Lindsay Australia Limited (LAU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lindsay Australia Limited FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Clay McDonald, CEO. Please go ahead.

Good morning, and thank you for joining us for Lindsay Australia's FY '26 Full Year Results Presentation. I'm Clay McDonald, CEO of Lindsay Australia, and I'm joined today by our CFO, Justin Green, and COO, Craig Baker, who will be available for questions following the presentation. Before we begin, I'd like to acknowledge the traditional owners on the land on which we meet today, and I pay my respects to the elders past, present and emerging. Lindsay Australia is a national leader in integrated rural services and refrigerated transport. We operate across Australia's major horticultural regions and freight corridors, delivering essential inputs, packaging and logistics solutions to the agricultural, manufacturing and temperature-controlled food sectors. The role we play is both essential and vital, delivering time and temperature-sensitive freight that sustain millions of Australians every day. Over the last 3 years, the team has focused on creating a scaled and efficient national network that provides customers with end-to-end solutions and creates value through our unique integrated model, express road, rail and sea services and our modern infrastructure that provides volume and scale flexibility. Regardless of what's happening globally and focusing through the cycles, the key demand drivers for Lindsay's service offering remain positive. Population growth and changing consumption habits is driving strong growth in the freight task. Through our strategy and investments, we are flexing our core operating model to align with changes in the market and to derisk our exposure to natural events that impact horticultural volumes. For example, our national network cross-docking infrastructure is designed to support variations in customer order size as demand and inventory management signals change. As delivery frequency, express flow-through, availability expectations change, we have the network infrastructure and systems to support our customers. Through organic growth and acquisitions, we've intentionally diversified our revenue by region, service, product and customer to achieve more consistency in volumes. I'm particularly pleased with our success in the dairy category. The changing consumption habits and preferences drive demand for protein. Dairy companies are benefiting through increased volumes. Customers with a national task and products that are in high demand with time and temperature-sensitive characteristics is Lindsay's sweet spot. So we're excited to be partnering with blue-chip dairy brands supporting the supply chain side of their escalating demand. We consistently get asked where are we in the cycle? There are way too many variables to be definitive about what, when and how things will play out in our market other than acknowledging that there are periods of oversupply and undersupply that can influence returns. At Lindsay, we don't try and pick these cycles, but have a long-term focus on consistently investing through the cycle and readying the business to take advantage of changes in the market as they occur. Disruption in the transport market continues to play out as the compounding pressures of high interest rates, deferred tax payments, same-day super and increased property, labor and maintenance costs leading to escalating insolvencies and year-on-year reduction in heavy-duty truck sales. I'm delighted to provide an update on 2 developments that defined this year for Lindsay: the completion of SRT Logistics integration and our scale entry into the secondary freight market. First and foremost, I'd like to thank Rob Miller, Brad Hilder and the SRT team on a very successful first year as part of the Lindsay Group. SRT integration is now complete and has delivered everything we set out to achieve. The transaction delivered 15% EPS accretion on an FY '26 pro forma basis in year 1. We realized $1.5 million of cost synergies against our original target of $1 million and redeployed $5 million of capital from the combined business. SRT's TransBass and Tasmanian operations has improved the seasonality and consistency of our earnings and reduced our geographical risk. Whilst on the commercial side, our extending connect strategy has been well received by SRT customers looking for a national end-to-end solution plus Lindsay customers who are targeting sale opportunities on the -- just as importantly, we recognize the capability SRT had in a sector of the market that is large, attractive and which Lindsay doesn't traditionally compete. By leveraging off the capability, combined with our size, scale and regional presence, I'm delighted to announce we have secured a 5-year contract to provide secondary freight services to approximately 40 Woolworths and BIG W stores from Mackay to Cairns in North Queensland. This is Lindsay's largest single contract win and will generate between $30 million to $36 million of revenue a year, delivering a return above our hurdle rate of 15%, supported by $20 million of dedicated capital across 4 sites, including 2 greenfield sites, Townsville and Cairns. Rollout will begin in October '26 with full operations in July '27 and the full run rate captured in FY '28. Secondary transport market is complementary to our existing operations, and this opportunity is a direct dividend of bringing SRT into the Lindsay Group and combining our strengths to create customer value. Let's take a look at our key performance highlights for the year. Backed by the network expansion, Lindsay delivered a record full year result. Revenue exceeded $1 billion for the first time, reaching $1,072 million (sic) [ $ 1,072.7 million ], up 26.2% on FY '25, with SRT Logistics contributing $149.7 million and organic growth and market share gains of further $73.2 million. Underlying EBITDA rose 25.6% to $127.8 million and underlying EBIT rose 37.7% to $60.4 million, reflecting the first full year contribution from our acquisitions and improved utilization of a network that is now substantially built. Underlying NPAT was $27.6 million, up 27.1%. Underlying EPS rose 10% to 7.6 cents. Our key safety metric, lost time injury frequency rate improved by 34% to 10.9, a pleasing result following continued investment in safety, leadership and technology. The Board has declared a fully franked final dividend of 1.7 cents, bringing the full year dividend to 3.8 cents. Taking a closer look at segment performance, Transport, including SRT Logistics delivered revenue of $762.9 million, up 32.9% with EBIT up 25.9% to $77 million (sic) [ $77.4 million ]. Tasmania now represents 19% of transport revenue and our expansion into Southwest WA, together with the new Perth facility continues to broaden our geographic base. The transition to high productivity vehicles is helping to soften margin pressures across the division. I'm also pleased to advise that we've successfully recontracted our rail linehaul services with PN for another 5 years. PN's investment in their sites and fleet make them an ideal partner for Lindsay. Rural had another strong result with revenues up 15.3% to $190.8 million, EBIT up 22.8% to $12.2 million and margin expansion from 6.0% to 6.4% on broad-based growth across cartons, fertilizer and nutrients. The team leveraged off the GJ Freight acquisition in Southwest WA to strengthen our integrated rural packaging and transport offer. Rural overcame supply disruptions in key product lines caused by the war in the Middle East to deliver a standout performance. W.B. Hunter contributed $118.9 million in revenue, up 7.9%, with EBIT of $3.2 million, up 11.3%. Pet and produce, fertilizer and cartons all traded positively and the Nagambie and Seymour stores are now fully embedded. Under Chris Kerton's leadership and with Rural, Hunter and Transport now working more closely together, we expect the Hunter's improvement trajectory to continue. I'll now hand over to Justin to take a closer look at some of the numbers.

Thanks, Clay. Welcome, everybody. Over the next few slides, I will take you through the key financial measures and would draw your attention to several key callouts. Let's start today with cash. Operating cash conversion strengthened in the second half, consistent with our normal seasonal trend. Reported conversion rate for the year came in at 61%. However, after normalizing the prior period tax timing, conversion was 74%, which was above our normalized long-term average. The bottom left table is a really big call out for cash as it shows how the deferred tax balance that we have spoken about over a number of years now has largely been unwound. After peaking in '24 at just over $40 million, we paid a further $16.4 million of deferred tax in FY '26, leaving only $16.9 million to unwind. What this cash flow demonstrates is that the cash-generating capability of the business remains really strong and that the business continues to convert earnings into cash, which underpins the balance sheet strength. Let's now take a look at CapEx as it has been a big couple of years. You can see here that the capital spend did moderate in 2026, coming in at $40 million (sic) [ 40.5 million ], which was at the lower end of our half year update. The reduction in '26 reflects genuine efficiency gains from several key initiatives. As Clay mentioned, we were able to extract capital synergies from the SRT acquisition. Those synergies, coupled with higher equipment utilization and value extracted from fleet transformation projects enabled the fleet spend to come in line with the prior year at just over $35 million. CapEx spend on facilities is forecast to normalize as major projects to unlock growth in Perth and Adelaide were completed. The expansion in Adelaide, which is a Lindsay freehold site came in at just under $9 million. Key highlights for the year included the deployment of another 25 high productivity road combinations across the network. These combinations now account for over 13% of our total road kilometers. Looking ahead to 2027, our capital plan is expected to be around $57 million across fleet facilities, which includes the $20 million of growth capital for the new secondary freight contract. Touching now on returns, you can see on the ROIC table, the strategic investments made over recent years take our invested capital to $400 million. Those investments have built a larger, more diversified and more capable network and positions the business for the long term. Although returns for the year at 13.9% are below our medium-term target range of 15% to 20% and down slightly from 14.3% in 2025, important to note, much of that step-up in invested capital was recently deployed in the past year. Encouragingly, the returns have already improved from 12.6% at the half year. The level of investment we have made over the recent years naturally takes us now to a deeper dive on the borrowing slide. The increase in debt in the past 12 months was driven by strategic growth investment. Net leverage for the year finished at 1.92x, which was a reduction from 2.23x at the half year and importantly, finishing within our target range. Looking to '27, net leverage may be above the top of the target range at the half year due to the capital deployment timing. But like this year, we forecast it to normalize in the second half and reducing to around 1.8x for next year's end. We finished the '26 year with plenty of funding capacity of around $85 million in available facilities, which provides flexibility to support future opportunities. What the following graphs demonstrate is that our balance sheet remains strong. Net leverage is being managed through the cycle and that we remain well placed for the next phase of the group's development. As Clay called out, the Board has declared a fully franked final dividend of 1.7 cents per share, bringing the full year dividend to 3.8 cents per share fully franked and in line with the prior year. The dividend reflects confidence in the strength of the balance sheet and the cash-generating capability of the business, which we expect to strengthen further as the remaining deferred tax unwinds and earnings continue to build. Our approach to capital management remains unchanged. We will maintain balance sheet strength, stay disciplined in allocating capital and pursue growth opportunities that support sustainable shareholder returns over time. FY '26 marks an important transition for the Lindsay Group. The platform is built, SRT is integrated and the fleet and facilities are in place to support a larger and more capable business. With that, I'll hand back to Clay.

Thanks, Justin. Turning to how we grow from here. Over the last 3 years, we've intentionally been in build mode, expanding our reach, building out our customer offering and unlocking infrastructure constraints. We deployed $400 million of invested capital into making Lindsay stronger and resilient in our market and more valuable and efficient for our customers. The way we have shaped the business has us positively positioned for growth, and we see 3 key opportunities. The first growth engine is refrigerated primary logistics, growing where we already lead. It's a market worth around $5.7 billion, and we hold the #1 position in rail and road and #2 in TransBass. Our investment in equipment, sites and people will enable us to efficiently grow our share on the lanes we already compete lifting utilization and continuing our transition to high productivity vehicles. This is about capturing incremental volume over capacity we've already paid for, but it comes with only modest sustaining capital. The second opportunity that has been unlocked is the secondary freight market. This is a complementary sector with a market size of roughly $3 billion. Contracts in the market are usually larger, reasonable term and more consistent volumes. As a group, we are very focused on the successful rollout of the North Queensland contract. And from that process, we will develop critical skills and capability that will set us up for further opportunities. The third is Ag services, deepening our integrated model across Rural and Hunter. This is a network-led growth that requires minimal capital. It means growing our unique integrated offer and packaging across our rural regions, gaining share where we already operate and continuing the turnaround we're driving through Hunter. All of these 3 growth engines are underpinned by the transformation work running across the business that targets a medium-term ROIC of 15% to 20%. Looking ahead to FY '27, the team is very focused on extracting operating customer and financial benefits from the investments we have made over the last 3 years. Externally, the transport sector remains in flux due to a combination of cost, regulatory supply and customer pressures. Refrigerated transport is expected to remain competitive in the near term with the volume outlook anticipated to be flat by static customer demand. A major milestone for the business will be in October when we commence the first region in our Woolworths contract with all regions operating by July '27. On the rural side, growing conditions across our rural regions remain broadly favorable. Lower biennial avocado and citrus volumes in WA and Central Queensland are expected to be offset by continued growth in Tasmania and other key regions. Lower forecast rainfall in the 12 months ahead is largely negated as the regions we service are irrigated and have good water supply as a result of the last 3 years. With that, I'll hand back to questions.

[Operator Instructions] Your first question comes from Philip Pepe from Shaw and Partners.

Yes, well done on a pretty solid second half. Just on the expansion into secondary freight, can you just give us a bit more detail, please, on how that contract came about and how quickly you hope to expand into some of the other states?

Thanks, Phil. I think we flagged reasonably early on that the SRT acquisition had a whole bunch of benefits. And one of those benefits was their expertise and reputation in secondary freight. And so as part of that as we integrated the business, we then started looking for opportunities to expand the secondary freight capability on the mainland. So that really came through a combination of both what we've got is in the network and coverage and the SRT capability and reputation in that sector. I don't know whether there's any -- Craig Baker sitting here dying to answer a question, whether there was anything else you wanted to add to that.

I think -- and when you look at the North Queensland particular pillar, our network, like I said, in the North, but it's also expertise in and out of it. So the rail in North Queensland is particularly unreliable. And I guess our road services and [ infrastructure ].

And if I can sneak in a second one, please. You mentioned sort of $85 million balance sheet capacity for M&A. I would imagine at the moment, probably plenty of businesses coming across your desk waving the right flag up for sale. Has prices adjusted accordingly? Is there much interesting that's out there?

I think the main thing here, Phil, is, and we're trying to emphasize through the presentation is we've built capacity into our business. And as the market gets disrupted, bringing that volume across into -- we've got that operating leverage, bringing it across cheaply it would probably be our goal rather than kind of any immediate M&A activity. Justin, is there anything you want to add to that?

No, that's spot on Clay. We always want to maintain sufficient capacity to be in a position like we were in '23 to act swiftly if opportunities arise. And that's why it's always important to make sure that we maintain sufficient capacity on the balance sheet to do that.

Your next question comes from Ian Munro from Ord Minnett.

On the result. Just with respect to the secondary freight expansion, can you maybe just give us a sense of the CapEx involved? I know you flagged some numbers there. Just interested in the, I guess, the leasing component relative to the fixed facilities. And is it a case of investing that capital and potentially getting more throughput in excess of the numbers that you flagged from a revenue perspective?

So Ian, we've got $20 million of dedicated capital against that 5-year contract at this point in time. Most of that is in kind of rolling stock, so new fleet, trailers, et cetera. We will be opening 2 new sites in Cairns and Townsville. They'll be leased sites for us. What was the second part of your question, sorry Ian?

Just wondering whether associated with that capital investment, is there any incremental revenue opportunities above what you've flagged to the market?