On April 21st, 2016, Jeff Kendrick, CEO of CEMATRIX (OTC:CTXXF), delivered a presentation and answered questions with MicroCapClub's community. CEMATRIX was originally profiled on MicroCapClub at $0.16 per share on September 26th, 2014. The company currently trades at $0.45 per share, roughly 10 TTM diluted earnings. Its cellular concrete product is starting to gain market acceptance in large infrastructure projects in Canada, as seen in the company's most recent financial results.
CEMATRIX is a manufacturer and supplier of technologically advanced cellular concrete products with applications in a variety of markets, including oil & gas construction and infrastructure construction. Cellular concrete provides a cost- and labour-saving solution for various construction applications.
Below, we have posted the transcript of the presentation and question and answer session. You can download the slide presentation here.
Jeff Kendrick, CEO of CEMATRIX: My name is Jeff Kendrick. I'm president and one of the founders of CEMATRIX Corporation. We started the business back in 1999. The first few years were initially R&D, and this is sort of our second go at growth in sales, because initially, back in 2008 and '09 before the crash, all of our work was in the oil sands industry and growing dramatically. We went from a lot of sales to zero overnight, and basically had to start the business all over again in the infrastructure market. The goal today is to give you a quick summary of what we do so you get a better understanding of what CEMATRIX is all about and what opportunity you may have with us.
Slide 2 is forward-looking statements. Everybody knows what that is, so I won't talk about it. If anybody doesn't, they can certainly ask at the end of the presentation.
Slide 3 is just a summary of the outlook at this point in time. 2015, just to go over last year's data; in 2015, the revenues were up 77 percent, to $15.4 million from $8.7 million. We had EBITDA of $2.8 million before stock-based compensation. Our 2016 revenue projection is around 18 million, which is not a significant increase, but we truly believe that 2017 will be a significant year of increase in sales, just based on the projects that we're working on right now. 2016 EBITDA, we expect it to be comparable, and the reason for that is in 2016 we'll have a higher influence of infrastructure sales and the infrastructure margins tend to be slightly lower than the oil & gas margins.
Our project pipeline has now exceeded $99 million, and 94 percent of this is infrastructure-related. It's interesting to note that back in 2008 and '09 before the crash, 95 percent of that would have been in oil & gas construction. So, a complete turnaround for the business into a much more stable environment in the infrastructure market. Just as a little bit of knowledge, our historical success rate on that pipeline has grown to 20-25 percent of the pipeline, and in fact, in 2015 it was 25 percent of that amount. Keep in mind that 99 million includes sales into 2017 and beyond as well, so it's not all related to 2016.
We'll go to the next slide. Why is CEMATRIX going to be successful? It's really summed up in one of the referrals that we have in our website. This came from a construction company, or an EPC company, KBR Inc. (NYSE:KBR). Essentially, on a small project that we completed in less than two weeks, we saved them over 5,000 man hours and over seven weeks of construction and essentially brought the project back on its timeline.
The business' cellular concrete, which is the next slide, is essentially the sale and onsite placement of cellular concrete. So we are completely mobile, and we place the material and finish it so that it's all in place.
How do we do that or what is cellular concrete? Essentially, it's a Portland cement-based material. If you think about Ready Mix slurry, we take all the sand and gravel out and we replace it with a carefully constituted air bubble system. By doing that, this microscopic air bubble system results in a lightweight, high-flowing insulating material with some structural properties.
How do we make it? Which is the next slide. Essentially, we make it in mobile batch plants. There's two types. The slide that's here is our dry-mix unit. These are fully automated, computerized portable batch systems that mix the slurry, pump it and foam it at the same time, and place the material as well. We have three of these big units that can pump up to 120 cubic meters an hour, and we have five of the smaller units that don't do the mixing. They take a delivery of a slurry that's predesigned by us from a ready mix company like Lafarge (OTCPK:HCMLF, OTCPK:HCMLY). They dump into the back of our unit and we process it from there.
Who are our customers? Essentially, they're the engineers who design materials into projects. Geotechnical engineers and other engineering firms that participate in that types of specification development as well.
What is the size of the market? Which is the next slide. It's essentially immeasurable. There's just too many applications in too many significant markets in order to really try to determine what the size of the market is. You'll get a feeling of that as we go through the presentation about where it can go.
If you look at the next slide, we're really in three separate billion-dollar construction markets. The first being infrastructure, so our material is used in insulation or as a lightweight fill for roads and runways, MSE panel backfill, bridge abutment backfill, retaining wall backfill, shallow utility insulation, tunnel grouting. On the oil sands and refinery, which is really sort of industrial construction, there's service roads, tank base insulation, facility under slab modules, pipe rack insulation, fire lines and other. The commercial side, which we don't pursue directly but we get specified into that market, so runways, building under slab parking structures, roof decks and shallow utilities.
It's kind of like the pink insulation in your walls. We look at it as you can't see the pink insulation, but it's all around you. It's the same with cellular concrete. If you look at a typical city like Calgary, where we're from here, it's in the shallow utility insulation, void fill, foundation support for buildings, tunnel grouting, bridge embankment backfill, MSE panel backfill, and road bases as well.
Same thing for the industrial side of the resource sector, where you're looking at these industrial facilities where essentially the entire site is being covered with cellular concrete to insulate and protect various infrastructure on that site and various utilities beneath that site.
Some of the examples of the products we've done, if you move to the next slide, is this picture with the plane on it, the Delta plane... is the Reagan International Airport in Washington, DC, where we poured 13,000 cubic meters of the lightweight fill over very weak soils. These projects can be up to 50,000 cubic meters or more. This one is probably one of the most prestigious projects we've done to date.
Road reconstruction. This is a road being built over very weak and unstable soils, or had been built over and it had failed. They tried numerous times to repair the road. In this case, we poured essentially a floating base of cellular concrete over the weak soils, and they built the road upon that. Again, these projects can be up to 50,000 cubic meters or more. We're basically in the early market stage development of some of these applications, including this road application.
Bridge abutment backfill. Anytime you build bridges over weak and unstable soils, typically they use these MSE panels, as you can see here at the end of this bridge abutment. We essentially provide a lightweight fill behind those bridge abutments to provide less pressure against the bridge abutments themselves, but also the underlying soils, which are very weak. Again, these projects can be up to 50,000 cubic meters or more.
I think our largest to-date is around 30,000 cubic meters, and that's the next slide, which is just an MSE panel backfill project in Southern Ontario. This is the extension of the 401 to the new bridge that's going to... it's called the Gordie Howe Bridge going from Windsor over to Detroit... and we poured over 30,000 cubic meters as a lightweight backfill behind these MSE panels on both sides of the freeway. Again, these projects can be up to 50,000 cubic meters or more.
Next slide is a refinery project that we're working on right now north of Edmonton in Alberta, Canada. You can see that gray material across the entire picture. That's our material. So essentially, we're providing an insulating sub-base basically across the entire site or most of the site. Again, these projects can be up to 50,000 cubic meters or more. By the time we finish up this project this year, we'll probably be close to that 50,000 cubic meter mark.
The next slide, which is titled Oilsands Facilities, same thing. You can see the material being poured down there. It actually flows like water or looks like it's a mousse when it's processed. It's mostly self-leveling, and essentially you can imagine trying to cut Styrofoam and everything, trying to put them in between all of these pillars and things - it takes forever, and it costs a lot of money. With our material, essentially it's lowering costs to start with, and it's much faster to place.
Again, these projects can be up to 50,000 cubic meters or more, and we're working on one right now for Suncor Energy (NYSE:SU) up in Northern Alberta that will probably end up being over 50,000 cubic meters.
Finally, the next slide is tunnel grouting. Anywhere where you have older cities, most of the infrastructure - meaning utilities, sewer lines and water lines - are all being put underneath the city. Essentially, they use molds to cut out a tunnel, they put the carrier pipe in, and then we grout it between the carrier pipe and the outside earth wall of that tunnel. These are significant jobs. We do a lot of Southern Ontario right now, some in BC, and we're currently working on our first project in Montreal. These are again, projects that can be up to 50,000 cubic meters or more.
The reason that I mention the volume opportunity in each of the applications is it's important to note that our total volume last year to generate the 15.4 million in sales was only 81,000 cubic meters. So, we're currently in the design in that pipeline that we're talking about of projects that are larger than last year's entire volume. We believe that the number of those types of projects will continue to grow as the market acceptance of the product continues to grow over the next number of years. Again, we're in the early stage market development of this product in use.
Some examples of that are on the next page. There's a couple of Prairie highway projects in Canada that are designed in for over 100,000 cubic meters of cellular concrete. We're currently in the bid stage right now with the groups that are going to be completing that project or bidding on to complete that project. There's a couple of Ontario bridge projects right now. One that's already specified 36,000 cubic meters, but we've heard that that's going to increase to 50,000 cubic meters per side. Then, there's another one that's 100,000 cubic meters. These are both going between Windsor and Detroit, extremely large projects. Again, they're larger than our lasts year's volume in entirety.
There's a Prairie hydro project right now that's specified 276,000 cubic meters of lightweight fill, and we are currently in discussions about possibly using our product for that particular job.
The next slide shows our sales growth by market from 2008 to 2016. It's important to note that 2007 is not on this slide, where we did $7.7 million in sales and made $800,000 on that $7.7 million. That was a doubling of sales from the previous year, and that reflected what the growth was going to be, had we not had the crash in 2008, for the end of 2008 into 2009. In fact, 2008 sales were originally contracted to be higher than 2007 sales, and in September of 2008, we actually had $13 million under contract or close to being under contract for 2009, and we hadn't even had the selling season yet. Unfortunately, by December of 2008, all of those sales disappeared.
You can see in the 2008 chart the significant influence that oil and gas sales had at that time and the change since then as we've been slowly building up the infrastructure market. 2015's been kind of an unusual year, because we actually had some significant oil & gas projects that we completed as well. Just because the oil price has dropped does not mean that a lot of the larger projects are not continuing to go ahead, because they're looking - for example, Suncor's (SU) Fort Hills project - they're looking at long-term oil pricing, not short-term.
Even so, we expect that in 2016, more than 75-80 percent of our work will be in the infrastructure area, and that will continue to grow.
The next slide is just a summary of where we are today. We have announced $8.4 million in contracted sales. We have another highly probable $9.6 million, which comes out of that sales pipeline that we've talked to, for a total possible at this point of time of $18 million. Other projects, which is the sales pipeline that we're working on, are $99 million.
It's important to note that these are real projects that we've been approached on for a design or a quote or both. So, they're not just pie-in-the-sky type projects. These are real projects that engineering firms or owners that have approached CEMATRIX for that information. It's important to note also that it is 90 percent infrastructure-related as opposed to the past, where all of it was related to oil sands construction.
The next slide just shows our capitalization to-date. We have 34.2 million shares outstanding at December 31, which was our last announcement date. Our Investor Relations company has since then exercised their options of 300,000, so total outstanding is about 34½ million shares right now. Fully diluted is 2.4 million on top of that with the vested options.
It's also important to note that we haven't raised any money since we went public back in 2006, except for a short-form offering right after the capital combination.
Next slide, investor highlights. Just to go over things. Unlike the 2008 and '09 crash, the drop in oil prices did not put a halt on our growth. Has it affected us? Yes. In fact, in 2015, we probably would have had an additional $5 million-plus in sales had it not been the drop in oil price in Western Canada... well, that affected Western Canada.
Next slide, just a reminder that our customers are in three distinct billion-dollar construction markets, and there's numerous applications within those markets.
The next slide. One of the things that we've done - even though prior to 2015 we were in kind of a survival strategy after the collapse of our market in 2008 and '09 - we built up over a 500,000 cubic meters of seasonally adjusted production capacity, or about $88 million in sales. Again, we only poured 81,000 cubic meters last year, so we have a lot of room in our equipment capability.
Next slide. We have unique proprietary equipment, foaming agents, material mixes and processes. We don't... none of those things are patented. Most of them relate to formulas... and if you patent a formula, people can just copy it, so we protect our technology the best we can in other ways.
Next slide. We have achieved significant engineering owner/contractor acceptance across Canada and into the US. Since a number of you gentlemen are from the US, it's important to note that the US market in the development of cellular concrete is much further ahead than it is in Canada. Essentially, CEMATRIX is developing an entire market in Canada. So just like in Canada, where we have building starts of 100,000 units per year, in the US it's usually ten times that. In the US, the market is probably more than ten times larger than it is in Canada for the cellular concrete business.
Finally, just to summarize again, 2015 was another record year for CEMATRIX. The 15.4 million in sales, a 77 percent increase over the previous year, and that generated 2.8 million in EBITDA.
So that's the slide presentation. Ian has passed on a few questions that I'll go over that he had for us. So I thought I'd go over those first, and then if we have any time, you can ask additional questions at the end.
Why don't the big cement companies just develop and sell cellular concrete themselves?
First of all, they have been developing cellular concrete for the past 35 years, both HeidelbergCement (OTCPK:HDELY) and Lafargeholcim, but they've been unable to come up with the capability of producing cellular concrete consistently in high volumes, which is what we do. In fact, right now, Lafarge is an indirect partner of ours and is, in fact, selling our product in some locations in Canada, and we continue to develop our relationship with them.
Can they supply themselves? Not really, if you think about what they do, as they make cement and they make ready-mix that they sell. They don't have the equipment or the technology or the people to do what we do. They would never get into it. In fact, most of the cement companies are all retracting back to their strengths, which is cement sales and ready-mix, and they're getting out of all their ancillary businesses.
Who are your main competitors in Canada and their market share? What competitive advantage(s) does CEMATRIX have over them... IP, proprietary methods, etc.?
There are none. There's a couple of small players in - somebody has the smallest machine in Southern Ontario that is more of a pain in the neck than anything. They can't do what we do, and they certainly can't pour the volume that we can. There are many more suppliers in the US. Most of them are mom-and-pop operations. There are a few that have the capability of pouring high volume, but the quality of the material is not the same. So, our specification of material is much lighter and stronger than they can provide. What we've done in the US to-date is basically go in and cherry-pick projects, like the Washington, DC, project. Again, because our technology is that much better that it enables us to produce better material at a lower cost.
The competitive advantages that we have, again, it's technology related. The lighter and stronger the material you can make, and if you can process it in high volumes... there's very few companies in the world that can produce from one machine 100 cubic meters an hour. We have that capability, and our material's that much better.
Since you had less than $500,000 in sales to the US, do you have plans to increase your US presence or remained focused on Canada?
We actually had 1.9 million in sales last year - I was just going back - in the US, which is up from 0.7 million in 2014. Again, those are cherry-picked sales, so we don't go after all of the potential opportunities down in the US. But the other quick answer to the question is that the focus in the future will be on the infrastructure market and growth in that area, which includes the US. So, when we expect to expand in the next five years, we expect to expand our US business quite significantly.
What is the average margin on oil & gas versus infrastructure jobs?
I mentioned earlier, typically we're generating 40 percent plus in the oil & gas side just because of the nature of the market and where it's being done. Infrastructure projects are typically in the 20 to 30-35 percent range. Smaller ones are higher, and higher volume ones are in the lower end of that range.
In the past, Q1 was typically a seasonally slow quarter for CEMATRIX. Is that still the case, or has the business changed, either through new types of work and/or new geographies, such that the prior seasonality has become muted?
Part of the reason for going into the US is to try to reduce the effect of seasonality on our business, and we do. If you notice the past year, we had a fairly good first quarter, where we broke even. We continue to expect to generate work during the first six months, but the biggest part of our business is really from July 15th to October 15th every year, which is really the main construction season.
Can you give us a couple specific examples of jobs you have done that came about due to the Lafarge relationship which you otherwise would likely not have gotten?
Yeah. There's been a number, but there was a large grouting project in Ottawa, Ontario, Canada, that we did that with one of Lafarge's clients that they introduced us to. Most recently, we just started a tunnel project in Montreal, Quebec, which again was one of Lafarge's grouting customers, and they introduced us to them. We worked for a year with the City of Montreal in designing material for that project, and it's currently underway and is expected to be done by the end of May.
Has Lafarge's merger with Holcim affected your opportunity pipeline, and if so, how?
The ironic part is it's been a negative effect, because for the past year they've all been focused on making that combination. So, it's affected their participation in the development of our business. We expect things to start getting rolling again with Lafarge and Holcim mid this year and continuing to grow that relationship throughout North America.
You added a couple mixing units last year - one wet and one dry. What's on the table for capex in 2016/2017?
When we did our budget in the Fall, we actually expected not to be doing too much from a capital expenditure perspective in 2016 and '17, but because of the large number of significant projects that we're working on, we're probably looking at building another dry mix unit and possibly some wet mix units to expand our relationship with Lafarge as well.
Now that Trudeau has been in office for a bit, would you characterize his administration as beneficial/harmful/neutral to your business?
We believe it's been harmful, particularly on the oil & gas side. Besides the oil price drop - which he's not... he didn't cause it - however, the continued delays in pipelines to take the oil from Canada through the East to the Eastern Canada or through the West to the Coast or down into the US, it's certainly going to affect investment in Western Canada on the oil sands side.
What is a good range or estimate for profitability (operating profit) if CEMATRIX can achieve $30 million in annual sales?
First, we believe that it is imminent that we will achieve $30 million in sales. At a margin of 30 percent, I'd say there's a good average between infrastructure and oil & gas and an overhead of $3 million, which we don't expect to expand much even at the $30 million level. We generate approximately $6 million in before-tax profits. That's again an approximation. There's a lot of variables that go into that.
Why do you present EBITDA before stock-based comp in the corporate presentation instead of just EBITDA? Is there anything about the corporate stock option plan that makes the stock-based comp irrelevant for investors?
I didn't mention it earlier, but I am a Chartered Accountant. And I'm not trying to put down the profession, but stock-based compensation is not a real expense. It's something that, because of the issues of companies going bankrupt in the US and things that happened and the Sarbanes-Oxley thing, they created this fictitious number called stock-based compensation that really is a stock-value related item. It is not an expense to the company, so it's not... no cash ever goes out of the company. I believe, as a Chartered Accountant, it's totally unrelated to anybody's business, but everybody can look at it their own way. We just look at it and we take that... we take the information, again, before stock-based compensation expense.
There have been a few articles that talk about the cement industry's environmental footprint. It's said that cement production accounts for 5% of human-generated CO2 emissions annually. Have you done any studies on cellular concrete? If it's better than conventional methods, it could be an added selling point.
This is correct. Keep in mind, though, that we don't replace concrete or anything to do with what the cement companies and ready-mix companies do right now. Every time we sell a cubic meter of our product, it's a new market for the cement companies, okay? So, even if it was better than conventional methods, we don't replace their material, and that's why I just bring that up at this time.
Now, we have not done any studies, but the material itself, if you think about it, reduces heat loss in many applications and can be used to build buildings eventually. That's reducing the need to harvest trees and is supposedly - we've been told by engineers - that it continues to absorb CO2 out of the atmosphere. It, therefore, could be a selling point in the future.
Have we done anything on it yet? No. Will we in the future? Probably. Again, we're just coming out of our survival strategy and starting to make good money again and look at continued growth. With making that new money, we expect to put more money back into R&D over the next number of years. So at that time, we'll probably look at that type of information.
Can you give an example of a project and the amount of either time or money that you've been able to save a customer using your cellular concrete product versus whatever else they would be using?
Well, I mentioned the one earlier, which is on our website - one of the referrals - but there's another job that's a really good indication, and this is, I mentioned, tunnel grouting is one of the big applications for our product.
We did a project in Northern Alberta for the City of Edmonton. They actually have their own tunneling division. They were doing a tunnel under the North Saskatchewan River, and it wasn't a long tunnel, but it went right under. The original specification called for a traditional grout, and it was going to take them three months to do and cost them so many millions of dollars.
We actually completed the project in two days, so we saved them over two months, close to three months, for the construction. We're not sure of the dollars, but it was quite significant. The reason that we could do that is, if you think about the bubble structure within the material, the bubbles act like frictionless ball bearings.
So, we can actually pump the material long distances, and it actually just flows along under low pressure, where traditional grouts are pumped very carefully under high pressure and it takes a long time to fill up a tunnel in that regard. Again, saved over three months of construction and significant dollars as well.
I appreciate your time, Ian, and everyone that's on board. Always available for other questions, don't hesitate to call at any time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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