PWR Holdings Limited (PWH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PWR Holdings Ltd HY 2022 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Kees Weel, Managing Director. Please go ahead.

Good morning. Good morning, ladies and gents. Thanks again for dialing in. This time of the year has come around pretty quick, as we all know. I guess we'll get straight into it and a lot of people have already seen and gone over the presentation anyway. So I'm not going to stop and read every individual line, but I'm sure we'll certainly do the best we can for everybody. Performance highlights, overall 22% growth across all key markets. Motorsports, 20% growth again which is a great result. OE, as we've said, 43% growth due to the strong push for Aston Martin for the Valkyrie program and also the GT500 program that's come out of the States. Emerging Tech which we always anticipate that it's got a big growth there but 36% with a broad customer base and certainly a fairly big input of micro matrix this first half. Aerospace and Defense looking at a very strong order book for the second half of the year, it's weighted for the second half. Automotive Aftermarket probably our biggest thing is they're working on increasing capacity because we are capacity limited there. Online store, we launched the online store on the 15th of December, which is a little bit ahead of schedule. NPAT, a sold conversion and our dividend of $0.035 per share. Performance challenges. I don't think I have talked too much about this, but everybody knows the market uncertainty with COVID changing the rules and guidelines. The international state border closures restricting movements of employees. Employee availability due to government-imposed isolation requirements impacting production capacity. The COVID-19 vaccine mandate due to the nature of a manufacturing facility, we didn't have too many people that could work from home. And be fully effective on the social distancing, so it's not always available. The management team has spent considerable time in the planning and implementation of the vaccine mandate for PWR Australia as well as the COVID-19 safe operating procedures globally to minimize the current and future impact to operations. To protect our employees and in anticipation of the state borders reopening with increasing community transmissions in December last year, we introduced a COVID-19 vaccination mandate for the Ormeau facility effective from January 4 '22. That was double jab -- that was certainly double jab -- have to be double jab before they could enter the building. Prior to introducing the vaccine mandate, PWR engaged in an extensive consultation with employees, including holding on-site information sessions with doctors, et cetera. The introduction of the vaccine mandate resulted in the loss of 19 employees -- sorry, 9 employees over a total of 300 employees. So it wasn't too bad. But obviously, people's choice, they decided that they didn't want to be vaccinated. The challenges, other challenges. Supply chain, that doesn't come with surprise to anybody, lead times and minimum order quantities for raw material. We have increased sale prices where possible to pass on through raw material costs. We have been increasing forward orders and inventory of raw materials to ensure continuity of supply. We've increased finished goods inventory for programs and are warehousing the finished goods in the U.K. to reduce the shipping distance for final delivery to the customer. That was mainly for the Valkyrie program to make sure that the goods were in the U.K. when Aston Martin wanted to draw on that. Inflation, goes without saying the -- has increased. Will continue to put pressure on our wages, rates, et cetera, raw material and supply chain costs. Recruitment and retention, effective onboarding, upskilling and retention of employees is critical to the growth and continuation of the performance of the business. Performance overview. The -- I won't go through every line on the performance overview, but it's very healthy. We -- our revenue was up considerable to what we thought it was going to be. And therefore, all those numbers have dropped into place. Particularly when you look at the last half -- the first half of last year, we had nearly $2 million of COVID support to have this result this year with no COVID support was fantastic. The depreciation, investment in equipment over the past year has increased capacity and capability. While first half '22 EBIT was $2 million higher than prior period, depreciation expense was $1 million greater. Because of all the new machinery we have been putting in, the depreciation costs are going up. Our performance trend run through every graph there, but it's very healthy on every graph to where we are. Our revenue, our EBITDA, NPAT and dividend per share. So when you look at the trend for that, it's been very healthy and very fulfilling. Revenue by market sector for the half year. Motorsports is still very strong. Growth was driven by a broad-based return of motorsports events for 2022. The Automotive Aftermarket was constrained by limits on production capacity and prioritizing of high-margin sectors, including motorsports. Further growth potential is evident, including the online store. OEM includes the Aston Martin Valkyrie program so OEM was strong. Against last year, it's up 20%, et cetera. Key points. I know where a lot of people are looking at key points for emerging tech. On our motorsports side that we -- it was up 43% from last year. And that was a lot to do with the micro matrix core that we're selling into high-end motorsports coming up on this year's F1 program. The OEM, strong growth in cold plates and battery coolers, and electronics in high-end electric vehicles. Aerospace and Defense is not as good as we would like the first half. There's very -- it's definitely very weighted for the second half. So second half will certainly make up that margin there. Revenue by currency for the half year. As everybody knows, we do have a forward foreign exposure program that we lock in every year, and we are very much protected on that. So the -- we have a foreign exchange program that's locked in for at least 3 to 6 months ahead of where we are all throughout the year. And U.S. exposure is largely offset by the U.S. production costs. Operating expenses. I think the key points are raw materials and consumables usage increased by 13%. Movement of finished goods inventory and work against raw materials. One of the biggest expenses is employees. We employed an extra for the same period last year, we employed an extra 88 people. And there's certainly a big increase there, plus the 3.1% award and market pay rate increase. External recruitment fees, et cetera. I think everybody that's in business today would understand that the employment and employing the right people is expensive. And as we increase into some of these niche markets, some of the disposal -- waste disposals that we have to do is getting up there. Other expenses, increased insurance and marketing programs. Balance sheet. Balance sheet, as everybody knows, it's always been strong. It's still very strong, very strong liquidity and cash position. We paid out $6 million in cash in September for dividend. The ROE decreased. Plant and equipment increase reflects the completion majority of the previously announced capital investment. Inventory and prepayments are greater as we respond to supply chain pressures in ensuring production continuity. Loans and borrowings include the right-of-use liabilities, $10 million multicurrency and $7.5 million equipment loan that remain in place and not being utilized at this stage. Balance sheet strength is utilized and unutilized facilities provides ability to seize organic and other opportunities. Intangible assets unchanged apart from foreign currency movements. Working capital and the cash flow, key points. Operating cash flow decreased by 45% for the same period last year. Prior same period, including $2 million of COVID payments last year. Prior period include $2.7 million customer contract prepayment. And the first half FY '22 includes $6.4 million increase in working capital, including $2.2 million increased trade debtors due to strong December sales and $3.7 million increased inventories and prepayments to manage supply chain risks. Cash conversion and operating activities at 67%. Capital investment financed from operating cash flows and retained cash services. Liquidity position is very strong. Cash reserves of $16.7 million and finance facilities over $17.5 million. Business outlook. Organic growth, extensive organic growth opportunity. Disciplined approach to selecting which opportunities to progress. Motorsports continue to supply all major motorsports categories as they strive to develop more efficient cooling technology. OEM programs continuing to ramp up with long awaited programs now in production and the expected commencement of the AMG X1 program in the second half of 2022. And negotiations continuing along on future programs. Auto aftermarket, solid market demand, but we are impacted by insufficient production capacity at the moment. We're working to increase production by the introduction of an afternoon shift in selected departments and that is at [indiscernible] as we speak. Online store. The online store is launched ahead of schedule on the 15th of December '21, an important sales channel to supplement existing strategies. Business outlook for emerging tech. The EV market, we are very well placed to deliver high-performance battery and electronics cooling products to the ever-expanding prestige EV market. Cold plates, the cold plate market has previously limited to automotive application is now spreading into adjacent markets, providing an overall larger market. Micro matrix, our MMX opportunities continue to grow as the technology matures in its current markets, and it is an R&D focus for aerospace and defense. Additive manufacturing, 3D aluminum printed parts are now included in a growing number of high and PWR cooling systems. PWR, we continue to develop and extend the application of additive manufacturing together with our technical partner, Velo 3D. Business outlook for aerospace and defense. Second half demand, deliveries for key U.S. customers looking at a strong -- for -- is looking strong for the second half due to increased demand. Australian defense government decision on a large defense program to be made in March quarter. I think there's a decision that will be made within the next 3 weeks. Subsequent selection for PWR as part of the supply chain would have a good future growth opportunity over an extended period. International travel, PWR will be reassuming international travel to visit important customers, and we'll be exhibiting 3 international trade shows in the second half of '22. Prototypes, PWR have recently secured prototype contracting with aerospace and defense primes for bespoke systems and have the potential to lead on to production for future platforms. The electric lift -- the electric vertical takeoff and landing program, PWR remains in a high future growth area for PWR with several aerospace manufacturers turning to PWR for thermal systems support and manufacture. Hydrogen fuel cell, fueling technology has been a focus for PWR providing lightweight and compact solution to allow our customers to increase energy density for their platform solution. Managing risks for our business outlook. COVID has always been, as everybody knows, a big risk in knowing what to do and when. PWR has been actively planning and managing COVID risk, including introducing a vaccine mandate to access -- to gain access to our Ormeau facility in 4th of January. Increased community transition transmission in January impacted our workforce and consequently, our production by 18%. Subject to future uncertainty related to COVID, the temporary delay in production is expected to be recovered in the coming months. Supply chain risk. Supply chain risk shortages have increased the lead time and minimum order quantities for raw materials. To ensure production continuity, we plan to further increase raw material orders and inventory. We have a saying, we'd rather look at it than looking for it. Planning for the future success. In addition to achieving current year targets, the management team are laying the foundation for our future growth and success. We will continue to partner with our customers to develop the leading edge in high-performance cooling systems, applying this knowledge to new applications and expanding to adjacent markets where commercial opportunities exist. To ensure we position PWR to capitalize on future opportunities over the medium and long term, are: investing in people; investing in capability and capacity; and investing in staff retention. Laying the foundations for the next 10 years plus and also for the growth and success. Investing in people. PWR recognizes that people are core to our future business. To deliver on current and future opportunities, PWR is investing in growing headcount to 450 by December '22. The people strategy includes: Investment in headcount, growth requires an ongoing investment in people to build headcount with focus on targeted selection and efficient upskilling; our apprentice program, in 2021, last year, PWR signed up to 12 new apprentices. In the past 3 weeks, we have signed a further 14 new apprentices, employing 44 apprentices across a range of trades that is continuing to expand the apprenticeship program; the graduate engineering program, PWR has commenced a 2-year graduate engineering program where graduates rotate between engineering teams to gain valuable experience before they could decide their preferred specialization; global engineering exchange program, PWR has an exchange program between Australia and North America. To expand the professional experience of the engineers and to reinforce the PWR DNA across all operations; work experience program, PWR runs a work experience program for high school students interested in career in advanced manufacturing. Investing in capability and capacity. Capital investment, an ongoing targeted capital investment program is critical to staying in the forefront of technology developments and to ensure we have sufficient capacity for anticipated and planned growth. Future CapEx will be focused on a new fit-out facility and our program specific equipment. Factory footprint, we continue to assess the optimal factory footprint to ensure we plan for growth while maintaining efficiency. North America, we have signed a new lease for a factory to add on a further 14,000 square feet that will be available before the end of '22. That is actually a machining facility predominantly targeted for aerospace and defense. Australia is continuing discussion for a new factory to supply growth in late '23 and beyond. That's an extra factory on our current capacity. Digital Systems, commenced a full review of digital systems, in particular, ERP planning platform to ensure that the systems will support future growth. Certifications. Rigorous certification and processes are a prerequisite for supplying to our key markets and are essential to improve operating efficiency. In addition to maintaining the AS -- Aerospace 9100 and the ISO14001 certifications, we are seeking NADCAP certification for our vacuum braze furnace and a number of security certifications in Australia and North America to support expansion of the defense program. Investing in staff retention. Retaining skilled staff is critical to achieving our growth plans. We invest in upskilling our staff and strive to provide a rewarding career path. Our staff retention strategies include: STI, the PWR STI program has been expanded in recent years to include supervisors and their key team members, providing a direct link between PWR performance and personal reward; career development planning, we are developing individual career plans and training pathways; supervisor training, upskilling for supervisors so they can better support their teams; employee assist program, independent and confidential support for our staff and their immediate families; Weely's Diner, PWR Australia provides morning tea, lunch -- and lunch daily for all staff free of charge; work life balance, production intensifies between November and March each year, ahead of the new race season. This year, PWR closed in total of 10 days between Christmas and New Year to allow the team to recharge and time spent with family, returning fresh to start for another busy year ahead. That's basically it for the presentation. And I'd certainly welcome any specific questions that might be coming our way.

[Operator Instructions] Your first question comes from Cameron McDonald from E&P.

Kees and Martin, a couple of questions from me, if I can. Just whether we're sort of seeing a resumption of normal motorsports calendar. How should we think about the growth in that business now that we're back to sort of a normal calendar cycle?

Yes, it's been a little bit hard to forecast that over the last period of time. But now that some of them are coming back, and these are the smaller programs, particularly in Europe for instance that have been probably nonexistent, we're running about half pace for the last couple of years. How we see that is that you've seen in the first half, there's a 20% increase of motorsports, that was slightly above where we internally anticipated that to be. And for the second half, I think will probably similar because as you have said that the smaller programs, race programs will certainly -- it'll start to be racing this year in the next couple of months. So all their programs will start. So we have seen quite a bit of activity in some of the other programs or people are spending up money on really start racing this year. So I think if we do see that percentage to be around 20% for the second half, I think it will be a very good result.

Okay. And then you mentioned the aerospace and defense contract, which you think is potentially coming in the March quarter. Do you know any other people bidding for that contract, so what the competition looks like?

I think the competition is limited without being cocky. As this particular contract that the primes are bidding for, they need 80% of Australian content in those vehicles. And so they're trying to buy everything in Australia. So look, I think we're in very good shape. The 2 parties that are bidding for the contract with the government, we have supplied both of those companies with product for their initial vehicles, their initial display as in operating vehicles to show the government their capability. And so we are certainly with both customers on that. So -- you think it'll be a slam dunk, but it's never done until the [indiscernible] as you would know.

You're supplying both bidders, that's as close to a slam dunk as you can get, right? And just a final question from me, just on the balance sheet. You mentioned that the balance sheet remains strong to take advantage of any opportunities. Are there any opportunities that you can see out there that are other than inorganic? And how much are you looking to spend on the new factory, particularly in Queensland?

It's probably the -- well, there's 2 questions there. The opportunities are probably more organic rather than a purchase for sure as we sort of shied away from any M&A at this stage. Obviously, we've looked and things come across our desk fairly often, but nothing has really suited us -- that suits our business. So we shied away from that. So we've stuck to the organic growth sector. So -- but as far as CapEx and future development into the new factory coming up, it's probably in various stages, but we are looking at automation -- manufacturing automation fairly heavily at the moment. And that will probably had some impact into next year, if you like. But it certainly won't be too much this half. But we certainly impacted next year, whether we could get some efficiencies and et cetera for next year. So that's what we're working at the moment.

Your next question comes from Chris Savage from Bell Potter.

That hedged production you highlighted in January, Kees. Can I ask, firstly, are you back to normal in Feb? And secondly, given Jan, Feb, March are just so busy for you, when would you hope or expect to sort of make up that production shortfall?

Yes. We'll make up that production shortfall in the next 4 months, for sure. I guess the big thing, Chris, is that nothing has fallen off the table. And we just have to shuffle some time frames around what have you and customers understand that. And so February is certainly back to normal. And what we don't catch up from by the end of February, we'll catch up for the next couple of months. So we're very positive about that, and there's a lot of things that play for that. And unfortunately, probably the biggest damage we've done in the first 2 weeks in January when they opened the Queensland border and everybody decide to party, et cetera, et cetera, we know the result. But that's life, and that's just something we're going to deal with. Work harder.

And just in that emerging tech result, you highlighted there was a program that was there in the first half of '21. It wasn't there in the first half of '22, but you're expecting it to come back or recommence again this half. Can you give us some color on what that program is and how material it is?

I thought that material. It's a cold plate program in the states into a military vehicle, is it?

It's a radar.

It's a radar. It's something that we don't talk about too much of what the usage is for. But it's definitely for a radar electronic cooling plate. And yes, so that will be weighted in the second half.

Okay. And I know Cameron, before us around the F1 or motorsports. Can I just ask with the big changes we're seeing in F1 this year? How is that going to impact your revenue? Is it a positive impact, a negative impact, what is it?

I think it's a positive impact, Chris. As you can see, with the micro matrix split -- or the emerging technology split on our page on the split there, you see that micro matrix is certainly a big push for that in motorsports. So all the new cars this year have some part of micro matrix in that vehicle. And it's very, very high end. It's probably the best and most extensive coolers that we've ever made that are in that section. So I would expect that to continue. Yes, I would expect that to continue. So I think it's going to be a very strong year in F1.

Your next question comes from Sarah Mann from MA Moellis Australia.

Just questions on emerging tech. So OEM, that seems to be growing quite strongly, I presume that's EV, and that's clearly a pretty large market. Initially, it feels like the EV adoption is happening pretty quickly at the luxury prestige end of the market where you have relationships. Are there any OEMs that you are, I guess, not talking to or which -- just give us a feel for which ones you are talking to, which ones you aren't talking to and the ones you aren't talking to and why not?

Well, I think it's like a lot of things you'd like to deal with everybody. But some are priced differently how we would see the pricing. So I think that's with OE, it's -- there's always a price pressure there. So the thing with that is that we're a bit picky and choosy, I guess what we deal with in OE, but the big push for the EV market in the OE sector is electronics and battery cooling. So we have -- we are talking to quite a few people at the moment. We're very, what shall I say, it's -- we're a fair way into a couple of programs for prototypes. And if those -- if we do win those programs, it's a very, very extensive program or a very good kicker for us for OE. But with our traditional OEs of Valkyrie and obviously now X1 being pushed back, X1 we'll pushed into 2024, it will be '23 and '24 program, so that's good in one way. So it extends that pipeline. And we are working on a couple of programs now that will fit in between '24 and '26.

Right. And in terms of the EV opportunity, you mentioned that if they come off on prototyping on like could be pretty big from a volume perspective. Is there any kind of automation you can implement there to kind of get some efficiency gains? And if so, what would the time line be around that?

Yes, that's correct. We're working on a couple of programs right now that start of production is in 2026. I know that sounds fair bit away, but it's not really, it's -- it will go pretty damn quick. So there's some samples that we're manufacturing at the moment. And in '24, they want preproduction samples in '24. And we would like to have an automation line in '24 for that, so we could get our economy of scale and also see if we can get some efficiencies on that program. The individual numbers of those programs are pretty high, like very high.

So then just last question for me, which is a bit of a broader one around emerging technology. I mean it clearly sounds like it just a huge range of end market opportunities for your technologies like I don't know, hydrogen fuel cell, EV, aerospace, et cetera. Each of them are really big in their own right, but at the same time, Kees, your product is premium very high end. When you look at these potential markets, like what percent do you think is actually available to products like yours that are at the very high end?

I did make a statement a couple of years ago, which doesn't -- seems like yesterday that our emerging tech part of our business would be equal to motorsport in the next few years. And I think the groundwork that we've been doing and the take-up of those opportunities has been very good. I think it will be still in line with that for sure, because I think we'll probably do around about that at $15 million or $16 million total for emerging tech for the full year against what we do $8 million or $9 million for same period last year for the last full year. So it's probably 100% up. So to grow it from $16 million to maybe $25 million, $30 million the following year is certainly in our ballpark. So we think there's certainly going to be a very, very big push. Well, we know there is a very big push of knowing for well what crates will be on the table and what prototypes, et cetera, that we're making at the moment for potential programs that's -- yes, it's -- I would say, it's endless, the opportunity there in with us at the moment.

[Operator Instructions] Your next question comes from Alex Lu from Morgans Finance.

Just a couple of questions from me, please. Yes, can I just ask about capacity maybe first up. So you're adding new capacity into the U.S. and Australia. But just wondering, do you have enough capacity to serve the work that you've got in the pipeline? And do say you win the Australian defense contract, for example, do you have enough capacity to kind of service all that work before that new capacity comes online?

We will have, we will have. A lot of the bigger capacity is a couple of years out. And program specific, when it's program specific, we'll certainly make it work. The defense program starts in '24, '25. And we can actually do that with the current machinery that we have and the facility we have. So that's not a big issue. Some of the other programs we're looking at, we'll certainly be introducing some automated machinery and robots, et cetera. But they come in on '25 and '26. So we have the time. We are certainly putting a lot of infrastructure in place at the moment to make sure we have that capacity for the planning of the future.

Okay. Great. And I guess related to that, just looking at staffing levels, you had a -- I mean, you've got a goal to reach 450 plus by the end of December this year. But you're already at 401. So you just say, for example, you hit 450 by, say, June, will you slow down? Or will you just continue hiring at the same rate that you are at the moment? And also related to that, are you having to pay up for staff as well?

Yes. Our staff, I think the world over is expensive right at the moment. But with the program as far as the number of people we're putting on, we certainly are continuing like most companies, extremely interested for better staff and good quality staff, which is hard to get. We are certainly putting a lot of effort into in-house training and upskilling to do some of that. So that's a great thing. The -- whereas we say, we'd like to be at that 450, yes, it's only because we have the work. We're not just putting on staff because we're putting on staff, it's the more staff we put on, the more work will be able to do. So -- but we over the last few years, as you know, we've been investing in staff, and we don't get a repayment for that for usually 6 months afterwards. So you're investing in your left hand and collecting in your right hand. So that will always be the case. So we'll always will be a little bit behind on that, best to collect there. But program specific moving forward, we see a lot of opportunities. So we just want to make sure that we're ready for those opportunities, if you like.

Your next question comes from Marshall Van, private investor.

Two questions, probably one comment is the first one is I know from experience, if I see PWR putting staff on, that means future revenue. So any time you say we're putting staff on, I know that's good. Tied into that, you had the COO role filled and now I see there's no one as COO, and you're talking about automation and all that, presumably it's still a fairly integral role moving forward?

Yes, it certainly is, that is for sure. We -- as you know, we're always looking at growth and people. Yes, the COO role has been filled and we have a guy that is there, Paul Belshaw. And with particularly aerospace and defense, there's so much security programs and all the certifications of different licenses we have, et cetera. So he's taking a very strong presence over there because that's where we come from, that aerospace and defense sector. So yes, it's -- I think as you said in your question, when you're putting more staff on, that's a good thing, which it is. And I think you know by experience that we don't have staff sitting around. And yes, we have so much opportunity, right? At the moment, we have had for some time, and we can see that certainly out for foreseeable future. Yes, we're just looking for great people.

I think as we always said, it was never the lack of opportunities that was always getting the resources to fulfill one.

No, exactly.

One other quick question. Just looking at your revenue by currency, U.S. currency didn't grow much from '21 to '22, presumably '21 had sort of the OEM programs kicking in, not much growth in '22, sort of any hover around that?

It'll be probably more weighted on the second half. Yes, we had -- with the forward program, the Ford OE program over there, they had the chip shortages and what have you for that. So that didn't operate for probably 2 months that it could have. And as you know, they closed down over the -- this Christmas period because it's too cold for whatever reason. I'm [putting it] politely. So I think we'll see a fairly good take-up on that in the second half.

Normal transmission to resume.

Exactly.

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

Okay. Thank you. Thanks again, everyone. Look, it's been certainly had those challenges, we all know that. I think from a personal point of view, I think it's a strong result, not that we're sitting on our laurels. But we have, as I said before, we have a lot in the pipeline and looking forward to talking to everybody at the full year. Thank you very much.

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