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

Thank you for standing by, and welcome to Johns Lyng Group Limited JLG FY '25 Results Call. [Operator Instructions] I would like to hand the conference over to Mr. Scott Didier, Group CEO. Please go ahead.

I will provide an overview of our performance for the 2025 financial year. Also joining me on this call this morning is Nick Carnell, Chief Executive Officer, Johns Lyng Group Australia; Matthew Lunn, Group Chief Financial Officer; Adrian Gleeson, Director of Investor and Business Relations; Gemma Sholl, Executive EA; and Pip Turnbull, EGM Business Development. I'll begin shortly with an overview of JLG performance for the period. Nick will then speak to the progress of our Australian operations before Matt provides some more details on our financials. I'll then provide some closing remarks on the outlook before opening the floor to questions. I'm pleased to share that the group has delivered a resilient financial result for the year ended June 30, 2025, driven by strong performance in our core business as usual operations, including contributions from acquisitions. Group revenue for the year was $1.18 billion, up 1.8% on the prior corresponding period with group EBITDA at $126.8 million. Our insurance building and restoration service division delivered BaU EBITDA of $122.4 million, demonstrating the strength, depth and adaptability of our business. In a year largely benign weather conditions, our team has delivered strong earnings from our core operations, confirming the success of our long-term strategy and the trust we have built with our clients. Across the group, we've secured multiyear contracts with Zurich, AIG, Aidacare and TIO, while extending agreements with Suncorp, Hollard, Auto and General, and the Market Lane Group. Integration of our Queensland-based Keystone Group further strengthened our presence on the East Coast. In our Disaster Management business, we continue to expand programs with new government contracts and maintained strong engagement with state and local governments, demonstrating our leadership in emergency preparedness and response. In Strata Management, the acquisition of SSKB bolstered our national platform, while our Essential Compliance & Home Services pillar grew revenue by more than 50%, including contributions from the acquisition of Chill-Rite HVAC. In the U.S., our operations gained momentum in the second half of FY '25 following project commencement delays in the first half. Despite this progress, operating conditions remain challenging as we continue to execute our U.S. market strategy. We advanced the rollout of our core lines, including Makesafe, Express, Reconstruction and Steamatic Restoration alongside Reconstruction Experts and Advanced Roofing. We continue to leverage existing client relationships to grow job volumes and revenue while strengthening our referral pipeline with new partners, including brand and brand insurance brokers. Although Johns Lyng U.S. revenue contracted by 13.6%, largely due to first half delays, we are actively pursuing multiple attractive growth opportunities across the market. On behalf of the Board, I thank our people, clients and shareholders for their ongoing support. We remain committed to delivering consistent high-quality service and supporting the communities we serve whilst continuing to build our momentum. With that, I'll hand over to Nick Carnell, our Australian CEO, for the overview of the Australian business and some of the key wins across the growth pillars.

Yes. Thanks, Scott, and good morning, everyone. Our Insurance Building and Restoration Services division delivered strong business as usual growth despite unusually benign weather conditions and transitory operational challenges in New South Wales. The division achieved BaU revenue of $1.026 billion and BaU EBITDA of $122.4 million, reflecting the robustness of our core operations and the success of our long-term strategy. During FY '25, we secured several major new client contracts, demonstrating the breadth of our capability and the strength of the relationships we continue to build across the market. These included a 3-year national building contract with Aidacare, a 3-year Northern Territory contract with TIO, a national Building and Restoration agreement with AIG, a 2-year national building and restoration contract with Zurich. In addition, we extended a number of existing contracts with key clients. Suncorp extended its national building agreement by 1 year. Hollard extended its restoration contract across Victoria, Western Australia, Northern Territory and South Australia by 2 years, and Allianz extended its national restoration contract by 1 year. Auto & General extended its national building contract by 1 year and additional 1-year option and Market Lane renewed its national building restoration agreement under an evergreen arrangement, and IAG New Zealand extended its national building contract for a further 6 months. While our CAT activity was lower than in FY '24 due to benign weather, the division responded to several significant events, including Cyclone Alfred in Southeast Queensland and New South Wales, floods in the North Coast and Hunter regions in New South Wales and ongoing remediation works from prior events such as Cyclone Gabrielle in New Zealand. These projects showcase the group's ability to rapidly scale operations, mobilize resources and maintain high-quality outcomes, reinforcing our reputation as Australia's leading integrated building and disaster response provider. Importantly, these emergency response projects often generate new client wins and deeper relationships, which translate to ongoing business as usual opportunities. In Disaster Management, Johns Lyng continued to expand its programs for government clients. We delivered multiphase programs for Bulloo Shire Council and Quilpie Shire Council in Queensland and Scenic Rim Shire Council in Queensland to continue to support emergency recovery in Victoria. We also extended contracts with the Department of Housing in Queensland, providing temporary accommodation solutions and project management services. We're engaged by Homes Victoria to deliver up to 9,000 home energy upgrades supporting the government's gas substitution road map. These programs highlight the group's capacity to deliver meaningful outcomes for local communities while supporting state and federal priorities. Strata Management business, Bright & Duggan grew significantly during the year, reinforced by the strategic acquisition of SSKB Strata. This acquisition added over 44,000 lots across 790 schemes to the group's national portfolio, bringing the lots under management to more than 140 across -- 140,000 across 4,800 buildings. Bright & Duggan continues to deliver exceptional service to strata clients while presenting opportunities to cross-sell core services, including building and restoration works as well as direct and scheduled maintenance services. The strata market remains significantly -- a significant strategic growth area with clear opportunities to consolidate the fragmented industry. Our Essential Compliance & Home Services division also delivered a strong result with revenue increasing by more than 50% compared to financial year '24. This was supported by additional contract wins across the business portfolio and the acquisition of Chill-Rite HVAC, enhancing the group's capability in heating, ventilation and air conditioning services across regional New South Wales. This division represents a defensive recurring revenue stream that complements our broader service offering and provides resilience against the cyclical nature of CAT activities. Commercial Building Services performed in line with expectations, generating $65.5 million in revenue, consistent with the prior year and EBITDA of $6.1 million. Commercial construction is now in final stage of run-off and operations are largely wound down by year-end, allowing us to focus those resources on large loss insurance and core BaU activities. Across all of our pillars, financial year '25 has been a year of resilience and growth. Despite lower CAT activities, peak interest rates, high inflation and some operational challenges, the group delivered a strong BaU performance, maintained a disciplined cost structure and strengthened our national platforms. Our diversified defensive growth model continues to provide a foundation for sustained long-term performance, positioning Johns Lyng to capture opportunities across Insurance Building, Disaster Management, Strata Management, Essential Compliance & Home Services and other commercial opportunities. I'll now welcome Matt Lunn, our CFO, who will talk through the financial results in a little more detail.

Thanks, Nick, and good morning, everybody. FY '25 demonstrates both growth and disciplined financial management. As Scott and Nick both highlighted, we delivered group revenue of $1.18 billion, up 1.8% on FY '24 and group EBITDA of $126.8 million. Our core Insurance Building and Restoration Services division delivered BaU EBITDA of $122.4 million, and that reflects a strong performance from core operations complemented by contributions from the 3 acquisitions during the year. This was partially offset by lower CAT EBITDA of $8.8 million due to benign weather conditions experienced during the year. Our balance sheet remains very strong with net assets at year-end of $504.9 million, and that provides the flexibility to fund further strategic investments. Operational efficiencies, including a global headcount rationalization of approximately 120 FTEs and targeted overhead reductions have ensured the cost base remains aligned with the run rate of operations. Pleasingly, cash conversion improved in FY '25, enabling reinvestment in strategic priorities, in particular, in Disaster Management, Strata Management and Essential Compliance & Home Services without compromising the balance sheet. With the financial review complete, I'll hand back to Scott for closing remarks.

Thanks, Matt. Post year-end, we announced that JLG had entered into a Scheme Implementation Deed with Sherwood BidCo, an entity controlled by Pacific Equity Partners. Under the proposed scheme, Sherwood Bidco will acquire 100% of the shares at $4 per share, representing a 77% premium to the closing share price to PEP's proposal. Independent Board Committee has unanimously recommended the transaction and further details will be provided in the scheme booklet ahead of the shareholder meeting expected in October 2025. Looking forward, FY '26, we entered the year with strong foundation for resilience despite challenging operating environment presenting headwinds. We have a diversified and resilient business model, blue-chip clients, long-term contracts and recurring revenue streams. We will continue to deliver exceptional customer outcomes, expand our strategic growth pillars and maintain financial discipline. Our key priorities for the year ahead include continuing to scale our strata and EC and HS pillars and capturing underpenetrated markets. We'll also execute the U.S. growth strategy, roll out Makesafe, Express Reconstruction, Steamatic Restoration and Reconstruction Experts while maintaining operational efficiency and supporting growth through selective acquisitions and organic expansion. Based on current pipelines and assuming the benign environment, we are forecasting group revenue of $1.264 billion, an increase of 7.1% on FY '25 with a group EBITDA of $120.5 million, slightly below last year's performance as we continue to invest in our strategic growth pillars. On behalf of the Board, I again want to thank our people, clients and shareholders. We are proud of the achievements this year, particularly amidst benign weather conditions and are confident in the strategy and foundations we have built. With that, I'll now open the floor to questions.

[Operator Instructions] The first question comes from William Park with Citi.

Firstly, can I just talk -- can you just touch on the guidance for FY '26? Am I right in looking at margin being sort of 1.3 percentage point lower versus what you guys have reported in FY '25? And if that is the case, what's driving that? Is pricing now sort of structurally under pressure given the level of scrutiny across the industry? Or are there any other sort of factors that's driving this margin decline in FY '26 that you're expecting?

Will, it's Matt speaking. So in terms of the guidance, you rightly point out the revenue is contracting -- the margin is contracting into FY '26 from FY '25. From a revenue perspective, we've got a good growth at the top line, up 7.1%. BaU is growing at 12.1%, but the margin is contracting to 9.5%, down from 10.8% in FY '25. So that's about 140 basis points. What's really driving that more than anything else is some latent capacity in the cost base. So you can see in FY '25, we delivered some $82 million worth of CAT revenue in the forecast. The contracted work in hand is $32 million, $33. We can comfortably deliver at least another $50 million, probably even another $75 million worth of incremental revenue with the existing cost base. So that will provide some operating leverage of probably between 50 and 75 basis points of upside in the margin. In addition to that, there's an extra $2 million in the incentive plan in FY '26 in the forecast. Obviously, we paid back the incentive plan in FY '25 after slightly missing guidance. And there's also a nonrecurring noncash doubtful debt provision in the forecast of about $3 million as well. So if you add all that together, the underlying EBITDA margin in the forecast is somewhere between 10.5% and 10.8%, which is more of a sustainable number.

That's very clear. And then just in terms of U.S., you provided some color around the revenue number there. But just in terms of margin, I know it was around sort of 10% in the first half. Just curious to know how that's tracked in the second half, please.

Yes. Look, the margins improved into the second half and the benefit of the operating leverage. Obviously, revenues grew into the second half by about $20.5 million, which is positive, notwithstanding we fell short of total expectations by about $15 million. It was still good growth from a U.S. revenue perspective into the second half. That bolstered U.S. margins, but they still fell short of the 10% underlying margin. We still feel that underlying margins are around that 10% mark. If we were to normalize or the losses in the start-up businesses. So all the new service lines that we've launched that are approaching breakeven across that portfolio of start-ups in FY '25, revenue was about $6 million. We lost about $4.5 million. If you make those adjustments and then adjust also for the 30 FTE decreases that were affected in the second half, you'll get back to an underlying margin of about 10%. So again, disappointing from an actual reported margin perspective, but the underlying margin is still about 10% in the U.S.

And then just lastly, Commercial Building Services project commencement delays, and I appreciate that jobs have commenced during first quarter '26. Just wondering what's caused those delays? Is it weather related? Or is it something else?

No. This is mostly around the edges, Will. So in Commercial Building Services, these are smaller jobs. When we think about the shop fitting business, it's retail store fit-out. When you think about the floor coverings business, it's typically flooring for retail stores and other commercial premises. It's just a handful of smaller jobs being delayed. That business is a good business. Revenue is consistent with the prior year and margins should be around that 10% mark. Yes, slightly lower in FY '25, but it's not a material miss.

The next question comes from Tom Chapman with Jefferies.

Just a couple. Firstly, you kind of spoke to record registrations earlier this calendar year. How are you kind of seeing this translate into whether it's BaU or CAT revenues? Obviously, it feels like the CAT guidance is a bit soft given the events we've had.

Yes. I think the revenue did step up in the second half. We've sort of seen that pretty consistent throughout that second half. This is typically the quieter period of the year, in particularly here in Australia. Hurricane season is kicking off in the U.S. at the moment. So we're watching that closely. But revenue -- registrations have been pretty consistent without any massive step-ups. It was a step-up through January and February with some messy weather, which I think we touched on at the half. And that's sort of how -- so that sort of gives us a bit of confidence around the BaU outlook without any major, major catastrophes. So even the weather in Sydney over the weekend with the rain, but we've seen over the last week, there is sort of looking to bolster some nice BaU registration there being major catastrophe. So we closely watch our capacity and our resource and to Matt's point around the margins for FY '26. We're closely monitoring that into November when CAT season probably kicks off here in Australia, making sure we do have some capacity to react like we have in years gone by. So strong registration without being anything too silly.

Yes. Yes. No, that makes sense. And then just 2 related to the PEP bid, if that's all right. Is there any chance you'll pay a franked dividend to clear out your franking balance as a part of the arrangement? Or is it all just going to be capital return?

No, it's going to be capital return, Tom. So under the terms of the Scheme Implementation bid that we've signed with Pacific Equity Partners, a dividend is only permitted from surplus cash and the definition of surplus cash excludes any debt drawdown. So based on the material payments we've got coming up over the next few weeks, in particular, in excess of $20 million worth of earn-out payments, we don't have any surplus cash as it's defined under the scheme implementation deed.

Yes. Yes. No, that makes sense. And then just one other related to the bid. Just the material adverse change condition doesn't give a year for the EBITDA, like -- so the actual condition is if you missed EBITDA by more than 12.5%. Is that related to your FY '26 guidance?

It's really benchmarked against the FY '25 results. And of course, the material adverse change clause is only effective through this period up until the implementation of the Scheme Implementation agreement. That's expected to be wrapped up subject to the shareholder vote, et cetera, by the end of October. So based on the forecast, based on run rate, we don't foresee any issues from a material adverse change perspective.

Right, right. So given you obviously hit your guidance here and the movement in EBITDA into next year is all good, then yes, that condition is not an issue.

Correct. That's right.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Scott Didier for closing remarks.

Thanks very much, everyone, for your continued support. And yes, thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. Thank you.