VEEM Ltd (VEE) Earnings Call Transcript & Summary

Good morning, and welcome to VEEM's investor webinar to discuss this morning's trading update. On today's webinar, we have Managing Director, Mark Miocevich; and Head of Corporate Development, Dave Rich. [Operator Instructions] I'll now hand it over to Mark.

Good morning, everybody. Sorry to bother you just before Christmas when everyone is so busy and winding down, but we had a Board meeting on Tuesday, and there's a change for trading that we need to inform the market about and to give also some further color to those comments, so you are as well informed as possible. We've got revenue for the second half of this year in the range of $30 million to $35 million and EBITDA, 3 to 4, and net PAT in the range of $0.4 million to $1.2 million NPAT and this the first half of the '24-'25 year. So this 6-month period. And the second half is expected to remain unchanged from our AGM update. So in short, we've gone into a pocket of someone called it an air bubble, but it's a pocket in the second quarter for a number of reasons and I'll detail. So we put some cost reductions in place at around $80,000 per annum by some overhead reduction costs as one of the steps just to mitigate our position. And we've extended our bank loan out for a couple of years. We expect our cash flows to be adequate to fund all our requirements. There's no issue there. And having received that government grant recently, the $1 million grant we've ordered a new big machine for propulsion manufacturing -- propeller manufacturing, which will give us further capacity about this time next year. So as you know, we've been in between ASC contract -- this refit contract. So we wanted to make sure we had those order books full and we're working hard to do that, and we did allude to in the AGM that we had some issues with the GP levels on a couple of these industrial jobs, which were of a concern to us. So we're working very hard to try and update that. But in particular, they have slowed us down a little, but they're being concluded during November and December. And we consider those jobs to be perhaps not ideally manufactured in the foundry process. And we've -- all the quality system was followed, but we're having some extra strength of that review process going forward. And I think we have like a review committee on complex and large castings and we've actually incorporated now a higher level of approval. So either the CEO or myself that will be attending those meetings really to manage that process through. And I think there's -- we put this review committee in place. I think we had an issue about 3 years ago. And we've been pretty good running from that time. We've had very little problem. But I think that this is exposed to perhaps it just needs some higher level of attention to, I think, perhaps to deal with some of the strong personalities that can come through. So that's something we consider to be. We have a remedial action there. We can put in place a corrective action, which should improve that significantly. So there was a second isolated incident regarding manufacturing of Gyro shell, and it's a very broad explanation that was in here. But specifically, the manufacturing of Gyro shells that during the manufacturing process going back a month or 2, we identified a small machining problem, and went through a review process for a quality system. There's a material review board who are made up of senior technical people in that area, and they elected to change the process we manufactured the shell. So it was all duly authorized. But unfortunately, they missed an important factor. And when we assembled our Gyros about 6 weeks later, [indiscernible] to go through the manufacturing and supply process to the main assembly hall. It was found that overlook something, and we ended up with 3 Gyros with high vibration and power, which we couldn't possibly send. So we had to disassemble those Gyros and carry a remedial action on the shells to be able to complete those Gyros, which can be completed in December. We lost most of November's production on those big Gyros. So very disappointing, but I guess from my perspective, there is a cold comfort in that the quality process was followed, the senior dispositions in that process. They made a judgment call and what they needed to do, and unfortunately, got called it wrong. And we wear the consequences of that. But the quality system is important that it is followed, that it was important for us to establish. In fact, the great processes have been followed. So that was a quite damaging to November. So as Dave explained point 3. On point 4, this is really unusual. We work really hard when there's any sort of drop in the defense area, which is natural because of the refit program. We worked really hard at other contracts coming through, and we thought we had this very well covered. And in October at the AGM, we talked about, in particular, Volvo, who we have been talking to about increasing the scope of what we manufactured for them into different size pod drives. And we were really confident about that because we've been talking in October, but it's taken until now to get the final verbal go ahead and they're desperate for a large number of these before March. So we're now -- we're masoning madly getting ready for casting, producing our preproduction prototypes, and we'll be in full swing early in January, and we have to produce around $400,000 of these Volvo propellers a month. So what that means is January, February, March are very, very busy for us in propellers where normally it's a quiet period of the year in propellers. So that means we're flat out. The -- also occurred back in September when I was at the superyacht shows I had a verbal agreement from our agent that 3 of the large 10 superyacht manufacturers we've been working with had verbally agreed to a new contract or supply with us to capitalize on low shipping costs rather than air freighting costs. And it was in the bag, it was tying up the loose ends. But unfortunately, and I won't say it's because it's an Italian thing, but these are big companies. Every time we went to sign them, there was a new little stumbling block we had to overcome, and it just went on and on and on. And in the meanwhile, what they were was holding back some of their orders. So we 2 weeks ago, and we've got the last 1 signed, it's all go, and we've got a large intake of orders. This new contract is actually to lower their cost and in return, they give us larger look ahead, so orders 6 months in advance and they've given us additional lines of their production. So they're giving us more production lines in each of these companies, so more propellers per year. So it's a great contract to have. But despite our very best efforts, we just could not get them over the line until December, even though I had the verbals back in September. So that's really hurt our output that we were hoping to have during the second quarter. And also, we quoted a bunch of [indiscernible] work a few months ago. And normally, we get -- we got ahead pretty quick, and we can just commence production while we're looking at the final terms and the final contract arrangements. This is why we've done this for 30 years. So we can use their work to best suit their production requirements, because they normally want them quite quickly. So there's 3 big things which were designed to give us the volumes and turnover in the second quarter were all delayed simultaneously. But we really didn't have any understanding that was going to occur when we had our AGM, we thought we had it all as in the bag as of November and December would be very busy. So what we've done is, on top of that, we've reduced some of our production costs -- and we've looked at -- we had a trial program running on cleaning, running out of stores and the extra cost was to be offset by higher production productivity so they didn't have to do all the cleaning in their own production division and manage it. And that proves that we've run that trial for about 6 months now and hasn't really been effective. So we shut that down and the productivity gains weren't realized how we closed it down, and we took those people out of the equation and a couple of management guys that we didn't feel that we needed at this point based on what we're doing. So we've managed to save $800,000 a year in overhead costs per annum. And so we'll see the benefit of that in the back half of the year. So that's already been done. So we've worked very hard where we can to pick up and improve our position going forward. So we see this as what is a second quarter haul? Or is what someone said this morning, it was like an air pocket and certainly the third quarter and fourth quarter, particularly the third quarter looks extremely busy. But to run to the back of the financial year will be as normal and will be very busy as normal. So it's a one-off thing. So I'm sure you've all got a million questions. So please feel free, and I'm happy to answer any queries you've got any of it.

[Operator Instructions] We actually haven't received any as yet.

Well, can I disturb -- perhaps I can just give a bit more color to the Italian one, these contracts that are coming up. Traditionally, we've been airfreighting our propellers to Italy, and that makes us -- it adds about 17% to the cost of Propeller. Sea freighting can be as low as 5% to 7%. So there's a significant saving on the size of propellers we're sending to them. So they are very keen to gain that advantage. And we've always wanted to do this, but you've really got to get commitment from both sides to make it happen. It means ordering 6 months in advance instead of about 6 weeks in advance and they can generally do this particularly with our product with the interceptors means that it is easy to do. But we had to -- what we wanted to do is gain by offering these lower prices. And we had to give some sort of fixed period. So we had to building the LME growth in that space and look forward on our local labor rises. So we need to do all that. And we said, look, we can offer all that to you and give you the best price we possibly can, then we'd like to have increased volumes. So they offered us some additional lines from each of these people. So we should expect to see a turnover from these companies rise. We don't know exactly how much it will rise because they're giving us lines, but they don't offer themselves know the exact volume of each line of that vessel. But these are the 3 biggest -- these are the 3 big ones in Italy, which is really important to us. Not just from a turnover and business perspective, but it's also your brand building, but everyone watches these people for what they do throughout Italy. So we're seeing this is quite significant. And on the Volvo side, we've been working with Volvo for -- I'd have to say it's been close to 20 years, and we have not been happy with the GP that they were prepared to pay. So we've partnered as friends on those and we're focused on the other series we make and have done for 20 years. So I believe that there's been issues in the field and they really believe their best interest is served by paying them a little more so that we feel that we can achieve our GP results and that we can then take over production of the small one, which is up to -- it could be a size of 1,800 individual propellers a year. So we were very excited about that. And these are the first orders coming through now. So if we work hard, then we could add that to our arsenal and next financial year, we could see as many as 6,000 propellers going through the facility, which is a truly extraordinary result. So we're also focusing on, as you know, the sharp lines of this year, that's continuing on as normal. We're putting that together in the auto pricing will go up, I believe, in January. We're getting strong interest in that, and we think that will still enter the back half of this financial year in some way and much more, of course, next financial year. So another interesting thing that's occurring is this Friday. We're hoping to have a video out on Monday, but on Friday, we should be commissioning a new Gyro test sell, which is like seesaw that is powered by hydraulics, which will simulate oceans and wave motion. So our Gyros will truly be operating as they are in the vessel, and we can even putting wave formations from different oceans in the world as that is well published data. So we can actually test the Gyros in the conditions I will be operating in. So a really exciting news on Gyros and the Mark II has been met with a great reception from the trade show circuit in October and November. So that's looking really positive. And we expect gyro sales -- we said we still are working very hard to get out the same turnover and volume of props, volume of Gyros as we had last year and we had that huge -- those huge orders dragged forward from Strategic Marine. So we've got a very strong orders for the back -- we have a lot of strong inquiries for the back half of the year. So at this stage, we're saying, well, that still a reasonable expectation. So we'll know more as it goes through, of course. But the businesses continue on as strong as we thought. We've just had that dip in the second quarter.

Right. Thank you, Mark. A couple of questions have come through from [Alexander] of Morgans. Are you able to provide us an update on SHARROW.

Yes, I have. We're in the second boat with SHARROW, there's a series of boats, I think it's for that they've looked at trialing and they're trying and gathering the data of all that, but they're still taking time, and they're targeting a very different types of vessels at the moment. But we're all very excited about it. What we have seen though, every time we go and do a trial on SHARROWs, there's probably been I think we have 4 big boats we've been trying to including ours. It is very difficult and to get the right design per vessel. So we're giving a space on that. But what we are seeing on every vessel is a much quieter and we found it to be acoustically as well. They're much smoother and they're better on tuning, their responsiveness is much higher and that is already a consistent feature of their product, which is worthwhile noting. But we do have to give the space to be able to get the design right. They are operating on bigger boats with the shaft angle. And I know that's a keen focus for them. And we should know more once we completed these trials, which will probably be a bit in -- early in the new year. So as we find out more, we'll send them through, but they're in the middle of processing the data and tuning designs. So it's frustrating for us because we want to crack on. Why do they give us a design and we've got it finished within a few weeks when we get it out. So the production side of -- from our side of it, it's going very well. We're very happy with our progress.

A couple of other questions on SHARROW been answered. With any further questions from anyone before we finish up. It's got a couple more come through right now. One is, how has Tony been going in the U.S.

Tony Elms I think he is referring to?

Must be, yes.

Yes. We sent Tony around -- he's like a weapon for us. The guy is that clever. We've seen him out to talk to clients about Gyrostabilizers. He was also talking about propulsion, but a lot of some of this work was involved talking to one of our major U.S. customers that I can't. Unfortunately, it's a bit sensitive to talk about who, but there's some opportunities there on shaft lines with them, and that's where we're frantically working on that effect after the presentation today, I've got some reviewing coming up to [indiscernible] some costing there. So this is part of our desire to increment some technology on shaft lines of just cheaper price as we can do now, but to also put some really clever technology into shaft lines, and that's what this particular boat I was very interested in. So he's had great success, I would say. And very importantly, having him here does in some way, take over from Bret and I on the technical development of what we're doing. And I think that's really important for the future of them, and he's a very impressive individual.

Thank you, Mark. Can you talk about exposure to the lower Aussie dollar and how this impacts the business?

Yes, sure. I can handle that one, Sam. Our net exposure is to U.S. dollars. So we export particularly a lot of our props or gyro in USD, but we obviously buy a lot of items in USD as well. So we're a -- net USD back to Aussie is the stronger -- is the larger exposure. So -- and AUD falling in terms of U.S. dollar is a benefit to us. But having said that, we do have a pretty strong hedging program. So we're not in the game of trying to make money from currency movements. So we hedge 12 months out for a portion. And then as it gets closer, we increase the hedge. So the Aussie dollar bouncing around doesn't impact us too much in the sort of short term. But if it was to fall a little bit, that would be a benefit to us in terms of receipts -- net receipts.

Thank you, [Joe]. Another question here from Sam. Also, are you the supply for tolls in the Australian Navy for submarines -- is there a potential to work with the U.S. defense sector for this? And additionally, how many times larger is this U.S. opportunity.

We're exploring that at the moment. It's a really interesting question. We've had people here. We're having people here in January. We're being -- we know we're being fast tracked to have approvals to quote on this equipment. In fact, we've had to complete some additional security work this month to enable us to do that. So there is a fast-track program running to give you some idea in the time we're building our AUKUS submarines, which I think is 8%. The U.S. will build 63 submarines. So it's significantly greater, and it has been listed that submarine valves are of great interest to them. They are having a supply strain in the U.S. So there's quite a lot happening at this space. And we're particularly looking for items that we have considerable expertise in. So we're not -- we want to be jumping around doing things we haven't built before. We'd like to focus on valves where possible because we believe the volumes I think, are really quite attractive. So we will know more early in the new year on that. But no, we expect defense to become much stronger than we could see 18 months ago. So we still see the big product for us has been obviously propulsion and stabilization. But the defense side from being a take what falls locally as being a steady part of the business with slow growth, we see it now being a significantly higher growth for our business and it is evolving. This is not waiting until we start building AUKUS in Australia. This is happening right now.

Thank you, Mark. Next question from -- this one is from James Tracey from Blue Ocean Equities. When do you expect to see first shaft line orders.

I will be careful to say. I have a tender going in tomorrow. So these -- tender is restarting now to tender with our new supply chain. So we expect to see orders flowing in. There is some -- orders already flowing are fairly small ones that are flowing in at the moment that we're doing, but there will be -- it will continue to increase through the back half of this financial year. What we are doing is automating the quoting process for shaft lines so that we built into our website as our propellers are. So people can simply go online, put their boat details in, it will give them the right propeller choice and price. And then by knowing that information and the propeller we've chosen, we can automatically give them a price on the shaft line. So there is -- it's a very fast way to get our costing out there and our offering out there. So we are particularly focusing our existing clients. So we do believe that will bring the faster success as we can get.

Thank you, Mark. A question here on Gyros. Having had the problem with the Gyro shells, would you be able to spot similar QC problems as the shells are delivered before built?

The process for the shelves is actually to build quality in, which means that, inherently, the process you machining the accuracy by the steps the order in which it's machined, every operation by operation and they made an error, and they lost sight of a critical feature of that, which we build back in. So there's also -- one of the things we identified is that with different operators, they have different levels of skill levels and some of the measuring equipment we use, which is standard in the industry is -- can be sometimes a little interpretive in how and the sizing they pick. And we've purchased equipment, which is much more expensive, but much easier to use and much more accurate and reliable and this is part of our process as well. So what we're doing -- and I remember this from our aerospace days back in the 90s that people like Boeing and Airbus didn't want to know that you were just working within your tolerances. They wanted to know how you are moving to the middle of the tolerances to how you're improving your process to the same thing applies to the shells. Not only are we targeting to work within the tolerance our engineers have set, but we know that certain parts of the tolerance being a certain end of the tolerance or in the middle of the tolerance is best for our product. So they've also been incorporated into these last round of changes. So it's been a comprehensive review at a much higher level. So that will certainly be better shells with better technique.

Thank you, Mark. Another question here. Sounds like Q3 will be very busy. Will it result in more overtime required, impacting margins.

Over time is certainly not a problem for us to a certain level. So we have a certain amount of overtime we allow for a day, which is 12.5%, 12.5% very acceptable to us, double time isn't. So we generally run at guys that are running a couple of hours a day and Sunday mornings. And what you find is there's extra cost of employing an additional staff member. And bearing in mind, they're very hard to find in Western Australia. So overtime, serves its purpose. But you've got a 20% on cost for these people straight up. So your 5% more on your overtime is already now 30%. But there's a significant advantage in the capital that you don't need to use, in my words, the capital is -- you don't need more capital or more for the same people. But the other one is that if you're just adding a couple of hours on a day, you find the guys that all at their peak efficiency. So you simply can have them flow on to finish a job or get going on another one. They're in the zone. And that also brings about further efficiency. And there's also the fact that our overhead costs are not increasing. They need more supervisors, for instance, and that all comes with a cost. So we've always had a policy with overtime to run those 2 hours a day and Sunday mornings. Anything beyond that is a real issue. But what we're finding our productivity during the last couple of months has been quite low. So we will burn up that productivity, which will pick us up last couple of thousand hours of short here, which is what we're chasing at the moment and that gives us an extra 800-odd months turnover. So we have no problem meeting that busy period, and we'll manage it over time accordingly.

Thank you, Mark and David. That concludes the Q&A segment. I'll now hand it back to Mark for closing comments.

Yes. Guys, once again, I want to apologize for knocking up Christmas. We're really being a bit disappointed by this, and we know that the markets will be as well. But I just wanted to reinforce that this is a timing issue for us and we are back to busy normal third and fourth quarter. So we certainly don't see any area of concern there, and we will be spending our time reviewing and finding out what more we think we might have been able to do to mitigate our position with these contracts. If there's anything all, anything more we can think of, we can certainly put it in our playbook going forward to should arise in the future, we may be in a better position to be able to deal with it. So thank you for your time, and I have a wonderful Christmas and New Year break, and we'll see you back in the new year with more good news.