Synertec Corporation Limited (SOP) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for your time and your interest in Synertec. Today, we're presenting the financial results and key achievements following on from the release of our annual report. So today, joining me, I've got Yash Gala, CFO; Jason Denholm, General Manager of Technology; and Andrew Lawrie, General Manager of Engineering. The way we'll go through it today is we'll just quickly flip through the slides, hopefully, generating a lot of questions. We've penciled in 30 minutes, but we'll take as long as it takes to answer the questions that come through. So we really encourage you to ask the questions. We like these opportunities to explain what we're doing within our business. So I think we'll just -- and I'm Michael Carroll, so I probably should introduce myself. I'm Michael Carroll, I'm the CEO of the business. So Yash is our master of ceremonies and he'll be clicking through the slides as we progress. So the various managers of those particular areas as we come to them will talk to their respective slides. And then we'll be taking questions via the app, if you like. And yes, we look forward to getting those questions, as I said. So kicking off on the first slide. We always include this slide. It's been a staple in various forms right from the start. We think it's important because we do have new investors all the time, and we're a little bit unique in that we have a technology division, which is borne out of the engineering division. And between the 2, we believe that it's a very powerful story, and we can take the learnings from dealing with the largest multinationals in Australia, their key problems, the things that keep them awake at night. We get to work on those problems, solve those problems for those clients and potentially come up with an opportunity which we can take to some sort of commercialization or at the very least, the competitive advantage solving the common problems of business. So that's the rationale behind the structure of Synertec, and it served us well thus far. So I think I'm going to hand over to Yash to talk about the FY '25 highlights in the first instance. So Yash, do you want to take over?

Yes. Good morning, everyone. Just wanted to talk about the highlights of the business for FY '25. The revenue number, $18.2 million is a reduction on last year by about 8%, mainly driven from the engineering business unit. Technology revenue has gone up 90% year-on-year. There were some headwinds in the engineering business for the first half, which we'll cover a bit later on. Our normalized segment EBITDA, on the other hand, for the engineering business at $2.2 million is the highest that we've ever had. That it's a classic tale of 2 halves, first half at $400,000 and the second half at $1.8 million normalized EBITDA. The engineering business is sort of looking solid at the moment with $72 million of live opportunities that we've bid for or tendered for and with $19 million of facility, we are sort of at a position where we are ready to grow it. In terms of the panels that we've won over the last 12 months with Sydney Water, Water Corp and the existing panel at Melbourne Water. We've got about $300 million of total panel work over the next 5 years shared across the different panel members. With 100 engineering resources and with no injuries, I mean, the track record there has been fantastic over the last 5 years. I'll hand over to Andrew to discuss a bit more further on the engineering business.

Thanks, Yash. Yes. So look, I guess the headline there, obviously, is our highest ever normalized EBITDA for the engineering business. As Yash said, it really was on the back of a strong second half. The first half of the year, I guess, we saw consistent slowdown in both, I guess, the rate of release of projects by clients, but also the amount of time it took them to make decisions on awarding tenders. And so that really I guess, impacted our revenue and the work that was coming in and resulted in us having to take some tough decisions towards the second half. We've got some really good data on our pipeline, and I guess we could kind of see and react accordingly, the trends that were coming through, but we saw a substantial increase in the time clients were taking from release of tender to award of tender. It was consistently pushing out significantly, which is what changed that metric for us and meant that we were -- our pipeline wasn't as healthy as we thought it was. So in the second half of the year, there's a real focus on pipeline, on growing that pipeline and making sure that we had a robust pipeline for sustainable growth going forward. The decisions that we took towards the end of the second half meant that we really had the right size and the right resources to be able to deliver the work in the second half, and that resulted in that really strong EBITDA performance over the second 6 months. As Yash mentioned, some of the key highlights and what will really set us up for growth going forward is the panel appointments that we've had, particularly interstate. So the Water Corporation and WA and the Sydney Water Panel are really -- they're going to be long-term drivers of growth for us. They really give us a foothold in those states and consistent baseline work to grow the business around. And then when you add in other panels like the ANSTO and APA panel we've also been on, we've got a really solid platform there. The 90% revenue from repeat customers, it's -- this is a number that we're really proud of. And I guess we talk about this quite a lot. It really goes to the quality of the work that we do and how much our clients appreciate the value that we add to them. But we actually see that probably decreasing over the next couple of years as these new customers come on and we grow them. There'll be a little downward trend in that, I think, in the next 12 months. And then obviously, as they become repeat customers again, that will grow back above the 90%. Last point is just we still continue to deliver for our existing customer base across Australia. Okay. So just going a little bit deeper into some of the opportunities for growth, we've got geographically. So the solid base we have in Victoria, with our long-held clients here, and we particularly call out Melbourne Water there because of the panel work we've got and the baseload that gives us. We're now able to replicate those in both Western Australia and New South Wales with Water Corp and Sydney Water. Nationally, the APA panel that we got on last year is also a strong driver of growth. So we're able to support them across all the states. We also have engineers at the moment working in the water space up in Queensland. So we're getting a bit of a foothold up there in Queensland as well to start delivering our core services. The value of panels is, I guess, that it gives us exclusive access to a pipeline of work, and it provides a barrier of entry to all the rest of the competitors that are on that panel for usually a significant period of time, 3, 5, up to 8, 10 years, sometimes on panels. It also gives us really good visibility about the upcoming workloads that we can do the resource planning around that. So we can get quite good at working out what skill sets we need, where and when, and bringing them on board or moving them around as we need to. And I think just, again, on the strategic impact of those, that baseload work and consistency and visibility of pipeline enables us then to grow our other industry sectors in those geographies. So we've got a core team. We've basically got the overhead infrastructure covered, and then we're able to leverage that into the other industries that we're really strong in Victoria. We can bring them into the other states where we've got that baseload work. We thought it would be worth just drilling down into what a typical engineering project, I guess, for this audience, just to understand some of the work that we do and the types of projects that we get involved in. So I guess this is one that's -- it's in the press at the moment and has been on and off over the last few years. But the Melbourne Metro project, we've been embedded in that team for the last 5 years. So the Synertec team has been in there building and going live with the control monitoring system. So integrating all of the new stations, the building management systems, the tunnel ventilation systems, the fire detection systems, train control systems and other enterprise systems. We've been integrating that into an overall control system for the Metro tunnel project. So our engineers are still in there. We've just been engaged to support the go-live going forward of those systems. So we'll be in there for some time into the future as well, supporting that project as it goes into operation.

We'll go to Jason for the technology update.

Okay. So just to talk about technology and powerhouse. So yes, the recent award of another powerhouse unit to Santos GLNG, which we announced earlier this week, which is exciting news. So that's our fourth unit at Santos in the Surat Basin. And yes, we see there's a real positive step as we're becoming more of a standardized solution to Santos now. We delivered $2 million in revenue, so up 90% year-on-year. 90% EBITDA on the 4 contracted units. So that's really high margin, thanks to the low OpEx cost of the systems. This year, in June, we celebrated 5 years of continuous 99.9% fossil fuel-free power for Santos. So this is a key milestone for us because it shows it proves the -- it improves the performance of the system and shows our track record. And the system was proven during some bad weather events as well. We had Cyclone Alfred go through, and the system performed very well, and we required very low maintenance over this 5 years cumulative operating time. We've spent a lot of time on the supply chain capability. We've got strategic partnerships with Chinese technology suppliers now, and that allows us to get better technology at lower cost and also allows us to scale up the operation significantly. We've been accredited for site installations on Santos sites. So that is our safety accreditation, which allows us to deliver end-to-end systems with Santos, and that's a real barrier to entry for other players. It requires a good track record in engineering and industrial experience. And so this will help us roll out more powerhouse systems for Santos. And another milestone is we're now reducing 2.4 kilotons of CO2 per year for Santos with the 3 units currently deployed. So that will only increase once we put the fourth unit in towards the start of next year. So this slide really -- just wanted to illustrate the opportunity in the CSG well space. So Queensland has about 12,000 CSG wells with plans for thousands more to be drilled over the next 5 to 10 years. So zooming in on the Surat Basin there, we see the little dots there are all the CSG wells that are currently active at the moment. And the green pins are the locations of our powerhouse contracted units. And the orange pin is the previous location of one of our systems, just demonstrating that System 1 has been relocated earlier this year. So this demonstrates the opportunity in this space with thousands of wells that require higher reliability power. There's aging power systems assets that need to be replaced and also the opportunity with the new wells being drilled that require remote power systems. And on the pipeline, just to give some information on our pipeline, we've divided into 2 categories. So stand-alone power, which is our 100% renewable microgrid. And then the powerhouse grid support opportunity -- well, grid support product, which is around supporting existing grids. So in the short term, proposals nearing FID, we've got about 10 units that are very close to being approved in the oil and gas sector, and they're primarily the BOOM or rental model units. And in the grid support, we've got about 9 units across different customers and opportunities in the DNSPs, utilities and oil and gas sector. And then longer term, we're in conversations sort of over the next 5-year term, looking at 500 to 1,500 units, primarily in the oil and gas sector and then 100 to 300 units in the DNSPs utilities and oil and gas sector for the grid support model. So we're starting to -- with that proven track record that we've got, we are seeing a lot more inquiries now because that's really important for our customers is having that proven track record and a safe pair of hands.

And I think we've had someone text me saying that the -- just how do they ask questions? So Yash, do you want to explain?

Yes. There should be a Q&A box on your screen under which you can type the question. The questions will directly come to me and then I'll be able to read it out and ask to the panel members here.

Okay. So I think probably just going back to you, I might just ask a few questions to get a bit more conversation going. Jason or you, if you -- can you just reverse up on that slide there for me? Thanks. So what's the relationship between the 2 lines going across here, Jason, in terms of our customers?

Yes. So the proposals nearing FID are the immediate opportunities we have. The next line is really some of the -- a lot of them are big customers. So what we have is them interested in a small amount of orders in the short term that could -- that opens up a bigger opportunity once those first few systems are proven in their operating environment. I think all customers are very conservative with trialing new technology initially. But we believe once that's demonstrated, yes, we've got a very strong business case and economics and technology solution that allows them to scale up and deploy a lot of our systems.

Okay. So we have got a question here from one of our attendees. So the first question we have is, what is the barrier for people to buy powerhouse?

I suppose I'll kick us off because I've been doing this the longest, I suppose. So I think when we first started this, it was 4.5 years ago when we first conceived of this idea. And it took a long time to first sort of convinced that the technology was appropriate. So I think we're still in a bit of a phase where we've got a new approach, which is what we're offering against the traditional approach, which they've done for decades and decades. And so it's worked, right? They've made a huge amount of money with the traditional method. So the environment is changing. The focus on carbon emission is coming into it. And so we've got to convince a very conservative, successful group of people that what they're doing is not the way to do things in the future. And so we did our first trial that came online in the second half of FY '23. So it's less than 3 years. And here we are with 4 units with a major energy company in Australia. So that's -- while it's frustrating -- very frustrating for us and for our original shareholders, we can see that it should be faster. But actually, it's probably well ahead of schedule anyway and so of a typical new technology. So I think what people want to see from now is, yes, okay, you've got -- you've got 3 in the unit in the field, you got 3 units in the field. You've got multiple repeat purchase orders from Santos. But one of the real things that people are looking for is the advocacy. So Santos is obviously a really good advocate for us, and they're putting their money where their mouth is. Now the industry is saying, and they're looking over the fence and they do share experiences, the operators in the coal seam gas field. And they are saying, well, who's up next? The next purchase order is going to be a bit of a watershed moment for us. A third unit, a third client will absolutely square away any doubts around the technology, the performance, the actual technology in the box and how it can deliver. The conversations that we've been having recently have been around, okay, we think the technology is really good. We understand the commercials. They're really good. But the commercials, we'd like them to be a bit better, and we go, okay, that's -- we understand that. And so the team has been focusing on China and getting cost out, so we maintain our position at the front of the pack of any emerging technologies, which there aren't really any that are knocking on the door at the moment, but they will come. And so we now can go to the clients and say, well, we've got the technology squared away. We've got the multiple order from Santos. We've got the supply chain that can deliver at the scale that's required, which is hundreds per year, and we can demonstrate that. So still, there is a little bit of a story to go around being able to deliver hundreds per year. And of course, we can't make that up. It's as clear as anything that that's got to be a process of evolution and learning and bringing in partnerships, which we're doing. And I think we're right at the cusp now because you saw that -- this slide here that might be still on the screen. Is it?

Yes.

Yes. That slide there, which is on the screen is, we bag some of those ones in the proposals nearing FID and the advocacy is squared away. So we think then that the people that we're talking to at that top line there, they're the same people that are contributing to the numbers in that bottom line. They're not unknown to us. This is -- the top line is going to feed the bottom line. And so from our point of view, it's a very exciting time for us. It's been a very -- an up and down road. And another question that we get from people is, why couldn't this happen, say, in FY '25? Well, FY '25 had quite a few headwinds. I think probably the one from our point of view, which really knocked some opportunity out of us was Cyclone Alfred. That did a huge amount of damage. Our systems performed well, but infrastructure, which powerhouse was earmarked to go into, got severely damaged. And those assets are still not operational. We had -- we thought we were going to have a breakthrough, and Alfred came through and knocked us off our feet. So we've had some good luck along the way, and I think we've had some bad luck along the way. But none of the -- nobody has said to us, go away, don't talk to us, we don't believe in the technology. Everybody is keenly interested in our next step. This is from potential clients point of view. Everyone is very keen on the next step, the next purchase order. And we keep talking, and we've got a lot of inbound inquiry. Because of that 5 years of continuous fossil-free 99.9% delivery of electrical power in the most remote areas in Australia, people are really starting to stand up. So we're pretty excited at the moment, I can tell you that.

Another question has come in. And I think this is probably for you, Andrew. I can chip in, if you like. But there has been a great turnaround of the Engineering business from first half to second half. From the numbers quoted before, it was $400,000 to $1.8 million in the normalized EBITDA for Engineering. How did you achieve that? And why was there a big shift?

Yes. Look, I think I sort of touched on it before, but it was -- I guess, it was about making the -- looking at the data, seeing what was happening in the market, see what was happening with our clients and then making the tough decisions at the right time, which is what we did in the first half. And then that really set us up for the performance in the second half. So we had the right resources, we had the right number of resources. We were able to deploy them efficiently on the work that we had, and we were able to maintain really high margins on the work that we were doing through the second half of the year. So yes, look, that's really what it was about. I guess, our total head count has reduced, which means our revenue earning capacity has reduced a bit, but the profitability fundamentals are really strong, and that shows in the second half results.

Yes. And all the -- just to add to that, all the projects and everything that we've won in the second half as well or that what we are bidding for at strong -- similar margins or even stronger margins than what we've had in the past.

Correct. Correct.

Okay. Next one, okay. Well, it's a bit of a broad question. What are the growth prospects or drivers for the business?

I suppose we'll break it into 2. Maybe do you want to kick off on that from your point of view, Jason?

So growth drivers, yes, there's the market pressures of customers needing to sort of reduce their emissions. But more importantly, it's continued to reduce the operating costs and improve performance. So we believe, yes, our products, powerhouse addresses that very well. And with that proven track record that we're sort of compounding now over time with adding more units we see more growth opportunities because our customers often requires that track record or that proof to be had, they're very conservative, like Michael said before. So if they've seen something operating well, they will look at that solution, and they'll give it a go. So yes, we're really excited about how the system has performed and the growth opportunities that it opens up.

And also, one of the challenges in the pitch that we put to people is that you can compare just the fuel costs or the rental costs that we eliminate. But that's the -- it's not the full picture because you're in remote areas, you usually got multiple generators who've got the unreliability. These generators, what are the latest numbers, about 80% reliability. So if you're totally powered by a generator, 20% of your field is not operating. And so it is actually quite a sophisticated conversation that we have to have. And I think traditionally, because the majors and the operators have got other very large cost centers. They haven't got the granularity around what the -- at the field, at the site costs are. And when we start talking to them, they go, well, that all sounds reasonable, but we're going to have to go off and validate your numbers. We can basically -- after doing it for so long, we can basically tell them their business model, and we compare it against our total life cycle cost of model. And the numbers are so powerful. They sort of say, well, that's very compelling, but we just need to validate that ourselves. So it's not just a widget that we're selling. We're selling a life cycle cost reduction, which adds in some cases, to the -- when it's at scale, when we extrapolate it across their whole operations, it is hundreds of millions of dollars a year for every year going forward. So that captures the attention of executives. But again, they need a lot of convincing that the numbers are right. And I think Dave Harris, who is on leave at the moment, his role as CFO, as a CFO of listed companies prior has been invaluable in understanding how the executives think and pitching our value proposition to them. So that's sort of where we're at, and that's the stories that we're telling the operators, and we're starting to get traction because one of the big things that's out of their mind of concern is performance and technology. That's locked away now. Now we've got supply chain that we're dealing with. And 5 years without a breakdown is very compelling.

Growth prospects on engineering?

Yes. Yes. So look, I guess the growth prospects for engineering are really a summary of what I discussed before. So I guess we're confident that we've got the profitability foundation set from the second half of this -- of last financial year. Over that last 6 months, we really put a strong priority on growing the pipeline, both in terms of the total value of the pipeline but also in terms of the robustness of the information that we've got in there so that we can have some real confidence in the volume of work that's coming and the resourcing decisions that flow from that. And then I guess the third key driver is really about the panels that we were on and that opportunity to grow geographically with the baseload of work secured, in particular, with Sydney Water and Water Corp in Perth.

Okay. The next question, yes, that's for me. Can you comment on how the funding for the growth will be possible? So just to give an understanding of the funding situation at the moment, we finished the year with $3.7 million in the bank. Our financial state that the net operating cash outflow for the year was $4.1 million. That's a deficit on the cash balance that we have. So what we've done is we've put in an extension on the facility that we had with Altor Capital, a $4 million funding facility towards drawing down for working capital requirements. So that's for funding working capital. And in terms of powerhouse expansion, we'll be intending to draw down on Tranche 1 and 2 of the facility that we already have in place. So there's sort of like 2 types of funding, one towards powerhouse and the other one mainly towards the working capital situation. The next question we have. This is more for powerhouse. Is powerhouse still a novel product? Or is there a competition out in the market?

Yes. I believe it's novel. We have different competitors in different markets. Our key focus market is the oil and gas sector. And in that space, we don't see anyone doing anything similar. So 100% renewable power, doing a BOOM model, having that full end-to-end solution, which I think is a real benefit to customers. Customers want a solution, not just components. So we can provide that full end-to-end solution and guarantee the availability of supply and do a full turnkey system. So when we look at it that way, I don't see any -- there's no competitors in that space that are doing all those things that we are doing. Yes. I think they're probably the main points. So yes, I think there's a lot of opportunity in that oil and gas space alone. And so to have that niche product in that area is...

I think this one's for powerhouse as well. Do you see clients open to co-investment or new partnership models to make large-scale powerhouse projects more feasible, given it requires a lot of investment, if we have to deliver 100-plus units to Santos, for example?

I'll take that. We did -- we have considered this. And in the early days, there was the opportunity for co-investment, but it was going to be difficult, and it was going to delay the delivery of the technology. So we just actively decided to go it alone because when we were going -- with the opportunity to co-invest by a large energy company, their internal processes would have stifled our innovation and our speed to market. We saw speed to market as being absolutely vital. And so we approach the investor community, they supported us. And so we've had those conversations. And we're not saying that we wouldn't. We would very much welcome a co-investment but there is the time for it. And probably, it's provided -- the risks are that if, say, super major A took a position in our company, then all the other operators may say, well, we don't want to open up the ins and outs of our operations in order to decide whether the powerhouse is right. So we thought that the risk at that stage was too high that we would have been penciled as a single source supplier, if you like, to one of the supers. And so yes, we've actively considered that. We think we still -- we still talk to the investment community. There is support there that when we get a large number of orders, we become a very bankable proposition, and we would get a lot of support and a lot of competition. So the rates that we would be able to get capital at would be very competitive given that the asset life is 15 years better, et cetera, et cetera. So it's an infrastructure play. So at this stage, yes, thanks for your question. But right now, we're sort of still playing out our first capital strategy, if you like.

Another question for engineering actually. Great to see the significant result in second half of FY '25 for the engineering business. Should we expect the second half run rate to continue into FY '26?

Yes. Look, I think there's no reason why it shouldn't continue. So as I said, the profit fundamentals are there, and we've got a robust pipeline and the opportunity to grow geographically. So yes, I think they absolutely should continue into this financial year.

There's a lot of questions, and we've answered some of them. So I'll just go through to pick the ones that are -- okay.

Yes. So another question, yes. So we've got -- can you touch base on any supply chain vulnerabilities and mitigation strategies you have in place?

Yes. So firstly, we spent a lot of time in China over the past year, meeting with different suppliers of battery technology and inverter systems. So we have identified multiple products that can be used as alternatives. We do have a kind of a leading product that we target on using. But if that -- if there's a supply chain restriction there, we have different options. We also have identified an option in the U.S.A. as well. So we're not solely dependent on China. So the system is designed to have an open architecture. And what that means is that we're not reliant on a single specialized component. We can -- for the power system and battery, we can get the powerhouse working with other components as well. So that gives us a lot of resilience in the supply chain.

I think -- and also just to add a couple of points to that is that the -- our IP, if you like, is largely in the software. There's tens of thousands of hours have gone into developing the software. That software -- that's the open architecture discussion that Jason has just brought up. So currently, we use Siemens PLCs, mainly because they've supported us in our vision early in the days, and they helped us develop our ideas and our IP. So that's how the Siemens relationship in this case came about. But that software can actually be applied to any of the other major brands of PLC, for instance. So I've been very -- right from the start, we've been very conscious that we can't be tied to any one mast. And so even with our preferred battery provider. They've got manufacturing facilities in China and in Vietnam. So -- and then when the Trump administration came in, of course, there was a lot of uncertainty to say the least around all of that. So we then started looking into the U.S. market and seeing if worse came to worse, and we had to choose, have forbid, we could still provide to Australia from either market, whichever side, I'm not saying which side, we would choose, but we have spent a lot of time on the supply chain. In terms of the design of the system, our documentation in earlier presentations, we actually showed the philosophy around creating modules of deliverables. So we could take those -- that package of documentation to any fabricator in Australia or overseas and just say, just build that. Don't think just build because it's specified down to the bolt, to the nut, to the washer with specifications, all of that painting quality, da-da-da. It's all specified. So we can take that package, a documentation package provide it to a competent fabricator and they would be able to deliver exactly what fabricator B was going to deliver. So yes, it is modularized, if you like. So we've spent a lot of time on that.

I think that is -- that's it. We don't have any more questions from our listeners here.

So on that basis, I think no final comments from anybody? I think well, we've -- yes. Well, thank you very much for your interest. And I think Yash and my mobile phone is on the back of the various presentations over the recent time. So please, if you have any further questions, reach out, and we'll do our best to answer them. So thanks very much for your time.

Thanks, all.