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

Thank you for standing by, and welcome to the Matrix Composites & Engineering 2022 Full Year Results Conference Call. [Operator Instructions] And now I'd like to hand the conference over to Mr. Aaron Begley, Chief Executive Officer. Please go ahead.

Thank you very much, and good morning, everyone. Welcome to Matrix's 2022 full year results presentation. I'm here with Brendan Cocks and we're coming to you from Perth. So we have a presentation, which has been put up on the platform. So we're going to be talking to that presentation and effectively just turning through each page. I'm going to go directly to Page 3 for those that are following the presentation titled FY'22 Growth Trajectory. So this -- FY '22 is very much reflected the fact that the business is growing. The outlook is very strong going into FY '23. And we're seeing diversity coming through revenue streams and delivery on our strategy. So last year, we produced a revenue of $306 million, which was a substantial increase on the prior year. And we've seen continued growth half-on-half through FY '21 and FY '22. This is really being driven by [ offshipping ], a diversification across the oil and gas market, growing revenues from our Corrosion division and also revenue being generated and growth opportunities being generated from our Advanced Materials division. We managed to produce our EBITDA loss significantly from prior year, but down to $2.3 million and cash has been stable across the year. The year we've started with 7.6 -- $7.2 million and finished the year with $7.6 million. We also don't have any trade or term debt. So the balance sheet is quite clean. From an operating perspective, we saw an increase in subsea buoyancy revenue, that was up to 60%. The Corrosion Technology business grew very strongly with an 81% increase in revenue growth. And we've continued to seek traction from our Advanced Materials business into the Resources sector and also into the Renewable sector. Also, within last financial year, we obtained some funding from the WA government to establish the first deepwater hyperbaric testing chamber suitable for testing some critical equipment to the oil and gas industry. Currently, all of that offshore. And we also see our environmental systems accreditation and we've been recently certified to ISO 14001. From an outlook perspective, we feel the business has emerged from the challenging COVID-19 conditions that we saw across 2020 and 2021. And that's been underlined by the substantial improvement and outlook and an increasing backlog. We currently have $30 million in buoyancy in our backlog. So to put that in perspective, that we've got 2 contracts totaling $30 million that exceeds all of last year's revenue and we've only just started the year. So those contracts have come in the first 2 months of business operations this financial year. Our Corrosion Technology business continues to give us some stable recurring revenue streams from the local Oil & Gas and Resource sector. And our Advanced Materials business is continuing to accelerate and is broadening into the Clean Energy sector, which we see as a very adjacent market. We also have quoted over $50 million of quite into the Offshore Floating Wind sector, which is a direct application for our buoyancy technology. As a result, coming into FY '23, we expect a significant revenue growth on FY '22. So we believe that, that growth will be quite strong, underpinned by the fact that we're growing our backlog. So moving to Page 4. Look, we've delivered on a number of initiatives in FY '22. We've maintained our capability to deliver into the recovering Oil & Gas market. And we significantly -- we have recently picked up the $16 million order in the SURF market, which utilizes exactly the same production capability as our drilling riser buoyancy business and enables us to leverage that underutilized plant capacity that we've got. So that's been quite significant and exposes us to a market, which is valued at hundreds of millions of dollars per annum and is going to be very strong over the next 5 years. We've also picked up some new deep water drilling riser buoyancy contracts as the drilling market recovers and we're seeing those opportunities appearing in Offshore Wind. Corrosion Technologies is continuing to deliver for us. And that's really giving us that underlying sustainable revenue from the local resources sector and Advanced Materials, the third pillar of the business, has further increased our exposure to the Resources sector in particular, in Renewables. And that's really given us some momentum in our diversification strategy and opens up a large number of opportunities in the Resources sector. So I'm going to pass over to Brendan who will run through the financial results. Over to you, Brendan.

Thank you, Aaron, and good morning, everyone. We just turn to Page 6 by name Financial Metrics. We did go into a bit of detail on the following pages, but I'll just make a couple of comments on this page. We have, as Aaron mentioned, achieved encouraging revenue growth during the year. That's led to a reduced EBITDA loss, which was $2.3 million on an underlying on a normalized basis. I will note during the period as well that we've kept our overheads reasonably high as we've had a lot of heavy lifting to do both from qualifications with some of our key clients and also a strong quotation pipeline well servicing, which mean our engineering overheads and department was pretty heavy during the period that we think help lead to growth expected this year. From a statutory EBITDA point of view, it was around breakeven, small $100,000 loss but the difference there between the underlying EBITDA was -- there's 2 adjustments. One was the reduction in our asset-retirement obligation during the year, where we had a formal review of that provision and led to a reduction in that. And they also had an FX gain during the period of $700,000, which we normally are split out the gain or loss relating to FX. You note there also from an employee point of view, we've grown our employees in a difficult market during the year where we sit at 90 at the end of the year and we're possibly managing what overheads we may need to execute on current projects, especially in our direct labor force. On Page 7, we've got a slide there in relation to our revenue growth. So encouragingly, we had strong revenue growth through the year. And what we have seen is half-on-half growth over the last couple of years as we've come out of the difficult COVID period for us with a really subdued oil price. We do, as mentioned, as during the year, that growth came from both our subsea buoyancy products picking up but also Corrosion and our new Coatings division, which is now a couple of years old to the business. We achieved 80-plus-percent growth in that business unit and recorded over $10 million in revenue for the year, which has been a great contribution to the business. Also, our Advanced Materials division is starting to grow, and we see that, that area of the business, although there's a lot of front-end type consulting work in studies that on success of some of those studies with our key clients may lead to some more significant revenue in future years. So -- but then into FY '23, off the back of the recent contract wins, recurring revenues in our -- in both our Coatings division and also well Construction and Advanced Materials division, we expect strong revenue growth to continue into FY '23. In Page 8 on the balance sheet, I'll make a couple of comments here. But one thing that we do have at the moment is a net liability position. I will explain that, that does some -- that is a result of the lease accounting standards where we had to -- we had to take quite a large lease liability and right-of-use assets under the accounting standards. But as with a lot of our peers, we went through a number of impairments in recent years to our asset position as there was subdued Oil & Gas market and difficult to be where that was heading over the last few years. So the result of taking up that lease accounting, but then having a heavy, heavy impairment situation meant that it's put our balance sheet into a net liability position. What I will note is it doesn't really reflect the fact that we still carry our $130 million facility, which retains full capacity and is fully maintained. So just thought -- I would note that. Also I'd note, there's no debt on our balance sheet at present. We haven't carried debt for a period of time. Although now with an increasing pipeline of work and new contract wins, we are exploring options to support our working capital, we've done some form of our debt on the balance sheet. Slide 9, cash flow from operations. From an operating cash point of view, we used $4.1 million during the year. A lot of that was working capital movements and also the annual debt from our facility. What I will note is that during that period, we've also retained recharge $2 million worth of strategic raw materials, which we think is prudent in the current market to minimize any supply chain issues. And that $2 million forward stock that we purchased will be used in the front end of our high-mile project this half. So closing cash position of $7.6 million at the end of the period. At this point, I'll hand back to Aaron.

Thanks, Brendan. Okay. So we're going to jump into a more detailed overview of our strategy and outlook, which starts on Page 11. So we're breaking the [indiscernible] with the 3 business pillars which we've been talking to. And the structure has been put in place to really underpin our long-term sustainable growth. So there are 3 areas which we talked to before: Subsea, which includes the company's buoyancy product line and other related products related to both the oil and gas and also the emerging Floating Wind sector; Corrosion Technologies, which covers coating systems and other repair and sustainment systems for the resources, primarily the Resources sector; and finally, Advanced Materials, which encompasses some high-tech solutions that we -- that we work with industry to develop across -- primarily across the Mining and Renewable sector. So Subsea, as I mentioned earlier, we're really past the worst of the effect of COVID. The oil prices businesses remain strong this year. And that's resulted in a large number of projects being sanctioned and increasing backlog that we're seeing with our clients and major rapid contractors around the world, and it gives us an opportunity to leverage that latent plant capacity that we've sustained through the downturn. So our plant is capable of manufacturing buoyancy for really 3 key market sectors. And they include: Subsea and SURF, which is -- for applications in oil and gas operations associated with subsea production; deep water drilling, which was our traditional business, if you like; and then the growing and emerging Offshore Wind sector, which is a market that is a global phenomenon. It's not just something that's happening in Europe. It's also happening in Australia and in North Asia, and there's some very, very large projects on the drawing board that have been committed to. So Corrosion Technologies really continues to produce that sustainable revenue for us. Some of our key clients include Woodside, where we are a cornerstone client for this division, impacts with their operations out of Darwin. Alcoa across Australia, including Malaysia and Western Australia and also in the East Coast. Santos, again in South Australia, West Australia, Northern Territory and Queensland and CSBP's operations in Western Australia. So it's very much focused on that sustainment CapEx. This is money that the Resources sector have to spend whether they're building new plants or not. And we have a number of technology growth applications in that sector as well. So it's a very large market. It is quite fragmented, but we have a number of unique and established and proven product solutions that we're pushing into that space. Probably the most exciting part of the business for me in the long term is the Advanced Materials business. And that's because of simply the magnitude of some of the growth opportunities. And Advanced Materials encompasses a business unit where we sell high-tech solutions into materials-based solutions into the Resource sector and increasingly into the Renewable sector, which is growing very strongly. Some of our key clients include Fortescue Future Industries, Woodside again and a number of mining companies, but I'll talk to those in more detail later on in the presentation. Turning to Slide 12. Look, this slide is really just highlights the importance of the sustainability not just across the Resources sector and general industry, but also in the Oil & Gas industry as well. Sustainability relating to the circular economy, reduced carbon footprint and also sustainable practices is something that highlights quite strongly now when we produced vendors for the supply of equipment. So for example, in a recent project, we've been approved by Petrobras to use recycled materials in the manufacture of some of our buoyancy products. It's something that we've been doing for some time but there's a recognition now by the operators that the circular economy has to be included in their supply chain. So that's one of the initiatives that we've introduced. Localization of supply chain is also more important than it has been historically by moving our supply chain closer to where we are to reduce carbon footprint and also looking at the recyclability of our buoyancy models. So turning to Slide 13 in terms of outlook for subsea. But this slide has been -- we've used this slide a couple of times. The graph has been updated and pushed out to 2026. What it shows is a very solid 5-year horizon of demand in the global subsea space. So this is really a lead indicator for the market activity. The contract awards, which are now exceeding $20 billion a year, really going to underpin demand for buoyancy in the SURF space across markets in Brazil, French Guiana, the Gulf of Mexico, West Africa, Asia Pac, including Australia and also Europe. And we expect our market share of this market to grow quite significantly over the next few years. And subsequently, we see a substantial increase in demand for buoyancy coming from these markets. Moving to Slide 14. That's reflected in -- an increase in our quotation pipeline. So this has grown significantly from our last report. So bid to contracts, so these are bids have outstanding that we expect to be closed within the next 6 months has grown by about 50% to about $85 million. There's been some ins and outs in this particular figure because they had -- there was a substantial order that we were expecting to receive earlier this year that has been shifted out for next year, which is no longer in that bid-to-contract and is back up and bid-to-bid. But the bid-to-bid pipeline has more than doubled, but it's now $380 million, and our opportunity identification remains at greater than $200 million. The interesting thing about this pipeline is it also includes $50 million of opportunities in the Floating Wind sector. Now, Floating Wind is growing at a pretty dramatic rate. By 2050, DMV forecast there will be 1,500 offshore floating wind turbines installed around the world. That's billions and billions of dollars worth of equipment that we can -- that we can supply into that sector. So it's a very big and very large and growing opportunity for us. So all across these 3 sectors of deep water drilling, subsea or SURF and offshore floating wind turbines, we're utilizing the same material, the same technology and the same substantial production capacity that has remained pretty underutilized over the last 5 or 6 years. So there's 3 growing sectors that we're pushing very, very hard to take a share of and that will grow those order books and increase production over the coming years. So turning to the next slide, Advanced Materials. I think the -- probably the key areas that we're focusing on here are where our clients are looking for solutions for renewable, where they need which might be hydrogen production, hydrogen storage and other related production technologies, where existing materials tech basically either won't work or suboptimal. So it might have something to do with waste, corrosion is another feature and compatibility with hydrogen and other materials. So there's some very large emerging opportunities for us there. The way we normally engage with our clients is we get paid to develop solutions to those clients. And once those solutions are proven and commercialize, we then manufacture those solutions for them. So it's a very -- I think a very solid business model. It's very, very low risk for us because we're getting compensated along the way. We share some risk with the client in as much that if it works, we both benefit from it. IP is sometimes owned by the client, sometimes owned by us or we have IP-sharing arrangements. So it's a very collaborative process that we go through. And the size of the product is potentially tens of millions of dollars of revenue in coming years out of the Renewable space and out of the Resources sector, utilizing technologies we know a lot about, utilizing our production capabilities, where we have invested clients -- invested in making these processes work. We test beds for -- ready made from putting these products to work. So if we need -- if we develop a prototype and we put it into the field, we've actually got the client paying for and wanting that product to prove out in their applications. And generally, an LNG company, whether it's Woodside or someone else or an iron ore company, we'll have the same problems and the same challenges that all LNG or all iron ore companies have that they're trying to solve. So we don't just solve that business that we work with that we sold to the industry sector. And then there is an opportunity for our clients to then participate in a royalty arrangement or some other IP-sharing arrangement as we sell into those other sectors. So lots of potential in this space and lots of opportunity to ride the renewables growth. On to Slide 16, I'll touch on this briefly. I think I've talked to this enough, but Corrosion Technologies is really driving its revenue primarily from the LNG sector. We see opportunities in the iron ore space as well and other related industries. But look, we had strong revenue growth in 2022. We expect another solid year of performance from this sector. And it's great because we're getting revenue generated every week from this business and help underpin our revenue base and generate sustainable income and exposure to new markets. So it's been a very valuable addition to our business. I just want to touch a bit more broadly on the Renewable Energies market. All of our clients whether the oil and gas or mining based or other resource affected base clients as some involvement in renewable energy, it's a very strong thematic in Western Australia, whether it's companies like Rio Tinto are committing billions of dollars to the electrification of their mining operations. They're very hard and strong growth story from Fortescue Future Industries around their green hydrogen initiatives or the emerging market, which is Floating Wind. We think that this gives our business because of our involvement across this space, a real pathway for long-term growth. There's -- we've always had to deal, I guess, with the specter of the cyclicality of the Oil & Gas industry. It's long-term relevance and share of the global energy market. And it's still growing, but at some point, it is going to decline. We've seen that this transition into renewable energy has been a very -- a very adjacent, highly adjacent pathway into long-term growth for the business of technologies. So for example, whether we're developing high-tech composites for Fortescue Future Industries to use in hydrogen manufacturing or whether we're producing deep water buoyancy for floating wind farms in Korea or offshore Australia or in Europe. We're leveraging our current capabilities. And the outlook for this market is very strong. On Woodside, as many listeners will know has a hydrogen strategy. That's going to be quite a significant investment that they'll make here in Western Australia and also in the U.S. over the coming years. So we're embedded in with those customers, and we will go on the journey with them to support them with our technology. So finally, to Slide 18, which is the conclusion of my presentation. We're heading into FY '23 with the biggest backlog that we've had in a long, long time. We expect to be able to grow that backlog through the year quite significantly, and we expect significant year-on-year growth from FY '23 as compared to FY '22. We also see a 5-year pathway for solid underpinned revenue from the Subsea sector, which would continue to support us through that period. And of course, we're seeing these new opportunities emerge in Floating Wind and the Hydrogen and Resource space, which is coming out of our Advanced Materials business. So I think the outlook for the business hasn't been as good for a very long time. Not only are we seeing a recovery in traditional market, but we're seeing -- we're getting runs on the board in adjacent sectors like the subsea market and also the markets that we're -- that we get gaining access through Advanced Materials and Coatings. So I think FY '23 will be very good from a revenue perspective. And I suspect the business will continue to grow over the next 5 years. So that concludes my presentation. Thanks for listening. I'm going to hand back to the moderator now, and I think we'll take questions.

[Operator Instructions] We have a question from Ross [ Pedregal ] with [ Colin Same Asset Management ].

Just forward-looking, obviously, you understand that we're pretty optimistic, oil and gas services going forward. Can you just talk to me about how one should look at the prospective margins from current initiatives and prospective new businesses, whether it's in the Offshore Wind sector or the typical normal customers going forward, seeing, I believe, and you can correct me if I'm wrong, with only yourself and another competitor with basically a duopoly within the sector?

Sure. Well, look, there's probably -- there's 2 to 3 players, including us in the sector. And in terms of margin, really, I don't think they're going to move much from what our historical margins have been in -- by the buoyancy. So about the Floating Wind, the margins are about [Technical Difficulty] as a blended margin. I mean they may move from contract to contract, but as a point of margin, we're not anticipating much of a change across those sectors. But we're basically making the same stuff. Yes, there are different competitive pressures and there is also a different value proposition to the customers and margins can vary significantly from product line to product line and contract size to contract size, but as a blended margin, there's really not a lot of difference.

Okay. So you can confirm that as we're entering cost inflation pressures just globally and generically, but you're able to maintain your historical margins on an overall basis?

Yes. So generally, we have to pass through those cost increases in terms of material price increases. But we actually have seen Advanced Materials come off a bit, but in some areas and go up and others, but we generally have to pass those through because otherwise -- and like all manufacturers, we're all on the same boat.

Sure.

Anything else I can help you with that?

I'm just surprised there should be more questions, maybe on anyone that likes to make money.