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

[Audio Gap] Our CEO, Aaron Begley, will then provide a more comprehensive presentation on our operations and outlook following the formal proceedings. Throughout the 2021 financial year, Matrix continued to navigate a very challenging period in the oil and gas sector. This originated in FY '20 following the onset of the COVID-19 pandemic. Our first half in FY '21 was particularly impacted, reflecting the dramatically weak oil price and broader COVID-19 global impacts on the oil and gas sector. We recorded revenue of $8.1 million for the half compared to $22.6 million in the prior corresponding period. This eventually led to a full year revenue result of $17.6 million compared to $27.4 million in the prior corresponding period and an underlying EBITDA loss of $4.4 million versus a $3.7 million loss in FY '20. So these were 2 very hard years one after the other. However, we did generate $6 million of revenue in the final quarter of FY '21 as the COVID-19 situation began to ameliorate globally and there was subsequent recovery in the oil price. We prudently maintained our production capability at our world-class Henderson facility to cater to the promising recovery of activity within our traditional oil and gas markets. So post FY '21, we have seen continued signs of a revival in the oil and gas market. This has generated increased subsea spend and a subsequent rise in the number of drilling rigs, approaching a level not seen in the past 5 years. We've also announced several new riser buoyancy contracts in the international deep sea drilling sector in recent months, another positive sign that the offshore oil and gas markets are recovering. Matrix is well positioned to capitalize on a growing pipeline of opportunities with buoyancy tenders in excess of $170 million currently in play in the subsea and SURF markets alone. Additionally, over the past 6 months, our growing corrosion technologies business has produced approximately $6 million in revenue, and we are targeting further growth on the horizon to give Matrix a robust, long-term and sustainable earnings base in the years ahead. This underpins a core plank of our strategy to move towards stable, long-term brownfields project maintenance and sustainment work. Furthermore, the company has continued to demonstrate its capabilities to deliver a diverse range of advanced materials and composite solutions for clients, particularly in the local resources sector. Our recent successful, well-supported $7 million capital raising that we recently announced at the end of November was also a positive affirmation of the company's outlook and gives us the financial muscle to readily capitalize on these emerging growth opportunities. On behalf of the Matrix Board, I would like to thank our senior management and employees for their commitment and hard work during the year. Finally, I would also like to extend a special thanks to our shareholders for their continued support through a volatile period in FY '21 as the effects of the pandemic linger. Underpinned by industry-leading operational capabilities, a bolstered balance sheet from the capital raising and positive market conditions, Matrix is primed to deliver value for shareholders in FY '22 and beyond. Thank you. And I will now continue with the formal items on the agenda for the meeting. First item of formal business is the presentation of the annual report [Audio Gap] which includes the financial report, directors' report and the auditor's report. Pursuant to the Corporations Act, the company is obliged to present to this meeting the last audited financial statements and report for the year ended 30th of June 2021. These were circulated to all shareholders with the notice of meeting. Before I invite shareholders to comment or ask questions in relation to the financial statements, I wish to note that as announced to the market in July of this year, KPMG have been appointed as the new auditors of the company. The appointment of KPMG was the result of an extensive audit process or a tender process undertaken by the company. And we welcome that appointment and look forward to working with KPMG as our new auditors going forward. Turning now to the annual report and financial statements. Whilst there is no requirement for shareholders to approve the annual report and no resolution is required, I now invite shareholders to comment or ask questions in relation to these financial statements. Mr. Hogg from KPMG is also available via telephone to answer any questions in relation to the audit of the financial statements. Are there any questions in the room relating to the financial statements? Are there any questions online?

No.

There are no questions online and none in the room, so I'll continue. Before I commence with the reading of the individual resolutions, I advise all resolutions will be voted on by a poll, and the results of the poll will be lodged on the ASX later today. All shareholders and their representatives were provided with yellow voting cards as they entered. On this voting card, there are a series of boxes. Please indicate on your card how you wish to vote by ticking or marking either the for or against box for each resolution for your vote to count. If you are a proxyholder, a summary of the votes to which you are entitled has been provided with a yellow voting card. If you only have directed votes, you need to do nothing other than submit the voting card. Votes at your discretion or open votes are shown in the column titled votes open on your proxy summary and can be cast at your discretion by marking either the for or against box. Once you have finished marking your card, please place it in one of the ballot boxes circulating the room after all resolutions are read. If there are any aspects regarding the voting on which you are uncertain, please do not hesitate to ask one of the Link representatives who will be circulating the ballot box. We will now proceed through the resolutions and conduct a poll following the reading of all resolutions. As set out in the notice of meeting, Mr. Chris Sutherland was appointed as Director following last year's AGM and is offering himself for reelection. Are there any questions in the room relating to this resolution? Are there any questions online? No questions. I now move Mr. Chris Sutherland, who was appointed to the Board since the company's last AGM and who ceases to hold office in accordance with rule 19.2 of the constitution and being eligible, be reelected as a director. With respect to resolution 1, I advise that proxies have been received by the company as follows -- I think you have the [ numbers in front of you ], and I indicate that Chris has been elected. So congratulations, Chris. Welcome back to the Board.

Thanks very much.

Now turning to resolution 2. As I have an interest in the outcome of this resolution, I will now hand the chair to Steven Cole, who will take the meeting through this resolution.

Thanks, Peter. All right. Next item on the agenda is resolution 2, relates to the reelection of Peter Hood a Director. Peter is our Chairman of our Board at the moment. As set out in the notice of meeting, Peter is retiring by rotation and offers himself for reelection, having last been elected by the shareholders in 2018. Just -- we have a little bit of a notice of -- I think -- no? We thought we had an emergency in the room, but we don't. Okay. So Peter's career background and experience is listed in the information memorandum that went with the notice of meeting, and Peter has the support of the Board in his reelection with Peter prudentially abstaining from joining in that recommendation. Are there any questions in the room relating to this resolution or online from anybody out there in [ Etherland ]? There are not. Thank you. All right. I now move that Mr. Peter Hood, who retires by rotation in accordance with rule 19.3 of the company's constitution and being eligible, be reelected as a director. And with respect to resolution 2, we do have the proxy voting on the screen behind with some 95-plus percent for; a very small, miniscule against; and a few open proxies there. And these votes will all be tallied as part of the poll at the end of the meeting, but a strong indication as far as Peter having the support of the shareholders at this stage. I'll pass then back to Peter to continue with the meeting. Thanks, Peter.

Good to be back. Resolution 3 is an ordinary resolution that relates to the grant of options and performance rights to our CEO, Mr. Aaron Begley, under the company's equity incentive plan. The options and performance rights are structured with appropriate vesting conditions and performance hurdles as set out in the notice of meeting. The vesting conditions and performance hurdles are put in place by the Board to ensure that long-term performance is incentivized and aligned with the company's strategic objectives. ASX Listing Rule 10.14 requires a listed company to obtain shareholder approval by ordinary resolution prior to the issue of securities under an employee incentive scheme to a director or an associate of a director. Accordingly, the company is seeking approval for the issue of these options and performance rights for Mr. Begley under ASX Listing Rule 10.14. For the purposes of ASX Listing Rule 10.14, information about this proposed allocation is detailed in the explanatory statement accompanying the notice of meeting. A voting exclusion statement applies in relation to resolution 3 and is outlined in the notice of meeting. However, the directors, with Aaron Begley abstaining, unanimously recommend that shareholders vote in favor of resolution 3. Are there any questions in the room relating to this resolution? Are there any questions online? No questions. I now move that the issue of 2,415,056 options and 1,245,249 performance rights to Mr. Aaron Begley, Managing Director and Chief Executive Officer of the company, is approved and -- for the purposes of ASX Listing Rule 10.14. You have the numbers in front of you that clearly indicates that 95% of the vote is in favor of this. And I can now move on to resolution 4. This item of business -- pursuant to the Corporations Act, the company is required to include as part of the directors' report a remuneration report, which includes specified information. Directors have prepared a remuneration report to 30th of June 2021, which is included in the annual report on Pages 10 to 17 that has been made available to shareholders. Corporations Act requires companies to put to shareholders a nonbinding vote to enable shareholders to voice their opinion on matters included in the report. In accordance with the voting exclusion statement set out in the notice of meeting, I further advise that the company will disregard any votes cast on resolution 4 by or on behalf of any of the following persons: a member of the key management personnel, details of whose remuneration are included in the remuneration report, or a closely related party of such a member. Are there any questions in the room relating to this resolution? Any questions online? No questions. I now move that for the purpose of section 250(R)2 of the Corporations Act shareholders adopt the remuneration report for the financial year ended 30th of June 2021. You have the numbers before you, and they show over 95% in favor of this resolution. I can now turn to the last item on the agenda. Brendan, can we go through this item? The final item on the agenda is resolution 5, which is a conditional item of business called the spill resolution and is included in the notice of meeting as a result of the company's 2020 remuneration report receiving a strike at last year's AGM. Pursuant to the Corporation's Act, the votes cast on this resolution will only be considered if at least 25% of the votes validly cast on resolution 4 following completion of the poll are against the adoption of the 2021 remuneration report. And that would then constitute a second strike for the company. If the company receives a second strike and resolution 5 has passed, the Board will lead to convene a further meeting of shareholders within 90 days to consider the composition of the Board. When such a meeting is required, details of that meeting will be notified to shareholders in due course. In accordance with the voting exclusion statements set out in the notice of meeting, I advise that the company will disregard any votes cast on resolution 5 by or on behalf of any of the following persons: a member of the key management personnel, details of whose remuneration are included in the remuneration report, or a closely related party of such a member. Are there any questions in the room relating to this resolution? Are there any questions online? No questions. Unless there are any objections, I now move that resolution as set out in the notice of meeting be taken as read. With respect to resolution 5, I advise that the proxies have been received by the company as follows. Those numbers are in front of you. They indicate that, that resolution is carried. Are there any general questions in the room? Any questions online? No. I've now read through all the resolutions and answered the questions by shareholders, so we will now conduct the poll. If you haven't already submitted your voting card, please do so now to one of the Link representatives. [Voting]

Have all persons who intend to vote now voted? It appears as though the voting process has been completed. I therefore declare the poll closed. The results of the poll will be lodged on the ASX later today. That concludes the formal business of the AGM, and I now close the meeting. I thank shareholders for their continued support. And I will now ask Mr. Begley to provide a presentation on the results of the company for the year ended 30th of June 2021 and the strategy and outlook for the company going forward. Thank you. Thanks, Aaron.

Thank you, Peter. Okay. So thank you for attending today. I'm going to be going through an update, which has been provided in conjunction with our Annual General Meeting submission. So if you'd like to follow this online, I'll be clicking through from slide to slide as they appear on the screen and talk to those specifically. So I'm going to just go straight through to the screen entitled our business. So look, Matrix specializes in 3 key areas, which is the design and manufacture of subsea buoyancy for the drilling and subsea and defense sectors. We are a world leader in this area and been involved in this business since 1999. We also have a recently developed corrosion technologies business unit, which I'll talk to further. And we're also a leader in the development and production of advanced materials for replacing steel in -- primarily in the resources sector. Our key markets include the oil and gas industry, which is something we've been traditionally involved with, and an increasing exposure to the resources based in Western Australia. So it's specifically areas like LNG, iron ore, gold and nickel. We also have some exposure to the defense sector, and we have a growing exposure to alternative energies. If we turn to the next slide. So FY '21 was a very challenging year. It really -- after seeing growth in calendar year '19, when COVID hit Matrix hub, our customer base was severely affected, especially in the drilling sector. And the corresponding decline in oil prices meant that things effectively stopped in many sectors or were deferred or delayed or canceled for a large part of the calendar year '20. And this carried over into the last half of last financial year and subsequently was reflected in our results. But we've made it through to the other side. And certainly, in the first half of this financial year, we started to see signs of an extremely strong recovery in our traditional markets in the oil and gas space and also the emergence of new revenue streams, which we've strategically positioned ourselves to take advantage of in the brownfield space, in particular, in the resources sector in Australia. So our outlook going into next financial year and the remainder of this year is certainly very, very different from where it was 12 months ago. We've seen a strong resurgence in our traditional revenue base. We've seen some milestones achieved with our Coatings Technology business unit, specifically targeting the resources sector locally in Australia. And we've also developed strong relationships, technology relationships with leading Australian companies such as Woodside and also Newcrest, which diversify our client base, are going to build a more sustainable revenue for the business going forward and take advantage of our core skills in the area of advanced materials. The next slide's an interesting depiction of the correlation of the company's share price -- excuse me, of the company's revenue and subsequently share price with the oil and gas price. So you can see that when we had record periods of revenue in the early 2010s, that corresponded very strongly to an oil price that's set around $100 a barrel mark. In in 2016/'17, as that oil price dropped away, unfortunately, so did our revenue. And despite seeing a recovery in calendar year '19, the effects of COVID, which resulted a 1 point in negative oil prices last year, impacted our revenue base quite significantly. Where we sit and where we sat in the last 6 months is we're in a very different environment where oil prices sustainably sat above $70 a barrel for some time, well above the breakeven requirement for deepwater developments in areas such as Brazil, Gulf of Mexico and West Africa. There is a growing appetite for more oil and gas and subsequently LNG CapEx expenditure and exploration expenditure as oil and gas companies move to replenish depleted reserves and move to increase expenditure in a sector that's been underinvested in for many years and somewhat exacerbated by the effects of COVID. The business has had to restructure, and strategically, we've -- and deliberately, we sought to build a sustainable revenue base out of access to and exploitation of the maintenance spend in -- and sustaining CapEx spend in the local resources sector. So I'm referring to the 3 pillars of the business. And we have 3 pillars, which we define as subsea buoyancy. Now subsea buoyancy covers our traditional business in the drilling space, but it also utilizes the technology and the production facilities that we have here in Henderson, which are among the largest in the world, to produce buoyancy for the production space. So traditionally, Matrix as a business has seen most buoyancy production go into applications and deepwater drillships and semisubmersibles, which are used in exploration and completion. And this exposure has been less so in the areas associated with SURF or production. So that's where a field is -- needs to be developed, and you require subsea infrastructure and hardware associated. We're supporting that structure underwater and hence the term subsea buoyancy. So that's very much a key pillar in the business. It utilizes the 20 years of experience we have in that sector. And we are one of a small number of companies globally that have a significant capacity to deliver into that market. The second pillar is corrosion technologies. And what I opened the slide with was a reference to accessing the brownfields and sustainable CapEx market in the resources sector in Australia. And last year, we took the decision to acquire the assets and distribution rights of a Coatings Technology business here in Australia. And subsequently, that business has grown very strongly and gives us access to a number of Australian companies that we've had limited access to previously. So companies like Woodside, Inpex, Rio Tinto, Newcrest, BHP, Alcoa, major Australian resources companies that have a lot of corrosion issues and are looking to a company like us to provide technical and leading edge solutions into that market. Corrosion never sleeps. We think this is a great market to be involved in. It's something we're very comfortable with, and that business is growing quite rapidly. We're also able to bring along a kit bag of other technology solutions that Matrix has developed and other capabilities to service that market. The last pillar refers to advanced materials. And this is where we are using our technologies to address problems that primarily resources but also in some cases defense companies have in addressing issues around weight, corrosion and other performance problems. So we have a number of opportunities that we're working on that are actively producing some revenue at the moment, where we're developing at an early prototype stage and testing stage a large number of technologies that address issues in the mining sector and the LNG sector and other parts of the Australian industrial sector. The next graph shows a very graphic depiction of the increase in offshore expenditure. So here, you can see a very pronounced demonstration of the effects of COVID on offshore expenditure globally. It's taken a -- as it started to recover in 2019, when COVID hit, the decision to proceed with offshore developments fell away dramatically by nearly 2/3. Subsequently, as the oil prices have stabilized and improved and as the pandemic situation has somewhat stabilized around the world, there's been an enormous increase in committed expenditure for offshore CapEx, and we expect this to be sustained over the coming years. The next 2 graphs demonstrate in a more granular manner what our target industry sectors for subsea buoyancy are doing. The graph on the left is the forecast expenditure for subsea CapEx, so subsea specifically, which is part of offshore expenditure, over the next 4 years. So we've seen an increase back to levels that we haven't seen for nearly 8 years. And we expect that to be sustained over the next 3 to 4 years as oil companies all around the world look to -- or oil and gas companies all around the world look to increase their reserves and they'll continue to commit to projects in places like Brazil, Guyana, Australia, where there's a number of very large projects, including projects like the Barossa project with Santos and the Scarborough project -- recently announced Scarborough project with Woodside. So we expect the demand for our equipment types to be effectively at record levels not seen before over the next 3 to 4 years. So we're quite bullish about this outlook. There is going to be a lot of money spent. The feedback from our clients is they're being awarded contracts. And their outlook and forecast is very strong. And subsequently, they will need to buy equipment from companies such as Matrix to complete those contracts. The graph on the right, I'll touch on briefly, shows the recovery in offshore mobile drilling units that are being used. So specifically floaters, so semisubmersibles and drillships. We are the world leader in manufacturing buoyancy systems and drag reduction systems for this market sector, and we're seeing activity levels that we haven't seen for a very, very long time in that sector as rigs get reactivated all around the world. Going to the next slide. Look, this is just a quick snapshot for people who may not be completely familiar with the types of products that we manufacture. We obviously make drilling riser buoyancy, which is depicted on the left-hand panel on that screen. That was actually shipping out of Fremantle a few years ago that we shipped directly to a client in the U.S.A. But there's also some pictures of some SURF products that we manufacture. So these are buoyancy products and other products that we use sell into the subsea market. And that includes large -- very large buoyant structures for flexible risers, flexible riser buoyancy, installation buoyancy and other polymer-based equipment for subsea applications. In terms of our customer list, it's quite broad. It's very international. We're still very much export-orientated when it comes to subsea buoyancy. So customers like Saipem, NOV. We're qualified by ExxonMobil, for example, Baker Hughes, Noble Drilling and others that are shown on that screen. Demonstrate a wide customer base right from the operator to the EPC contractor to the drilling contractor. Not to be forgotten that our plant remains one of the largest of its type anywhere in the world, if not the largest in terms of capacity. We spent $130 million building this plant back in the early 2010s. We have the capacity to make 18,000 riser buoyancy modules or drilling -- or distributed buoyancy modules per year. And that capacity has not been eroded through the downturn. So we remain ready to be delivering to the increase in buoyancy demand. This pipeline demonstrates our short- to medium-term outlook for orders and demand for subsea products or SURF products specifically over the next year or 2. You can see in this pipeline that we've got 3 different levels there. The one on the bottom is bid to contract, where we bid buoyancy and other equipment to our clients that require buoyancy to deliver contracts at Phase 1. So they have to buy that buoyancy from someone. And then subsequently, we've got another level, which shows the quotes that we have outstanding to customers that are bidding on jobs that have reached FID with their clients, but the EPC contract is yet to be decided. So again, those 2 levels at some point, the buoyancy and other products that have been bid into these particular categories will need to be decided on in the short term. And lastly, we have a broader pipeline of opportunities, which we've defined as being greater than $200 million, which we can see in terms of a pipeline of projects that are coming in all around the world that will be applicable to our product line. And this is not just Australia here. This is very focused actually on the deepwater golden triangle, if you like, of the Gulf of Mexico, West Africa and South America. On the next slide, we've just got a very brief depiction of the forecast maintenance spend across Australia across a number of industry sectors. Look, in particular, we pointed out the increase in the maintenance and sustaining CapEx spend for the oil and gas industry. The LNG sector, in particular, is something that we're quite familiar with. It has a very high adjacency to our traditional oil and gas business. But the opportunity we see is to become a niche supplier to this sector, which is a multibillion-dollar sector, and we see strong growth across the next 5 years. And this is expenditure that happens year-to-year. So it doesn't have the same sort of cyclicality that we've experienced with our traditional business. So this is why it's a very important pillar and will be -- I believe, will become the business' bread and butter over the coming years. Lastly, I've got a brief slide on advanced materials. Specifically, we're targeting the local resources sector, but we're looking at the replacement of steel products with advanced materials. And these are advanced materials such as carbon fibers, advanced polymers, thermoplastic-based composites that are impact-resistant, lightweight and corrosion-free. And these address maintenance and operational issues that our clients may have right across a very broad spectrum of the resources space, whether it's carbon fiber products for the iron ore sector to replace steel and steel repair, whether it's lightweight composites for materials handling in the mineral extraction space or ultimately, whether it's materials that are going to be used in the emerging hydrogen space, which is something that's being pursued by a number of our LNG clients such as Woodside and others. This is where Matrix plays a very important role in providing development services and ultimately solutions that we will manufacture for this sector in our facility in Henderson, utilizing advanced materials and other products that have a strong degree of intellectual property associated with them and that we have some exclusivity in terms of supplying both here in Australia and globally. And I think I've covered the next slide. The other thing that I'd like to point out is our business has a long track record of successful product development. Riser buoyancy was obviously the most successful, but this was a product and a system that we developed over the course of a number of years, and we grew to become the world's largest supplier of this product. Other products include LGS, which was a development that we did with our technology partners AMOG in Melbourne, again, successfully deployed into a number of different applications around the world and here in Australia; well construction products; and also a system called IsoBlox, which is like a giant LEGO block building system to make very large floating structures. All of these are Matrix developments or codevelopments that we successfully conceptualized and took through to successful commercialization into a global marketplace. That's really -- that brings me to the end of the presentation. In summary, it has been a very difficult period through COVID. We've come out at the other end of it. We have repositioned the business to take advantage of a reemerging market with our existing capacity and capabilities, but we've also restructured the business to build 2 other pillars in terms of corrosion technologies and advanced materials that will build a sustainable income for the business over the next several years. These are growth market opportunities, and these are not designed for the company to just merely survive but to grow and thrive and return real value to shareholders over the next few years. Thank you very much for listening. I'm not sure whether we're taking questions at this point. There's no questions. Thank you. And that concludes it.