Bhagwan Marine Limited (BWN) Earnings Call Transcript & Summary

Welcome to the Bhagwan Marine First Half '25 Results Call. [Operator Instructions] To view documents relevant to today's meeting, select the Documents icon, available documents will appear. When selected, the documents will open within the Lumi platform. You will still be able to listen to the meeting while viewing the documents. Text questions can be submitted at any time and the audio queue is now open. I will now hand over to Managing Director and CEO, Loui Kannikoski.

Thanks, Michelle. Welcome, everyone, to Bhagwan Marine's Half Year Results Presentation. I'm pleased to be joined by Andrew Wackett, our Director of Finance. Throughout this call, we'll be referring to the investor presentation slides that have been released on the ASX this morning. Today's agenda is outlined on Slide 4 and we will focus on 3 key areas: our financial and operational highlights, a detailed review of our financial performance, which Andrew will cover, the market outlook and how Bhagwan is positioned for growth. You'll also notice that we've included additional information in the appendices. Following the presentation, Andrew and I will be happy to take any questions. Before we move on to our highlights, I'd like to offer a brief overview of Bhagwan on Slide 6 for those who are new to our company. Founded in 2000 by the Kannikoski family in Geraldton, Western Australia and starting with just a single vessel, Bhagwan has experienced remarkable growth. Today, we operate a fleet of over 100 vessels. Our strategic diversification has enabled us to expand our services nationwide across sectors, including offshore oil and gas, subsea, port operations and civil construction. We've established facilities at key ports across Australia, positioning us to respond quickly to demand and emerging opportunities. Our fleet serves a broad range of long-standing clients from government organizations and major mining oil and gas companies to port authorities and civil construction firms. Turning briefly to Slide 7. In July 2024, Bhagwan successfully completed its IPO and was listed on the ASX. I'm proud to share that we are now the largest listed Australian marine solutions provider. To complete the company overview section, we've highlighted our key strengths and what sets us apart on Slide 8. Since 2000, we've built an unrivaled foundation of expertise driven by our founder-led commitment to service and operational excellence. We take pride in being the largest listed Australian marine services company, underpinned by strong demand and robust pipeline in our core operations. Our consistent year-on-year growth is bolstered by compelling opportunities in the emerging sectors, including oil and gas decommissioning, offshore wind, defense, maintenance and the larger vessel market. Our facilities across all -- sorry, our facilities across all key marine hubs in Australia place us where we need to be, ensuring comprehensive coverage and timely support. Our large ferry fleet enables us to capitalize on the rising demand in a market where vessel supply is constrained. We'll cover the final strengths in greater detail throughout the presentation. Moving now to the operational highlights for the half on Slide 10. I'm incredibly proud of our team for maintaining their focus on safety and service delivery during a period of heightened demand and tendering activity. The commitment and dedication demonstrated by everyone has been truly remarkable. We've continued to build on a positive safety culture as reflected in our total recordable injury frequency rate and lost time injury frequency rate. Operationally, we experienced strong demand across all sectors nationwide, particularly in offshore oil and gas and subsea. We also gained significant momentum in new growth sectors. One standout achievement was the successful commercial completion of Bhagwan's first oil and gas decommissioning project as a Tier 1 service provider. Another notable highlight was commencing our first commercial contract using a remotely operated vessel for a major -- sorry, major global oil and gas client. More on this later in the presentation. Lastly, I would like to emphasize our ongoing focus on maturing our business and enhancing its capabilities to drive future growth. In line with this, we're appointing a Chief Operating Officer, and I'm pleased to announce that the recruitment process is well underway. Looking now at our financial highlights on Slide 11. During the first half of '25, we achieved record revenue of -- sorry, $154.1 million, a 41% increase over the same period last year. This excellent performance was driven by strong demand across our core business, bolstered by a significant contribution from our major decommissioning project. Our earnings increased by 32% to $27.3 million, while net cash from operations was up 64% to $21 million. I'm also pleased to report that as of 31st of December '24, our net debt stood at a comfortable $11.5 million. That completes the highlights for the half, and I'll now hand over to Andrew to discuss the financials in more detail.

Thanks, Loui. Our strong trend of revenue and earnings growth is clearly illustrated on Slide 13. As Loui mentioned, first half revenue, excluding pass-through revenue, was $154.1 million, reflecting a 41% increase on the prior corresponding period. This strong performance was driven by heightened activity across all sectors and regions with our major oil and gas decommissioning project contributing $26.4 million in revenue. Pro forma EBITDA reached $27.3 million, up 32%, and this included $3.9 million from the oil and gas decommissioning project. Notably, earnings from underlying core operations grew by 12%, underscoring our company's strength and our ability to leverage opportunities in new growth sectors. The pro forma adjustment of $0.7 million to EBITDA relates to nonrecurring transaction costs associated with our IPO. For further details and reconciliation of pro forma to statutory numbers, please refer to the appendices. Turning now to Slide 14. While I recognize that this slide is easy, the charts provide a comprehensive breakdown of the impact of our oil and gas decommissioning project and the performance of the underlying business. Over FY '24 and the first half of FY '25, the project contributed $91.9 million in revenue and $9.9 million in EBITDA, achieving an overall 11% EBITDA margin. The core or underlying revenue in the first half grew by 29% to $127.7 million, driven by increased fleet numbers, enhanced utilization and higher average day rates. Administrative expenses as a percentage of revenue improved to 13% and core EBITDA margins have returned to 18%, in line with our expectations. Operating cash flow for the half reached $21.0 million, representing a 64% increase over the prior period. This uplift was primarily driven by stronger earnings, lower interest charges and a disciplined focus on working capital management. Our free cash generation was impacted by a $6.7 million spend on the Dryden, our largest vessel in the fleet, which I'll detail shortly. And finally, on this slide, our IPO raised $76.8 million in cash, which we utilized to repay all external debt. Slide 16 outlines our capital expenditure for the first half compared to PCP and is divided into 3 categories: growth, sustaining and discretionary. As noted on the previous slide, the 10-year dry docking and capability upgrade of our largest vessel totaled $6.7 million, comprising $2.8 million in growth CapEx and $3.9 million in sustaining CapEx. The growth component included new and upgraded electronic operating and dynamic positioning systems. We also acquired a new tug to meet rising demand at Dampier Port operations and our growth CapEx includes an innovation spend of $0.6 million for remote operations and hybrid vessels, which Loui will talk about in a minute. Our approach ensures that we are flexible in responding to opportunities to optimize vessel maintenance for cost efficiency and availability with some sustaining CapEx brought forward to prepare vessels for longer-term projects. Looking ahead, we expect significantly lower sustaining and discretionary CapEx in the second half. Turning briefly to our balance sheet on Slide 17. I'd like to highlight 3 key points. Firstly, our net debt-to-equity ratio post IPO is 7%, including operating leases. Net financial assets, though, excluding operating leases, is $8 million. And finally, our annualized return on capital employed, that's EBIT to capital employed in the business, the debt plus the equity employed in the business improved to 16%, up from 11% in the first half of FY '24, clearly reflecting our earnings growth. That concludes the financial performance section. So now I'll hand back to Loui to cover our outlook and growth opportunities.

Thanks, Andrew. Starting on Slide 17 -- sorry, starting on Slide 19, we've included graphs developed by global shipbroker, Clarksons, which provide valuable industry insights. The chart in the top left illustrates a steady recovery from the utilization of global offshore support vessel fleet, including both anchor handlers and platform supply vessels since the impact of COVID-19. This increased utilization has driven global day rates back to levels last seen in the mid-2000s, as shown on the top right chart. It is important to note that the slight dip in global rates to the right of the graph is primarily due to large Middle Eastern energy companies delaying some projects. This caused a short-term increase in the platform supply vessels availability, however, had little or no effect of the rates on the Australian market. The chart at the bottom right -- sorry, at the bottom highlights that despite day rates trending upwards, newbuild orders remain constrained due to high costs, limited financing options and uncertainty surrounding vessel technology. This supply-demand imbalance suggests that day rates will continue rising over time. Further, we believe global day rates are not currently high enough to incentivize newbuilds. Whilst anchor handlers and PSV rates are up 19% and 13% since 2014, newbuild prices are up 45% and 44%, respectively. With the largest fleet in Australia, Bhagwan is exceptionally well positioned to meet growing demand for marine services and younger fleets in a constrained global vessel market. Turning now to Slide 20, where I'll outline our regional outlook and key development in subsea and innovation. In Western Australia, we're capitalizing on expansion and diversification opportunities in the larger vessel market. We're also seeing increased inquiries at the Henderson Marine Precinct, particularly in the defense sector. In the Northern Territory, our ongoing contracts with major global energy companies remain strong, and we're identifying further growth opportunities in the larger vessel market. Over in Queensland, we've experienced robust demand in the second quarter for maintenance services and civil construction support, a trend we expect to continue into the second half of '25. In Victoria, demand for maintenance services and support at Port of Melbourne is on the rise, and we're planning to mobilize additional vessels to back offshore wind projects in the second half of '25. Turning to subsea, there's a growing demand and diversification opportunities, especially in the telecommunication infrastructure sector. Finally, on the innovation front, we're enhancing our fleet capabilities through advancements in automation technologies and hybrid solutions, keeping us at the forefront of industry innovation. Again, more on that shortly. We've included the table on Slide 21 previously to recap our growth sectors. As highlighted, we continue to see promising opportunities in decommissioning, offshore wind, defense and maintenance. In addition to these, we've now added the fifth growth pillar, the larger vessel market. This encompasses opportunities such as platform supply vessels, emergency and standby support and anchor handling support, areas in which Bhagwan has significant expertise as a leading marine solutions provider. I'll expand on our ability to gain traction with these growth sectors over the next few slides. Moving to Slide 22, I'll share more details about our first large-scale offshore decommissioning project. We achieved operational completion in quarter 1 of '25 and commercial completion in quarter 2 of '25. The project was delivered safely and to an exceptionally high standard. Notably, we completed over 850,000 man hours offshore without a single lost time injury and the client feedback has been extremely positive. In a partnership with our client on its asset retirement initiatives, we decommissioned 9 offshore platforms of depths of up to 20 meters. This complex phase project was carried out over several months to safely remove or secure each platform structures. Our dedicated marine fleet, dock team and construction professionals ensured smooth execution from start to finish. This milestone showcases our strong capabilities in the offshore decommissioning sector and reinforces our commitment to safety, environmental responsibility and operational excellence. Slide 23 highlights the growth potential within the decommissioning sector. The data and graphs are sourced from a study conducted by the Centre for Decommissioning Australia or CODA. The study emphasizes the wide range of services required, including subsea lifts, the decommissioning of over 50 platforms, more than 8,000 kilometers of pipeline umbilicals and approximately 1,000 wells that need to be plugged and abandoned off the coast of West Australia, the Northern Territory in Victoria. The graph on the right further illustrates the significant long-term investment required to achieve this and estimates put the total spend required at about $60 billion over the medium term. Returning to defense on Slide 24. This slide highlights how Bhagwan is positioned to benefit from infrastructure upgrades together with increased vessel calls and border security requirements. We have a well-established presence in strategically important locations, including Henderson in WA, where land is at a premium, and we are fielding increasing inquiries. Slide 25 introduces the Ada Clara, a 26-meter customized inspection vessel designed for remote operations. In second quarter of '25, we commenced our first contract with an oil and gas major off the coast of Western Australia. During the project, the Ada Clara performed critical inspections of offshore subsea assets. Its compact design and reduced crew requirements delivered cost savings of more than 50% compared to larger vessels traditionally used for this work. We see being at the forefront of innovation as a vital and exciting part of our future. With this in mind, we are also progressing conversion of our first hybrid power vessel, which will be initially based at the Port of Melbourne. Turning to Slide 26. Bhagwan Marine is well positioned for continued growth with strong activity levels and sustained demand for our solutions. Key drivers include ongoing demand from major energy companies in the Northern Territory, diversification within the subsea sector, expansion and growth in the larger vessel market across Northern Australia and rising inquiries for defense from the defense sector at our Henderson Marine Precinct. As we pursue these opportunities, our focus remains on ensuring safety and service excellence, enhancing fleet capabilities, including remote operation technologies and hybrid solutions and maintaining disciplined capital allocation and cost management in an inflationary environment. With these priorities in place, Bhagwan Marine is set to deliver another strong year in FY '25. Turning now to the final slide. I'd like to leave you with 4 key messages. Firstly, we achieved record revenue and earnings for the half. Secondly, we have continued to demonstrate the strength of our core business, have an unprecedented pipeline in the tendering activity. Thirdly, the growth sectors we've highlighted in this presentation offer significant potential, and we are well positioned to capitalize on these opportunities. And finally, we continue to evolve as a business while maintaining our focus on commercial discipline and operational excellence. That concludes the formal part of our presentation, and Andrew and I are now happy to take any questions.

[Operator Instructions] As there are no questions in the queue, I will re-read the instructions and give people time to submit. [Operator Instructions] Our first question comes from Gavin Allen from Euroz Hartleys.

So just a couple for me. So you do point out you spent a bit of money bringing forward CapEx and on a new vessel. In the meantime, another thing that came out, which was good was your ROIC sort of increased to 16%. Is that a reasonable way we might think about possible contribution from that growth CapEx going forward, guys? Can you give us any flavor on how to think of that?

Yes. Sure, Gavin. Thanks for the question, too. So look, I think return on invested capital is certainly something that we focus on internally. And we have -- obviously have a hurdle rate for justifying new CapEx. And we'd certainly be hoping with any new vessel we generate a higher return than that. And importantly, I know there's been some industry comparisons to use EBITDA to capital employed. This is using EBIT, which includes essentially the cost of maintaining the vessel in there. So we'd certainly be hoping on any major new CapEx to generate a return in excess of that return we just posted in the first half.

Yes, sure. And then I mean it comes out in the presentations, but just in the interest of clarity, conditions as you're seeing them now, and this might be for you, Loui, as you're seeing them now versus last year in whatever mechanism or flavor you can provide, whether that be in broad terms or by region or however you might provide it, but just some flavor on how conditions are versus this time last year.

Yes. Thanks, Gavin. Look, as far as -- if you're asking me on the activity levels, the activity remains strong. And probably one of the things that as strong as we've ever seen is our commercial department, tendering activity is as strong as we've ever seen it. So it's very busy. I suppose to clarify some -- with tendering can be for the next 6 months, 12 months, 24 sort of things. So it's a little bit -- but we are seeing a lot of activity and it sort of gives us comfort that the future is looking pretty bright.

Just to add to that, Gavin, if you look at the oil and gas market, our traditional market in Western Australia and the Northern Territory at the moment, Santos is completing Barossa. Scarborough is under construction. Chevron has got quite a big CapEx spend on its assets, Wheatstone and Gorgon and also Shell is just committed to a project called Crux, which is really driving our core business. You would have seen the other day that in the announcements from the oil and gas companies as well to the decommissioning markets are definitely gaining momentum. So I think Woodside announced that they were spending $1 billion on decommissioning this year. And if you have a look at Santos' accounts as well too, you can see that there's a very large spend there as well, too. So -- and even in some of our longer-dated growth areas like wind farms, we're committing extra vessels to survey works and early works off the coast of Victoria this half and certainly see lots of opportunities for civil construction works and support both defense related in places like Henderson and Darwin, but also just mainstream port works in our core operations across the northern part of Australia. There's plenty of really large material opportunities particularly in Queensland and the Northern Territory at the moment.

The next question is a text question from Cameron Bell, who asks, do you think the utilization impact from the Saudi CapEx plans has bottomed?

Look, to try and answer that, I think it has. I mean I've spoken to quite a few of the international players in the bigger end of the marketplace recently and everybody is sort of thinking this along the same lines that, that little dip we see in the Clarksons report is not sustainable going forward. And most people think that, that will start an upward trend. And that will be mainly driven by the lack of supply. If you look at the -- what we tried to explain in the newbuild marketplace, there's just very few newbuilds there to try and help with the supply. So I think supply and demand is going to continue that trend upwards.

I think to add to that, too, if you look at the Tidewater result that came out overnight in the U.S., I think they said pretty much the same thing that expecting that impact to settle over the first quarter, first half of this year and build. And just reiterate that point that Loui made in his presentation that since 2014, since the peak of the last cycle, day rates are only up in the teens and newbuild prices are up 44% to 45%. So industry economics haven't incentivized newbuilds. And so the way forward from here really for the industry is either day rates will have to rise or the fleet will just get older, global fleet. So we see it the medium term only being like a very positive set for very positive conditions for us.

The next question is from Andrew Johnston from MST Access.

Can you hear me okay?

Yes.

Excellent. Okay. Look, 3 quick questions. And look, apologies if this information is sitting somewhere, but I didn't find it. But just if you break down the revenue between -- and I suppose if I could pick commercial oil and gas, decommissioning and defense. And if you don't break it down, can you sort of talk generally about what the pipeline of opportunities look like for, say, the next 2 years compared with the sort of work you've been doing in the last 2? Where are the -- in other words, where are the segments that are -- you expect to grow more quickly than others?

Yes, I'll try and answer that. I mean the work in our core business, if you like, the stuff we do day-to-day and try and explain that that's around the country, which is quite vast. But our core business is very strong. But we've also got some inshore construction projects on the East Coast coming up towards the end of the calendar year, which will not be involved in both of them to what end is yet to be determined, but that's going to keep us very busy. The projects that we've got, through our offshore sites, core business are strong and they're going to go for the next probably 12 to 24 months. So the core business looks good. Decommissioning, for instance, we're expecting some growth in that area with -- on the West Coast of Barrow Island just started decommissioning there's a decade of work there to give you an idea. We expect that to start impacting us over the next 6 to 12 months. And then we've also got decommissioning of the Thevenard Island boat ramp project, which we hope to be seeing some tenders coming out in the next probably 3 to 6 months. Defense is just -- defense is always at this point is still a bit of an unknown, but we are getting a lot of inquiry through WA and the Northern Territory. So we expect that to increase. It's very, very difficult to try and put a number or a percentage for that at the moment, which is probably the same as the wind farms that we've got on the -- mainly on the East Coast and West Coast. But just on the wind farms, we're doing a lot of survey work and stuff like that. We've moved a few more assets to the area to be able to achieve that sort of work. So in all of those sorts of areas that we mentioned, there's definitely an increase in demand, if you like, and certainly in inquiries. So it's -- as far as I sit here, the future as far as all that's concerned looks pretty bright.

Okay. Great. So just on that, if I go back to Slide 14, where you break out the decommissioning work. So is -- and I suppose a question going forward as well. Do you expect -- like is all your decommissioning work just in that one project that you've identified? Or is there other decommissioning work that sits part of your core revenue? And then going forward, do you -- will decommissioning just get included into core revenue in the future?

No. Look, I think decommissioning, we keep it as a separate part of the business. And the reason for that is that particular project we did, whilst we're at sea for about 6 or 7 months, the project itself took about 18 months. There's a lot of pre-works, a lot of engineering services that we contracted in and these sorts of things. So I think in the future, for me, it would be better to be split out and be separate because it demands a lot of other services from the business that are not currently here. So -- and probably the other thing to add to that -- and I know you haven't asked the question, but one of the things that Andrew mentioned was the margins that we made on our first foray into as a Tier 1 contractor, we're at about 11%. Our expectations would be a bit better than that. I mean we went into that project knowing that we wouldn't have everything 100% right. I'm not saying that the next one will have it 100% right, but we would expect to have better margins than what we achieved in the JVR project. But it's really important to highlight the fact that it's -- we are the first Australian company to be Tier 1 with a major and that is the biggest decommissioning project in our history at this point in time. So we're pretty well placed for future projects.

And Andrew, just to add to that, look, we did separate it out because it was an outsized project in our book of work. So we just wanted to give everyone some quite good transparency on what was happening, but also to demonstrate that the underlying business is benefiting from the industry thematics of improved utilization, improved day rates and those sorts of things and there's plenty of other work going on. And sorry, just to answer the last part of your question, yes, we were providing work to other decommissioning scopes, but on a far smaller scale. So we just included those in our core business.

Okay. Great. And if I can just squeeze in 2 more. One very quick one on Slide 16, you talk about bringing forward -- I think you used the word bringing forward CapEx or maintenance getting ready for longer-term projects. Is there some particularly long projects, long-term projects that are in the pipeline that's different to what you've had in the past?

No. What we do with the fleet, so the fleet can be in the spot market, longer-term contracts and what we call sort of longer term is anything sort of beyond 6 months. And some of the vessels that we talk about with that CapEx spend are vessels that are going into 12- to 18-month projects. And this is sort of what we do generally. So it's nothing to sort of single out. But we did single it out through the CapEx spend because we need to get the boat ready for that period of time. And while the projects you don't want to be pulling the boat out for surveys or any of the maintenance spend that you see coming up through that particular time frame. So it is a bit of a juggling act to try and make sure that we don't overspend, I suppose, if you like, just to take advantage of boats going into contracts, but it's something that we keep a real close eye on and try and measure correctly, I suppose.

It sounds like the CapEx on a half-to-half basis, the CapEx number is going to be a bit volatile. So are we better off to look at average it across a year or something like that or a year or 2 years?

Yes. And to answer, I think that's correct. I think to do it properly, you've got to do it over more than a year because whilst we had a fairly active year this year, a lot of the survey requirements are on 5-year period. So you've got to try and average it out a little bit better. But this year it's showing a heavier year than what we expect for next year. Next year, we expect it to be much more back to where we normally see it. So you do have different years. So I think you got to base that over a couple of years.

Okay. And look, one final question. If I go to slide -- one of the earlier slides, the one that shows the industry and shows the day rates moving up, but there's no actual -- there's no newbuild. I'm sort of intrigued by the things that are -- the issues that are driving that. Is that just a function of the cost of a newbuild going up so much? Just -- and if that's the case, why is that? And is this just a post-COVID hangover as the industry gets -- starts to get itself sorted out? Or what do you think is going on there?

Look, what's happened, it's not only COVID, obviously, the stuff going on in the Ukraine and other places around the world, of course, material prices, steel prices and aluminum and those sort of things up phenomenally. Just trying to give you an idea from pre-COVID to build a year -- to build one of our vessels, so to speak, for a $5 million number, we're looking at $9 million to $10 million now. The issue is trying to get the industry to accept that they're paying a day rate on a $10 million asset instead of $5 million. So that's -- and the larger the vessels get that number gets greater. So we're really trying hard to get the industry to accept that. And in the oil and gas industry, especially demand vessels under 15 years old. So when those things happen and if you see the gap in the -- how long it's been since vessels are getting built, we're running out of time. So I believe over the next couple of years, the prices are going to increase the newbuilds quite exceptionally. Probably to give you a little bit more color on that. We have 4 of the large tenders that we've been involved in recently where they all require new boats have all gone back to existing vessels because the prices are so high. So it's going to take a bit of time to get that level accepted, if you like. So I think we're still -- it's going to take us 12 to 24 months to be able to get people to accept that if they want these new vessels with more technology and all these sorts of things, it's going to come quite price. So we're away from that. So this is why we see day rates just increasing steadily as that time goes on.

And further reflecting the economics that Loui talked about, when you look at the day rates from 2014 onwards declining and that corresponding newbuilding activity declining as well. If you go back to 2011, 2012, 2013 when the industry was building around 300 large vessels a year, there was a lot more shipyard capacity globally. So a lot of that shipyard capacity has come out of the market in that extended downturn. So as we sit today, it's not actually the capacity to add newbuilds of anywhere near that size because of that extended downturn. And the economics, the day rates relative to the newbuild prices are not incentivizing that to restart again at the moment. So that's what we're saying that for that to happen, global day rates are going to have to rise relative to newbuild prices, so sometimes we're going to have, given that equation.

There are no further questions. I'll now hand back to Andrew and Loui for closing remarks.

Just thanks, everybody, for taking the time, and we'll see you at the full year results. Thank you.

That concludes today's call. Thank you for joining us. You may now log out.