VEEM Ltd (VEE) Earnings Call Transcript & Summary

Hello, and welcome to VEEM Limited's Investor webinar to discuss the company's FY '26 results. Presenting today will be Managing Director, Mark Miocevich; and CFO, Tino Kapfumo, who will be going through the presentation released this morning in the ASX. [Operator Instructions] I will now hand it over to Mark.

Thank you, Ben, and welcome, everybody, for joining us. I'm pleased you are able to take the time to go through our presentation with us. So we'd like to kick off, if we can. I'll ask Tino if you wouldn't mind just going through the highlights.

Thank you, Mark. So revenue for FY '26 was $51.7 million at the upper end of our guidance with activity of $54.2 million representing an increase in WIP as we became busier delivering into the ASC contract. EBITDA was $3.6 million, within our guidance of $3.25 billion to $3.75 million. Cash balance ended at a healthy $9.4 million with net debt down to $1.2 million, and this is after our capital raise of $13.1 million net of costs. Undrawn facilities sit at $7.5 million, providing ample liquidity. Operating cash flow for the year was $4.8 million with EBITDA margin of $6.9 million and no final dividend declared. So revenue for the year for FY '26 was at the upper end of guidance, which was below last year due to lower gyro sales and a delay in receiving our ASC orders. EBITDA for FY '26 was $3.6 million, which was down from 9.1% in the prior period, but at the upper end of our guidance provided and again, related to lower gyro sales and delay in receiving ASC orders. Cash flow from operations was strong at $4.8 million as the ASC contract kicked off and propeller orders accelerated late into FY -- second half of FY '26. Net debt at $1.2 million was a reduction of $12.5 million after net capital raise proceeds of $13.1 million and additional equipment debt of $2.4 million. As I've described, the first half was characterized by a slowdown in the marine market, which is now improving and delay in ASC orders, which we're currently delivering into. As a result, we saw a split in first half and second half sales with second half sales up 21% and EBITDA from a small EBITDA loss of $0.2 million, ended up at $3.8 million. Recovery in the marine market has led to an increased proportion orders in the second half of FY '26, and we're seeing this continuing into '27, which Mark will go through later on. The factory extension was completed with our 3 CNC machines delivered and currently being installed and commissioning underway. The 3D printer was installed and commissioning and commissioned with the remaining $600,000 received from the government grant. Mark will now go briefly through our products, particularly for those who might be new to VEEM.

Yes. For those of new, I guess it's best to know what we're all about. Currently, VEEM provides the highest performing fixed pitch propellers on the market. So fixed pitches when you've got all the blades attached to the hub as the photo shows. And we've been exporting globally for over 20 years. So we are considered to be the best globally in doing that. We will go faster, less vibration, less noise. So we've been winning business that way. And most of the leading boat builders in the world now are using us. I think, it's half of the top 10 superyacht builders, nearly everyone in the East Coast of America. Princess Yachts, people like that, that are, I guess, demanding and discerning customers. So the market itself, we've looked at -- and you look at the numbers, there's USD 0.3 billion for new builds each year. And we're primarily involved in new builds or were, I should say, which has been around 10% of the of the global market. And it's been really focused on the high performance end of the market. So we've got the most advanced manufacturing facilities in the world, which run around the clock lights off, being loaded and unloaded automatically. We have -- going forward, we've expanded that to include a new technology on our VEEM Extreme range of products, which are made from a high-tech -- high tensile strength alloy, which I'll talk about it later on. We do defense. We have always done, and most one of the Collins-class from over 30 years. I think we're something in the order of $250 million to $300 million worth of product that we've delivered into the defense space in Australia over the years. So we've now got an enhanced security range of secret level in Australia. We believe the defense market is very sticky, a reliable long-term revenue. It is difficult to get into. And moving on to the U.S. defense supply chain. We've done all the work required to gain entry into this market, but just working through the process in America to get them to supply, and we've only -- I think we've received $180,000 in the order so far. So got some way to go. The future of obviously, we've got Hunter class coming up, which are in the final stages and negotiating, there's also potential for the overseas Type 26 programs, our Hunter class boat is a modified T26. There's only one of the supplier globally in that. There's also AUKUS opportunities both in Australia, the U.S. and the U.K. that we need to focus on, and the U.K. really hasn't come into the picture just yet. And there is a general increase in softer defense capability in this country that has to be developed due to the circumstances of the globe at the moment. Gyros, look, we're the only supplier of large gyros in the world. There's large barriers to entry. The market exists for all vessels from commercial, defense and recreational. We have just -- released to Mark III model, which is really important to us, a huge market grade $1 billion a year, if everyone bought one. So we're looking at moving more into the commercial market. We're finding that those people are better equipped to deal with gyros. They tend to buy more and it works while their understanding technically is better. But expansion in defense-rated industries is happening as well, and we've got a very nice tender at the moment where we're working with, which is from a Northern Hemisphere defense department, which is using our biggest gyros as icebreakers, which is quite an interesting technical development. So we're looking at the adoption, but we think it will be similar eventually to the small recreational gyros. And we've just -- I guess we're moving to a new model that addresses some of the problems of the early units which has been holding us back a little. Engineering side, look, this has worked just falls in the door, and we've done it since 1968. We can cast over 250 different alloys, we're the biggest balancing shop in the country, we do a range of machining, founding, balancing and fitting, welding, that's all part of our old business. And the future of that is, we've got, I guess, best foundries in Australia. So products such as our Hollowbar, we're looking at expanding to new markets close to Australia, which is our Centrifugal cast Hollowbar, which has proven to be quite popular in the alumina industry and increasing our capability here to deal with not only defense, but mining, industrial as well. And the 3D printing side, which we don't say too much about, but we've recently commissioned a 3D printer for printing molds for casting, which eliminates patterns all together. And that's going to be really important for low-volume work, which will be available continuously in this country. So I'll hand it over to Tino.

Thank you, Mark. Going through the financials in a little bit more detail. The most significant reduction in revenue between FY '25 and '26 was the reduction in gyro, which we have talked about. However, the coming Mark III, which Mark will talk about later on in the presentation, is expected to spur sales and increase that into FY '27. Noting our order book is $1 million at present. Defense was down due to a delay in receiving ASC orders. But again, we've seen the difference between first half and second half with revenue up 130% in the second half. We experienced a downturn in the propeller market, but we saw Q2 to Q3 of last financial year being the trough, that picking up at the end of Q3 into Q4 and so far has been sustained into the beginning of FY '27. VEEM Extreme inquiries have been robust since the launch of the first contract signed and we began delivering into our launch customer, mainly fast ferries, Again, Mark will talk more about the details of the products going forward. The result this year also includes setup and preparatory costs for U.S. defense revenue in addition to development costs for Gyro Mark III and VEEM Extreme. So we expect these costs are now tying to roll off as we start to commercialize the products going into FY '27. Due to the lower sales budget in the first half of the calendar of FY '26 led to an impairment of the gyro capitalized cost of $24.2 million in addition to $0.6 million of obsolete gyro stock as a result of the launch of the Mark III. We ended FY '26 with a strong balance sheet. This was from our capital raise of $40 million before costs and $13.1 million net proceeds. So as you can see, we had net $9.4 million of cash with no overdraft and no undrawn trade facilities. This gives us $7.5 million in unused facilities available. In terms of CapEx, we've continued to invest in the business, $2.5 million of CapEx, predominantly the 3D printer, which arrived as well as equipment and tooling. Product development costs, as I spoke to earlier before, of $24.2 million were impaired as well as $600,000 of obsolete gyro. So I think the takeaway from our balance sheet is that our balance sheet is strong. and we're ready and prepared to take on the growth opportunities that we face in FY '27. Cash flow was strong in operations of $4.8 million, driven particularly by ASC with the contract beginning and starting to be delivered in the second half. In addition, we've continued, as I spoke about investing in the business and we had $7.4 million in net financing inflows predominantly from a capital raising of $13.1 million after costs. This brought down our net debt. As you can see from here, we have no overdraft anymore. Our bank debt went up as part of the asset finance facility for the 3D printer. Our HP liabilities came down as part of the normal payment of those. We have $9.4 million in cash, bringing our net debt down to $1.2 million. So again, showing that our balance sheet is very strong. Back to profitability in the second half, positive operating cash flows and a strong balance sheet ready to take advantage of opportunities that are coming forward. I'll now hand over to Mark to talk about our products and those opportunities.

Thanks, Tino, for that. Okay, the bit you've all been waiting for is what's been going on with the propulsion side of the business. So what we found was the propulsion side dropped off a little and largely due to Trump's tariffs. There was a lot of hesitation in the marketplace. And as soon as it ruled in the Supreme Court back in February that he couldn't have his tariffs the way he had them meant that there's like a light switch went on and people started ordering and we've been pretty flat out since then. So we all know that he spent other ways through the tariffs, but for the rest of the world, it seems to be -- this is the signal to start buying again was there. So they did. So what we've done is we've been working on the VEEM Extreme range for the last probably 2 years. But the order design and testing was all done late last calendar year. We've done a little bit more this year. And now we're now launched into production and meeting all the early demand and building up the pricing programs, the sales programs for it. So what we found is -- and if you have a look at the picture on the left, last year, we spoke about our propulsion improvement and the rudder improvement, so it's 11.9% and 6.4%, which got us to about 18%. And that was against a standard commercial propeller and a standard plate-type runner, which was actually on our boat initially. So we tested that and found that improvement. But this year, we've been working on the bracket we didn't think the bracket would be significant. We thought maybe a few percent, but our resident computational fluid dynamics people, they unlocked much more, and they've managed to be able to find a 6% improvement. And now, in fact, we have our brackets are matched to our others, which provides much of that benefit. So we've sort of -- now that we've got 24%, 25% improvement. And that's across a very broad range of speed. So what we can do now is we can actually tune in the bracket and rudders based on the speed of the vessel otherwise, if I'd like, the efficiency at high speed that some customers, it's very important. Others are more at cruising speed. We can give them what they're chasing. But this is a really significant step up. I've never heard of anyone getting near this improvement. And it's all down to this new high-tech alloy, which was just double the strength of bronze, and we can unlock all of that strength in the products we've got and that makes everything so much thinner in profile and we can move our designs around to capture the benefits of that strength, which is what we've done. The best thing about it is we made sure Lloyd's was on board for every test that we did. So one little one left to do, is we can make the main propeller shaft is a little bit smaller. We've developed a unique attaching method for the propeller on to the shaft, which you can see where it goes on. And that enables us to use more strength in each shaft which means we can make the shafts a bit smaller. And that means that we can make the boss of the bracket and the boss of our propeller they're a little bit smaller and that will lead to a little less drag. So there might be another percent or so in that we can pick up. But everything counts and plus it's cheaper to buy a small shaft. So it's all good. Many Fast Ferries, and we've got some benefits here saying they've got an 8.3% fuel burn reduction than we found more. While it's a bit misleading. They were already using one of our bronze propellers. So they went to one of their new ones and picked up 8.3% when we made that change on our boat, we only picked up 6% difference, maybe their propels are a little worn after a few years. But that's what they found, they documented it will. And we've done the modeling on their rudders. They'll pick up 7% on their rudders, a bit more than we picked up. So they're going to be looking at around 15% just by the rudder and the propeller from where they were, they're chasing a 30% reduction in carbon footprint. We've just given on half of it, which is significant. So they've been a wonderful advocate of that, and they've realized that around the world. We've got a lot of now inquiries from customers looking for the same thing. So I think the product is going to be very successful. The advantage of the whole shaft line is that previously we generally only supplied propellers. I would suggest that 90-something percent of our sales were just a propeller. And now we're going to be able to sell a shaft line, not just a propeller and that's going to lead to the significant increase of 3 to 5x the value of the sale we're making before. So really powerful change for our business coming. So that way, we're moving into that starting from now, and we're working very hard to build that up, supplying from now and building up to the back half of the year, it gets busier and busier. And we believe that's one of our many strategies to help us fill that slowdown in the submarine work. We have completed most of these orders. So you know from our previous graphs you've seen that every -- it's a sizable business because of the refits. And this is -- this product is one of the things we're doing to try and smooth out those peaks and troughs. Just a note on the Sharrow, we're still working with Sharrow and we've got the number of sets in production at the moment. It is proving very difficult for Sharrow to be able to have that translation from outboards to inboard powered vessels. So we're working with them while they're still working through the technology. And we have offered them, of course, our VEEM Extreme range of alloys. So they'll get the same advantage if they choose to use alloy as well. So we continue to maintain that relationship. Okay. In defense, interesting, defense. ASC is on board. Obviously, we're very, very busy doing that up until probably January, February, which is terrific. And there'll always be that we're continuing to work after that time, but perhaps not quite at this volume. Fortunately, this time around, we're able to negotiate all of the valves to come back to VEEM for storage, so we can cycle them correctly and protect and so they're a pristine condition when they need them, but also as a byproduct that enables us to have a better handle on what the usage of these valves are and what they might need next, which enables us to level load a little more by perhaps being able to work with ASC and some of these valves. You look like you're running lower on these ones. We know your usage pattern is a little high. Would you like those. It also enables us to manufacture a little bit of advance when we feel the need, which will help level out those peaks and troughs. So we're likely to continue on with those until the submarines mothball, which will be, we think, around late 2040s. We're in the final stage of negotiating the hunter class. I know has been going for quite a while. There are some issues with secret ratings which is a cost we need to carry over the life of the program. But be part of this is once we're one of the Australian ones and I think its Shipset 2 is on they're aiming for. There's also the opportunity to look at supplying the rest of the Type 26 or some of them. We're 1 of only 2 accredited suppliers for that program globally. So that's working very well for us at the moment. And a nice thing is that Kongsberg now see us as an approved supplier. And we have another $1.6 million order in the system, making mono block propellers, which is our specialty. And there that's in process now. So expect Kongsberg to become a regular customer of ours, which is good news. So we're continuing to work on the U.S. defense chain -- and it surprised us that we're all absolutely accredited, approved every part of our business is ready to go. And we have got a $180,000 confirmed order, which we're making, but it's still pretty thin pickings and we've still got some approvals that are needed at their end. So HII and some of it can be government approval from the State Department for Transfer of Technology. Others are internal and the people that are -- work inside HII, going back to Virginia-class submarines. Those people are actually designated as AUKUS managers, and they are working within their organization to send tenders and work out to the Australian part of AUKUS. So it is all happening. It's just very slow. But in the meanwhile, we are working with another group of consultants. We're just starting to work with them to explore what is available in the sustainment side because America has 66 submarines running around and there's a lot of work on sustainment. In fact, there might be more work on sustainment because some of these items they have trouble getting because of the new build program. And some items are obsolete, which means they can't get them. So we're sort of working through that. So continuing to work, and we expect that to have results for us, but it just -- it's just taking us longer than we all thought it would take. Okay. Next one. the gyros, okay. We've started building Mark IIIs in a small frame and they all roll out towards the back part of this year. Key features, we've gone to a no scheduled maintenance, gyro, which is really important. So customers normally get every 3,500 hours even on the small gyros, it's $20,000 to $25,000 to change all the internal sales and all the external oil pumps. That's a big problem and a big cost, especially for commercial vessels. So by doing this from moving seals and patenting this new patented oiling system means we reduced the -- eliminate the seals eliminate the service cost as is a mechanical pump not electrical. There's just simply a trial start-up pump, which runs for a very short period, then turns off. So that's a really big cost reduction. We've also made sure that it is available as a retrofit kit to all of our existing gyros in the field. There's over 80 of those at the moment. And which means when they get to their first major service, we can offer them this upgrade at the same price and then they will never have to spend any money on major services again. So that puts us where we always want it to be. So the power consumption though is available. We found, in fact, it was more than 20% reduction just by eliminating the seals. The new low-friction bearings will carry an additional reduction. So it may well be that we expect to be running around half or less what we used to burn up in power, which is really, very important on boat. The new gyros cost is less to build. They have less assembly time, a more reliable build because there's less connections, which is very important. So we've now started to build on the small frames, we've passed the peak of our development costs and they'll be tapering off towards the end of this year, which is very convenient for us because we need a couple of our key engineers to assist us with the introduction of VEEM Extreme as we have to do more and more boat analysis to be able to estimate fuel saving reductions for our customers. So that will be a service we will need to provide when requested. So it's working out very well. Now the slowdown in the market, the global marine market meant that China sales really slowed up to nothing there for a while. And the auditors and the Board felt it the write-down of what we'd spent considering it was on the very original model, it was on the very original model, that it was appropriate time to write that down. So we've got some sales now, which is happening. And now we've got these new Mark IIIs. I think there's been some eagerly anticipated sales on that where people are just sitting back and waiting to see. So we've done a testing, we're now building and -- thank you, Tino. This is my favorite photo. I don't know whether any of you have seen the SpaceX rocket, but I keep it on my wall. I didn't know their journey until we'd already done this. But if you look at SpaceX's rocket, the first one they built from the last one, their current one they're building now. The difference is a bit like ours. You can see the complication of the external pipes and down the bottom of the little boxes there are oil pumps. We made it very reliable in the Mark IIs, but we felt that once we went to this for the oiling system, the bottom end changed a lot, and we pushed ourselves to put all of the necessary fluid galleries inside the wall of the casting which makes it very simple to assemble and makes it even more reliable because there's no joints there that can potentially leak a drop of oil. It's a tremendous high technology unit, and I believe that's what the market will receive eagerly. I think it's where it was wanted to be. It's a fantastic thing and the guys, the development teams to be very proud of themselves who have done a fantastic deal. Okay. Engine products and services falls in the door all the time. Hollowbar's still going for us, which is great, mostly in the alumina industry. So we're always looking for opportunities. We've supplied someone in the Middle East before now. So we're still pushing, do a lot of dynamic balancing, which we're one of -- I think, we're Australia's largest dynamic balancing shop. Foundry demand for relatively short lead time, low-volume, sophisticated product, and we're still doing that. And our new 3D printer, which is actually a sand printer. So it means that we can print molds, up to a certain size, and that means no patents. And when you're doing low-volume items, the cost of the patent is really prohibitive in people buying from a new source. So even in the U.S. defense market, if we can quote just casting for casting, that puts us in a very strong position. We don't have that extra cost of the tooling costs, which our competition in America doesn't have because they paid for their tooling years ago. But a new extension -- doesn't look like that at the moment. It's full of machines, it's 3 machines being installed and commissioned. They'll probably all be running over the next 6 weeks. So that will fill up. And as you can see, there's probably room for probably, I would suggest, maybe 10 machines in there like we have in the other factory. So that's all happening. So we're very excited about that. And it's what we need because we know that VEEM Extreme product takes a little bit longer to machine. Also, we have rudders and brackets to consider, which will be new additional products. So we've got plenty of capacity for expansion. Okay. Going forward, outlook is propulsion. We expect the global demand from our propellers to continue and, in fact, increase for the new product we've got. We found that our market didn't really involve workboats, whereas the big saving is for workboats people that are spending between $1 million and -- $0.5 million and $1 million a year on fuel, these are going to get tremendous benefits and reduction of carbon footprint and in fuel burn, and as a bit of a no-brainer, that can pick up depending on what they've got current on their vessel, but they could pick up, up to 18% just by changing the propeller and the rudder, which is an overnight job, as it doesn't impact our operations, and they can pay for all in their OpEx. With Trevor -- Tino has been very clever in organizing potential funding through export finance Australia, which means we can fund them into a program where they paid off per month based on the level of fuel savings we estimate and anyway it stays in their OpEx budget, and they have to go a bidding for CapEx, which we all know is very difficult. So we're monitoring the Middle East because it has had a bit of an impact on market confidence in that 50- to 90-foot market. But on top of that, that market is moving bigger. So we just monitor this at the moment. And you can see there's a couple of big boat builders in that 50 to 90-foot range that are restructuring at the moment I think to find the Princess and Sunseeker are big players in that market and they're both going through a bit of change at the moment. So the VEEM Extreme. We'll be talking to our existing client base. And one of the very positive things is we host a Maritimo and Riviera a month or so ago when we went -- did our road trip. And they did say, look, we've got customers -- a customer each that had a desire to have the VEEM Extreme and they're both expressed a view that I'd like to have VEEM Extreme and an option for all their vessels. So that was very encouraging because we believe that people that don't use their boats much. And I guess, Riviera and Maritimo in that market with their pleasure boats, we would have thought there would have been a limited access to that, but having as an option means that the client can get to choose. So that's really strong. And our focus will go mostly there into commercial and defense for the fuel savings. Obviously, defense is a range extender. That's critical. And for the ferry market and offshore supply vessel market. One of the inquiries have got the people 78 offshore supply vessels. So there's a savings there of $7 million or $8 million a year on their fuel bill, which is significant and a huge reduction in carbon. So there's also a drift to automate more. I won't go into too much detail on that because -- we wanted to keep that fairly confidential. But again, we've had some significant robotic upgrades in our post machining parts of our manufacturing process. which should improve our GPs, we estimate by 6% or 7% on our product range, which is very important for us. Defense side, Defense remains strong. ASC is there. It's great to see them on. We had that contract negotiation that had to occur, which delayed orders. And so we're super busy at the moment. That will continue on to after Christmas. There's a continuing work, we say qualification work, but it's more so now waiting for them. And of course, we'll be pushing into as the sustainment side, I think that's a worthwhile pursuit. We've got a designated path that we think will be fruitful. Hunter at the final stage. We've got the high level qualification we've got are not just suitable for the U.S. and for Hunter, but those qualification opens doors and other defense projects. So we're talking to people like Rheinmetall, for instance, with the tank program. So that's important. And also, Oslo, there's a lot of work coming in Oslo over the next 20 years. So having the right qualifications being able to supply and meet their needs is very important. So we're well positioned to take the opportunities as they come from that. A little slow but very sticky. With Gyros, we've got a -- it's about a $40 million potential contract that we're working through now for a Northern European country and a defense area. There's a patrol boat program where the -- looking using ice breakers. And that's a great opportunity for us. And we hope that will be available to commence later this calendar year, so before Christmas. So we're working very hard on that as well as now the Mark III stuff coming out. So we expect that to pick up and start growing. And this, we're hoping will be the product we always wanted and the growth pattern we always wanted. So I think we've proved that we're seeing a better understanding in the marketplace. And I had a question going back last year. So I said, look, do you think the market really understands gyro stabilizes. And I think that tender on using large gyros in patrol boats for icebreaking where they're going to actually rock the boat with our gyro to break ice as a travel through the ice area. It will simply rocket and break the ice. It does show that there is now a significant understanding of our technology. And I do think that we've in the ice on that issue and then we'll go forward from there. Engineering continue as normal. We've also -- this is a slowdown. We took the opportunity to cut our overheads back a bit and now provide additional capacity for growth. So we're in a pretty good spot. And happy to take questions.

[Operator Instructions]. A couple of questions to come through. Firstly, regarding -- so defense revenue was a lot higher in the second half once ASC orders started coming in. Should we expect this pace to continue into FY '27?

Yes, it certainly will. I think we had -- still had $13 million worth of orders to fulfill when we started this financial year, and we expect that to flow into January, February of next calendar year. And that's without any other orders coming through. There's always orders flowing through. And the whole -- what our program is for this year is to make sure we get all those out successfully on time. And we also then start seeing sales coming up on the VEEM Extreme range of products. Also, we'd like to be commencing the Hunter class and commencing the Northern European Navy work on gyros. So they're the big movers for us for this financial year. So it will be a little bit busier this first half than the second half, we predict, which is a little different. Normally, we have a slower first half and a busier second half. This year, we think it might be back the other way, but it certainly will be a successful financial year as we have had in previous years. So business going back to normal, I would say.

Next question. How much additional capacity does the completion of the factory extension and commissioning of the new CNC machines give you relative to current demand?