Bhagwan Marine Limited (BWN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Bhagwan Marine Financial Year 2026 Results Webinar. My name is Jimmi Meredith. I'm from InvestorHub. I'll be moderating today. [Operator Instructions]. Also note that a recording of today's webinar will be made available on the Bhagwan Marine Investor Hub after we finish. So if you do need to drop off early or want to share this with anyone later on, you'll be able to do so there. Just to quickly introduce the Bhagwan Marine team joining us today with Loui Kannikoski, Bhagwan Marine's Managing Director and Chief Executive Officer. We also have with us Cheryl Williams, Chief Financial Officer; Andrew Wackett, the Executive Director of Finance; and Anthony Wooles, Chair of the Board. They will be joining with us for the Q&A segment following a presentation to start things off. So I'll kick things off with the presentation. It will run for approximately 20 minutes. And once that wraps up, we'll go into the Q&A. So with that, we'll get started now.

Okay. Welcome, everybody, to Bhagwan Marine's full year results presentation. My name is Anthony Wooles. I'm the Chair of Bhagwan Marine. I'm delighted to be joined by Loui Kannikoski, our Managing Director and Chief Executive; and Cheryl Williams, our Chief Financial Officer. Andrew Wackett, our Executive Director of Finance, is also with us today. Throughout the session, we'll refer to the investor presentation released to the ASX this morning. On Slide 2, you'll find just an important notice and disclaimer that I draw your attention to. As we move to Slide 3, I'd just like to outline the presence of Bhagwan across our country. We are the largest listed marine solutions provider in the country. We operate across the energy and resource sectors, ports and infrastructure and emerging sectors, including defense. We deliver a broad and integrated range of marine services, and we have a tremendous competitive advantage offering end-to-end solutions. Our large and multinational fleet is unrivaled in Australia. It's a multifunctional fleet and presents a tremendous barrier to entry in our sector. We respond to a wide range of customer needs nationally. We have recurring work and project-based activity. And during fiscal '26, we're very pleased to complete the transformational acquisition of Riverside Marine. Riverside is an excellent strategic fit with Bhagwan, and I'm very pleased to say from a Board standpoint that the integration is progressing very well, and Loui will speak to that in more detail shortly. In terms of where we operate, our national footprint is what we really call internally the power of our incumbency. We're established a key marine hubs around Australia with vessels, people and operational capability already in place. We have an ability to respond quickly, mobilize efficiently and support customers as their needs evolve. Locally, we can act nationally and respond locally tremendously well. Riverside Marine has further strengthened that footprint, particularly across Queensland and in Northern Australia. Combined with our long-standing customer relationships, that presence creates a meaningful competitive advantage and a tremendously strong base for further growth. When we talk about growth, this is where I really get quite excited about our business because we've got compelling opportunities for sustainable growth. On this Slide 5, you'll see that the platform for that through this power of incumbency is a very, very strong core business. We've got a market-leading position that's been built over more than 25 years. We're founder-led with tremendous corporate IP throughout our management team. The Kannikoskis remain key shareholders and our established marine hubs generate circa $50 million of revenue per annum simply through that incumbency presence, while long-term contracts contribute approximately $70 million per annum. Constrained vessel supply supports the utilization of our fleet. It supports our pricing and our long-term asset values. Indeed, our net tangible asset value of $0.42 per share is a clear illustration of that feature of our business. We remain very, very focused on safety, operational execution, margin expansion, free cash flow and return on our asset base. There are clear opportunities to deepen our customer relationships and broaden our service offering and increase our utilization across our enlarged fleet. Those organic growth opportunities present themselves on a daily basis, and we respond every day, both locally and through our corporate office here, what we see is just tremendous underlying growth. From an acquisitive growth standpoint, we have spoken about M&A as being central to our growth strategy since floating and the Riverside Marine acquisition demonstrates our ability to identify and execute strategic M&A that's added scale, capability and earnings. We will continue to assess future earnings with a disciplined focus on strategic and commercial fit. In addition, we see tremendous blue sky opportunities ahead. In decommissioning, we have already worked and demonstrated our capabilities in the defense sector, some of the most recent announcements being evidence of that thematic and offshore energy provide further long-term growth potential. These opportunities represent upside well beyond the strength of the core business and are not required to underpin that core business but provide us enormous opportunity longer term. With that overview, I'd like to pass over to Loui to take us into the results presentation more properly.

Thanks, Anthony. I'll start with the key financial and strategic highlights for FY '26. Cheryl will then take you through the financials in more detail before I come back to cover growth opportunities and market outlook. Following the presentation, we'll open the call for questions. Anthony, Cheryl, Andrew and I will be available for Q&A. Moving now to the financial highlights on Slide 7. Net revenue for FY '26 was $235.9 million, down 16.6% on the prior year. The reduction largely reflects the deferral of selected short-term projects in the second half, driven by uncertainty in the Middle East and organizational restructuring within the energy sector. The reduction largely reflects the deferral of selected short-term projects in the second half, driven by uncertainty in the Middle East and organizational restructuring within the energy sector. Importantly, activity picked up again in May and June and demand across our core markets remained strong. Pro forma EBITDA was $46.1 million, down 9% on FY '25. On a softer revenue base, the EBITDA margin increased to 20% from 18% last year, reflecting disciplined cost management and excellent operational focus across the business. Cash generation also remained strong. Cash from operations increased to 9.6% to $40 million with a cash conversion of 90%. Pro forma free cash flow was $8.3 million. The Board also declared fully franked dividends for FY '26 totaling $0.08 per share. Moving now to our strategic highlights on Slide 8. The key point here is that during FY '26, we continue to do what we said we would do. We made progress across market penetration, market development, margin expansion and the integration of Riverside Marine. We secured the 5-year Coral Knight contract with Jadestone Energy, increasing long-term recurring revenue and validating our investment in larger vessel capability. We also acquired the Bhagwan Ocean, expanding our ability to pursue higher-value marine projects while continuing to build our position in decommissioning through additional project wins. Within the business, we embedded the COO function, strengthened our business development capability and continue to improve financial governance. At the same time, we maintained a strong focus on cost and margin discipline. Mark and Peter Carmichael and Cheryl are all doing an excellent job in driving these initiatives. And finally, we completed the Riverside Marine acquisition, which I'll cover in more detail on the next slide. Overall, these actions have strengthened the business and created a broader platform for growth as we move through to FY '27. Turning to Slide 9. As Anthony mentioned earlier, Riverside Marine is an excellent strategic fit. We completed the acquisition on the 31st of March and integration has been progressing well. Our initial focus has been on bringing the 2 businesses together in a practical and measured way while maintaining quality delivery for our customers. This has included aligning governance, reporting in key functions as well as strengthening the commercial coordination across the group. As we move into FY '27, our focus shifts to technical and operational integration and capturing the revenue and cost synergies we identified through the acquisition. Turning to performance. Riverside Marine delivered $60 million of revenue and $24.5 million of pro forma EBITDA on a stand-alone basis for FY '26. The fourth quarter was particularly strong with revenue up 17% and EBITDA up 30% on the prior corresponding period. Importantly, the business also has a very high-quality revenue profile with 94% of FY '26 revenue generated from long-term recurring work. Looking ahead, we see clear opportunities to increase volumes, improve vessel utilization and expand activity across existing customers and markets. Before I hand over to Cheryl, I would like to acknowledge the Campbell family and the entire Riverside Marine team. It is a pleasure working alongside them, and we have enormous respect for the business they have built. So I'll hand you over to Cheryl.

Thanks, Loui. I'll now take you through the group's financial performance in more detail, starting on Slide 11. As Louis highlighted, net revenue for the year was $235.9 million, down 16.6% on FY '25. This result is largely driven by the timing of short-term projects, which were deferred in the second half. Encouragingly, activity strengthened during May and June, with tender levels remaining strong across our core business, providing confidence in future opportunities and demand. FY '25 benefited from $26.4 million of revenue associated with the TVI decommissioning project. While this project did not repeat in FY '26, its successful execution significantly enhanced Bhagwan's reputation and our track record in decommissioning, positioning the business to pursue a growing pipeline of opportunities in this strategically important sector. The blue segment on the graph represents Riverside Marine's fourth quarter contribution of $15.1 million in revenue following the completion of the acquisition on the 31st of March. Moving to the revenue profile on Slide 12. The quality of our revenue base continued to strengthen during FY '26 with recurring revenue increasing to 56% of group revenue, providing greater revenue certainty and reducing reliance on project-driven activity. The acquisition of Riverside Marine further enhances this profile, increasing recurring revenue to approximately 62% on a pro forma annualized basis and strengthening the resilience of future cash flows. Importantly, while this growing base of recurring revenue provides greater stability and supports more consistent financial performance, Bhagwan Marine continues to retain meaningful exposure to spot and project-based work, allowing shareholders to benefit from upside as market activity strengthens. As a result, we enter FY '27 with a stronger revenue profile, underpinned by a growing base of recurring revenue and supported by attractive growth opportunities across our core markets. Moving to pro forma earnings on Slide 13. Pro forma EBITDA for FY '26 was $46.1 million compared with $50.9 million in the prior year. It is important to recognize that FY '25 benefited from a $3.9 million EBITDA contribution from the TVI decommissioning project. Excluding this contribution, core Bhagwan EBITDA was $47 million in FY '25, with the underlying business delivering a consistent earnings outcome. EBITDA margins remained broadly stable year-on-year despite lower revenue, highlighting the strength of the operating model. Riverside Marine contributed $6.1 million of pro forma EBITDA in the fourth quarter following completion of the acquisition. On a stand-alone basis, Riverside Marine delivered $24.5 million of pro forma EBITDA for FY '26. Including Riverside Marine, group EBITDA margin increased to 20% from 18% in FY '25. Overall, we are pleased with the quality of earnings delivered in FY '26 with profitability remaining strong and margins demonstrating the resilience of the underlying business. Turning now to Slide 14 and cash flow. Cash generation remained a key strength of the business during FY '26. On a pro forma basis, net cash generated from operating activities increased 9.6% to $40 million, while cash conversion remained strong at 90%, demonstrating the business ability to translate earnings into cash. Underlying free cash flow was $4.7 million, increasing to $8.3 million on an adjusted pro forma basis. These outcomes reflect the stability of our earnings profile and our continued focus on disciplined cash and capital management. The business invested $18.1 million in sustaining capital expenditure to maintain and enhance fleet and operational capability, while lease prepayments totaled $13.6 million. I'll now move to our net debt position before returning to capital expenditure and investment activity. During FY '26, we took several important steps to strengthen the group's long-term earnings capacity, including the acquisition of Riverside Marine and continued investment in the fleet. As a result, net debt, excluding leases, increased from $5.3 million to $74.5 million at year-end. During the year, the group deployed $94.1 million towards acquisitions, principally Riverside Marine, together with $9.1 million of growth capital expenditure and $3 million in dividends paid to shareholders. These investments were partly funded through $8.3 million of free cash flow generation and $28.7 million raised through equity capital raising. Importantly, despite these significant growth investments, the balance sheet remains conservatively positioned. At year-end, leverage was 1.2x, gearing was 34% and interest cover remained strong at 11.7x on an annualized EBITDA calculation. We believe this reflects a measured approach to capital management with substantial financial flexibility retained to support the business as we integrate Riverside Marine and pursue future growth opportunities. Moving to Slide 16. Total CapEx for FY '26 was $27.2 million, down $37.5 million in FY '25. Growth CapEx of $9.1 million was invested in fleet additions aligned with contracted demand and long-term growth opportunities. This included the SeaWind 1, the hybrid electric Narrah and the Bhagwan Ocean, which strengthens the group's capability and positions it to pursue incremental high-margin marine construction and logistics work. Sustaining CapEx was $18.1 million, reflecting targeted fleet upgrades and maintenance investments to support safety, reliability and operational efficiency. The increase on FY '25 also reflects inflationary pressures and longer maintenance lead times. Overall, our approach to capital allocation remains disciplined with investment directed towards maintaining fleet quality while selectively adding capability where we see attractive returns and clear customer demand. Looking briefly at the balance sheet on Slide 17. The Riverside Marine acquisition has increased the scale of the group with property, plant and equipment rising to $269.1 million and intangibles to $69.5 million. Net debt increased in line with expectations, reflecting acquisition funding, strategic fleet investments and longer-term lease commitments. The group ended the year with net debt of $74.5 million, excluding lease liabilities. Working capital remained well managed with the movement in reported net working capital, largely reflecting acquisition-related deferred tax liabilities and accounting timing differences. Net tangible assets per share were $0.42, while annualized return on assets was 6%, reflecting the significant investment made to expand the group's fleet, strengthen capabilities and support future growth. We enter FY '27 with a stronger asset base, having invested to build scale, capability and market position. Our focus now is on converting that investment into sustained earnings growth, stronger cash generation and superior returns for our shareholders. I'll hand back to Loui to cover growth opportunities and outlook.

Thanks, Cheryl. As a recap, Slide 19 brings together the key elements of our core business model. We operate across substantial addressable markets with multiple opportunities for growth across our core business through acquisitions and in emerging markets. We remain focused on operational efficiency, margin improvement and disciplined cost and capital management. The long-term industry and rate outlook also remains positive, supported by favorable supply and demand dynamics. The long-term industry and rate outlook also remains positive, supported by favorable supply and demand dynamics. Together, these factors provide opportunities to increase returns from our existing asset base and importantly, convert those returns into a stronger free cash flow. Ultimately, sustainable earnings growth and increasing returns on assets and stronger free cash flow are what we believe will drive long-term shareholder value. Turning to Slide 20. We can see some of the industry dynamics underpinning the positive long-term outlook. Looking at the Clarksons charts, the key message is that supply and demand imbalance remains supportive. Global offshore vessel utilization has steadily improved over the past 5 years, supporting stronger day rates for both anchor handlers and platform supply vessels. Rates now returned to levels last seen in the mid-2000s, reflecting higher utilization and tighter vessel supply. The next slide helps explain why we expect the supply environment to remain tight. Looking at the fleet value on Slide 21, the chart on the left shows that newbuild activity remains well below historical levels. High construction costs and constrained financing continue to limit new orders, which is helping keep vessel supply tight and supporting day rates. For context, since 2014, anchor handlers rates have increased by around 20% and PSV rates by around 5%, while newbuild prices have risen by approximately 90% and 100%, respectively. We are also seeing the tighter market reflected in the asset values. Bhagwan's own fleet value has increased from approximately $117 million in 2024 to approximately $199 million in 2026, including approximately $40 million from Riverside Marine. These dynamics support the value of our existing fleet and reinforce our disciplined approach to investing in larger specialized vessels. Moving now to our final slide and key takeaways for FY '26. First, we have a strong core business with increasing recurring revenue, strong cash generation and long-standing customer relationships across our key markets. Second, there are meaningful organic growth opportunities already in front of us. We can continue to deepen those customer relationships, increase utilization across the fleet and drive greater returns from our existing asset base. Third, the Riverside Marine acquisition has materially broadened our national footprint, fleet and capability while adding further recurring revenue and the integration is progressing well, and we see further opportunities to generate value from the combined platform. We also have an additional upside from emerging markets such as decommissioning and defense as those opportunities develop. And finally, the industry fundamentals remain supportive with tight vessel supply underpinning rates and asset values. Our focus in FY '27 is straightforward: execute well, increase utilization and returns and convert these opportunities into sustainable earnings growth and stronger free cash flow. With that, thank you for your interest in Bhagwan and for your time today. And now we'll open the call for questions.

Okay. Thank you, and that brings us to the end of the presentation, of which we will now move to the Q&A segment. For anyone who has joined late, just a reminder on the call, we have Loui Kannikoski, Managing Director and CEO; Cheryl Williams, Chief Financial Officer; Anthony Wooles, Chair; and Andrew Wackett, Executive Director of Finance. So welcome to all of you. For those who haven't submitted a question yet, there's still time just use the chat feature in the bottom right of your screen. To kick things off, I'll go with one of the ones that was submitted earlier. Guys, what do you see as the greatest challenge to successfully scaling the business over the next 3 to 5 years?

I'm happy to address that question. It's Anthony Wooles speaking. Look, probably continuing to build the sort of organizational capability. I don't think that organic growth or growth through M&A presents any particular limits. We see opportunities everywhere. What you need to do in this business is just continue to build the organizational capability to deal with scale. I mean this sector can surge somewhat. You'll see that evident in some of the short-term projects and the nature with which they need to be integrated into the very strong core business. You need people that are very capable. You need continued systems that can support that growth. We need to ensure that we just don't -- we can't have facilities just everywhere. So ensuring that we are effectively able to mobilize our fleet. So it's really, I would say, primarily an organizational and operational capability challenge. But I mean, for 20 years, this business has grown at 15%. And that it simply ensures that the imperatives internally from the Board down to just to build that sort of internal organizational capability. And I think we now, as a publicly listed company are a real destination for talent and not just marine talent, and we've seen evidence of that since we floated. So that would be my primary response.

Yes. Look, I might just add to that, Anthony. I mean, one thing that we're trying to get people to understand that we have been around for a long time, and we've been through a lot of ups and downs. And if you have a look around, we're one of the survivors of the industry, if you like, and that's happened through us being very diverse and being able to operate through several different sectors. And as we stated in the presentation, our geographical spread helps immensely. The acquisition of Riverside has been a tremendous boost, even though sadly our share price hasn't seen it that way. But for me, we've just gone from strength to strength, and we've done that through the talent and team that we've got with us. And obviously, that's been strengthened by the people within the Riverside organization as well. So I'm really proud of that fact, and I think people need to understand that.

Great. I'll move on to the next one. As the business grows, how does management balance investment and future capability with delivering returns for shareholders?

Hey, Andrew, I'll answer that one or Anthony?

Well, I'll go first, Loui. It's Anthony Wooles here again. I think that's a very good question. Sustainable growth really requires that you're very, very focused on the engine room, the underlying earnings engine room of the business and that business is capable of delivering sustainable returns. And then that really provides you with permission to grow and deploy shareholder funds to growth, which I fully expect our shareholders would welcome and as we've evidenced both in organic growth and through acquisition. We remain enormously disciplined on everything from our pricing, our gross margin through our overhead. We're continuing -- I mean, post acquisition, we will absolutely get this business match fit. That should result and will result in strong cash flow generation because of particularly our disciplined CapEx and same business CapEx profile. And as a result, we expect to be dividend paying through that growth period. So I would -- my -- I talk a bit about the investment thesis for Bhagwan, we will be a growth stock, and we will also continue to pay sustainable dividends. That's an outworking of the focus on that engine room of earnings and very disciplined growth, both organic and inorganic. And that's a balance that every publicly listed company has to step through. And that discipline, I can promise you, is well embedded now in Bhagwan.

Okay. So are you able to provide any guidance for financial year 2027 so far?

Thanks. That's another good question. We don't provide guidance typically, but we do monitor consensus from the analysts and I think this year, in particular, we've also provided a pro forma back when we did the Riverside acquisition. I think you can see from that $25 million of EBITDA that Riverside reported in the year just gone on a full year basis, that to the EBITDA that Bhagwan reported just over $40 million, you can see that where the consensus is probably likely to the end of this year.

I'll just give a heads up team. That one, there's kind of like a few questions in one, so it might pay to answer what you can. So can you provide any comment on return of activity in May and June? How about the scale of additional decommissioning projects, the CapEx breakdown? Can you comment on decrease in growth CapEx or significant increase in sustaining CapEx? The status of the Riverside integration and do contracts help mitigate cost inflation? Sorry, I know that's a bunch all in one, but it's kind of all put together there.

Yes. Look, I think there was about 7 questions there. So look, probably talking about May and June, one of the things that we were -- when we've seen that things were changing a little bit, and we had to make an announcement we're trying to be really conservative going forward. And so we had a conservative outlook on May and June. And as it turned out, those 2 months were a little bit above what we were prepared to talk about. But that was one thing. Jimmi, you're going to probably have to read through a few of those other things because my memory on that flash.

Yes, there was the scale of additional decommissioning projects was in there. comment on the...

Jim, I'll just jump into that one because otherwise I'll forget the rest. But as far as decommissioning goes, probably to give everyone a little bit of an idea, the Thevenard Island decommissioning project that we did is still to date, the biggest decommissioning project in the Australia's history. So those types of projects are not coming every 5 or 6 months. So they're not steady as yet, but we are doing small parts of decommissioning virtually throughout the year. And currently, we're undertaking a small decommissioning project that takes about 2 or 3 weeks. So we are involved in decommissioning all the time. But there is some big jobs. There's a lot of big work to come. The outlook is very strong over the next decade or so, but there will be some stops and starts. And that's what's probably difficult for us to sort of progress. And where it becomes difficult is to try and set the business up for stops and starts and try and maintain the team and the fleet that's required to be able to carry out these decommissioning projects. So it's still a bit lumpy at the moment, but I think it will improve with time.

The next one in the list was comments on the growth CapEx. And if you have a breakdown of it, any comments on the significant increase in sustaining CapEx even?

I'll take that one, if you like. It's Andrew speaking. On the sustaining CapEx, we did say that we thought that would be in the high teens this year back in August last year. And there's a couple of factors driving that. There's a large docking program that we have, but also we've seen a substantial inflation in repairs and maintenance costs. So you think Caterpillar type equipment, that sort of thing, lots of cost inflation, longer lead times. So we do see that as more of the normalized sustaining number around that number we just reported. Growth CapEx, as Cheryl said, really broken down into 2 new vessels, the SeaWind, which is on a long-term contract, supply contract in the north of Western Australia and the Bhagwan Ocean, which is a new multi-cat and that completes our fleet of multi-cats and enables us to really attract some of these really major civil works projects that are coming up, particularly in places like Queensland. So it really sets us up well for the future.

And do contracts help mitigate cost inflation?

So I'm not quite sure what the question is trying to get out there. But I think we do have inflation protection in all of our contracting all of our short-term work, spot work is reprice on a dynamic basis. So it reflects cost increases. Fuel, which is probably the major issue for us is a pass-through item as is labor. So we can negotiate that on an ongoing basis with our customers. And I think you'll see the proof in that is this financial year, we had obviously substantial volatility in fuel prices. And you can see that our EBITDA margins actually improved year-on-year. And I think that's proof of our ability to manage our costs on a dynamic basis and manage very volatile costs throughout the year.

The next question references Slide 12, which I believe was something Cheryl was covering in her part of the presentation. What does "pickup in May and June actually mean?" Can you provide some more nuance on this line with the segmentation in Slide 12? And additionally, in Slide 12, why does spot revenue treated as recurring revenue?