hours of energy has now been delivered through Redflow systems with over 10 million hours of field operations since 2018. We also successfully validated Redflow's safety profile for the global standard 9540A. This is an important value proposition of the Redflow system as industry concerns around safety risk of lithium-based systems continues. Earlier this month, we announced a master services agreement with global engineering company, Black & Veatch. This landmark agreement opens the door for Black & Veatch procurement and deployment of Redflow batteries in the U.S. and other global markets. We also made ongoing progress across key programs critical to further market acceptance, notably, UL certification for our Gen3 battery in the U.S., announcement of new inverter partners and ongoing negotiations with a global reinsurance company. Last but not least, we were delighted to be announced as a finalist in the Queensland government 2022 Export Awards for the winners to be announced in October. Our cash position of $9 million at the end of June has been bolstered by a successful $5 million placement, which included some leading Australian small cap institutional investors and also our current share purchase plan. I would like to thank all investors who have participated or are intending to participate in this growth. As I noted earlier, the market for stationary energy storage is continuing to undergo a fundamental shift. Whilst lithium remains a preeminent battery technology, the industry attention is increasingly turning towards proven commercial [ agendas ] capable of rapid scale-up that can also perform at longer duration discharges. This has been assisted by some of the structural imbalances with lithium demand and supply, and there is little doubt that lithium supply stationary energy storage is going to be a major challenge over the medium to longer term as the demand for EVs continues to rise. California is expected to vote on Thursday to ban the sale of new gasoline-powered cars by 2035. And The New York Times also note that at least 12 other U.S. states could adopt this new regulation soon and that 5 are scheduled to do so in the new year. This will have a massive impact on demand for lithium batteries and further requirements on electricity goods for dispatchable renewable energy. When combined with increasing demand for longer duration, increasing concerns around the safety of lithium-based systems and energy security issues, global dynamics are moving rapidly towards Redflow's core strength and commercial readiness. The market is massive. It is growing at an exponential rate. The market is shifting in its needs. And the recent commodity costs and availability challenges is further expanding our window hub opportunity. This growing demand and opportunity for flow batteries is not just our view. The importance of flow batteries are being recognized by the current U.S. Administration Secretary of Energy, Granholm, specifically highlighting the importance of flow batteries for the United States' ability to meet their quick storage needs. In Australia, the government has also referred -- referenced flow batteries as an increasingly critical technology as highlighted in the Australian government Department of Industry, Science, Energy and Resources Low Emissions Technology Statement [indiscernible] on mid-November 2021. Zinc-bromine battery in our flagship 2-megawatt-hour deployment in California was specifically highlighted in the report. Moreover, this current momentum is going to benefit from the massive stimulus that is expected from the U.S. Inflation Reduction Act, which President Biden recently signed into law. The Inflation Reduction Act is probably the most consequential climate change legislation ever enacted by the U.S. government and includes some USD 370 billion of spending on climate change. Storage is a key factor in the stimulus. We expected to have a very positive impact on a number of projects in our pipeline through stand-alone energy storage and investment tax credits or ITCs and it has also generated a number of new sales opportunities. It also supports our strategic focus over the last 12 months to explore localization across a number of components in our supply chain to also benefit from being classified as being made in the U.S.A. When combined with the recent U.S.-Australian clean energy partnership, I believe we are uniquely positioned to leverage these transformational changes in our industry. The key to our success remains our batteries, which we have developed over many years. Our core operational performance profile, [indiscernible] discharge, sustainability, safety and our unique hibernation feature provide a strong value proposition to the industry and our customers. When compared with other lithium alternative peers such as zinc, Canadians and iron-based flow battery systems, we also believe we have a number of key competitive advantages, including energy and power density, operational experience, flexibility and deployment and a low -- below raw materials cost profile. As we have noted to investors previously, we've been focusing on the development of our business in the U.S. market as well as continuing to make progress in our core Australian market. In FY '22, we recruited a California-based team to lead our sales and business development and have developed a number of important partnerships in one of the largest energy storage markets in the world. One highlight of this strategy is our recently announced master services agreement with Black & Veatch as highlighted in Slide 15 of the investor deck. As we've noted previously to investors, a key pillar of our growth strategy is the development of a strong ecosystem of engineering, procurement and construction partners, and we are delighted to partner with Black & Veatch, one of the world's leading engineering firms. Black & Veatch have already installed more than 2.5 gigawatt hours of energy storage with customers and critically recognize the growing importance of flow batteries in the energy ecosystem. This agreement will streamline the procurement and deployment of Redflow batteries on behalf of its customers, and I can confirm we are already collaborating with the Black & Veatch team on a number of exciting opportunities. Back in March 2021, when we announced the 2 megawatt-hour sale to Anaergia, we stated our goal was to ensure this deployment would act as a major beachhead for our entry into the large California and U.S. energy storage market. In January of this year, we officially launched the system with the support of Anaergia executives, the Australian government and executives from the California Energy Commission. Since then, we have hosted a number of prospective customers, developers and industry stakeholders to the Rialto site with a significant number of opportunities being generated and advanced significantly from having this key reference deployment. Critically, Anaergia has also been delighted with the system, our core technology and our company. Our deployment at the Rialto site has led us to announcing an LOI to further service 6-megawatt-hour projects in a new site in Victor Valley in California. The developer has been appointed, design for that site has been finalized and the project is now going through necessary permitting and approval processes. Once successful, we expect deployment of the system to occur in the second half of 2023. Critically, we've also achieved the California Energy Commission goals for the project who have partially funded the project for Anaergia. California has allocated $380 million over the next few years to fund the deployment of long-duration energy storage projects like flow batteries to meet the summer peak needs in the state. So we feel we are very well positioned to work with the projects with the support of this important stakeholder. Back in May 2022, we took a step of disclosing selected sales opportunities in our pipeline for the first time. This showed a number of exciting new deals, but also the changing shape of our pipeline on the back of proving our batteries can scale up to multi-megawatt hour deployments and increasing market acceptance. A number of these opportunities are strategic in nature with necessary longer sales cycle that we feel are worthwhile to pursue as they represent the opportunity to achieve a step change in sales and market validation. Since May, we have continued to progress a number of these opportunities, including the Southern Ocean Lodge and Bureau of Meteorology deals in Australia that we announced earlier this month. The Southern Ocean Lodge is one of Australia's most iconic sustainable ecotourism destinations, and we are delighted to be chosen as a battery energy storage system of choice due to our world-leading operation profile, safety and recycling credentials. The recently announced Bureau of Meteorology is also a landmark deal for Redflow. It is the first time we have been directly selected by an Australian government entity. Our batteries will form part of the Bureau's renewable hybrid power supply projects to dramatically reduce diesel consumption and enable extended operations in the event of a power failure. We were also delighted to announce this morning that the initial order by the bond has been increased from 18 to 26 batteries for installation across 3 sites. Our long-standing partner, 720 Electrical, will deliver the system with the first deployment targeted to next month. We believe these deployments will be a key reference point for the bond, but also other government and private sector opportunities for Redflow. In Australia, our focus on the commercial and industrial market is showing strong momentum with a number of exciting opportunities across the energy, manufacturing, mining and industry sectors. We also remain engaged with a number of energy operators who are slowly but surely starting to explore energy storage options that meet their needs and longer duration requirements. So in summary, our sales pipeline has grown significantly over the last 12 months, both in terms of scale and quality, including a number of exciting opportunities at some of the world's largest companies. Our order book now stands at over 1.7 megawatt hours of batteries for target delivery in FY '23, and we are focused on converting some of the strategic deals in our pipeline into orders in the short to medium term. As part of our strategy, we've also been working on critical industry credentials that will materially assist our sales efforts and customer engagements. This has included demonstrating our safety credentials through testing our battery against the global standard 9540A that has been verified by leading independent engineering firms and also progress against the U.S. UL listing in the U.S., which is considered critical for a large-scale rollout. We also announced a series of new inverter partners that will now -- that will enable Redflow battery deployments across our target markets. And we've also significantly progressed our engagement with a global reinsurance company where large customers may wish to purchase reinsurance against their warranty. I look forward to sharing progress on these capabilities in the coming months. A material growth in our pipeline and ability to convert opportunities into sales and revenue is underpinned by a wholly owned ISO 9001 Thailand facility, which has been operating since 2018. After successfully navigating the challenges of COVID in 2020 to early 2022, we are well positioned to execute on a step change in growth that our business development efforts are generating. This is enabled by a new highly experienced general manager that we recruited earlier this year who is busy implementing lean manufacturing systems, the introduction of Gen3 into our production environment and a clear plan to scale the 80 megawatt hours by the end of 2023 as customer demand increases. Given the positive nature of our pipeline and customer engagements, we are also actively exploring a number of options to scale beyond the 80 megawatt hours per annum capacity of our current facility with the goal of achieving manufacturing capacity of up to 500 megawatt hours by the end of 2025. The shape and trajectory of this expansion will be determined by customer commitments and demand profile, but we want to be ready for it when it comes. As many investors on this call will recognize, our Generation 3 battery has been a multiyear program for Redflow. This progress was significantly challenged by the COVID-19 pandemic and restrictions on travel. So we were delighted to announce its introduction into our production environment in July after extensive development and testing. Gen3 will deliver a significant reduction in production costs, enabled through a 50% reduction in part count and a 40% reduction in production time. In addition, we have continued to invest selectively in more engineering resources and also key machinery over the last 12 months to enable production ramp-up and productivity. As noted on Slide 17, this includes a new high-specification press in Taiwan, a new computer numerical control machine for precision tooling in our Brisbane facility and a new injection molding machine to drive cost efficiencies through new production approaches. Looking back to 2021, I am proud of what we achieved as a company over the last 12 months, and I would like to thank our talented team for their efforts. When we walked through our results 12 months ago, we have highlighted our ambitions for the U.S., the importance of our energy sale and large-scale, high-voltage megawatt hour design and the need to prudently navigate through an ongoing COVID environment where infections in Thailand were getting 20,000 cases a day and supply chains and shipping was significantly disrupted. Today, we have a fantastic U.S. team, a growing presence with multiple gigawatt hours of sales opportunities in our target markets, a proven large-scale, multi-megawatt hour system for large deployments and a manufacturing facility that can rapidly scale up our new Gen3 batteries to meet this growing demand. We have invested in establishing a platform for growth, and we've established the momentum to make for a very exciting 12 months ahead and long-term future. I'll now hand over to Trudy to run through the financials.

Thank you, Tim. Revenue for the second half of the year was lower than the first half with revenue for the full year down by 27% compared to FY '21. The final revenue recognition for the Anaergia projects supported revenue for the first half, with revenue for the second half lower on the back of the anticipation of the release of the Gen3 into production in July 2022. Our order backlog at 30 June was 71 batteries. It is currently 173 batteries with a growing pipeline of potential orders. Other income is the accrual of R&D tax rebate or R&D expenditure in FY '22. Noting that in FY '21, Redflow also received JobKeeper payments. Raw materials and consumables are lower by $550,000 compared to FY '21 on the back of the lower revenue. 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 cost. This is higher than normal due to lower production with the introduction of Gen3 into the production line in Q4 FY '22. It's also materials used in our R&D program and all freight costs, which are immediately expensed to the P&L. COVID has adversely impacted freight costs for inward and outward goods. Other expenses are up approximately 30% compared to the prior corresponding period, mainly due to the increase in payroll expenses, professional fees and fair value adjustments. Payroll costs are higher due to staff returning to pre-COVID hours and pay rates. Staff took significant hour or pay and/or pay reductions during FY '21. Increased staff in line with growth projections, including the initiation of the U.S.-based team. There's also a noncash impact in share-based payment expense. This is for the direct options and Redflow's long-term incentive program. While expense is recognized each year there's 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 option issued in consideration for Investor Relations advice during the 2021 capital raise and options issued to fund [ FC ]. Increased U.S. consultancy to assist with increased interest in the U.S. and the commencement of UL and other certifications necessary to further expansion in the U.S. It is a fair value adjustment, noncash impacting in relation to the New Technology Capital Group share placement agreement. As supplied to the market, the last share issue will occur on the 14th of September, and this will finalize Redflow's obligations under the share placement agreement. Moving on to the balance sheet. Redflow finished the financial year with $9 million cash at bank. Since 30 June, $5 million has been received from a placement, and there was currently an SPP open to raise up to $5 million. SPP is due to close on the 8th of September. Trade and other receivables, including accrual for the FY '22 R&D rebate claims, inventory has increased due to buildup of material to the commencement of Gen3 production. Other current assets include prepayments in relation to inventory and capital equipment to support our growth plans. Trade and other payables includes a liability for the New Technology Capital Group share placement agreement. As previously noted, there has been drawdown -- New Technology Capital Group have had drawdown on this share since 30 June with the final allocation of shares to be issued next month. Our cash flow. Payments to suppliers and employees is up 51% compared to the prior corresponding period. This is due to increasing inventory in preparation for increased production and increasing staff in Thailand to support increased production. The commencement of a U.S.-based team, the removal of COVID government support payments such as JobKeeper and with easing of travel restrictions, increased travel and marketing costs. The significant increase in outflows for financing activities reflects payments made for capital equipment for Australia and Thailand to support scale-up. The proceeds from the capital raise are the funds received from last year's capital raise in July and August 2021. I'll now hand back to Tim.

Thank you, Trudy. Now on to our outlook. As noted previously, FY '22 is a year we have seen significant progress in the institution of our strategy as we have diligently put a number of key capabilities into place to realize the potential of our world-leading technology and our ambition of being a leader -- global leader in medium- to longer-term energy storage duration at gigawatt hour scale. In parallel, we have highlighted the market forces and customer interest that are shifting as they start to look at energy storage alternatives in the market. Our recently announced capital raise will ensure we can significant progress on our strategy for FY '23. The key focus for FY '23, therefore, is about conversion, execution and scale. This means converting some of the exciting opportunities that we've been working on for many months in our pipeline, scaling up Thailand and developing a manufacturing beyond our current facility as well as growing our industry partnerships, including new EPC and power system partners, and driving core economics into our business. All this needs to be done while prudently managing our cost basis and focusing our resources wisely. I remain very excited about our outlook and are confident that we have a world-leading product and solution, a great team, and we have the ambition to fulfill our potential. I look forward to keeping you all updated as we progress. I'll now turn over to any questions. Thank you, Amy.

[Operator Instructions] The first question comes from [ Gary Fast ], a private investor.

Yes, Tim. Well done on the last 12 months. Just a question regarding the telecommunications sector, which Redflow is considered to be a key market 18 months ago, with particular interest in South Africa and recently, Australia. Just a couple of questions on that. How is it tracking in South Africa? Because obviously, one of the reasons Redflow was selected was because of the [indiscernible] within the power. We haven't heard much about the progress in there. Could you just put a bit of color around that and also the future opportunities for us and whether that sector is still really relevant for us in the batteries?

Yes. Great question, Gary. And I think as we conveyed before, we did see some very significant opportunities for us in South Africa. And that was mainly due -- it was a combination things. One, it was due to the battery test and looking on the lead-acid batteries. And the second one was that there's lots of sense of pretty -- lots of sense of use of [indiscernible] generators in South Africa and other African markets that our battery is well suited to. Really, we saw some major opportunities there that really will be impacted over at a pretty significant effect in terms of our ability to access that market and really do the business development that we were wanting to see. And that was back in 2020. And I think as everyone has seen through the news, the situation in South Africa was pretty challenging for some time. Having said that, we are actually still operating those factories for Vodacom across those sites. We have some other interesting opportunities in the telco sector in South Africa as the battery issue still continues. But it's a market that we're probably approaching fairly prudently, knowing that it's still got a long sales cycle, and we've got a little bit more work to do there. So in a nutshell, we still see major strategic opportunities in the telco space and elsewhere. We think there's a lot of momentum behind us in the U.S., which is probably where most of our focus is. But we still see some opportunities to create some further sales momentum in that market. In Australia, we have executed successfully against the office 56 sites for the bushfire resiliency. Those systems are working really well and serving as a great platform for us to kind of demonstrate that hibernation feature, but also for other telco sites. So we're still engaged with customers there. To be honest, it's a longer sales cycle, but we still see some opportunities in the telco space for us. But when we look at hybrid office sites or other sites like the Bureau of Meteorology, some of those telco deployments have really served as a strong reference point for us as well. So in a nutshell, yes, we still will look at selective telco deployments. Our battery is well suited to those and we'll approach those on a case-by-case basis.

[Operator Instructions] And our next question comes from [ Norman White ], a private investor.

Just a couple of questions. The current sort of government announced during the election campaign the plan for 400 community batteries. Does this represent an opportunity for Redflow?

Absolutely. We know that there's a number of community batteries initiatives, both in the East Coast and the West Coast, that are currently underway. What I can say is that we are engaged with a couple of parties around some of those community battery projects. As you'll know, that the majority of those that have been deployed currently are lithium-based batteries. But we see there's a great role for us either on stand-alone flow batteries or potentially a hybrid model where some of those community batteries may be a combination of lithium and flow batteries together. So to answer your question, Norman, yes, we think it's an opportunity for us. And yes, we have some opportunities that we're working on in that space. Interestingly, anecdotally, what we've also heard is that one of the key differentiating factors that we have for some of those communities actually is the noise factor. We kind of heard some anecdotal reports that we hear across the industry that the noise from the air conditioning for some of those lithium-based systems is quite loud for some communities. And so from a visible basis, we think we have an advantage there. And clearly, our ability to operate at high temperatures without any active air cooling potentially adds to that value proposition as well. So yes, it's a sector that we are interested in and are pursuing some opportunities around.

And just the federal government also announced the plans to develop a battery manufacturing hub in Gladstone, I think it was. Again, does this represent an opportunity for Redflow, particularly given the post and [indiscernible] challenges faced in the manufacturing world?

Look, we often get asked, Norman, about localization and manufacturing back to Australia. And clearly, the current government is very interested about encouraging firms to invest back into Australia. And we've had some dialogues with various government entities about the opportunity for us to do so. There's a couple of things that will drive us towards that. One is just getting the economy to scale up for our battery. So it means that we can introduce more automation into our battery and probably less later because the differential in labor costs here in Australia versus Thailand is still pretty high, that by about factor of 4. So automation and, therefore, scale becomes really important. But the critical message that we're also taking to various government stakeholders that we're talking to is really around that anchor demand. If we can achieve some of that anchor demand across a number of government assets and entities, then the attraction to establish manufacturing facilities here or some kind of assembly facilities here also becomes much stronger. Look, we are a proudly Australian company. We've invested significant amounts of money here into the economy. We've had a number of -- a high degree of [indiscernible] people here in Australia, and this is where our corporate functions and our engineering functions are. And that's also where our R&D occurs as well. Now we'd love to see what else we can do in Australia, but it's really up to, I think, some of our engagements with government entities to make that attractive for us in the business case.