Carbon Revolution Limited Annual Report 2022
Carbon Revolution Limited
Contents 2 Letter fromChair and CEO 4 Key achievements for 2021-2022 6 Board of Directors 8 Senior Management 10 Directors’ Report 28 Remuneration Report 47 Other Disclosures 49 Auditor’s Independence Declaration 50 Corporate Governance Statement 52 Consolidated Statement of Comprehensive Income 53 Consolidated Statement of Financial Position 54 Consolidated Statement of Changes in Equity 55 Consolidated Statement of Cash Flows 56 Notes to the Financial Statements 83 Directors’ Declaration 84 Independent Auditor’s Report 89 Shareholder Information 92 Corporate Directory Annual Report 2022 1 Carbon Revolution is a global technology company and tier one OEM supplier, which has successfully innovated, commercialised and industrialised the supply of lightweight carbon fibre wheels to the global automotive industry.
Carbon Revolution Limited 2 Letter from Chair and CEO James Douglas, Chair On behalf of your Board of Directors, it is our pleasure to share with you the Carbon Revolution Limited Annual Report for the financial year ended 30 June 2022 (FY22). Carbon Revolution is an Australian technology company manufacturing advanced carbon fibre wheels. The Company was founded with the purpose to transform the performance and sustainability of the world’s vehicles. True to this purpose, Carbon Revolution is the clear global leader in the manufacture and sales of lightweight carbon fibre wheels for the automotive industry. In FY22, Carbon Revolution passed the milestone of 50,000 wheels sold and our wheels are currently available on cars made by General Motors, Ford, Ferrari and Renault. The Company achieved a 15% growth in total programs (development and production) from a year ago. At present, we have 15 active programs, 6 awarded programs in production and 9 programs in development. We look forward to new program launches in the year ahead. In our short history, this is a record number of active programs, signifying the increasing acceptance of and demand for our technology from global automotive manufacturers. “ In this difficult local and global environment, we are happy with the revenue growth, positive contribution, and strengthening customer demand that we’ve seen through FY22.” Our wheels are materially lighter, have demonstrable road noise reduction benefits, attractive aesthetics and deliver significant efficiency gains compared to steel and aluminum alternatives. The efficiency gains and road noise reduction benefits translate into enhanced performance and increased fuel efficiency or range enhancement for electric vehicles. As part of our growth into the aerospace industry, we are also teaming up with the Australian Defence Force on the design of the CH-47 (Chinook) Helicopter’s wheels. Whilst dealing with significant local and global headwinds throughout the financial year, we are pleased with our progress in FY22. Our FY22 revenue of $40.3mwas 15% above the previous year. We finished the year with a record run-rate of c. 25,000 completed wheels (June production, annualised) and delivered a strong positive contribution of over $400 per wheel and almost $2m in total for the final quarter. This improvement in performance is clearly demonstrating the profit potential of the Company as volumes increase and as our manufacturing efficiency program delivers the results that we are confident it will. The Company reported a loss after tax of $43.1m (FY21: $31.8m). The business faced challenges related to COVID-19 on different levels, including timing delays with our customers launch of their new cars, the impact of the continued global shortage of automotive semiconductor chips on our customers and significant COVID-19 related absenteeism particularly during the middle quarters of the year. The disruption of global supply chains led to some rawmaterial shortages and increased freight costs. There were also two operational issues that significantly impacted efficient factory production frommid Q2 to early Q4 during FY22 – thermal barrier coating (TBC) machine performance and diamond weave resin quality. Both of these issues were resolved early in Q4. In this difficult local and global environment, we are happy with the revenue growth the business has recorded in FY22. On a positive note, we do see recovery across the automotive industry with the emergence of new program launches. Late in the 2021 financial year, 2 new Ferrari vehicles were released with Carbon Revolution wheels, the 296 GTB and the 812 Competizione and our wheels for both are now in production.
Annual Report 2022 3 Jake Dingle, CEO andManaging Director The depth and length of our relationship with Ferrari clearly highlights how highly we are regarded as a valued partner, and the strength and potential of our technology. Another significant milestone for Carbon Revolution this year is our first programwith General Motors, the new Chevrolet C8 Corvette Z06 & Z07, which feature our carbon fibre wheels. At the time of the vehicle launch, Corvette’s chief engineer Tadge Juechter said, “… It’s super light and saves over 40 pounds versus the forged aluminiumwheels which are pretty lightweight wheels...” and are “much, much stronger” than an aluminiumwheel. Production for the program has now commenced. We expect this to be our biggest program to date, in terms of annual wheel sales. During the year we also strengthened our management team and leadership capabilities to support the Company’s growth strategy with the appointment of Dave French as Operational Strategy Lead. Dave is a globally experienced automotive executive with extensive background in business planning and strategy, vehicle program delivery, product development systems and manufacturing plant management. We also welcomed Sam Casabene as Director of Procurement and Supply Chain, and TimBoyd as Director of People and Culture, strengthening our leadership in both areas. Very sadly and unexpectedly Adrian Smith, our former Director of Sales and Business Development passed away after a brief illness in April of this year. We were all shocked and saddened by Adrian’s passing and our thoughts remain with his family inMichigan. Adrian was a very important member of the team and is missed by all. In July we appointed Jesse Kalkman, formerly of Nextsteer, to fill this executive role. We are delighted to have Jesse come onboard as part of the Executive team. He brings a wealth of executive experience in global tier 1 supplier organisations. InMay 2022, we welcomed the announcement of a Commonwealth ModernManufacturing Initiative (MMI) grant of $12 million for the Mega-line project. This grant will help Carbon Revolution increase capacity to meet the future demand for our carbon fibre wheel wheels in the rapidly expanding global electric vehicle (EV) market. The grant will contribute to the remaining scope of Phase 1 of the Mega-Line project. We are pleased with the progress of the Mega-line project. The construction of Phase 1 of the Mega-line has progressed well in FY22 in line with our plans. Whilst further construction continues, the completed elements have now entered the commissioning phase. The Mega-line will be commissioned in stages, with the end-to-end process expected to be in production early calendar year 2023. First production wheels are expected to come off the Mega-line in Q3 FY23. With increasing customer demand for our wheels, as evidenced by the record number of active programs, andMega-line development rapidly progressing towards production, we believe the Company is in its strongest position to deliver on its potential and purpose. On behalf of the Board, we would like to thank each and every member of the Carbon Revolution team for their considerable efforts and achievements throughout the financial year, particularly in the face of the continued challenges of COVID-19 and global supply chain disruption. Carbon Revolution builds a unique and highly sophisticated product, and it has a unique team and culture which we are confident will deliver long-term, profitable growth for our shareholders. Finally, we are grateful to our customers and shareholders for their ongoing support. Carbon Revolution’s journey and ambition would not be possible without this support. James Douglas Chair Jake Dingle CEO andManaging Director
Carbon Revolution Limited 4 Key achievements for 2021-2022 Achievements
Annual Report 2022 5 Strong market engagement for lightweight carbon fibre wheels – a record 15 active programs strengthen the outlook Operational progress made – c hallenges overcome during the year exiting with strong foundations for improvement Over 56,000 wheels sold and growing – improved sales momentumwith revenue up 15% Phase 1 Mega-line project progressed well – first production wheels expected in FY23
Carbon Revolution Limited 6 Lucia Cade Independent, Non-Executive Director Appointed: 3 August 2018 – Board and executive experience that spans utilities, technology and innovation, industry-led research and development, construction, global technical advisory and infrastructure investment – Currently serves on the boards of South East Water (Chair), Paintback (Chair), Urban Utilities, Future Fuels CRC, Engineers Australia, FLAIM Systems Pty Ltd – Former director of Water Resources Group Limited (renamed to Purifloh Limited) (April 2018 to November 2019) – Bachelor of Engineering, Bachelor of Economics andMaster of Engineering Science fromMonash University and anMBA from the Melbourne Business School – Fellow of Engineers Australia and Fellow of Australian Institute of Company Directors Jake Dingle Chief Executive Officer, Managing Director Appointed: 20 November 2008 – Started at Carbon Revolution in 2008 as one of the initial investors and founders – Background in engineering, operations, strategy andM&A within Australian listed companies – Former head of M&A and Corporate Development for Goodman Fielder and has also held positions at BCG, L.E.K. and Tenix Defence Systems – Mechanical Engineering degree fromRMIT with First Class Honours and anMBA from the Melbourne Business School (Dean’s List and Rupert Murdoch Fellow) – Graduate of the Australian Institute of Company Directors James Douglas Independent, Non-Executive Chair Appointed: 25 November 2011 – Over 25 years of investment banking and venture capital experience in Australia and the United States – Partner of Co:Act Capital and non-executive director of Export Finance Australia – Prior to his involvement in venture capital, James spent 15 years in investment banking, including as co-head of Global Banking at Citi (Australia) and Global Head of Consumer Products Investment Banking for Merrill Lynch in New York – Science degree and Law degree from the University of Melbourne – Graduate of the Australian Institute of Company Directors Board of Directors Committee Membership A Audit and Risk Committee R Remuneration & Nomination Committee Chair of Committee Member of Committee R R A
Annual Report 2022 7 Mark Bernhard Independent, Non-Executive Director Appointed: 3 June 2019 – Significant board and executive management experience in the automotive industry, having served as Chairman andManaging Director of General Motors Holden Australia from 2015 to 2018 – Chief Financial Officer and VicePresident of Shanghai-GM from 2011 to 2015 – Non-executive director of a notfor-profit, Healthy Male, since August 2020 and chair of their Audit and Risk Committee – Non-executive director of Bapcor (ASX:BAP) since March 2022. – Studied Transformational Management at Stanford University, MBA fromDeakin University and a Business/ Accounting degree fromMonash University – Graduate of the Australian Institute of Company Directors Dale McKee Independent, Non-Executive Director Appointed: 27 September 2018 – Director, Treasurer and Chair of Audit and Risk Committee, Museums Victoria – Trustee, Marion and EH Flack Trust – Former senior partner at PwC with extensive experience serving listed companies in audit, accounting, corporate governance, risk management and capital markets matters – Former member of the Australian Auditing Standards Board – Bachelor of Business from Federation University – Fellow of the Institute of Chartered Accountants in Australia and New Zealand R A A
Carbon Revolution Limited 8 Dr Ashley Denmead Chief Technology Officer Founder of Carbon Revolution – More than 15 years of experience in virtual and physical prototyping of composite parts for automotive, marine and industrial applications – Double degree inMechanical Engineering (First Class Honours), Computer Science (Software Development) and a PhD in composite materials at the Deakin University Centre for Materials and Fibre Innovation Gerard Buckle Chief Financial Officer Joined: in September 2019 – An experienced senior executive, with a demonstrated capacity to develop and implement strategic plans and improve business performance – Previous roles at Incitec Pivot Fertilisers, Olex, Repco, Jetstar and Orica, with previous CFO roles at Jetstar, Orica and Olex – Chartered Accountant, with a Bachelor of Business and a Graduate Diploma of Applied Finance qualifications Dave French Operational Strategy Lead Joined: in February 2022 – Globally experienced automotive executive with an extensive background in business planning and strategy, vehicle program delivery, product development systems and manufacturing plant management – Over 35 years’ experience with Ford in Australia, China, US and Thailand including positions as global Vehicle Line Director (T6 products), Director of Cycle and Product Planning (Asia Pacific and Africa). Member of the PACGroup (USA) advisory board with a special interest in business alliance development – Bachelor of Engineering (Mechanical) fromAdelaide University (Hons) Tim Boyd Director of People and Culture Joined: in January 2022 – A People and Culture Executive with significant experience in blue chip local and multi-national, multi-site organisations in manufacturing, insurance, social services and government enterprises – A values-driven trusted advisor with a deep understanding across all aspects of People and Culture and business acumen – Previous roles at FordMotor Company, GMHBA Health Insurance, GenU (Karingal St Laurence) and State Trustees – Degree inManagement (ADMgt Human Resources Major) from Deakin University Ron Collins Vice President North America Joined: in February 2021 – Experienced engineering executive with 31 years in FordMotor Company in various engineering roles including Director of Chassis Engineering, Director of Body Engineering, and Director of Asia Pacific Engineering – Experienced in the global auto industry, with multiple executive roles based in North America, Europe (Germany), Asia Pacific (China), and Australia – Bachelor of Science in Electrical Engineering from the University of Iowa, MBA from the University of Michigan (High Distinction), andMasters of Engineering fromWayne State University Jake Dingle Chief Executive Officer, Managing Director Appointed: 20 November 2008 – Started at Carbon Revolution in 2008 as one of the initial investors and founders – Background in engineering, operations, strategy andM&A within Australian listed companies – Former head of M&A and Corporate Development for Goodman Fielder and has also held positions at BCG, L.E.K. and Tenix Defence Systems – Mechanical Engineering degree from RMIT with First Class Honours and an MBA from the Melbourne Business School (Dean’s List and Rupert Murdoch Fellow) – Graduate of the Australian Institute of Company Directors Senior Management
Annual Report 2022 9 Sam Casabene Director of Procurement and Supply Joined: in December 2021 – Globally experienced Purchasing Executive with an extensive background in strategic procurement, product development, supply chainmanagement and start-up operations – Focused on supplier relationships, quality and people development – Over 42 years in automotive including Ford Australia as Vice President of Purchasing, Director of Purchasing – Ford ASEAN region based in Thailand and Vice President Purchasing at Vinfast LLC, Vietnam – Bachelor of Business (Accounting) RMIT University Melbourne, Certificate in Logistics, Mt. Eliza Business School Jo Markham Director of Customer Excellence Joined: in October 2020 – An experienced senior executive, with a passion for developing leaders and building effective teams within a culture of trust, fairness and transparency – Extensive auto experience spanning product development, manufacturing, quality, customer experience, sales and logistics and warehousing – Previous roles at General Motors/GM Holden and Fiat Chrysler Australia – Bachelor of Engineering from the University of Melbourne Andrew Higginbotham Operations Director Joined: inMay 2021 – An operations leader with FordMotor Company progressing to Operations Director and Plant Manager leading up to 1400 employees with an operating budget of $90million – Leadership roles in assembly, machining, stamping and quality operations with experience in the United States and Japan and also a member of the Australian Executive Committee – Divisional General Manager of Motorised Division at Jayco leading production, R&D, purchasing and sales functions – Masters in AdvancedManufacturing fromRMIT, and First Class Honours in Bachelor of Mechanical Engineering at Monash University David Nock General Counsel and Company Secretary Joined: in August 2017 – Appointed Company Secretary in September 2017 – Previous roles with listed Australian, US and European entities including Regional Commercial Director, Oakley Asia Pacific (Luxottica Group S.p.A.), Regional General Counsel, Quiksilver Asia Pacific (Quiksilver, Inc.), and roles at Publishing & Broadcasting Limited and Village Roadshow Limited – Arts and Law Degrees (Hons) from the University of Melbourne and anMBA from the Melbourne Business School (Dean’s List) Vale It was with great sadness we acknowledged the passing of one of our Carbon Revolution family. After a short illness, Adrian Smith passed away in April. Adrian was based in North America since 2019, as Director of Sales and Business Development and member of our executive team. Adrian worked tirelessly with our customers to build strong relations based on trust and respect. He was admired by his colleagues for being a team player and an excellent communicator. He will be deeply missed and leaves a lasting legacy at Carbon Revolution. Adrian had a passion for high performance vehicles and cutting-edge technology, but his greatest passion was reserved for his family. Our heartfelt thoughts and condolences go to Adrian’s wife, his daughter and their extended family. Given the professional that he was, Adrian would want us all to get on with business. With heavy hearts, we will honour him and do just that.
Carbon Revolution Limited 10 Carbon Revolution’s principal operations, which include its corporate office and manufacturing facilities, are located in Geelong, 75 kilometres southwest of Melbourne, Australia. The 10,000m2 Geelong facility is quality accredited to international automotive supply standard IATF 16949, and has achieved ISOQuality and Environmental accreditation. Carbon Revolution also has personnel in North America and Europe to service current and prospective customers – global OEMs (Original Equipment Manufacturers, or global car makers). Since its first OEMprogram for Ford in 2015, the Company has progressively increased production capacity to meet increasing OEM demand. With almost 60,000 wheels on the road, Carbon Revolution’s scale is without peer among carbon fibre automotive wheel manufacturers. About Carbon Revolution (“Carbon Revolution” or the “Company” or the “Group”) is an Australian technology company manufacturing advanced carbon fibre wheels. Established in 2007, Carbon Revolution is the first company globally to have successfully developed and manufactured singlepiece carbon fibre wheels to original equipment vehicle manufacturer (OEM) quality standards, with commercial adoption across several major OEM vehicle platforms. Carbon Revolution protects the design and manufacture of its wheels – some of the world’s most complex carbon fibre products – with over 55 patents and precious IP. Business Model and Strategic Priorities Carbon Revolution primarily generates revenue through the sale of carbon fibre wheels to global OEMs. The Company also generates revenue through the provision of associated engineering services and customerowned tooling related to those wheel sales to global OEMs. The sale of Carbon Revolution’s wheels takes place under supply contracts with OEMs. The Company has prioritised the automotive new vehicle wheel market, where its lightweight wheels deliver substantial performance and efficiency benefits. The business works closely with its customers to introduce, design and develop new wheels. The business model is based on concurrently developing materials, products and processes with the aim of lower cost and higher volume industrialised production. Carbon Revolution’s wheel technology is desirable among OEMs and their customers because it delivers strong, durable and attractive wheels, which weigh up to 40–50% less than aluminium equivalents. Reducing wheel mass has significant benefits for a vehicle’s overall efficiency, as it reduces the vehicle’s unsprung weight and rotational inertia. Directors’ Report
Annual Report 2022 11 Since the first Carbon Revolution wheel was released to the market in 2009, performance benefits associated with improving wheel efficiency have become well accepted and have led to adoption in the performance and premium/luxury vehicle categories by five OEMs including Ford, Ferrari, General Motors and Renault. However, as the automotive market rapidly transitions to electric vehicles (EVs), Carbon Revolution’s efficiency technology is viewed as an ideal enabler of range extension, both through weight savings and aerodynamics. A significant proportion of wheels currently under development are for EV applications. Driving this expansion is an increased understanding of the significant efficiency benefits of this lightweight technology and desire to increase range without adding further mass and cost to a vehicle through additional batteries. As the adoption cycle matures, designers and engineers are beginning to fully embrace the unique design characteristics afforded by carbon fibre, allowing outcomes otherwise not easily achieved in aluminium. A key benefit of carbon fibre wheels is their potential to reduce road noise – a significant challenge for EVs – coupled with weight savings which improve range. This, and the ability to create aerodynamic styling and larger wheels in unique and contemporary designs which are not as feasible with traditional materials, allowOEMs to design a vehicle that stands out from its competitors. Carbon Revolution’s growth focus includes adding higher volume OEM wheel programs for EVs, including larger formats such as SUVs and light trucks, to complement its highperformance program portfolio. The Company is driving the industrialisation of its production processes and is commissioning the first phase of its first Mega-line. Developed with the latest Industry 4.0 technology, the Mega-line will deliver improvements in production scale and economics that will enable the Company to deliver large volume programs to a broader cross-section of the market. The business case for Phase 1 of the Mega-line is underpinned by formal agreements to initiate detailed design and engineering relating to four newOEM programs. One of these has now achieved formal award. This program is expected to enter production during the first half of 2023 and ramp up over the subsequent twelve months. The Company also aims to leverage its technology into adjacent industries, such as the aerospace and transportation sectors. The Australian Defence Force has already accepted virtual validation of the wheel designed by Carbon Revolution for the Boeing CH-47 Chinook helicopter. This design represents a 30% weight saving compared to the existing wheels and enables retrofitting of the wheel to existing hardware, opening an opportunity on the 1,200 global fleet of CH-47 helicopters. Carbon Revolution is committed to investing in, improving and growing its operations to further its position at the forefront of carbon fibre wheel design and development into the future, and maximising value and sustainable returns for shareholders.
Carbon Revolution Limited 12 1.1 Wheel Program Portfolio In FY22 Carbon Revolution passed the milestone of 50,000 wheels sold. During the year we sold wheels for vehicles built by Ford, Ferrari and General Motors and we have contracts to provide wheels to car makers for future models. The long-term sales outlook and pipeline for new programs continues to be very strong, with a record 15 active programs. The Company is experiencing very strong interest from current and newOEMs as evidenced by the levels of program quoting and detailed customer enquiries in the latter part of FY22. A significant proportion of the active programs and customer enquiries relate to electric vehicles. The new Ferrari programs which launched in late FY21, the Ferrari 296 GTB and 812 Competizione programs, and the new C8 Corvette Z06/Z07 program, ramped production through FY22 as expected. Stage of Program Lifecycle Number of Programs June 2022 June 2021 Comments Awarded programs in production 6 5 Corvette Z06/Z07 program commenced production Programs in development Awarded 3 3 SUV program and the first of the Mega-line programs expected to transition to production in FY23 Under detailed design and engineering agreement 6 5 Total 15 13 As announced in April 2021, Carbon Revolution secured formal agreements to initiate detailed design and engineering on four programs with an aggregate expected volume of ~75k wheels per annum. The first of these programs was awarded in June 2022 and is expected to enter production during the first half of 2023 and ramp up over the subsequent twelve months. The other three programs are EV SUV/Pickup programs with one customer, where the wheel design and sourcing process is underway. As communicated during the year the expected start of production for the lead program in this group has been rephased by the customer with start of production moved to the first half of 2024. 1.2 Operations, Technology and Mega-line The Company is proud to report a zero lost-time-injury frequency rate on a rolling 12 months basis, ending June 2022. This is a very pleasing result and shows the commitment of the whole team to creating a safe work environment at Carbon Revolution. From a production perspective, operations started the year well in Q1 FY22. Through the middle of the year, operations faced external headwinds related to significant COVID-19 related staff absenteeism, rawmaterial shortages and increased freight costs related to the disruption of global supply chains. To combat longer lead times for carbon fibre, the business increased its rawmaterial stock levels to ensure supply of materials into production. Along with these external headwinds, the team dealt with two internal issues: Thermal Barrier Coating (TBC) machine performance issues and a quality issue with DiamondWeave resin. The resolution of both the TBC and resin issues was more difficult than would normally be expected as the overseas suppliers could not easily come to Australia to assist with issue resolution activities, due to the pandemic. These internal issues were resolved early in Q4. With normal production levels being achieved late in the year, the Company was pleased with the production momentum the factory delivered in late FY22. The June 2022 annualised run rate for boxed wheels was c. 25,000, a new record level of output for the Company. The production momentum in the factory also provides evidence the Company is mitigating the ongoing challenges posed by labour absenteeism and global supply chain disruptions. With these internal issues and external headwinds, FY22 was a difficult year from a cost of production perspective. The Company did not achieve its planned reduction in production cost during FY22, although it has exited the year with improved performance momentum and maintains confidence going into FY23 that the required reduction in production cost is attainable. The progress of the Mega-line project is on track. The construction of Phase 1 of the Mega-line has progressed well in FY22, and whilst further construction continues, the completed elements have now entered the commissioning phase. Phase 1 of the Mega-line will be commissioned in stages, with the end-to-end process expected to be in production early calendar year 2023. The first production wheels are expected to come off the Mega-line in Q3 FY23. The Mega-line project is being managed to match forecast customer demand, including a later introduction of new equipment into the Mega-line than originally anticipated in April 2021. This will result in some capital spend being moved into FY24 and FY25. With increasing customer demand for our wheels, as evidenced by the record number of active programs, and the first stage of the Mega-line development progressing towards production, we believe the Company is well positioned to deliver on its potential and purpose. Directors’ Report continued
Annual Report 2022 13 1.3 Revenue FY22 revenue of $40.3 million increased by 15% from FY21, representing a record level despite the industry headwinds. The growth followed the ramp up in production and sales late in the year for the new C8 Corvette Z06/Z07 program, sustained demand for the Ferrari 296 GTB and 812 Competizione programs and a stronger mix of higher priced wheels. Demand for these programs drove the 11.4% increase in wheels sold to 14,205 wheels. The stronger production and sales levels late in the year led to record quarterly revenue and wheel sales volume in the June quarter of FY22. 1.4 Talent and Engagement Carbon Revolution continues to develop a committed and diverse team capable of transforming the performance and sustainability of the world’s vehicles. During the year we continued to care for employees with the whole team focussed on providing a COVID-safe workplace, with a special focus on health and wellbeing. We encouraged vaccinations and enacted workplace processes to minimise infection and protect our people through various waves of community transmission, lockdowns and high COVID-19 related absenteeism especially during the middle two quarters of the year. The tight employment market has proven to be a challenge in sourcing employees, headcount has grown to facilitate the increase in production and sales volume, finishing the financial year with 547 FTEs (including 104 labour hire contractors). The team has implemented initiatives to improve attraction and retention of employees, including a refresh of our market presence focused on highlighting the variety of employment pathways we offer. The team achieved a significant occupational health and safety milestone of zero Lost Time Injury Frequency Rate (LTIFR) for the year. The result demonstrates our sustained commitment to keeping our team safe and maintaining a safety-first culture. The Company’s commitment to people development is reflected in the number of our employees who have been promoted or advanced to more senior roles across the business. Over the year 10% of our team have built capability and skills to advance in the business. During FY22, we further strengthened our executive teamwith the addition of Dave French, SamCasabene and TimBoyd. Dave, Sam and Tim have joined our team in the roles of Operational Strategy Lead, Procurement and Supply Chain Director and People and Culture Director respectively and all have deep automotive experience in their fields of expertise. 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 FY18 FY19 FY20 FY21 FY22 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Total revenue Sales volume (#wheels) Total Revenue ($’000)(LHS) &Wheel Sales (Units) (RHS)
Carbon Revolution Limited 14 1.5 Financial Review Consolidated Statement of Comprehensive Income Consolidated FY22 $m FY21 $m change $m Sale of wheels 38.2 32.2 6.0 Engineering services and tooling 2.1 2.7 (0.7) Total revenue 40.3 34.9 5.4 Cost of goods sold 57.4 49.2 (8.2) Gross loss (17.1) (14.3) (2.8) % of total revenue (42%) (41%) (1.5%) Research and development 12.0 6.5 (5.5) Selling, general and admin (excl. one offs) 16.9 17.8 0.9 Total expenses 28.9 24.3 (4.6) Other income 4.3 10.5 (6.2) One off items – (2.2) 2.2 EBIT - reported (41.7) (30.3) (11.4) Net interest expense 1.2 1.6 0.5 Loss after tax (42.9) (32.0) (10.9) Carbon Revolution reported a loss after tax of $42.9m (FY21: loss $32.0m). Key movements from the prior year include: Sales revenue increased by 15% to $40.3m following: – Higher sales due to the ramp up in production for the new Corvette programwhich commenced in FY22, and sustained demand for two Ferrari programs launched in late FY21 – Partly offsetting this growth were lower sales for a Ford GT500 program, as this successful program nears the end of its production cycle – Average price per wheel increased 6.7% to $2,695 due to these changes in the sales mix In the difficult local and global environment encountered in FY22, we are happy with the revenue growth the business has recorded in FY22. Gross loss increased to $17.1m from $14.3m in FY21. The continued disruption to global supply chains from the pandemic created challenges in the factory in FY22. Cost of goods sold (COGS) per wheel increased 7% to $3,902 per wheel in FY22. The business faced challenges related to COVID-19 on different levels, including timing delays with our customers’ launch of their new cars, the impact of the continued global shortage of automotive semiconductor chips on our customers and significant COVID-19 related absenteeism particularly during the middle quarters of the year. The disruption of global supply chains led to some rawmaterial shortages and increased freight costs. There were also two operational issues that significantly impacted efficient factory production from mid Q2 to early Q4, Thermal Barrier Coating (TBC) machine performance and DiamondWeave resin quality. FromQ2 the business also faced increases in carbon fibre prices, negatively impacting COGS in the second half. These challenges reduced flow through the factory, and caused increased scrap rates and increased COGS during the middle of the year. Carbon fibre prices appear to have stabilised and the TBC and resin quality issues were resolved early in Q4 FY22. Directors’ Report continued
Annual Report 2022 15 Selling, general and administration expenses decreased by 15.6% to $16.9m. The decrease to a more stable underlying cost base in FY22 occurred following numerous efficiency improvements and cost reduction actions implemented during the year along with the non-repeat of one off costs related to an internal strategic project and implementation of a new ERP system in FY21. The lower cost base was achieved despite the 15% increase in sales and growth in programs in development, demonstrating the commercial leverage potential from scaling the business. The business continued to invest strongly in Research and Development (R&D) required to improve the product technology, bring its production processes to full industrialisation and develop an increased number of customer programs, four of those supporting the business case for the Company’s Phase 1 Mega-line investment. In-line with the Company’s expectations R&D expenses were $12.0m. This is a $5.5m increase on the prior year, which includes $3.9m of amortisation. Capitalised R&D costs in FY22 were $17.3m (FY21: $11.2m), which reflects the growth in the number of wheel programs in development and launch stages. Other income decreased by $6.2m to $4.3m in FY22. The FY21 year included $6.8m of the JobKeeper allowance. The absence of the JobKeeper subsidy in FY22 was the major reason for the decrease in other income. 1.6 Cash Flow FY22 $m FY21 $m Change $m EBIT (41.7) (30.5) (11.2) Change in working capital and other (3.8) 2.2 (6.0) Net interest paid (1.2) (1.6) 0.4 Other non-cash items in EBIT 14.7 20.6 (5.9) Net cash used in operating activities (32.0) (9.3) (22.7) Capital Expenditure (15.6) (12.6) (3.0) Intangible Expenditure (17.4) (11.3) (6.1) Net cash used in investing activities (33.0) (23.9) (9.1) Net cash from financing activities 0.7 86.6 (85.9) Net cash inflows/(outflows) (64.3) 53.4 (117.7) Net cash used in operating activities worsened by $22.7m driven by $2.8m higher costs of good sold due to the challenges around TBC and resin in FY22. In addition, costs for R&D were $5.5m higher while there was no income from Jobkeeper ($6.8m). The ramp up of new programs late in the financial year resulted in an increase in trade receivables of $7.6m. Net cash used in investing activities increased by $9.1m as the Company continued to invest in industrialisation assets, specifically Phase 1 of the Mega-line, to support future growth plans. Intangible expenditure increased $6.1m to support research and development on programs in development. In addition to an increased number of programs in development, it is anticipated programs in development will lead to increased production and sales volumes in future years. Net cash inflow from financing activities decreased by $85.9m. This decrease is mainly attributable to the completion of an equity raise in FY21 which resulted in a net financing inflow of $89.9mwhich was not repeated in FY22.
Carbon Revolution Limited 16 1.7 Capital Employed FY22 $m FY21 $m Change $m Receivables 20.4 12.2 8.2 Inventories 20.2 18.2 2.0 Less: Payables (14.5) (12.1) (2.4) Working capital 26.1 18.3 7.8 Property, plant and equipment 57.6 47.3 10.3 Intangible assets 34.9 25.3 9.6 Capital employed 118.6 90.9 27.7 Ratios Working capital/ sales revenue 65% 52% 13% Debtor days 185 127 58 Inventory days 128 135 (7) Capital employed increased by $27.7 million from June 2021 to June 2022. In addition to the changes in working capital mentioned above with respect to cashflow there was further planned investment to support Phase 1 of the Mega-line and increased research and development to support the higher number of programs in development. This increase in investment is necessary to expand production capacity, improve production efficiency and support current and near-term future programs. Accordingly, property, plant and equipment increased by $10.3m to $57.6m and intangible assets increased by $9.6m to $34.9m. 1.8 Net Debt FY22 $m FY21 $m Change $m Loans and borrowings Current 13.7 9.9 3.8 Non-current 4.3 6.5 (2.2) Total loans and borrowings 18.0 16.4 1.6 Less: Cash and cash equivalents (22.7) (87.3) 64.6 Net debt/(cash) (4.7) (70.9) 66.2 Net debt/cash decreased by $66.2mmainly due to the planned investment in Phase 1 of the Mega-line, increased development costs to support the higher number and stage of programs across the development pipeline and the FY22 net loss after tax. In addition to the $22.7m cash and $0.7m of unused facilities in place, the Company has potential funding sources of $33.5m, of which $20.0m is planned to be in place in FY23 including additional $7.5m of working capital finance, the first $6m tranche of MMI grant, the second remaining $4mExport Line of Credit and a new $2.5m of equipment lease finance. Directors’ Report continued
Annual Report 2022 17 1.9 Prospects There is increasing customer demand for Carbon Revolution’s wheels, as evidenced by the record number of active programs, and with the first phase of the Mega-line development progressing towards production, the Company is well positioned to deliver on its potential and purpose. The Company continues to monitor the local and global impacts and risks related to COVID-19. There are ongoing COVID-19 related uncertainties and disruptions facing the global automotive industry in the near-term. Carbon Revolution’s key focus areas for FY23 include: – Capturing demand for carbon fibre wheels from current programs, including the Corvette Z06/Z07 program – Successful launches of the Premium SUV program and the first Mega-line program – Development activities for contracted programs and award of the remainingMega-line programs – Working collaboratively with existing and new customers to apply our technology to the emerging generation of electric vehicles – Delivering production cost improvements with the objective of materially improving contribution margin – Ongoing construction of Phase 1 of the Mega-line with successful commissioning ahead of first production in Q3 FY23 – Reducing cash burn by minimising operating and capital spend – Securing appropriate short and long-term funding 1.10 Forward-Looking Statements Carbon Revolution advises that this document contains forward-looking statements which may be subject to significant uncertainties outside of Carbon Revolution’s control. No representation is made as to the accuracy or reliability of forwardlooking statements or the assumptions on which they are based. Actual future events may vary from these forward-looking statements and it is cautioned that undue reliance not be placed on any forward-looking statements. Carbon Revolution does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. To the maximum extent permitted by law, the Company and each of its directors, officers, employees, partners and agents disclaim any responsibility for the accuracy or completeness of any forward looking statements whether as a result of new information, future events or otherwise.
Risk Description of Risk and Potential Consequences Mitigation strategies Carbon Revolution is not yet profitable or cash flow positive – Carbon Revolution has not yet become profitable and cashflow positive, as such, is currently reliant on its cash reserves and sources of new funds until it is cash flow positive. – Carbon Revolution’s ability to raise additional funds if required to meet its operational requirements, repay borrowings, and fund its growth plans, through debt or the issue of securities may be subject to factors beyond the control of Carbon Revolution, including general factors affecting the economy and capital markets (including COVID-19). There is no guarantee that such funding, whether debt, equity or otherwise, will be obtained or available on favourable terms, or at all. Carbon Revolution may also experience difficulties extending or replacing its working capital financing facilities. – Carbon Revolution has certain loan covenants under the EFA loan agreement, and any failure to meet loan covenant obligations may adversely impact on Carbon Revolution’s financial performance and prospects. – The business completes an annual budget process, regular forecasts and conducts sensitivity and scenario analysis to understand possible implications on profitability and funding needs. Cash is managed carefully in order to preserve cash to enable the business to meet its stated objectives. – The Company considers that strong relationships with its debt and equity funding providers is important to the long term prospects of the business. The Company has communication plans for both current and potential shareholders and debt funding providers. In FY23, the Company plans to draw on the remaining $4m of the $8m export line of credit and to put in place $2.5m of equipment finance leasing. The Company also plans to pursue a $6m upfront payment during FY23 under the MMI grant announced inMay 2022 and confirmed in August 2022 by the Federal Government. The Company is also actively working on other funding opportunities beyond these, as referenced in the going concern note of the financial statements. Exposure to cost increases in supply chain, and other supply chain disruptions – Some of the materials used by Carbon Revolution in its manufacturing processes are highly technical and only capable of being supplied by a small number of suppliers, or in some cases one supplier. Further, Carbon Revolution’s wheels are subject to rigorous validation tests undertaken by the Company’s customers, and changing the supplier of a material may require re-validation of wheels. Finally, Carbon Revolution is often exposed to changes in customer ordering patterns with limited notice. As a result of the above factors Carbon Revolution is exposed to heightened supply chain risk. – Suppliers to Carbon Revolution may seek to increase prices with or without notice. The likelihood of price increases is higher in a macro environment of inflation, global conflict (such as the Ukraine conflict), and supply chain disruptions related to COVID-19. There are limits on Carbon Revolution’s ability to pass on price increases to its customers, global OEMs. Supplier cost increases may result in higher costs and lower margins and affect Carbon Revolution’s financial performance. – Shortages in, or delays in shipment of, materials may impact Carbon Revolution’s ability to manufacture and ship wheels to its customers on time, or at all, resulting in lost sales and potential impact on other programs, and Carbon Revolution’s reputation. – Carbon Revolution has recently strengthened its supply chain and procurement team and is currently completing the re-organisation of this team. – Carbon Revolution is increasing the focus on long range planning and early action planning, to avoid supply chain disruption and delays. – Carbon Revolution uses a detailed Sales and Operations Planning system, in conjunction with its Enterprise Resource Planning (ERP) system, to organise and plan resources in order to meet customer requirements. – Carbon Revolution has developed a list of critical materials and suppliers, and is seeking to mitigate risks by developing and trialing alternative materials to allow for validation of multiple materials. – Carbon Revolution has also developed a strategy for strengthening supplier relationships including the use of long term pricing agreements to reduce the risk and impact of price increases. Directors’ Report continued 1.11 Business Risks Carbon Revolution Limited 18
Risk Description of Risk and Potential Consequences Mitigation strategies – Supply shortages or delays may also result in the need to utilise an alternative material that results in a need to re-validate a wheel for a program, which may result in increased costs, reduced margins, or damage to customer relationships. – Supply chain disruptions and shortages may also result in increased costs, for example if Carbon Revolution elects to air freight materials, rather than sea freight, or if it is necessary to pay more to ensure supply with the same supplier, or move to an alternative supplier. Carbon Revolution may not be able to achieve its manufacturing quality, volume and cost targets – Any inability of Carbon Revolution’s manufacturing processes and procedures to consistently produce the required quantity of wheels at the required quality standards and specification targets and within the required customer timeframes, at the expected cost levels, may result in higher scrap rates, quality issues and/or costs per wheel, or shipping wheels late or not according to customer specifications, which may result in loss of customers, failure to obtain new wheel programs or increased costs for Carbon Revolution, which would negatively impact its financial performance. – Shipping wheels late or not according to customer specifications could result in Carbon Revolution being required to pay costs or damages to its customers, or product recall. This in turn could result in negative reputational damage and could adversely impact Carbon Revolution’s ability to secure new programs or retain customers, which would have an adverse impact on its ability to generate revenues. – Failure to achieve the desired quality targets or to produce wheels at the forecast cost levels may result in reduced margins and/or an inability to access a broader cross section of the wheel market due to higher than forecast product costs. – Failure to introduce new customer wheel programs into production on time or on budget, or at the budgeted quality or cost levels, or other unforeseen or unexpected challenges involved in the introduction of new customer programs, resulting in higher costs, lower margins, or shipping wheels late or not according to customer specifications. – The business has a quality system in place and operates with IATF 16949 and ISO9001 certifications. Quality reporting systems are used to identify where quality issues exist and appropriate problem-solving tools are used to understand and fix root causes. – Significant focus and attention is given to ensuring and improving quality and manufacturing consistency by the production quality team and the executive team. The quality team has recently conducted 8D problem solving training for cross functional teams to aid with problem identification and resolution. There is a focus on applying lessons learned in relation to quality improvements to prevent and mitigate future issues. The Company will also shortly be deploying Statistical Process Control for critical functions across the plant. – The customer excellence team uses aWheel Development Framework for new program launches, underpinned by the execution of gateway elements and governed by scheduled executive gateway reviews. A thorough business case is developed and approved by both the executive team and Board during Gateway 1 – Business Case ProgramApproval and Quote. Business case confirmation then is an element of every remaining Gateway. – EDI (Electronic Data Interchange) systems allow the Company visibility of both forward orders and forecast requirements. Sales and Operations Planning systems are used to organise and plan resources in order to meet customer requirements. – Actual and forecast DIFOT (delivery in full, on time) are key measures used in the business to constantly monitor and understand the Company’s ability to deliver to customer plans. Annual Report 2022 19
Risk Description of Risk and Potential Consequences Mitigation strategies Carbon Revolution may not be able to increase its capacity to service contracted demand, or otherwise execute its industrialisation plans, including the Mega-line project, as planned – Various technical and engineering challenges must be overcome in order for Carbon Revolution’s capacity and industrialisation plans to be achieved. This process may take longer or cost more than anticipated, not achieve the outcomes anticipated such as delivering the expected volumes, production efficiencies or cost reduction benefits or unforeseen issues may arise during the engineering or commissioning process for new equipment. The capital cost of expanding operations may be higher than anticipated resulting in a lower return on investment than expected. If Carbon Revolution cannot automate and scale its manufacturing process to the extent anticipated, it may have a material adverse impact on Carbon Revolution’s performance and prospects. – New and larger volume OEMwheel programs which Carbon Revolution plans to commence production on the Mega-line may experience delays or cost overruns if there are delays in completing the Mega-line, the Mega-line does not perform to expectations or other challenges arise in relation to the installation and commissioning of major equipment projects. This may result in reduction in revenues, lower margins, or contractual claims against Carbon Revolution. – Carbon Revolution may not have the internal resources or capability, or be able to employ or engage the appropriate capability, required in order to successfully build, install and commission new production assets or fully utilise the expected benefits of those assets once commissioned and in production and may not have ready access to the expertise required to support implementation due to travel restrictions. – The Mega-line project may impact production on existing customer programs, which may result in reduced revenue and damage to customer relationships and contractual claims against Carbon Revolution. – Carbon Revolution has introduced a comprehensive capacity planning approach that identifies and systematically applies project management disciplines to close the gap between equipment cycle time and demand takt time (required production time in order to meet demand) ensuring that short and mid-term capacity is sufficient to meet expected demand, and with identified gaps addressed with engineering projects or additional investment where required. – Carbon Revolution has a robust project governance structure in place to plan and manage the Mega-line project and to manage risks relating to the project. To support our engineering lead, a project scheduler has also been engaged. The project scheduler closely monitors the timing of all critical path items and escalate any timing risk throughout the project. An active steering committee is in place, with Board representation, to monitor progress and oversee key decisions. – New industrialised equipment has been designed and tested using discrete event simulation and virtual commissioning techniques before actual acquisition and construction. – Maintenance plans are established by the Industrialisation team for all new equipment before handover to the production maintenance team. – Operations team assess risk impact on current production and factor any risk into their Sales and Operations Plans. If necessary to mitigate risk, inventory can be built ahead of time to assist the continued supply of wheels to customer orders during the project construction phase. Loss or failure of key infrastructure or equipment – Carbon Revolution’s wheel manufacturing process is complex and contains numerous distinct processes, many of which utilise specialised and bespoke equipment that is not readily replaceable. – Loss, failure or breakdown of equipment may result in the capacity of the entire plant being reduced within a short period of time, and impact the ability to meet customer on-time delivery requirements. – Some equipment suppliers are based overseas, and the rectification of equipment may be delayed or face additional challenges if travel restrictions (such as those in place as a result of COVID-19) prevent supplier personnel from visiting Carbon Revolution’s manufacturing facility. – Business continuity and disaster recovery plans exist, which outline procedures to be undertaken in the event of loss or failure of key equipment. – Production Equipment Risks Assessment register is maintained. – Preventative maintenance schedule exists and is reviewed on a regular basis. – Critical spare parts have been identified and a register exists. Spare part holdings are regularly reviewed to ensure the required levels are maintained. – Reliability Centre Maintenance Program in place. Directors’ Report continued Carbon Revolution Limited 20
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