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

Thank you for standing by, and welcome to the Matrix Composites & Engineering Ltd 2022 Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Aaron Begley, Chief Executive Officer. Thank you, and over to you, sir.

Thank you very much, and welcome to our 2022 Half Year Results Presentation. I'm in Perth at the moment with Brendan Cocks, our CFO, and we're going to be talking to the published presentation that's been put up on the platform, and I'll try and guide everyone through the presentation according to the page numbers. So if you'd like to refer to that presentation, I'm going to jump straight to Page 3 and just give a bit of an overview of our first half performance. I guess in summary, we're seeing the beginnings of a strong and sustained recovery in our oil and gas markets. Oil currently is around USD 100 a barrel and underinvestment in this sector over the past 4 or 5 years has really driven a very pronounced uptick in investment in this sector globally. So we're seeing a very strong outlook, and we think this will be sustained over several years. As I'll go into detail in the presentation, what we think is 4 or 5 years of very strong market conditions in the subsea space and the drilling sector, and so we're quite confident with that. We've also seen some good results being delivered by our new Coatings division, which has been very pleasing, and we've made some very significant milestones in advanced materials. So just on -- in terms of our financial summary, our revenue was up approximately 70% from the preceding corresponding first half in 2021. And that's really being driven by that momentum in the oil and gas market recovery and also additional revenue from our corrosion technology division. Our diversification is continuing with the revenue that we're seeing from corrosion technology and advanced materials. And this resulted in a moderate EBITDA loss of about $1 million for the period, which was down significantly from the first half FY '21, and that's just as a result of increased activity. That's simply where that results come from. We remain very focused on financial management. Our current cash balance sits at around $10.5 million. And our December 31 cash was bolstered by the completion of our capital raise, which was completed on the -- during January this year. We don't have any trade or term debt, so the balance sheet is very clean. From an operating perspective, the majority of our revenue is derived from the SURF sector and the drilling well -- and the drilling sector, so that constituted about 60% of our first half revenue. The rest came from a combination of the corrosion technology business and advanced materials, the majority of that balance coming from corrosion technology. We saw the corrosion technology business expand by about 30% half-on-half, and we expect that run rate from the first half to be continued into the second, so that business line is now contributing materially to the business' bottom line, which has been very good. And we remain capable -- we've retained our production capability to manufacture our traditional oil and gas product lines. Also, we've made a few recent announcements in the advanced materials space, and then we're really seeing -- we're gaining some traction here. We did announce contracts with Woodside, Newcrest, and more recently, with FFI or Fortescue Future Industries, which is our first excursion into the hydrogen space. From an outlook perspective, as I mentioned in the opening, we really expect that this increasing activity in the oil and gas lines is going to be sustained for some time. The oil price is obviously very high, spiked very recently by events in eastern Europe but also underpinned by the fact that there's been very low investment in the sector for some time. So I'll go into more detail later in the presentation in that. We did announce an LOI recently for a major drilling riser buoyancy order. We expect that to be converted to contract quite shortly. And our tender pipeline is continuing to strengthen in the subsea and SURF markets. So I think I will hand over to Brendan now to run through the financial metrics, and I'll come back to those -- the outlook for the business in more detail later in the presentation. So I'll pass it on to you, Brendan.

Thank you, Aaron. If we turn to Page 5, I'll just deal on a couple of points on our key financial metrics. So on the first line, our revenues, it is our third half of double-digit growth since we were significantly impacted by the oil price shock early in the COVID-19 pandemic. But in that growth that we're seeing and especially in the second half, we're now seeing both a recovery in that subsea market come through into our revenue line but also growth out of our Coatings division, which was from an acquisition a couple of years ago. And encouragingly as well, there's some -- we're starting to see our advanced materials starting to contribute to both the top and bottom line. We experienced reduced EBITDA loss for the period of $1.3 million. And we do maintain a significant facility and we have a level of fixed costs within the business so we do expect as our revenue grows, that growth in that -- and most of the margin that comes through those increased revenue projects drops through to the bottom line. So as the market recovers and if we keep growing, then that will reflect healthily in the EBITDA line. The other point I'll draw your attention to is just at the bottom there, employees. So you'll see that we had quite an increased employee count at the end of the half. Our workforce is variable, in that, we'll vary our employees based on the project load. And at the end of the half, we had a number of projects we were executing, so employee count was quite high. But encouragingly, we were able to find those employees in a pretty difficult labor market in Western Australia. If you turn to Page 6, it's got our balance sheet there. So we ended the period with a cash balance of $7.7 million. But at that point in time, we'd only completed the first tranche of that capital raising with tranche 2 really to settle based on the AGM that was held in January. So we received a further $4.5 million during January in relation to the capital raising. Our current balance as at yesterday was $10.5 million within the business, but we'll always be managing each month with swings in our cash balance as we manage through our working capital cycles. Other than the other working capital balances throughout the balance sheet, I'll note another couple of points so we hold no trade or term debt at the moment, although we're currently exploring options in that space, which would help support growth as some of the opportunities we're looking to convert through to other projects. And our assets, fixed assets and noncurrent assets, effectively reflect our investment in our Henderson facility, although the value in that Henderson facility has been reduced over recent accounting periods due to our impairments in a low oil price environment. And on the next page, Page 7, cash flow from operations. We had a modest cash operating outflow of $800,000 for the period, which was basically stemming from our EBITDA loss, although it was somewhat lower with positive working capital movements, which will move around based on project timing. Our CapEx principally relates to payments for our corrosion technology application equipment and also any required project tooling that we'll invest in during the period. You'll see there, it's got the proceeds from issue of shares, which, as I mentioned before, reflects the tranche 1 funds that came in. And yes, tranche 2 was received in January so it will be in the full year cash flow. At this point, I'll hand back to Aaron to take you through the strategy and outlook.

Thanks, Brendan. We'll now go to Page 9. As we've talked in previous presentation, the business very much has 3 pillars, subsea buoyancy, which encapsulates that traditional oil and gas business, the drilling riser buoyancy and also SURF buoyance and corrosion technologies and advanced materials. In the subsea buoyancy space, we're seeing very strong demand forecast for this sector. A lot of this is coming out of South America, both driven by Petrobras, Exxon and Equinor in that market. But there's some very, very large investments going on in places like Guyana with Exxon, and of course, in Brazil with Petrobras. So we're seeing a lot of forecast subsea demand being underpinned by those projects. But also outside of that market, regionally, there's a lot of project work happening. And then recently, Woodside announced sanctioning of the Scarborough project that's gone to FID. There's Barossa and Dorado and a number of other projects around Australia. So being around that, that puts us in a very strong advantage to pick up our pressure of work there. There's also a bit happening in the West African market space and in the United States and we're exposed to all of these sectors. So we have the capacity to produce over $200 million worth of buoyancy in the plant as it's configured in Henderson. So I guess the engine's running and ready to take off as far -- and service that market as those orders become realized and come through the door. In the corrosion technology space, this has been a very pleasing acquisition that we made about 18 months ago, very much in line with our strategy to build sustainable revenue in the business. Subsea buoyancy tends to be extremely cyclical and quite lumpy as that performance over the past few years has demonstrated. The corrosion technology space, we like a lot because corrosion is something that affects all energy and resources assets all around the world and especially on coastal assets in Australia, like the ones that Woodside, Inpex, Santos and others to operate. We've been able to diversify some of our revenue in this business segment, and we're seeing increased revenue from non-oil and gas customers like Alcoa and CDIC. So we've completed some projects for those companies and expect to do a lot more in that space. And we're complementing the coatings technology that we sell in this division with some of the other technologies, such as carbon fiber repairs, structures, specialized application equipment and a number of other advanced technologies that we package into this basket of goods that we sell into this maintenance space. Advanced materials is really starting to get some traction. Again, we're focusing with similar client base but in different part of those businesses to corrosion technologies. And very much, our focus has been on looking at composite material solutions for applications in the LNG space, iron ore as well, which we think will feature quite significantly next year, gold, and recently, hydrogen and renewables. In this market, we're seeing lots of interest in what our capabilities and technologies can do to lower costs and make operations safer right across the sectors we outlined there. So turning to Page 10, I'll just go into the subsea space in a bit more detail. The favorable graph on the left shows global subsea spend stepping up quite significantly in 2022. There's going to be over $23 billion of contracts awarded in this space. And just to outline, this just relates to subsea equipment, not the overall spend in the offshore sector, which is much, much larger. So this is a subset of equipment spending in that -- in the offshore sector. But we think and our clients think, this is really going to underpin 5 years of very strong conditions in this space. And it's something that we haven't seen since really the beginning of the 2010s. So the market outlook does look very good in that sector. Also, in the drilling space, we're seeing more reactivations. We're seeing market conditions change, where we're seeing an increase in rig rates. Drilling contractors have more money to spend. They've got more wells to drill. They've got to reactivate more rigs. So all of that bodes quite well for some sustained spending as activity increases across that sector. So turning to the next page, Page 11. Just to get a bit more granular in terms of our outlook here. We have a served pipeline there. If you compare it to the last pipeline that we published, there's been a few changes. Look, our bid to contract has increased slightly from when we last published the pipeline report. There's been a bit of churn in that bid to contract segment. But we're -- from what we're seeing, we would have hoped to have probably converted a few more of these quotations and orders by this point. But I'd just like to highlight that the time to engineer some of these projects is quite significant from order placement. So to give you an example, we have one customer in South America who was awarded a major contract in September. They've only -- their engineering processes have taken about 6 months. So they've only just been able to come out to issue tenders for buoyancy, for example, for that project this month. So it's taken about 5 or 6 months from contract award -- from their contract award to the point where they're actually able to issue RFQs for the type of equipment that we supply. So we still expect most of that -- if the contract were to be awarded over the next 3 to 4 months. It might extend a little bit further than that, but we would expect some of that to be realized in that period. There have also been a few supply chain delays, especially in South America, which will also cause few delays and some decisions being pushed out a few months. Bid to bid, that's where we bid clients that are bidding projects to their end clients. That's grown quite a bit to about $170 million in terms of active quotations and the opportunities to supply buoyancy into the SURF sector continued to grow. Moving on to Slide 12. Look, we're seeing no significant change from when we last reported this other than our Coatings revenue continues to grow. It was up to $4.1 million in last half versus $1.6 million in the corresponding previous half, and we're seeing quite sustainable revenue coming from this sector. It's been great to use also corrosion technologies as a channel to market to most of western Australia and Australia's major resources companies. So even though at the moment, we're pretty focused on LNG, which is a very adjacent market for us in this space, we're also being exposed to iron ore, to the alumina sector, and we're able to bring our basket of capabilities along with us when we're supplying these services and products into the sector. So I think this will continue to grow. I think it will be quite a material part of the business in coming years. And we remain dedicated to growing this and building a sustainable revenue base for the business. So that's been very, very pleasing and quite encouraging. So if we turn to Page 13. Advanced materials has really gained some traction. We've been talking about this for a while. And typically, the process is that we will work with clients to solve issues that they have with performance of equipment or safety issues around things like performing hot work or weight or manual handling. But it also can be things like fatigue in real life and all sorts of applications. And we're applying our significant capability in areas like carbon fiber, [indiscernible], even exotic materials like titanium and some of the more proprietary technology that we have into this sector. I think the opportunities that we're most excited about are those areas where we see sustained revenue and a strong intellectual property position in some of these sectors. Hydrogen's, obviously, a very exciting area to be involved with as well. And most of our clients in the oil and gas space and the resources space have a renewables or energy transition strategy. I mean, Fortescue is obviously quite significant. They've got a completely separate division, who are focusing on the hydrogen space in a big way. But even companies like Rio Tinto and Woodside have high general renewable strategies, which we're seeking to participate in. And so that really brings me to the conclusion of the presentation. I think in summary, the first half has really just demonstrated that our traditional markets are poised for a very strong and sustained rebound. We have positioned ourselves to grow in those sectors that we think will be strongest over the next few years within the subsea space. So we see some pretty significant opportunities. We expect to materialize over the coming year. Our traditional business in drilling riser buoyancy, look, is really going to be bolstered by the fact that more rigs are being activated, day rates are going up and there's simply more wells being drilled. So that's excellent. And that CapEx pipeline looks very good. So we hope to be able to build our backlog quite significantly over the next year. And I guess we're delivering on our strategy of building a sustainable revenue base for the business. Coatings is going very well, continue to grow and advanced materials is a very exciting part of the business because the opportunities that we have to service the local resources and energy sectors through that conduit are quite significant. And the upside there is pretty profound to the business. So all in all, yes, we're very positive about the outlook over the coming years, and we believe the business is well positioned to take advantage of. So I think that brings me to the end of my presentation, and I'll pass back to the moderator.

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

Just a quick question. Does the effort to build these future-facing diversification opportunities come at a time when you need all hands on deck to secure traditional business of the cycle upticks? Can you just brief us on how you manage this plethora of activity?

So yes, thanks. That's a really good question. Look, if we look at the 2 markets in the subsea space, we're really -- we're not quite one of one, but we're certainly the dominant player in the drilling riser buoyancy market. I don't think that we're missing any opportunities in that space because we're really recognized as being the only vendor that remains there. So I don't think we're seeing any opportunities missed in drilling riser buoyancy at all. Where we have some dedicated development resources there -- we got an office in Houston and most of the drilling contractors are headquartered there. So he's very much focused on just servicing our oil and gas customers and subsea customers in North America. So he's not distracted, I guess, to your point by some of the other things that we're doing in, say, the advanced materials space. In South America, we have a dedicated business resource down there as well. He's based in Rio, and the majority of the subsea opportunities we're quoting on the moment come from South America. So we've got -- we think we're covered quite well in those 2 areas. And the rest is taken up by the rest of the team. I mean, it's -- the Coatings business is effectively a separate business unit -- operates effectively the separate business unit with completely separate business development opportunities -- separate business development personnel. So it has a general manager that has a separate BD person that's just dedicated to that market. Where probably my time to share a bit is with the advanced materials space, and I tend to spend most of my time in either the subsea space and embedded that in advanced materials. But I think we covered that, Steve. There's a few milestone processes that we need to go through with some clients as we closed our qualification processes as well that may -- yes, I don't think we're missing anything.

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

Thank you very much. Thanks for listening today. And on behalf of myself and Brendan, if you have any further questions, you know how to contact us, so we'll be happy to answer those. Thanks for listening.

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