Macmahon Holdings Limited (MAH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Macmahon Holdings First Half '20 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mick Finnegan, Chief Executive Officer and Managing Director of Macmahon Holdings. Thank you, sir. Please go ahead.

Thanks, Christian, and welcome, everyone, and thank you for joining us today for Macmahon's half year results presentation. My name is Mick Finnegan, and I'm the CEO and MD of Macmahon. And I'm joined by our CFO, Giles Everist; and our Investor Relations Manager, Chris Chong. During today's call, we'll run through the key points included in the investor presentation released this morning, and we'll then give you the opportunity to ask questions. I'll start with an overview of the half. And as you can see from Slide 2, it was a strong 6-month period for Macmahon. The business has proven it can successfully grow for a number of years now and the first half was no exception. In fact, first half FY '20 represented Macmahon's sixth consecutive period of half-on-half revenue growth. But what's most important is that this hasn't been growth for growth's sake. The increased scale of this business has translated into stronger earnings, cash flow and return on capital. With $91 million of operating cash flow in the half, up 160% on the prior corresponding period, combined with our well-positioned balance sheet, the Board has elected to declare an interim dividend of $0.25 per share, adding to the final dividend declared at the completion of FY '19. Given this strong first half result, together with our order book, which provides us with good visibility into the second half, we've today increased Macmahon's full year 2020 guidance to $1.3 billion to $1.4 billion in revenue and EBITA of $85 million to $95 million. Turning to Slide 3. I'd like to point out some of the key achievements that have driven this improved performance. The first half reflects our ability to consistently deliver on our long-term order book. For example, in our Surface Mining division, we achieved record production at the Batu Hijau, Byerwen and Telfer projects in the half. We also continued our high-performance at Tropicana where we have operated for many years. We also secured a 2-year extension at the Martabe project in Indonesia to March 2023. At Telfer, it is very positive for us to have resolved the dispute with Newcrest, which delivers increased contract rates. It means that project is cash flow positive. Meanwhile, in Underground, we successfully completed the acquisition of specialist contractor at GBF. And I'm pleased to report the integration is well advanced and tracking in line with expectations. The acquisition of GBF is a step change for Macmahon, making the business more diverse and less capital-intensive. It also enables us to broaden our offering so that we can service clients through the life cycle of their mining operations. Operationally at our underground projects, we successfully ramped up at the Boston Shaker which has demonstrated the efficiencies of having one contractor perform both disciplines on the same site. We also secured extensions at Tujuh Bukit and expansions at Olympic Dam and Leinster. I've already talked about our guidance upgrade. But looking beyond that, there are positive signs for Macmahon. Our order book is $4.5 billion following the letter of intent from Silver Lake Resources worth approximately $200 million. And we also have a large tender pipeline with 25 opportunities for Macmahon worth over $7 billion, of which $2 billion to $4 billion could be awarded in 2020. And during the half, we're also very pleased to attract 2 new non-executive board members, being Bruce Munro and Hamish Tyrwhitt. They bring a wealth of contracting experience, relationships and discipline to the business as we pursue further growth. Turning to Slide 4. I know safety is spoken about extensively in our industry. But I must say, I'm proud of how we at Macmahon put this into action. You can see our injury rates fell during the half while our employee numbers went up, which is really pleasing. We are also proud that our mental health program, Strong Minds, Strong Mines, was recognized when we won at 2019 WA Mental Health Award. However, more importantly, we are seeing positive impacts on our people, which have many flow-on benefits to the business as a result of this program. Moving on to Slides 5 and 6, we've listed out the company's key projects. There's quite a bit of detail on these slides, so I won't repeat it all here. But what I will add is that the 3 largest contracts we have: Batu Hijau, Tropicana and Byerwen, are all long-life mines that operate at the bottom half of the global cost curve. This provides us with a strong, stable base, and pleasingly, all projects have good potential for further material mine extensions and expansions. In fact, we are currently in final negotiations with QCoal regarding Byerwen to expand and extend the scope on that contract. AMNT are also currently investigating an extension of the Batu Hijau pit and still working on the development of its large Elang deposit. I'd also like to touch on our Underground division, which has seen considerable growth post the acquisition of GBF. GBF's letter of intent with Silver Lake Resources is an excellent outcome and reinforces our strategy of growing our Underground division, which accounted for 19% of our business revenue for the half. With that, I would now like to hand over to Giles to run through the financials for the half.

Thanks, Mick. Good morning, everyone, and thank you for taking the time to join us today. Slides 8 and 9 really tell the story of how this business has grown and evolved over the years. On Slide 8, you can quite clearly see the continued half-on-half growth in both revenue and earnings that Mick referred to at the start of today's call. Then on Slide 9, the charts show our strong earnings growth has consistently achieved guidance over the past few years. And we're on track for our increased FY '20 guidance. Turning to our profit and loss statement on Slide 10. I'd like to talk to some of the key factors behind our improved performance in the first half. Revenue was up 27% driven by organic growth with strong production at our existing projects, a 5-month contribution from underground contractor GBF, which was acquired in August 2019, and new work, such as the Boston Shaker contract. Group margins were lower largely due to the impact of GBF, although this was in line with our expectations. Our plan when acquiring GBF was to integrate the business during FY '20 and start capturing our share of the growing underground pipeline to scale the business. Moving towards the bottom line. I note our effective tax rate of 14%, which is close to the guidance we provided of approximately 15%, with historical Australian tax losses to be utilized over the next 2 years. The difference between our statutory and underlying earnings is detailed in the appendices on Slide 27. There are only minor adjustments, namely noncash share-based payment expense, M&A transaction costs and GBF customer contract amortization. There is also a minor impact from the new leasing standard, AASB 16, which is set out in the appendices on Slide 28. Slide 11 goes into more detail on the sources of revenue. As you can see, we have a good mix of commodities with over 80% related to gold and copper/gold. And we generate almost 2/3 of our revenue here in Australia. We also have a good spread of clients. The surface business still provides the bulk of our revenue at 76%. However, when compared to 86% in FY '19, it is reducing and reflects the growth in our Underground division, a trend we are focused on continuing. Moving to the cash flow - net debt waterfall on Slide 12. The company generated $91 million in operating cash flow, up 160% on the prior corresponding period. This represented an EBITDA-to-cash conversion of 80%. This was an improvement on the first half last year and remains a key priority for us. We are targeting full year cash conversion of 85%. We spent $70 million on CapEx in the first half and now expect FY '20 CapEx to be $155 million, up from the original guidance of $110 million. This reflects scope growth in the Underground division, new contract wins, including Silver Lake Resources and new equipment such as automated drills and diesel electric trucks. Of this $155 million, $85 million is sustaining CapEx, which is unchanged from previous guidance. Moving on to our balance sheet, which is on Slide 13. Macmahon now has an expanded balance sheet that reflects the GBF acquisition. Importantly, our gearing remains at a relatively modest level of 18.6%, with increase due to growth CapEx and a GBF acquisition. Positively, our underlying return on average capital employed and return on equity has continued to improve to 14.6% and 13.7%, respectively. The majority of our debt is equipment financed leases totaling $206 million. We also have a working capital facility of $75 million. Lease debt of $17 million, which primarily relates to our head office lease, has also come on to our balance sheet due to the new leasing standard. Before handing back to Mick, I want to touch on the company's capital allocation policy and our interim dividend. With strong cash flow generation and a solid balance sheet plus good medium-term earnings visibility, the Board elected to declare an interim dividend building on the final dividend of $0.05 per share for FY '19. This decision follows the capital allocation policy that was adopted in 2019 and has been designed with the clear intention of paying sustainable dividends where it is appropriate to do so. The objectives of this policy are to maintain balance sheet strength, assess revenue visibility and outlook, retain flexibility to invest in growth and return cash to shareholders. The first half FY '20 interim dividend of $0.25 per share equates to a payment of $5.5 million. It will be 30% franked and paid on the second of April. I'll now hand over to Mick to cover our strategy and outlook.

Thanks, Giles. The strategy on Slide 16 would look familiar to many of you as we have been working on these core priorities for a few years now. We think that by focusing on a clear, consistent plan, we've been able to grow the business and drive value for our shareholders. But rather than going to the detail on each point, I want to talk about how this strategy translates into our key priorities. Firstly, now that we have established the reliable delivery of our projects, our focus is on safely optimizing and enhancing margins. Secondly, we are focused on scaling the business by growing our underground and civil operations, which will add more diversity. Thirdly, it is paramount that we continue to manage the allocation of capital efficiently and deliver good returns. And lastly, we are focused on constantly finding new areas of differentiation. We are investing in technology to enable all components of our business, from finance to people and equipment, to be fully integrated so that we can drive further efficiency improvements. Examples of this include an advanced management operating system and tech-enabled solutions to decrease cycle times, improve tire life and decrease consumable and maintenance costs, amongst other things, that are important to our business. By delivering on these initiatives, we can drive value for our customers, our staff and our shareholders. On Slide 17, you can see our work in hand remains very solid, with an order book of $4.4 billion largely made up of high-quality clients and long-term alliance style contracts, providing us with strong revenue visibility over the medium term. It also includes new work of approximately $200 million at Mount Monger for Silver Lake Resources, which is currently under a letter of intent. I'd also like to point out that the majority of our 3-year work in hand is related to gold and copper/gold mines. In addition, over 60% relates to Australian mines. In the short term, however, when combining the revenue already delivered in the first half of FY '20 and our work in hand for the second half, we already have $1.3 billion of revenue secured for this financial year. And note that the work in hand figure does not include civil or underground churn work. This provides us with strong confidence in our increased guidance. There also remains a strong pipeline of opportunities for Macmahon with 25 potential new projects set out on Slide 18. These are what we consider credible opportunities for Macmahon and they total more than $7 billion of value. Of note, we are already exclusive of preferred tender on over $4.5 billion of these opportunities. As I touched on earlier, we believe there is significant potential for order book expansion at our 3 largest contracts: Batu Hijau, Tropicana and Byerwen. These projects and their clients are strategically important to us, and we anticipate that some of their growth plans will be confirmed in the near term. This forms part of the $2 billion to $4 billion of new work in our pipeline that could be awarded in 2020. When you combine these opportunities with the others in our tender pipeline and consider the work we already have contracted, we are in a healthy position to deliver continued growth over the coming years. So on Slide 19. In closing, it is pleasing to be able to deliver another set of strong results. What we have achieved already this financial year, plus the secured work in hand, has enabled us to increase Macmahon's FY '20 guidance. I can also say, I'm genuinely excited about where the business is going and also the team that we have in place to steer it. We've got a robust business that, with the addition of specialist underground mining contractor GBF, is more diverse, is less capital-intensive. And with this greater scale, we can service clients through the life cycle of their mining operations. There is a strong pipeline of new work available and we have a solid balance sheet that enables us to win and deliver on this new work. Our focus is on the safe and efficient performance at the project level, investing in technology, supporting our people and completing the GBF integration so we can continue to deliver shareholder value. And with that, I'd like to hand back to the operator and open for questions.

[Operator Instructions] There are no questions on the phone at this time. I would now like to hand the conference back to today's presenters. Please continue.

Thanks, Christian, and thanks, everyone, for taking the time to join us. We're very aware, it's a busy time of year. And we look forward to catching up with everyone over the coming week in Perth, Melbourne and Sydney. But as always, if anyone has any questions, please reach out to Chris, Giles and myself, and we'd happily answer any questions. Thanks for taking the time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.