Matrix Composites & Engineering Ltd (MCE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Composites & Engineering Ltd FY 2020 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And now I hand the conference over to your first speaker today, CEO, Mr. Aaron Begley. Thank you. Please go ahead.

Good morning, everyone, and welcome to the 2020 full year results presentation for the Matrix Composites & Engineering. I'm Aaron Begley, and I'm here with my CFO, Brendan Cocks, and we'll take you through the published presentation that was released at the exchange this morning. There are page numbers on each of the slides. So I'll refer to those page numbers as I go through the presentation. So if you'd like to turn directly to Page 3, which is overview. Our financial results for the full year were down on last year. This is primarily because of the reduction in the oil price, which was quite profound at the beginning of the calendar year this year as a result of the global impacts of COVID-19. And this has materially affected the global oil and gas industry, in particular, the exploration sector, which we have historically participated in, and has resulted in a lower-than-expected second half revenue. We were on track for full year growth until COVID hit. We had a large forward order book. We were a large forward quotation book that we're actively pursuing. But as a result of deferments and cancellations and wins and some losses, this has resulted in the weak second half result. The underlying EBITDA loss for the business, again, entirely as a result of subdued second half revenue, was $3.7 million. This is slightly greater than the previous year, but really a reflection on that subdued second half activity as a result of the sector weakness. Our NPAT loss was $64.5 million, which is quite significant. The vast majority of this is as a result of non-asset -- noncash asset impairments and also the derecognition of a deferred tax asset, which Brendan will take you through in his section of the presentation. We have continued to be very careful with cash through this period for obvious reasons. We ended FY '20 with just under $15 million cash and no trade or term debt. This is an improvement on the FY '19 results. And again, Brendan will take you through the cash flow waterfall to explain the -- where that cash has come from. We have had quite a modest second half cash outflow. Again, as a result of a number of factors in the business, including that very prudent cash management and a reduction in operating overheads. With respect to our operating overview, we did deploy an LGS system at the beginning of the year on the East African coast. Unfortunately, that was suspended due to COVID-19 restrictions on crew changes. So that particular opportunity is still ready to be reactivated once the rigs start working again. We've also sold our first order of a now centralizer range into the Middle East, which is quite significant. That market, still very active and strong despite the subdued global oil price. We've also received our first orders with 2 Australian LNG operators for our new coatings technology line, and we continue to provide both equipment and materials to those sites. And we've been advancing very actively with our diversification strategy to pursue opportunities in the local resources sector. Our COVID-19 responses have been very good. We are currently not impacted from an operational standpoint as a result of COVID-19. In terms of our outlook, our key focus is on building sustainable revenue for the business, and that's going to come from servicing the Australian resources sector. We are targeting a more stable revenue base whilst maintaining the ability to produce the project-related work that we have historically produced. But it's key to us to build a sustainable revenue base, which will come out of servicing the local resources and LNG sector, whilst being able to pursue those opportunity for project -- opportunities for project-based work when they come along. I'm going to turn to Slide 4 now. Indeed then, this has an outlook element to it. We have a world-class modern and highly automated manufacturing plant. We know a lot about advanced manufacturing. We're recognized as a global leader in the role of advanced materials and composites. So we know a lot about that, and we have some very clever people that are global experts in that area. We are actively pivoting, and we're targeting the opportunities that we see in the local resources sector to provide operational cost reduction, life extension of assets and productivity improvements to the resources sector. And that's something that we're actively pursuing. We see a substantial opportunity there, and we've already got someone on the Board. We're effectively applying our expertise and resources to target those areas where we see growth opportunity and sustainable revenue. And we have a solid financial position, a substantial production facility and all the personnel and correct technical expertise we need to ensure those opportunities. So this is not an outstanding start by a mean. What we're doing is we've identified our core competencies, our capabilities, and we've targeted a market where we believe we'll be able to achieve growth and a sustainable income base in the Australian -- West Australian and Australian resources and LNG sector. So I'm going to hand over to Brendan now, so -- who will take you from Slide 6 onwards.

Thank you, Aaron, and good morning, everyone. From a point of our key financial metrics, during the period, we recorded a statutory EBITDA loss of $43.8 million and also an NPAT loss of $64.5 million. This, as Aaron explained, was driven by a number of large one-off and mostly noncash adjustments. When adjusted for these large nonrecurring adjustments, we recorded an underlying EBITDA loss of $3.7 million. Those adjustments during the period included an impairment of our assets and also a derecognition of our deferred tax assets. So the impairment of assets was $36.3 million, and the deferred tax asset taken off the balance sheet were $12.6 million. Now both of them were as a result of following the accounting standards. And looking at the 5-year forecast for the primary industry we participate in, which is the oil and gas industry and uncertainty within that industry means that we need a more conservative forecast going forward, and that has led to the impairment and the removal of the deferred tax asset at this time. We also recorded a loss on sale of assets, which was primarily a result of the sale and leaseback and the removal of our buildings as an asset. And also there was restructure and obsolescence costs of $2.1 million, which was looking back at a number of our materials that we procured in a time when we're producing at a greater volume. So we've taken a conservative view on them. Of note also on the revenue, it was on the back of a weak second half, where we recorded ultimately a revenue of $27.4 million, and that was largely impacted by order generation and project execution from February onwards. If we turn to Page 7, the balance sheet. The sale and leaseback completed in December '19 has resulted in an increase in our cash holding. The impairment we discussed on the previous page was once we've worked out the quantum, then we need to allocate that across our asset base. So the end result of that was there was a $17.6 million reduction to our plants and equipment balance. There was a $16.5 million adjustment to our right-of-use assets. There's a $2.2 million impairment to our intangible asset balance and also the $12.6 million reduction in our deferred tax asset. Just to note that we still retain all our tax losses. And even though they've been derecognized, we can access them in full in the future. And also, even though we've taken a hit to our asset-carrying values, the facility still remains in good order with ability to return to nameplate capacity with the flexing of our variable labor force. On Page 8, which is around our cash and capital management, cash of $14.7 million, and that results in a net cash of $14.7 million because we now hold no financing on the balance sheet. Since year-end, we've maintained a reasonably similar bank balance, except for the $1.2 million in -- we paid for coating equipment, which we're already earning revenue on. Focus for the business is to manage cash as aggressively as we can. Where possible, maintain our overheads at a level which protects our cash balance but also retains capability in the business. Slide 9, we go through our cash flow of operations. So of note, we ended up with an operating cash outflow of $5.6 million. In half 2, that cash outflow was only $1 million as we managed overheads and access government funding and we also drew down on existing stock levels so we could protect our cash balance. It also included a reduction in salaries across all our indirect staff of 20%, which they've all taken from the 1st of April for at least 6 months. Outside of the cash flow operations, there's $20 million, which is the net proceeds from the sale on leaseback and which is the event which has helped protect our cash balance through the year. At this point, I will pass back to Aaron.

Thanks, Brendan. Well, if you'd like to turn directly to Slide 11, I think it's important to give some context around the presentation with respect to what our capabilities are. Over the past 20 years, we've built up a substantial capability in the areas of advanced materials and advanced manufacturing and more recently, technology development. Now advanced materials, as we define it, things like composite materials, carbon fibers, kevlars, synthetics, advanced phone systems, ceramics, that sort of thing, thermoplastics, engineering plastics and thermal plastic composites. So these are materials that are used broadly in the aerospace sector. They're used in the manufacturer of all sorts of goods and products that are used across industry and also in consumer products. And we are experts in that field. So that's something we've become very good at. So we have laboratory facilities and we have scientists, and we really do have people that run around in white coats that develop composite materials and understand and test them and something we do very well. When we built our Henderson facility, we applied the principles of advanced manufacturing right through the process of designing and building that plant. So our people are also quite adept at lean manufacturing principles, advanced manufacturing in terms of process flows, robotics, automation. And that's something that made us and continue to make us very competitive in our traditional market and can be applied in other areas. Technology development is something that we've done internally for a long time, where we have developed products like LGS, centralized products, some of our planting systems for SURF and something we've been quite good at. But it's also now a service that we provide externally to customers, such as some of Australia's key resource players. And this is a business line that has a lot of opportunities for us as our customers identify issues, identify potential solutions and then ask us to develop and manufacture them. So quite an exciting growth part of the company, and we are actively engaged with a number of companies on this and are currently performing work for them under contract. Turn to Slide 12. I'm going to just stop here very briefly and talk about our traditional markets. More detail on the next slide. But our traditional markets, we really defined as the deepwater drilling sector, the subsea and SURF market in relation to oil and gas production offshore and well construction, both onshore and offshore. If you turn to Slide 13, please. Just a bit of commentary around these markets. Well, probably the market that has been hit the hardest has been rather the deepwater drilling market, which drives demand for one of our traditional products, which is riser buoyancy. Several major -- several of our major customers are currently in Chapter 11. So customers like Diamond Offshore, customers like Volaris and others are -- have really struggled through this period where there's been a diminished demand for rig time. There's been deferrals of projects, and there's been a collapse in the day rates for rig hire. And this has resulted in a number of the projects that we had on the cards that we had expected to book by March, April this year being either canceled or deferred. And a lot of these projects have been shifted to right by at least 12 to 24 months. So we would expect this sector to have at least 1 to 2 years of subdued activity. Some of the projects will come back. Some of them won't. As I mentioned earlier in the presentation, we did have an LGS string that was being run off Mozambique. That was quite an important milestone for us. But unfortunately, that project is being deferred. But it was really a sign of how established we have become in the marketplace for that technology. Eventually, that opportunity will come back. The timing is uncertain. And the market will remain cyclical going into the future. And there's a degree of unpredictability around it. Nevertheless, we have still maintained the capacity to reduce drilling rise of buoyancy and SURF buoyancy, which when those projects come along, we will be able to service. And this is really the underlying reason for shifting our short- to medium-term focus into developing a sustainable revenue base from brownfields operations in the Australian resources sector, if we're able to build a substantial revenue base targeting those opportunities that we see in that space. And we're profitable on that basis when these projects come back, which they will, at some point, we'll be in a position to make some very good money out of that process. With SURF, there were several major projects that we'd been slated for in Australia, including projects by a number of Australian operators. They have been deferred. I mean, I think everyone is aware that Scarborough, [ cleared the ] Barossa and others have been -- the FIDs have been shifted to the right. So we're just waiting for those to be reactivated. But we have been actively bidding into the Brazilian market where there is renewed activity down there. So there are a number of projects that we're targeting there, and we'll continue to do so, and we have been quite active in that market in recent times. With respect to well construction, the North American unconventional market has collapsed. They are very much a swing producer in the oil and gas sector. And with the oil price where they are -- with the oil price where it is at the moment, there's been a steep drop in rig count. However, our focus is really on the Middle Eastern market, which remains very robust, and there's some substantial opportunities there that we're pursuing. And finally, I guess, in this sector, one thing to point out is despite our reduction in operating overheads, despite the market outlook, we have retained or continue to maintain the ability to produce our traditional product line. So when the opportunities do come along and the market recovers, we'll be there to take advantage of them. We had quoted a $50 million-plus pipeline of work early this calendar year. With respect to what's happened to that potential workflow, most projects that were there have been deferred. There have been some cancellations, but we've also won some, and we've also lost some. So some of those we've announced in terms of the wins. Some of them we haven't announced because they haven't been material. I'd like to turn to Slide 14, which is where we believe the growth path of the business is from a sustainable perspective. So specifically, when we talk about what we're pursuing within the resources sector and the LNG sector within Australia. Composite materials, coatings technologies, the technologies that we develop with thermoplastics have a number of different applications to reduce the operating costs and improve the performance of resources companies. So what does that mean specifically? Well, for example, the corrosion control technologies business unit that we've established, where we have a number of our clients that are currently using the product and the equipment that we hire out, that -- that's of great interest to -- or the reason, specifically the reason why customers use it is because it gives them extended asset life substantially extended beyond what is currently used in the -- or has traditionally been used in the market, and it's also cheaper and quicker to put on. So have scheduled advantages and we can give them guarantees in terms of how long these coatings are going to last. So in some cases, they will never need to be replaced through the life of the asset. And that's really our niche. That's our key point of differentiation in this market. Composites are also used in applications where you need to lighten structures where you can't use hot work where you want to do repairs actively with operating facilities. And these could be LNG plants. They could be offshore facilities. They could be refineries. They can even be operate -- iron ore operations and gold operations. So -- but primarily, our target is the industry that we know very, very well, which is the oil and gas sector. So LNG is a big target for us. We also have a number of specialized testing services. We have the largest subsea testing facility in this part of the world that we use traditionally to test buoyancy systems. This is of interest to Navy. It's also interest to anyone that has subsea equipment operating off -- subsea environment. So a lot of those components need to be tested. They're currently tested in Europe. We're seeking to bring that testing work back in-country and to generate revenue from our equipment that we have in Henderson that's traditionally been used to produce buoyancy products. So the key target is very much about reducing the operational cost of Australian resources companies and improve productivity, reduce downtime, utilizing advanced materials technologies and advanced manufacturing processes. Just turning now to Slide 15. Something to point out, I think we're planning to point this out. This isn't a knee-jerk reaction to COVID. This is something that we've been working on since 2018. If anything, this pivot to utilizing our core competencies to service the local resources sector has probably been accelerated as a result of COVID-19 and the reduction in the oil price. But we've been identifying and working with customers in Australia for a couple of years now. We've successfully penetrated this market. It is -- we're not -- we're going from a standing start here. We have the acquisition that we made in the Coatings division was quite important and has enabled us to continue to service that market. And we've also got a number of other examples where we've produced products and equipment for offshore pipelines, for SURF applications and local market for brownfields operations. The attraction to us is the very, very large size of the OpEx spend in the Australian resources sector. After being an asset owner, the next biggest game in town is servicing resources assets and operations, and that is the market that we're going to pursue to build our sustainable revenue base. Slide 16 is just a quick snapshot of a few of the things that we're doing with our coatings division. So this Coatings division is very much in line with our OpEx strategy. So that's opened up all sorts of opportunities right across the Australian resources and industrial space. Turn to Slide 17. So we announced recently that we had a strategic review underway. We've engaged Azure Capital as an independent corporate adviser to assist with the review. And the reason we're doing this is that we're aware of the market conditions. They are very challenging. We are also pursuing a pivot towards supporting our clients from an OpEx perspective as opposed to just engaging in their capital spend cycles, and we need to optimize shareholder value. And so there are lots of options on the table. These are corporate options. These are strategic and business options from an organic perspective and also in inorganic product perspective. We need to review ownership and equity structure considerations as well. So this is something that we're doing with an open mind with Azure and they will continue to support us through the strategic review process, which is ongoing. But we expect to have an outcome by the AGM, and we'll report out on that at that point. But in conjunction with that, we're also looking to expand our Board, and that will be consistent with the outcome of the strategic review, and we've currently retained a recruitment term. And the recruitment process has commenced to recruit another Board member. In summary, on Slide 18, look, there's obvious weakness in the global oil and gas CapEx sector. We're not alone here. All the major service companies have experienced the same, very challenging conditions. But we're continuing to take very proactive measures to ensure that the business is responsive to these market conditions. And we're subsequently pivoting towards that brownfield OpEx market to provide a sustainable revenue base, but we'll maintain the capability to execute and service those project opportunities as they come along. We've already got some revenue being generated from our coatings acquisition, our coatings technology acquisition. We have hired equipment in place at a couple of LNG facilities. And we're currently supplying coatings and personnel and other specialized services to that -- to those clients. We're undertaking our broader strategic review with Azure, and that will identify further opportunities to enhance shareholder value. And we'll update everyone, as I mentioned before, at the AGM. We've got a solid cash position. We've got a strong focus on capital management; cash retention; and ultimately, profitability. That's where we want to get back to and in a sustainable manner. So I think we're very well positioned to withstand the current conditions. We're well positioned to take advantage of the growth opportunities we've identified and consider whatever strategic options we think are valid as a result of the strategic review. So that's it from me. Thank you for your time, and I'm going to hand you back to the facilitator.

[Operator Instructions] Our next question is from Steve McNamee from Norvest.

Yes, staying back to me. Actually, on your register with CEV projects. I think my bullishness for your company at the last AGM may have to be put up for a couple of years. But clearly, as a company, you're all dressed up looking for somewhere to go. Could you just comment -- 2 parts to this question. First, can you just comment on the barrel replacement situation in the oil and gas industry? Because notwithstanding what's happened in the last 6 months, I assume that, that situation has got worse. And eventually, there's got to be a spend on the CapEx front in order to replace those diminishing barrels that are on the balance sheets of a lot of these oil majors. And the second question, which is not completely related. But in the issue of the strategic review, you made the comment as well as that you're looking at various issues with the Azure Capital as well as ownership and equity structure considerations. Would it be fair to say, given as a capital or M&A specialists, that you're looking potential in a possibly buyout options and/or mergers and acquisitions? Would that be what that sentence implies?

Steve, it's Aaron. Well, look, I'm probably going to address your last question first. Look, we've used Azure because they have a good reputation. They are local. We're able to access them because we've got closed borders. But to directly address your question around M&A. [ Four ] things that we need to have all options on the table. We haven't specifically used Azure because we're considering buyout or M&A options as the primary reason for engaging Azure. So the answer to that probably is no. However, we can't -- look, we may have a blind spot here. And part of this independent strategic review is to stand back and say, have you considered all the options? So if that is one of the options, which it is an option, that's something we need to consider, but it's not the primary reason we're engaged Azure. So does that answer your question?

Yes. Yes, yes.

Okay. We respect your second question with replace to -- with respect to replacing reserves, probably to give us some context around that. What we're hearing from some of the big epic contractors like Technip and McDermott and Subsea 7 is that the view is -- now they've obviously maybe a little bit biased [ to who will move ] this year. But the view is, is that low-cost quick turnaround subsea developments is where they think the industry will go over the next 5 years. So that's a good thing for us because it is subsea, it's offshore. They can be in shallow water, deepwater. It doesn't really matter for us. It doesn't have to be deepwater. It can be a shallow water subsea opportunity, and we have products and services that we can supply that market. So I would be looking for -- from a project perspective, a return to spend in the subsea space before a return to growth and spend in the deepwater drilling sector because there is a lot of idle assets out there and in the deepwater drilling sector. And it's very subdued. There's oversupply, but I think I would see a return to spend in that subsea sector before I'd see a substantial return to spend in the deepwater drilling sector.

[Operator Instructions] And we have another question from Steve.

I'm sorry to hog all the time here, but I'm concerned. There's nobody else listening on the call, I'm it. There's nobody very inquisitive when you're at this minuscule capitalization. But anyway, look, just in the area of composite products and advanced materials, have you looked at any of the products in the nanotube game as an additive in any of your products, the sort of thing guys are just around the corner, First Graphene, they're just around corner from you. There's obviously groups in South Australia that are producing a halloysite product, which seems to be used in various -- they're planning to use it in various high-end materials. And the other area, which I was thinking about was I see over the 7 West group, I was reading a piece there, where there are big dump trucks for some of their projects. I think it was them. I'm just trying to think of their mining operations. They come in. They automatically replace the back piece of the truck with a lighter composite material that reduces their fuel costs and increases their load carrying capability. And the other piece to this was that what happened to that whole train, that train carriage hauling -- haul unit, which the client didn't follow up on? Was there a reason for that?

Yes. Okay. So first one was the question around carbon nanotubes and graphene. Look, we have engaged directly with those graphene guys around the corner from us. And we've looked at their materials. We've had a play with them. The issue that we had was the additive levels were sort of -- we hadn't -- we couldn't put enough of it in our materials to make a material difference, right? However, now we're in the coatings sector, that might change. So that's one of the areas where that particular technology is -- does have an application, but that's something that we've just started the coatings business and some of the technical developments within that. So that's something that we'll probably revisit. But at this -- when we did actually visited. We actually have met with them. We've looked at their -- what they're doing is very interesting. But in our historical product ranges, limited application; in our new product ranges, yes, there may be some applications there. So that's something that we're looking at. With respect to the carbon fiber dump truck trays, that was something that was being done by MinRes. Our understanding is that project has been put on hold or halted completely. It's disappeared from their investor presentations. I don't believe it was a particularly good application, throwing in sort of car sized 30, 40 ton rocks into the back of something that was made in a similar manner to the way you'd make a carbon fiber bicycle frame. So unfortunately, in that application, I just thought it was a wrong application of the technology. But I might have judged. I guess that's up to MinRes and as whether they want to continue to pursue. With respect to [ PN ], which is your last question, look, where we got to with that project is -- we're just about to manufacture the first part. And the customer had a number of personnel changes. And those new personnel, for whatever reason, elected not to pursue the project any further and to stick with what they had, which was using steel wagons. So yes, there's still been -- -- they're looking to stay in the dark ages. It didn't fail or succeed. It just didn't progress. They decided to put their -- the capital and elsewhere. That's it.

Yes. So just on that, so the product specifications, there was no fatal, any failure of the product that meant that it didn't work?

No, no.

So that product just sits there waiting, dusting down in the future. And who holds that technology? Do you keep that in house?

So the grant that we have is the IP is actually -- and this public domain, the IP is owned by [ Pacific Nashville ], but we have a license to utilize it. But that's currently where it sits. But at the moment, we don't have an advocate for that product right now, yes. All right? Anything else, Steve?

I hope somebody else is out there asking a smart question.

No, I think you you're the only one there.

[Operator Instructions] We have another question in queue from [ Chris Whipple ] from [ Agranole ].

Just a -- the -- there's a heightened level of residential property-related activity here in Perth as a result of the government stimulus moment. Recall once being down at your site, and you had that magnificent plastic molding machine, which I think from memory had civil-related applications for tunnels and the like. Are you seeing any improvement or any inquiry or any change in terms of that application?

So that particular machine we bought on the back of expanding our capability in SURF market because some of that -- most of our SURF customers would prefer to have plastic skins, which are made by [ rota molding ] on the outside of the buoyancy models, right? So that's primarily why we bought that.

Or missing 2/3 of the market?

Yes, we were. We're missing 2/3 of market as a result. So we bought that machine to penetrate that market. We have successfully penetrated it. We've done a lot of project work with that piece of equipment. The civil part of it, though, that particular project has stopped. The -- we didn't own the IP to it. But the machinery that we bought, which can make both the SURF product and also that particular civil product, is being -- is currently being utilized. So it's not as if it's idle because we're not making the -- that particular product, which was called the Tunnelwell product. But no, we're -- currently, that project has been put on hold.

[Operator Instructions] There are no more further questions from the telephone lines. So I'd like to hand the call back to the speakers for the closing presentation. Please go ahead.

On behalf of Brendan and myself, thank you for participating in today's call, and please contact us if you have any further questions. Thank you very much.

Ladies and gentlemen, that does conclude the call for today. Thank you for all participating. You may all disconnect. Goodbye.