PWR Holdings Limited (PWH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PWR Holdings Limited HY '25 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Kees Weel, Managing Director. Please go ahead.

Thank you, operator, and good morning, everyone. Thanks for dialing in and listening to us this morning. I'm here with Sharyn Williams, our new CFO. And I would also like to take the opportunity to thank our previous CFO, Martin, for his efforts over the past 4 years. Firstly, I'd like to outline a few highlights from the half. We're focused on a growth opportunity and our highlights this period strongly reflect that. Overall, our results were slightly ahead of November trading update for both revenue and NPAT. Aerospace & Defense is really building momentum. Our revenues grew 79% when we land our first large U.S. government project order. This was a significant milestone for us and validates the investments we've made to date to build our credentials and reputation in this sector. We've also made good progress in getting race ready for production across all 3 locations. We're already generating revenue and have multiple accreditations, but we want to make sure we have the capacity and credentials to capture the growth from global pipeline opportunities. Commercializing our innovation has been a huge part of our success. We're constantly looking to innovate and develop new and better cooling solutions for customers. Examples of this are our battery cell cooling technology and our MMX developments, which we're generating revenues from. We're underway with fitting out our new Australian factory. We expect that completion in November, that's full completion. We will talk some more about those details in the outlook. we're in a good balance sheet position. After the investments made to date, we are still in a net cash position. This reflects on strong cash generation from businesses and also discipline in the way we allocate our capital. Moving on to Slide 5. You will recall, we talked about 4 pillars of our strategy last time: innovation, profitable growth, sustainability, and investing in our people. Innovation is driving growth. New products are in market, and we'll continue to invest in and ensure we keep our leadership position. It is great to see that our A&D is gaining real momentum, revenue up 79%, and we land our first big order for the U.S. government project, and we have confidence in the pipeline. Sustainability was the front of mind when designing Stapylton, our new factory. And we will be more environmentally friendly with our new headquarters, but also having sustainable, profitable and a growing business. Becoming a member of the Defense Industry Security program and stepping up our cybersecurity to meet Aerospace & Defense high standards. We have a strong team and strong culture. We're at 550 global people now, turnover improving and workplace flexibility trials going on. We also have a team of being part of the business for a long time. Over 54 staff members have been with us for over 10 years, 10 members over 20 years, 8 of those of 15 years, and 36 of 10 years and over. I think that speaks for itself of our people business. Slide 6. This slide breaks down where our revenue come from and is a good snapshot of the business mix. We are really happy with the growth in A&D, as we've said before, in the emerging technology area, obviously, key areas for us and good to see our efforts being rewarded with orders. Motorsport up 5%, a solid result, especially with team delaying new designs due for the '26 regulation changes in F1. OEM was down with 2 programs wrapped up and -- but we're being selective here, focusing on high margin work, especially with limited manufacturing space in Australia right now. Aftermarket took a little bit of a hit, but it was largely due to our own making. We adjust our discount structures to protect margins, which meant some revenue trade-offs. E-commerce is growing, which is great, but we're still seeing some pressure from softer discretionary spending. That's a quick summary of the half year, but I want to take a moment to reflect of where we come from and heading to. Our strategy. As you can see, it's been 10 years since we listed and I'm just as excited about growth opportunity today as it was back then. Looking back, we're incredibly proud of what we have built. When we floated, we were primarily a Motorsport business, heavily reliant on that sector with significant FX exposure to the pound. Revenue 10 years ago was $47 million. Fast forward to today, and we've transformed into a global recognized leader in Motorsports, proudly working with 100% of all F1 teams. We've also evolved to vertically integrate business across 3 locations, which gives us the flexibility to adjust production to navigate evolving trade environments, particularly with tariffs and supply chain shifts. Expanding into The UK and U.S. has been a natural hedge for us for our FX exposure, reducing our reliance on a single currency. This is a business that generates strong cash flow, and we're being disciplined of how we have allocated capital, balancing shareholder returns with investing in growth. We had opportunities -- we had options for diversification. We could have acquired an established business or built one ourselves. After evaluating the market, we took the lower risk approach, leveraging our existing IP to build it organically. This strategy of investing ahead of the curve, expanding our Australian footprint, upgrading manufacturing capabilities and entering into Aerospace & Defense has driven our success. Our ability to commercialize new technologies and organically build the A&D business from scratch in just 2 years has given us confidence to invest further knowing that the growth potential is there. FY '25 marks another pivotal transition year. This is our largest investment to date, but the opportunity is just as significant. Our new Stapylton headquarters alongside global expansion sets us up for the next phase, particularly in the A&D and emerging technologies. We have proven our ability to execute from investments in machining and additive manufacturing to secure NADCAP and AS9100 certifications, all of which laid the foundation to enter high value markets. This year, we reached another milestone of securing our first major U.S. government Aerospace & Defense order, validating the investments we've made to build our reputation. Importantly, all of this has been funded from our own cash flow, and we remain in a net cash position today. We now have multiple revenue streams across 3 locations, generating $139 million last year, growth that came from deliberate investments in head count, R&D facility expansion and capital equipment. Enabling the next phase of growth. So let's talk about the next phase of growth, where we're heading to from here. One of the greatest strengths of our business is that we own our IP and technology, which means we're not limited to Motorsports. We can apply expertise to other high value industries. We have already proven that with the revenue growth and delivered recent years expanding into Aerospace & Defense, an industry that aligns perfectly with our technology know how and capabilities. But that success just didn't happen. It was built on prior investments. Just like today, we use excess cash, cash flow to expand head count, strengthen our cybersecurity and quality systems, and enhance our manufacturing processes. Now we need to take the next phase, because we've outgrown our current footprint. Over the past few years, we've tested and proven that we compete and win in this space. We have commercialized our technology, secured major customers and built momentum. Now it's about being race ready for the next stage of our growth, particularly in A&D. Getting there isn't just about scaling up production. It requires a full investment in infrastructure to meet the rigorous standards of Aerospace & Defense. This means additional quality certifications, stronger control processes, enhanced cybersecurity and IT systems and deeper capabilities in design, simulation, planning, procurement and production. This is where our new Australian factory in Stapylton comes in, our home base for the next 25 plus years. We are taking a long-term approach to do it right. We've been rigorously planning to fill out and move for the past 18 months, and it's all starting to come together. That said, we've faced some challenges around timing, particularly where we rely on third parties. This means we may have to operate across both sites a little bit longer than expected and logistics are what will create some financial disruption, not just in revenue as manufacturing efficiencies is temporarily impacted, but it also costs like an initial freight pickups and generators while we operate on 2 locations instead of one. We'll work to keep that disruption to a minimum, but we want to be upfront about it so there are no surprises. Overall, we're really pleased with the progress, and we're grateful for the Queensland Government of the $8.8 million in support, which will be distributed over the next decade as we hit key milestones. We're excited about the future, confident in our ability to execute it, and we are all looking forward to operating from our new headquarters. I'd like to hand over to Sharyn now to talk through our numbers in more detail.

Thanks, Kees. I'll walk through the key parts of our financial performance outlined on Slide 11. Revenue for the half came in slightly ahead of our November guidance. As Kees mentioned earlier, the key drivers of the revenue were Aerospace & Defense, where we saw a strong 79% growth and Motorsports up 5%, both exceeding November guidance. However, OEM and Aftermarket revenue came in lower than expected, largely due to the completion of 2 major OEM programs at the end of FY '24, 3 niche OEM EV programs not proceeding in FY '25 even though PWR had received purchase orders in FY '24 for this work. The restructuring of Aftermarket pricing where we standardized discount structures to protect margins in a way that balanced volume impacts. The external environment in that space remains challenging with consumer spending constrained, with this likely impacting the response to the change in our discount structures. While group revenue was down 2%, the larger impact was on EBITDA. I'll unpack the drivers of this by making some comments on manufacturing margins versus overheads. As Kees said earlier, we are investing ahead of the revenue growth curve, which means higher overheads in the short term before the revenue fully materializes. We've been very deliberate about the type of costs we're putting into the business. And we're very conscious that maintaining a strong manufacturing margin so that when revenue growth comes through, we are able to leverage the fixed cost of the business. So turning to manufacturing margins. These remained robust during the half with raw materials flat on the PCP. We don't break out the production labor from other sales and overhead labor, but I can say that the increase in production labor during the half was mainly in The UK manufacturing head count where we had to support increasing volumes in that location. There were some annual wage adjustments contributing to some increase in production labor. Turning to EBITDA margin. This was impacted by deliberate investments in overheads to drive growth. These overheads are critical to unlocking larger opportunities and they don't keep scaling at the same rate as revenue grows in the future. We increased Aerospace & Defense head count, predominantly in response to the projected growth trajectory of the region in U.S. These roles largely mirror our successful approach that we've taken in Australia, where we invested in technical expertise, which has been driving strong revenue growth in that space. In addition, we've made some investments in enhanced capacity planning and quality assurance capabilities in Australia. These are critical enablers to ensure that our products meet the high standards of the A&D sector. So Australia is now race ready to deliver on larger government and higher spec projects. We're already generating A&D revenues, which is great. These investments we're making now are taking us to a next level where we can capture the larger opportunities. A great example of this is the recently announced circa AUD 9 million milestone order, which validates the approach we're taking. We're conscious of the revenue profile and that labor is our largest cost driver. So to give you some context on the shape of our head count over recent times, back in December 2023, we had 535 people across the globe. We increased this to 578 at June 2024. But during the half, following the realignment of cost to revenue, that number reduced to 550 at December '24. So the result of that is there will be some savings through the second half following the reduction in head count. The impact reduction year-on-year is largely driven by the investments I just spoke about as well as timing differences in tax expenses. The fully franked dividend declared reflects the Board's proportional dividend payout ratio and aligns with our disciplined capital allocation approach, ensuring we balance business growth and reinvestment back into the business with shareholder returns. Turning to Slide 12. Our balance sheet is very strong. The group retains ample liquidity to support our growth plans. Working capital for the group reduced by around $2 million since June 2024, where we had strong debtor collections and made some investments into finished goods inventory. You will note there's a new item on our balance sheet, which is our FX forwards contracts provision. This reflects our accounting treatment of our forward FX contracts where we're treating them as effective cash flow hedges where they'll sit on the balance sheet until they're settled. During the period, we made good strides in our Quarry Road headquarters, investing $9 million into that area. We did make an investment of $5 million in our other property plant and equipment across our 3 other locations. After these investments, the group maintains a net cash position of $6 million at December '24. This is made up of gross cash of $11.5 million less drawn debt of $5.5 million. We do like to keep some cash across the 3 locations, but we're very mindful of making sure we minimize our debt expense. The available liquidity including the undrawn facilities provides us ample funding capacity to execute our strategy. Since listing, the group has taken a highly disciplined approach to growth with the strong cash generation from the business funding reinvestment, leaving no to minimal leverage on the balance sheet. As we move forward, we remain committed to maintaining this financial discipline while chasing and seizing the opportunities that are in front of us. Turning now to CapEx details and our new Australian factory on Slide 13. The group made really good progress during the half. Our investment is twofold, getting all of our 3 manufacturing sites A&D ready to capture the significant opportunities ahead. This also has a benefit of maintaining flexibility to mitigate the evolving terms of trade, and also provides us an opportunity to driving automation and efficiency gains across our global operations. To give some context, the current Australian site consists of 4 separate leases that we've outgrown as revenues have expanded. Our new largest Stapylton factory consolidates our operations into one purpose-built site, unlocking efficiencies and greater automation and capacity to support our long-term growth. The full year CapEx forecast number is $41.5 million which is predominantly growth CapEx in the form of factory upgrades across the 3 locations and additional equipment to provide capacity and efficiency. $35 million of this $41.5 million is being incurred in Australia, with the balance spent across UK and US. Of this CapEx, we've incurred $14 million in the half, leaving circa $28 million to be funded in H2. To fund this second half CapEx, we'll utilize both our cash generated in the second half and also a portion of our debt facilities to fund this. We had at balance sheet date available limits of $24.5 million in our debt facility and an additional $7.5 million in an asset finance facility. This combined liquidity leaves us with significant funding headroom and flexibility. I'll now provide more detail on the financial impact of the new Australian factory outlined on the right-hand side of this slide. As Kees mentioned earlier, this is a critical multi decade investment and we want to ensure we do this right. And we want to make sure we capture the full benefits of this opportunity. Firstly, CapEx. In the table at the top, you can see an updated version of the table you saw at the August, full year 2024 presentation. We said at the time these estimates were likely to change as we progressed with the new facility and got closer to the moving parts. The factory upgrade itself involves electrical upgrades, including solar, expansion of the offices, connecting services such as air, gas and power, amongst other items. A few key changes to note. Early access rent of $1.2 million is now part of the cost of the asset we're constructing and therefore will be treated as CapEx. This increases to $1.8 million when outgoings on that early rent are included. The $13 million equipment investment will now fall across both FY '25 and FY '26 due to the logistics and timing of the move. Turning now to the OpEx impacts in the bottom right-hand table. I'll walk through these in detail as they impact the remainder of FY '25 and also into 2026. Firstly, the factory move itself. The relocation estimate has slightly increased to $2.7 million due to the need for temporary generators to power some parts of the site. This $2.7 million also includes moving fees and other transition costs. Secondly, the costs that relate to our new lease. Our new 15-year lease is structured with very attractive incentives, reducing our total lease cash outflows by $800,000 in year 1 compared to what we pay now. This means moving into this building, our cash outflow will be less than it currently is for the first year. However, AASB16 front loads the lease expenses, meaning we'll see a $2.5 million increase in lease costs per year from FY '26 showing as expenses on our P&L. These expenses are above the actual cash rental, so present a temporary drag on the P&L initially. The AASB16 expenses likely commence a bit earlier than the lease start date of July, noting that we're targeting effective control of the site in the next few months. We've popped in there $700,000 for this as an estimate. However, our exact timing is unknown. The third area of OpEx relates to how the increased investment in capital equipment and the fit out unwind in depreciation expenses. The current estimate is $2.4 million. You'll note in the prior presentation, we had $1 million for leasehold improvements only. Now we've got further visibility on the equipment, the types of the equipment and costs on the equipment, we have factored in an additional $1.4 million into depreciation into 2026. The final area to call out is the incremental debt expense, given we're drawing down debt. We expect this will increase our debt cost in FY '25 and '26 to about $600,000 per annum. We do expect the new factory to deliver meaningful efficiencies. We've got some aspirational targets in relation to efficiency and productivity, but we'll wait until we're operational to fully understand these benefits better. Another investment from the new facility is the investment in solar power sorry, another benefit from the new facility is the investment in solar power. This will reduce our reliance on grid electricity, which is great, create a better environmental outcome. But to quantify this, we do have a larger footprint and increased machinery. So once again, we want to understand the impacts once we're in the facility. Slide 14 speaks to working capital and cash flow. As mentioned earlier, and you'll hear me say it a few times, we remain in a very strong financial position, balancing growth in investments while maintaining disciplined capital allocation. Net working capital reduced since June and cash conversion was very strong at 127%. This benefit from favorable timing on debtor collections and mitigated the EBITDA reduction as the cash produced from operating activities, which decreased by only $2 million. Free cash flow was negative this half, reflecting our ongoing investment cycle. This is temporary as we continue to execute on capital investments during 2025. It's important to note that before committing to these investments, we have built cash reserves of about $21 million in anticipation of these costs. This demonstrates a disciplined approach to self-funding growth wherever possible. FX remains a factor for the business that we keep a close eye on. As a net exporter, a weaker Aussie dollar benefits us, especially against the USD and pounds. As Kees mentioned earlier, a key advantage of our global manufacturing strategy is the natural hedge that it provides with our cost base increasingly denominated in USD and Great British pounds. We actively manage our FX risk, and we do maintain hedges to provide us some budget and forecasting certainty and also act as shock absorbers when FX rates fluctuate. Fully franked dividend of $0.02 per share has been declared and is payable in March 2025, equating to 49% payout ratio. As a reminder, this is consistent with our policy of between 40% to 60% of net NPAT. The group's well positioned from a balance sheet perspective, with increased debt facilities providing the group stronger liquidity and greater flexibility. Disciplined capital and cost management will remain a priority, alongside a strong commercial focus on generating returns from our investments. As we expand capabilities, we're already seeing early signs of the targeted growth opportunities being realized. Kees will now talk through the current trading and outlook.

Thanks, Sharyn. Let's talk about the update and the outlook now on Slide 16. This slide provides a high-level summary of our program pipeline across emerging tech grouped into Aerospace & Defense, and on the left, the OEM and Motorsports on the right. The detailed pipeline slides that you usually see are still in the appendix. For Aerospace & Defense, we refined our focus on the top 40 highest value opportunities, ensuring that resources are directed where we see the most potential. I want to focus on left hand side first. Aerospace & Defense, where we've seen just shown the top 40 programs with the most potential. The 3 things here are: our pipeline remains strong our secured programs have increased each year as we get more traction on this space. You can see that the secured programs have doubled compared to those in the half -- in the first half of '23. These A&D programs have longer lengths and are contracted based not ordered based like Motorsports. This gives us a better visibility of earnings as we lock in more secured programs. Turning to the right-hand side of the page and looking at Motorsports and OEM. Even though this had been more subdued last year for some teams holding off for the '26 regulation changes, we are still growing our key potential programs. There are some tailwinds coming for 2026 as the regulation changes and the 11th F1 team and some programs that we have been nominated supplier come into realization. For those that aren't close to Formula 1 regulation change, basically these increasing -- I think are increasing the electrical output of the battery systems from 120 kilowatt to 350 kilowatt. This increased power battery will generate more heat and require cooling solutions. That's where we think there is a great opportunity for PWR. Our cooling solutions and the new core technology well placed to play a role in these regulation changes with our partners in Motorsport. Going on to the next Slide 17. I just want to lastly cover the key things we're focused in the second half. Firstly, getting into the new factory is a big priority. It's going to give us many benefits, but it's a big job. The team are doing a great job on this, and it's all coming together. But just a reminder, we will have some disruption to production. We've got to decommission machines, move them, recalibrate them, and in a perfect world, they'll all go in the right order and have minimal downtime. But as we get closer and coordinate with people outside the PWR that we can't control. Some of those stars won't line up, unfortunately. So giving you a heads up that we'll have some disruption that will be in the short-term. The longer-term price is far outweighs our short-term challenges. This, of course, will also flow through to revenue, and we expect 25% revenue to be 5% to 10% below our '24 revenue. The factory is expected to be fully operational by November '25. The A&D platform is progressing well. We've achieved a lot already, and we want to nail The U.S. accreditation footprint and The UK accreditations and capability by 2027. Remember, we've all been investing over the years, and we've kicked A&D goals. This gives us confidence to keep investing. As you saw in the pipeline slide, it's getting more secure and continuing to grow. One of the things found is A&D pipelines time lines are longer and delivery of orders can be over a longer period. So we're confident in the growth. We're just remaining cautious on the timing of the delivery of revenues. We've already started the design work and regulations change for the regulation changes and continuing to increase market share in motorsports and bring new productions -- new products and productions to market. We'll be pragmatic in the OEM space, making sure that we're selective in the programs we take on to ensure the returns reflect the investments. In Aftermarket, we're pushing for market share growth in North America and Europe, while continuing to bring new products on the market. Finally, our global operating model is so important and is a huge advantage. The benefit is having flexibility to respond to evolving terms of trade risks, and the key benefit is the current environment. This expansion and investment is being done on a disciplined manner, and we have a conservative balance sheet and are keen to retain our approach for minimal leverage to grow. Our capital allocation decisions will continue to be pragmatic with a balance sheet between shareholders -- a balance between shareholder returns and investing in growth opportunities. So thank you very much for listening. We're open for questions. And hopefully, between Sharyn and myself, we'll be able to answer those questions. Thank you.

[Operator Instructions] Your first question comes from Alexander Lu from Morgans Financial.

Can I just start with the FY '25 guidance, please for revenue to be down 5% to 10%? Just wondering, can you just give us a bit of an indication on how that looks across the different segments? Obviously, the ones that are most reliant on Australia will be most affected. But yes, any color on that would be much appreciated.

It's probably -- Alex, it's probably a little bit across the board. And it's more about timing. This -- we put that out there because of timing really. We -- obviously, we're starting to move on the 1st of April machinery. And on the 1st of May, we'll be moving sections of the manufacturing plant in full earnest. So really, in an ideal world, as we've said, in an ideal world, all the stars will align. But we're cautious and maybe we're not -- none of us are operating in an ideal world today. So it's really timing on some of the programs and more specifically timing on our Aerospace & Defense. And when you look at that last order that came in for nearly $9 million, we'll certainly have the capability of getting the production done on time. But there's other things that -- there's other parts that go on to that part before it can be delivered to the supplier. So there is a third party thing there that we rely on, unfortunately. So that is going to skew our number a little bit. And the good thing about it is we're not losing the business, that the business will obviously flow into 2026. So we see that as a timing issue. We don't see it as losing. We have certainly great visibility of our pipeline and where we are today. It's just a matter of getting those products made and out the door before the 30th of June. So it's not -- we haven't lost the work. We won't be losing the work. It's more about timing. So I'm a great believer of being upfront. And as you know, we've done it for 10 years, just saying it as it is and being upfront. So it's more of that message.

And I guess more importantly and this flows into long-term as well, but do you think that will damage any of your relationships with your customers where they might have to wait a little bit longer for their products and things like that? So I guess, have you communicated this with your customers that there could be some potential delays and things like that? And they may not get it in June, they might get in July or August, et cetera?

Yes. No, we've definitely had very good communication with all our customers moving forward. And we -- they're 100% on board. And they've obviously built a little bit of a time line on their product that it's not going to kill them. So they're very 100% backing on our approach. It's not our intention to be late. But as we've said before, that there's things that are going to be outside our control. And we have mentioned in there that we'll be use some generator power for a period of time. That's not ideal. Certainly not ideal, but that's unfortunately one of those things that has happened in the program moving towards a particular date. So I don't see it as a major issue that we're going to lose any customers or any program. It's more of a timing thing. And also, on top of that, Alex, sorry, you -- I think everybody knows that we always under promise and over deliver. And we've done that for 10 years, and I can't see that changing.

Your next question comes from Elijah Mayr from Goldman Sachs.

Just a couple for me, maybe just following on there. With the revenue guidance and sort of noting you mentioned the dates around moving machinery manufacturing, is there sort of risk as well into the first half '26, noting that you're expected to be fully into the new facility in November this year?

No. There's certainly no risk for '26 at all. We're very well catered for '26. And we've got November in there as a long date, because there will be a couple of machines that will be moving in October and what have you -- which we can't move any other than that. So it'll be only a couple of machines out of about 45, 50 machines. So I don't see that as a big issue and a big problem to our '26 output.

So you guys are still sort of consistent in terms of a normalized run rate of production and manufacturing or at least business operations from that second half '26?

Absolutely.

And then maybe just quickly on sort of the FY '25 guidance and maybe specifically around, I guess, employee costs, just noting that there are some changes made there given the operating environment and the moves and the shifts. You had $32.7 million in the first half. Can you sort of give a sense what the second half is expected to be and sort of what the normalized run rate of those employee costs are?

It won't actually give forecast numbers for the cost, but just to give you the guardrails that might help. So the head count that was taken out in November, we didn't really see the benefit of that in the first half. It was mainly the 6 weeks benefit. So you would need to flow that through for the full second half of this year. So if you just worked on average salary rate by those number of heads, it's probably a good way to get there. The other thing is, in terms of additional labor, we would have gotten in to manage peaks of revenue, et cetera. We'd be mindful about the timing of bringing those on.

Your next question comes from Sarah Mann from Moelis Australia.

First question for me is just on Motorsports. So clearly, I know you said that it's already an impacted period, but just curious around what you're thinking for the timing of the potential uplift in spend from the Formula 1 teams with the new car, potentially with the new team joining as well. Like, is that kind of something that we could see in this current half? Or is it going to be more the back end of this calendar year?

Yes. Well, I think we'll see it more so in the first half of '26, for sure. As you've said, there's another team, which is automatically sort of in a nice way 10% more revenue because there's 11% instead of 10%. And also, the new rigs on top of that, particularly the, as I called out earlier, the battery component. On the electrical side, the cooling of that is massive. And we're very fortunate enough that we're dealing directly with the engine manufacturers because that comes into the engine module for the '26 program. So, yes, we're very heavily involved in R&D and preproduction items right now as we speak. But we -- there'll be a little bit of an inflow for that for this half of '25, but the main inflow for that would be at the start of '26.

About the head count, thanks, Sharyn, for the context that you've given. Just trying to understand as well, though, I guess, the rate shift in terms of the mix of the types of headcounts. Obviously, you're investing in higher skilled, more expensive A&D specialist staff. So should we be assuming that even though you've got the benefit of kind of the lower head count, it doesn't all just drop through because you're substituting them with more expensive staff?

In terms of the mix over time, you're right, it would tweak it up a bit. But those -- the head count did come out across all locations. They could have been, as you say, some of the head count that might not have been at the top end of [ town ]. But I don't think they're material movers in your assumptions. So yes, I think you could still take a pragmatic approach to getting to where you want to get to on head count assumptions.

That's really helpful. And then just a broader question just about the U.S. defense environment. So clearly, there's some talk and who knows what eventually happens, but the department -- government efficiency potentially going after cost out in defense. Like are you seeing any of this impact, I guess, how the defense primes are making contracting decisions? Or what's the talk amongst some of your customers around this, if at all?

There's a little bit of chat. There's obviously, I think, the whole world is chatting. But there's certainly a fair bit of correspondence happening down the pipeline. And as it's coming -- certainly coming our way, the -- a lot of phone calls and a lot of opportunities. Certainly, a lot of further opportunities have sort of come about the last few weeks for sure. But they're long-term, it's a bit of a long road for some of those -- for it comes to opportunity to actually winning the deal and then producing or what have you. So that's probably 12 or 18 month program. But there's certainly some uptick in inquiry, as you would expect, which is helpful. And I guess the whole world is waiting to see what's really going to happen. But there's a lot of push. I've seen a lot of push for a lot of countries for looking after their borders, et cetera, et cetera. So we can only see an uptick in Aerospace & Defense spending globally.

Your next question comes from Angus Hewitt from Morningstar.

I think most of my questions have been answered, but I've got a -- I guess just a follow-up on that head count line of questioning. The increase was previously flagged as ahead of the curve supporting growth. And from memory, more increases were planned for 2025. So that reduction in head count was a little surprising. What's changed?

Well, a lot of things have changed. It's -- when you look at our big picture, some of the head count, as you know, people you put on probably don't perform as well as you like. And when the bar gets a bit higher, sometimes you have to have a, I might say, clean out, but you've got to certainly make sure that the people you are employing are on point. And so as we've done for a long time, we haven't really had the opportunity or necessity to really have a close look at what we're doing. But as I said, as the bar changes a bit and gets higher, you have to have great people doing great things. So some of the people that we did unfortunately go probably weren't up to standard. And it's -- there's no free rides, right? At our place, there's absolutely no free rides. So we're just setting the tone of where we're going and efficiency and what have you in the new factory, we just can't carry people. So it's more along those lines.

And those roles, they were mostly just across the board. Is that what you were saying, Sharyn?

Yes. In terms of if you look at the practicalities of even the growing revenues over the period, there is an element of putting head count into certain areas of, say, production. As the revenue shifts across those as well, you will have head count attrition from that. Whether you choose to replace them when you're looking at the revenue you're looking at in the near-term, that's where you do get some evolving head count whereby attrition it comes out. So whilst the head count put in has been largely A&D focused, when the team had a look at the time around where they needed the head count, there were some that come out of production labor as well. And just part of the natural looking at where you need resources. So it wasn't a category by category. It was certainly considered trimming across the board.

And with the new factory and the pipeline that we've got going forward, we could see a step up again from 2026. Is that reasonable?

Specifically in head count?

In head count, yes, specifically in head count.

Yes. I was going to say we have outlined the other OpEx costs on that slide. In head count, it will really be about what we need for the revenue and work we've got in front of us. There won't be people underutilized there standing around just because we've got equipment there where we've invested more. It will be more of a what do we need to get the work out the door. I don't know, Kees, if there's anything to add on that.

Yes. It's -- well, we -- by moving to this new factory, we are obviously pushing for efficiencies and what have you. And I think the space and the way the factory is laid out that our in-house efficiency number is achievable. And we certainly like to be doing a lot more work with the same amount of people.

Your next question comes from Tim Piper from UBS.

Just one on the Aerospace & Defense outlook. Just on the EVTOL side of things, you sort of noted the composition of the near-term relatively small $1.5 million. Is that sort of an annualized revenue number that you're thinking about EVTOL in the short-term?

That number was just in terms of our pipeline, what kind of programs we've got in there in terms of size. So it wasn't meant to be indicative of run rate or anything, Tim. It was just to give a materiality. But at the moment, it's not a big portion of our pipeline itself.

But that is yet to sort of go into more commercial production, at the $1.5 million that's just dependent on timing of ramp up?

Yes, it was very much around pipeline and what's in that pipeline summary in terms of programs to work, et cetera.

And just in that pipeline slide in FY '25 where you've got 30 Secured programs, what's the rough breakdown before between what's already in production and what's for future production in that 30?

You're talking about the OEM Motorsports 30 on the far right?

No, the [indiscernible] top 40...

Sorry, [indiscernible].

Yes, Aerospace.

We haven't got that in front of us, sorry Tim.

We haven't got that in front of us, Tim, but I'm sure we can dig that out for you.

In the appendix.

Just thinking about the second half, you're kind of calling out that sort of a bunch of this work is being deferred from sort of second half of '25 into '26 for Aerospace & Defense sector in particular. Has the second half outlook changed in terms of the quantum of dollar contracts that are sort of there in terms of landing in the second half? Or there has been some that have kind of dropped out of the pipeline that you'd expected to be there in the second half as well that's contributing to the guidance for '25?

Nothing has dropped out. Nothing has dropped out, maybe just moved a little bit. And I think we're always going to get that with Aerospace & Defense that they'll move out a little bit because of timing, not only for us, not particularly for us, but for the other parts of their equipment build. We have really no problem. And then they'll push it out because they haven't got other producers of the equipment that are on time. So it's likely that some of those things will be pushed out, but the job hasn't fallen away, it will be just pushed out into the first half of '26.

[Operator Instructions] Your next question comes from Luke Durbin from Oracle Investment Management.

Just a 2 part question for me, just on the balance sheet. I understand the $30 million debt facility is largely to assist with the Stapylton transition. Is that correct? And then further on the...

Yes.

Okay, good. And then the fact that you are taking on a little bit of debt for this, is this a reflection that the business is maturing a bit and likely to be a longer-term shift in the capital structure? Or would you more anticipate the debt being paid down from cash flow in the shorter to medium-term?

I think only after being here for a month, I wouldn't want to talk on behalf of Kees and the team, but there is appetite to take on some debt for certain strategic projects. But in terms of it being a step up in leverage moving forward, that's something, I guess, as a team would look at the risk profile of each thing. If you look historically, the business has churned out quite a bit of cash. So being very mindful about funding growth from that and making capital allocation decisions, we give that cash back to shareholders, do we look at reinvesting it in growth. There's certainly, a lower risk appetite. I don't if you want to make comments, Kees, but this is my initial views.

Yes, that's correct. But also, our initial debt for the building now, we're going to have a -- we anticipate paying that off fairly quickly through cash income over the next 2 years. So we haven't got an exact date on that, but I think we'll probably have that paid off by the end of '27, where we are -- and then other things, it's just great having that opportunity, I guess, if we do want to have some debt and what have you, I think it's -- we have a very, very good association with our bankers and what have you, and they look at it very positively. So they don't get too much out of us anyway because we haven't got any debt with them.

Poor Phil, he's probably on the call, Phil.

Yes. Good on you, Phil. Thank you. But no, they're very quick and very upbeat when we asked for a little bit of a hand just to do this new building and what have you. But I do certainly want to make it very, very clear, we're not going to borrow money to pay dividends, that's for sure. So rest assured anything that we borrow will be put into good play and excess cash or operating cash will be paid out in dividends. So shareholders have a right to get that. And I think we've done very well in the past 10 years, and we'll continue to do so.

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

Okay. Thank you. Thanks, everyone, for dialing in today. And thanks, Sharyn. I know it's your first line of duty today. You've only been here for 3 or 4 weeks and taking over the rein from Martin. And I know Martin is definitely in very good state. But thank you for your input so far. And we look forward to seeing everyone and talking to everybody in the road show in the next few days. So thank you very much.

Thanks, everyone.

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