PWR Holdings Limited (PWH) Earnings Call Transcript

Thank you for standing by, and welcome to the PWR Holdings Limited FY 2022 Results Presentation. [Operator Instructions]. I'd now like to hand the conference over to Mr. Kees Weel, MD, CEO and Executive Director. Please go ahead.

Okay. Thank you. Thank you very much, and good morning, ladies and gents. Another nice day here in Brisbane. Look, I'll go straight into the business side of it. I think you've all probably seen and had a fairly good look through. So I don't want to go into too much depth. But I'm sure if there's any questions later on if I have missed something and someone, certainly pull me up. Look, we certainly had a strong growth through all sectors of the business and very happy how that's all going. The OEM growth obviously, a few of the new OEM programs are coming online now with 65% growth against last year. Aerospace and defense, as everybody knows, that's a small part of the business at the moment and expanding rapidly, was heavily weighted to the second half. Motor sports, as a lot of you know, I did call it out this time last year or thereabouts, and so it will be fairly flat. I guess, with 23% growth, I suppose that's not flat. The auto aftermarket, a steady increase, a little bit off the mark where we'd like to be, to be [ denounced ] but it's a little bit of growth in there 6%. Emerging Tech, we all know how I've called that out in the past, how we think that growth is across the business. And at over 100% growth and nearly 20% of the group revenue, it's a pretty solid start. The NPAT conversion against revenue, very good view on the positive side of the 20%. And the final dividend of $0.085 per share, which will be paid out in September with a total of $0.12 per share for the year. Just moving on performance and challenges. We all know about the COVID. We don't have to talk about that. We still get that excuse every day. The border closures have certainly been a problem to get staff in through our borders. That's opening up a little bit. And the vaccine mandate, we are still double vax company. So no-jab-no-job basically. So our performance challenges wouldn't be surprising that our supply chain is obviously at a bit of pressure of lead times and the mineral order qualities, et cetera. The cash operating deal as we've put certainly, which we can talk about later on, we've put in a lot of cash into inventory to make sure we have got it. And as we all know, I keep telling people aluminum doesn't rust and we'd rather be looking at it than looking for it. Recruitment and retention, a worldwide problem there. I think every business in the world has got the same problems, but we would like to think that we're getting closer and closer to be on top of that every day. Inflation, I don't have to talk about that. It gets hammered in the press every day. We know what that is. Performance overview. I guess just looking at the key points really. The numbers are the numbers. We're very happy of our -- the top performance, certainly a strong second half, which represented 55% of the revenue. It wasn't that long ago, we were 35-65 split, and it went to 60-40. And this last year, it's obviously 45-55. So it makes it less lumpy and it's certainly very good for us to -- easier to manage that way. I'm not going to run through the particular numbers, it's there in print. We don't want to get too excited about that. Our performance trend. It's right across the Board. It's very, very good across the Board on that. You can see the graphs there, self-explanatory. Where we sit in the top 50 companies of the 300 club, we're around about that 36. I think it's tidy. And it certainly puts us in good stead to where we want to be. Certainly, we've cut out a different revenue by customer market here, and you'll see the numbers now, of what we call advanced cooling and then also emerging tech? Very, very good, how Martin has pulled it out because we get a lot of questions on that. So you can see the percentage of the growth, et cetera, in each sector. Motorsport, really across the board, nothing extraordinary in any particular key market there. But certainly on emerging tech in Motorsport, including Micro Matrix, has been a big push there. OEM, the Valkyrie and certainly the X1 programs and Rimac are very up and coming part of the OEM area. Auto aftermarket, as I said before, probably a smaller growth than we anticipated, but that's mainly through capacity, which we will talk about later on. Aerospace and defense, it was a bit of a timing thing for the first and second half and certainly had a very strong result in the second half, and that will always be a little bit lumpy for the first and second half, how contracts fall, et cetera, et cetera. Revenue by currency, very evident that the GBP is a big number for us. We have forward contracts out for 6 months at a time. We're very covered with that pretty straightforward. Operating expenses, as I said before, the cash conversion for raw material, you see that the usage of raw materials certainly increased significantly. Employee expenses because of further headcount we have now roughly 450 globally and our predictions were to be 450 at the end of this calendar year. So we're a little bit ahead of the curve there. A few extra expenses of occupancy expenses and other expenses, it's broken up in the description that we have under there. So I think that's reasonably well. We're very -- we are very, very cautious on cost and cost containment, which I think flows down to the bottom line anyway. Balance sheet, still a very strong balance sheet in our opinion. I don't think I need to go through every line there. We are still doing a lot of CapEx, which we'll talk about shortly out of cash in the bank balances. So I think balance sheet is very good. The cash movement, I don't think we need to go into too much of that. It's very positive. Nothing stands out that we need to be concerned about. And obviously, as I said a minute ago, the capital investment is all from operating cash flows, et cetera. Our liquidity position is strong. Cash reserves of a bit over $20 million and we have a $17.5 million of undrawn finance facilities at foot. Global operations, we can -- just another page to show we're very global across the world, and it's increasing daily. Our business outlook, our organic growth, very, very happy how that is progressing. Motorsport continue to be across all major categories. OEM programs, you'll see in the pipeline, which we'll get to shortly. It's very self-explanatory there. Aerospace and Defense, certainly with the NADCAP accreditation and our accreditation program is certainly well ahead of schedule. And automotive aftermarket was probably, as I said earlier, a little bit under where we thought it would be, but it's capacity, and we certainly are addressing that as we speak. Emerging technology, business outlook. The EV, electric vehicle market is very strong in -- I guess we look at it more so of the NDAs that we signed daily. There's a very big push in that side on the market across the globe. Cold Plates, particularly in aerospace and defense, very busy in that sector, Micro Matrix or Motorsport and aerospace and defense is certainly a growing part of the market. Additive manufacturing, we've certainly continued to develop our knowledge and also our capability with the technical partner Velo 3D. The business outlook for Aerospace and Defense, a very strong half for FY '22, is more of a timing thing. The Australian Defense, we expect that decision to be made. I know I don't want to say too much because the rest of the world is talking about it and everybody has an opinion. I don't think anybody knows. But our internal knowledge of that is that we hope to be -- hope to do an announcement sometime in September. International travel has opened up. I've just come back from a trip to the U.K. and also America. We've had our engineers on the road first time in 2 years in May. Four of our engineers of sales and engineering staff went to the U.K. to visit customers, et cetera. Prototypes, it's very busy. Our R&D and prototypes is very busy, and a lot of that will come through fruition. Electric take off vehicles and landing, the EV market, on that, I think everybody knows that they have dedicated an area at the Brisbane Airport now for a future of that. So that's obviously not far from happening. Hydrogen fuel cell technology has certainly been a big focus in some of our R&D areas. So that's another area that we feel we're doing a fair bit of business in the future. And I'm already spoken about the NADCAP accreditation. Pipelines, as everybody knows, we're very reluctant to put customer names in there. But when it gets to a nominated supply, we certainly put the car, et cetera, and what have you. It's certainly it's a busy area. The pipeline for automotive OEM is very, very strong, leading into the next 5 to 6 to 7 years. Other pipelines, MMX, cold plates and aerospace and defense and energy. It's very similar and I think everybody knows what's coming there. And I think it will be an interesting couple of years ahead of how that pans out. Planning for the future and our future success. We are certainly laying the foundations for future growth and success. And we continue to partner with customers to develop leading-edge technology, et cetera. And we ensure to -- to ensure our position PWR to capitalise on future opportunities over medium, long-term are investing in people, investing in capability and capacity and certainly investing in staff retention. More into our people and the investment of our headcount. I touched on it earlier of the headwinds for recruitment across the globe for everybody. In all businesses, it is certainly a big topic. We've certainly increased our apprentice program, which will be coming up towards the end of this calendar year, we will be obviously increasing that once again. The Graduate Engineering Program has certainly taken off very good. And also our Global Engineer Exchange Program has started. We've signed up a guy to go to North America. He will be going in the next 2 to 3 weeks for a 2-year stint and also a guy from our engineering department to go to the U.K. and that will be happening in January/February. Work experience programs with local schools, et cetera, is very strong, and we've certainly got a lot of students on work experience coming in during the holidays. Investing in capability and capacity. We see front of the new building there in the U.S., I was over there 2 weeks, 1.5 weeks ago. And here we're just waiting for the power to be put on there. That is way behind. There's obviously been delays in building materials and switchboards, et cetera, et cetera. So that is certainly behind schedule but we are assured that we have power there over the next 2 weeks. That's the factory footprint in there. Australia, we're working on designs and lay out on new factory plan to support our next 10 to 20 years. That will be a new 10-acre site, and we're working on conceptual drawings right now, and we plan to move into that site in 2025. The U.K., we're reviewing our options to commence small-scale manufacturing in the U.K. It's well down the track. There will be more to come on that in the next couple of weeks. Certifications, I spoke about before with NADCAP AS9100 and ISO14001 has certainly been a big push for that over the last 6 months to get that in place. Staff retention is damn hard. Everybody knows that. We have extended our STI program, and also our LTI program for people that mean a lot to the company, and what have you. So in our career development planning, we're always planning and training pathways for young people to make a pathway in the company. Supervisor training ongoing. I guess, when you grow as quick as we have, it is a problem. You just lack that supervision training and sometimes it can catch you out. Our Employee Assistance program, we've got a lot of support to our staff and their families. We've had financial people come in and talk to all our staff for any financial issues they have and it's like a private bank, if you like, and that has been very, very well received by everybody. Weely's Diner, still going strong. When we floated in '15 -- 2015, we floated 85 people at [ OMO ], now we have 340 plus, so you can imagine the Weely's Diner is pretty busy during meal breaks and what have you. So that's really a very good snapshot. We're very pleased with the overall result, very, very pleased with our NPAT percentage on revenue, and we'll continue to have a very strong focus on that. So really, I think that's about it for me. I'm happy to take questions, and I'll leave it to the organizers to go on to the questions.

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

Can I just start off with F1, please? And just noticed yesterday that the new regulations got approved with the power units for 2026 and increased electrical power and also the use of 100% sustainable fuel. So the other thing I noticed was the looking to reduce the overall cost of power units. So just wondering if you can make a few comments around those changes and whether you see that as positive or negative, please?

Yes. Well, there's two things that come out in the last 24, 48 hours and one is the regulations for next year, which is basically unchanged. So that's very positive for us. We certainly don't see that as negative. And I think when you talk about cost cuts, I think that phrase is a little bit out of whack because I do see the invoices that go out and people that spend the money. So I think the cost cutting is a little bit out of whack on our site that they might cut costs in other areas. But there's certainly, on the cooling side, we feel it seems to be the status quo. For the regulations in for 2026, there is certainly some changes there. When does the change in regulation, Alex, we see that as a positive because there is a whole new cooling program and a whole lot of R&D, and I'd say that R&D would start next week. We've already anticipated. Some of the teams have already anticipated some of the new program coming into 2026, and we've already started on some R&D programs. So no, I think it's a positive in both areas and certainly no negative whatsoever.

Okay. That's good to hear. Can I just I move on to just -- I just noticed that you did -- it's very small, but I noticed that you raised the provision for bad debt of about $133,000. So just wondering what that was related to, please?

That debt has now been paid.

Okay. So it's not relevant anymore?

Not relevant.

Okay. And then finally, on the U.K., so you just noticed -- obviously, you made some comments around commencing small-scale manufacturing to support the European market. So just wondering what types of products you're looking to manufacture? And would you look to increase capacity in the U.K. over time?

Yes. We're looking to relieve some capacity of our Australian branch and also American branch. We do a lot of midrange coolers for the European market other than F1. And we intend to put together a small fabrication plant over there. And I think there will be more to come out of that in the next couple of weeks. So we've been looking at different opportunities there for some time, I was over there a couple of weeks ago and we are putting some stuff together that will help us with our capacity constraint, particularly here in Australia and America. So if we can do certain part numbers in the U.K. that will help us a lot and that will allow us to do more product here in America.

Your next question comes from Chris Savage of Bell Potter.

I know you're reluctant to talk about this defense contract, but I'll choose my question carefully. There's been media reports recently that the size of that has reduced from 450 to 300 vehicles. Are you able to confirm that? And if so, does it alter the annual production? Or is it just going to be reduced, like from the 15 years to 10 years or something like that?

Yes. I'll let Martin probably to add a little bit more than that, but look, I don't take too much what report to say out there. We're very close to that because we're in both camps, as you know, with raw material and [ hand wire]. But if you want to comment on that, Martin?

Yes. Obviously, it's an area that's continuing to move. We understand one of the options being considered is these 300 with options of increments of 50 vehicles to increase that. So I think the summary is it's not quite settled as to what the full program will be. We understand that will likely just impact how long the program runs for, not the annual production.

And when would you expect first revenue from that contract?

Once the announcement occurs, there'll be down selection to confirm each of the component suppliers. And then from FY '24 onwards, there will be preworks into a small run program up to full production in '26.

And Martin, this one is probably also more so for you. Just the currency, I know you always forward hedged 50% 6 months or so. But the pound obviously weakened in the last several months. So I assume you've -- there's been a change in the hedging rate versus last year. So can you talk about what the impact of that will be in FY '23?

It certainly impacts us when the pound weakens. We have hedging out to the end of December at this stage, and we'll continue to monitor when the appropriate time is to extend that further. And the reason for doing that is just to sort of limit the variation for us, but the hedging is a 50% hedge against the downside movement or the weakening of the pound, but we have a 75% upside if the pound strengthens. So it's really just limiting or protecting on the downside as best we can. But the other that's most pleasing aspect, I suppose, over the coming years as we look to expand our footprint or our activity in the U.K. that will also assist the buffer any movement in the pound.

And Kees, you mentioned inflation at the start of your presentation. So are you planning or thinking about putting any price rises through this year, financial year?

We've already done that. We've already done that 5%. Have we done that? Or is it going?

That went through in July.

And is that just Motorsport or across the whole company?

Across the whole board.

Sure. And just last question, again, forgive me, Martin, probably more so for you. Just the CapEx, like it came in at 5%, I think the second half was only 1.5% versus 3.5% in the first half, just seemed a bit of a drop-off. What sort of CapEx level should we anticipate for this year and going forward?

We're expecting in the order of 10% back to our usual level. It was impacted by timing of -- lead time of equipment. So we've got orders in and we've increased those orders, put more orders in since the end of the year. But there's generally a 12-month lead time on major items, but because those lead times have blown out, the CapEx has rolled into this year.

So did you say this is going to be more like a $10 million CapEx figure?

Back to around the normal levels because of that, I suppose that delay has now [ fallen ] everything back 6 months or so.

[Operator Instructions] Your next question comes from Sarah Mann of Moelis Australia.

Just a question on the inventory. So clearly, lead times, et cetera, it is totally prudent to hold more stock. Just trying to understand like how much of the uplift in inventory was from cost inflation versus holding -- just holding higher levels of stock?

The vast majority of it was higher levels of stock. The incremental price increase is about not a great proportion of that at all.

Got it. And in terms of lead times, I mean, have you seen that start to move at all? Or it's still kind of staying at kind of consistently elevated?

It is leveling out a little bit there, but it's certainly longer than it has been in other years for sure. And I think the people that know me well, I do have a saying a bit of looking at it and looking forward. And really, we had to make a decision of, well, cash in the bank, what does that give us or raw material with the price increase, while we have that stock for the raw material, it certainly would probably balance out if you had the money in the bank. But probably the main thing is that the lead times have always been fairly long anyway. And because we are probably not 100% sure of everything that is happening on a weekly, monthly part of the business, we certainly keep extra stock in case of pushing on an emergency programs, which there is a lot of in our business. So yes, we've certainly increased our stock holding. But as I say to people, aluminum doesn't go rusty. So I think it's better than money in the bank.

Sure. That makes sense. And then in terms of the pipeline, so you've given a lot more color this time than normal, which is good. And some of the contracts that you flagged are quite large/long duration, particularly on the OEM front. Can you just give us, I guess, a bit of color around what kind of automation and investment in capacity will need to happen to support those contracts and just some idea around the timing and the quantum of the CapEx spend around that, too, please?

Yes, that's a very good question. Yes, some of those larger programs there certainly will be investing some automation because the volumes of the parts are significant. So we've already started to do some R&D and initial works on automation for those contracts that are coming up in '25 and '26, particularly. We have time on our side, but we want to be in front of the game for that. As far as expenditure go, I think we'll be able to certainly handle that with our normal CapEx with -- I think you can safely say our normal CapEx over the next 2 to 3 years will be around about $10 million per year in that circa, so I don't think there's going to be a large spike in CapEx. I think there will certainly be a spike for our new building but we're trying to smooth that over a couple of years there. So I think that in '25 our CapEx could be maybe $12 million to $14 million instead of around about that $13 million circa. So I hope that answers your question there.

Yes. No, that's excellent. And then just like a broader question. Lastly, so you flagged the opportunity with EVs for OEM customers that look pretty sizable. Looking around who's innovating in the space, it feels like the Chinese manufacturers are really pushing hard into the EV space. And given you've obviously got strong relationship with the more premium OEMs in Europe. Like how do you think about, I guess, the risk of the Chinese manufacturers really dominating in this space? Like, is that a negative for you guys? Or is it potentially an opportunity? Just interested in your thoughts around that.