Johns Lyng Group Limited (JLG) Earnings Call Transcript & Summary

Welcome to the Johns Lyng Group 1H '23 Investor Call. [Operator Instructions] I would like to now hand over to your host for today, Group CEO, Scott Didier. Thank you, Scott. Go ahead.

Good morning, everyone. My name is Scott Didier, and I'm the Group CEO of Johns Lyng Group. I'm proud to be able to present our excellent interim FY '23 financial results. I'm joined today by our Australian CEO, Nick Carnell; Lindsay Barber, who is our Group CEO; Adrian Gleeson, Executive Director, Investor and Business Relations; our Group CFO, Matthew Lunn; and Pip Turnbull, our Group Executive responsible for business development. This presentation is also available online and contains comprehensive financial data and further commentary about our results, strategy and outlook. As you'll see, our results are at record levels, and the outlook is very strong. At the outset, I want to acknowledge the tireless work and outstanding commitment of our staff. As an example, as our CAT business grows, our people are asked to respond quickly to emergencies. This is difficult, sensitive and important work, and these results are a credit to our employees who work with [indiscernible]. The first part of the 2023 financial year was a record financial performance for JLG. Our work in hand gives us confidence that the full year results will also be a record, and I'll elaborate on this later. On all financial measures, the company performed strongly. Revenue was up 71.2%, NPAT was up 83.6%, and EPS is up 87.8%. Importantly, the balance sheet, in spite of this subtle growth, is very strong. Cash conversion is at 120%, net assets at $373 million, cash on hand of $83 million means we have resources to continue the next strategic bolt-on acquisitions without raising equity. The directors have declared a $0.045 dividend per share, which is up 67% and reflects a 47% payout ratio. Importantly, we strengthened our governance regime with a Board restructure and made a securities trading related party transactions policy. And at all times, our growing philosophy is simply define and follow best practices. We are an ASX 200 company, and our governance and compliance procedures reflect this hard-earned and [indiscernible]. Turning to our Australian business. Our Insurance Building and Restoration Services, Commercial Building services and Commercial Construction businesses [ make up that return ] and business as usual activities. BAU was up 62.1%, and EBITDA was up 62.9%. Our key clients on the major insurance -- our key clients are the major insurers and carriers. And during the period, we saw contract renewals with QBE, Allianz, Comminsure, IAG and RACQ. These are major contracts, and it's pleasing that we are the trusted partner of these companies. What this means is that we have confidence going forward and our work with these insurers will continue to grow and that they will be growing and [indiscernible] earnings as they become more predictable. As you know, we've focused much attention on Australia market in Australia. I've explained previously why we said this business as such a key growth market. From JLG's perspective, Australia is a consolidation play, whereby we can extract the economies of scale from strategic bolt-on acquisitions and leverage vertical and horizontal adjacencies from our existing portfolio of businesses and some acquisitions. In the period, we acquired North Shore Strata Management and Adpen Strata management and have identified further acquisition targets. We also acquired A1 Estimates, which expands JLG's insurance repair estimating capability. This business is to service both IB&RS, BaU and CAT segments of our business. Turning now to the CAT segment. CAT revenue was up 178.9% to $186.1 million, and EBITDA contribution was up 180.3% to $21.3 million. These are outstanding results that may exemplify through interrelated teams. One being the quality of JLG Group, which positions us as a trusted partner to communities, insurers and governments and in turn, generates more opportunities; two, being a competitive advantage and [indiscernible] Victoria's Circle of knowledge. With every event we work on, we enhance our service protocols and deliverables, and it gives us confidence that we continue to be a preferred supplier in the CAT recovery and disaster management market. I want to make some general comments [indiscernible] CAT division and the nature of its earnings. At JLG, we've always been very careful in discussing CAT and the earnings profile this division delivers. CAT [indiscernible] nature is unpredictable. But we now have multiyear experience -- we now have a multiyear experience profile in this market with many data points and [indiscernible] observations. CAT events are increasing in frequency and intensity. As a result, we're covering new construction work is large in scale, budgets and longer in duration and these events are becoming multi-period and multiyear events on the JLG's perspective. As a result, the business has more sustainable and visible earnings profile, which allows us to appropriately resource this division, which creates operational efficiencies. Our other observations that the key customer stakeholder in these events being insurers and governments, federal, state and local, are looking for trusted counterparties to assist and complete work. I'm pleased to report that we are gaining a very strong position in this market. Our ability to render assistance and mobilize resources makes JLG the preferred partner during the CAT events. First half '23 saw carry-over work from the Southeast Queensland and Northern New South Wales flood events in February 2022. JLG provided services that were extensive, including make-safe, restoration and reconstruction, much of this -- much of which has a mitigation and resilience aspect and provides immediate and [indiscernible] communities being serviced. We anticipate our work in the Northern Rivers will continue well into FY '24. Additionally, we continue to assist communities in Victoria, New South Wales and Tasmania, which were affected by flooding in October 2022. CAT events are indeed unpredictable. But as we expand our geographical footprint and grow our relationships with insurers and governments, we anticipate that this segment will grow substantially in the periods to come. For the first time, we highlight the contribution of Reconstruction Experts in the U.S. We acquired RE a little over a year ago. Qualitatively, the acquisition has been outstanding. Hopefully, [indiscernible] did its work better than we could have hoped for. For instance, in October 2022, Hurricane Ian made landfall in Florida and continued to affect communities up the east coast of the U.S.A. RE was able to render practical assistance, including emergency water and make-safe services as a precursor to the longer term rebuild program now in progress. We continue to explore business associated with JLG's other service lines, such as Makesafe and Express Builders, that will further develop RE's offering, revenue and profitability. Qualitatively, RE made an excellent contribution to the revenue contribution and in AUD $116.2 million and EBITDA of $13.6 million, [indiscernible] 12%, which is consistent with our modeling and expectations. Let me finish by giving you an update on our strategic direction and priorities before providing updated guidance in FY '23. We have identified 4 growth pillars at JLG: IB&RS, Strata, Disaster Management and the USA. There are dedicated slides in our results presentation that expand on the growth strategy of each of these pillars. But I want to highlight in what I see the key -- I want to highlight what I see as the key initiatives and how we are organizing our business so that we can underwrite the future revenue prospects of JLG. As I mentioned previously, our aim is to no longer grow the quantum of earnings we generate in these segments, but more importantly, the regulatory and predictability of these earnings. In the IB&RS pillar, we see this by deepening the wonderful relationships we have with our insurance clients. By becoming a trusted partner who delivers on time, high-quality and [indiscernible], we retain and expand our position on insurance panels. This is aided by our continuous product and service innovation. For instance, our Emergency Broker Response product has been a game changer with 100% take-up. With this product, we get on site quickly and we create a safe environment. This is an excellent outcome for the affected insured customers that often means the cost of the work is mitigated by our early intervention. It is a win-win for customers, insurers and JLG. In Strata, we will continue to benefit from the economics of scale that consolidation brings. There are [indiscernible] and JLG is the second-largest player with a 3% market share. We also have service adjacencies whereby we can retain a higher proportion of work generated in-house at a very good margin. In the CAT management segment, we have created a new business line, Disaster Management Recovery, with a dedicated management team. This business has been established to service government contracts. Increasingly, the recovery and reconstruction work associated with large categories is being managed by government and semi-government entities. This work is important and at times [indiscernible] dealing with communities in distress. Disaster management and recovery has been established to coordinate this complex work. We have completed work in Queensland, New South Wales, Victoria and Tasmania and expect the announcements regarding more government works to be made shortly. Importantly, we are building proprietary, intellectual property about how to execute these projects. This is value that accrues to the business and builds [indiscernible] business model from a competitive perspective. We are cementing our relations with governments and semi-government counterparties, which means that when there is a cat event, we can mobilize resources to assist communities quickly and efficiently. We're also seeing increased work in the sector stemming from ongoing resilience and mitigation projects that have been commissioned as communities and governments think to the future potential of more cat events. At the full year, I said that in the U.S., we are making haste forward. I'll amend that slightly to say that we are making haste quickly, but very, very carefully. We have a full plate of opportunities, have identified some acquisition targets and continue to explore how we can leverage the preexisting Steamatic U.S. business and complement our risk models. We are very excited about what we have achieved to date, and we are very excited about the future prospects of the U.S. business. In closing, I'm delighted to provide the following updated financial guidance. Forecast revenue for FY '23 is now at $1.146 billion, which means an 11.6 -- sorry, 11.2% increase in our previous guidance. FY '23 EBITDA is now forecast to be at $111.1 million, which is an increase of 5.5% over the previously advised guidance. Thank you for your interest and support of JLG, and thank you for taking the time to join us for this morning's briefing. Nick, Lindsay, Matt, Philippa, Adrian and I will be happy to take any questions you may have.

[Operator Instructions] Our first question is from William Park at Citi.

Can we just touch on -- you talked about the increasing severity and frequency of cat events and you've provided some color around FY '23. Could you sort of provide some color around, I guess, the profile that you'd sort of expect in FY '24? Are you suggesting from your commentary that you're expecting the contributions from cat events to step up from this point forward?

The contributions from cat events we are dealing with right now are the overhang. So in the New South Wales and Queensland floods, the Tasmania floods and the Victorian floods, we've got a massive overhang to deal with over the next two years at least. The work we did for governments in the disaster recovery for all the cat events, that work was primarily strip out, clean out and dry out. Not a lot of reconstruction. It really is the first part, is you've got to mitigate the water, so it doesn't generate mold and hazardous content, et cetera. So if you can think of how large they were, that cat event, those tidy ups on those cat events, but there's no rebuild or very little rebuild in those. So that's why we know the cat event work that's to come is really substantial.

I think also, Scott, from a financial perspective -- this is Matt speaking. From a financial perspective, as always, we do not forecast for cat events. Our cat forecast is exclusively contracted work in-house. So we've got to the start of the financial year, when we put out our FY '22 original forecast of FY '22 result, the original forecast was $100.5 million cat revenue. In this first half alone, we delivered $186.1 million. Accordingly, we've upgraded our cat forecast revenue by $140 million, so it now stands at $240.5 million which implies contracted work in hand in the second half of $54.4 million. But what I can tell you is that number is growing all the time.

While we are on the topic of cat, I don't know how material this will be. I'd imagine it's sort of somewhat immaterial for now. But any sort of upside from what's happened in New Zealand in recent [indiscernible]?

Yes. So it's Nick Carnell here, William. [indiscernible]. And I've been in New Zealand for about 6 or 7 months now. [indiscernible] acquired over those couple of months. We had a team establish there for that period and since this has been secured, we've seen significant registration volumes, and we're supporting customers -- clients on the basis of the long-term contracts and opportunities there as well. So this has been a real milestone for our [indiscernible] in New Zealand. Our intent was to always have a strong BaU business there, but that's been accelerated by the events of the last month.

And just one last one from me. I'd noticed on the Reconstruction Experts website, you guys are looking to hire business development manager in Nashville, Tennessee. Just on that, have you made any sort of meaningful progress? I appreciate that you've already got presence in that region through Steamatic. But just wanted to understand how you're tracking with expansion beyond sort of organic growth.

We're looking for M&A opportunity in Nashville but we're primarily focused probably building it out organically. Hence, we're looking for a head of BD in Nashville. To be honest, I checked in last week. They had some people interview last week. I haven't spoken to them this week to see how they're going with filling that position.

Our next question is from Elijah Mayr from CLSA.

Congrats on the results. Just a couple for me. Maybe you can just drill into the guidance a little bit, particularly around BaU. If I'm looking at BaU on a first half, second half, it looks like you're sort of guiding to it to be broadly flat. And I understand that Commercial Construction is going backwards a little bit. So would've thought with some of the acquisitions and the growth in the U.S., it might have been a little bit higher. Can you maybe break down your expectations in BaU on an Australian basis for IB&RS and U.S.?

Elijah, it's Matt speaking. I think, as always, we're pretty conservative with our second half BaU's guidance. I think what you can see on the forecast side, if you've got the presentation there, is very strong forecast year-on-year underlying organic growth. So BAU revenue, excluding acquisitions and commercial construction, for the full year forecast to be $556.3 million revenue. That's up almost 12% on FY '22 or $57.4 million. I should expect the lion's share of that growth is coming from IB&RS. But I think what I can say at this stage is we've been pretty conservative in terms of the second half BaU growth assumptions.

No problem. And with the Commercial Construction segments, it's obviously a bit of a drag on FY '23. You got $10 million in the outlook. How should we think about that for FY '24 going and onwards? Is this business going to be significantly wound down by the end of the financial year where it won't be as much of a drag?

Yes, we're running all the jobs there -- sorry. We're running all the jobs there, and we'll close out the jobs. I think we'll have most of them done by June, might carry over 3 jobs there, and then we'll just wind out of that division and only focus on lines to life insurance work.

Yes. Understood. And then maybe just one last one on U.S. Thanks for the detail on the revenue and the EBITDA there. Can you give us an update on the rollout of the sort of the Makesafe and Express Builders over in the U.S. and how much, I guess, they contributed to the performance?

Yes. Yes. In terms of the launch of new services, Elijah, I think it's going really well. We've launched Express in Colorado, Texas and Florida and also Makesafe in Florida on the back of Hurricane Ian. So those service lines have been launched. We're recruiting great management at the moment. But in terms of the first half contribution, it's minimal. The most important thing is we now have established those entities and they are generating some revenue, which will grow exponentially going forward. So I think the other part of that is that sort of growth strategy. We will target that every quarter for organic opening of offices and [indiscernible] business partners. So again, what we said early days about the seamless blueprint we use here in Australia [ indiscernible] implementing, educating carry on, that they're on that pathway here.

Our next question is from David Meehan from Moelis Australia.

Just hoping you could quantify the [indiscernible] pipeline of quoted work outstanding has moved over the last 6 months. You mentioned the contract of work on hand earlier. But maybe how some of the quoted work outstanding in earlier phases of the pipeline has moved, that would be helpful.

Yes. So I think my reference is at the full year, our quoted pipeline at the moment is about $550 million. So again, that work has been quantified. I think it's just awaiting an outcome. That's here in Australia. The pipeline, which is what we've used in the past to describe the opportunity we see in the U.S. through RE is $1.3 billion at the moment. [indiscernible] probably headline numbers around the opportunity we're seeing. Some of the government contracts that we're doing to even sit outside of that. So some of that, especially the work we're doing in Victoria at the moment, that continues to grow. And to expand on Scott's point earlier, the time for that to mature will be even more meaningful through FY '24 as well. So that's [indiscernible] that's moved from even 2 to 3 tranches of work to 7 or 8 tranches of work now, with different scopes opening up. So there's a lot of work that's been quantified. And as we always say, that will take time to drop in to work in hand.

Our question next is from Kieran Harris from E&P. [Operator Instructions]

It's Julian Mulcahy here. Just a few questions on the cat revenues. Did any of that $186 million include the U.S. number or that's purely the Australian business?

There's about AUD 6 million of CAT revenue generated from the U.S. About $1 million also from Steamatic, Julian, and the balance from Reconstruction Experts. So in terms of the second half, contribution from Reconstruction Experts in the cat segment would expect at least in the second half, but it could be significantly more based on the [ movement ] at the moment.

Right. So the $116 million in the presentation of the RE number, that's RE at $116 million, including $6 million of cat.

Correct. That's right.

Okay. Cool. And I just -- it was such a strong [ blip ] on what was expected on the sort of cat side and gets that you won these government contracts. But has there been any sort of change in how it's recognized, like the government pays you more upfront than you'd normally on normal transactions?

No, look, I mean the cash flow dynamics are similar. Certain components of the government work that they will prepay. For example, we've built a temporary accommodation, by which, so part of the higher charge is prepaid. But obviously, under the account expense, we defer that revenue. On profit, it will be recognized once it's earned. But that's the immaterial in the context of the rest of the revenue we delivered. So it's very, very similar to the rest of the BaU business.

Right. Okay. And the -- with the RE profit result, you said it was sort of in line with what you expected, but it looked a bit lighter in terms of margin relative to when you bought it. Is that just the first half, second half sort of timing thing? Or is this the new sort of run rate margin on that business?

No. Look, I think for time being, for the next two years, as we expand and grow, we are investing in a few additional overheads to facilitate that growth. The full year, when we kind of qualitatively spoke around the forecast for RE, we said in the range of $200 million to $230 million revenue on about a 12% margin, acknowledging that is a little bit lower than the historical numbers we put out there at the time of the deal. As we build up new service lines, put some more overheads on to facilitate growth, I think that 12% margin is pretty sustainable going forward.

Right. Okay. And just finally, what was the sort of contribution from Strata in terms of you doing the work that you've got your foot on through the management business?

Yes. So just a couple of [ sound back ] on the Strata business, Julian. So first half of '23, we delivered about $48.5 million revenue. That's up 15% on the prior period versus being first half '22. Strata Management, so the core business of [indiscernible] delivered $27.7 million revenue. That was up 9.1%, so very strong growth in that Strata management space, which obviously lower organic growth traditionally. And then Strata Building Services grew 25% period-on-period to $20.8 million of revenue contribution for this first half.

And just one final question. Your minorities was up quite a bit. So I just assume that a lot of that related to the extra cat work.

It's probably extra bit of cat work. In absolute dollar value terms, there's also an additional contribution from Reconstruction Experts and the business partners now in the U.S. But as a percentage of profit, it's actually reduced with the [indiscernible] as well.

Our next question is from Russell Gill at J.P. Morgan.

Just a handful of questions. Just following on from the cat. I guess the message you're giving is that you're, I guess, a bit more confident in the outlook and to some degree, forecasting this line of business going forward. Can I just delve into some of the trends that you're seeing? You're obviously seeing a bit of switch from -- or some increased government work coming through. Can you just possibly think going forward in the years ahead whether you see the government growth -- I guess, growth in government-related cat work increasing relative to the commercial sector and how you see that playing out?

I think, strategically, we've sort of set a strategy 5 years ago to improve the standards of the work that was done on behalf of the government in this space, that we're the natural provider of that work. And it's only because of our investment in communities, and that goes back to our value organic expansion into these areas that we can provide those services. To your point around forecast, we still feel that it's very challenging to forecast cat and to quantify even the work we've got on right now. Yes, we're feeling confident about the hangover that goes into FY '24. But anything beyond that is still very unknown. So I still resist the temptation to try put a number out there in the new financial year, and we've got to stick to what's worked for us in the past in contracted work only. So we've remained really diligent on our BAU's organic growth. It was upside in cat. Now that's for our IB&RS space that allows us the capability to go and sell into government like we have with the disaster management space. Now the scope of work we do is very different for government, and that's why we've got a specialized team that do it. But we're continuing to work very closely with the 3 states that we're working with at the moment. Hopefully, a fourth very soon. And in time, it would be interesting to have some strategic alignment schedule across the country which are these events are responded to.

And while I've got you, Nick, just on other trends you're seeing in the cat work. I mean, clearly, the revenue you're booking is up a lot. There's obviously a huge amount of cat work out there. But the last sort of 1.5 years you're seeing, I guess, a lack of raw materials, access to labor, some challenge in that. Are you seeing any changes around the insurance sector around cash settlement of claims and therefore, what doesn't hit you guys?

No, I think that probably the numbers speak a little bit rough [indiscernible] season which we're getting through the work. No significant change in cash [indiscernible] trends. I think, if anything, what we've seen in the results will continue to see some of the innovative solutions we provided to both insurers and to government. So this is work that has been pushed us really over the last 3 or 4 years, design solutions that have given us access to these types of outcomes. And I think things like temporary accommodation units, the facilities they're providing for customers that are displaced, these are the things that we've designed and we're working closely with government counterparties to implement no significant change to what we've known.

Okay. Great. And Matt, just on the cash flow. I mean the operating cash flow result was unbelievably good. I was given always the impression that if you get a big uplift in cat work, it probably is a temporary working capital drag. We seem to see the other way around, like your receivables has dropped. Is there some one-off things in there? Or am I reading it wrong regarding the operating cash flow?

No, look, I mean, this is [indiscernible] full year result, Russell. I'm sure you remember that the second half of '22 was temporarily suppressed, and that was basically driven by a massive increase in accrued income, which followed a massive increase in job volumes. So [indiscernible] phenomenon driving a temporary suppression in cash flow. What I said at the full year result was that I expect the balance sheet to normalize in the first half of '23, which is exactly what's happened. So we've seen a reduction in net working capital of about $10 million to $11 million, and that's driven a very strong cash conversion from EBITDA of about 120%. So going forward, in a normal, if there's such a thing as normal environment, cash conversion from EBITDA should be between 90% and 100%. Yes, we're an asset-light business. There's no working capital drive on cash flow per se. But when we get these big spikes in volume, we do have to scale up. We have to mobilize resources. We have to increase capacity, and that temporarily suppresses cash flow. But again, the balance sheet ultimately releases that cash, and we've seen that in this first half.

Okay, which I completely understand is just the significant uplift in your cat revenue this half. But essentially, you're saying all the mobilization occurred in May, June, that any additional mobilization is half.

That's exactly right. Yes, that [indiscernible] happened in the fourth quarter of '22. So now we're operating at a consistent volume.

And then while I've got you, Matt, just on the Commercial Construction business. Have you -- are you taking all the medicine this year? So should this business in '24 onwards be not a drag on the profitability for the group based on how you're seeing things?

Absolutely. So I mean, look, under the accounting standards, we recognize all the forecast losses immediately, which we've done based on the information available at the time. Hence, the $5 million loss in this first half going forward into the second half, we're still carrying a large overhead base. We've got some 50-odd of staff in that business continuing to perform that work. Hence, the second half forecast [indiscernible] half. But as the guys said, once we get through this financial year, the vast, vast majority of that work will be complete, and we will not be doing more traditional commercial construction work going forwards.

And last question, just, Scott, on the U.S., and apologies if I've missed this before. Just the margin from the RE business at 12%. How are you thinking that in that business over the next couple -- is that 12% margin, do you see upside risk to this? Or is the revenue opportunity across the different mix of work, I guess, a bigger driver of that business rather than the margin?

I think the revenue will certainly increase. And the margin. I think, it's conservative at 12%. We're investing a lot in the growth over there at the moment. We want to roll out fairly quickly, and we're investing in that. But the traditional work they do right now in multifamily housing, it actually carries a higher margin. So we're using a little bit of that for expansion. And then [indiscernible] maintainable. I think take that 12% is very conservative, but I think we can roll out and have consistency with that -- with our other products coming in.

And we don't have any further questions in the queue.

Thanks very much, everyone. One more, Michael.

Okay. Michael Peet, Goldman Sachs.

Just on the $186 million cat, could you just give us a sense of how much was insurance versus government?

Sorry. Can you ask the question again? Sorry, Michael. [indiscernible]

Sorry. The $186 million cat booked in the period, how much was government versus insurance company work?

Can we come back to you with that offline, Michael, if that's all right?

Yes. No problem. And just thinking sort of more strategically longer term. If you roll back 3 to 5 years, what do you think your -- of the addressable market in cat, where do you think you sort of -- do you know what sort of percentage roughly you'd be doing now versus what you were doing 3 to 5 years ago?

No. No, we can't. I mean we could probably dig at that, spend some time doing it. But I'll probably -- all I can say is go back 5 or 6 years ago, go back 8 to 10 years ago, we would have struggled to really facilitate [indiscernible]. We didn't have the offices, we didn't have the footprint going back sort of 6, 7, 8 years ago. Now what Nick and Lindsay and the rest of the team have implemented these offices all around Australia, where we have local presence, local tradesman, local relationships. So we can and we do respond quicker than anybody. Giving you a lot of examples of that, the insurance companies ask and request that everybody submit a cat plan when they put their submissions. In their RFP, they ask for a cat plan. Most people will say they can do a national cat plan. The fact is and reality is that nobody can service the full cat plan, a full national cat plan, except for Johns Lyng because we have 39 offices around Australia. Our nearest competition has 3 offices. Some on their website will say they've got 6, 7 offices but some are considering a man working from home [ as a worker in an ] office. That's not an office. So yes, to answer your question, Michael, our footprint to cover cat is real. And our insurance customers understand they know it's real because of how we respond and also how our costs don't escalate compared to our competitors because of the local presence.

I think also [indiscernible] with access to new subset -- a new subsegment of the cat market, and we did that in July '21, when we were first awarded the Victorian contract through BRV, Bushfire Recovery Victoria. Prior to that. we didn't do any cat-related work [ at all ] for our government. So we've actually accessed a whole new subsegment of the market, Michael.

We have no further questions in the queue.

Thank you very much everyone for your support.

Thank you.