Chesterfield Special Cylinders Holdings (LSE:CSC) — Interim Results

0:01 Good morning, ladies and gentlemen, and welcome to the Pressure Technologies PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and they can be submitted at any time using the Q and A tab. Just situated on the right hand corner of your screen, please simply type in your question at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, we would like to submit the following poll,

0:31 and I'm sure the company would be most grateful for your participation. And I'd now like to hand over to CEO, Chris Waters. Good morning. Good morning. Thank you, Mark. Thanks for the introduction. It's good to be back on platform, and and good morning to everybody who's who's who's joined us today. I'm going to just first give an introduction to the to the presentation today. We've got an an introduction to to the group for those less less familiar with the with with with the company, and some group highlights from our interim results presentation 2022. James will talk in a bit more detail about those financial results, and then we'll look specifically at the two operating divisions of CHESTERFIELD SPECIAL CYLINDERS and PMC, looking at their divisional highlights, followed by an outlook and summary.

1:24 So first of all then, our our our group and, apologies for those who who are more familiar with the group, but but but as an an introduction, our our focus, in in Pressure Technologies is is to realize value from our two core manufacturing divisions of CHESTERFIELD SPECIAL CYLINDERS and PRECISION MACHINE COMPANENTS. We launched in 2019, in June 2019, just three years ago, our growth strategy for those two divisions. At the same time, we we we executed the divestments of of non core operations. Our focus was was the the scale and growth and diversification of of of both both divisions in in core markets and extension in into new markets. CHESTERFIELD SPECIAL CYLINDERS is the cornerstone of of of Pressure Technologies established back in in '27 '97 in in the manufacturing of of safety critical gas containment systems.

2:20 And we serve, as you can see in the bottom left hand corner there, some some very, very significant blue chip customers in in defense, in industrial, and oil and gas markets. We we also have not only alongside our product cylinder product business, we we have a a growing inspection and recertification business for for cylinders and pressure containment systems. And we have an an exciting opportunity in the hydrogen energy energy market. We'll talk about in a bit more detail in the presentation today. In our precision machine components business, the Almet router and Martrack brands are very much focused on safety critical applications for for oil and gas production, drilling, ex exploration.

3:09 We're also seeing, in addition to oil and gas market opportunities, new new opportunities in in defense and and industrial industrial markets. But our focus for the PMC division over the last three years has been the the diversification and scaling of that operation across the blue chip customer base as you can see there, the Schlumberger's, Halliburton's, Baker Hughes, and and so on. So that's an introduction. We'll talk then today about the results for the first half of this financial year for those two divisions and the outlook for them as well. So first slide for for for me here is is is the group highlights. Very much, as as you might expect, facing diff different different markets, a mixed bag of of results for the group and and heavily influenced by the by by the contracts, the major defense contracts in CHESTERFIELD SPECIAL CYLINDERS, where we see between month and month, quarter and quarter, and in this case, half year, very, very significant differences in in revenue depending on the milestones and the contract placement for for those made major major major contracts.

4:22 In particular, for CHESTERFIELD CYLINDERS, whilst we have a very low much lower level of of activity in the first half of twenty twenty two, comparatively, in in in 2021, the first half performance was very significantly, positively impacted by by contracts. So the contrast between '21 and '22 is is really quite significant. And those revenues of of of 6,300,000 compared to 11,300,000 reflect that phasing of major defense contracts. Defense contracts for the likes of BA Systems and Naval Group, Dreadnought submarine programs, surface ship

4:58 programs. For our PMC division, although we we see similar levels of of of revenue that reflect the the what has been a depressed oil and gas market in in 2021 and early twenty twenty two. We believe we're seeing the very much the bottom of of that depressed market. And whilst revenues have been similar, the the the profitability in in in the in the PMC division has has been very, very slightly improved. For CHESTERFIELD, positive very positive outlook for the CHESTERFIELD business based on on its highest order book for five years driven by major defense contracts. We we're seeing a continued strong performance in our hydrogen business as that as that market steadily expands and and and grows with with strong revenues there in in the in the twelve months till the till the period end.

5:52 And, as I mentioned earlier, integrity management, our services business that that's focused on the inspection and recertification of cylinder systems, almost doubled its revenue, in the in the first half of the year compared to the prior year. In in PMC, the order book has has grown steadily in the period. We've had a profitable full year now for our router operation while the Almet operation has, due to the nature of its products, has had a slower recovery, but we're seeing the order intake in that division now continue to grow with with a strong expectation from our from our customers that that will continue to do so. So strong second half expected based on the CHESTERFIELD SPECIAL CYLINDERS order book or order book that is well well committed and and will be delivered throughout the second half of the year. We're expecting continued growth in oil and gas market outlook for our PMC division. And as a result, we remain confident in meeting the full year market expectations.

6:48 So the following slides then will give you a bit more color and detail in the financial results, and I'm going to hand over to James to do that. Thanks, Chris, and good morning, everybody. So this is the group financial results split between CHESTERFIELD CYLINDERS and PRECISION MACHINE components, and there's a slide just about our banking facilities and net debt position. So the group's position, as Chris has just highlighted on the previous slide, revenue was 9,500,000 against 14,500,000 for the same period last year. And our adjusted operating loss was 2,100,000 compared to the 1,100,000 adjusted operating profit in the previous year due to that positioning of contracts through each individual half year. I think the key thing for us is, if you can see on the right hand side there, that defense revenues continue to be strong, oil and gas revenues in the bottom right graph, the colored graph there with the blue, the red, the green, and the yellow.

7:41 Our defense revenues in the red still remain quite strong, but that will grow into the second half. Our oil and gas revenues are still at the lower end but are starting to recover. And again, that should grow into the second half. And our hydrogen revenues, as you can see in the green, are starting to become more prominent to the group as a whole. In terms of, net debt, our net debt position at the end of the year was 5,400,000 compared to 4,900,000 at the end of the previous year. So despite that large loss in the first half, our actual net debt position only moved by 500,000. At a more detailed level from a p and l perspective, to show you that split of revenues and operating performance between each division, Effective, I just focus on a couple of key things there that the lower CSC position against the previous first half of naught 300,000 operating loss compared to 3,000,000 operating profit in the first half of last year was driven by that main that contract activity and milestone placements.

8:38 That will benefit the second half of this year, so that will look different at the year end. For PLC, the operating loss, as Chris said, was slightly improved compared to the previous year for the same level of revenue, and we expect to see that higher performance in the second half as well as we start to see OEM customers reporting improving outlook for the second half of the year. If I flip on to the next slide, which is about the balance sheet. Key thing on here, talked about net debt already at the $5,400,000 net debt compared to 4,900,000 at the year end. So we've reduced our facility borrowing down to $4,000,000 in the first half of the year. Right of use assets and asset finance leases, we're reducing those over time. So that's come down to $2,700,000 at the half year. And our cash and cash equivalents was equivalent of about $1,300,000 at the half year point.

9:28 We do hold just over 12,000,000 of tangible assets, predominantly tangible fixed assets. As and as you will know that we've written off in the prior periods into previous years, our intangible asset base down to just just over 200,000. Our net working capital position was about 7,600,000 at the half year point, and we expect to see that at a similar level at the year end.

9:54 In terms of CHESTERFIELD, as we've talked about, reduced revenue down to 6,300,000 from 11,300,000 and an operating loss in the first half of point '3. I think as Chris said before, the key thing there, the order book at the end of March twenty twenty two is $14,600,000 compared to $8,000,000 at the same time last year. So there's been a big change in order intake, which will then facilitate that growth in revenue into the second half of the year. And as you can see there, its gross margins are are still fairly consistent at about 29% with prior periods. But for the first half of last year, it was uplifted because of that increased performance and profitability on the defense contracts that went into the first half of twenty one. As I say, second half of this year for CHESTERFIELD should be a different second half with the weighting of all those orders being placed into the second half, and we expect to see a good performance at the second half of the year.

10:49 For PMC, as we said, the revenue and the loss were consistent revenue for to the prior period of '21 to 3,200,000 and just a slightly improved operating loss of 800,000. Again, the order book at the end of March for PMC was 2,200,000 compared to 1,600,000 at the same time last year. So that order book is definitely improving, and we anticipate growth into the second half of the year. The other key thing for PMC this second half is that they will be doing some operational work on a particular line of defense works with our CHESTERFIELD CYLINDERS division, and that should start to see that diversification of revenues away from oil and gas into the second half. And on the graph at the bottom there, you can see where it's got a slight yellow bar above the dark blue. That's the industrial revenues that we're expecting to grow over the next six months and beyond. But for the moment, that still remains around 10%, 12% of our business in the division.

11:51 And if I just move on to the net debt position. So in the quarter as in the half year, sorry, as I said, that we've got 4,000,000 drawn debt now. We extended our bank facility with Lloyds Bank through to September 2023. So that lasts for another eighteen months as of the half year point. From September 2022 quarter end, so this last quarter that we're just starting now in July, the the previous tests of leverage test, which looks at net debt compared to adjusted EBITDA and our interest cover test that were there in prior times. They returned to us, in this last quarter of the year, and we're not foreseeing we're not foreseeing any issues with that covenant test in this last quarter. Going forwards, we that will continue through to the end of the, contract, at the end of September twenty twenty three.

12:42 On the right hand side there, just showing you that split again between net debt between cash and cash equivalents, bank borrowings, asset leases, and right of use leases being that 5,400,000 as we experienced at the half year. We anticipate that reducing through the second half. And I think that was me. Don't Chris, I'll hand back to you if that's okay for your operational highlights. Thank you very much. Great. Thanks, James. Great. So we're now going to get get a bit of detail on the two operating divisions. We're going to start with CHESTERFIELD SPECIAL CYLINDERS. First of all, we're going to look at the highlights for the first half of the of of the financial year. And then importantly, we're we're going to cover two two exciting growth areas of of the business, hydrogen energy, and the various various elements of that and and and its outlook, but also our integrity management services. So our strategy for the growth and development of CHESTERFIELD SPECIAL CYLINDERS back in 2019 was very much about the improvement of of margins and operational performance, for our core defense contracts, but also for the diversification, into new sectors. And hydrogen, is an exciting, diversification, exciting development, for for the business. I say the diversification, but actually, CHESTERFIELD SPECIAL CYLINDERS HOLDINGS been involved with with with hydrogen pressurized hydrogen storage for over for over seventy for over seventy years. But but, nevertheless, with the with the increasing adoption of of hydrogen in the global energy mix, There there is a very exciting opportunity.

14:14 So strategically very important for the group. And our other element, core foundation of of strategic growth for CHESTERFIELD integrity management services, business started in 2016 that that takes our our our product focused business into new areas of of services and and and recurring recurring revenue and deeper relationships with with customers. So we'd like to explain a bit more about that. So so first of all then, the highlights from from the first half of of the year. Some of these points we we have already covered, but a bit more color color here. As as as we explained earlier on, the first half of the year and the second half of the year and the the very significant difference in performance in first and second half is driven by the the the placement of of of contracts for for major defense from from major defense projects and and also the milestones for for the delivery of of those contracts.

15:10 And these are things typically that in CHESTERFIELD SPECIAL CYLINDERS, we're we're unable to to influence very significantly. As you can imagine, these are defense construct new construction programs for submarines and surface vessels are are established over a decade before, and we have one small but important role to play in in providing the pressure systems, the cylinders for the various various systems on onboard these the the the either strategic deterrent nuclear submarines, conventional submarines, or or surface surface vessels, not just for UK Navy, but but also for overseas Navy and for for for submarine constructors who export those to NATO friendly NATO friendly navies. So so very significant. The the various now these were anticipated order placement time lines. This wasn't as it has been in previous years delays or or unexpected phasing of contracts. This is the expectation that we had at the start of this year, a very heavily weighted second half.

16:14 And that will, you know, it drives the order book, James mentioned earlier on, so over £14,000,000. And a significant portion of that will be delivered in the second half of the year. And typically, our defense contracts are the highest value, the highest margin, and therefore, have the highest contribution to overall profitability for the CHESTERFIELD SPECIAL CYLINDERS division. That division has its highest order book for over five years. That's bringing together of several major UK defense contracts, the Dreadnought submarine program, where we're supplying systems to BA BA systems. It also we're also supplying cylinders for Naval Group, Naval Group for their domestic navy conventional submarine programs for Barracuda.

17:04 So so those are sort of dominant contracts for us. But but our our defense order book also contains significant orders for our integrity management services business for the inspection recertification in situ of cylinders on nuclear submarines and surface vessels. So significant fluctuations in the first half compared to 2021, but a very significant recovery of revenue due to those milestones expected in the second half from a firmly committed order book from those customers. We've seen strong progress as well in hydrogen sector. Bit more detail on that in in in the follow-up following slides, but but, £22,400,000 worth of of revenue in the twelve months to the end of of April. That was only 500,000 in in the period before that.

18:00 And integrity management performance, strong as well. So as I've said, strong second half performance expected from CHESTERFIELD CYLINDERS with more than GBP 11,000,000 worth of revenue already in the order book for delivery throughout the second half. Good pipeline of hydrogen energy opportunities for established and new customers, not just in The UK and Europe, but now overseas. And we have not only the the hydrogen demands are only coming from from refueling station contracts, which was the which was the early stage in development, but also from large scale green hydrogen storage. And we're we're seeing that that that dynamic change in in the in the hydrogen market. It's a strong outlook for the second half of the year based on defense, hydrogen and integrity management contracts.

18:53 So then a few slides on hydrogen energy and a little bit of detail on orders inquiries and developments in that space. So we saw in the first half of the year, order placement was slower than we had anticipated. And I think several contributing factors to that. Our cylinders are not the only component required for refueling station contracts at chillers, compressors, and various other components. The lead time on on those components were were were affected by by global economic conditions and and also, of course, the the increasing costs towards the the end of of Canada twenty one and the early part of of of twenty twenty two. So so the the the pace of the development and production of of the refueling stations certainly was slower than anticipated, slower than our customers anticipated.

19:48 And therefore, the ordering of storage is probably about six months behind where we anticipated it might be about a year ago. Nevertheless, those plans for those customers are still very strong in terms of the construction and rollout of hydrogen refueling stations for heavy duty trucks, for buses and so on, very much in line with the overall market direction that we've talked about in previous presentations. But we've had several orders in the first half, orders that we're either working on or have been placed for our customers, Shell, Haskell and McPhee. And that's been based on our successful 500 bar medium pressure storage. But we're seeing other developments and demand in for hydrogen storage solutions, which I'll talk about talk about next. It's not just been UK and Europe for us. It's also we we have secured our first contracts in in Australia and and and New Zealand.

20:46 And we're we're we're we're also seeing not not just the the demand for the for the static storage, but also the demand for the transportation of hydrogen from the offtake of of green hydrogen production through through through electrolysis

21:03 through to the through to the end use. And whether that end use is is for refueling or whether it's for decarbonization, that the pressurized storage, either static or or or for transportation, is is very strong growing market, and and CHESTERFIELD CYLINDERS is well well positioned to supply solutions for the mobile and static storage of of hydrogen. So as a result, we focused our efforts on on on the development to meet the the solutions that customers are looking for. And and back when we we launched we our 2020 December 2020 fundraising, we we we talked about the the development of of mobile of of trailer trailer solutions for for for hydrogen trans transportation and also the the development of of of very high pressure storage solutions, the ability to to to store more hydrogen molecules in a smaller footprint by by the use of of significantly higher pressures up to up to a thousand bar.

22:04 And those are the areas where our research and development team, our business development team are working at at the moment with customers to to define the the the steel and composite road trailer solutions to to meet the demand for for the transport of of hydrogen from offtake to point of use, decarbonization or or refueling station. But and also the the ultra high pressure ground storage up to a thousand bar, which which we're seeing increasing demand for as a result of of the anticipated growth in heavy duty truck demand for hydrogen at significantly higher pressures around 700 bar. So we're expecting through 2023 and '24 for a thousand bar to become more common, and we're also expecting in 2023 and '24 to see the demand for road trailer solutions in The UK and Europe increasing very significantly. So that's orders, inquiries and developments.

23:02 So far for for CHESTERFIELD CYLINDERS, refueling station projects have been our our core core projects. And we've we've been focusing very much on on the strengthening of of customer relationships, which gives us greater forecast visibility. It also gives our customers, of course, the confidence that we have the capacity and the relationships with our suppliers to deliver their their outlook. And we've seen at least in just taking two examples, our customers, McPhee and and Haskell, are significantly through 2023, significantly ramping up their production capacity to meet the demand for hydrogen refueling stations, and they have an expectation on us to be able to meet that that demand and and the supply of of of of hydrogen storage pressurized hydrogen storage to meet their lead times. And typically, lead times are significantly shorter than than our our defense contracts, and and the volume of cylinders are likely to to be higher in in the long run. And and and you can see our outlook. This is the outlook we have shared with you before. That's not changed.

24:13 The outlook for bus and truck refueling station demand over the next over the next few years is set to to increase very, very significantly. And we we are, you know, well developed in our relationships with customers to get the best view then granular level bottom up that that their forecast visibility, makes sure that we can meet their their demand. Of course, we've had to make sure that our relationships with a very significant steel suppliers, Tenaris and and Valerac, are also strong. And we've talked in the past about the strategic cooperation agreements we have in place with both Tenaris and Valorac that make sure we we have access to and and the the supply of the of core products for for the storage of of hydrogen.

25:02 And so so that's been important, and we've had to demonstrate that to to our to our customers, which which which we've done. Standardizing designs has been very important. So the use of standard use of standard designs allows our customers to develop their solutions with with their end customers, end users, and operators very efficiently. And and the development of of of straightforward supply agreements and commercial terms has made much more efficient the contracting process with with with those with those customers. So good good progress with refueling station projects. But refueling station is not the only component of of our growing hydrogen business. We're seeing increasingly now the outlook for green hydrogen really coming in in in into play. And this is for those of you not not so familiar with this area, this is about the the the pressurized storage of of hydrogen created

25:57 through through through electrolysis, either through solar, wind, wave, and other other means of of green green green energy. Significant commitment from the UK government and and from the European Union to ramping up significantly the production of of green of green hydrogen. And for us, that presents several opportunities. Not all of that hydrogen will be stored at high pressure. Some of it will be stored at low pressure. Some will be through through pipelines. Some will be through liquefied storage. But but we we anticipate that that there will still be a very significant demand for pressurized storage, and and and that storage then

26:36 will be taken off the green production for its industrial and industrial decarbonization and and refueling station con contract. So it allows CHESTERFIELD CYLINDERS to to extend its its value across the full supply chain for for hydrogen from from the point of of generation storage through road transportation and then through at the point of use in industrial decarbonization and refueling station projects. And for those projects, we we've we've just started one one of our first projects collaborating with with with other end end users in in looking at looking at decarbonization projects and how storage is used within those projects, a base use base funded project, which we're starting very, very soon.

27:28 So so that was our high hydrogen couple of points on hydrogen. I'm now going to talk a little bit about integrity management services. Not not an area that we've given a much detail on in the past, but I'm, you know, pleased to to give here a bit of the history and also the the outlook. So it's always been a focus for growth since since 2019 for CHESTERFIELD SPECIAL CYLINDERS. It's been a part of CHESTERFIELD CYLINDERS business that has been actually growing since 2016 based on very strong established credentials of the specialists in CHESTERFIELD CYLINDERS for naval submarine and surface vessel inspection. That's the inspection of cylinders and pressure systems in situ onboard while the vessels are are are in dock using co codes and and standards that Chesterfield helped to develop, internationally accepted codes and standards that Chesterfield helped to develop.

28:21 And this obviously helps maintain operations, avoids the the the extremely complex and costly and sometimes impossible removal of

28:31 cylinders for factory inspection and and testing. It's now to integrity management service around 10% of of our revenue and and is no longer exclusively from from defense contracts. It's also from oil and gas oil and gas contracts, so diving support vessels, offshore oil and gas applications. We've just secured very recently contracts with major offshore operators for their offshore production and drilling facilities where, again, we we will inspect in situ and and help recertify

29:05 the the the pressure systems on board. Those pressure systems typically use for motion compensation or control of buoyancy for for crane operations and also for diving support vessels, the breathing air systems, the critical safety critical breathing air systems. So really exciting. And and this year, we're record levels of of revenue after a COVID pandemic disrupted 2021.

29:32 I have a a slide on on on precision machine components. And and, as I mentioned earlier, our our growth strategy from 2019, for for, for PMC was very much about the the diversification of the customer base. All of our PMC entities, Ruta, Helmet, and and Martrack, were very dependent on a small number of of of customers for a very narrow range of of of products. Our our growth strategy was to extend that range of of customers and extend the range of of products that we operate using, bring new skills into the business to enable that that diversification. And and on that basis, then look at alternative sectors to to supplement the oil and gas oil and gas business. So looking at the highlights for PMC in the first half of the year, as James illustrated earlier on with the graphs,

30:27 we really believe that the two years of depressed oil and gas market conditions is that that that period is is very much over. We've seen demand for for specific products suited to our router operation. We've seen that recovery strengthen over the past over the past year. And and as a result, the router engineering operation in in Rotherham, very close to our CHESTERFIELD SPECIAL CYLINDERS operation, has had a has had a full profitable year, very profitable period driven by by the diversification of of the customer base, driven by a wider range of of of products. But but those products have have been in demand

31:09 for a year as a result of the reestablishment of CapEx projects, exploration and drilling, the wellbore reinstatement and cleaning for the restarting of oil and gas production. So there's been that demand for for the router operation for a year, and and it's been profitable as a result across a broader range of customers. But our Almet operation was was affected by by lower levels of oil and gas production and it the components that we make in our Almet facility for for Cameron and principally for Cameron, a part of the Schlumberger Group and and also for Baker Hughes. That was affected very, very, very, very badly as a result of lower oil oil and gas production during during the pandemic.

31:56 And we we've now seen over the last few months the the significant recovery of of that demand from from Cameron and also from Baker Hughes as their production projects now really start to to ramp up and the demand for those components have have increased. And and Almed in June had its record level of of intake since the beginning of of the pandemic. So we're very much more optimistic about the the outlook there. And in that period, we we we haven't just been waiting for recovery. We've spent an awful lot of of of of time and and and effort in strengthening our operational performance, our quality performance. We're very much rated at the highest level by our our core customers, in particular, Cameron and and and Baker Hughes and and Halliburton in terms of on time delivery, in terms of quality, but also in terms of of of relationship.

32:50 And we're very optimistic about that more diverse customer base and the increasing demand throughout the rest of of 2022 and

32:59 into 2023, a much stronger, more sustainable, and more scalable division we have today than we did back in in 2019. And importantly, we're anticipating a return to profitability in the second half of the year as the Almet performance strengthens alongside alongside the Ruta operation.

33:24 So a final slide to summarize here, a challenging first half of the year for the group driven by the phasing of defense contracts, but a very strong second half outlook as a result of that order book as a result of integrity management and hydrogen energy projects coming through, plus the anticipated steady recovery of our PMC business throughout the the second half of of the year. Notwithstanding those those challenges that all businesses are facing today in terms of supply chain, in terms of labor, availability, cost base, and so on, The board, we're excited very much about the opportunities in hydrogen, integrity management, recovering oil and gas markets, but we remain confident in meeting full year market expectations.

34:18 So Mark, thank you. That was the end of the slides. And of course, we now have some opportunity to answer questions. That's great. Chris, James, thank you once again for updating investors this morning. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. As I've Chris and James take a few moments to review those questions submitted already, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q and A, can be accessed via your Investor Meet company dashboard. Chris James, as you can see, you've received a number of questions throughout today's presentation. So firstly, thank you to everybody for their engagement this morning. Perhaps if I may just hand back to you just to read out those questions and give a response where it's appropriate to do so, and I'll pick up from you guys at the end. Sure. No. Thanks, Mark. Yeah. Yeah. No problem at all. So, Christopher, I'll read them out, then if between the two of us, we'll we'll give you the answers if that's okay.

35:09 So for We got we got the first one there from George, haven't we? Yes, George. Yeah. It says, what are typical milestones in a defense contract that will drive performance improvement in the second half? Yes. Thank thanks, George. So there there are a couple of things to talk about when we we we look at the the phasing on on defense on defense contract. First of all, it's the the the order placement, and and the order placement comes in in phases in itself. So we'll receive part order for what can be very significant raw material. So the raw material tube that we use is a very specialist tube, a very, very, very special alloys of tubes. So we'll we'll typically have a milestone that is the the based on the ordering of raw material, which we'll then receive on onto our site. And we then start the process of of inspect of inspecting that material, checking its checking its thicknesses, tolerances, and so on. And and as you might expect, given the nature of the of of the product, our customers are heavily involved in that. So so the milestone will be based on the receipt and confirmation of quality of of of raw material in the first instance. The the next milestones are then the processes by which we forge the cylinders.

36:20 We forge the cylinders. We heat treat, those those cylinders, and then we we set about the process of assembling them, adding the the the necessary fittings, and, of course, various testing testing phases. And the milestones are configured around those those manufacturing processes and and also the inspection, testing, and witnessing and sign off by by by customers. Now we we have visibility of of of those. Whilst we're we're we're not in control of when the contracts will be placed, we we we do get good visibility once the contract is placed about when those different milestones will fall. And that's why we we said, you know, we're confident in the second half that those milestones, which milestones do then generate revenue and profit and and our ability to invoice, you know, we we have that visibility in the second half, and that that's that's that's what's driving it.

37:11 Okay. Thanks, Chris. I hope that addresses your point, George. This was a presubmitted question. How are we coping with raw material price increases? Yes. I think well, I mean, every industry is is facing price increases across its supply chains. Raw materials are very significant part of of our of our total cost base and and a very significant part of all the contracts that we're working on, in particular, in in Chesterfield special cylinders, but also in in in in precision machine components where we're using advanced alloys. We started to see the the the rise in raw material costs throughout the the second half of of twenty twenty one, and then, of course, very sharply during the start of the Russia Ukraine conflict driven in part by the shock to nickel prices and so on. So a bit of detail there, but nickel is a very significant component in our cylinder tube manufacturing, but also in our advanced alloys in p m in PMC.

38:11 So how we're coping with with that? Well, the important thing strategically is to have strong supplier relationships so that we're not just at the end of of of of a of a process, that says, this, you know, this is the price. Take it. And and, of course, over the last two two or three years, we've established strong strategic supplier relationships with both Valerec and and and Tenaris. We are seen by them as being strategic customers, in in which case, it it is we we've been able to get good visibility and, I believe, fair pricing from those those strategic suppliers. Ultimately, our intention where we can is to pass those costs on to to our customers either through variations in in contracts or through the initial pricing. And typically, we will price contracts on on a in a in a dynamic way, taking into account of of raw material costs at the time that we that we bid the work to to the customer. So in in effect, we're passing on those those costs. Now our customers, of course, then have noticed that the prices are are are increasing, and and we've seen, you know, in some cases, up between 3045% increase in raw material costs for for for steel.

39:25 But but our our customers have been very supportive. We've been very transparent and and open with them about the way in which those those costs have varied. And and and so far, you know, we we have had good understanding from from customers when we're passing on those costs. Okay. Thanks, Chris. Okay. The next question was also presubmitted. Are you happy with the size and quality of your hydrogen sales force? Yes. I'm I'm very, very happy with not just the size, but the the the, you know, the the the personalities involved and the quality of of the team. It's been, you know, an an important area for growth and and development of of the business. It was a commitment in 2020 that we made to strengthen and have a dedicated hydrogen biz business development sales force, and that's what we we've established. As as you might expect, the the the sales process for hydrogen, it's not it's not a transactional sales process.

40:18 It's a very technically driven sales process, Understanding the technical detail of the customer requirements, their operational requirements is very, very important. So, actually, we have a a good strength of technical knowledge and and experience both operationally and d and and in detail technical cylinder design within the the dedicated hydrogen hydrogen team. Not to say that we we know we we we won't need to expand that in in future. We are looking at the moment at how we cover other regions, how we cover Europe more more effectively, how how we cover other other regions more effectively. But today, very happy with the with the size and quality of the hydrogen team. Okay. Thanks. K. Another presubmitted question. Are are all companies beginning to increase capital expenditure on exploration and production?

41:09 Yes, Alan. We've seen this come in two in two phases. We we saw it at start in in March 2021 where there was a steady recovery in the in in in reopening wells in in various regions, less so in in the in the in the North Sea at at the time, but but several of our customers were were actually then starting to to engage in in in their reinstatement of of of Wells and the restarting of some of the capital expenditure projects that have been paused in in in 2020. That started in in March, but it started very, very steadily, I say steadily, at at a relatively relatively small scale. What we have seen more more recently, since the Ukrainian crisis, and the, the move away from Russian oil oil and gas is the restart of of of significant volumes of land drilling in in The US.

42:15 Also, we we've seen deepwater South America, deepwater West Africa, and now more increasingly North Sea projects restarting. And in fact, some of the abandonment work that was going on in 2020, 2021 has been stopped and reversed. So we are seeing that recovery of of capital expenditure on on E and P activity. We're we're also naturally then seeing the the OpEx expenditure. So a lot of the components that are used in oil and gas drilling production are are consumable. They wear parts. They they wear out in a lot of our ALMET operation. They manufacture the the wear parts and components for for for production in in in flow control.

43:03 Those flow control components, we're seeing the demand increasing increasing steadily on the OpEx side in addition to to the CapEx side. Okay. Next question is from David. Why was gross margin depressed in one half one results? I think that's fair to say that, David, that that's mainly around the phasing of defense contracts. They're our biggest contracts, and and, obviously, it's margins that we have for those particular contracts being fairly significant. Any sort of quarter or half year where there aren't major defense revenues to follow with the margin, it tends then that reduced revenues and the impact of reduced margins in other contracts, which aren't as significant as they are with defense contracts. It just means we have a lower performance in that period. But, obviously, in the second half, we're anticipating a return of better gross margin as we get those defense contracts coming through.

43:53 Yeah. Next question. Got a question. Question from Roger on given given PMC. I mean, it's a it's a very, very you know, it's important question, Roger, about given the delay for PMC to return to profit. What are the arguments for keeping the division rather than selling it and closing it down? You know, our focus remains the to to deliver value, from from from the growth and development of of both both divisions. We we put tremendous amount of of of effort and focus to re re to recover performance, within the PMC operations. We we didn't feel that was possible for our quad Scott operation in 2020 going into the pandemic, and we took the tough decision to to close that operation and and diverse and and bring the the order book and the customers into into into router. We we believe very much in the, in in in the outlook for for for those, for those operations and the recovery through through oil and gas markets.

44:53 They are better better performing, more sustainable, more scalable operations to today than they were in in in twenty twenty twenty nineteen And actually, recovering their performance and profitability gives us various options for those divisions in the future. Our focus has been, though, very much to to to return them to to profitable performance in recovering market conditions. Okay. Next question is from David. Trade receivables increased from 9,000,000 to 12,000,000. Why was this? That's not necessarily trade receivables, David. That's mainly around our contract assets because, obviously, we're working with long term contracting. We kind of hold a lot of stock, and we hold a lot of accrued income and and revenues on an accrued basis whilst we wait for contracts to complete. So it's actually mainly around contract assets in in our in our books rather than necessarily trade receivables. Trade receivables have gone up slightly, but not not massively compared to the year end of last year. But the majority of the uplift is down to the fact that we've been working on projects throughout the first half and then their completions and new projects coming through into the second half as we've ordered raw materials. That just builds up our contract position that will eventually unwind itself as contracts complete. So that will go up before it comes back down in the future. But, yeah, at this point, it was really not not down to trade receivables, but mainly around contract accounting positions that we hold.

46:20 Yeah. Got a question from a from Adrian. Can we have an update on your expected capital expenditure for the remainder of of the year in and 2023? I I just would would elaborate to our principal capital expenditure, Adrian, that we we've committed is to our CHESTERFIELD CYLINDERS operation. That was the the upgrade of of several of our manufacturing processes that we committed, funds from our 2020 fundraising to to do. That was the the upgrade of our shop blast facilities, reconfiguration of our of our manufacturing and cylinder production lines to enable the long lead time defense contracts to to work alongside and not and not disrupt the shorter lead time, higher volume hydrogen cylinder hydrogen cylinder manufacturing.

47:14 Those that that that cap capital expenditure has progressed already throughout 2021 and and into 2022, and we're we're expecting that that that that committed CapEx plan of of about $11,500,000 in total will complete in by the middle of twenty twenty three. K. Got a question from Paul about do we price in dollars? And if so, how much benefit is the weak pound to dollar exchange rate? We do, Paul, but we mainly trade in euros. So there's not a huge amount of significant benefit from the weaker dollar rate at the moment. But, yeah, if the euro rate, as we continue to trade more with our European hydrogen supplies in particular going forwards, We'd expect to start to build more revenues in into dot into euros. And, hopefully, if the if the exchange rate does remain kind of where this weaker point, it should hopefully mean that that does benefit us when we convert that money back to sterling should we need it for our sterling purchases and and so forth. But, yeah, we don't really do a massive amount of trade in dollars, but we we do do some, but not very much mainly in euros.

48:25 Good question from Roger about inflation and and how inflation is impacting the business. Of course, we we covered raw material cost earlier on, but perhaps in some of the other areas of cost inflation we've seen. In fact, we saw towards the end of 2021, we saw some wage pressure from some very specific specialist roles, which which naturally have have increased our our staff our staffing costs. We've we've we've also addressed general wage wage levels as as all businesses have had to do in order to remain competitive in with across across the board for for recruitment, but also retention. So we've done that. We've very success successfully managed to to to do that, but, of course, it does add add cost, and and those costs then, of course, do translate in into increases in in in price or in some cases, you know, low low lower margins on on committed contracts.

49:23 The we we've seen around 15% or more increase in our energy costs on on on-site. We, you we are an energy intensive business. Our forging processes, you know, use use use gas. And, of course, our subcontract suppliers who who deliver heat treatment processes also see see use a lot of gas. And and that that, of course, has has has translated into a into a higher cost through our through our our our supply chain. So, yes, inflation has has has definitely been impacting the the the the business where where we can through contract variation and pricing. We we we you know, our intention is to recover as as much of that inflationary pressure as we possibly can. Again, in terms of utility costs, we were on longer term deals that completed during the second half of the year.

50:13 So we may find that our further forward, energy costs may go go up, but will manage as best we can with the deals that are available to us. But I think that answers kind of Nigel's question as well about energy costs. So, yeah, we we've been on longer term arrangements, but we'll do our best to find the next best rates that we can get when we get to that point. Yep. So another question regarding sorry. Regarding, yes, regarding hydrogen. So it's a question. What do we see as the the the key drivers of of hydrogen growth over the longer term? And and we've we've presented already now, I think, for at our at our prelims earlier on this year and and again, today, our outlook for the hydrogen refueling market.

50:59 The the key drivers for growth in in that in that market, I think it's an an an uncontested that there is this very significant demand, for, hydrogen in mobility and decarbonization supported by, by UK and European governments and and the US government, very strong support, but also the, you know, Australia and New Zealand. So very, very strong support in terms of overall market demand. What we see as potentially constraining factors at the moment, though, are the supply chain for for for the for the for the components used in in re in refueling stations. Those are the things that that might sort of hold hold that back supply chain in in in general faces, you know, time time constraints and pressures at the moment. But I don't think anything's holding back the the the the the demand.

51:50 We know we see that as being very, very, very strong. But as with any sort of sort of pioneering area or new area, the the the growth in the early years can be quite quite sporadic, and we're seeing we're seeing a bit of that at the moment. But well positioned otherwise to, you know, to to capitalize on this very exciting opportunity both now in terms of delivering products, but also being able to, in the future, deliver integrity management services for these safety critical installations, you know, refueling stations and decarbonization applications. I think that's it, Chris. That's great. So, Chris, James, thank you very much indeed, and thank you once again to all those that submitted questions. Any questions that we haven't got through, obviously, we'll make those available to the company after today's meeting. Chris, James, I know investor feedback is particularly important to you both, and I will shortly redirect investors to provide you with their thoughts and expectations.

52:41 But before doing so, wondered if I may, Chris, just ask you for a few closing comments, and then I will redirect investors to provide you with their feedback. Yes. Thank you very much, Mark. I mean, we we after the twenty twenty fundraising, we know we we significantly increased the the investor base for for Pressure Technologies, and we're very pleased to welcome so many new investors to the to the group and to using the IMC platform. Really important for us to have the opportunity to describe the outlook for the business. I know a strong second half we anticipate, which is driven by defense business, but but but also the exciting prospects for hydrogen business remain strong. James and I are fully committed as is the rest of the management team to deliver value from that and also to see the the the improving prospects for PMC in a recovering oil and gas market. So nice to be able to share those thoughts and that outlook today. Thank you very much. Yes. Thanks very much. That's great. James, Chris, thank you once again for updating investors this morning. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order management team can better understand your views and expectations.

53:47 This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Pressure Technologies PLC, we'd like to thank you very much for attending, today's presentation. That now concludes today's session, and I wish you all a very pleasant morning. Thank you.