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

Thank you for standing by, and welcome to the Matrix Composites & Engineering Limited 1H FY '25 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Aaron Begley, Chief Executive Officer. Please go ahead.

Thank you very much, and good morning, everyone. I'm here with Brendan Cocks, our CFO. We're presenting from Perth today on our 2025 half year results presentation. I'm going to be talking to the presentation that's been put up on the ASX platform, so I'll directly turn to Slide 3, which is of our business. So just to bring those that are not that familiar with our business up to speed, our core businesses include the delivery of subsea buoyancy and SURF energy product solutions to the global market. We support growth in the renewable energy sector across a variety of different opportunities and sectors, and we protect key infrastructure with corrosion-resistant coatings and systems. And we also deliver advanced materials and technologies into oil and gas resources and infrastructure, defense and the renewable sector. On that slide is an image of our plant in -- located in Henderson, south of Perth and the Australian Marine Complex, and that is the world's largest capacity plant in terms of manufacturing syntactic foam. So turning to the next slide, which is Slide 4. So we saw positive momentum, which continued in the first half. So compared to the prior half, there was a significant revenue growth and also EBITDA growth. So revenue was up 47% on the first half of FY '24 to just under $40 million. And that was really driven by a strong subsea product demand. We've been very successful in penetrating a share of the subsea -- global subsea CapEx market, and that's really been reflected in our results. So our new SURF awards and with secured revenue is -- for FY '25 is now at around $60 million, and that will be a record year for that product line, especially considering this product line didn't feature significantly only a few years ago. Our Advanced Materials are on track for continued growth in FY '25, which is very important from a diversification perspective. And we're seeing sustainable OpEx and maintenance revenue from our Corrosion Technologies division and really deepening that breadth and reach into the energy and resources space. We saw increased profit. Our underlying EBITDA at $3.2 million, resulting in an NPAT of $1 million. And our second-half revenue for FY '25 is trending similar to the first half, as we have seen some delayed customer awards tip some revenue into next year. But the medium and long-term outlook remains very positive, it is very strong. We finished the half in a robust financial position. It's actually since improved. So our cash on hand at the end of the half was just under $16 million. But currently, it sits at around -- just over $19 million and our net cash at $8.3 million. You can see in the graph on the right that our split was -- in terms of revenue contribution, was dominated by subsea buoyancy. And as I mentioned earlier, it was predominantly drawn from the subsea or SURF market, which we've seen very strong growth, and we expect to see strong growth over the next several years. So I'm going to pass on to Brendan now, who will take you through the first half FY '25 financial results. And I turn directly to Slide 6. So over to you, Brendan.

Thanks, Aaron, and good morning, everyone. So as Aaron mentioned, we received a revenue of $39.4 million for the half. So that reflects a 47% increase from the prior corresponding period last year, which resulted in an underlying EBITDA for the period of $3.2 million and an NPAT of $1 million. With that half, and if we look at our last 2 halves over the last preceding 12 months, it reflects a business revenue of just under $100 million and EBITDA of $13.5 million. So probably just reflects the operating leverage of our business. We've got a couple of comments on cash there, but I might cover them in the next few slides. So if you just turn to Page 7, so with our balance sheet, there's a there's cash of $15.7 million there within the balance sheet and the net cash of $8.3 million when you take off debt attributable to a convertible note. So -- but of note, the $15.7 million increased to $19.2 million as at the time of reporting, which just reflects the working capital cycles we experienced within the business. I might just turn to the next slide, which is the cash flow, and that might just articulate that cash flow better. But we are heavily influenced by project movements. Of note and on the prior balance sheet, our working capital and our cash was pretty consistent for the period at a total of $38 million. So although we see big swings in our bank and our debtors and creditors and inventory and customer deposits, we still maintained that a total of $38 million across all those lines. So being able to keep the working capital within the business that helps us support our existing projects, but also win new projects. The drive in the -- for the improvement in the cash in the last few months was driven by some significant receivables, which were invoiced on one of our key projects in December as we came up to 3 large production milestones and then we received subsequently in early February. At this point, Aaron, I might hand back to you to take run through some of the operations.

Thanks, Brendan. We'll go straight to Slide 10 under the Matrix outlook and growth. So as we've mentioned in previous presentations, the business has 3 core business pillars: Subsea, Corrosion Technology and Advanced Materials. Subsea encompasses all of our products that go into the subsea market. And they include SURF, which is where we supply subsea products for production applications, mainly in deepwater, deepwater drilling for mobile drilling rigs, well construction, energy transition, including fixed and floating wind, and other types of subsea equipment, excluding defense. And that's really been a key driver of our revenue recently. One of our other focuses is to build diversity of revenue and market base and sustainability [ in revenue ] across those other sectors, which include resources, defense, infrastructure and renewables. And that's really wrapped up in Corrosion Technologies and Advanced Materials. So Corrosion Technologies is a business we've been in for the last 4 years, and that supplies anticorrosion coatings, equipment services primarily to the LNG and port infrastructure and mining sector. in Australia. And so that business provides a good sort of month-to-month revenue base from that sector. And Advanced Materials is a more broad, I guess, selection of markets and applications, which include renewables like hydrogen production, defense and the resources sector. And that's an area where we do expect significant growth over the next few years, in particular in the resources space. Turning to the next slide, Slide 11. We put this slide in to just demonstrate the growing share of deepwater investment in the global energy production space. So deepwater is definitely a sweet spot for us. Our technology is a leader in the market in terms of the way the products perform for deepwater oil and gas applications in particular. And so we've seen a large amount of our products used in places like Brazil, other parts of South America and also the Gulf of Mexico, and we're also targeting West Africa, where there's a lot of deepwater projects that are slated to be kicked off over the next few years. And I think the key driver to this market is the growing share of global oil production makeup the deepwater investment will make between now and 2030. So the image on the right-hand side, which shows the share of deepwater from 2023 to 2030, really does tell a story about where oil and gas will come from over the next 5 years, and that is one of our key target markets. So there are some very strong fundamentals that have been exhibited there. And our strategy here is to grow our market share as far as the percentage of that deepwater CapEx spend, grow our product range, so we don't just manufacture buoyancy, we manufacture other products like [ VIB ] suppression for pipelines and risers, other pipeline products, protection systems and a whole variety of polymer-based technologies for this sector. So we're really seeking to capture more of that spend. So going to the next slide, Slide #12, you can see that FY '23 was a real turning point for our entrance into this market. So we took our facility in Henderson that was quite underutilized and our technology and pivoted towards servicing the SURF market. This took many years in the making. But over the last 2.5 years, we secured over $120 million across 4 projects in this specific market. And you can see from the growth curve, we've grown from a negligible amount in FY '21 and even prior years was similar to where we sit today in FY '25. So we've also deployed our equipment successfully. So it's one thing to manufacture and market products into this market. But ultimately, the proof is in the successful deployment of equipment. And I'm happy to say that we successfully deployed well over 1,000 modules, probably closer to 1,300 to 1,400 modules in ultra-deepwater applications that we've manufactured over the last couple of years. So they're in the water. They've been successfully installed, and this helps build our track record with that product. And also, we can piggyback up other products onto that success as well. So we'll continue to add to our growing list of qualifications with deepwater operators and EPCI contractors globally. So that's -- so we're building out our client base, and we're also building out our product lines to increase our share of that CapEx. We've got about $300 million of competitive quotations that are yet to be awarded. We haven't had any subsequent material project losses. We -- I think we announced a $22 million award in November '24, but we are seeing some delays in award from our international client base. And that's not because their projects have been delayed. It's just simply the engineering delays from the EPCI contractors that have occurred, but it just meant that those projects have been pushed for the right 3 to 6 months. And so we've seen some revenue that we didn't expect in this half tip into the next half, hence the comment around first and second half being similar to each other from revenue terms. But the outlook for us is very good. The global subsea project equipment forecast spend graph there shows just very solid and sustained demand in this sector from now to the end of the decade. The two areas that we specifically look at are SURF and pipeline spend. That's what drives our demand. We don't really have a lot of involvement in supplying products to what's called SPS or subsea production systems. We do bits and pieces for it, but the main driver is SURF and pipelines. And that actually peaked in 2027, but it's probably a 1- to 2-year tail in terms of project awards to us after that. So a very strong outlook for us in that target segment. Moving on to Slide 13, the business really started from supplying equipment into the drilling market. We supplied over $1 billion of products into this market over the last 15 years. There's about 200 rigs and drillships with about $2 billion worth of buoyancy all around the world. So there is a market for upgrades, primarily in replacements. This has been a lot softer than we expected, frankly. I think one of the challenges that we have is there is a bit of a dip in rig utilization this year, with demand being pushed into '26 and '27. So discretionary spending on replacements in this sector has been pretty limited. The orders that we are seeing are really for products like LGS, which is quite a differentiated technology that we sell into this market for drag suppression. So we do expect to see orders for that product this year and also upgrades and extensions. That's really what drives demand in this market. But we've been very busy with opportunities in this sector. I think over the last year, we bid over USD 140 million of quotations into the drilling sector globally. And we -- so there has been a lot of activity. It just hasn't transformed into the sort of orders we would have expected at this point. But I think that graph tells a bit of a story about any form of discretionary expenditure. But if they do need the equipment to drill a well, they come to us. So that's -- we're ready to pass on those opportunities when they come. So Slide 14. This is a graph which is -- I find quite interesting. It shows the floating offshore wind forecast in terms of installed capacity from now to 2033 and shows it right through -- right across the globe. What's interesting to us is that floating wind as opposed to fixed wind presents a lot of opportunities for our business that has the capacity to mass produce very large quantities of subsea buoyancy. Floating wind uses buoyancy for mooring systems to support cables and also potentially for the structures themselves. So this is a very large and growing market. This year, we'll see the first FID of a commercial-scale floating wind project in North Asia, actually with first commercial-sized project anywhere in the world. There's a lot of buoyancy required for, as I mentioned, mooring lines, cable protection support and so on. And we think we're very well positioned to take advantage of that, especially in this region, which will see the -- we will be early adopters of this technology. So we're positioning ourselves to supply into that market. Turning to the next slide, which is Slide 15. Look, I'll touch just briefly on Corrosion Technologies. Look, this has been a great business for us in terms of diversification and market exposure. It's with an adjacent technology. We're supplying customers like Woodside and Inpex and Rio Tinto and others. We have seen some project wind downs in WA and the Northern Territory as certain work fronts have been completed or have been delayed, but we're now selling to a much broader customer base across Australia, New Zealand and PNG. We're selling the systems into customers like Exxon to Shell and to a variety of other diverse marine asset owners. So this is going to continue to grow, probably not as quickly as we would have liked, but the diversification of customer base, I think, will really see some good growth over the next -- result in good growth over the next few years. Advanced Materials on Slide 16. I guess some comments on this are really around defense. Matrix is a [ member ] of this, the defense industry support program. We're quite active in the defense sector. We're also part of the Australian Marine Complex, which will see Australia's largest naval facility developed over the next few years, basically on our doorstep. So we're looking at where we can be involved and leverage our manufacturing and Advanced Materials experience into that sector. We're already supplying solutions and products into crewed and uncrewed systems in Australia, so -- and also products into the U.S. market. And that planned investment in the Australian shipbuilding sustainment sector is expected to be up to $160 billion from 2025 to 2024. They're very big numbers, and we're chasing the slice of the pie. In terms of Energy, Resources and Civil, probably our two key targets here are in our well construction products, centralizers in particular. This is an oil and gas consumables product line that we've been involved in for a long time. We relaunched that product in North America last year. It's been very successful. We've supplied tens of thousands of products from about June last year to now into the U.S., and we're expanding into Canada and also in parts of South America. So we have a very strong distributor relationship across there, and that's growing. It's a great business. It's -- they're high-value consumables or high value-add consumables, effectively a catalog sale. We keep the product on the shelf and distributed through distributors in the U.S. and also in other parts of the world, including Saudi and Saudi Aramco, where we're now fully qualified, and we would expect to see significant volumes out of that market over the coming years. We're also focusing on the local mining market. There's a lot of consumables that are polymer-based and some that are not, where we're displacing those with polymers in the Australian mining sector. We've co-developed a product with Rio Tinto, we -- which uses a 3D-printed technology to replace steel in materials conveying, and we expect that product to be deployed in the field later this -- well, probably by the middle of this year. And we've actually added extra capacity in terms of injection moulding to service this increase in demand. So to the conclusion, which is Slide 17, we experienced strong revenue expansion in the first half compared to the previous first half. And so we're on a solid growth trajectory. The second half is likely to be similar to the first half, given some of those award delays tipping over into next financial year, but the pipeline remains very, very strong, so -- in subsea in particular. We're leveraging our installed capacity. So we're not having to spend any money of significance to increase our output. We've got a lot of capacity in that Henderson plant. We can produce at least a couple of hundred million dollars of syntactic [ points ] in a year with our current installed base. And we're seeing recurrent accretive revenue from Corrosion Technologies, Advanced Materials across oil and gas and -- sorry, excuse me, renewables resources and defense. And we expect that part of our business to grow significantly in the coming years. So that concludes the formal part of the presentation. But before I end, I'd just like to make a comment on another announcement that was put out to the ASX this morning with some Board changes. The first one is Steven Cole's retirement after 11 years from the Matrix Board. So I'd just like to take this opportunity to thank Steven for his very valuable contributions across that period. Navigating some stormy seas and also seeing our return to profitability and growth in recent years, steven provided some great oversight and -- in terms of governance and strategy. And yes, we'll certainly miss his counsel there. But also, I'd like to welcome Stephan Kirsch on to the Board. Now Stephan is a very interesting addition to our Board. He has extensive senior mining sector experience at a very senior level and has been in the Australian mining sector for over 25 years, has great contacts and technical knowledge and commercial knowledge across the mining market, which is going to be a key focus for our Advanced Materials business unit. So I'd like to welcome Stefan and say goodbye to -- and thank you to Steven Cole. So that concludes the formal presentation. I'll hand back to the moderator for -- to facilitate any questions that might be out there.

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

Firstly, sorry to be pedantic on some of the language in the outlook. You say group revenue for the second half is likely to be similar to the first half. I'm just wondering if there's open to any interpretation on the word likely if there's a downside risk for the outlook?

I'm sorry, can you repeat the question? I didn't quite hear you, Joseph.

Sorry. So you've emphasized in your outlook statement that the second-half group revenue is likely to be similar to the first half. I'm just wondering if there's any interpretation of the word likely if there's any downside risk implied in that comment?

I think there's both upside and downside risk, Joseph, because there is still a bit of short-term work that we need to win. But at the same token, yes, we could certainly see an increase. There's enough work out there to do that. It really comes down to project timing. So I can't really be more specific than that.

That's okay. Understood. And then my second question, just on the outstanding quotations for the SURF and drilling market, it seems that these quotations that you've released today versus some of the quotations you spoke about at the FY '24 result, they're about the same in terms of value. Just wondering if within those numbers, if there's been any new contract -- or new quotation additions or removals or maybe contract -- quotation losses between the 2 reporting periods.

There's been very few quotation losses. There's been some additions. Obviously, we've won some work as well across that period. But what we've seen is that the size of some of these projects are so large that a small engineering delay upfront, for example, if a client needs to reconfigure a field or something like that; just results in our inquiries being pushed down the road a bit. The challenge that we've got is that they expect the same delivery time. So what we see is compression of delivery. So the delivery time might be the same and, but the -- in terms of the delivery date, but the order placement is delayed. So it does put a bit of pressure on us to put it out, but it also plays to our capacity as well. So it's also a bit of an advantage for us. I mean if we -- if the orders were placed earlier, we sometimes have the option of making it earlier, which is obviously advantageous as we can smooth production. But it's one of those things where we have very little control over when those orders are going to be placed.

The other comment I'd make is that's probably what we're seeing in SURF in the drilling market, there has been some projects come out where we've just downgraded the chances of them going ahead. We haven't actually lost any to a competitor. But likewise, we've done fresh quotes during the period as well in relation to the drilling sector. But some of them probably indicate the CapEx that the drillers want to spend on their rigs, but it's not necessarily pushing through.

Great. That's great color. And then just lastly, you mentioned in your report that you're still targeting around 10 million per annum in revenue -- recurring revenue from Corrosion Technologies and Advanced Materials. It's probably implying, I'm not sure if that's applied to FY '25. But if it is, it's probably suggesting a stronger second half. Are you able to provide any commentary on what gives you confidence in delivering that for FY '25?

It's -- I mean it's a modest increase in the second half. I think we've probably done more like 4.5% early in the first half. But probably some of what we would expect would come out of our well construction products where we've added -- we're adding an additional capacity right at the moment. So we've purchased an additional injection moulding machine with [ offer ] service growing interest in the U.S. market and also cover what we would like to see happen in the Middle East.

Yes. And so specifically, the demand is there from the U.S. So that's been really good. It's been strong and consistent. So that's driving those sales. We've also got a backlog of work in defense that we have to deliver this half. We've got some infrastructure products that we can just continue to pump out the door. And the forecast for [ MCC ] is probably a little bit, well, modest. But we do see -- we do have quite steady historical demand for that product. So it is one of those products, which is relatively sustainable in terms of its revenue, but it's also [indiscernible]. So I think we've got existing -- that forecast is based on existing backlog, plus also just run rate and what we see as growth. So yes, we've got reasonable expectations that, that will be met. And I think next year, it will continue to grow quite rapidly, especially with some of the work we're doing in North America.

Your next question comes from Oliver Porter from Euroz Hartleys.

Just wanted to touch on that $300 million, where you said your customers are expecting delivery within the same timeline. Can you just give a bit of color around the composition of that, like maybe between FY '26, FY '27, '28 and beyond of that $300 million?

Well, I would say that even from a risk-weighted perspective, we expect probably 2/3 of that to be delivered across that period. That's what it looks like. So it's -- yes, look, there is a lot of work out there. I mean the -- where demand is coming from is primarily from Brazil with projects from Petrobras, Shell; in West Africa, Total, Gulf of Mexico, customers like Woodside and some of their projects there. So Namibia, Nigeria, Brazil, Guyana, there's also some projects in Indonesia and Malaysia that are all deepwater. So it's a really interesting dynamic for us. And we're involved in bidding on all of those. There's also a recent announcement of Subsea 7 and [indiscernible] that will create the world's largest subsea installation contractor that both of those companies are major clients of ours, so -- that we see as a good thing for us. So yes, there's a significant backlog of work that's coming.

And I think just one more point, Oli, was of some of those large projects, there's definitely some that -- some meaty ones that are due for delivery in FY '26 and there's some that will be FY '27 projects. So definitely a bit of both.

Yes. I mean the annoying thing for us is especially being a public company and having to report on a financial year basis is sometimes the project deliveries don't fall neatly into each half. So it's still a bit lumpy.

Yes. No, understood. Last one for me. That $60 million quote for offshore wind, do you have a sense of when you'd expect -- I know danger talking about...

Probably the earliest will be later -- will be towards the back end of this year, calendar year.

Your next question comes from Nicholas Rawlinson from Jefferies.

As you mentioned before, Subsea 7 and Saipem [ merging ], so they might have their hands a bit full. Does that have the potential to cause any delays to awards for you guys? Or will they still be on the hook to get going for projects like [ BCS-9 ], for example?

Yes. So for -- so basically, they still have to deliver to their customers. And so their customers are really not that concerned that they're merging from that perspective. They want oil out of the ground as quickly as possible according to their schedule. So they'll still be beholden to customer schedule. I don't think the merger is actually going to be completed until back into '26, beginning '27. So I don't see -- and at the moment, it's at an MOU stage. So I don't think it will affect any of the short-term work, but they still have to deliver into their projects.

Okay. That's helpful. And you've mentioned that the medium-term and long-term outlook is strong. And I know you have $300 million of submitted SURF tenders out in the market. But could you give us an indication of -- if any of those awards are due to land in the next 3 or 4 months, like before the end of FY '25?

It's unlikely. Some of them might. There will be a few small ones that might land into that period. But I think they'll be around the middle of the year. So whether they fall this side or the other side of the financial year, it's just -- that's not there.

Okay. And I think your previous aspirations were to double Advanced Materials year-on-year. But it looks like it's down a touch from last year. What's changed in that division? Has it just been delays towards as well? Or is there something...

There's been a delay with some of the -- and again, it falls over into the next financial year with some of the defense contracts. They're still coming, but they've just been -- defense gets delayed, like you did wait a while with that program. We probably have not seen the ramp-up in well construction as quickly as we expected out of the Middle East. It's coming. We're building some momentum there. But again, it's just not been quite as quick. Corrosion Technologies has been down a little bit. But all the -- it's really a short-term issue for us. The trajectory has been the right way.

[Operator Instructions]. Next question comes from Joshua [ Gris ] from [ XL-Network ].

I was just wondering, with larger contracts on the horizon, is management strategically managing cash flow or the working capital to ensure financial flexibility as the project milestones fluctuate? Or like are there any mechanisms in place to smooth out that variability and sustain positive cash flow as the business scales?

Yes, we're certainly managing the cash flow. There was a capital raising we did 2 years ago now that was quite large, but it was very purposeful in helping us support through some of these large projects as we emerge through. So we continue to manage our working capital very closely. And also, we would like to this year start bringing more debt options into that working capital, which helps smooth it out. But also, the reality is we're dealing with rather large projects. So we don't expect to see -- they don't run on 6-month cycles. So we don't expect to see half-on-half cash flow positivity. There will be large swings, based on just where a project may fall at the close of any period. But we're certainly managing those projects very closely through the whole project life cycle, which is, as a project company, our biggest focus.

Okay. Great. And one other question I had, which I think is sort of been mentioned anyway, but it was just relating to the [ 10 million ] place. Obviously, there's quite a bit there, and you mentioned it might fall either side of the financial year. So I assume that a large chunk of these then are in the advanced stages. And are you guys confident of winning any of these or...

Yes, sure. I mean, look, they're with our current customer base, and we've got a track record with them. And yes, look, a lot of them are in advanced stages. But we get involved very early in the project, right? So we get involved with the customers at the bidding stage and then try and offer solutions, which help them win the project and install it. efficiently. So we -- there are projects in the pipeline that we did up to, in some cases, 18 months ago. So yes, it's -- there's a lot of work that have gone into all of those proposals.

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

Thank you again for listening. I'll -- Brendan and I will sign off there, and we look forward to talking to you next time. Thank you.

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