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

Thank you for standing by, and welcome to the Matrix Composites & Engineering Limited 2023 Financial Year Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Aaron Begley, Chief Executive Officer. Please go ahead.

Thank you very much, and welcome, everyone, to Matrix's 2023 Full Year Results Presentation. I'm Aaron Begley, the CEO of Matrix, and with me Brendan Cocks, our CFO. So for those following the presentation, we'll turn straight to the slide, which is entitled Matrix's Growth Proposition. So we put the slide into really -- to really highlight where we are, where we're going. We have the world's largest synthetic foam plant that's operating in Henderson in Western Australia. It is the center piece of our production capability. And we're leveraging our plant's production capability into very strong growth that we're seeing in the subsea production space, resurgence in drilling activity internationally and growing markets in defense, and what we see coming from offshore floating wind. We see strong revenue expansion, which has been highlighted by our results this year and our outlook. And importantly, we're also seeing the growth of our current and sustainable revenues from our Corrosion Technologies division and growth opportunities coming from renewables from our Advanced Materials division. We'll just turn to the next slide. So in review, last year saw a significant increase in revenue, up to -- just under $50 million, which was a 65% increase from the previous year. Most of this growth occurred in the second half, which was 3x our first half revenue, which is the busiest plant and production facility has been since 2016. The second half produced about $2.5 million in EBITDA, which resulted in an overall positive EBITDA result for the full year. Our headline NPAT of $8.7 million. This was driven primarily by that positive EBITDA and also reversal prior asset impairment, given the positive and sustained market outlook. Our cash position at the end of the financial year was $20 million. That's actually grown since then. And we just reported that as a subsequent item, 30th August cash flow is $23.5 million. From an operational perspective, the offshore oil and gas market is very active at the moment. We've been awarded over $80 million -- during FY '23, we're awarded over $80 million in new orders, which included drilling riser buoyancy, buoyancy for SURF, orders for advanced material in our Corrosion division. And our Corrosion Technologies division is creating some recurring income for us, which is important for the business and really does stabilize our revenue base. And our Advanced Materials product lines are really starting to gain momentum across a variety of different industries. We expect the growth trajectory to continue in FY '24. We currently secured $55 million in SURF contracts for this -- to deliver in this financial year. We do expect to continue to secure more for delivery in this financial year. We also have -- we're also continuing our run rate with Corrosion Technologies and our Advanced Materials business division is also gaining real momentum. We think that the outlook for our -- for the subsea market will continue to build. We've got a very active quotation pipeline and we think this will add significantly to our revenue base both in FY '24 and also into FY '25. Corrosion Technologies and Advanced Materials is a very important and exciting opportunity for the business as it's creating both growth -- strong growth opportunities, but also the promise of sustained revenue that's coming from the resources sector, the local energy sector, of course, renewables. And in the long term, we're looking forward to penetrating the new offshore floating wind opportunities that we see emerging all around the world, including in Australia. I'm going to pass over to Brendan, who will take you through our financial results, and then I'll come back for the strategy and outlook section. Over to you, Brendan.

Thanks, Aaron, and good morning, everyone. Just turn to Slide 6, which is our key financial metrics. It's a summary page, the financials. Just a couple of comments on that slide. Revenue was delivered within guidance, reflecting a 65% increase on last year's revenue. Encouragingly, we were EBITDA positive for the second half and also profitability in the second half was sufficient enough to offset the loss in the first meeting that we had a small EBITDA profit at the end of the year. This is encouraging because it just shows that with the increased volume and throughput that it does drop to our bottom line, showing our strong operational leverage within the business and our facility. Operating cash flow reflects our current working capital cycle and project life cycles where at the end of the year, we had projects that were substantially complete which paid for majority of the raw materials, but then we still had substantial milestones to collect, which we've invoiced and will collect between -- which we have been collecting between July and until the end of October just in time for when we'll be ramping up on some of the other big projects for this year. Our gross cash was at $20 million and as Aaron mentioned, had grown to $23.5 million and some of these milestones are collected as well. We expect that to keep increasing before we go into our next working capital cycle with [indiscernible] project. On Slide 7, we've got strong revenue growth. So we have been -- experienced recovering and growing revenue as the energy market recovers and grows. We do expect continuing growth into FY '24, and that's based on our current order book, but also conversion of near-term opportunities, which we're working hard on. Aside from that subsea order book, we're also working hard on getting growth across all our 3 divisions in the business in FY '24. On Page 8, we have our balance sheet. So we did strengthen our balance sheet through the year with both the convertible notes that we took out in December and then also a subsequent capital raise in March. We've experienced higher working capital requirements with the increased workload. And as I mentioned before, the year-end reflects -- effectively reflects the bottom of the cycle as one of their main projects where we're producing for the year. So our [indiscernible] project, which we'd all but produced all the modules for that project. At year-end, we paid for all the raw materials, but we still probably had over half the size of that contract that would be paid subsequent to year-end in the production milestone payments which we're now collecting. The other thing that strengthened our balance sheet is there was an impairment reversal, which we took within the half year, which reflects the stronger market we now operate in, reversing prior impairments, more partially reversing them. We also had the capital raise and stabilization of earnings reflect some net asset position at the end of the year of [ 26.8 ] which is a lot stronger position than what was a net liability position at the end of June '22, putting us in a good position to execute work and keep securing more work. On Page 9, cash flow from operations really, really dominated from the workload that we've done on at the moment, and you'll see just the movement in our -- increase in our receivables reflects what I was talking about before, where we had -- we're pretty heavy in the working capital cycle side, we had a number of receivables that will come through early in the new financial year. We also had a large deposit that we've invoiced in June that's been subsequently paid to year-end, so that's almost an offset that $8 million increase with the increase in receivables. Had modest capital expenditure, which is some sustaining CapEx, but also reflects some investment in our production tooling as we win new projects and make tooling -- bespoke tooling for those projects. And at the end of the year, as we mentioned, we closed with cash of $20 million. I'll now hand back to you, Aaron.

Thanks, Brendan. So if we can just go directly to Slide 11, I'll report out on the 3 pillars of the business. Our core traditional pillar which is subsea, which encompasses all the products we manufacture of the subsea market regardless of industry. So this includes exploration, production and opportunities in offshore floating wind and are emerging markets in Corrosion Technologies and Advanced Materials. And it's important to point out again that Corrosion Technologies and Advanced Materials offer great -- fantastic growth opportunities for the company and also the opportunity for a broader sustained revenue base. Turning to Slide 12. We're looking at our subsea quotation pipeline, which you'll, note for those who have been following the business, has grown from last time. Look, we -- I think one of the questions we get is where the conversions from bid to contract to orders. I think one of the -- our response to that is a lot of the quotations that we have -- that are live here -- kind of been live for some time of projects, which have quite a long decision-making time frame. In many cases, the end date, the delivery date doesn't change. But because of the complexity of the projects, it does take quite some time for our clients and their clients to make final decisions on exactly the way they're going to execute their projects, the design of the equipment that they need and that sort of thing. So we will not get the contract opportunity pipeline includes a substantial amount of orders that is converted, will be delivered into this financial year, some of them still over the following financial year. But it's important to point out that we really have had no material losses in terms of our bid-to-contract pipeline. The few small orders that we have lost competition has really been because of legacy relationships, not because of price or technical capability. So we're quite confident that we'll continue to convert a significant amount of that bid to contract pipeline in the near term. This bid continues to grow. So the bid is where we bid to contract that our clients are bidding on. There is a lot of work coming in the subsea space, as you'll see from the next slide. And our key clients include major EPIC contractors as detailed in the slide there. And also, ultimately, we're approved by companies such as ExxonMobil internationally, Petrobras, recently Aramco, formerly Saudi Aramco and a number of other operators. Turning to Slide 13, to give you some flavor for the outlook. We expect this market, that is the subsea oil and gas space, to be busy for the rest of the decade. And that's in line with what our clients are saying. The -- I think in that graph, the path to look at that drives our business is really the green part, which is the demand for SURF and that's likely to remain at levels of around $4 billion plus over the next 5 years, which will underpin demand for the products and services that we supply. The pipeline market also is the lead indicator of some of the activity in our sector but primarily serves as a key driver. And being on the approved vendor list with large EPIC contractors such as Subsea 7, recently TechnipFMC. And Subsea 7 will continue to generate work through the foreseeable future. Turning to Slide 14. This looks forward a few more years as we lose visibility in the subsea oil and gas market. So we start gaining some visibility of what's going to be happening in the off-loading offshore wind market. This market is very interesting to us because of the share size. The size of these developments is absolutely enormous. To put it in perspective, just from a mooring cable perspective, a large FPSO development in the oil and gas industry might have 12 mooring lines. A large or even medium-sized floating offshore wind system will have hundreds of mooring lines, and that's just per installation. And those mooring lines require buoyancy as do the power cable and we also have products for power cable protection and other products that can be utilized in offshore floating wind. So it's a very bullish long-term outlook. Key target geography for us includes obviously Australia. There are some very large installations that are proposed offshore Newcastle in New South Wales. Originally in Taiwan, South Korea and Japan, there are a number of opportunities there. And we're working with the same EPIC contractors that are involved in the oil and gas space that are utilizing their skills to penetrate the floating offshore wind space. We've increased our participation in this market. We're participating in trade shows. We're engaging with clients. It is a longer-term prospect for the business but a very important one and one that we need to be a center of mind or front of mind for with the EPIC contractor to really gain some momentum in what will be a much larger market than the SURF market currently is. So turning to Slide 15, Corrosion Technology. So a couple of key milestones that we achieved last year included the ongoing supply of the coating systems to companies like Woodside and Impex and other resources companies. We've also signed a licensing agreement with the manufacturers of Humidur out of Belgium. So we expect to be manufacturing the paint under [ license here ] towards the end of this calendar year. And we've also started to build some of our own IP around composite repairs structures, which utilize material by carbon fiber in lieu of doing traditional weld repairs and some other aligning technologies. So our target market here is the LNG sector, the iron ore sector, ports, brownfield developments and it's a very large -- a share of a very large spend that we're chasing. To put it in perspective, the industrial paint market in Australia, this is just the value of the paint market alone is about $800 million. So we're seeking a share of that market. We have a very strong value proposition and a lot of interest from major operators that are looking to save a lot of money on their operating and maintenance expenses, and this is something that our product can enable. So the great thing about this is very different from our buoyancy business, which is a CapEx-based product. This is an operational base expense. So we literally get orders to this product every day. And so that builds some real sustainability into the business, and we think it can grow quite consistently. Turning to Slide 16. So Advanced Materials is a real growth opportunity for the company. So key markets here include defense resources and energy transition opportunities, in particular, hydrogen. In the defense sector, the growth opportunity we see is within unmanned water vehicle market, that is growing from the war. We do have our first orders from this space that we're manufacturing at the moment for local defense contractors. Not something we've announced at this stage until it becomes a bit larger, we probably won't have much more commentary on it. But it's a very large potential market because of -- because of the global opportunity where you might -- Australia might be looking at acquiring 8 manned submarines over the next 20 to 30 years. They will potentially use literally hundreds of unmanned underwater vehicles as Australia's partners in the AUKUS alliance. So we have relationships with companies in the U.K. and also the U.S. And we believe that this is going to be quite significant for us, especially considering our scale to manufacture a large quantity of both composite and syntactic structures in our existing plant in this existing configuration. So it's a bit of a sleeper but a big opportunity for us. The other point to talk to on this is really around the work that we're doing for companies like FFI where manufacturing componentry to their electrolyzer plant in Gladstone and we're actually starting to produce components for production for them. So that's been a great milestone and that will hopefully continue to drive demand there. In Advanced Materials, we now also include well construction products because it's not a subsea product even though it is in the oil and gas industry. And you may have noticed that we recently announced an order from Aramco, relatively small. That's only about $1 million, but this is for a product that we've been qualifying with Aramco. It's taken nearly 8 years to get that approval, but the size of the -- ultimately is quite significant for the business. This is our first order for a relatively small part of their demand, actually a very small part of their demand. And as we build traction in that market, so that's that should lead to some pretty significant sustainable revenue because we'll be supplying this product into a large proportion of their wells that have been drilled through Saudi, and they are the world's largest oil company. Over to the final slide, just to wrap up. I think last year, we secured $80 million of new orders, which included $55 million of orders that will be delivered into this financial year. And we have a growing pipeline with some [indiscernible] in terms of conversion that we expect to be able to add to our backlog for this financial year and also for next financial year. The outlook for SURF remains very strong over the next -- more relatively end of the -- until the end of the decade. So we continue to run in that market. We appear to be very competitive. We've got a big plant that we can gain a lot of operational leverage from. There's a proven profitable track record with that facility. And we're utilizing effectively the same production technologies that we've used historically for drilling and buoyancy in the SURF market and really gaining quite a lot of traction in terms of market share. Corrosion Technologies and Advanced Materials are expected to grow significantly over the next few years. Ultimately, we want the business to be profitable just on the basis that that's a sustainable technology. And we say sustainable in terms of revenue production. And that's really one of the underlying themes of that strategy is to make sure that the business is profitable -- sustainably profitable and growing on the basis of revenues that come from those 2 pillars, whilst being able to capitalize on the upswing in the CapEx cycle in the oil and gas industry and then ultimately, offshore floating wind when it comes along. So it's a good place to be. So I think that's probably where I'll wrap up. Look -- I think we delivered on what we said we were going to do -- deliver on last year. We've got a good backlog going into this year. We've got great momentum coming from Advanced Materials and Corrosion Technology and a continued sustained improving outlook for the subsea market that we've historically participated in and continue to grow strong growth trajectory. Thanks for listening. Yes. And I think we'll hand back to the moderator to see if there's any questions.

[Operator Instructions] Your first question comes from Joseph House with Bell Potter Securities.

I've got 3. So firstly, I'm keen to get some commentary on the replacement riser buoyancy market. Is this a market segment that could support new orders for you in the near term?

Look, absolutely. So one of the challenges with the replacement market for riser buoyancy really comes around a lack of visibility. So we do have -- we've had quite an active period of closing. And what we're finding is that there is probably 2 key drivers to demand for that product. Number one, generally, the drilling contractors are not going to spend money unless it's underpinned by an order from their customer. So we're an upgrade and a riser, drives -- is required to mobilize a rig and the customer pays for it, then they'll proceed. So we, a few months ago, announced an order for TransOcean. And that was very much the case. They picked up an order actually in Australia, needed to buy some new buoyancy and refurbish a riser that was all funded as part of the mobilization charge by the customer, and therefore, we got the order. The other thing that we are seeing is we would have expected a bit more sooner, but for the fact that the lead times on new risers are now going out to 12 to 18 months. And so the buoyancy goes around the riser. So where we know customers have actually upgraded their riser system, they don't need to place the buoyancy orders right now. They will have to actually place that order sometime in the next 6 to 12 months to meet the riser delivery, but that is -- that's delaying in some cases, their order placement. Well, the other thing that we're seeing is we've got some specialized products like LGS, which is a drag reduction product that we sell into the market. That's effectively being specified by Petrobras. But it will take a year or 2 for that really to flow through the orders for us. But we do expect an uptick in order take in that market, it's just a bit unpredictable to when that happens. Does that answer your question?

Yes, it does. That's really helpful. I guess next, I wanted to focus on Corrosion Technologies. Just keen to hear your thoughts on the growth opportunities here. How should we think about sales growth beyond your traditional customers. In your presentation, you made mention of customers like Rio and Alcoa. Yes.

Yes. So look, generally, these customers, it takes -- it takes a while to demonstrate the product, do testing work and then get ultimately specified into projects or their engineering manual. But look, we've seen our first sales now into Rio, into ExxonMobil and others. And this is really -- that really should build over time into quite significant recurring revenues. So we have been quite reliant on a couple of key customers, but we're now seeing some very big players like Rio and like Exxon start using the product. So I would expect that's just going to add to that recurring growth over the coming few years. And the fact that we can now manufacture the products here also removes a break on growth, which was really around being able to react quickly to market demand. Because quite often, our customers don't want to wait 16 weeks or what it might take for a customer order that we made. They -- we need to respond a lot quicker and being able to manufacture that product here should really drive additional growth. So it's a great business because as I mentioned, it's sustainable, it's predictable and it's a very large market. I mean, the paint market in Australia is ideally much bigger than the buoyancy market globally. Now it's also quite -- it's also pretty crowded and you've got to find a place in that market, but we're really getting some traction there.

Have you -- just have one more question, sorry. Have you had any additional interest in your subsea product for use in floating offshore turbine projects? And maybe an extension to that question, what geographies do you see being key markets for Matrix?

Sure. Well, as I mentioned in the presentation, we're interacting with our current customer base companies like Subsea 7 and [indiscernible] others who have the facilities and the experience to install the type of equipment. So the key markets are really, for us, are probably South Korea, Australia, potentially Japan and Taiwan. But really, we think the first heads of the rank will probably be in South Korea in terms of a local geography. Certainly, offshore Norway and the U.K. are also growth markets. But I think the big ones for us are going to be South Korea and Australia.

[Operator Instructions] Your next question comes from Michael Burn with [ Camden Equity ].

My question relates to gross margin. It's -- this is the thing that confuses me a lot. I know in the -- in 2010, '11, '12, and I know it's a different time with fully a different company, but gross margins got up to 30% back then. I'm struggling to -- and I've seen in the last result, we exited the half with a gross margin of about 15%. And I know we've got -- it's a different company, different product suite, different industry conditions to a large degree, but can you give me some idea of what internal expectations are for gross margins going forward or across the cycle?

Yes. Thanks for the question, Michael. It -- in the statutory reporting, so there will be -- our gross margin will include a number of fixed costs that relate to our production facility, also have depreciation and amortization relating to the production facility. So I suppose there is a big volume element to what is reported in the statutory reporting. I suppose from a business, we look at it slightly differently, where we understand what our -- we understand pretty accurately what our fixed cost base is and we've had to -- we've had to weigh that fixed cost base over the downturn over the last 5 years in maintaining our facility, maintaining our quality accreditations, maintaining our industry accreditations. So that as the market returns, we're in a best position to win the project work. So what I'd expect would find is that -- and this is part of this operational leverage that, that gross margin will just keep increasing because there's a substantial amount of fixed facility costs sitting within that reported margin. I suppose the other way we look at it as a business is we've got -- if we're not doing anything, we're probably still got [ $15 million ] worth of the company costs are largely a fixed cost base. So -- but then as these projects ramp up quickly, we're not really -- we're not changing that revenue base dramatically. But then we're wining -- they're winning work at strong margins, which then will overtake that fixed assets and the fixed costs and grow our gross margin back to that some -- that 30% that you talked about. So that we're winning work in excess of that kind of contribution at the moment.

It does. It's just that it's not -- it's quite -- and I understand the way the business is configured that there are fixed costs embedded in the manufacturing process, which is does not appear variable to the cost model. If you get up to $50 million, $60 million, $70 million of revenue, I mean do I think of -- and I'm probably going to decline to answer because it's announced bit of spend feeling, but for every $10 million of revenue that rises due to the gross margin rate up by 200 or 300 basis points, is there a little [ sum ] that can be applied?

Yes, we don't -- I mean we don't -- we probably don't look at it that way. But yes, I mean, we're looking at a largely fixed cost base. And then we're adding everything that we add in over and above. We're adding in at that kind of historic -- at least the historic margin you were talking about. So it should move pretty quickly.

I mean, feedback any guidance in the future with disclosure obligations, not just standing would be helpful as none of the business is really difficult given the -- we've come through a period of severe pain. We had some great times, and there has been some severe pain and now we're merging out of this, but it's really difficult to [indiscernible] to find out where -- how the business is going to be performing once it is -- once some kind of a scale from a demand point of view.

Yes. Well, it's a pretty simple economic model. We've got a fixed cost base. And then once that fixed cost base is covered, then your marginal profit basically equals your gross profit or your gross margin on those projects. So yes, that's [ simplified ] put again.

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

Well, thank you very much for listening, and we are -- we've been quite pleased to present this result. And Brendan and I are available if there are any questions following this presentation, and I think we'll sign off. Thank you very much.

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