MAAS Group Holdings Limited (MGH) Earnings Call Transcript & Summary

Good morning, everyone. It's, as said, Tim Smart here, Head of Corporate Strategy and Investor Relations. Welcome to the Investor Call for MAAS Group. In a moment, I'll introduce Wes Maas, our CEO; and Craig Bellamy, our CFO, to take you through the presentation. That should take about 25 minutes or so, and then we'll open it up to Q&A. You will see the pack we've presented, hopefully, the high-level messages are there, but we've also put in that quite a lot of detail. But of course, if you do have follow-up questions or queries for us, I'm more than happy to help facilitate getting your answers on those. So without further ado, let me hand it over now to our CEO, Wes Maas. Wes?

Thanks, Tim. Good morning, everyone, and welcome to our FY '23 results presentation. In terms of the agenda, I'll walk through the first 3 sections and then hand over to our CFO, Craig Bellamy, to give the group level consolidated financials, after which I'll wrap up with ample time for questions. Our strong FY '23 results, which I'm about to detail are a function of our disciplined investment framework and underpinned by our strategic fundamentals, namely an asset base, which we continue to invest in, that is directly exposed to key renewable energy and infrastructure projects, a highly aligned and incentivized founder-led team focused on being the lowest cost provider in each end market and a successfully established track record of organic growth and accretive acquisitions. Moving to Slide 4. Our values-driven culture is the foundation of our success and growth. It's a true differentiator from our competitors. Rather than simply act like owners and operators, we are owners and operators. Moving on to Slide 5. Just as our culture and values create competitive advantage, so too does our strategic location of our assets and operations. Our geographic hubs are strategically located within close proximity to many of Australia's largest infrastructure and renewable energy projects across the country. While our Construction Materials and Civil Construction and Hire Operating Businesses are primary near-term beneficiaries of these projects, our residential and commercial real estate business will also benefit down the track from the associated population growth and economic growth that these major projects will drive. Moving on to Slide 6, turning to our financial year highlights, which the year just gone saw record results once again for the group with EBITDA at the high end of updated guidance. Our results were driven by strong performance from both newly acquired businesses as well as our existing ones and in the face of significant adverse weather and macro headwinds. Our disciplined focus on working capital saw cash conversion at 88%. Our business is asset-backed with tangible assets growing to $1.25 billion, including a residential land bank of 8,000 lots recognized on our balance sheet at historical cost of approximately $15,000 a lot. Beyond our strong financial performance, I'm pleased to report that our safety focus continues to see meaningful reduction of the rate of worker injuries. Moving on to Slide 7. Although we listed a little over 2.5 years ago, we've been growing our business and capabilities through cycles for over 20 years. Since listing, we've grown the geographic spread of our business as well as deepen the capability within our segment. Significant investment in assets and capability position us very well to continue on our growth path. While proud of the entire portfolio and integration of our businesses, it's worth calling out our construction materials business, where our strategy continues to deliver ongoing success in developing a leading East Coast construction materials business, generating superior returns from our portfolio of valuable strategically located long-life assets. Moving on to Slide 8. The update here is that our strategy remains unchanged, and our priorities for FY '24 are consistent with the previous communications. We continue to drive return on capital discipline. We will focus on consolidation within our portfolio, driving further synergies and striving for operational excellence. We will continue the process of integration across our portfolio and look to identify additional efficiencies. We will adapt costs and CapEx in our residential development to adjust the near-term challenges in the market. We will execute on the capital recycling program, and we'll continue to invest in the broadening and deepening of our leadership talent within the group. Moving on to safety. As an extension of my previous comment about our values culture being at the center of our success, the fact that the safety of our people is our highest priority, we've reduced the lost time injury frequency rate by 45.5% over the last 12 months, something I'm very proud of. While we made solid progress, our firm goal is zero harm to all our workers, and we will continue to strive towards this. Slide 10. We are committed to operating in a sustainable way, recognizing the importance and role we play reducing environmental and climate-related impacts. There are a number of initiatives underway across our business that target reducing our environmental impact and in a number of cases, are also generating positive financial outcomes. As a company, we understand the increasing expectations around sustainability, and we're committed to developing a road map meeting or exceeding sustainability reporting requirements, which we'll share in the coming year. People, culture and community. As a values-driven company, we're committed to the well-being of our people and communities we operate in. We very much have a policy of growing our own ethos and the MAAS leadership development program, we're investing, is an important part. We also had 66 trade apprentice positions that we've supported across the group in the period. Moving to Slide 12 and the current trading conditions and outlook. We saw a very strong Q4 across our Construction Materials and Civil Construction and Hire Businesses with infrastructure and renewable energy projects driving solid volume and prices. Cost inflation remains, but pressures have moderated and price discipline is maintaining product margins. Interest rates have been a headwind for the residential development business. In terms of the outlook, trading conditions for FY '24 are forecast to remain broadly consistent with the second half '23 run rate on an annualized basis. Other factors to consider for our FY '24 outlook. We have a very strong secured pipeline across the Civil Construction and Hire and Commercial Construction divisions. Our strategically located quarries are well positioned to take advantage of key infrastructure and renewable energy projects. The announced capital recycling program will realize more than $70 million in the coming year. Our forecast that external land lot settlements will remain consistent in FY '23 in the residential business. We will also see a full year contribution from the acquisitions of Schwartz, Dandy and Austek. And as we've done in the past, we'll provide a further update on trading conditions and our outlook at our AGM. Moving on to Slide 13 and our 5 business units operating across the Industrial and Real Estate segments. You can see here the respective EBITDA contribution and returns through FY '23. Moving into Construction Materials. Construction Materials delivered a very strong EBITDA growth despite the heavily weather-impacted first half. We acquired Dandy Premix in December 2022, and I'm very pleased to report that it's exceeded expectations with a very strong performance since acquisition. We completed the acquisition of Austek at the end of May. This gave us extra product capability into the asphalt and spray seal markets. In terms of the outlook, we exited FY '23 in very solid shape with renewable energy projects and infrastructure driving strong demand and creating opportunities for us in the year ahead. We will continue to demonstrate price discipline in order to maintain product margins. The very strong growth in revenue and EBITDA was driven by growth and contributions from the newly acquired businesses and also the exiting -- also the existing businesses from ASP strength and production efficiencies. The flat margin outcome for FY '23 was especially notable given the revenue mix with concrete increasing proportionately with the Dandy acquisition and the weather impacted first half. Margins in the second half were approximately 24.9%, against 19.6% in the first half. Moving into Civil Construction and Hire. While the most mature of our operating units, Civil Construction and Hire continues to drive strong growth and returns. The group engaged on a number of the largest renewable energy projects in FY '23, highlighting the benefits of our integrated model. The acquisition of Schwartz has expanded our geographic and civil capability in the Central Queensland area. It has performed very well and has also driven significant aggregate volumes from our quarries. Strong revenue growth of 48% and EBITDA growth of 38% was a function of the contribution from Schwartz as well as growth from our existing businesses. Shift in revenue mix saw a small decline in overall blended margin, while working capital discipline saw strong cash flow conversion of approximately 89% compared to 48% in the prior year. Moving on to our residential real estate business. Revenue and EBITDA declined due to a reduction in land settlements as the unprecedented speed of interest rate rises impacted buyer confidence. We completed 181 settlements for the year in comparison to 270 in FY '22. During the year, we commenced sales at Eagle View Estate in Tamworth and made strategic land acquisitions in Dubbo, Bathurst and Griffith. For FY '24, we're expecting land lot settlements to be consistent with FY '23, noting that an extended pause on interest rate rises or a reversal could significantly alter this outlook. Housing fundamentals continue to look attractive beyond the near-term interest rate impacted environment, and we'll continue to focus on delivering availability and affordability to capture the strong underlying demand. EBITDA decline was driven by a reduction in land settlements as well as a reduction in gross profit per lot due to the mix of estate and product, which had shifted. While this mix or a fall in gross profit per lot, it is notable that the GP per lot in FY '23 was still 30% above FY '21 levels. Included in the overall settlements were 55 build-to-rent settlements, noting also that build-to-rent development will be paused in FY '24, while we focus on delivering existing commitment and sourcing of a capital partner for this area. Moving on to our commercial real estate business, which incorporates commercial development, commercial construction, building supplies and leasing activities. The gross development value of our existing projects grew to $872 million, and there is a property compendium providing more details at the back of the full year presentation. FY '23 saw a strategic acquisition of a number of sites in the industrial, self-storage and childcare asset classes. Our Construction business maintained existing Insurance Australia Group contracts across various regions, and we'll continue to grow this business. Pipeline is robust and developed maturity of existing projects over the next 3 to 5 years will roll out. Return on capital considerations will see recycling of some completed projects through FY '24. During the period, EBITDA increased by 69%, driven by fair value gain on investment properties, noting that such gains were attributable to purchasing discipline and successful planning and delivery outcomes, not simply cap rate adjustments. Existing fair value gains, EBITDA increased by 51% with strong contributions from the commercial construction and building supply businesses as well. And finally, our manufacturing and sales business. EBITDA growth of 129% was driven by normalizing of supply chains and recovering of demand in the tunneling, underground hard rock and concrete pumping space. There remains substantial opportunity for further growth without additional capital through expansion into new markets, including the U.S. and European markets. We also have the opportunity to continue to expand our toll manufacturing segment. I will now hand over to CFO, Craig Bellamy, to go through our consolidated group financial results. Thank you.

Thanks, Wes, and good morning, everyone. I'll start on Slide 28 and go through the financial highlights. As [indiscernible] noted, FY '23 has been another record year for MGH, and I would like to take you through the highlights. Starting with the group pro forma profit and loss, MGH has achieved a record EBITDA, EBIT and NPAT, achieving double-digit growth in all metrics with EBITDA and EBIT growth of approximately 30%. The growth in the result was largely driven by the Construction Materials, Civil Construction and Hire and along with commercial real estate, all of which enjoyed strong growth ranging from approximately 40% for Civil Construction and Hire through to 80% for Construction Materials. We're really pleased with the result. There was no secret of the challenges that were faced during the year with weather in the first half and the drag on residential real estate with the rising interest rate environment. But to deliver such a strong result in a challenging year was very pleasing, noting the second half delivered approximately $97 million EBITDA. Our EBITDA margin remained solid at 20%, slightly down from the prior year, which was driven by the slowdown in the residential market, weather impacts in the first half and respective revenue mixes, that we note that during the second half of '23, it was 22%. Turning to Slide 29, the expenses. Our operating expenses have increased by 55%, which is driven by the growth in revenue, the revenue mix and the businesses acquired. Revenue itself grew by 50%. 34% of the increase in expenses was driven solely by businesses acquired in FY '23. With respect to depreciation, it was a $9.6 million increase, $1.2 million of that arose from AASB16 with the remainder of $8.4 million almost solely related to businesses acquired during FY '23. With respect to the amortization of $7.5 million, $3.2 million of this relates to the amortization of leasehold quarries with the balance of $4.3 million driven by the accounting standards in relation to the assets we are required to recognize with respect to business combinations. Turning to Slide 30 and our pro forma cash flow. We have seen our pro forma operating cash flow increased by 96% to almost $117 million. This represents a cash flow conversion of 88% compared to 56% in the prior year and has been driven by strong working capital management across the group. We've also invested in our land bank during the year, which will drive future growth in the coming years. Our net maintenance CapEx for the year was $12.8 million, which we will discuss later in the presentation. Turning to Slide 31. The cash flow attribution by segment. As you can see from this slide, all divisions have improved. Civil Construction and Hire is without doubt the standout with a cash flow conversion of 89%, up from 48% in the prior year, with commercial real estate also a significant performer. Both of these divisions have managed working capital with a strong discipline. Looking at the Civil Construction and Hire pro forma EBITDA, it grew by 40%, but it only required a $5 million net investment in working capital. With respect to the noncash items, you'll note the fair value gains of approximately $30 million for the year, which was in line with expectations. Looking at Slide 32 and our land inventory. With respect to our land inventory, you can see we've invested approximately $100 million for the period, $50 million on acquisition and $50 million on development. As we've explained previously and as illustrated in the graphs below, there is a multiyear lag between the englobo land acquisitions and settlements, so the return on these investments will come through in future periods. With respect to our residential land, the investment that we have made during the period has provided us with a significant land bank of developed lots. And accordingly, our land development for FY '24 will be significantly less and help improve our cash conversion even further as we settle developed lots in FY '24 and beyond. Slide 33 looks at our capital investments. You can see that we've made growth CapEx of $46.5 million, driven by fleet expansion and fixed plant upgrades at the quarries with net maintenance CapEx of $12.8 million. Our total growth and maintenance CapEx of $59 million is consistent with the prior periods, particularly taking into account the growth in the business and the size of the asset base with total assets increasing by $500 million alone during the year. Turning to Slide 34 and our capital management. Our net debt ex-AASB16 property leases was approximately $440 million at year-end with a pro forma leverage ratio of 2.5x, which sits in the midpoint of our target gearing range. Our weighted average cost of debt for FY '23 was 4.9% with our margins still in the range of 1.8% to 2% and approximately 25% of our drawn debt fixed. The group has liquidity of approximately $140 million from our core facilities at year-end. And when combined with our forecast operating cash flows and asset recycling for FY '24, we expect the balance sheet to continue to strengthen over the coming 12 months. You can see from the graph, our debt maturity profile with FY '25 being the main maturity date with the group already in discussions with its banking group to extend tenor and grow future capacity. With respect to the dividend, the company has declared a final dividend of $0.03 per share fully franked, taking the full year dividend to 6%, which represents 9% growth from the prior year. Slide 35 looks at our balance sheet. As you can now see, we have total assets exceeding $1.4 billion and total tangible assets of $1.25 billion, noting our residential land bank remains valued at historical cost. Our significant investment during the year was made in our property, plant and equipment of approximately $100 million and our land portfolio, which increased by approximately $100 million. Slide 36 is an illustration of the consideration to how we approach group financing. But in summary, it's really -- it boils down to this, a disciplined and strategic investment basis, long-term return on capital, cash conversion and low to modest leverage. Slide 37 looks at our capital employed. Our capital employed at year-end was $1.1 billion. The group return on capital employed on EBIT for the period was 13% compared to 16% last year, with the residential real estate being the main drag during the year. We expect to improve our return on capital employed going forward, given our disciplined investment and capital management strategies demonstrated through our consistent strategic investment for long-term growth and our targeted capital recycling for FY '24. Slide 38 addresses the capital recycling. As we have discussed at Investor Day and again today, we're implementing an asset recycling initiatives to recycle at least $70 million of assets in FY '24. The decision as to which assets are to be recycled are fundamentally driven with a focus on maximizing return on capital or IRR, with the assets to be disposed of ranging from commercial property, noncore property of the group and low-yielding or surplus assets. These initiatives are already underway, and we are confident in the execution of this strategy. I'll now hand you back to Wes.

Thanks, Craig. Moving on to Slide 39 and our growth initiatives. For those of you, you may have seen this slide. It's been the same or similar slide in our pack for the last 4 years. Our outlook is really unchanged. If you look at Construction Materials, we're going to continue to focus on our lean manufacturing leverage off our quarry positions. In Civil Construction and Hire, we're focusing on the renewable energy space and our integrated positions. In the residential space, we've got a very solid pipeline of approved developments. We've got a good pipeline of land that's on the ground. Some would say more than what we should have, but we're [indiscernible] strong cash conversion in coming periods. And we're very well positioned to take advantage when the market does turn. In the commercial real estate, we've got a significant pipeline of in-demand product in our industrial self-storage and child care products. We will move into a recycle of capital, which is driven by our return on capital considerations. And the manufacturing and sales will continue to streamline the product range, and we will increase volume out of our currently owned facility and expand into the U.S. and European markets. Moving to Slide 40 and talking about our overall key messages. I'm really pleased and proud of our result coming in at the higher end of our tightened range and the midpoint of our previous range, especially given the backdrop of the materially adverse weather conditions in the first half and also the macro headwinds with the interest rates, which affected our Residential segment. The newly acquired acquisitions are exceeding expectations, and we continue to see strong growth from our existing businesses. We're focused on operational excellence, cost and CapEx discipline and driving organic growth. Our balance sheet is in very good shape, and we've got very strong asset backing, solid liquidity position and the capital recycling initiatives. We'll expand on that in the coming 12 months. We're very positive on the outlook, and we've got the building blocks in place to capitalize and build on a strong pipeline and opportunities in FY '24 and beyond. I appreciate your interest in our company, and that concludes our formal presentation. I'll now open up for questions.

[Operator Instructions] Your first question comes from the line of Sophia Owad with Macquarie.

Congratulations on a great result, guys. Maybe just 2 quick ones from me. Firstly, on the FY '24 outlook. So you've guided for it to remain broadly consistent on an annualized basis for the second half. Could you possibly provide some more details, please, on this regarding the organic growth in the business here and what the assumptions are for the noncash gains?

So yes, we're positive on the outlook. On the contribution of the existing business and the noncash gains, noncash gains will be fairly consistent with FY '23. So we're not expecting significant expansion there. On the exact split between organic and nonorganic, I don't have that number in front of me. I'd have to come back to you.

It will be driven hard on the organic [indiscernible].

Sorry, what you say will be driven.

It will be driven hard by the organic.

Yes. Okay. That's great. And second one for me, just on the capital recycling. So could you just give a bit of an update on the progress and expected timing of the $70 million?

Progress, we're underway. There's quite a few parcels that have already been listed for sale. We -- I suppose it will be spread across the FY '24 year. We haven't got into specifics if it will be first half, second half, but it will be quite evenly spread throughout.

Your next question comes from the line of Liam Schofield with Morgans.

Just to touch on, again, the asset sales. What's the -- I suppose, the NOI impact there for the commercial property? So you're obviously selling out of a few different categories. How should we think about those rental receipts changing?

I think our total rental income for this year is about $5 million, and we're not disposing of our portfolio, so insignificant.

Okay. And $872 million of GDV, what cost is yet to spend on that?

I think there's about -- there's roughly a couple of hundred million dollars to spend. So that $872 million portfolio is progressively delivered over the next 3 to 5 years, roughly 70-odd percent in the next 3 years. So our current facilities and current business cash flow, et cetera, will amply cover that.

And more broadly, some of your competitors have been sort of just talking about, I suppose, price growth and volume growth over the last 12 months. But likewise, increasing costs, that aside, they've seen improving margins. How are you guys finding that price/volume mix relative to cost inflation?

I would say, we would be consistent with our peers.

[Operator Instructions] Your next question comes from the line of Matthew Chen with Moelis.

I just wanted to ask, would you be able to call out the organic growth in the Construction Materials segment? I note that you've got that in the Civil Construction, and Hire.

Just bear with me, Matthew, sorry we actually have that in the [indiscernible] that was provided. I think we've said there's -- on the second dot point on Slide 16.

Yes. Great. And then those margins in Materials and Hire in the second half, are they your expectations going forward? So specifically the improvement in the CM side and then the slight compression in the Hire because of that revenue mix. Can you just give us a bit more color on that?

We believe it will be similar in the period going forward, fairly our exit rate is obviously how we rolled into '24. So all things being equal and in the current outlook, we expect it to be consistent.

There are no further questions at this time. This concludes the question-and-answer session. My apologies. We do have a follow-up question from Liam Schofield of Morgans.

Just one more quick question while you've got some time, guys. Just on the resi sales. Now obviously, you'd be contracting lots to sell in this half to settle next half. Can you just talk to me around like footfall at the moment contracting levels? And I suppose, are you starting to see a stabilization of interest rate expectations and I suppose, purchases willingness to execute?

Yes, Liam, a few points there to cover. I think in terms of we've made a statement that we expect our settlement target for FY '24 to be consistent with FY '23. So that's obviously reflective of what's going on the ground. In terms of the stabling of the interest rate environment, I think there is -- I think in recent weeks, there's probably been a little bit more activity and acceptance by the feedback from the sales team acceptance by people that this is the new interest rate environment. So we've never seen a diminish -- a drop of no people coming in. It's just that conversion time that sort of like takes. So I think that people seem to be adapting to that and the couple of recent pauses, I think, are assisting, but we've guided in terms of where we expect settlements to be for FY '24.

Yes. And obviously, you talked about that mix shift change during the year. Can you just give us a bit more color around what caused that mix shift? And does that change, I suppose, in '24 or beyond?

Just based on the land registration profile in terms of when you develop out the next stages of your estates. So we had some smaller lots come up on one of the projects in [indiscernible] where a lot of dual occupancy. So it's just a tighter margin and of a lower volume, a tighter margin can obviously make a significant -- on a weighting basis. It makes more of a difference when you look at the volumes that we did in FY '23. If we would have had those in FY '22, it wouldn't have made as much of a difference to that GP. In terms of the outlook for FY '24, I think it will -- there's always little pockets here and there, but I think of the land that we have developed, ready for sale, I think we will hopefully be moving towards the traditional mix.

Yes. Okay. And are you seeing more willingness for purchases on like built product or just land at the moment?

Definitely, built product is more salable, easier to sell.

Your next question is a follow-up from Sophia Owad of Macquarie.

Just a quick follow-up on your CapEx expectations for FY '24 across PPE, land and investment properties. So do you think they'll be similar levels to FY '23? Or are you expecting more or less?

No, it will be materially less in the land development side. We currently have approximately 380 lots on the ground. And we've got a strong land bank developed on the ground ready for sale. So you're going to see a significant cash conversion and cash return over the next period. The only area that will continue to increase is the delivery of our commercial development portfolio.

This concludes the question-and-answer session as well as today's conference call. Thank you for joining. You may now disconnect your lines.