Carbon Revolution - H1 2024

Transcript

Operator (participant)

Good morning, and welcome to the Carbon Revolution plc's Business Update call. Today's call is being recorded, and we've allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Ashish Gupta, Investor Relations for Carbon Revolution. Thank you. You may now begin.

Ashish Gupta (Head of Investor Relations)

Thank you, operator, and thank you, everyone, for joining us today. Hosting the call today are Carbon Revolution CEO and co-founder, Jake Dingle, and CFO, Gerard Buckle. We'd like to remind everyone that this call contains forward-looking statements, including but not limited to, Carbon Revolution's expectations or predictions of financial and business performance and conditions, competitive and industry outlook. The forward-looking statements are inherently subject to risks, uncertainties, and assumptions, and they are not guarantees of performance. We encourage you to read in full the Form 20-F issued with the SEC on November 13, 2023, and the accompanying presentation for a discussion of the risks that can affect Carbon Revolution's businesses.

Carbon Revolution is under no obligation and expressly disclaims any obligation to update, alter, or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. With that, let me turn the call over to Jake.

Jake Dingle (CEO and co-founder)

Thank you, Ashish, and thank you all for joining us today. I'd like to begin today's call just by saying how proud I am of what the Carbon Revolution team has been able to accomplish up to this point. Next, I'd like to dive into today's agenda. I will start off by highlighting some of our accomplishments achieved during the first half of fiscal 2024. Following this, for those that are less familiar with Carbon Revolution's story, I'll provide a short overview of the company. Next, I'll discuss our value proposition and how we are well-positioned to capitalize on accelerating industry trends. I'll then turn it over to Gerard, who will provide financial and operational highlights. Firstly, I'd like to cover the company's background and the enormous and exciting global opportunity in front of us.

Carbon Revolution is an established Tier 1 supplier, disrupting the roughly $40 billion automotive wheel market with our highly differentiated and unique lightweight carbon fiber composite wheel technology. We've spent over a decade developing this technology and are the first and remain the only company to produce and sell carbon fiber wheels at scale to top global automotive OEMs in North America and in Europe. Our carbon fiber wheels can deliver up to a 50% weight reduction compared to conventional aluminum wheels, providing significant benefits for all vehicle types. For an EV, this weight saving can result in a 5%-10% extension of range if reinvested in battery mass and depending on the level of integration into the overall vehicle design and architecture. Additionally, reducing mass from a vehicle's wheels reduces rotational unsprung mass, which substantially improves the handling, acceleration, and braking of the vehicle.

We believe that our technology is many years ahead of our closest aspiring competitors, and we've built and protected our competitive advantage in a number of important ways. First, after more than a decade of development, we have a strong IP portfolio of 120 patents, with 84 granted and an additional 36 pending. Second, we've established relationships with major global automotive OEMs such as Ford, General Motors, Jaguar Land Rover, Ferrari, Renault, and now a premium brand of a major German OEM. Most of whom have multiple programs awarded, and this provides substantial visibility to our expected near and medium-term growth. Finally, as Gerard will discuss in more detail, with the first phase of our Mega-line project commissioned, we'll focus on gaining efficiencies, improving wheel quality, and expanding capacity on the line, particularly with new programs coming into production over the coming years.

This largely automated manufacturing process is progressively adding substantial capacity at lower cost per wheel and helping us to meet the accelerating demand from our customers, the global automotive OEMs. Carbon Revolution's wheel technology uniquely addresses the challenges faced by OEMs arising from the rapid transition to EV and the popularity of larger but heavier passenger vehicles. Tightening regulations such as the Corporate Average Fuel Economy, or CAFE targets, are accelerating the demand for innovative technologies that significantly improve overall vehicle efficiency. As a result, the automotive sector is transitioning to EVs, and vehicle mass is dramatically increasing due to the enormous size and weight of batteries required to achieve adequate range. This, combined with consumer preferences towards SUVs and trucks and increasingly larger diameter wheels, has resulted in significant structural challenges for OEM vehicle engineers.

These are challenges that we are able to provide them with a very compelling solution to. Moving now to the size of the opportunity. The total addressable market for the global automotive wheel industry is enormous. It's expected to grow from $38 billion, which it was in 2020, to almost $60 billion by 2028, reflecting a greater than 5% compound annual growth rate off an already very large base. Based on the number of EV programs we have in development, we expect Carbon Revolution's lightweight wheel technology to be an important part of the range solution for EVs, as well as supporting the efficiency, performance, and handling of conventional ICE vehicles, whose weight has steadily grown over the past four decades.

Notably, with the EV market share expected to increase from less than 5% of the global market in 2020 to greater than 20% within the next decade, we're seeing the demand for our technology dramatically accelerate as vehicle weight reduction becomes a top priority for OEMs. Carbon Revolution's lightweight wheel technology does provide a compelling solution, particularly for electric vehicles. Our carbon fiber wheels can reduce weight by up to 50%, enabling a 5%-10% extension in EV range. As a bolt-on solution, it doesn't require significant investment in vehicle design or manufacturing either. As OEM design studios trend towards larger vehicles and larger diameter wheel sizes, this new generation of massive vehicles are becoming so heavy that they challenge the overall vehicle structure.

In particular, they increase the stresses on the suspension structures, and impose other weight challenges to such an extent that our customers are increasingly telling us that using aluminum wheels is becoming impractical at these applications and increased sizes. Our solution allows studios to deliver desired aesthetics while meeting stringent OEM structural requirements and performance targets. This all creates a clear pathway to widespread adoption. Additionally, our wheels reduce road noise, which is particularly noticeable in EVs due to their nearly silent powertrains. While other sound reduction measures often increase vehicle weight, Carbon Revolution's wheel technology reduces road noise while still providing enormous weight savings. The low density, highly damped nature of carbon fiber composite structures allows our wheels to reduce road noise transmission.

We now have two EV programs awarded and in the advanced stages of development, with further programs in the pipeline, including large SUV and pickup truck segments. Carbon Revolution's penetration is now expanding beyond the performance and luxury segments to the large-scale SUV and truck platforms that represent a very significant part of our customers' current and future revenues and profits. Carbon Revolution has captured a clear first-mover advantage with our unique next-generation automotive technology. There's a well-established adoption curve for comparable automotive technologies. When introduced, new automotive technologies typically penetrate the luxury or performance end of the market first, before transitioning to full adoption as a mass-market product. You can see some great examples on slide seven. Carbon Revolution's unique technology and rapidly growing backlog of awarded business make it incredibly exciting to be engaging with our OEM customers as we progress rapidly along this adoption curve.

After more than a decade of intensive technology development and significant investment to date, we've successfully delivered around 85,000 wheels to our global customer base. Our first program was the Ford Mustang GT350R, and we've subsequently delivered three additional programs to Ford: the GT, the GT500, and the Dark Horse Mustang programs. We've had multiple programs to date with Ferrari. We have the Corvette Z06 with General Motors, the Renault Megane, Megane hot hatch, and most recently, our first SUV program to be launched, the Range Rover Sport SV with Jaguar Land Rover. Our list of programs and customers has grown with the seven awarded programs currently in development. We have had 18 programs awarded to date, and we're only just getting started.

Of these, six programs are currently in production, five programs are now in aftersales, and that is they've completed the serial production stage, and we're now supplying aftersales or spare parts for vehicles in the market. We have seven awarded programs that are in development, meaning they have been formally awarded but are not yet in serial production. Activities during this pre-production phase include virtual design, engineering, physical prototyping and testing, and then multiplying out production capacity ahead of serial production. Typically, the customer will reveal or launch the vehicle to consumers during this phase, at which point it typically becomes known that the vehicle will be fitted with our carbon fiber wheels. Just before I turn over to Gerard, I'd like to note also that we have a track record of beating OEM award forecasts.

For the four main programs completed to date, we've either exceeded or significantly exceeded the original awarded volume. This historical outperformance versus the original OEM forecasts gives us the basis for full confidence in our revenue forecasts. With that, I'll now hand it over to Gerard, who will review our financial results.

Gerard Buckle (CFO)

Thank you, Jake. I'll begin with an overview of our fiscal first half results, discuss the growth we've achieved in the last year, compare our performance to last year, and expand on our contribution margin. We are incredibly proud to report that we delivered 107% year-on-year revenue growth, selling almost 13,000 wheels with revenue of $26.1 million. The increase in revenue and wheels sold was driven by consistent run rates being achieved in existing programs and the introduction and ramp of the JLR Range Rover Sport SV and the Ford Mustang Dark Horse programs. We're an early-stage growth company with a small team, and in the half, we successfully launched two new programs and significantly increased our production capacity through the commissioning of the Mega Line. This is a significant achievement for our small team.

The Mega Line commissioning has resulted in multifold increase to our production capacity, and we will continue to bring on more capacity throughout the year. Commissioning activities at this scale do result in some disruption to operations, and as such, we did experience some additional costs from lost time, excess labor costs, and increased SG&A during the half. Adjusted EBITDA loss for the first half of fiscal 2024 was $14.5 million, compared to $12.9 million in the prior period. The increase reflects costs associated with the commissioning of the Mega Line and the new programs predominantly. As at March 31, 2024, our funding position is tight. Being an early-stage growth company, we are reliant on new capital to continue the development and launch of new programs, and building the capacity of our Australian plant.

At March 31, we had $1.7 million of unrestricted cash in bank and $35 million of restricted OIC funds in escrow. We are currently negotiating with our capital partners, OIC, for an early release of some of the reserve funds. There is no assurance an early release will be agreed, but negotiations are continuing. We are experiencing significant sequential and year-over-year growth. We posted record quarterly revenue in the quarter ended December 2023, up 177% year-over-year, and above the high end of the previously provided guidance range. Revenue is expected to continue growing on a year-on-year basis, as we continue to ramp our recently launched programs and introduce new programs.

In our financial performance summary, for the first half of FY 2024, you can see the strong revenue growth of 107% we've mentioned, and growth in our contribution margin of 58%, albeit at a lower percentage to sales. The cost of both commissioning the Mega Line and launching new programs simultaneously led to increased direct production costs and scrap costs in the half. The increase in manufacturing overheads of $5 million relates to an increase in production engineering, production supervision, scrap, and maintenance required with the capacity expansion. The team is striving to reduce costs and scrap levels in the third quarter of FY 2024 as commissioning is completed and new launches continue. As expected, there is growth in our SG&A costs from $6.3 million in the prior period to $8.1 million in this half.

That growth is primarily it primarily relates to the additional costs of being a listed company in the United States. Listing costs, D&O insurance, and other items are higher in the U.S. as compared to the comparative expense in Australia. Transaction costs of $12.1 million are related to the SPAC merger, NASDAQ listing, and related transactions. Interest expense of $7.3 million is as expected, and reflects a full half of the interest related to the PIUS line, and several months of interest related to the OIC preferred equity, which is non-cash. Adjusted EBITDA is adverse by $1.6 million or 13%, and that reflects the significant activity during the first half, as explained.

Contribution margin increased by 58% year over year in the first half of fiscal 2024 to $1.7 million, compared to $1.1 million in the prior year period. While we achieved $134 per wheel in contribution margin, we did experience $84 per wheel in one-off impacts, driven by the simultaneous commissioning of the Mega Line and the launch and production ramp of new programs. Time lost due to commissioning activities resulted in $71 per wheel of missed margin, and the overtime, the increase in overtime cost required to make up for the production impact of lost time, resulted in $13 per wheel of lost margin. Adjusting for these one-off items, our contribution margin would be at $217 per wheel or 11% of revenue.

As I said, the team is focused on improving these items in Q3 FY 2024. As an early-stage growth company, as I noted, we are reliant on new funding to continue our growth, to introduce new programs, and to expand our capacity. The capital structure currently includes a PIUS term loan of $60 million, which commenced in May 2023 and has a four-year term, and preferred equity with OIC, where $35 million was received in November 2023, $35 million is currently in escrow, and $40 million is earmarked for future expansion. As of 31 March, our funds are tight, and we've had $1.7 million of unrestricted cash. As I stated earlier, we are working with OIC at present on the early release of some of the escrowed funds.

The company also has a $60 million committed equity facility that it will be able to access following the registration of the necessary SEC documents. I'll now hand back to Jake.

Jake Dingle (CEO and co-founder)

Thanks, Gerard. Now, turning to our margin improvement opportunity. Over the near to medium term, we expect volume growth and benefits from our Mega Line automation will provide operating leverage and allow us to reach profitability on an Adjusted EBITDA basis. Importantly, the Mega Line automation provides both labor and material cost savings, as we're able to increase material yield and reduce carbon fiber waste. Initial signs of progress are already apparent.

Additional capacity is expected to be added through 2024 and 2025 as new programs come online, with the Australian plant capacity expected to expand to around about 70,000 wheels per annum in the coming years. After optimizing our manufacturing activities in our lead plant in Australia, we expect to establish new plants, replicating and continuing to refine the Mega Line manufacturing technology in lower-cost countries and in closer proximity to carbon fiber suppliers and our global OEM customers. We anticipate that these new plants will be much larger and allow further significant scale and cost benefits for many years into the future. Planning continues to progress on our first in-market manufacturing plant. We'll be assessing items such as the manufacturing configuration of new plants and potential location over the coming quarters.

Turning to our preliminary revenue for the third fiscal quarter or calendar, or the first quarter of this calendar year, where we expect revenue to be in the range of $10 million-$11 million, or an increase of 110% year-over-year at the midpoint of that range. It's important to note that the fiscal third quarter sequential decline includes the Southern Hemisphere summer holiday shutdown period, which reduces production days as compared to the prior quarter, ended December. The year-over-year growth in fiscal third quarter is expected to be driven by increased production of Corvette Z06 E-Ray, the ongoing ramp on the JLR Range, Range Rover Sport SV, and the initial stages of the ramp of the Ford Mustang Dark Horse programs. Looking towards our fiscal fourth quarter, we continue to expect revenue growth to be supported by the introduction of multiple new programs.

So to wrap up, we're very excited about Carbon Revolution's future. Our unique and innovative technology solution addresses the core challenge facing global OEMs today: efficiency. Our proven track record has allowed us to establish our position as the clear global market leader. This position is backed by many patents and broader intellectual property advantages. Importantly, we're now seeing a tipping point in the global adoption of our carbon fiber wheels, and we couldn't be more excited for the road ahead. Thanks for joining us today, and we look forward to updating you on our progress as we continue our carbon revolution. I'll now hand back to the operator to take questions. Thank you.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Thank you. And our first question is from the line of Eric Stine with Craig-Hallum. Please proceed with your questions.

Eric Stine (Senior Research Analyst)

Hi, Jake. Hi, Gerard.

Gerard Buckle (CFO)

Hi, Eric.

Jake Dingle (CEO and co-founder)

Good morning, Eric.

Eric Stine (Senior Research Analyst)

Hey. Good morning. I guess it's late afternoon for you, but yeah, good to chat. So first, so I can appreciate, you know, given timing of new programs, and I know you're no longer gonna give that calendar year 2024 outlook. I believe that outlook had been for growth of 100%+. So just curious, I mean, it sounds to me like that's you're not necessarily backing off that goal. In fact, you're confident, but this is more just due to variability of timing. I mean, is that a fair way to characterize it?

Gerard Buckle (CFO)

That's absolutely correct.

Jake Dingle (CEO and co-founder)

That's right, Eric.

Gerard Buckle (CFO)

Yeah, yeah, that, that's right. Sorry, Jake, but I'll let you answer the question.

Jake Dingle (CEO and co-founder)

Sorry, we'll need to coordinate. So yes, that's correct. A lot of our growth for this year does come in the second half, and that relates to new programs that come into production. Clearly, the actual ramp date can vary somewhat with the global OEMs, depending on their overall vehicle schedule. So it's hard to predict exactly how that's going to come through. They don't go away. They can move to the left or to the right to some degree. So really, that's the purpose of not trying to give a full year outlook this far out, Eric.

Eric Stine (Senior Research Analyst)

Yep.

Jake Dingle (CEO and co-founder)

Yeah, we're confident in the programs that we have.

Eric Stine (Senior Research Analyst)

Yep, understood. Do you... I might have missed this, but I know in the past you've given a backlog. I think the backlog as of, what, October of last year was $730 million, if I'm, if I remember correctly. I don't know, is that a number that you plan to give going forward? Did you give it and I missed it on this call?

Gerard Buckle (CFO)

No, we will plan to give that going forward, Eric. We haven't won any programs. No programs have rolled off, so, you know, the backlog really hasn't changed. But we will update as programs as we have new programs.

Eric Stine (Senior Research Analyst)

Okay.

Gerard Buckle (CFO)

If the volumes of programs change, we will update that from time to time, for sure.

Eric Stine (Senior Research Analyst)

Okay. Is, I mean, any just commentary on the pipeline since your last call? I mean, clearly, you know, even though I know there are a lot in the mainstream media talking about, you know, things being a little choppy in terms of EVs, more hybrids. You know, just curious, does that have an impact in any way, either positive or negative, and maybe what you're seeing in terms of the overall pipeline over the last, you know, call it three to six months?

Jake Dingle (CEO and co-founder)

There's a couple of factors that are important here, Eric. I think the first thing to say is that our technology, it really is a fit for any propulsion system. We've obviously mainly been seen or completely been seen on conventional ICE vehicles up to this point. The push for greater efficiency with new propulsion, whether it be EV, full EV, hybrid, or even hydrogen, that they are all pushing for efficiency. So the good news for us is, this technology is not, it's not linked just to a single form of new propulsion. It's an efficiency technology that's appropriate for any form of vehicle into the future.

The vehicles that we're on are still at the premium end of the segments, and they are, they're typically, a little less exposed to, to some of the cyclical fluctuations that we're seeing. And probably the other point to make here is that the 70,000 wheels that we've talked about getting to in our, our Australian plant is largely spoken for by the programs that we've already got in production. And so, when we talk about the planning that's underway for offshore production, that's not just our own planning for our operational footprint expansion, but it's also planning with customers as to the next generation of programs that would, that would potentially fit into that offshore plant. So, you know, we, we are in a good position in that the majority of our, our, capacity in Australia is really spoken for now.

Obviously, programs can vary up and down in terms of the actual volume, but in terms of contracted volumes, we're comfortable that we're close to having that plant filled.

Eric Stine (Senior Research Analyst)

Oh, that's great news.

Gerard Buckle (CFO)

And then, Eric, I might-

Eric Stine (Senior Research Analyst)

Disclose that.

Gerard Buckle (CFO)

I might just add on to what Jake said there. Jake said the, you know, that 70,000 wheels of capacity is largely spoken for by our current programs in production, but I'm sure Jake meant programs in production and awarded in development to come into production. So those, you know, those active programs in our table, there are 13 programs. All of those programs, you know, when they're, when they're fully in and ramped, you know, they, they largely speak to that 70,000 wheels. And those, those programs are in development. We have seven programs in development. There's two EVs, and there's five ICE vehicles. You know, the development is all on track. They're all going well. There's, there's no problems with those programs.

There's nothing stalled, nothing sort of moving backwards at this stage. We are. Of course, we are subject to, you know, the OEMs and how their whole vehicle program build goes, but those development programs are all on track.

Eric Stine (Senior Research Analyst)

Got it.

Jake Dingle (CEO and co-founder)

Then probably the only other dynamic, Eric, and yes, I will confirm I was talking about awarded, not in-production programs, so sorry for that. The other point, though, is when we talk about awarded programs and volumes, we should also relate that to one of the pages we have in this, the release, which just shows that what we've typically seen with programs that have been completed is that ultimately we have produced more volume than was originally contracted, either because the demand for capacity is increased or the length of the program is extended, or both. So, you know, we are reasonably confident in what we're seeing there in terms of volumes.

Eric Stine (Senior Research Analyst)

Right. And so the commentary about the existing programs, you know, when you look out a little bit, filling up that 70,000 unit capacity, that's, that is just assuming what the projections are. That does not take into account, as you've said, that historically you have exceeded those volumes.

Jake Dingle (CEO and co-founder)

That's correct, Eric. So in some cases, you'll see that we were more than double. We certainly haven't accounted for that, and we don't expect that in each case. But, but it certainly-

Eric Stine (Senior Research Analyst)

Yeah

Jake Dingle (CEO and co-founder)

... history shows that that's, that's really quite possible.

Eric Stine (Senior Research Analyst)

Okay. Thank you.

Gerard Buckle (CFO)

Thanks, Eric.

Operator (participant)

Thank you. At this time, I'll turn the call back to Jake Dingle for closing comments.

Jake Dingle (CEO and co-founder)

Thank you, operator. Well, thanks very much, everyone, for joining us today. And certainly, if there are other questions following on from this call, please reach out to our investor relations group, and we will do our best to answer those. Thanks very much for joining us.

Operator (participant)

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.