PWR Holdings Limited (PWH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PWR Holdings Limited FY '21 Results Conference Call. [Operator Instructions] I'd now line -- I'd now like to hand the conference over to Mr. Kees Weel, MD, CEO and Executive Director. Please go ahead.

Well, thank you. Good morning, everybody. Thanks for your time this morning. And it -- the 6 months goes around pretty quickly these days. So yes, here we are for our F '21 results. I might say it's a very pleasing result for the management and the Board of PWR. We obviously have had some challenges over the last period of time with COVID, as nearly everybody else in Australia has. And I think, the less we talk about that, probably the better. I think everybody has had enough of that, so we try to look positive for the future, and that's what we're doing. So I'm not going to go through every page line by line. I guess the majority of the people that have got the document in front of them had a good read of it and are ready for the tricky questions later on, so I'll just start on a good start on the leadership team. We've all had a bit of a touch-up on the photo. So we'll skip past that page. The performance overview is as it is with cash and deposits. I'll start down there. The market cap is what it is. Our debt, we paid down quite a bit of debt. And revenue of $79 million, EBIT of $29 million and net profit after tax of $16 million and obviously share per dividend of $0.088, which We'll go through that later on. Performance trend, that page, I'll consider that as read and very self-explanatory for the performance trend of from '17 to '21. So it's not too bad. Have a look at that. And the TSR: As you see, we're in the rating about 6 in the top 50 companies of the ASX 300, obviously excluding energy, et cetera. There's a few people in front of us. Obviously the Afterpay boys just got there by a long shot. And then I guess the rest are mainly into mining, et cetera, so it's not too bad. Our investor highlights. The -- we have spent -- as we always do, is spend quite a considerable amount of our revenue into research and development. And our CapEx has been around about that $10 million to $11 million in the last 4 years. So we don't think that's going to alter too much in the future, but that's just the trend. The AS9100 certification, I will spend some time on that right now, and we can slip over the rest but later on. And we put that in earlier this year. Unfortunately, we did put it in our busiest time of the year, and it did cost us a little bit of -- I guess it cost us a little bit of momentum. And a couple of the reasons why we've done that was -- one was so to get our certification with COVID. We sort of had to do it at that time to get the certification people here, et cetera. And also we were quoting on some aerospace and defense programs, and it was certainly a lot better read with that certification on the bottom of the page. So looking at that going forward, we certified our whole business. It's not just the products that we're doing for aerospace and defense. It goes across our whole company, so if you're getting a radiator or a cooler for your Mazda or your [ Heads-Up Hold'em ], that goes through that same certification, so it's only going to do the product well in the future. The business growth across the markets and et cetera has been very good in -- particularly in America. America has been a big standout this year, obviously coming from a small base but being a standout, particularly the -- some of the hurdles and headwinds that they're coping with COVID over there. And it's been, let's say, trying times but with our management and team over there doing a fantastic job. Emerging tech, I've spoken about this for some time now. We -- I did say in the last couple of years that we think it will [ draw off ] our motorsport in time to come. Well, I think it's starting to get the runs on the board and it's got a full tank of gas and it's raring to go. NPAT. To be over that 20% to 21% on our revenue is very strong. It's certainly where, me personally, I want it to be. And I'm not being bullish on that at all, but if we can keep that number around about that, on the high side of 20%, like that 21% to 22%, particularly when we get into some bigger revenue in the future years, I think that's certainly a great thing to have. TSR, that reads for itself. And as you all know, our dividend policy has always been between 40% and 60% of NPAT. And the review, which we're not going to go over the numbers every time we see them, has been strong: revenue up, EBIT up, NPAT up. And our sales by currency just gives you a bit of an idea of what we're doing around the globe. Emerging tech speaks for itself. Dividend, we've spoken about. So our financial performance. I don't think there's any need to go through every line there. You've seen our revenue increase; and a little bit of an offset of the currency movements in the last year of a little bit over $3 million, which was enough, for sure. And the revenue mix continues to change a little bit, with emerging tech increasing. And automotive aftermarket growth in demand is very strong. And the online store is ready to go, which we'll talk about a little bit later on in the presentation. The pie chart there, that's certainly something that I know a lot of our investors look at. And you can see exactly what it is, our growth and et cetera. I know industrial -- I'm not going to ignore industrial. Industrial there, it's a very, very small part of our business, but as I've said with other categories of our business in the past and -- I will say that we have got our eye and -- opportunistic eye on industrial in the next couple of years. So it's not going to be tomorrow, but it is there is some fairly decent plans on foot to tackle that market. Our financial performance and by third parties and currency, I think it's very self-explanatory, and I don't think we need to go through any particular line there. I'm sure there's people that have questions later on, so we will save some time for that. Our balance sheet. We're still in a strong position. We still are spending quite a bit of money on CapEx with plant and equipment. Our loans and borrowings have come down a bit over the last 12 months. And we have quite a [ pocketful of ] unutilized facilities to provide either through seized organic growth or whether we do a purchase at all. So we feel we're sitting in a very good position, as we always have been. And when the right opportunity arises, obviously we will do something about it. Working capital and cash flow. You can read through those key points there. It's the whole thing is very strong and very pleasing to report about because there's nothing there that is a negative of where we see it. The segment analysis which we will show you, particularly with PWR North America which is the old C&R. So that name is generally [ staying to change ] to PWR North America to make it more of a global business. So the OEM and emerging tech are the main driver of that area, but then on the way forward we see that the aftermarket area will be very strong. So getting into some of the supporting pages. About PWR. I think you know what we are. We're very motivated to make sure we are the best in the world, and that doesn't come easily. It comes with a fair bit of pressure from -- to the Board and the leading staff on the higher end. And that also pushes down to the floor, so we're -- it's not easy, but when you have a great group of people around you and -- it does certainly make it easier for myself and some of the senior staff and the Board when you have great people around you. So the key markets, as we've known before: motorsports; automotive aftermarket, OEM; aerospace; and defense; and other emerging technologies, as far as cold plates and micro matrix and additive manufacturing. So just starting on emerging tech. And obviously, as you have read, we've obtained the AS9100 certification for many reasons. And I think you'll see that play out over the next couple years. In the emerging tech right at the moment, there's, I guess, 2 big players or -- cold plates and micro matrix. Some of the micro matrix product is going into high-end motorsports, but you can't count it twice. So we are leaving that in emerging tech, although some of it is -- go into high-end motorsports. And so when it gets to a level that we can segregate it, we will do that again. So hydrogen fuel cells is a thing for the future. Bar and plate, we've been working on our bar and plate design; and that has been very fulfilling, particularly in high-end motorsports. And I had a discussion at the weekend with some of my engineers. And we are certainly going to be -- push our bar and plate capability into industrial, et cetera, so that's something down the track. And battery and hybrid cooling system is starting to develop with battery cooling plates, particularly for some of the OEM drivers that we'll see come more and more as the hybrid cars start getting more common out there. Additive manufacturing. As everybody knows, we've put in [ 2 ] aluminum [indiscernible] -- sorry. I'll just [indiscernible] -- of high-end aluminum 3D printing, and that's certainly starting to gain some momentum. As people know, we've had that in for nearly 12 months now. And it's starting to gain some momentum with products going into some aerospace but also some very high-end motorsports. Our CFD and modeling services is very strong. We've put a lot of effort into that over the last period of time, and that side of the business will become a [ cost center ]. We are [ bringing out ] to supply some of that to outside customers. That's not only into cooling but into engineering and so forth. Our super alloy brazing capabilities, we have recently put in and commissioned our vacuum furnace and also our heat treatment furnace down at PWR in Queensland. It's certainly on the verge of getting filled up with capacity. The business outlook. The certification, we're -- and a lot of people don't know the AS9100 certification is not for everybody. And then we are one of the few companies, independent Australian manufacturing companies, that have that. There are -- also other companies do that here, but they run on the back of their mother company in other parts of the world. So it's a big ticket item for the staff and the business for PWR. Emerging tech, showing great growth potential. And OEM, we continue to ramp up, with long-awaited programs now in production, which we'll get to. Head count increases. The -- we've always been focused on training and employing and upskilling people. So our head count is certainly continuing to expand. We -- certainly a lot of [ business in ] our pipeline. And unfortunately, we have to put people on probably 6 to 12 months before some of these programs [ to hit ]. So I'm sure everybody can do the maths there. Facility expansion, we're certainly fairly full here. And North America -- there is a big push to obtain some premises in both of Australia and North America. And the outlook that we're doing that is for the next 10-year program, so watch your space on that. Our capital investment, certainly not too much different to what we've had before. And I guess a lot of people are saying there were -- "How many more tours do you guys want?" but when you're growing like we are and then looking for that extra capacity and capability -- and we are certainly not trying to spend a lot on capital investment. And now we're starting to look at some small robots, et cetera and et cetera to do some of their work in some of the coming programs. Website -- or asset utilization, we will take that as read. Website has been a key part of the last 6 to 9 months of -- have a look at that. It's certainly doing its -- doing us and Australia proud of how that reads. The online store, we've talked about this before. It has been completed; and will be launch ready when we have production ready for that, which will be certainly before the end of this year. The OEM pipeline. This is the key OEM pipeline, so these are the key ones. And I thought it was necessary to put that in. We put that in, in '18, I think, in our annual report and it was very well received. It just gives a little bit of a flavor of what's happening and what we're doing. And you'll see all the nominated ones. There are some undisclosed ones there that -- or various numbers behind that. There's a few that aren't on there because things are changing daily. There are some small programs that we're doing in America already for some start-ups. We're a bit [ upfront ], but we're always a bit hesitant in putting everything down just in case one falls over. We're pretty proud and we don't want to do -- see us fail, but there are some programs that we're doing in North America at the moment that are on a small level. And -- but there's only one way that will go, and that will be upward. For emerging tech. It -- with the themes like our certification and our diversity of what we do and timing, when you put all that together, it quite -- there's quite a number of programs that are certainly available to us. And we're continuing to just add the pipeline up for that now. As I said before, I did make the comment a couple years ago, times goes fast, but our emerging tech, we feel, [ draw off ] motorsports in the years to come. And just doing some numbers over the weekend, and that is certainly getting that way. Investing in our people, that comes as no surprise. It's sort of it's what we've been doing for some time now, but when your approval numbers come up, you don't have to [ do much of a percentage ] to certainly make the numbers of your people increase. The -- I guess the strategies of recruitment development; retention; apprenticeship program, which we've spoken about before. I think we've got 37 -- don't quote me, 37 of apprentices across a range of trade. Work experience program. And we've also got our employee assist program to support the PWR team and employees. Investing in capability. I think, a lot of people that haven't been there for the last 12 months or so, you'd be very surprised of what is available down there now with capability and machinery. We've certainly put in quite a number of CNC machines in our machine shop area; and not only that but fin machines and die designs and, as I said before, with the vacuum furnace and the heat treatment plant. We have ordered an extrusion plant to come in from overseas that will, hopefully, be here before Christmas. And then we're certainly spending quite a bit of time and on -- effort on software and upgrade. And we're also currently looking at -- look at an ERP system that we feel that we will need for the future. And we are doing everything possible we can for future business down the track. So as I've said, it's not about today. I think it's the next 10 years that we are working on. So yes, well, that's pretty much it. I think it's a very comprehensive document that people can have a look at and look at down the track if they haven't already. I'm sure it's been analyzed pretty -- or scrutiny-ed pretty thoroughly, so I'd like to open that up to questions and any inquiries or queries anybody might have.

[Operator Instructions] Our first question is from Cameron McDonald of E&P.

Just 2 questions from me, if I can, the pipeline you've outlined in the OEM slide on Slide 20. Obviously you've got the GT500 coming off in the next 12 or so months, and that's 6,000 vehicles. What's the -- without going into each one of those line items below, but are they going to add up to more than 6,000? Or are we expecting that the headline revenue from OEM might actually fall once the GT500 rolls off?

Yes, a good question and a size one. Yes, the GT500 is -- has certainly been pushed out a little bit for 2 reasons. One reason is because these -- during these last 6 months, they've had 6 weeks of no productivity there because they've been waiting on chips and what-have-you to get these cars out. So that's pushed it out a little bit. So obviously with our revenue for last year -- so that was a bit of a negative, why our revenue didn't quite hit the mark, but what it also shows is it certainly runs into that they are going to do some more vehicles. Because originally they were only going to do 8 vehicles total -- 8,000 vehicles total. So now they're -- have got other 7,000-odd vehicles to do to the end of the run of what they're saying. That runs into the first half of '23 and which will -- is a great thing. In between that, we have got some other programs coming along, which I mentioned before some of the smaller programs that we're doing now that will probably run into some -- well, we will -- we do know that some of those programs will run into those numbers. It might not be 7,000 as we say, but I think the revenue side will certainly counteract the revenue that have been mainly the Ford GT program...

And the other comment I just wanted to get some more clarity on is just on the balance sheet. You indicated that you're in a strong position, which you undoubtedly are, to take advantage of organic or other M&A opportunities. What are the sort of things you'd be looking for to complement your existing business from an M&A perspective if the right opportunity came along?

Yes. I think, as you know, we're pretty hard taskmasters and pretty hard to please. We're pretty hard to please, so it's going to be -- it has to be something that we're actually bolt on, something that can bolt on that's not going to weaken what we already have. And I think, if history -- if everybody does their history numbers, I think not too many of the M&As work out very well, in history, so we are very, very cautious. We do get inquiries every month or so of potentials, but what we've seen in the past 12 months, people being way off the mark in their expectations and what they're trying to do. When you have a business that we already have here and that's returning 20% net on revenue, it's pretty hard to get something else that's going to be equal to that. So I think our -- what we've done with our organic growth in the past has been very, very good and very, very strong for the business. And what we see in the next 4 to 5 years particularly, it's organic growth is going to be exceptional. So yes, that's our answer. We're fussy. We're very fussy.

Is there any need at some stage in the future to have European manufacturing capability?

For sure. We have a lot of exposure to the pound, as we all know, and it would be good to bolt on something in Europe. And we have actually looked at a couple of programs there but not the right programs for PWR at this stage.

Our next question is from Tom Tweedie of Moelis Australia.

Just a couple from me. With your pipeline of emerging tech contracts, at a high level, are you able to give us some color on what relates to military aerospace and what relates to motorsport [indiscernible] as a percentage perhaps?

It's probably a hard one. [ I'd call it ], don't know, 20-80 right at the moment.

Sorry. 20% motorsport. 80% would be emerging, military aerospace.

The other way around.

Okay, excellent. And I was just going to ask also: On the emerging tech side you mentioned further capital investment in perhaps automation, robots and things like that. Looking, say, 3 to 5 years out, when [ commercializes ] military aerospace, what -- how should we be thinking about automation on the emerging tech side? Is there a low-hanging fruit that you can automate a good portion of that process? Or is that going to have to scale head count with the revenue there on that side of it?

The -- on that side of it, certainly with the battery cooling plate, et cetera, which is a growing part of our business for particularly hybrid cars, et cetera in Europe, there's quite a bit of opportunity there. And we feel -- we're already doing quite a bit of business with a couple of key manufacturers over there. And then there are some programs in our pipeline of some volume, and then we feel that it's probably going to level out. With some of the high-volume programs, they -- we're certainly happy to invest in automation, which is fine, but then the piece price goes down. So it's a little bit of a leveling out so that -- but as you guys know, we're not going to do it for nothing. And we -- and it's got to still fall into our modeling of profit per part. So we're certainly looking at some small production sales that will ramp up some of those opportunities in that volume area.

Okay, brilliant. And sorry, just one other question just off the back of the OEM programs sort of looking again further out obviously. Are you seeing a shift to perhaps some EV OEM programs coming on? And also how do we think about that if that is the case? Coolers per car would obviously be down by numbers, but the revenue per vehicle in terms of cooling capacity, would that be similar just because the technology is more expensive?

Yes, correct, 100%. 100% you got it right there.

Our next question is from Chris Savage of Bell Potter.

Can you just give us a bit of color on F1 this season and the level of spend? And what's the outlook for next season with the new rules and regulations coming in?