RedFlow Limited (RFX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the RedFlow Limited Half Year Financial Year 2023 Financial Results. [Operator Instructions] I would now like to hand the conference over to Mr. Tim Harris, Chief Executive Officer. Please go ahead, sir.

Thank you, Vaishnavi, and good morning, everyone. So thank you for joining RedFlow's half year financial results for FY '23. As usual, I'm joined this morning by Trudy Walsh, our Chief Financial Officer and Company Secretary. We released a presentation earlier this morning to accompany our results, which is available through our website. I intend to refer to the presentation throughout IFRS. As a broad summary, our results today are a reflection of the progress we have made over the last 6 months, where we have delivered on a number of projects and built a very exciting pipeline of opportunities that reflects our focus on commercial -- on the commercial industry market and larger systems. As noted previously, whilst a number of target projects have been slower to turn into sales than we had originally hoped, we are very well positioned to benefit from the shift to lithium alternatives and then fundamental shift to longer duration requirements, which is increasingly a focus in our target markets. At Slide -- as highlighted on Slide 4 of the presentation, we're pleased that we achieved close to $700,000 of revenue for the first half, along with the current battery back order of approximately 1.3 megawatt hours. We have a qualified pipeline of nearly 2.8 gigawatt hours of opportunity, which is a significant increase over the last 12 months. We now have over 250 deployments in the field and have delivered over 3 gigawatt hours of energy through our batteries. Our cash position is strong, and we can expect this to be further bolstered by expected R&D tax refund of approximately $2.3 million, which is expected in the coming months. This puts us in a good position to convert these key opportunities and begin initial scaling of battery production through our Thailand facility to execute on these key projects. Turning to market forces. We have seen a huge positive shift towards the opportunity of energy storage solutions for the stationary market, energy storage market in the last 6 months. [indiscernible] concerns, longer duration requirements, lithium supply bottlenecks and price increases and broader geopolitical forces have added to the [indiscernible] for robust, proven stationary energy storage solutions. In Australia, as highlighted on Slide 6, forecast last year by the Australian Energy Market Operator, AEMO, show a massive increase in the need for dispatchable energy storage of 640 gigawatt hours by 2050 as solar PV and wind growing this year, which are sources of generation on the group. Storage is essential to meet core renewable targets and recent concerns around the maintenance issues and early retirement of coal firms, power generation have accentuated the concerns around system stability that only energy storage console. And it is increasingly being recognized that the requirements around energy storage is also changing. Earlier this month, AEMO provided an update to their July 2022 Integrated Systems Plan was highlighted a specific need around longer duration storage solutions to mitigate growing reliability risks. We've highlighted that experts on this report on Slide 7 the firmer commentary stating that there remains an urgent need for additional commitments to occur, including in dispatchable projects such as long duration storage to satisfy reliability requirements over the next 10 years. A clear reference to an increasing risks of instability and the specific benefit that investment and longer duration storage will bring by the Australian market operator is inherent to my knowledge. These dynamics is coupled with increasing awareness and concerns around the high level of dependency on a narrow supply chain for renewable products and solutions, including energy storage, which has the potential to undermine national security and achievement of renewable in its targets. This occurred both in our target markets in the U.S. and Australia. Earlier this month, Prime Minister Anthony Albanese told the National Press Club that the domestic production of batteries and other clean energy technology was a key element of the government's plan to shore up the nation's sovereign manufacturing capacity that was so exposed during COVID-19 pandemic. This focus can also be seen in the Australian government's National Battery strategy, which was launched earlier this year, which commits to a plan to scale, compete and enable local manufacturing for energy storage. The plan is currently open for consultation, and we believe that we have a key role in enabling Australia to meet its renewable energy storage and strategic needs. We are planning on actively contributing to this important initiative. Closer to home for RedFlow, in October 2022, the Queensland government released its Energy and Jobs Plan. This $62 billion plan has a goal to reach 70% renewable energy in the state by 2032. Battery manufacturing is noted as a critical part of the plan with a commitment of $500 million for grid and community batteries. The Queensland government is also developing a Queensland battery industry strategy and a discussion paper identified the need for 22 gigawatt hours of energy storage for grid or highly grid and off-grid projects and an additional 50-gigawatt hours across the rest of Australia. Again, long-duration scale batteries have been highlighted as a key enabler of Queensland meeting its renewable energy plan. This is exactly the sentiment and opportunity that RedFlow has been diligently building towards. We have a battery design for medium to longer duration requirements, a proven operational profile at megawatt scale and a capability to demonstrate our ability to meet the need for larger systems. Specifically, in Queensland, we are well positioned to help deliver the government's plan. As investors will know, we are a proud Brisbane headquartered company that has invested much of your invested capital right here. Our product is ideal for Queensland conditions. Our core R&D and corporate functions allocated here, and we have continued to invest in our ecosystem in Queensland, including our recently announced collaboration with the University of Queensland. In addition, the fact we are a zinc-based battery underpins a broader ecosystem. Australia has 20% of the world's zinc deposits and in Queensland, 4 of the 5 largest zinc mines in Australia operate here, supporting over 5,000 mining jobs. As we grow, we look forward to tapping into this great resourcing capability and contributing to the economic and environmental credentials of our local zinc industry. We look forward to active engagement with the Queensland government around its energy and jobs plan about how we can deliver and support its goals, including supporting its public commitment to supporting local Queensland companies to deliver its plan. We were there -- we're delighted to have signed an MOU with Energy Queensland earlier this week, which is a further step in the part for our -- state in our collaboration to date. Energy Queensland is 100% government-owned corporation with a number of operating subsidiary companies reporting to the Queensland government. The memorandum of understanding highlights the working relationship we have developed to date with EQ, but also quickly identify the potential for RedFlow flow battery solution to be an important complement to existing lithium projects. There is still a lot to do, but this announcement is an exciting and important step in the public validation of our technologies and the opportunity EQ see some partnering with RedFlow. We look forward to updating investors as this relationship progresses. It's also worth noting that we are in discussions with a number of other large-scale energy providers in Queensland and across other states around their long duration in the storage needs. The future for RedFlow in Queensland and in Australia looks bright. In other key markets, we're seeing further stimulus and focus on energy storage. The major step change we have seen in the last 6 months is the transformational impact of the Inflation Reduction Act in the U.S. As shown on Slide 10, the U.S. government expects that over 230 gigawatt hours of energy storage will be required by 2030, double of what was expected without the IRA and 14x 2021 levels. The IRA provides generous credits for storage projects and additional credits for local manufacturing and where projects are located in disadvantage or locations significantly impacted by the energy transition. Importantly, storage projects do not need to be coupled with solar assets to be supported, broadening and deepening a range of storage assets and applications that may be eligible. As noticed in previous addresses, the impact on our own activities and pipeline in the U.S. has been rapid and material. We've seen a notable uplift in inquiries and storage projects look more economically beneficial and end customers and partners are seeking to better understand looking alternatives. We conveyed investors some months ago that we have been anticipating these dynamics, and we have been diligently analyzing and qualifying U.S.-based suppliers of critical materials over the last 12 months. Depending on the nature and profile of our pipeline moving into firm customer commitments in the coming months, we are targeting to develop some level of operation capability in the U.S. by the end of 2023. Needless to say, our U.S. team has been extremely busy with some of the highlights noted in Slide 11 of the presentation. We made the conscious decision to invest in the world-class U.S. team in California on the back of winning our 2-megawatt hour deployment with Anaergia. And we made rapid progress in one of the largest energy storage market in the world. We now have a number of multi-megawatt hour U.S. deals in our pipeline, which we invested heavily, which will represent a major catalyst for our profile and industry credibility. In addition to focus on key deals, we have significantly raised our visibility industry, developed a number of strong EPC partnerships, including with leading organizations [indiscernible] last year and have continued engagement with a number of industry stakeholders, including the U.S. Department of Energy and the California Energy Commission around specific projects, but also potential scale, manufacturing, funding and financing opportunities. We have continued to invest in critical U.S. industry standards, including UL certification, which has now moved to Phase 2 of its program. Our 2-megawatt hour projects with Anaergia's Rialto has continued to provide high value. We crossed over 12 months of operation earlier this year, and a system has continued to perform as expected. As per our plan, the site has provided us with a key reference site in the largest energy storage market in the U.S. with multiple hosted visits by end customers, EPC partners, investors and government entities over the last 12 months, including even last week. We've also used the learnings in this deployment into our new Energy Pod200, which is the cornerstone of our goal to deliver megawatt systems with a competitive, scalable modular approach. We remain engaged with Anaergia site continuing to provide high value around our ability to deploy our solutions to other sites, including the Victor Valley site, which we announced last year. I'm confident, therefore, that our focus on the U.S. market and investment in our U.S. capabilities will generate a significant return for RedFlow in 2023. Our focus on growing our pipeline in margin yields can be reflected in the numbers that we presented on Slide 3 of the presentation. As of today, we have qualified nearly 3 gigawatt hours of opportunities, which represents a 900% increase from 12 months ago. These are opportunities where we have engaged with end customer or EPC, undertaking detailed technical and commercial discussions and presented our commercial framework and initial pricing. We also have over 20 gigawatt hours of opportunity at the prospect stage, where we have some level of engagement with the end customer, project developer and EPC and there is joint interest to continue engagement. Some of the opportunities at this stage a gigawatt scale in their nature. Furthermore, on Slide 14 it's important to note that we have nearly 400 megawatt hours of opportunities, which are at what we call advanced stages. This represents nearly 4,000 [indiscernible]. This stage is where we have engaged in detailed technical solutions, providing pricing that is capable to be contracting for and a delivery and implementation timetable agreed. As expected, these are the opportunities where we are focusing most of our scaled resources and are opportunities where we feel are most static to our technology solution and provide the shortest pathway to material orders. An example of projects in our pipeline is further detailed on Slide 15. As investors will recognize there are a number of opportunities on this slide were featured in our last update last year. These are key opportunities where we have continued to progress and maintain a good level of confidence that they will translate into firm battery commitments in the near future. It's worth noting that our previous sales pipeline presided last year contained references to the Bureau of Mineralogy and Southern Ocean Live in Australia, both of which were subsequently announced. We also have a number of new opportunities highlight, including our Californian microgrid and Community energy projects, which are multi-megawatt in size and additional utility opportunities in the remote group and utility scale in Australia. It's an exciting list and one way we feels well-suited to our market focus, storage solution and delivery capabilities. It's also notable that the major of these projects are for multimegawatt-hour systems. We do still focus on smaller projects and have a strong pipeline of smaller kilowatt hour scale deals. But we also recognize that success in driving our target economics and industry competitiveness relies on scale. And we have a proven design and operational reference site that demonstrates our capability at megawatt hour scale that we can deploy from single megawatt hours to multiple teens of megawatt hours. As noted previously, our focus on enabling larger systems is a natural extension of our focus on the C&I market behind the meter applications and key opportunities. As noted on Slide 16, over the last 6 months, we have developed a core industrial solution for scaling small systems using our 40-kilowatt hour QuadPod and also our energy Pod200 for larger-scale systems. As highlighted, our 200-kilowatt hour system is an iteration of the 160-kilowatt hour energy pod, we designed and deployed for the Anaergia project and applies our core 10-kilowatt hour modular battery in a rapid scalable form. We have indicated key learnings from this early iteration to size the system to use 20 ZBM3s batteries and enhance performance and cost competitiveness. This solution now forms the core of our market offering and can be deployed a single 200-kilowatt hour systems and for multi-megawatt hour systems using exactly the same building block. That reduces complexity. It lowers the cost of RedFlow and our customers, drives higher revenue for us to our integrated system, which includes enclosures, racking, wiring converters and provides the foundation for a scalable business. And when we are speaking to customers, developers or EPC, we are doing so on the basis of the clear value proposition as highlighted on Slide 17. These include power and energy advantages of our core zinc-based chemistry, a modular scalable approach, the depth and breadth of our operational experience, our ability to scale our time and facility to meet immediate derivative needs and also a cost-down pathway that we can achieve with scale up. The energy storage is large enough for a wide range of energy storage technologies and solutions to be successful, and we feel we are well placed to be a global leader in our space and leverage the strong foundation that we have built. One of those foundations is our ISO 9001 manufacturing facility in Thailand as contained on Slide 18, We have a highly experienced general manager in place and a motivated, stable and competitive workforce for much to build. We're also delighted to host the Australian ambassador to Thailand, Dr. Angela Macdonald early this month and are grateful for the ongoing support from the Australian government in Thailand and other markets like the U.S. The last 3 months of last year have brought a few challenges to our production schedule with some disruptions caused by an estimated supply issue with one of our suppliers and a yield issue in one of our stack processes. These issues have now been impressed and we're about to target production levels to deliver our backlog and position ourselves to scale up while closely managing working capital requirements. We have further invested in engineering resources and effort around our scale-up plan in terms of design requirements to our ZBM3 and focus on solving anticipated scale-up problems to ensure that we can achieve around 80 megawatt hours annualized production around the end of 2023 as our pipeline crystallizes into firm battery commitments. Our business has continued to build a number of reported deployments in the C&I sector supporting critical infrastructure as covered in the slide today. We were delighted to deliver a third system to the Knox City Council following a successful deployment for 2 systems at childcare centers in 2019. Other councils can learn much from the council's commitment to energy-efficient buildings and a tangible to plan to deliver on its climate response plan. We completed the third Bureau of Meterology sites in rural New South Wales, followed by delays due to extreme major events across the state in recent months. Between 8 and 10 batteries have now been deployed at three radar locations in Yeoval, Hillston and Brewarrina and form part of Bureau of Meterology renewable hybrid power supply projects, incorporating hybrid solar, battery and diesel solutions, which has a goal to provide backup power for renewable resources for up to 12 hours following grid outage. We look forward to exploring further opportunities with Bureau as part of their renewable energy program. Finally, we have delivered around half of the batteries for our 560-kilowatt hour deployment at the iconic Southern Ocean Lodge in South Australia and are targeting to deliver the remainder in the coming months. These 3 projects will reflect the progress RedFlow at night creating a robust proven solution, which are supporting critical infrastructure and provide important reference points for other projects, whether in Australia, the U.S. or other potential markets. I'd now allow to hand over to Trudy to cover the financial summary.

Thank you, Tim. Our half year FY '23 results are reflective of RedFlow's focused on commercial and industrial sales and the building of a solid pipeline. It should be noted that the prior corresponding period included the final recognition of revenue for the Anaergia project, where revenue was recognized over time. Other income is attributed to an uplift of the FY '22 R&D tax rebate after the initial accrual for the FY '22 was included in the 30 June 2022 financial statements and an accrual for the R&D tax rebate for the first half of FY '23. Raw materials and consumables are $2.5 million. 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 with some lower factory efficiency during the final factory transition to producing the Gen3 battery. Our materials used in our R&D program and all freight costs, which are immediately expensed to the P&L. We are finally starting to see some return to more reasonable freight rates after the covered pandemic increases. Other expenses are up approximately 20%. This reflects RedFlow's investment in business development, increased staff with expansion of the business development sales team in the U.S.A., increased travel and marketing costs, including having boosted a number of renewable energy trade events and increased energy engineering capacity, supporting the ongoing development of the battery and supporting products such as the Pod200 and QuadPod. Moving to our balance sheet. RedFlow finished the half year with $11.4 million in cash at bank. Our trade receivables includes the accrual for the FY '22 R&D tax rebate, receipt of these funds is expected in March. The increase in property, plant and equipment reflects expenditure over the past 12 months to build our manufacturing capabilities. Intangible assets are the continued investment in RedFlow's IP and our patent portfolio. The significant reduction in trade and other payables is a result of the finalization of the equity issue obligation under the agreement signed with New Technology Capital Group in August 2021. Moving now to our cash flow. Net cash outflows from operations is up 38% from the prior corresponding period, a result of lower receipts from customers as the H1 FY '22 included progress payments associated with the Anaergia project. An increase in payments to suppliers and employees due to an increased expenditure in travel, marketing and business development and increased staff to support the growing sales pipeline and ongoing battery development. Cash at bank has been bolstered by the $10 million from a placement and a share purchase plan completed in August, September of 2022. I once again note, some of the aspects of these results do not reflect the progress RedFlow has made with a growing sales pipeline, which following feedback from customers, it is anticipated to convert into orders. I'll now hand back to Tim.

Thank you, Trudy. So when you take a step back, as highlighted on Slide 27 on the Investor Day, we believe that we have very strong foundations alongside some high growth opportunities that we've been focused on. We have a unique market proposition that is increasingly reflecting market requirements as the industry looks to longer-term solutions and also the safety concerns and availability over lithium supply. And some of the value propositions that we have developed over the last 12 to 24 months, including our unique hibernation mode is increasingly being very attractive to some of our end customers. We have a large market that we're targeting on, but we are also focused on the key markets in Australia and the U.S. that we think provide the best short-term focus in terms of traction -- commercial traction and ramp up. And we now have an attractive pipeline that we're focused on converting. Underpinning that is a manufacturing capability, supply chain and scale-up plan that is able to meet increasing customer orders over the next 6 to 12 months. So before I summarize our priorities for the second half of the year, I would like to address what is the core issue on many people's minds, which is our current share price. [indiscernible] I'm frustrated with our decline over the last 6 months. However, I must also recognize that the reality is that this is what the market is telling us around its perception of the prospects of the company as they see it today. We are not alone in this with a number of listed non-lithium unity storage companies, summering some similar or greater market declines in valuations over the last 4 months. What we do believe is that many of the efforts and sales opportunities we have noticed today, many of -- which are many months in the making, will generate commercial traction in the near term, which will translate into building a business that has a healthy, profitable future in a multibillion-dollar global market, which is growing rapidly. As noted earlier, some of the deals we are targeting to close in the last year are still outstanding. So that does not mean that our lost to a competitor or have been canceled. Instead, they have often been slowed by internal customer approvals, extended financing arrangements or other external factors such as interconnection agreements or regulated environmental studies. These are often difficult for forecast or project and I take responsibility to being too optimistic around accepting customer indications of their expected timing last year. Many of our key deals are still progressing, and based on our discussions with end customers and their project partners, we still believe I presented the best possible pathway for RedFlow to achieve short-term commercial traction and long-term shareholder value. Other developments such as the MOU we signed yesterday with Energy Queensland represent a positive milestone in the recognition of our solution and an important step to securing important projects and material orders with utility providers in Australia and elsewhere around the world. I firmly believe, therefore, we have a growth strategy that will generate the scale economics we need and our investment today in a core set of capabilities provides the best opportunity for short- and long-term commercial success. So as we look at our key priorities over FY '22 on Slide 20 of the presentation. As noted, our target markets are increasing with an increasing focus on the RedFlow proposition, including government support in the U.S. and Australia, which is focused on energy storage. We have invested intelligently over the last 12 months; we can position ourselves for the opportunity. We have developed a rich pipeline of qualified opportunities with a number of key multi-megawatt deals in advanced stages. We have a product and a manufacturing facility that underpins that pipeline and can scale up to immediate needs, and we have continued to invest selectively and keep capabilities to enable us to target those opportunities and also execute against them. So as we look forward over the next 12 months, our priorities on deal conversion, scale up, enabling commercial returns and execution. We want to convert the deals that are in advanced stages in our pipeline. We want to also advance other key strategic opportunities that we think are very important to us. We want to develop and solidify existing EPC relationships and broader new ones to enable low-risk execution and also scale up to Thailand to reflect our delivery commitments, but also look beyond Thailand for further growth opportunities and potential U.S. localization plans. And we want to invest in selectively in growth. So I think from where we are today, it's been a great 6 months. We don't think that's reflected in the past, but we said before, we believe we have a rich opportunity of qualified opportunities in the pipeline that we're focused on converting. Vaishnavi, I will now hand back to you to ask any questions from the audience. Thank you.

[Operator Instructions] The first question comes from [ Taaj Vasanth ] with [indiscernible].

I noticed in the MOU yesterday with Energy Queensland that was talk of the complementary nature of lithium and flow batteries working together. We've obviously seen some success from hybrid systems in the U.K. I was wondering if you could talk to maybe the rationale for end customers and hybrid systems. And then secondly, there's significant so of RedFlow, if this were to become a more popular project upon?

Yes. Thanks, [ Vasanth ] , for the question. So look, I think when we start to look across the landscape of any storage solutions and technologies, clearly, lithium is the technology and chemistry that's most established and current energy storage projects are most implementing. But we don't see our role in the landscape of energy storage systems to be a zero-sum game. It's not either or. We see very much a profile where the flow batteries and the RedFlow solution can complement the characteristics of lithium, which is much more suited to more power orientated applications, such as kind of grid stabilization. So a good example about this is the Australian government's low emissions technology road map. We have highlighted the role of lithium providing stability type services, but also have highlighted the role of flow batteries to provide that kind of energy arbitrage. So the ability to effectively and efficiently shift energy from when it's generated during the day to when it's needed most, which is at peak demand times, which is usually in the evening. And flow batteries are ideally suited to that and I think you're seeing alongside these kind of geopolitical elements that I talked about before, a much increase -- more increasing awareness about the complementary role that alternative energy storage technologies can provide. So that's a strong validation. Companies like EQ don't do things quickly, but we are very satisfied with the MOU that was announced. We think that represents an important milestone, not only in terms of our relationship with EQ, but also the validation for other utility providers that we're engaged in as well that some are likely to has publicly validated the role of RedFlow -- potential role of RedFlow in their ecosystem. So we look forward to exploring projects with them. Projects may include community type batteries, but also larger-scale utility systems on the distribution network that can play that kind of arbitrage role that flow batteries are ideally suited to.