PWR Holdings Limited (PWH) Earnings Call Transcript & Summary

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

Thank you. Good afternoon. Thanks for joining the call today. We have had a number of questions come through in about our announcement this morning. I will go through those questions and the answers we have available. And at the end of my preso, I'll answer any other questions that anybody may have.

We have about 9 or 10 questions. So first question is, what will be the full impact on the full year revenue and NPAT results? Through our ongoing reforecasting activities, it became apparent that the first half would be lower than originally anticipated, hence, today's trading update. Clearly, this is lower first half -- this lower first half will also impact the full year of '25 result. While we are not providing a full year update at this time, when there is more to say on that front, we will update the market. We would like -- we would add that we remain very positive on the medium and long-term outlook for PWR. In particular, while revenue for the OE and Aftermarket has been lower than expected for the first half of '25, the medium and long-term outlook on the other sectors to the second half of '25 and beyond remain strong. We have further work orders and customer indications suggesting Aerospace & Defense revenue for the second half of '25 will continue to grow when compared to PCP. Design and building work is commencing with race teams to gain advantages within amended design regulation applying to the 2026 F1 racing program, and we believe this will have a positive impact revenue on the second half of '25 and also into FY '26. The investments in Aerospace & Defense capability, factory space, equipment and systems are necessary to prepare to deliver in our medium- and long-term growth objective, especially growth in Aerospace & defense, and is consistent with our approach to invest now and collect later. Question two, what is driving -- what is driving the lower NPAT revenue when the revenue is only down 3.6%? Increase in average headcount by 33, largely focused on skills in Aerospace & Defense, cybersecurity systems capability and quality assurance and certification compared to PCP and wage increases year-on-year. Increase in commissioned equipment, leading to an increased depreciation compared to the PCP, increased manufacturing costs from raw material, electricity, water, nitrogen gas. Next question. What is the movement in headcount half-on-half? Average global forecast headcount for the first half of FY '25 is 575 compared to average headcount of the PCP of 541. At this stage, the headcount in the second half is expected to be relatively flat and will be managed in line with program specific revenue. Question 4, do we anticipate making up lost OEM revenue in the second half? Not for OE, but we do anticipate a stronger second half for Motorsports and Aerospace & Defense revenue. Question 5, what makes you so confident in the revenue for A&D and Motorsport for the second half? Our pipeline and the products we have under development will release in the second half. Question 6, what cost management activities are you focusing on? Labor and overtime management is our key focus. We believe we are rightsized for the forecast of revenue and headcount for the second half is expected to be relatively flat and will be managed in line with program specific revenue. Question 7. What do you anticipate the impact on the full year to be for Stapylton headquarters? As mentioned at the year -- at the full year, that the ASX announcement that was lodged on the 15th of August, '25 -- it will be a transition year for PWR, which is crucial to successfully position us for future growth as we move to our new headquarters in Stapylton. For the full year, the impact of the Stapylton headquarters in accordance with what we have mentioned in the full year results presentation, that is $4.3 million before tax. In the first half '25, the forecast impact on NPAT of the new factory of Stapylton is less than $300,000. This is included with statutory NPAT forecast referred to in today's ASX announcement. Question 8. When will we next provide an update? We will continue to keep the market informed in line with our continuous disclosure obligations. Question 9. What is your view on the EV market? Pushback on the EV market has been noted in the last 3 to 6 months globally. What drives -- what's driving forecast growth in A&D revenue? Continuing growth in the electric cooling plates and also the eVTOL. We are continuing to supply a number of eVTOL developers who are supporting through the certification process, which they need prior to entering into production. I'll now forward the call if anybody has any further questions.

[Operator Instructions] Your first question comes from Jack Dunn with Citi.

First one, just on these OEM programs, how much revenue were you expecting from those 3 niche programs? And do you expect revenue in OEMs to sort of -- in the second half to step down from that first half of [ $8 million ] that you're guiding to as a result of not having these programs?

Yes. There's 3 programs, 2 that were canceled and that was paused. And the 2 that were canceled is around about $5.6 million for the full year. And the one that was paused is around about $1 million for the full year '25. So do we expect anything else to fall out of the bottom of that? No. They are basically the only 3 new EV programs that we have been working on the last few years. And we did say at the full year presentation that this year was a fairly decrease in OE. And this has come a little bit further than that, but not -- it's not too much further. It's mainly -- it's all fallen in the first half.

Okay. Perfect. And just to clarify, did you say that was these are the only 3 EV programs that you had in your pipeline?

Correct.

Okay. Perfect. And then just moving to aftermarket. You mentioned globally, but was there more weakness seen in Australia versus the U.S.? Or can you just touch on how you're seeing aftermarket in those 2 geographies?

Yes, we feel still very strong with the aftermarket. I don't think the aftermarket is as bad as it looks. I know the revenue is down a little bit, but we decided to -- in June this year, decided to take away some of our used accounts we're giving aftermarket, particularly in Australia. And yes, our revenue is down, but our NPAT for that section is certainly up quite a bit from last year. I know the revenue is down. It looks a little bit bad that way, but the underlying NPAT for that is up from previous year.

Perfect. Last one, and then I'll just jump back in the queue. And in Motorsports, you're expecting growth in the second half, are you still expecting your flat growth for the full year, that 10% that you talked to?

My flat 10%. Yes. Look, we -- I think we're very well positioned in that to do very well in Motorsport for the second half. I know it's a fairly big skew, but I think everybody knows it's been dealing with us, it's always been skewed to the second half and it's always come home with that. So we're very confident that we'll hit that number.

Your next question comes from Alex Lu with Morgans Financial.

Just one follow-up on those 3 EV OEM contracts, please. So you kind of gave us an indication of the revenue impact from those contracts in FY '25. But just wondering, were they multi-year contracts? So just wondering, does that flow through to FY '26 and '27 as well? So just trying to get an indication on that, please?

No, they're only fairly short contracts, what have you, so certainly, they weren't going beyond '26.

Okay, so you will have some impact in FY '26, but not in FY '27?

Yes, very slightly in '26, Alex, only a quarter -- in '26.

Your next question comes from Tim Piper with UBS.

Sorry to keep harping on the OEM contracts. Just to confirm, so these have dropped out post what you talked to in August? Because you sort of gave some indications around where you thought FY '25 rev would be for OEM. So then you've effectively got what was that $5.6 million, another $1 million sort of drop out of that FY '25 number since August.

Correct.

Okay. Got it. Second question is around balance sheet and cash flow. Second half of '24, there was a pretty decent step-up in receivables. What kind of operating cash flow, cash conversion you're expecting in the first half of '25? And then what does the trajectory of borrowings now look like over '25? Do you think you end at a net debt position at the end of '25 now?

Yes. No problem, Tim, it's Martin here. We're expecting cash conversion to be certainly 90% plus in the first half because we had really good collections after a really large quarter 4 of FY '24. With regards to the debt profile, the timing of our drawdowns for the new facility are falling in line with where cash flow is expecting to be stronger in the second half of FY '25. So that will mute and soften the amount that we need to draw from those facilities that we've got in place. We will be by the end of the year, I would expect to be slightly in a net debt position.

Got it. Sorry, that's over around 90% operating cash conversion did you say in the first half?

Yes.

Okay. Got it. And then maybe just one final one at a high level. You already described '25 as sort of being a transitional year. With what's sort of panning out in OEM and motorsports, overall, does this sort of change your thought process around the trajectory of NPAT margin recovery back up to the targeted 20% level over the medium term? Has that been pushed out to the right at all?

I don't think we're going to be back to 20% straight away, Tim. But it's maybe soften off a little bit at the front end of that, but we anticipate by '27 to be around about that 18% I would have thought.

27%, 28% is sort of that medium term, we're still expecting margins to get the benefit of efficiencies from the new factory and continued growth in the sectors.

Got it. Sorry, just one last one. Just around the Aerospace & Defense revenue profile and seasonality. My understanding was there's not a huge amount of seasonality impact around timing of projects and revenues. But given the growth rate, it obviously skews to the second half. Just understanding why the first half of '25 is going to land at a lower level than the second half of '24?

I don't think so. The -- if you look at the first half of '24, Aerospace & Defense done [ $7.7 million ], and we had a full year -- the second -- well, we had a full year of Aerospace & Defense of $21 million. And the first half of this year for Aerospace and Defense have done nearly $13 million. And so we -- as you know, there's no little seasonality in Aerospace and Defense. And as time goes by, we're just increasing every 6 months a fair amount of revenue.

All right. I was more referring to versus the second half, so half-on-half. I mean second half '24, you did $13.3 million of revenue in A&D and it will be a little bit under $13 million in this first half. So it's sort of gone backwards a little bit half-on-half.

Yes. I think it's mainly program specific really, which we are incurring. Obviously, we -- I don't want to use what everybody else use, but I will say it, the election over there obviously stalled a little bit of some of the decision-making. And I get that at that level. But what we have seen, particularly some movement after the election last few weeks is very promising. So we don't see that being as a big problem.

Your next question comes from Sarah Mann with MA Moelis Australia.

Just a question on Motorsport. So obviously, I totally get the traditional second half skew. But this year, like you've got an extra team joining Formula 1. You've got all the work coming in for the new car. And traditionally, as you said, you've kind of grown at a flat, I don't know, 5% to 10%, somewhere in that realm, plus there was clearly the benefit of some of the price increases coming through. Can you kind of explain to us why the first half was kind of a little bit weaker than expected? Like is it purely timing? Or is there something big going on here around, I don't know, reallocation of budgets or change in technology and just how kind of some of the teams are spending?

That's a big question, Sarah. Which part do you want me to answer? I'll answer as I heard. The -- no, I don't -- I think part of the reason is that there's no change in -- or very little change in design and what have you of the cooling system this year because a lot of people are using -- particularly the back half of the grid, a lot of people are using the same program numbers and systems that they have on -- that have been running. So obviously, looking after their budget and spending it on their '26 car. You said early in your question there, there's another team starting. That hasn't been finalized yet with the other team starting off, but there is a big anticipation that Andretti will have a '26 car on the grid. We're already working with them and GM out of America, who is their biggest bagger. We're already working with them with product and testing for the proposed '26 [indiscernible] and the word around town is that looks like they're going to get that. And as you know, there's 10 teams in there now and another team that's just not at 10% increase by just having that 1 extra team. So we see Motorsport going through the next couple of years for sure, if not longer, of very positive and there would be increase particularly in the '26 year. And a lot of that or some of that will be in our second half this year of a lot of the work that we're doing for the '26 cars. So we're very positive about that.

That makes sense. So it's really just the -- the weakness in the first half is really just around timing and it's going to be a bigger skew than normal because of, I guess, saving the budgets for the second half of the year. So just to clarify then, like, I mean, historically, you've kind of talked a flattish growth of somewhere between 5% to 10%, right? Like sure, the first half was a little bit weaker, but it sounds like, given everything you've just described, you should be on track to do that or better.

Correct. Absolutely.

And then the other question I just wanted to ask was on the Aerospace and Defense pipeline, like you sounded pretty positive about what you were seeing there as well. But can you give us any specific color around I suppose what some of your eVTOL partners are kind of saying around timing as they move up into production and how they're going, progressing towards certification.

Yes. I think everybody would know as much as we do because it's very well spoken about in the open forums and particularly on the website as such -- everything seems to be on track, particularly with the 4 or 5 now people that we're dealing with. So the certification situation is obviously 1 that's going to hold people back as I've said before. But when you look at [indiscernible], particularly those 2 are that very well advanced with that. And it's going according to plan for our situation. So I would think -- I think in production-wise, that we'll be seeing some significant increase in production, particularly '26 and beyond.

Got it. And then just on the headcount component that you talked about before and some of the realignment of cost. So at the full year results, you called out adding 31 new heads in A&D kind of ahead of the curve. How many of the new staff that you added in the first half were for A&D versus for the, I guess, just the base business?

It's quite a few. I don't think it's quite 21, but it is quite a few because as I called out in the announcement -- our full year announcement that we're certainly ramping up for Aerospace & Defense, and all of those positions are higher lead and particularly with quality and cybersecurity and the rest of that red tape stuff that's behind the scene and certification wise, we have put on quite a few heads. And for moving forward, it would be a program-specific. As we said, called out in the full year that we're ramping up for that, and we will continue to do that. We'll probably be a little bit more cautious, I suppose, but we -- particularly now that the orders are getting very, very close and we're expecting orders imminently. We just don't want to be caught, say, with our pants down that we can't deliver. So it's chicken and the egg, but we still back ourselves for that for future growth that we've predicted.

So just to clarify, that sounds like you put in some headcount now, there'll be a pause, I suppose, in the second half. But as things ramp up in '26, you'll probably catch up on, I guess, some of the people that you're not hiring this year as you realign the cost base. Is that kind of a fair characterization?

Absolutely correct. Yes.

Your next question comes from Andrew Walton with [indiscernible] Holdings.

What R&D product and business development initiatives are you undertaking to diversify income potential through new revenue sectors, for example, quantum computing, data centers and like.

Well, we always continue, Andrew, to develop new products, and we've been developing a new product, particularly for F1 the last 4 years, last 5 years actually. And 1 of the teams has been using that for the last 3 years. And we have progressed that development quite a bit, particularly in the last 12 months and now we're dealing with the 5 teams to use that in the '26 car. So we're very confident that's a game changer, well it is a game changer, and which has been proven over the last 2 years with a particular team using those products. We always continue to push R&D across the board, and that's not only Motorsports, I know Motorsports a technical driver, and we use that a lot, particularly in F1, without dropping the name of F1. And that has a trickle-down effect into other categories. So we're being fortunate enough now that some of the products that we've developed in high-end Motorsport are now getting into eVTOL and Aerospace. So it's always that continuing improvement that we do. We have 4 full-time people here in Australia that are just doing nothing else but R&D development every day. And that's not only the work that they're doing, but the cost of what they do of their development is substantial. And yes, we do get a kickback from the government, as you know, with our R&D grant to cover some of that, but that's certainly not all.