VEEM Ltd (VEE) Earnings Call Transcript

Welcome to VEEM's investor webinar to discuss the company's FY '25 results release this morning. On today's webinar, we have Managing Director, Mark Miocevich; and CFO, Tinotenda Kapfumo. [Operator Instructions] I'll now hand it over to Mark.

Thanks, Ben. Look, terribly sorry for being a few minutes late this morning, tech issues at my end. Welcome, everybody. I'd like to just start off by going through a graph we've been using lately to show what's been happening and revealing what our trends are, as we've talked about, that this is our slow year in between contracts. We had a record year the year before in '24, which makes it obviously a bit more apparent, but the trend is still upwards, and we expect that to continue in the future.

Thank you, Mark. I'll just go through the highlights here. So revenue for FY '25 was $68.6 million, EBITDA of $9.2 million, net profit after tax of $3 million and operating cash flow of $4.3 million. Next, we have the executive summary, which Mark will just take you through.

Okay. So we had a stronger second half and the profitability was there and the turnover went up more. We had a slower start to the year. We had some new contracts coming through, which is a bit of a learning cost on that. And we also caught up on a backlog on propellers. So it was a little bit slower in the first half than the second half. So the flow seem to be fine. We have $4.3 million from last financial year. And the cash flow from operations was up 39% on the first half. So looking at the defense side of the business, we're in between contracts with ASC on the refit program. And there is the other work we do in defense and primarily Austal ships were very busy in the second half, which lifted our defense revenue. So we expect the ASC work to come back in '26 and it will be heavily weighted towards the back half of the year. Their whole refit program has been moved backwards, unfortunately for them and for us. So demand will come when they start placing orders for the next 3 fit at the end around December, I believe, is when it will occur. So we're set to have a really busy second half. The propulsion revenue was $35 million, including shaft lines. We're doing a few more shaft lines now, which is valuable, and we're sort of consolidating on that which is, of course, a record year, and we have more capacity and more capacity coming. So we sold 13 gyros and it was a little bit less than the previous year, record year due to strategic marine ordering a great deal and accelerating a whole order again. So we've been able to sell a reasonable amount of gyros, but a good part of it was very wide, very diverse. So we also spend around $3.9 million in capital development capital and development during the year.

Thank you, Mark. I'll take you through the financial results now. So as Mark has talked about, this was an in-between year for ASC, which was the major contributor to the reduction in revenue that reduced $9.6 million. This is normal and part of the cyclical nature of that contract. But pleasingly, we've signed the extension for 6 years and $65 million, which previously we haven't been happy to disclose, but we've been able to disclose this time around. EBITDA was $9.2 million in which profit before tax was $3.1 million and profit after tax of $3 million. Propellers remained robust as work was 1 and increased scope from existing clients subsequent to the backlog of FY '25 -- being cleared, allowed FY '25 to be relatively stable compared to FY '24. Engineering Products & Services, excluding defense, increased to EUR 16.7 million taking up some of the space and capacity left by defense. Really, this final year has been a tale of 2 halves. We've seen revenue up by 4%, but most importantly, the cost reduction measures we put in at the end of -- at the end of calendar year '24 have come through. So we're seeing the EBITDA improved, up 36%. And we're also seeing there our NPAT actual doubling over the half year. In terms of the balance sheet, with cash on hand of $0.8 million, undrawn facilities of $3 million. And during the period, we increased our overdraft by $0.6 million to $4 million. That was in the first half. and increased our trade facility by $1.1 million in the second half, and that's to gear up for FY '26. Cash flows was $4.3 million from cash flow from operations, $1.7 million from investing and $2.3 million from financing. But pleasingly, the second half with greater EBITDA and greater profit generation meant cash flows from operations were actually up 40% in the second half. And we currently have the $3 million in undrawn facilities between the trade facility and the overdraft at the end of the financial year. I'll now hand over back to Mark, who will give you an overview of the operations by division.

Thanks, Tino. If you look at the -- the comments as a breakdown of what we did over the last year from half to half. As you can see, propulsion is still pretty busy. There's some defense work we did in the second half and also bidding down the new Volvo contracts means a bit of learning. And there's -- the GPs on that work was perhaps a little lower than our traditional mix initially. And then it builds up as we get the routine down NPAT. So great to see defense and ASC was the real helper on this one. But as I said, ASC fell right back for this until the next refit comes on board. So I mentioned -- stabilized before, Engineering Products & Services, it's pretty standard, and it does just continue to flow through every year. There's nothing special there for us, really. The whole rebar was reasonably good. It's just pretty standard. So looking a bit deeper into propulsion. We had a record year in '24. We've got more capacity now, which is terrific to have. So it's important we can deal with anything that comes up. I do note that of the top 10 [ Supiot ] builder. Globally, we're now supplying half of them. which is a bit of a step-up. We found we won another big Supiot builder out of the Asian region, which was really impressive. There is a quite a bit of work down there that we can chase on the more sophisticated boats, which is great. Of course, we're continuing to include more robotics and tooling. As we learn more, it's important for us to stay on this automation curve. Australia is a very expensive country to manufacture anything, getting more and more so. The more robotics and more automation we have and the more competitive we're going to be. So we continue to do that. It's also been expanding our offerings to sharp lines, which takes time to set up our supply chain on this, but we have done it. And we have won some of those contracts, which is represented in our turnover in propulsion. And that will continue to grow. All our aim is to sell a sharp line with the propeller -- selling a propeller -- it's not much effort to sell a shaft line to go with it. So -- and it's 2 to 3x the value of the propeller is the value of the shaft line. So we're pretty keen and that's starting to get the momentum now that our supply chains have been established. The Sharrow agreement, we changed that during this last financial year, with Sharrow taking the lead and we manufacture for them in this first stage. It doesn't change our agreement at all, but it just means in the first stage, having Sharrow much closer to the customer is a really efficient way of doing it. And we meet with Sharrow weekly. We've had regular updates from Greg. They've got an enormous amount of work going on at the moment in America with the new facilities they're building, the restructuring that's going on. And that has, I think, had an impact on them because we've really had very little to do with Sharrow this financial year. So we're certainly hoping that as they get more organized that they will provide that through to us so we can then manufacture. So we still have our agreement in place. So as they develop that -- they have had some more significant results on their smaller ranges since we last spoke. They've now found that the maneuverability of vessels with the Sharrow has been significantly enhanced which means when they're turning, they're taking evasive action, the speed of the vessel doesn't decline anywhere near as much as a conventional propeller. So that's something really interesting we hadn't considered. And of course, we know the acoustic levels are much less. So they are certainly progressing. What we're looking for, for our market, of course, is the fuel efficiency, carbon footprint, which is still developing. We're still that -- their calculations are showing they're getting advantages in some areas, but not right across the range that they're looking for. So we'll continue to work with them. And of course, we're springboarding on all the testing we've been doing on our vessel to continue to develop our own range of products as well. So that's sort of look ahead for us. So expansion of facilities is underway. We've got another 1,000 square meters going in and additional capacity of 3 machines that will explain as we get to defense. They're primarily being backed by the Department of Defense. We have been fortunately received some grants for some of these machines, partial grants, I should say. And it is because they -- the primary focus of these machines is the differing defense requirements for specialists, propellers and other components. So I can't really go into those details, but they are allowed to be used for normal commercial work, which is great from our perspective. But that's what they're for. And some of the programs that we're now working on, these are necessary. So these machines have to be, for instance, segregated, isolated and only accessible by certain people when they're being used for this critical work. But overall, defense, we're looking at gearing up at the moment. So we know all about ASC, they had a wonderful announcement recently. Very fortunately for us, they were able to -- ASC did the main driver of the release and they were actually in the release said that $65 million over 6 years, which is approximately correct. I think it will be a little more as the boats are aging, of course. But in previous times, we haven't been able to release any sort of quantifiable moratory information on that, but we're just not giving permission. So this is for us quite pleasing because it gives all the investment community a greater understanding of what this contract represents to us. So we also are working on this demonstrated blade. We've been talking about this with BAE systems. It's a Konigsberg design propeller, and we've done Stage 1. We've actually completed Stage 2 in terms of the physical verification. We've been going through the final security clearances. These are the highest level of security of propellers that we've seen that they have to be manufactured in great privacy. And we're now just going through all of the security, the clearance as we need, and we're just about there. So now it's just going -- our approvals going through a review. And we hope that over the short term, the next few months, we'll have all the accreditation in place to be able to finalize a tender and contract on the first pair of propellers that we can manufacture. There's actually more than just hunter. Hunters are 6 boats that there's 42 of these vessels being built globally. Only 2 people globally are qualified and VEEM is 1 of them. So what we're hoping to do is to springboard onto the global supply chain on these. Currently, from a physical manufacturing perspective, we probably have our nose in front in terms of accuracy and compliance. So we're hoping that will put us in a good stead to win more of these. So it's about a couple of million dollars of both for that. So we think this is going to become quite a good ongoing work. The beauty of this springboard is under other work for defense related for Konigsberg generally where they are looking for suppliers for their products into the U.S. defense market and for other commercial projects as they don't manufacture these things themselves. So we've got some opportunities there in which we've been tendering on. So that's really, I think, a terrific outcome. So we also -- you'll notice, yesterday, we had to do a release on the HII part of -- which is for the Virginia-class submarines and for the aircraft carrier program. We wanted to wait a little bit on this because we wanted to have an order before we came back to the market because it's sightly concrete to work on it. Even if it's a toe in the water contract, it does signify that we're there, and we're producing and it will grow from there. But the government and HII were ahead of us, and they were quite insistent that they went to market. So we had to do so. But it's -- we've qualified at a higher level than the other people mentioned that the requirements of what we're doing is a little more intense and higher levels of secrecy. So we got through that. We've now just waiting for the early tenders to come through. And I do suspect that it will be toe in the water, job first, but it will be perhaps some. We could be manufacturing something for them before the end of the first half, but it will be small. And once we've got the time on the water, they can grow from there. But remembering they want to double their submarine output, they are having difficulty obtaining the type of work that we do in the U.S. So we -- I think that is -- we can expect that to be quite promising in what we do. So we're pretty excited about that. So the grants of machines. And we expected the involvement of just being in the defense sector now will enable us to win more working from related companies need the security clearance. A pretty good example is there's a missile program coming into Australia in '27. We're going through early stage talking to these people. In fact, we've gone through all these programs of security puts us in good stead that we're already partway down that road. Also, we find that Austal ships, a fantastic local company. We're heavily involved in their extended Cape class. They have landing barges coming which -- one of which requires propulsion of our nature and also the replacement for the Anzac frigates, a new Japanese one that has propellers as well. So we -- there might be an opportunity if they're built here for us to be able to provide the Austal content for that, which is terrific. So gyros, again, where we're seeing last year was a great breadth of customers, not quite as high, but it has helped us. It shows that our market penetration is growing, which is terrific. We have launched our Mark II with a 5-year warranty that we addressed all of the little bits and pieces that we found in the market including a couple of strange ones. We had half of the fleet at that stage, supplying waveless water than was specified, like running your car with what's radio at half full. You're not going to go far. So we found that and we've upgraded to compensate for that and changed it. I think the thing, acceptance was from us to say, look, a lot of our customers are going to be recalcitrant, so you're not going to change customers. So the best idea is to compensate. So it was a pretty small job to increase our -- significantly increase our cooling capacity to allow those sort of circumstances in the gyros still to run. And even if something is simple as people sending power down a POE cable, an Internet cable to a gyro, which wreaks havoc in all electronics. So some very strange things that you wouldn't think that a professional shipbuilder would allow to occur. Unfortunately, it does from time to time. So that addresses all those little items that we found that are out there now. What we've known about is very pleasingly is we're up to about 60-odd units that are out there and running a little over, and our warranty claims are diminishing every year since last Northern summer. It was our quietest Northern summer since it was released. So we're pleased and it's exhibiting all the right trends. So that's very pleasing. We still expect that's the biggest part of our business. And now we've got a very robust unit that we've got, then I think you'll start to see that greater sales volume that we're looking for. Our Engineering Products and Services, what can I say, we've been doing since 1968. All goes well, we've got a forever pipe range of pipes. It just keeps on keeping on for us, and we'll continue to meet that market need for as long as it's out there. So we saw the investment of $3.9 million in plant and equipment, capital engineering. So we're putting in additional robotics in our propeller processes and some new robots to extend our capacity and the product development, including gyro and shaft lines. So the gyro side of things, we've actually got some more technology we've been working on, which were coming down the pipeline now, which is patented or the application for patent has been applied. It will transform gyro to being a no scheduled maintenance unit. So it will tuck down under the deck and they won't really look at it for -- in fact, on Cypriots probably close to the life of the vessel. So it really is a bit of a game changer for us. So it's important for us to be looking for that ultimate product. So it's going to be better every day to make sure that we're going to remain the market leaders in what we do. So going forward, defense, we've got to look forward to ASC, HII and the Hunter class and then later in the track missile program. And of course, in between all that, the Konisberg additional work, the Austal additional work that comes. These are really significant naval projects for us. And if you look at doubling the U.S. submarine program, it means there's instead of being Collins Class is $12 million worth of valves for perhaps a submarine, the American ones are over double the size, some of them are 3x the size. So you can understand the amount of complex castings that they require, and they are complex. Complex materials, which we are very experienced at but very few people in the world now in the Western world are experienced in these type of metals. The foundry industry has been declining throughout the Western world. So the propulsion side -- look, we believe that propeller has been really quite strong. We are monitoring currently the impact of the U.S. tariffs. That's pretty unclear at the moment, and that will become more clear over the next few months. As you're aware, there's a tariff then it's reduced and it's increased and it's reduced, and that can wreak havoc on customers buying superyachts or bringing components into build boats even into the U.S. So we're watching that really closely. However, we are continuing to grow and expand what we actually do and there is several larger opportunities available for us that we're pursuing for OEMs. So we're -- by building this new facility is -- actually enables us to deal with whatever comes along our way. And we have been still keeping an eye on new locations. There's been -- we still think there's a pull or a demand in the U.S. or Europe as our next phase of expansion. As it unfolds, we will know more about that. And the shaft line one is something that we're still pursuing vigorously, and we see that as being a growth area for us as well. So it takes a little bit of time to do the design work and the supply chain development, but it's all happening. Gyros, Mark II has been fantastic, and we'll continue to bring new technology, and we expect to continue to grow. We're still the only player in the big space. There's still an increasing growth in the lower space where it's almost standard in the U.S., for instance, on boats over about 40 feet. So it's a fantastic product that works very, very well. And the traditional engineering demand, we continue to do, continue to make money. So going forward, we've got this -- traditional slower first half, and it will be slower first half because we've got all this big stuff in the back half, and we're simply waiting to get on with it. But it should -- I think it's the brightest future that VEEM has seen in its history is to have such strong areas in propulsion, defense and gyros, which makes us extremely excited.

Thank you, Mark. We'll give to Ben to do Q&A.

Thank you, Mark and Tino. Yes. So to remind you if you like to ask a question, please do so while the Q&A button at the bottom of the screen. First question come through here is VEEM has been a consistent payer of small dividends. Can you explain the thinking of not declaring a final dividend.

Sure. I'm happy to take that. As Mark has just alluded to in his final remarks there, we have a lot of work that's coming down the track, especially in fence. So -- we've recently announced ASC contract just yesterday, HII supplier status and Hunter is nearing completion. So we see that as work coming down the future that we're getting ready for. When those contracts start up, they're not quite self-funding, but their funding mechanism is very advantageous because they are large contracts which we get a large deposit for. So there's cash upfront to get that going. But as Mark talked about for things like Hunter, HII, there's been work we're doing in the interim to gear out to get ready to qualify. And we've just seen we had a good half -- second half -- increased profitability, increased cash flow. And we decided after we paid the dividend in the first half to maintain that cash to get us to that point of the new contracts and to get ready for them.

Thank you, Tino. When do you expect to get an indication from Sharrow on how the test propellers are performing?

Really interesting. They have fed back on the ones, the few that we've done, and they have performed their customers very happy. We're a little mystified as to why they haven't been able to give us more designs to manufacture. But as Tina was saying, there's a lot of work been going on, and I think they've just been strung on resources with all the changing in their organization. And Greg has explained that to us. And he assures that there are more coming down the track. And all we can do is talk and continue to urge them on in their good work. But we can't wait just for Sharrow to come, hence, why we've been doing our own development of our own shaft lines. And we've developed a new range of proprietary high-tensile alloys, which we've already been testing as our vessel is already set up for this alloys on board. And we've been able to -- even on our first prototypes, we've demonstrated a 6% increase in efficiency over our existing best quality bronze propellers. And the second prototypes will reveal even more than that. So what we're doing quietly behind the scenes is developing -- further developing our traditional monobloc propellers, which is our staple and the shaft lines to go with it. And we believe we can produce significant increases in dual efficiency and decreases in -- decreases in carbon footprint, which the market are desperate for and focus and we believe that the Sharrow propeller will become, I guess, the bookend of that and when they can get their development to the stage, we can just manufacture -- we're seeing a little bit of frustrating from our perspective. But we understand when you have groundbreaking technology, it takes time for it to be sorted and to develop internally. And you always believe it can be done quicker than what it actually can be done. And I think our gyros are a reason and a testimony to that, that it takes longer than what you think it will. It will be -- I'm sure Sharrow will be a great success. And we have got our foot on that product. So when they are able to do that, then we will be the main beneficiary of that development. So the Board has adopted the view that we just need to be patient and supportive and encourage them. And with our weekly meetings, we continue to encourage and provide any information we can and do whatever we can for them.