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

Thank you very much, and welcome, everyone who's attending to the 2021 Full Year Results Presentation for Matrix Composites Engineering. I'm Aaron Begley, the CEO. I'm here with my CFO, Brendan Cocks, and we'll be running through the published presentation, which is available on the ASX platform. So firstly, for those following the presentation, if you turn to Slide 3 with an overview. I'll just run through the financial, operating and outlook overview for the business. So from a financial perspective, it was another very difficult year for the -- for Matrix. Even though we have seen some stronger performance in the second half versus the first half, the impact of COVID-19 did impact the business quite significantly and it effectively impacted our customer base and also in our traditional markets and also in our emerging or new markets. So that was really the underlying cause of the lower revenue. I think if we go back to the beginning of 2020, calendar year that was, we were expecting to grow our revenue significantly from the prior period. Unfortunately, the impact of COVID, that negative oil price, the collapse of the offshore drilling sector and also factors such as restricted work on various sites around Australia resulted in that lower-than-expected revenue and a corresponding underlying $4.4 million EBITDA loss. The company also took a significant impairment last year as a result of the view of the sector and I guess our market capitalization versus the carrying value of the business and that resulted in an NPAT loss of $27.9 million. But the majority of that, of course, is noncash, which Brendan will go into further in his presentation. Look, we have continued to be focused on our cash balance. We closed the year with $7.2 million of cash and no trade or term debt at the year -- at the 30th of June. Since then, there has been no material deterioration in our cash position. Moving on to an operating overview. Throughout the year, we increased our traction in our pivot to local brownfields work in the local resources sector. That did get off to a slow start in the first half because there were a number of sites around Australia that were locked down or had restricted access. The Woodside facilities in Karratha, for example, they did stand down a large number of staff, which did impact our access to that site and also reduced their equipment higher and product sales into that business, but that since recovered in the second half and continues to grow very strongly. The Coatings Technology business that we established at the beginning of last year, certainly grown in line with expectations, and the outlook is that will continue to grow over the course of the next 12 months. And in the last 2 months, we've seen quite a significant upsurge in our traditional business. We've announced a couple of drilling riser buoyancy orders. We do expect more of these in the short to medium term as well as the offshore drilling sector recovers quite strongly. So we would expect at least another 30 rigs to be mobilized over the next 12 months and there will be a corresponding increase in activity as a result. But we've also maintained our production capability right through this period, which will enable us to access a substantial increase in demand for SURF products and drilling products over the coming year. So that capacity hasn't been compromised at all. In fact, from where we sat a few years ago, our capability in this area has expanded quite materially. Importantly, we've continued to develop relationships and contractual relationships with both Woodside, Newcrest and a number of other operators throughout Australia in line with our strategy to build a brownfield revenue base. We've also received a contract from the WA government to demonstrate our capability in materials science and deliver products that require the sorts of technologies that we -- the capabilities that we have within the business. In terms of our outlook, this -- our strategy really hasn't changed. We continue to build a revenue base in the sustainable brownfield space in the local resources sector. The move into the Coatings Technology business is part of that strategy. Whether the capital investments are being made or not, the assets in the LNG space, gold and iron ore sector still require consumables and maintenance and we think that, that's a very valid strategy to build an underpinning revenue base for the business. And we're kicking some goals in this area. We did have material revenue in the second half for Coatings, and we expect that to expand quite materially over the next 12 months. Offshore oil and gas markets are recovering very strongly all around the world, I'll go into that in more detail later on in the strategy, but that's evidenced by a substantial increase in global CapEx. And that's being manifested with orders that we've secured over the last few months. There's a very, very large pipeline of SURF and subsea equipment that is being procured and corresponding SURF buoyancy and other SURF product orders that will come from that. And we expect to maintain strong revenue growth in FY '20. So that's a bit of an overview of our performance to date. And I'm going to hand over to Brendan who will jump through to Page 5 to go through the key financial metrics. Thanks, Brendan.

Thank you, Aaron, and good morning, everyone. So just on Page 5, our key financial metrics. We recorded a revenue of $17.6 million for the year. It's a bit off last year, but after a difficult June '20 half during the early part of COVID where our revenue was significantly impacted, we have experienced 2 halves of reasonable growth and recovery in our revenue and we expect that trend to continue into the next half. Our underlying EBITDA of $4.4 million loss was impacted by the level of revenue we had in the business. We were performing profitable projects, but not at a level where it was covering our full fixed cost of our Henderson facility. It should be noted that as revenue grows, we still managed to maintain the full capacity of our Henderson facility. And so -- and with that fixed cost base sitting in there and being covered at the moment, it means that as we grow our revenue, a lot of that contribution drops to the bottom line. Our EBITDA and net profit of EBITDA unadjusted of $21 million and the net loss after tax of $28 million was heavily impacted by a $15 million impairment charge during the period. The impairment charge was impacted by the subdued revenue in the industry and going through a process of impairment. And as a business such as ours, we do need to take into account revenue that we've experienced within the industry over the prior years and our ability to forecast that and then you need to incorporate that into your future forecast. So unfortunately, in a period where we are expecting to see growth in recovery in the industry, we still thought it prudent to take an impairment charge over the last period given the state of the industry that we primarily participate in. If we turn over to Page 6 being the balance sheet. We've maintained a positive net cash position of $7.2 million. It's obviously something that we try and manage pretty closely and conservatively by ensuring that we keep our costs as low as we possibly can while maintaining our Henderson facility. Our net working capital was slightly lower than last year. And we continued to manage our working capital in the current market on a project-by-project basis rather than investing in a large inventory for upcoming projects based on ongoing continuous manufacturing stream, which in recent years, we haven't done. The balance sheet was impacted by the impairment, which was a write-off against our 2 main long-term assets being property, plant and equipment and also the right-of-use assets. The right-of-use assets has been an interesting impact because while we've had to write down our assets, we have been required with our recent sale and leaseback of the Henderson facility in late 2019 to fully provide under the accounting standards for all the lease accounting, which requires you to put a large long-term liability based on discharging your -- over the lease term of 20 years. So that full liability sits in there even though we've impaired the actual right-of-use asset on the other side of the balance sheet. But while it's a large number, it effectively gets discharged over the initial term of our lease, which is a 20-year term, of which we still got 8.5 years to go. Cash flow from operations on Page 7. We ended up with an operating cash at a similar and slightly lower level to our EBITDA. It demonstrates our ability to be able to manage the projects we've got at hand at a -- from a working capital point of view to on a project-by-project basis. From a CapEx point of view, which was $3.1 million, a fair portion of that was the pump and coating equipment acquisition that we performed last year. And that's actually been a great contributor to our revenue and demonstrating a good return on that CapEx investment earlier in the year. At this point, I'll hand back to Aaron to take you through the strategy and outlook.

Okay. Thanks, Brendan. So if you'll turn to -- directly to Page 9, I'll go through the strategy and outlook for the business. Actually, the image that you see there is actually a technology that we developed and launched 5 years ago called LGS. That's actually a low drag reduction technology that we sold to the Inpex Phase 2 project. So that's a local project manufactured in Henderson. So we would define that as a SURF project. So just a nice little milestone for the business that we're in the process of currently delivering. Look, I'm going to jump over Slide 10. We'll not spend too much time on it. Just we put this slide together to demonstrate how we pitch Matrix's technology to resources companies in Australia. So we have active and ongoing discussions with operators from the iron ore sector, from the gold sector, petrochemical, alumina and LNG where we look at the problems that those operators have from a maintenance or productivity perspective and provide solutions using component materials and thermoplastics and all the other things that we do there. And it's been quite successful so far. It does take time to mature into significant material sales. But as we let the market know last year, we signed a contract with Woodside Energy Technologies. That has produced material revenues for us over the last 6 months and will continue to produce material revenue for us in the coming year. And in many of those applications, we're looking at replacements or innovations or improvements to what current standard practices are. And the spend in these businesses is significant. We're targeting areas that would traditionally spend hundreds of billions of dollars across the industry sector in maintaining and operating resources assets. We've also signed an agreement with Newcrest as well for technology development and underground mining. And we have a number of other agreements with major resources companies that are underway. And this is really designed to leverage the business' capability in advanced materials and advanced manufacturing and make the Australian resources sector more productive. So, so far, that's been very good and we'll continue to pursue that. We turn to Slide 11, we thought this was important to point out. Our plant in Henderson is a highly automated advanced manufacturing plant, and it enables us to produce products quicker and more efficiently than anyone else in the world within that sector. We invested $130 million in this plant. There's been no diminishment in capability at all. The nameplate of this plant -- the nameplate capacity of this plant is 63 parts per day, which makes it the largest capacity syntactic foam plant in the world. So this capacity that we have is primarily latent at the moment. We are putting, obviously, a bit of throughput through the buoyancy plant at the moment, but it gives us an enormous capacity base, which can be utilized by our clients as the industry continues to recover. And that's not just in the drilling riser buoyancy market, but also the SURF and production buoyancy market, of which we currently have over $100 million of outstanding quotes in that sector. Right. So turning to Slide 12. I'm just going to go through the traditional -- our traditional markets. So to jump over to Slide 13. What we're seeing is a very, very strong recovery in the global subsea market. So this projection is actually I think this is from April. It's actually improved since then, but this is just the one that we published. In 2020, you can see the effects of COVID, actually the effects of a negative oil price, a huge degree of uncertainty in the offshore sector. But in 2021, there's been a huge hockey stick increase in global subsea contract awards and most of those have been committed already. So we're seeing a huge increase in demand in places like Brazil, Guyana, West Africa, the Gulf of Mexico. And one of the largest areas of development is actually here in Australia with the Barossa and Scarborough projects. And the Barossa project has reached FID. Scarborough hopefully will reach FID sometime towards the end of this year. And all of that underpins a significant increase in demand for subsea equipment, which is where we participate. So this would drive the demand for buoyancy for products like LGS, which is one of our other SURF products, which isn't a buoyancy product, but which has quite a long track record now and all sorts of other ancillaries for subsea production. So the visible size of the market over the next 5 years is approximately USD 76 billion. So it is quite significant. There's a quote there from Jeremy Thigpen as well, who's the CEO of one of our major customers, Transocean, and their outlook as well is that things will materially improve into 2022. So just supported by all of those third-party forecasts. On the next page, on Slide 14, this is the forecast for all of offshore global EPCI investment. So this includes the spend on drilling activity, completion activity, topsides, FPSOs, subsea equipment. So this is the subsea equipment forecast plus everything else that goes with it. So it's expected to exceed $60 billion this year, which is the strongest investment figure since 2013 when the industry was really at its peak. So we do see a very strong recovery in this sector over the next few years. On Slide 15. So over the last few years, we've been quietly working on increasing our capability in the SURF and subsea sector. The image to the right there are not buoyancy products. They're actually a line of a product line called LGS, which goes around subsea pipelines and flow lines. The large yellow products were installed on an Inpex pipeline. The other products have been installed on other pipelines and jumpers all around the world, including Malaysia and India. And the -- currently, the value of our outstanding quotations in this market is over USD 100 million. So that's just in the subsea and SURF market alone. A large -- as I mentioned earlier, most of these markets are outside of Australia, although we do have some within Australian waters. Brazil and Guyana are probably the 2 biggest areas of activity at the moment. Exxon is very, very strong in those markets. We were approved by Exxon. And we also are very active in the Brazilian and North American market. So we would expect substantial growth in this sector over the next 12 months. For those that are new to the business, turning to Slide 16. One of the questions that we are asked is around our track record of introducing and developing new products, and we do have quite a substantial track record. We started from scratch. We're drilling riser buoyancy modules. We've produced over $1 billion worth of those products since our inception and we've got a range of other products that we successfully launched. Products like well construction products or IsoBlox or LGS, they were actually launched at the beginning of the first downturn in the oil and gas sector in 2016, so they have been slow to start in terms of getting significant revenue growth. But look, we do have a strong track record in move -- in organically moving into new markets and successfully growing our business. So moving on to Slide 17. An important part of our business strategy going forward is to find a revenue base in adjacent markets or with current customers that is sustainable and more an annuity-style revenue base than we've been -- than we've had to endure from the CapEx cycles. I mean historically, Matrix's revenues have been very lumpy and they very much follow the EPIC CapEx spend for the offshore oil and gas industry. So I think it is an important -- it's very important for our business to make sure that we have a revenue base that month-to-month provide some stability and profitability with growth prospects. So we've looked to the Australian resources sector to provide that sustainable revenue and we're getting some very significant traction in that area to the point where it will make up a large chunk of our forecast revenue this year and materially contribute to our overheads. And that's with our traditional business growing strongly as well. So turning to Slide 18, just a bit more on that. Look, we're very active now in the operations of companies like Woodside and Inpex. And increasingly, we're also penetrating customers like Alcoa and some of the gold miners and iron ore miners in Australia. So what's new to the business is that we're getting a lot of orders. They're typically smaller in size. They're not -- typically not very large contracts, but they are long-term personnel and equipment hire orders and then lots of product and consumable orders that follow that. So that's very much what we're seeing out of our Coatings business. And there's also exposure that the broader business is getting across the board to these sectors. The key focus right now is really in the anticorrosion space, where we're supplying products, equipment and personnel and also in the steel replacement space where we're replacing steel with composites. And there are some quite significant development contracts that we've signed and that we're about to sign in that space. Key wins as I went through before, include Woodside, Newcrest, Woodside Energy Technologies. We also received a $1.5 million project from the WA government to develop some SOLSAN hand sanitizers. These are large bulk hand sanitizer dispensers that were manufactured in our facility in Henderson, and they're actually at Optus Stadium and will be used during the grand finals. Look, we also have some activity in the defense sector as well, but that is a slow burn. So in summary, look, last year was very difficult, but we've made it through. We've made it through that process and we've come out the other side into a very strongly recovering traditional market in the offshore oil and gas space. We're positioned to capitalize on that recovery. But we've also been building our sustainable revenue base. So we've been able to achieve both of those things during the year, which is quite significant. We've got some key long-term agreements in place with major resources companies in Australia. And we've also increased our capability in our traditional market space as well. The upside of that is that we expect to deliver a significant revenue growth this year. And look, I think we'll see that revenue growth come from both that sustainable brownfields revenue base. I believe that we'll see quite an upturn there from last year. But also we'll see substantial growth from our traditional markets and adjacent offshore markets. So that concludes the formal part of the presentation, and I'll hand back to our moderator. Thank you very much.

[Operator Instructions] Your first question comes from Steve with Norvest Projects.

Look, my question is just on your -- who's left as competitors in your traditional cyclical businesses, particularly the riser buoyancy devices? And are there any out there that also have latent capacity? And I guess that leads into the question of when you're quoting here your pricing points, are you finding it's open duck season, you can name your price now with less competitors? Or is there still quite a lot of pricing pressure?

Look, I don't think we can name our price, Steve. But the -- look, we do have fewer competitors. So the 2 biggest riser buoyancy plants in the world after ours were completely shut. They went off, they've been closed down and liquidated. There is some capacity in the U.K. to make this type of equipment. But the biggest single competitor that we've got is very busy in the SURF space and so I think they've got limited capacity to service the market. We don't seriously see them in any of the bids that we're putting together. I think one of those competitors is a little bit active and probably means that we can't just name our price, but there's been no deterioration in our pricing point from where it was 5 years ago. So look, the margins are still healthy in that sector, yes.

[Operator Instructions] We do have a follow-up question from Steve from Norvest Projects.

Yes, Aaron, sorry, just doesn't seem to be any other questions coming through, so I thought I'd throw one more in there. I don't want to hog your time. But it's clearly you're right at the hockey stick, as you call, it's probably on and it's come 18 months later than it probably should have come if we hadn't had COVID. And this is probably in terms of countercyclical, you couldn't get anything more -- that more defines countercyclical than where you guys are right now. But as we move into the cycle, where I was just interested in jumping in is with the strategic pivot. And you moved away from the cyclical and tried to get what I would assume is more recurrent earnings or annuity earnings as you call them. The work you're doing in advanced materials, compounds and composites and polymers and so forth, are you working that R&D facility lab you've got down there in trying to come up with things that put you ahead of the crowd in terms of advanced materials?

Yes. So look, I can answer that pretty directly. What -- historically, we've tried to, in the past, effectively come up with new products and new materials that we then look for -- where we then subsequently look for a market, right? So -- and that doesn't work very well in our experience. Where we've got a lot more traction is where we're able to go to a customer and say, look, this is what we can do, what are your problems and they identify and invest -- co-invest or invest completely in the engineering and R&D associated with solving that problem. The reason that's a better approach is because you've got a clearly identified problem to fix and you've got a customer willing to use it. So the likelihood of being able to commercialize that increases dramatically. So to give you another example. A few years ago, we developed a product called LiCos, which is a lightweight concrete product, because we thought it was a good idea to have a lightweight, high-strength concrete substitute. But we struggled to find a market because we didn't define a specific need or demand for it. What's the difference this time with companies like Woodside and Newcrest is they're coming to us and saying, look, we've got this specific issue. We've got a demand for it and we'd like you to help us fix it. And so it then becomes a technology development service, if you like, which then results in us being able to put something in the field and try it and then ultimately commercialize it, and we get paid right through that process.

Just 1 follow-on question from what you just said then. Does that also follow that you could do the same thing in your traditional space of the offshore guys, that they come to you with the issues that they might want to resolve and you come up with solutions?

Sure. Yes, absolutely. Yes. Look, that's effectively the LGS product that we had where our customers are saying they had an issue with drilling in high current. And now they -- we've solved that problem through the development of LGS, which has become effectively the default product for that environment now. So one of the contracts that we announced was actually for Diamond Offshore, which -- and they're using that product in their Gulf of Mexico operation. So that -- yes, that's how we do it in that space. But I think that, yes, that probably is the best example I've got of a traditional market application.

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

Okay. Well, on behalf of Brendan and myself, thank you for attending. If you've got any questions following this meeting, both Brendan and I are available to answer them for you. Thank you very much.