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

Thank you for standing by, and welcome to the Matrix Composites & Engineering Limited 2024 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. Please go ahead.

Thank you very much, and welcome to our 2024 half year results presentation, which we're conducting from our facility down in Henderson in the Australian Marine Complex. I'm here with Brendan Cocks, our CFO, and we're going to be talking to the presentation that's been put up on the ASX platform. So we'll dive straight into that. If you'd like to turn to Page 3 for those who are following the presentation, just a quick overview of what our activities are, snapshot of the plant. And in general, the business is involved in delivering polymer engineered products to the Subsea, corrosion-resistant technology and Advanced Materials markets across the energy, renewables, resources and defense space. Let's turn to the next slide, which is titled strong growth momentum. So in the first half, we achieved revenue of just under $27 million. That was a significant increase from the previous half, which was approximately $11.8 million. So a big pickup in revenue, which is really a reflection of our project activity and increased activity across all market sectors that we're involved in. We expect a full year revenue based on our backlog of Subsea contracts of around about $85 million. So that's what we forecast in that slide and is shown on the graph to the top right-hand side. The first half revenue is really a reflection of where we are in the ramp-up of various projects that we're executing. But it is skewed to the second half simply because of project timing and ramp up. The projects that we executed through the -- that we're executing for the first -- through the first and second half were all secured prior to this financial year. So it really just reflects the timing of the delivery of those projects. Importantly, we've seen a return to operating profit. So we produced a positive underlying EBITDA of just over $0.5 million compared to the prior period, which is a $2.3 million loss. And we expect a strong EBITDA result which will be skewed in the second half as we deliver and book the revenue from those projects that we're executing. And we've got a strengthened financial position. Our cash on hand at the end of December was just over $23 million. So that shows an improvement in our cash position there. And in terms of revenue contribution, we've seen quite a diversity of different revenue sources. 25% of it came from markets outside of Subsea buoyancy. And within the Subsea buoyancy market, revenues were derived across the first space, the drilling space, and also the deepwater mining and renewable space. So we've seen a good shift to a more diverse income base, which is very important for the sustainability of the business and demonstrates and deliver that strategy. So that's where I'm going to leave for a moment on this presentation. I'm going to hand across to Brendan, who will jump in the financial results and will give you a breakdown of what's happened there. And then I'll come back to the outlook section. Over to you, Brendan.

Thank you, Aaron, and good morning, everyone. If you just turn to the key financial metrics, Page 6, you'll see there that we recorded revenue of $26.7 million for the half, which was within our expectations. It reflects about 30% or just under 1/3 of our expected revenue for the year based on our revenue recognition of our current projects. And we've been flagging to the market that we expect a lot of the heavy lifting on the revenue recognition of those projects to happen in the second half where we're going to experience the busiest half we've had for some years. At that level, we recorded a profitable underlying EBITDA of $600,000. And at that level, it gives us great confidence that in the second half, we'll be able to substantially increase that profit level as we're still running it at a very similar fixed cost base for the business as we are in the first half, but then we'll have all the additional contribution for our existing projects as we deliver them at the back end of this financial year. We experienced a positive operating cash flow for the half, although what we are seeing with our current projects is there's working capital within the business that will go up and down with our existing workloads. And during this half, we did have some payments from a project we finished late last year. So that helped increase and recharge that working capital. That will be important for this half as we work through our 2 major projects. Gross cash at the end of the period was $23.3 million. Balance sheet on Page 7. We still run with a reasonably simple balance sheet, which reflects a lot of the working capital movements of our business. So I mentioned the cash at the end of the period, $23.3 million, which was higher than where we started the financial year. And within our balance sheet, there's still a reasonable amount of value, a portion to our lease liability and also our plant and equipment, which is our facility within Henderson. I'll just move to the cash flow from operations on Page 8. As I mentioned, we had that strong operating cash flow for the period, which was reflected in very strong favorable receivables and trade payables draw down, but also there was investment in inventory and deposits on progress billing. So it just shows you all the movements of those different working capital elements. It will, at the moment, dictate those cash flow from operations. But as I said, we started this period with $23.3 million. And as we move into our busiest half, we have a strong cash and working capital position to help us execute through these projects. You'll also note there was capital expenditure of $3 million. There's a small amount of sustaining capital we're spending on the facility, but a large chunk of that reflects our investment in project molds and project tooling, specific for the projects we're operating in and also for the industries and product offerings that we're currently tendering. Also there, there was some payment for a security deposit of $1.9 million. So that reflects cash that we provided in lieu of or in aid of providing a performance bond for one of our projects. So that's -- at the moment, that's cash that we provide the performance bond to our client. But at the end of the project, then we get that all refunding. So that cash comes back to us probably later on this financial year. Aaron, at this stage, I'll hand back to you to go through our outlook for growth.

Thanks, Brendan. So we'll jump to Slide 10. So over the last few years, we've been presenting the company as having 3 business pillars: Subsea, Corrosion Technologies and Advanced Materials. We're showing the Subsea pillar is our traditional pillar. The reason we do that is because we have a large installed capacity, which we can leverage as we provide products to the SURF market, the deepwater drilling market and upcoming opportunities in the offshore floating wind market. And then emerging, we show as Corrosion Technologies and Advanced Materials. Look, the emerging section of Corrosion Technologies and Advanced Materials is really starting to get some traction, in particular in Advanced Materials, which I'll talk to in more detail. But those 2 areas, the Corrosion Technologies and Advanced Materials, contributed 25% of revenue in the first half. So they now, they're very much part of the business as ecosystem. This is how we see the business. There are 3 parts to it, which provide diversity of income market sector exposure and also income type. So with Corrosion Technologies, we very much see some sustained income coming from the OpEx market. Advanced Materials provides some tremendous growth opportunities across the diversity of sectors, and Subsea really provides our project-driven income. But instead of being just a drilling market focus like we were in the past, we're now servicing a number of different markets in that sector. So through to the next slide entitled Subsea. We received over $123 million of contract awards since June '22. So this really just demonstrates after a significant period of downturn a return in our buoyancy revenues. But it's primarily driven by the SURF market as opposed to the deepwater drilling market, and it's our largest order book since 2016. And as I mentioned earlier, this has been driven by demand for deepwater buoyancy derived from fields in South America, in places like Brazil, West Africa, the Gulf of Mexico and elsewhere. So it's really been driven by that resurgence in deepwater field demand. Through to the next slide to provide some granularity around the demand. We've secured over $90 million of orders over 3 projects in the last 18 months, specifically from the Subsea production or SURF market. And you can see on the slide on the bottom left-hand side that the SURF market has not featured very strongly in our revenue base in the past. We've always had some involvement in it, but we've never seen this level of demand. And this is partially because of where we are with various stages of qualification of our products into this sector, but also the underlying strong demand and project pipeline that we're seeing from players in the deepwater market, and this is being serviced by major contractors such as [indiscernible] Subsea7 and McDermott's [indiscernible], Baker Hughes and others delivering projects to companies like Petrobras, and Equinor, Woodside and other major operators all around the world. In terms of the outlook for this sector, look, it remains strong really till the end of the decade. Most of our clients are expecting a heightened level of activity from now until 2030. We're only showing that graph out to '27 because that's just data that we've got available. But the visibility in this market is probably a lot better than we've seen in the drilling sector because these are committed projects in deepwater that require our equipment. We've got a quotation pipeline. We've split up into SURF and into drilling. So we have about $300 million of competitive quotations that we have in our pipeline that are yet to be awarded. So over to the next page, the drilling market. This is a market we've been really active in and dominated in terms of market share for a long time. We've got over $100 million of outstanding quotes to the sector. We haven't seen a lot of conversion yet as this sector is continuing to recover. However, you'll note on the graph, on the bottom right-hand side, the utilization rates, in particular for drillships, at the end of last year was up around 93%. That's actually improved even more. It's close to 100% now. So drillship utilization is very high. The major players in that sector, such as Transocean, Diamond, Novo Offshore and Valaris and Seadrill are recovering quite strongly, and at the end of last year, started producing free cash. So we would expect to see an increase in expenditure on upgrades, replacements and modifications for these rigs as the market continues in its current form. Over to the next slide. So the other products that we manufacture in our Subsea buoyancy range include products for deepsea mining. And we hope to also penetrate the offshore floating wind market, which is likely to be very large towards the end of the decade. So the DC mining equipment, we're currently delivering a $13 million order into a project that's mining for battery minerals. And that's quite an interesting project because it utilizes all of our current installed capacity and material technology. But it's an entirely new market sector, which is renewable focus. And we are fielding other inquiries from that sector for other operations. With offshore floating wind, look, this promises to be a very large market for buoyancy required for mooring systems and power cables for the sector. There are very large projects that are being touted for countries like South Korea, Taiwan, Japan. This market is emerging. There are only a handful of installations that have been currently commissioned, but there's a very large pipeline of projects that we expect to see moving towards delivery sometime over the next few years. So from probably '26 to '27 onwards, we would expect some large opportunities to present themselves. We're actively quoting in the sector. And the clients that we're quoting to are [ often ] the same BPCI contractors that are involved in installing deepwater equipment for the oil field. So it's a highly adjacent market that utilizes the installed capacity we have here in Henderson and the projects are very, very large. So a great opportunity there for the future. Turning to Slide 15, just quickly on Corrosion Technologies. This product we call Humidur, we supply across the country to infrastructure projects, to energy projects and resource operations. And it's really a product that demand is driven by OpEx requirements and sustaining CapEx. So unlike the lumpy project revenues that we see from the Subsea buoyancy space, there's this reasonably consistent demand for this product as companies like Woodside and Impax and Rio Tinto continue to refurbish and maintain their infrastructure all around the country. We've seen some good diversification of revenue in this sector, and hopefully, that will continue to grow in the long term. Turning to the next slide, Advanced Materials. This is a very interesting growth opportunity for the business in effect where we're leveraging and selling our expertise in engineering plastics and polymers to a variety of different sectors that require high-performance engineered products made from non-metallic materials. In some cases, we are substituting traditional materials. In other cases, we're designing and developing materials out of engineering plastics that go into very demanding applications. So for example, where [indiscernible] future industries, materials partner for their hydrogen project in Gladstone and we're supplying equipment for the production of electrolyzers. And if those ambitions are realized -- well, fortunately those ambitions are realized, that could be quite significant where we're actively supplying equipment into Aramco and Saudi from -- and these are products that are manufactured from engineering plastics. These are going into oilfield applications into horizontal and vertical wells. We're also supplying specialized equipment into the defense sector, primarily the Australian defense sector, but also the U.S. market. One of the big opportunities there is to supply buoyancy systems into the emerging unmanned underwater vehicle market, which is a capability gap closure. It's potentially very significant, not just for the Australian Navy, but also our Arcus partners. So that's a very exciting opportunity. And we've expanded into the civil market. So this year, we hope to do at least $5 million in revenue out of this sector. It could be significantly more next year, and there's lots of growth opportunities across defense, resources and the energy transition sector. And just to finish up on Slide 17. In summary, we've delivered growth in the first half. We expect to deliver further growth in the second half. So our revenue will -- and profits will increase significantly from the first to the second half. We're capitalizing on the oil and gas recovery and leveraging our large plant, which as far as we are aware, is still the largest plant of its type anywhere in the world. We're seeing sustained and accretive revenue from our Corrosion Technologies work, and we're seeing a rising level of renewable inquiries and lots of growth opportunities coming from the Advanced Materials sector. We're also funded for growth. Our balance sheet is in good shape, and we're ready to deliver on the opportunities in front of us. So that finishes the full part of the presentation. I'll hand back to the moderator. Thank you very much.

[Operator Instructions] Your first question is from Baxter Kirk from Bell Potter Securities.

Aaron and Brendan, good half. I'd just like to ask about the Corrosion Technologies business. I can see the revenue was down a bit there, half-and-half and on the prior period. Can you provide some color around that fall?

Yes. Look, in that sector, there's a few different areas that we derive revenue from. So we've got just basic vanilla product sales, and then we've got technical support, and we've got equipment hire. And in that half, I think year-on-year, our product sales were actually up, but our equipment hiring revenue was down. And the reason for that is a lot of our clients, instead of hiring the equipment as they've done in the past because they're doing intermittent projects, if you like, with the technology we provided, they've actually bought their own equipment. Now that's not the case across the board, but that was probably one of the primary drivers of the revenue drop.

But I think the other insight into that revenue line is we are one of the biggest suppliers into Woodside for that product. Likewise, with impacts in Northern Territory. But at different times, it will go up and down depending on the maintenance programs they've got on at any one time and it was a little bit softer this half. But we're still working with them and we're still their primary supplier for those products.

Okay. Great. So it's more like it's kind of dependent on Woodside's maintenance program then?

Not necessarily, but it was just influenced by it. And there was some project timing not just with Woodside but with other clients that will shift product demand from sort of reporting period to reporting period.

The opportunity of that product line then becomes how we can convert more customers, which is what a lot of our activities are on at the moment.

Cool. Just another question. Just in regards to the $1.9 million cash outflow for the performance bond, when do you -- you mentioned you'll get that later this year. Is that right? You'll get that back?

Yes, middle of the year upon the delivery of one of our current projects.

Yes. Should we expect more of these bonds for future contracts at all? And if you're continuing to do business with this particular client, will that bond simply just remain with them as you're doing more contracts with them?

Look, in the SURF market, with the larger contracts that tend to be bonding requirements, so there's different ways that we can fund them. But ultimately, at the moment, most of them are cash backed. But we are now moving into a period where we'd like to think that we can provide them through banks who won't require 100% cash backing for them. But effectively, they'll be -- they will be financed. So you may have a more modest cash backing requirement of maybe 1/3 of the value or something. So not all the projects will require them, but certainly ones in the SURF market probably will. And -- but yes, and with the existing one, the client that that's with, there's not a project following that. So we'll -- the bond will expire at the end of the project, and we'll get that money returned to us.

Okay. Just another question. With the $100 million in quotations for the drilling markets, are you actually -- so are you -- are those tenders being awarded? Or are they just sort of sitting there kind of delayed? Are you winning drilling tenders...

I'll provide some color around that. I mean they tend to be -- a lot of them are for budgeting purposes for our clients. So I look forward for the next year and look at their maintenance requirements and replacement requirements on their rigs. So there's a percentage of that. And that will either get tipped into an approval for this calendar year because they tend to operate in calendar years in terms of their fiscal year. They will tend to get tipped into later this year or next year's requirements. Some of them are project-specific where they might be bidding on particular wells or operations, and they need an extension or a modification. And the issue that we've got I think with this is we want to demonstrate the level of activity in that sector. So it has been busy. It is a bit of a sleeper in terms of what we know that at some point, most of these drilling companies will have to upgrade or extend their equipment or replace it or modify it. And we've also got quite a bit of LGS in that summary as well where we've had clients, including operators, request LGS-based buoyancy for drilling operations and high current. So really, it was to demonstrate just the sheer level of activity in that sector and what could be converted into revenue in the medium term. What we don't have is a good view on the timing of when these are going to be converted. But we thought it was necessary to break out the drilling market versus the SURF and other quotations to really provide some color around the composition of those 2 sectors.

Your next question is from Lachlan Rogers Uff from One Fifteen Capital.

Just a follow-up on the quotation sort of conversion. So under SURF, are there any trends both in the percentage of work going ahead and being awarded, and then also the percentage of those awarded? You guys are winning? Just some clarity about the transfer.

Look, I think most of the projects that we're quoting on the SURF space are either a stage where our clients won those projects; this is what we call bid to contract. So they need to buy the buoyancy from someone. Or they're at the seed or FID stage. So when you look at these large projects, it really starts with a front-end engineering design, which the operator will do prior to going to FID. Once they've gone to FID, they'll then go to the market for bids for the installation of Subsea equipment. And then finally, when they award that contract, that's what we call bid the contract. So that's where a specific EPCI contractor will have to proceed with it. I'd say the vast majority of the quotations that we supplied in that summary are for projects that are either being completely committed to by the operator or their EPCI contractor or are at seed stage. I'd say the seed stage is probably in the minority. But these are projects that are going to go ahead over the next couple of years. And the buoyancy will be awarded to 1 of the 3 players in the market, of which we're one. In terms of our market share, look, it's difficult to ascertain. It's probably somewhere around 30% currently.

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

Thank you very much. Well, thanks for listening. So we'll wrap up the presentation there. And Brendan and I remain available to answer any questions. So thanks again, and we will talk to you next time.

Thanks very much. That does conclude our conference for today. Thank you all for participating. You may now disconnect your line.