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

Thank you for standing by, and welcome to the Matrix Composites & Engineering Ltd 2021 Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Aaron Begley, Chief Executive Officer. Please go ahead.

Thank you very much, and welcome to the Matrix 2021 First Half Conference Call. I'm here with Brendan Cocks, our CFO, and we're talking to you from Perth. I'd like to refer you to the 2021 half year results presentation, which I'll be talking to. I'm going directly to the third slide, which gives an overview of our 2020 -- first half 2021 activities. From a financial perspective, the first half represented a -- quite a significant increase in revenue over the preceding half, over 69% increase. It did reflect some recovery from weak oil and gas prices, but also improved performance from our new investment in the brownfield services sector, which is under -- gaining real traction and produced a meaningful amount of revenue in the period. The underlying loss in the first half improved from $4.9 million loss in the preceding half to a small loss of $2.2 million. This was a slight deterioration from the preceding year, which was a loss of $1.2 million. I think what's important to highlight through this period is our ongoing capital management discipline. We retained 1 -- $11.5 million of cash at the end of the period with no trade or term debt. And on the 30th of June 2020, we had a cash cost of $14.7 million, and a large portion of that cash deterioration actually refers to a purchase and asset purchase that we made during the period, which related to the coatings business, which, in turn, has contributed materially to our revenues through that period. From an operating perspective, we've been very much focused on our pivot to brownfield OpEx spend to underpin our long-term revenue growth and provide a more sustainable revenue base that the business can grow from. We secured our Humidur Coatings business and secured orders post-acquisition of that business in June. We've also maintained our capability to produce our traditional oil and gas products and new riser buoyancy orders were a contributor to that first half revenue. The highlight, I think, going through this period has been the recent contracts that we've announced with Woodside, with Newcrest and also the WA government, in line with our diversification strategy. As we look forward, we're targeting those more stable and I think more solid revenue streams that will produce an annuity-style income for the business. It will come from those areas outside of our traditional oil and gas product base. This is a process certainly that's been affirmed by our strategic review that we conducted last year, and we've identified a large number of tangible opportunities in the West Australian resources sector. And more broadly, the Australian resources sector in the LNG market, the iron ore sector and the gold market. We're going to anticipate -- or we were anticipating more growth in our Humidur product line. And we're positioned to capture those traditional oil and gas products and projects as they emerge from the post-COVID-19 downturn. We're expecting to maintain positive momentum through our pivot strategy right through this current half and also into the following year. And I'll go into this in more detail further into the presentation. For the moment, I'm going to hand over to Brendan Cocks, our CFO, who will take you through the first half financial results. Thanks, Brendan.

Thank you, Aaron, and welcome, everyone. On Page 5, we have our financial overview. Matrix experience continues due to conditions in the oil and gas sector. Although encouragingly, we recorded a reasonable growth rate on the June '20 half, where we saw the west of the market. This translated to an underlying EBITDA adjusted to strip out the impact of foreign exchange of a $2.2 million loss. This modest loss reflected a focus on keeping costs to a minimum through this low-revenue environment. If I move to Page 6, the balance sheet, balance sheet made up a few different items. It still remains pretty simple, maintain a cash -- a cash balance of $11.5 million. The carrying value of $18.3 million on our property, plants and equipment reflects primarily the written down value of our plants and equipment in Henderson. That's the facility that we put in place back 10 years ago and still remains fully operational and the ability to scale up the capacity should the work come. The rest of the balance sheet reflects various working capital balances and also the lease accounting for our facility lease. So that's the right-of-use assets and the corresponding lease liabilities. Turn to Page 7, on the capital management. As mentioned, we finished with a cash at the end of the period of $11.5 million. The focus for the business and the management has been aggressively managing our cost base to reflect activity levels, and this is to protect our cash holding as best we can. On Page 8, the cash flow from operations. So during the period, we recorded an EBITDA loss of $2.2 million. This translated to a modest cash outflow during the period of just under $1 million with some -- smaller cash outflow of $700,000. The CapEx during the period of $1.8 million included the purchase of the coating application equipment that Aaron referred to previously, which we paid upfront $1.25 million. With a total value of $2.4 million, which will be paid on a usage basis over the next 2.5 years. Those pumps from the day of settlement have been earning revenue for the business as well, which is encouraging. At this point, I'll hand back to Aaron Begley to take you through the strategy and outlook.

Thanks, Brendan. So if you'd like to turn to the strategy and outlook section and then straight on to the following page, which is delivering -- entitled Delivering Key Technologies. So what's core to our product offering going forward in the brownfields and operations space is delivering engineered solutions that utilize our core skills in materials technology. So those materials technologies include products like thermoplastic composites, products made from carbon fiber, and carbon fiber materials, syntactic foams and Humidur Coatings and other coating technologies. And the key applications of these technologies is really in steel replacement. The repair of steel and the protection of steel. It also includes applications where we substitute other traditional materials such as rubbers and other engineering plastics and so forth with material technologies that have been derived from a variety of advanced manufacturing industry, such as the aerospace sector and the automotive sector. So we'll probably just turn to the following slide to -- which is on Page 11 to describe how we could deliver these to our key markets in the resources sector. So the service model we're using to deliver these solutions is a technology development service model. And the main premise is that we will work with clients to identify particular problems that they may have in their operations. And we'll then be engaged with our clients in a front end engineering design process and development process, develop prototypes, test those prototypes in the field. If they're successful, we then go to full-scale manufacturing, and we deliver and install those products. So the products that we develop under this page are really designed to reduce operating expenditure, minimize downtime and control corrosion. The products that we manufacture and the technology that we use are going to be lighter, stronger, noncorrosive and longer-lasting, longer-wearing than what's traditionally been used. So given the size of brownfields operations, the installed base in Australia, or in particular, in Western Australia, the market opportunity is very significant. So this has been really highlighted by the fact that we recently signed a technology service agreement with Woodside and a similar one with Newcrest. We're also pursuing other similar relationships with major resources companies in Western Australia. I'd like to turn to Slide 12. I'll just talk to the specific areas that we're targeting. Corrosion control is a multibillion-dollar industry in Australia and certainly around the world. And our strategic alignment with Acotec, to distribute and service, the Humidur Coatings in Australia is part of the solution package we bring to this market. So there are applications across marine structures, structures in iron ore mines, on LNG plants, alumina plants and right across a number of different sectors. These technologies that we sell are really designed to reduce plant operating expenditure. So either -- may last longer, they're quicker to install or they address some of the issues that the operators are dealing with. So we tend to deal directly with the active owner. So as opposed to dealing with EPIC contractors or other large service companies, our value proposition is really pitched and delivered to the owner of the asset where they actually realize all of those operating cost reductions. Through life asset support and specialized testing services go hand-in-hand. With specialized testing services, for example, we have the largest deepwater simulation facility in this part of the world. So that gives us the ability to test equipment for the oil and gas sector and also the defense sector. The light weighting steel structure is another very important area that we're focusing on. So this is an area where we can replace steel with products like carbon fiber and other advanced composites to improve things like fatigue, safety issues, material handling issues, manual handling issues, all those things can be addressed through the use of the technologies that Matrix have. So the market that we're being -- that we're pursuing is very much a very large market to replace steel in these applications or replace traditional coatings. So things -- well all assets will last longer and be cheaper to run. Just on the next slide, I'd like to talk briefly to our traditional markets. Matrix has a very big plant in Henderson. It's the most advanced kind of the largest office kind in the world. For nearly 10 years, we dominated the deepwater drilling market with the provision of deepwater riser buoyancy. We haven't turned that capability off in terms of our ability to deliver into that market. That plan is still there. But it doesn't occupy all of our facility. It does occupy a major part of it, but it -- but the capacity hasn't been reduced. So although we've seen deepwater rig demand at a 40-year low, and that market is unlikely to improve for a couple of years. Those of them that do come up, we will be able to service and service effectively. And when the market does improve and see sustained improvement, which we expect in 2022, '23, we'll be there to deliver into it. The subsea and SURF space is an area that we talked to for quite some time. We've had some traction in this market in delivering into local projects, and there are more of those local opportunities that are likely to start in '21 and '22, projects like the Barossa project, Santos, Scarborough projects, Woodside and a number of others provide real opportunities for the company. Significantly, though most of the world's subsea SURF spend comes from South America, which represents about 70% of the global market demand. From well construction products, we have seen an improvement in North American market conditions, although that market remains recyclable. But we're also continuing to target the Middle Eastern market, which has a sustained demand for that product line. To the next slide, we thought we'd put this in for those that are interested in our track record associated with product and service development. There are 4 key areas here that we'd like to highlight, where from a standing start, Matrix has organically developed a market and the capability, a world-leading capability, to develop and mass produce in an automated manner, a number of world-leading products or put the oil and gas sector. So Matrix drilling riser buoyancy modules are the obvious one. We really started this in 1999, not having produced a single product. And by 2011, we were the world's largest producer of these products. We were very much seen as the global standard, and we had more than 50% global market share in drilling riser buoyancy modules. Well construction are -- products are a similar story, even though the sales were less than -- less than $1 billion that we've generated today from drilling riser buoyancy. Nevertheless, most of these products are exported all around the world, and we produced over $80 million worth of sales into that market. And we've had other innovations like the IsoBlox product range and the Matrix LGS range that have been taken up all around the world by a number of different operators. And again, taken from a standing start from basically a concept on the page to full product realization and revenue across a relatively short time frame. So as we're entering new markets, we know what we're doing as far as product development is concerned. We've got a demonstrated a track record in identifying -- and working with our clients, identifying problems and developing product solutions and manufacturing and successfully delivering them to market. So we believe that the opportunity that we're pursuing in the resources sector will generate real revenue. In the next page, progressing our strategic pivot. It's -- as discussed, it's very much a strong focus. It is focused on the resources sector. Part of that is because of proximity. We're in Perth. There's an iron ore boom going on at the moment. The gold price is very high. It's home for the largest LNG producers in Australia. So then natural, highly adjacent fits to -- in terms of geography and in terms of a match for our skills and an understanding of those markets for us. And we have got real traction in the corrosion control sector and also the high-tech composite steel replacement sector as well in these markets. Defense is a slow burn for Matrix and many other SMEs that are involved in the defense sector, but we are actively engaged with all of the most [ primes ], and we export to the U.S. to that defense sector as well. Just a few key points on some of the success we've had recently with our shift to revenue stream from greenfield CapEx from -- to brownfield OpEx. We -- the Newcrest Mining technology development that we announced recently is, again, a composite replacement for steel. So we're manufacturing equipment for the Cadia project in New South Wales and subsequently for a project in Canada. That replaces steel work, steel products with composite because steel simply can't do what composites can do in that application. Woodside energy technologies, that technology development service has been producing revenue now for some time. And we're very much focused on replacing traditional materials that are used in LNG operations with new materials and new products that we develop tests and subsequently manufacture at our facility in Henderson and deliver into operations like the cracker gas plant and some of the offshore platforms. With our Humidur Coatings and Inpex Humidur Coatings, this is a real general success story for the company and also our customers in terms of using those coatings to reduce their operating costs from a maintenance standpoint and an ongoing OpEx standpoint. So I think the next slide, I have described in detail what we've done with Humidur Coatings there, but we, from a 0 start, generated about just under $2 million of sales first half for coatings. The Newcrest Cadia gold mine opportunity will produce revenue this half, but also should produce revenue next financial year. And if that product is fully commercialized, it represents a substantial opportunity for companies. The Woodside technology development agreement was signed in 2020 and it generated ongoing month-to-month work. The SOLSAN announcement that we announced recently is a $1.5 million contract that we've secured from the WA government to produce prototypes of a innovative solar-powered bulk hand sanitizer dispenser. These products will be manufactured in our facility in Perth and represents a pivot from our traditional business, but very much utilizes all the facilities and knowledge that we have in producing complex equipment in Henderson. Into the final page, which is our summary. Our key focus is very much building sustainable revenue from brownfield OpEx following the conclusions of our strategic review. We are seeing a recovery of the oil price. But that will take some time to manifest itself into revenue. But nevertheless, we remain ready to deliver into that market as it recovers. We secured a number of new intangible agreements in both the energy sector and the resources sector to build that momentum in our pivot to build sustainable revenue from our brownfield maintenance market. And we have a sound cash position with a continued focus on disciplined capital management. Look, we have been very focused on controlling our cost base. Our traditional market is very soft and it's reflected in our revenue. And it's important that our operating costs are brought down in line with those revenue -- short-term revenue expectations as we build a larger, more sustainable revenue base. And we do expect to deliver stronger second half net revenue growth compared to the first half. So that's where I will leave the formal part of the presentation, and I'll hand back to the moderator to facilitate any questions.

[Operator Instructions] There are currently no questions at this time. I'll now hand back to Mr Begley for closing remarks.

Well, thank you very much. Sure. I understand there are no questions. It's a busy time for everyone. So if you would like to contact myself or Brendan directly, we're available to answer any questions. Thank you very much for listening, and that's all for now. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.