Listen to ABC TV finance journalist Alan Kohler interview Redflow CEO Richard Aird and Chairman Brett Johnson on Alan’s The Constant Investor website. Topics covered during this 24-minute recording (also transcribed) include Redflow’s new Thai factory, target markets, competitive advantages of its batteries and plans for 2018.
Click the following link to listen to a recording of Alan Kohler’s interview with Redflow CEO Richard Aird and Chairman Brett Johnson, first published on The Constant Investor website at https://theconstantinvestor.com/ on February 7, 2018 (republished with permission ).
Transcript of Alan Kohler’s interview with Redflow CEO Richard Aird and Chairman Brett Johnson.
Host: Alan Kohler
Guest: Richard Aird (RA)
Brett Johnson (BJ)
Alan Kohler here with another Daily CEO for The Constant Investor and today it’s a double-banger. It’s Richard Aird, the CEO of Redflow, and his Chairman, Brett Johnson. Redflow’s share price has jumped in the last couple of months quite strongly because they’ve relocated their manufacturing to Thailand for a cheaper cost and that’s been a big project for them and the shares have responded accordingly. It doesn’t really change the market for them. I guess it improves their margin a bit, or perhaps quite a lot – they reckon that will knock off $1,000 to the cost of the battery.
But they’re still up against the market for batteries and competing against lithium. Their proposition, which is a zinc-bromide battery, as opposed to a lithium battery, is much more suited for industrial purposes than retail/residential ones, but they reckon they’ve got a pipeline of orders coming through and that they’re a chance to breakeven on cash by the end of this year. That’s what they’re talking about, they need to sell 250 batteries a month to breakeven and they reckon they’re on course for that.
The market’s starting to believe in them, it’s been quite a long time and Simon Hackett, the telco entrepreneur who sold Internode to iiNet has been the big supporter of Redflow, bought 17%, became Chairman, now stepped down in favour of Brett Johnson and Richard Aird who are now running the company. Simon is still there with 17%, still supporting the business and helping them with their technology, but Richard and Brett are now running it and as I say, the market’s starting to believe in them, so we’ll see how it goes. Here’s Richard Aird and Brett Johnson, the CEO and Chairman of Redflow.
The Redflow share price, I guess, hit the floor last October, under a cent, but started rising when you announced that you were making components for the batteries in Thailand, and today you announced that you’ve had delivery of the first battery, which was a pretty quick turnaround, and the share price went up a bit. So obviously, the Thailand thing is quite important, can you tell us why it’s important?
RA: I think the overall strategy’s important, Alan, and the announcements we made around that time where our share price got down to, I think, 8 cents or something. It wasn’t very pretty around the time that we announced that sort of strategic review and explained the reasons we thought we needed to relocate closer to our markets and for cost reasons to Thailand. We managed to articulate that to our shareholders we think and we’ve hit our milestones, everything we said we’d do back in July last year, we are doing or have done and are continuing to do. I think that’s helped the recovery of the share price but I think there’s also other broader issues or macro sort of interest in energy storage in general, that probably helps as well I’m sure.
Yes, of course. The Thailand announcement, basically that’s a relocation, is it?
I thought you were just going to make some components but you’ve relocated the company to Thailand, have you?
RA: Well, not so much the company, our home base is still here in Brisbane where I am right this minute. But we did pack up that line in North America. It was our equipment in a plant, in Flex’s plant – a large global contract manufacturer, Flex. We had our line there, so we packed that line up and shipped it over to Thailand and then we had to re-establish ourselves in Thailand and get the show on the road.
How much of a difference has that made to your cost base, can you spell it out for us?
RA: The immediate benefits around our supply chain with our much more efficient supply chain, the way our product works our supply chain is much cheaper into Thailand than it was into Juarez, Mexico. So there’s some immediate savings there along with some efficiencies with the way we’ve setup our manufacturing. We haven’t got the large overhead that we had at the Flex plant and so on. We believe we’re going to get close to a thousand dollar saving just by moving to Thailand, without having to do any product improvement or optimisation or cost down engineering that we have got started and in the pipeline over the next 18 months. But without that, just by moving to Thailand, we do get a thousand dollar benefit.
Okay. Perhaps we can bring Brett into the conversation. Brett, you’ve taken over from Simon Hackett as Chairman…
Simon’s like the guy with the Remington razors who liked the product so much, he bought the company. Well, he didn’t quite buy the company, but he bought a big stake in it, 17% of it and became Chairman and now he’s stepped back. What’s your view of the business – obviously, you’re optimistic about it…
How soon do you think Richard and the rest of the team will be able to get it into profitability?
BJ: Profitability? Big question there. Alan, the business which Richard’s running is dependent upon getting the Thai plant up. Now, we’re very confident that the Thai plant will be manufacturing very good quality batteries in the short term and will then be able to increase the number of batteries it produces each month in line with market demand. We’re very hopeful that once we get that line fully operational and we get the cost outs that the company will move to profitability.
What’s your own background, Brett?
BJ: I’ve been the Chair of Helloworld and on the board of Helloworld for a period of time. I was also on the board of a company called Scott Corporation, which is one of Alan Scott’s listed entities. Prior to that I was the General Counsel of Qantas for almost 20 years.
Can I just talk about cash with you, Richard? How much cash are you burning at the moment and how much have you got in the bank?
RA: As per our 4C we just put out a few days ago, we sort of had $6 million at 31 December. We’ve got some unusual expenses with the relocation and so on, so we’re burning between $700,000 and up to $1 million a month at the moment, so at least $3 million a quarter. That’s what we’re burning. We’re expecting our R&D tax incentive refund – actually, it might even be today – of $2.1 million, so that will help us along a bit. Then as we obviously get into production, you may have seen we’ve just started to produce stacks there. So, we obviously get new batteries coming off the line now that are – we have got customer receipts that we will be receiving in the near term as we start to deliver to customers.
Do you think you’ll go into cash breakeven before you run out of money or will you have to raise some more?
RA: I think it depends on how fast we want to go, Alan. I think we’re going to be in a good position to raise some capital because we’re going to have a very good reason to because of the sales orders coming in and the working capital, we’d probably like to be able to go faster in order to get to that 250 batteries a month, which is around about the organisation’s cash flow positive position. But we’re not planning on getting there until – well, I wouldn’t envisage getting there until later on in this calendar year, likely December. Through that period, yeah, there is a possibility we will need some working capital.
250 batteries a month you need to sell, if you’re looking at your order book now that feels doable by the end of this year?
RA: We’re building momentum all the time. Obviously, our channel partners and stakeholders around the business have been working with us for quite a long time, are really keen to see that reliable supply of batteries come online. Until they actually see them starting to come online I think they’re all quite confident, as we are of course, but it’ll be hard to get signed up purchase orders until they’ve got some confidence that they’re starting to see that delivery come through.
Can you give us a bit of a profile of your pipeline and your potential customer base? Who are they? What do they look like?
RA: We’ve got the three sort of main areas that we identified in that strategic review earlier last year and that continues to be the way, our sweet spot, so to speak, how things are working out. You’ve got the smaller residential type installations which tend to be more than one battery type applications but on a very large house, which ends up being a miniature industrial type installation rather than a straight residential. There is a lot of interest and demand when we can reliably supply in that sector.
The second one is what we call standalone, that commercial/industrial smaller to medium businesses particularly in areas in Africa is a good example where they’ve got unreliable grid, a manufacture plant running that has already put solar on but then with the use of some storage they can sort of make sure they’ve always got energy. There’s definitely demand in that small to medium size commercial/industrial space. Then we tend to separate our telco as a separate – of course, that’s still an industrial application, but telcos is a different application for us and one that we fit very well because telco, essentially globally, is a standard 48 volt application.
Most telco base station towers are 48 volt, which is what our battery is, so we do fit quite well into that telco system and that telco landscape. That is, I guess, a separate channel partner.
Can we just drill into the residential situation a bit? And in particular, the cost comparison with lithium ion batteries. What does your own cost versus the lithium cost and the comparable properties of the two batteries?
RA: Sure, Alan. Like all these things, it depends who’s working out the numbers as to what the business case is or how it works out. At this point in time we are definitely dearer than lithium. The cost of well publicised Tesla Power Wall, as I understand, is around about AUD$7-8,000. I think our battery, through one of our installers to a residential customer is probably in order of $10-12,000, so there’s no question that we’re dearer upfront. Even though we have a pipeline of engineering projects that are going to take 30-odd per cent out of the cost of our battery over the next 18 months. No doubt, Tesla and the lithium industry in general will still continue to erode their pricing as well. There is literally billions of dollar being spent on lithium R&D. Having said that, it’s slowed down a lot, how much their price is coming down, because they’re getting to the point where it’s getting difficult to get more cost out of it.
But around the benefits and the pros and cons, we are uniquely suited, we believe, to the peak daily discharge, the 100% depth of discharge. It doesn’t hurt our battery, it’s not eroded, so you get the benefit of using all the battery, every day and with no downside to the technology. It’s an energy storage machine or device rather than a box of chemicals that is a lithium or led acid battery which from the day it’s built is degrading over a period of time and particularly if you incorrectly use them or overuse them or more deeply discharge them than they should be, they degrade even quicker.
What’s your key selling point, is it your battery lasts longer?
RA: It does. It’s still at its full capacity at 10 years, it still will have all its capacity at its 10 year life. You’ll only have 60% of your battery after 7-10 years of a lithium battery.
Isn’t your battery bigger as well?
RA: Weight-wise, I think it might be quite similar, but the footprint was – we would be a bit bigger.
Because yours is a box, you can’t put that on the wall, is that right?
RA: That’s right, yeah. Having said that, I think the Power Wall 2, which the Power Wall 1 – I don’t think they sell it anymore, but the Power Wall 2 is made to mount on the ground because of the weight of it, a couple hundred kilos, I don’t think they’re terribly suited to hang on the wall anyway, but that’s by the by. They present very well in their form factor. But yeah, you’re correct, our footprint is different, it’s a box enclosure that sits on the ground.
I’ve said to Simon Hackett over the years that everyone’s going to buy lithium batteries, aren’t they? They’ve got the brand, they’re the thing that everyone talks about. South Australia put in a big lithium battery array. It’s like when your battery’s put forward as a big stationary industrial battery, South Australia should have bought your battery, shouldn’t they? And those kind of installations seem to suit yours rather than lithium, but people are still going for lithium?
RA: I think Simon might have written quite a bit about that at the time. We don’t necessarily suit that application that that big lithium battery’s being used for in South Australia. That’s a frequency regulation type – working with a big wind farm and lithium is fabulous for that. Very high power for a short duration, relatively speaking. So that’s a sprinter, if you will, we’re more of a marathon runner. We’re much better suited for time shifting solar over 3 or 4 hours, 6 or 8 hours, or work like that.
If you’ve got sun all day, you’re using all your solar now the panels have eroded in price a lot, people can afford to put more panels on, you’ve got excess energy, you can charge your batteries and you can completely use those, all the 10 kilowatt hours of that energy, over a period of time. Lithium doesn’t perform quite as well in that same scenario. I think it’s a clear case of both in the industrial sense and even for a lot of that particularly bigger residential installations that we technically suit better. I understand what you’re saying, there’s still a very big market with the lithium and a lot of money being spent on that.
I guess your business model is that the world will end up with at least two types of batteries and that you’ll coexist with lithium batteries and I suppose the question is what proportion of the market will end up being zinc-bromide and of that, how much you’ll get. So what’s your kind of thinking around those things?
RA: I tend to agree that lithium will be very successful. There’s also some reports and research coming out at the moment that I think are probably correctly saying that a really high per cent, something like 97% of global production of lithium batteries is going to go into EVs, so with the way that regulatory framework…
RA: Yeah, cars, electric vehicles. A lot of the production capacity we think that’s certainly the way things are starting to look like they’re unfolding. A lot of global production capacity, which a huge amount of that is emerging in China, like lithium production in China is specifically being built to go into cars. We believe that there is absolutely room for more than lithium in the market, there’s no question about that, and in a lot of cases and more specifically the areas that we’ve chosen strategically to go and focus on, we run very well and very competitive with lithium.
Brett, you haven’t had much of a go here, is there anything you’d like to add to that?
BJ: No. I think Richard’s actually summarised the position pretty well. I think the other thing to understand though, is that the Redflow battery doesn’t degrade over its life. Over a 10 year period life of a lithium battery, you’d expect the lithium to degrade by up to about 40%. But the Redflow battery provided it’s used correctly, will continue to provide its full 10 kilowatts of power for the full 10 years. I think that’s a major difference between the two.
I guess my sense is that retail customers and ordinary people don’t think about 10 years. Everyone’s in a much more disposable mindset than that and are more concerned about the price. It seems to be difficult to persuade people to spend another $4,000 on something that’s going to last longer when they’re just focused on the next five years.
BJ: Luckily the industrial clients look at the total cost of ownership.
Yeah that’s right, so it’s more an industrial application rather than retail I guess.
BJ: And as we said, the high end retail applications where people actually see the benefit of the technology.
RA: I think you’re absolutely correct, Alan, and I probably didn’t describe that very well in the beginning around the – it is a nuanced market I suppose, or a niche market, in that when I say residential, I don’t expect really massive single battery penetration head to head against lithium. I think it is probably a slightly different market where higher end houses and the energy system has been specifically designed with – there’s some complexity in the design of the system and they actually need a battery to perform a certain task. Whereas, shifting a bunch of solar energy from during the day to be able to make it useful at night, I think that’s probably a different application from a regular retail customer buying one in a Power Wall for their house or a Lithium LG or Samsung battery for their house.
What about apartment blocks?
RA: That’s another whole interesting thing. That becomes very much an industrial type application because most apartment blocks aren’t geared up for you to be able to – well, you wouldn’t want to be putting one of these batteries on your balcony, either lithium or – and you certainly wouldn’t want the lithium ones in your house. They tend to need to be building integrated and built with the design of the building. We’re starting to have conversations with those types of guys now, developers and design people who are considering energy storage along with a lot of other more design or environmentally friendly type setups for their building design. In a lot of unit blocks the energy storage would need to be designed into the basement or whatever. I guess it’s going to be taking away some car parks if they don’t get it right.
BJ: And solar on the roof, too.
RA: Yeah, and so on, yes.
Well, that’s really interesting, thanks very much guys, I appreciate you taking the time.
BJ: Thanks, Alan.
Thank you. That was Richard Aird and Brett Johnson, the CEO and Chairman of Redflow.
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