Calix Limited (CXL) Earnings Call Transcript & Summary

Before I hand it over to the guys to go through the presentation released on the ASX this morning, I'll just remind you that we will take Q&A at the end of the presentation which can be submitted through the Q&A button at the bottom of your screen. But Phil and Darren, I'll hand it over to you. Thanks very much.

Yes. So thanks very much, Simon. [ I ] move through to the next slide. Welcome all to Calix's half year results 2024. For those of you who don't know Calix, we [ were ] founded in 2005. We've listed on the ASX 2018. We're a technology company. I'll talk about the technology in just a second. But it's a technology that can really address multiple different industries and help them on their decarbonization journey. And so it's been a fairly rapid growth for the company, especially in the last 3 years in terms of opportunities and the investment we're making in developing those technologies. We move through the next slide, Simon. What is the core technology? Basically, it's a new type of kiln or furnace. It's a new way to heat stuff up. In a normal kiln or furnace, you put -- what you heat and how you're heating the same vessel. So you put fuel in there, rocks in there and you light your matches. It's being done much the same way for sort of 5,000 or more years. What we do is we separate how you're heating from what you heat. And we do that with a rather large steel tube. The biggest tubes we have made are over 1.8 meters in diameter and over 30 meters high. And we heat that tube to over 1,000 degrees centigrade. How we heat it, we can heat it with traditional fossil fuels, we can heat it with waste, we can heat it with burning biomass, we can heat it with renewable electrons. So the first advantage of the technology is, it's actually energy-agnostic. We can heat this tube with any sort of energy source we like. And what we heat goes down the middle of the tube. It needs to be a fairly small particle size. So imagine dirt or flour, just very small particle size and -- imagine holding a lump and dropping that lump of flour to the floor, and watching it just float down. Basically, all that's happening inside a tube. We're dropping what we heat down. It's floating down through the tube over 20 to 30 seconds and the red hot walls of the tube radiate heat into that power. And that's how we heat stuff up. We've radiated heat into those small particles. Why do it that way? Well, first of all, let's have a look at one of the applications of the technology, which is in CO2 capture. And what a lot of people don't know is that limestone by weight -- and here's a limestone. For those who can see, it's a whitish rock. Half the weight of this rock is CO2 trapped in the rock. When the cement lime industries heat this up, they release that CO2. It goes up into the atmosphere and the cement lime industries are responsible for about 8% of global CO2 emissions, and over half of those emissions are coming from the rock. And so in their kilns, they're heating up the limestone, turning it to lime to make cement and all of that CO2 is just going up into the atmosphere. With our technology, though, we're heating it inside of tubes. So the small particles of limestone are floating down the tube and as the CO2 comes out of those particles, they're not mixed with any furnace gases. They're contained in the tube. They're coming out the top as a pretty [ pure ] stream. And so the first application of the tech that we're looking at here is what we call our LEILAC application, low emissions intensity, lime and cement. And so the kilns [ are a way ] to directly separate the CO2 that's coming from this. And of course, if we're electrically heating the kiln with renewable energy, then it's a way to get to 0 emissions lime and cement. Another application of the tech and several different applications, actually for what we call our sustainable processing business, and this is where electrification and the ability to power a kiln renewable energy is really critical. And some of the stuff that we're developing here is quite exciting. Iron and steel -- the ability to make 0 emissions iron and steel is in this section and I'll cover that off in the half year update a bit further down, spodumene and its conversion to lithium, and the joint venture with Pilbara Minerals that we're developing to build one of these on their mine site to produce the lithium salt is one of the projects we're developing there. And the last application of the technology that I'll cover here is what we call our Magnesia business. It is the ability to actually take another raw material called magnesite and make quite highly active material out of that magnesite. Again, we're heating it up inside our tube, so same core technology. We're creating -- because there's no flames in hotspot touching the stuff as we heat it up because it's inside this tube, we can produce quite highly active materials. And so we've got a business that's actually generating revenue where we're making material to go into water treatment as a replacement of caustic. And also some really interesting applications of more active magnesia in biotech and agricultural applications. And so you can see here, I guess, multiple different applications for the one core technology. If we move to the next slide, Simon. We'll talk a little bit about the -- I guess, the competitive advantage or the technology [ motors ] at work. You would have heard me cover of cement and lime, iron and steel. We're also developing the one core kiln to go into the aluminum industry, so to take aluminum [ iron ] [indiscernible] and turn them into alumina. We've talked about lithium and lithium cell production. So the one core technology can touch on multiple different industries. We estimate the industries that we can help decarbonize at over 20% of global carbon CO2 emissions. And the ability of the technology to be lowest cost in that is the key advantage. We're not trying to separate carbon at the end of a pipe. It's actually just the kiln itself that's separating the carbon in cement and lime. And what I'm talking about is spodumene and the iron and steel applications. The ability of the kiln to be just a great kiln, let alone the ability to be renewably powered is really what's setting us apart from different technologies. If we move to the next slide, Simon. So just to give you a bit of a snapshot of the industries that we're looking at and I guess, the size of the opportunity of who we're working with. I talked about the CO2 mitigation space. You can see there in the cement and lime space, we're working with several different partners in developing that core technology, Heidelberg Materials, [indiscernible], Cemex, TARMAC, a CRH company, Engie, an energy company, Lhoist, a lime company. And that's really focused on the cement and lime opportunity, 1.4 billion tonnes a year of CO2 to mitigate in that industry. And also recently -- and I'll talk a little bit about this as well, the direct air capture opportunity with a company called Heirloom, Bill Gates backed company, targeting 1 billion tonnes of CO2 capture by direct air capture using our technology in combination with their technology. They want to capture that 1 billion tonnes by 2035. So pretty ambitious. And those particular businesses are on their way. We've already got licenses in place with Heidelberg Materials and Heirloom. The Heirloom license, for example, is a minimum of USD 3 per tonne. So when you multiply USD 3 a tonne by the market size, you can see here -- you start to get a glimpse, I guess, of the potential of this technology and the total investable market of this technology and the value. In the sustainable processing space, you can see here lithium, alumina and iron and steel and the sizes of those industries, lithium had [ $7 billion ] at the moment, but that's predicted to grow quite a lot. Alumina, again, you're in order of magnitude up, and in iron and steel in the order of magnitude up again. And again, we're successful in sustainable processing and putting a similar model in place that we put in CO2 mitigation. We're looking at licensing, and percentage of revenue is the way we're going to be licensing our technology to those sustainable processing industries. Already got a joint venture in place with Pilbara Minerals, and I'll talk a bit about that further down. And lastly, the magnesia business. You can see there again, some pretty significant markets. The water business were already earning some revenues, and Darren will cover off how that business is going for us, nicely growing revenues, nicely growing gross margins. And as I mentioned before, so pretty interesting applications in ag, marine and bio. If we keep moving, Simon, one last thing before we move into the financials is, a lot of, I guess, questions over the last few months have been around, well, is there still -- the interest in decarbonization is there's still the, I guess, the momentum in decarbonization. And is that still a great tailwind for our business? Well, the answer is yes. You can see here a quick snapshot of just recent moves in the policy space across Europe, the U.S. and Asia Pacific. Moves in the Asia Pacific, for example, China, extending its carbon pricing and emissions trading policy, looking to extend it across heavy industry. So it's had in there for power and just looking to add cement, steel, alumina, et cetera. And also I have been asked a little bit about, well, what happens if Donald Trump wins the election in the U.S. Well, the 45Q and the Inflation Reduction Act, which is really pumping a lot of interest in CO2 mitigation in the U.S., a lot of the beneficiaries of that are in Republican states and -- for carbon capture and storage from power facilities and these sorts of things. And so there is a big bipartisan support for those aspects of the build that also benefit technologies such as ours. So we see extremely low risk, that there's going to be lots of momentum in decarbonization policies globally from what we've seen. And lastly, in the EU on the left-hand side, you can see there, EU are introducing a carbon border adjustment tax, a carbon tariff, if you like. They're targeting 100% phase out of any free [ issue ] permits for CO2 by 2034. And so all of the industry will have to pay for their emissions by 2034. And so when they go on market and pay for those emissions -- I think last year, the CO2 price was about EUR 100 a tonne. It's dropped recently. But if you can look forward and see how much they're going to reduce their emissions by 2030 and then ultimately phasing out by 2034, there's going to be a lot of upward pressure on the price of CO2 in the European system as well. So we don't see any change in the tailwinds and the momentum behind decarbonization. I'll cease my sort of introduction a bit there, and I'll let Darren talk a little bit about financial results.

Yes. Thanks very much, Phil. From my perspective, key highlights and key messages from the first half is the beginning of being able to demonstrate the value that we're able to create for the company beyond just purely the magnesia or the water business. As Phil outlined above, the technology has application across some very large addressable markets across a thematic that will dominate the opportunity for the company over the next 5 to 10 years, which is decarbonization, decarbonization of iron and steel, lime and cement and other applications. And we're starting to see for the first time in this half just finished, revenues and earnings associated with the application of the technology into those lines of business. So at a top line revenue growth. Obviously, we reported $16.3 million in revenue for the half, which was up 28% on the same period last year. And just breaking that down a little bit further, our revenues are a combination of products and services, which was up 41% on the same time last year to $12.2 million, and grants and other income, which helps support some of the research and development that we're doing, and that was in line with the prior period. Underpinning that is also a strong growth in gross profit associated with gains that we're making in our water business. And Phil will talk a little bit more about that. But in terms of specific lines of business, just teasing out magnesia or water business, we've seen strong growth in revenues in the U.S. and Asia Pacific at much higher margins. And that's been something that we've been talking about for the last year or 2 now, ensuring that we're generating significant growth in revenues at improved margins. And in fact, as we can see in a couple of ages time, we've invested in new plant in the United States to expand our footprint as we see there's very good prospectivity for growth in both revenues and good margins in that marketplace. So we've made some investments in the first half to increase our footprint in the U.S., and I'll touch more a little bit about that as we go forward. The other element that I'm particularly pleased to see is revenue contribution from other areas of the business. If I look back just 4 years or so ago, the business was purely in terms of the profit and loss and the financials was purely about the water business. And I think in 2019, the revenue from the water business was only a little bit more than the amount of revenue we generated from LEILAC in the last 6 months. So we've seen good contributions from customers paying for products and services in CO2. And again, that's only just commencing in terms of the opportunity for that business going forward. Our third pillar in terms of positive contribution to the profit and loss was the gain that we're able to report associated with the IP that we're contributing to the PLS JV. And so, across all 3 key main areas of the business, we're seeing positive contribution from gains and revenues. At the same time, we're continuing to invest primarily in research and development activities. But as Phil said a couple of slides ago, the opportunity that the technology has to really pursue significant value creation for our shareholders, is immense, and so we continue to invest in research and development, primarily around our CO2 capture business and sustainable processing, and we're really pleased to sort of see some of the technological advantage that we're making, and Phil will touch on that a little bit more in terms of ZESTY and CO2. But also, as I said, it's a platform that's being created for the company. Simon, I might just quickly switch to the next slide. So that's the kind of key highlights from the profit and loss. Again, repeating some of the comments that I made earlier, contribution from the water business, good revenue growth from LEILAC, which was up 1,500% on the previous year. Obviously, there was a low base. But we've been saying now for a couple of halves that as we grow our cost base in lines of business such as the CO2 one, customers are increasingly interested and supporting, paying for the work that we're doing for them, and we're starting to see that play out. And as we move forward, and again, Phil will touch on Heirloom, there's significant opportunity for us to continue to earn revenues -- growing revenues in that line of business. Again, I mentioned previously, it's great to see the project with Pilbara pass FID in the last half, and that project remains on track, on budget. And again, Phil will talk about that. And in terms of our free carry, the intellectual property that we're contributing, again, that's beginning to contribute to the earnings in the P&L. So Simon, just the next slide now, and I'll touch on the balance sheet and the balance sheet flexibility. A key message, I think, from my perspective is, over the course of the next 2, 4, 6 weeks, there's a significant amount of cash that we've got embedded in working capital, which will unwind into cash in the bank. We've got a number of grants and rebates that we're due to receive over the course of the next little period of time. And so that will, again, I guess, reinforce from our perspective, the flexibility and the strength that we have in the balance sheet to continue to pursue the investments that we're making across what are significant and large addressable markets. And we retained -- with 0 debt we've retained a lot of flexibility in how we fund the business moving forward. And Phil will talk a little bit more about that as well. So Simon, the final slide for me. As I said, in terms of the operating cash flow in the first half would be -- was probably negatively impacted in terms of the timing of some receipts of receivables that we'll receive in the next couple of weeks. And so again, it's a reflection of the investment that we're making mistimed with some of the receipts that we're getting associated with our investment, but that will unwind in the next few weeks and months, as I said. We have been investing in long lead procurement items forL2. And again, Phil will provide an update, and we have recently updated about the progress on L2. And we've added manufacturing capability in the U.S. We have a new plant that's been commissioned in Texas. And again, the opportunity in Texas is -- and Southeastern United States is significant for the water business. And we've got another plant that's about to come on stream, I think in the next week or so in the Midwest as well. So -- and obviously, we continue to invest in the JV with Pilbara. So those are some of the key highlights, I think well capitalized, strong balance sheet, significant growing revenues across all 3 of our core areas of our lines of business and a very strong result with growing margins in that first half. So Phil, I'll hand back to you.

Excellent. Thanks, Darren. Move to the next slide, Simon. Okay. Just one of the things before I jump into the sort of latest updates around the LEILAC business. Around November, December last year, we wanted to have a quick snapshot, if you like, of where we see value in that LEILAC business because one of the things that we did back in 2021 was we had an investment from [ indiscernible ] [ company ] called Carbon Direct into the LEILAC business. They came in for 7% equity for EUR 15 million, and it was the first, I guess, proof point of our spinout model. And the spinout model, if you recall, is really about, as we get the technology to sort of pretty good value inflection points, we look at bringing capital into those subsidiaries and getting the subsidiaries sufficiently resourced to chase after the commercialization. So 2021 is when that happened with LEILAC, our first tick the box, if you like. And that basically valued the LEILAC business in 2021 at EUR 300 million or about AUD 500 million. At that stage, we had 34 projects in the pipeline. We had no license agreements in place. Since then, we've put 2 license agreements -- global perpetual license agreements in place, one with Heidelberg Materials in 2022 and one with Heirloom around direct air capture in 2023. We've built the projects in the pipeline up to 82 -- so 82 projects in the pipeline as at end calendar year '23. And so we've progressed the business and de-risked the business quite considerably since that Carbon Direct investment in 2021. We're trying to just get our heads around value just to help, I guess, other people get their heads around value and one of the things we looked at is, say, comparable companies like a Svante. Svante are developing CO2 capture and the pipe system with what's called MOFs, middle organic frameworks. Now Svante, the biggest carbon capture facility that built on a cement plant, is 400 tonnes per year capacity. In 2019, we'd already built [ Leilac ] 125,000 tonnes a year CO2 separation capacity. So we're already a little bit bigger than Svante. Some of them have built a 10,000 tonne per annum capacity facility on a power plant, not a cement plant though. Now Svante completed the capital raise, and one of the other things we've got been asked recently as well, obviously, the financial markets in the public market space have been a little bit dampened by interest rates and uncertainty. What's it like in the private market space. And I'll talk a bit about this and I'll talk a bit about the iron and steel opportunity as well. We haven't seen really any dampening of enthusiasm in the private market space around investing in decarbonization technologies. Svante completed a capital raise in December 22 of [ USD 380 million ], which gave them a post-money value of over USD 1 billion and unstated in terms of number of projects in the pipeline, unstated in terms of any end user license agreements in place. And so that's an interesting sort of benchmark, I guess, to compare the 2 technologies, chasing the same price, chasing decarbonization of cement and lime industries, but one, certainly in the private space. Sorry, the Svante has certainly taken a couple of capital raises in the private space that have really put an interesting valuation on their company. So we think there's considerable value just in the lime part of our business. If we move to the next slide, Simon. Where are we with LEILAC? So obviously, a little earlier this year, there was announcement by Heidelberg Materials that they were closing the Hanover facility due to some overcapacity they have in Germany. Unfortunately, that impacted the project. Heidelberg reiterated recently that they're committed to the LEILAC-2 project and that we're looking at alternative sites. That work is underway. And -- so hopefully, we're going to be able to announce something fairly soon on the residing of LEILAC-2. LEILAC-2 is important for the cement and lime -- cement applications where we use -- looking at alternative fuels. It's very European sort of way to make -- cement is looking at alternative fuels and LEILAC-2 is set up to look at that specifically. And one thing we want to emphasize is that the applications in direct air capture and other applications in lime and cement that we're looking at, that are fully electric versions of that kiln unimpacted at all by any delay in LEILAC-2. So all of the stuff that we're doing with Heirloom, et cetera, is moving ahead as planned. We just go to the next slide. I'll talk a bit about Heirloom. Obviously, Heirloom is a Bill Gates backed company attempting to capture CO2 from the atmosphere. Our technology is a critical part of the way that whole system is going to come together. Microsoft have put a full contracting with Heirloom and thrown of 350,000 tonnes of CO2 removal, and we think the estimated value based upon the price per tonne is about $200 million for that contract. So Heirloom are already signing forward contracts in for the system they're looking at. And so again, as Darren mentioned, we've signed an agreement with Heirloom that our technology will be exclusively used in the Heirloom [ capture ] system. We've completed calcium looping tests work successfully. Quite extensive test work completed there. And paid engineering work has commenced. And so one of the things that -- obviously, licensing is great and getting more of these global licenses in place is going to be important to continue to progress the LEILAC opportunities. We're getting paid to work for these projects, is also important. And so in a combination with a rising revenue, obviously, in the water part of our business and rising gross margins. Because counterparties are seeing the value in the technology and want to assess it for specific projects, you can start to see the revenue coming in, in the engineering part of our business for the LEILAC -- in the LEILAC part of the business. And so paid engineering work commenced with Heirloom and [ numerous others ]. We move to the next slide. I mentioned 82 projects in the pipeline previously. So certainly, I think there was 76 at August last year, so moved again up to 82, representing over 20 million tonnes of CO2 abatement projects. And again, just emphasizing on this slide that we're starting to get to a reasonable coverage of our engineering costs by charging for all of those companies that want us to have a lot good projects in their pipeline. So it's very refreshing and encouraging to see our cost recovery coming into that business. And as we've sort of hinted at before, encourages to keep accelerating and investing in getting this technology commercialized as soon as possible. Okay. If we keep moving, just a quick slide on the size of the price, if you like. The -- I talked about 1.4 billion tonnes of CO2 to be mitigated in the cement and lime industry. DAC is potentially a similar scale opportunity or even bigger. And so the size -- full-scale plants that we're going to put in place just for cement and lime are probably [ 2 ] week from now to [ 2050 ] if we are to address that whole 1.4 billion tonnes. DAC is a similar scale opportunity. So massive opportunity for the company. Okay. Let's move through the sustainable processing. So ZESTY, zero emissions steel technology, really exciting results coming out of a recent study we completed with the support of ARENA. What is ZESTY? Basically, it's using our same core technology and inside the tube we put hydrogen and in the top of the tube we put iron or irons. Typically, they're low value or even waste, these irons. They're very small particles. As those particles of iron ore drop through the hydrogen, we heat the tube externally with renewable energy. And that -- basically the hydrogen converts the iron ore to iron. The fact that we can use small particles is a key technical advantage. And if we go into the results of the front-end engineering design study, which is the next slide, the key thing I want to point out is no palletization is required. And what that means is that we avoid the capital and energy penalty associated with getting these irons and putting these pellets, which is the standard way to then take an iron ore to a direct reduced iron ore, hot briquetted iron. And the results of this study, which we completed in December, we test -- had over 90 tests on 6 Australian ores -- iron ores or once we get above available temperature of 900 degrees centigrade which you can see in this graph, we're right into the what's called [ metallization ] target range. We've converted the iron ore to iron at a level which is sufficient for direct feed into a blast furnace or basic oxygen furnace. And so we actually have a technology here -- sorry, I'll just go back a bit, the fact that we don't have to do palletization. If you look at the costs that you save there, actually, the demonstration plant that we're looking at here for ZESTY which is 30,000 tonnes per annum, is starting to get close to the cost -- the current cost of producing hot briquetted iron using the normal room, the normal, I guess -- when I say normal, the normal high carbon route. So this is a pretty profound outcome of this particular study. Because we can use small particles, we're avoiding palletization and the costs -- even though we're using renewable energy and hydrogen, the cost of producing HBI are down -- getting down towards a standard high-carbon HBI. So this is, as I said before, a profound result, and we want to progress ZESTY as quickly as we can. If we just move. What is ZESTY worth? Very good question. Don't know. What I've looked at here is some companies that have raised capital recently. You remember I talked before about cement and lime and the fact that a company called Svante could raise over USD 300 million even in the current sort of financial environment. We'll do some recent raises in the iron and steel space. You can see here Electra have done a Series A and Series B raise. They're up at sort of what's called tech readiness level 3. They're not out of the lab yet, but they raised about $85 million. And on your standard sort of dilution metrics that may be -- value that company around USD 0.25 billion. And another company called Boston Metals. They're developing another technology to make a 0 emission steel. They did a raise recently, just September 23, of $0.25 billion. And again, conservatively on those metrics, that sort of values that company nearly USD 0.75 billion. They're not out of the lab yet either. Another company called H2 Green Steel just completed the largest raise into a green steel project, $1.5 billion of equity raised, $4 billion of debt. And they're doing a -- what -- they're claiming as a 0 emission steel plant in Sweden. But really, it's natural gas driven and the hydrogen part of that is still quite low TRL, maybe 6. And so 6 is like [ steel ] pilot scale. What have we done? Well, ZESTY were built at 2,000 tonnes per annum. 500 tonne per annum feed rates is what we got to in the testing that we've completed with those 6 different ores. And the tube we built are capable up to 2,000 tonnes per annum. We're definitely out of the lab. And so we're roughly TRL 4 plus is where we see the ZESTY technology. One thing I will say about cement and lime and one thing I'll say about iron and steel, there's probably only half a dozen technologies that are ever going to decarbonize those industries. And so why are these companies being valued so highly? It's because there's very few companies playing into a huge market and a huge industrial problem. And with the latest results we've got from the ZESTY FEED study and all of that extensive ore testing that we've done at that pilot scale, that has really encouraged us to look at how we can accelerate the ZESTY opportunity. And so when we talk about the capital, I guess, options available to the company, if we look in the private space and see the valuations for these companies, and we think about what we did with the Leilac business in terms of getting private capital into a subsidiary. That's absolutely one of the options that could really accelerate ZESTY and are quite an exciting option that we're considering. Okay. Just quickly touching on the Pilbara project. The project with Pilbara Minerals, 45%, 55% joint venture. That particular project there, as Darren mentioned, past final investment decision in -- I think it was August last year. So it just made it into the half. And that project is proceeding well, on time, on budget. We've been asked a bit about lithium pricing. Well, lithium pricing has obviously dropped quite dramatically over the course of the last 12 to 18 months. But the other thing that's dropped quite dramatically is spodumene. And so the difference between lithium and spodumene is what we call the chemical margin. The chemical margins have actually improved slightly over the course of the last 12, 13 months. So this particular project still remains of interest to both parties and commitment for both parties continues on time and on budget, as I said before, targeting completion during - probably towards the end of March 2025, commissioning beginning in the next quarter. And so that one there still line of sight to probably USD 40-plus million in revenue as the value of lithium and the lithium [ cell ] itself. So a very interesting project, material to us, still on time and on budget and moving ahead well. We move to the next slide. Just on advanced batteries. We've completed a program on the advanced batteries. The material we made is in a motorcycle. The motorcycle is on its way to Australia now. We're going to be doing lots of testing on it. We've been able to show that, that material is as good as commercially available materials in the battery space. But the key thing we've also been able to show is that the carbon intensity and the energy required to produce that material in our technology is lower. And so what we're going to be pursuing is really cathode production opportunities with our technology, being a little bit [ ambivalent ] about what particular cathode materials we're going to be pursuing there. We've proven it in lithium manganese oxide. We do testing in several other materials, but this particular focus will be around electrification, renewable energy power of cathode production. So this particular line of business, the advanced batteries piece, is going to [ slope ] now into sustainable processing as one of the sustainable processing opportunities moving forward. So great progress on the batteries piece. It's going to be a part of the focus of sustainable processing to take that to market. We move to the next slide. Quickly on magnesia. As Darren mentioned, good growth in our water revenues, mainly driven from the U.S., still plenty of upside in the U.S., plenty of greenfield opportunities there, not -- going head-to-head against other magnesia competitors. Just simply replacement of caustic is generating all of the growth and all of the gross margin growth. As Darren mentioned, 2 new hydration plants, one fully commissioned, one undergoing commissioning right now in Wisconsin. And so those particular plants they were adding 50% to our capacity to produce this material in the U.S., and it's going to be exciting to see that progress from here. Lots of advances in the ag, marine, AMR, antimicrobial resistance space. You can see the steps that are being taken moving forward. Those particular applications, let's call them, the bio applications of the magnesia. It will take some time, but everything that we're doing there continues to prove the effectiveness, the efficacy, if you like, of the materials that we're making with our core technology. And there will come a time when things like antimicrobial resistance will keep forcing itself on, I guess, humanity to the point where we have to find alternatives to antibacterial treatments that don't engender antimicrobial resistance. And so the opportunities in these markets are huge. And so we're going to continue to progress all of these different applications of the magnesia business, and we still see them as highly prospective. We move through. In terms of sustainability, we have 3 different ambitions. We've progressed well against all of those ambitions over the course of the half. Move forward again, Simon? Lastly -- second last here, I should say, before I sum up. Just in terms of the Board, 2 new Directors joining us in January, Dr. Sarah Ryan and Peter Dixon. A huge welcome to those Directors who have enormous experience being brought to the Board. And so we have a highly experienced Board now. Peter Turnbull is looking to retire during this year. And Alison Deans has been nominated as the Chair [indiscernible] the company. So the Board renewal process is nearly complete, and huge welcome to Dr. Sarah Ryan and to Peter Dixon to the Board, and we look forward to working with you. Just in terms of where we're at on our KPI dashboard, the only watch points here, LEILAC-2. Obviously, we're working hard in Heidelberg to identify the new site. The magnesia metal plant, the basis of design there is being delayed a little bit. But other than that, everything else is on track. Move through to the last slide. Just in terms of quick summary. Obviously, the core technology, we continue to be highly excited by. We don't see any change in the macroenvironment in terms of decarbonization. We don't see any change in the financial environment in terms of capital available and wanting to be placed to accelerate that decarbonization. And so we're continuing our strategy of acceleration. We're investing in the technology and the development of the technology in these businesses as a result. As far as capital is concerned, obviously, building [ head company ] revenues and gross margins helps us. We're not just a science and R&D company with no revenue. It's great to see the revenue building in the water business. It's great to see the revenue coming in for our engineering services for these new applications, which is endorsement in and of itself. As Darren mentioned, we continue to have a strong balance sheet. We have very prudent and focused investment to build technology value. And the P&L impact of the Pilbara project, for example, is just one example. But obviously, as we look back on 2021, when we had carbon direct investments, the cement and lime part of the business, there's enormous opportunities to continue to look at other deals in a similar way. And that moves on to the next point nicely because equity farm-in at the subsidiary level is one of those areas where we see considerable -- considerably more value than the head company is probably being given -- being attributed with currently. And so much more efficient for us as we want to accelerate those businesses to look at getting equity in at those subsidiary levels. So LEILAC, which is de-risked since 2021; ZESTY, where we want to get on and build this 3,000 tonne per annum plant. We see in the market some very interesting benchmark values. And so those options remain extremely interesting to us. I'll probably talk about LEILAC, Pilbara and ZESTY pretty well during the talk. So I might conclude there, Simon, and happy to answer any questions.

First question, it looks like there's a meaningful working capital outflow in the first half. Would you expect that to reverse in the second half? And what's the outlook for CapEx in the second half?

Yes. Hopefully, I'll address that to a certain extent, and I'll just reiterate that, Simon. Yes, indeed, a significant reversing of that situation over the next few weeks and months or so. Just a timing issue more than anything. But we continue obviously to invest in the platform that we're building. In terms of CapEx in the second half, yes, I think as we mentioned, the 2 plants in the U.S. are pretty much there, other than the Pilbara project that will continue to be built and obviously funded significantly by our partner there as well. And the government -- that's probably the key CapEx items in the second half in terms of LEILAC-2. Obviously, we're working through a process to finalize the site selection and work on engineering for that once that one site has been completed. So yes, in terms of CapEx in the second half, it will not be as big as the CapEx outlay in the first half for sure.

Just a follow-on question on LEILAC-2. Has there been any developments with Heidelberg around allocating an alternative site and a 6-month delay to expected construction a reasonable assumption?

Yes. Look, I think what we've been able to say in the public domain is we absolutely are working very hard as a Heidelberg on selecting the site to move the LEILAC-2 project too. I think when -- a few weeks ago when Heidelberg reiterated their commitment to the project, we talked about the site selection not being weeks, but not being 1 year or more. So it's somewhere in between. We obviously want that to be sooner rather than later, as do Heidelberg. And so we're working to that time line. As soon as that site is selected, the 6 months required to engineer the -- just the integration aspect. The plant itself is designed, it's ready to go. It's the integration with the existing plants that we've conservatively estimated at 6 months engineering. And so once we know which site, we can probably give a more accurate update on whether that is 6 months or whether it's 4 or shorter. So watch this space, and hopefully, we could have some news soon.

Calix capture CO2, what are your CO2 storage consideration for LEILAC and other uses? Has there been any thoughts or development of various storage choices that can be offered as a package or through partners to different clients?

Yes. So if we have a look at the LEILAC-2 project, the Port of Rotterdam is a member of that project. Port of Rotterdam is one of the largest CO2 storage hubs being developed in the world. And so absolutely, the consortium that we have there developing LEILAC-2 with us includes all of the thinking that needs to happen around CO2 storage and infrastructure. We're also doing -- looking at onshore options as well with the geologic size of Belgium and Germany. So absolutely, LEILAC being connected through to storage is part of how we think about it. The U.S., for example, several projects there being looked at proximate to CO2 pipelines. LEILAC does need to be connected to a CO2 storage applications and resolving that is part of what we do, and we're working with our partners and with experts on doing that. One other thing I'll add though is utilization. The project that we're developing in South Australia, which is looking at utilization of CO2 from a lime plant for green methanol production is one of those areas that were also progressing. So [ BioSolar ] German fuels company, an energy company called Mabanaft in a joint venture, ARENA funded, we're supplying the CO2 to that site, and that will be used to make a green methanol. Maersk, the second largest shipping company and the largest container shipping company in the world, has committed to green methanol as its shipping fuel of the future. So CO2, utilization options are also being developed with partners, if you like, to LEILAC.

Can you please provide your thoughts on whether you see heat batteries such as that proposed by Rondo Energy as an opportunity or a threat to your business, i.e., can this technology be retrofitted to existing kilns to decarbonize or is it potentially an opportunity more suited to Calix's kiln?

It's absolutely more an opportunity than a threat. What Rondo's technology and other heat battery type technologies do is they take electricity when it's really cheap. They convert it to heat and store it as really hot bricks. And as and when electricity or other energy sources become very expensive, they then convert the heat in the bricks back to electricity. And so they'll sit there and be a battery, if you like. That's actually quite complementary to our technology more than anything else. Those batteries -- as a heat battery, they can't necessarily decarbonize cement as we say half the CO2 is coming from [indiscernible]. Heat batteries will do nothing there. But heat batteries will certainly work with our technology well. We made a site, for example, to build -- double the capacity of our kiln and only suck down energy when it's really cheap and only run the kiln when it's very cheap. And so in combination with heat batteries and energy systems, we might have kilns that are very, very flexible in terms of taking cheap energy. And even though you spend a bit more in capital in the ability to access cheap energy allows the kiln to be quite economic. So yes, so heat batteries and the ability to load balance and all those sorts of opportunities are available to our technology, and I see that as complementary. Hence the reason, by the way, companies such as Engie are working with us in the LEILAC project. So Engie is, obviously, one of the largest utilities companies in the world.

Given you're using waste sponge from iron ore, do you have a feeling for the value add to iron ore producers? Will it have a material increase on their recoveries?

A short answer is, I would think so. Obviously, we're in discussion with iron ore producers. They play their cards very close to their chest. But suffice to say, there'll be numerous attempts by the iron ore industry to process [ fines ]. So BHP, Rio, have all attempted to do it. They've failed technically to be able to do it. And so those particular installations which were well over -- [ actually ] 2 decades ago were there to do just that, is to take a lower value material like an iron ore fine or ultrafine and produce a hot briquetted iron product. And so absolutely, I think, they see value in it. We have processed a hell of a lot of iron ore through our facility in Bacchus Marsh from some of the largest iron ore producers in the world. So that sort of says to me they see value in it.

And can you itemize where your cash was spent in the first half? And how does that look over the next 6 months?

Maybe -- Darren, do you want to --?

Yes, I think the key area of investment, I think, if you look at the P&L, it's R&D, which has grown. And the key area where we're accelerating our investment there are in the 2 areas which represent the most prospective value for the company, which is in cement lime decarbonization and direct air capture, so the CO2 business. We've built a very strong, very capable team to really attack that opportunity. And as Phil said, that's 2 markets that are worth multibillion-dollar -- have a total addressable market of multibillion dollars on an annual basis with our licensing model. So reducing the -- sorry, sorry, accelerating the technology up the TRL cycle and de-risking the tech as quickly as possible and getting the tech into the marketplace will allow us to tap into this opportunity that we're creating to generate license and royalties associated with that technology. So that's the one key area of increased R&D spend. And the other area is in the sustainable processing part of the business, which, again, as we hopefully have been able to try and illustrate this morning, very prospective opportunity across, obviously, the spodumene opportunity with Pilbara, which is contributing some [ game ] with our IP being recognized. But in terms of ZESTY, again, relative to the market opportunity and I think the slide said something like USD 640 billion total addressable market on an annual basis, spending $2 million or $3 million in additional R&D in the first half, which was co-funded by ARENA, I should add, represents significant -- a smart investment for the company when the results so clearly demonstrate we look like we're on to a really interesting winner in terms of the lowest cost of a HDRI product. That's particularly interesting and exciting and it's something that we feel represents really strong -- good value for investment. The other area in terms of capital is obviously with the Pilbara JV with our plants in the U.S. that I've mentioned and also some long-lead procurement items for LEILAC.

What color can you give on the competitive landscape in carbon capture and cement at Heidelberg or others may be looking at?

So what -- competitive landscape, yes. So Heidelberg have 3, I guess, technologies that they're looking at, ultimately, to help them decarbonize. The first is what's called [indiscernible], which is a chemical that sits there at the end of the cement plant at the end of the pipe, and that chemical absorbs the CO2, and then you've got to take that chemical and boil it up again, and that releases the CO2 as a pure stream. That technology has been around for 60 years in the oil and gas industry -- 60-plus years, and it's being applied to cement. Several Heidelberg projects are looking at [indiscernible]. And the only issue or the problem with [indiscernible] or the several problems, we think, but it's going to be bloody expensive. I don't think anyone has walked away from the fact it's going to be expensive. [indiscernible] themselves who are supplying the technology for Heidelberg at what's called the [ Norcem ] project. I don't have much to say their technology will -- at least the lowest cost will be around at least EUR 100 per tonne of CO2 captured. So Heirloom, technically a little more advanced given the history in oil and gas. When I say technically more advanced just they're at a higher TRL, if you like, but that's going to be much more expensive. The other thing that Heidelberg is looking at is what's called oxyfuel. It's where you separate air into oxygen and nitrogen and you just put oxygen through your burners on the cement plant. You still need a cement and capture system at the back. You still need to separate air into oxygen, nitrogen, that takes energy. So again, energy penalty associated when using oxyfuel, but it's one of the technologies that have been around and trying to be developed in Europe since the late '90s. So there's a bit of momentum behind oxyfuel. We've been around since 2019. So we're the new kid on the block and we're punching well above our weight, I think. But these 3 sort of technologies have been looked at. A couple of others being looked at. I mentioned Svante. That's like a metal organic framework version of an AV. It has the same issues. It will require energy once the metal is absorbed the CO2, just to put steam through and release that CO2 as a pure stream. There is membrane technologies where you try to separate again, the gas from a gas through membranes. All of them are -- they have a limit in terms of how cheap they're ever going to be because of the energy penalty. So where we have technical advantage is we have no theoretical energy penalty. Now our retrofits will, of course, have energy penalty because we are moving hot streams [ about ]. If we built a plant from scratch and use all of the heat streams in a greenfield application, our target would be to have and use no more energy and a best available technology cement plant today. So we see ourselves as -- well, I guess, what we say is we've got physics on our side. We're just [ heating ] stuff up in a different way. And so that's where we see significant competitive advantage versus the others. But as I said, there's half a dozen that will ever decarbonize cement, lime and we're one of them, and we think we've got pretty good advantage.

So just 2 more questions. Is there any updates on Cemex?

Yes. Cemex continues to be in that pipeline. They got 3 projects that we're developing with them. And as soon as we can, we will update on Cemex. They're interesting company to deal with. They remain committed to the technology. And as I say, as soon as we can update all those projects and on -- and I don't know that -- one of the question would be when are you going to sign a license agreement with Cemex, when they agree to our terms is the answer to that.

Last question. There's a recent announcement of BHP, Rio and BlueScope working together to build our ESF plant. Is the ZESTY technology suitable as a feedstock to this facility, and therefore, is a selection of the location of the ZESTY power plant linked to the BHP, Rio and BlueScope to determine a location for their facility?

Yes. No, excellent question. And very pleased to see that announcement by BHP, Rio and BlueScope. What they're looking at there is what's called an electric smelter. An electric smelter is absolutely what can sit downstream of the ZESTY unit. So once we take the iron ore and convert that into an iron, what an electric smelter can do is melt that iron and take with some of the impurities out of the iron to make it suitable for electric arc furnace, for example. And so that type of smelting technology is absolutely compatible with ZESTY. It does need to be co-located with the ZESTY plant, not necessarily. We can produce a hot briquetted iron product from our ZESTY facility that can be moved to a smelter and [ smelted ], probably a little more efficient if it's co-located. But for these first demonstration units, that type of efficiency is a critical element. So in some [indiscernible], great to see them doing it. It sort of says that these guys are moving down a pathway to decarbonize as quick as possible. And since they're still bloody interested in making sure that their hematite/goethite ores, which are 96% of our exports and a huge part of their revenue. They're looking at ways and means to make sure those ores can be electric arc compliant, which they are now. And so it sort of says that these guys are looking ahead nicely. And that's good for us because ZESTY integrates with that sort of technology beautifully.

So that's the end of the Q&A. I'll just hand it back to you for closing remarks.

Excellent. Thanks, Simon. Look, first of all, thanks very much for all of your attention, all of your support over the course of the last 6 months. We're into a pretty exciting phase. We've got a FEED study complete for a 30,000 tonne per annum demonstration facility that is getting close to the economics of making a hot briquetted iron. And those economics exclude any carbon advantage that our technology might have. We feel that technology, if I look at benchmarks in the market, is highly valuable. And we want to look to progress that as quick as possible. We have similar views in the LEILAC space, accelerating nicely in direct air capture in other projects coming there in the pipeline and really looking forward to updating the market on LEILAC-2. And so with more projects coming into the pipeline, with engineering fees being generated by that line of business, I remain highly excited by it. Things progressing well at Pilbara and magnesia and the water business continues to grow nicely for us in the States. So personally, I see a huge opportunity for the company over the remaining part of this financial year, and I really look forward to updating the market as and when these opportunities reach some interesting milestones over the course of the next few months.

Great. Thanks, Phil. Thanks, Darren. Thanks all for attending.

Thank you.