Macmahon Holdings Limited (MAH) Earnings Call Transcript & Summary

Thanks very much. And I'd like to welcome everyone, and thank you for joining us today for Macmahon's 2020 Results Presentation. I'm Mick Finnegan, the Chief Executive Officer and Managing Director of Macmahon, and I'm joined again by our CFO, Charles Everest; and Investor Relations Manager, Chris Chong. I know everyone's very busy, so we do appreciate the opportunity to run you through the presentation. And once we've completed it, we will address any questions you may have. But firstly, as you may have seen, we also announced Charles' resignation today. I'll let him talk to this in a moment. However, I understand his position and would like to take the opportunity to thank him for his significant contribution to the business over the last 7.5 years both as a director and an executive. And while it will be sad to see him go, won't be for some time as he facilitates a smooth transition of Peter Pollard, our incoming CFO. Now turning to the presentation in Slide 2. I'll start with the key numbers, and I'm very pleased to say that Macmahon has delivered on market guidance with another strong result. In fact, the FY '20 result was a record for the company in terms of earnings and operating cash flow. This was particularly important given the current uncertain times we are all finding ourselves in with the COVID pandemic and its economic and social consequences. And I'll talk a bit more about this in our response to it shortly. We have now met or better our market guidance for the third consecutive year, and this year delivered record earnings, which highlights our consistent execution and growth strategy to expand our service offering across the full mining value chain. As you can see from the key numbers, revenue grew by a healthy 25% to just under $1.5 billion. And this growth in the top line did translate to earnings with underlying EBITDA growing by 32%, underlying EBITA by 22% and reported NPAT by 41%. These were all record numbers for the company. Importantly, our cash conversion was also very high, over 91% of the EBITDA, and we continue to improve our return on capital to 14.8%. The strong earnings and cash generation also allowed us to maintain our strong balance sheet while also increasing shareholder returns through increased dividends. And we remain confident Macmahon is well positioned to continue to deliver growth, and we've increased our FY '21 guidance to a revenue of between $1.4 billion to $1.5 billion and an underlying EBITDA of between $90 million to $100 million. And we do have a record robust order book of $4.5 billion to -- under $4.5 billion to underpin this increase. And in particular, we have over $1.2 billion of work already contracted for FY '21, which does put us in a strong position early in the year, notwithstanding any unforeseen impacts of COVID. Slide 3 recaps the key developments for the year and some of the business drivers behind our strong FY '20 performance. Our service division achieved record production at Batu Hijau and the Byerwen project, and we also secured significant contract extensions at Martabe, where we achieved a 2-year extension in March, which brings us out to March 2023. And we'll dig our involvement in that project to beyond 8 years. And then, of course, a 3-year extension and expansion at Byerwen with opportunities for further growth in both the scope and tenure there. The satisfactory settlement at Telfer during the first half has had a positive financial impact on our second half in particular, delivering the increased contract rates and a positive cash flow contribution. And as you know, our underground division has significantly grown. We were awarded the Boston Shaker contract last April at Tropicana, which we have successfully ramped up, and its performance has clearly demonstrated the benefits of having one contract performed both the open pit and underground disciplines on the same site. We've also completed the GBF acquisition in August, and this has continued to broaden our service offering and enhance our ability to service our clients' needs. And this integration has continued to track well and is largely complete. I've already touched on our guidance for FY '20, but it's also worth noting our growing and strong tender pipeline. And we currently are looking at around 23 credible opportunities, totaling over $7.5 billion. Of these around $2 billion to $4 billion are due to be awarded in the next 12 months. As I mentioned in my introduction, COVID has had a major impact on economies and communities all over the world. In Slide 4, we have outlined how Macmahon has responded, and we'll continue to respond to protect our people and our business. At a broad level, we have implemented all required protocols around screening and testing, social distancing, sanitation and travel restrictions. In Australia, we relocated some of our interstate workers to comply with travel restrictions given the differing state government requirements and have focused on physically and mentally supporting our workforce through this challenging period. This has included the online implementation of our strong mines initiative as well as a fatigue management program amongst many others to support our people. In Indonesia, there is a different risk profile, as you can appreciate. But rest assured, our clients have the strictest controls in place. In fact, that Batu Hijau, our largest contract, we see the most stringent controls we've implemented across our entire business. And this is a credit to the senior management team there and AMNT. Overall to date, there has been a net minimal impact to productivity, our supply chain and our margins. However, we're not taking a fortunate position for Granite and remain proactive as far as possible in managing the risks. But what has been evident through the COVID period is that our amazing team of over 7,000 men and women have pulled together incredibly well. Our latest have been outstanding. And the can do agile culture we've been building over the past few years has really been visible. Now turning to Slide 5. You can see the growth in our workforce, which, at record levels, following the acquisition of GBF. Despite this significant growth, the graph pleasingly shows that our injury rates have continued to reduce year-on-year, including our LTI frequency rate, which is now at a record low. Nonetheless, there is no room for complacency when it comes to safety, obviously, and we will continue to challenge ourselves to improve this further. And I did mention a moment ago, our award-winning mental health program, Strong Minds, Strong Mines. It has been an important part of our COVID response, and we're now excited that it is being offered to the wider mining industry. Although with Slide 6, we could briefly highlight some of our key projects. We have provided further details on other projects in the appendix at the back of the presentation. Firstly, Batu Hijau, our copper-gold mine, we continue to perform well, and we're pleased to have achieved record production volumes. The alliance management team on-site are performing extremely well, and we are seeing world-class levels in a number of areas. We also note that AMNT continue to investigate a significant expansion at Batu Hijau. And if all goes to plan, we are thinking this expansion could be awarded in the second half of FY '21. We also achieved record production levels at Byerwen, and we were pleased to announce the award of the $700 million 3-year expansion and extension of this contract earlier this year. QCoal is an excellent partner, and we look forward to working with them on this high-quality long life asset for many years to come. Meanwhile at Tropicana operations continue to perform well, and the relationship with this client remains strong, and it's very important to us. I'd also like to touch on the underground division, which is saying considerable inorganic and organic growth over the year. As I mentioned, we were awarded the Boston Shaker contract last April at Tropicana. Following this, we completed the acquisition of GBS, who were then awarded a $200 million 3-year extension with the Silver Lake Resources Group at the Mt Morgan project. All this is culminated in our underground revenue growing from around $80 million a year in FY '19 to $260 million a year in FY '20, which now represents circa 20% of our all-in revenue. I'd now like to hand over to Giles, who will run through the financials in a bit more detail.

Thanks, Mick. Good morning, everyone, and thank you again for taking the time to join us today. As Mick has mentioned, it is with regret that I have decided to resign from Macmahon. It's been a challenging but rewarding 7.5 years, and I am genuinely sad to be leaving at a point when the company is delivering on all the hard work that the team has put in, and I believe will continue to deliver. It has been a purely personal and family decision. My wife and daughters are all based in Europe, and with the current travel restrictions, this is far from ideal. But I'm confident in the business's outlook, and I intend to stay with Macmahon for the next 6 months to assist and ensure a smooth transition to Peter and the broader team. Now enough about me and more about the financials. Slide 8 outlines our historic financial performance over the last 4 years. While the track record may only be as good as your last performance, I'm pleased the business has consistently demonstrated growth in both revenue and underlying earnings over this period. Slide 9 shows our performance against our market guidance. As Mick said, this is the third consecutive year we have met or exceeded our guidance. And bearing in mind, this included the increase in our guidance for the half year. If you recall, our original FY '20 EBITDA guidance was $80 million to $90 million, so it's pleasing to have exceeded that. With $4.5 billion of book in hand and over $1.2 billion already locked in for FY '21, we're in a good position to continue to deliver earnings growth. This, of course, is subject to COVID-19, not significantly disrupting our business. Turning to our profit and loss statement on Slide 10. I'd like to talk to some of the key factors behind our performance. If you recall, at the half year, revenue was up 27%. The business maintained this momentum into the second half, and we finished the year with revenue up a very solid 25%. This included an 11-month contribution from the GBF acquisition and continued strong performance across the board, including the ramp-up of the Boston Shaker contract. We note our second half margin performance was stronger, and our year-on-year EBITDA margins increased from 16.4% to 17.3%. With Telfer's contribution reducing, and with further growth of the broader underground business over the coming years, we expect margins to continue to improve. The strong earnings performance flowed through to the bottom line with NPAT growth of 41%, but more importantly, also to earnings per share. This strong bottom line result was helped by a lower-than-expected effective tax rate in the second half of 6%, which brought our full year effective tax rate to 10% versus our target of 15%, which we expect for the next 2 financial years. The difference between our statutory and underlying earnings is detailed in dependences on Slide 30. There are only minor adjustments, such as noncash share-based payment expenses, M&A transaction costs and amortization of GBF customer contracts. Slide 11 goes into more detail on some on our sources of revenue. I won't dwell on this too much, as you've seen the slide in our previous presentations. Stated as at the end of FY '20, you can see we still have good portfolio diversity in the business, a good mix of clients and commodities, with over 80% related to gold and copper-gold projects. Almost 2/3 of our revenue was generated here in Australia. As you can see, our underground division has grown significantly, from 7% in FY '19 to 19% in FY '20, following the acquisition of GBF and the ramp-up of Boston Shaker. Drawing underground to at least 25% of the business remains a key focus. The net debt waterfall on Slide 12 provides an overview of our major cash movements and outlines how our strong EBITDA translated into an increased cash position year-on-year. EBITDA of $239 million converted into an operating cash flow of $219 million, which represented a cash conversion rate of over 91%. CapEx spend for the year was $142 million, which was a bit below the $155 million guidance we provided, mainly due to our review and deferral of some CapEx during the fourth quarter. We expect our FY '21 CapEx spend to be around $175 million, of which $95 million is sustaining CapEx. Our balance sheet is summarized on Slide 13. Our net debt was $60.9 million, which includes AASB 16 lease liabilities. The key points to note here are the low gearing level at 11% and leverage ratio of 0.3x. We also had available liquidity of $198 million with cash on hand of $142 million. This clearly provides significant headroom to fund organic and M&A growth. Having said that, we recognize the value of retaining a strong balance sheet particularly during these uncertain times. Importantly, our underlying return on average capital employed and return on equity have also continued to improve to 14.8% and 14.6%, respectively. I would like to conclude by briefly reiterating our capital allocation policy on Slide 14. As you can see, our core objectives are to maintain our financial strength, invest in growth while also being able to return some cash to shareholders. During the year, we have invested around $190 million in growing the business and returned approximately $16 million in cash to shareholders through dividends, whilst maintaining a strong balance sheet. Our capital allocation policy has been designed with a clear intention of paying sustainable dividends where it is appropriate to do so. As a result, the Board has declared a final FY '20 dividend of [ $0.35 ] per share, which will be 30% franked and brings the full year dividend to $0.6 per share. I'll now hand back over to Mick to go through our strategy and outlook before we open to questions.

Thanks for that, Giles. The strategy outlined on Slide 16 remains unchanged, as are our strategic priorities and they are resolved to deliver our needs. And we believe this strategy has guided our focus and provided the foundation for delivering this year's strong financial performance and the positive track record we've been developing in recent years. By focusing on a clear consistent plan, we've been able to grow the business and drive value for our clients and our shareholders. I have talked about our strategic priorities before, but please bear with me while I go through them again. Constantly reminding ourselves of these has helped to keep us on the right track. Firstly, we are focused on margin enhancement and optimization at our current projects, post significant ramp-ups, of course. Secondly, we continue to work through expanding our service offering across the mining value chain with a specific focus on civil underground and rehabilitation. And on that front, we've already made good progress growing our underground business, as we've already alluded to today. And in addition to this, we were recently awarded a $20 million civil package for Streamlines Coburn Mineral Sands project near Geraldton, which is TMM's first major entry into WA and quite strategic for us. With the end of the -- with the end-to-end suite of services in place and the base business are now performing well. We are well positioned to tackle our third focus area of organically securing our fair share of new work opportunities in our pipeline, that I will discuss in a moment. And lastly, we are focused on modernizing our offering and constantly finding new areas of differentiation, including smart investments into technology. By delivering on these initiatives, we can drive value from each of our businesses for our clients, staff and shareholders. Before I talk about the outlook for the next 12 months, I just want to expand on our order book and tender pipeline as these are important considerations. On Slide 17, you can see our work in hand remains very solid with an order book of $4.5 billion. And you'll notice this number is the same as this time last year. And this does exclude short-term underground and civil churn work, which has represented about $110 million in FY '20. Importantly, it does include the high-quality clients we talk of and the long-term alliance style contracts, which provides us with the strong revenue visibility over the medium term. And this is highlighted by over $1.3 billion of contracted work beyond FY '24. In terms of the next 12 months, the important number for us is the $1.2 billion already contracted for FY '21. And this does exclude the churn work I just mentioned a moment ago. This puts us in a very strong position with 10 months still available to win and commence new work. I'd like to add that the majority of our 3-year work in hand is exposed to gold, copper-gold and coking coal mines, which is -- which are good sectors to be exposed to currently. This again provides us with the strong confidence in our revenue guidance for FY '21. This brings me to our tender pipeline on Slide 18. Pleasingly, the pipeline of credible opportunities for Macmahon has grown. And it now totals more than $7.5 billion, of which we are preferred tender on over $3.8 billion. It is also worth noting that around $3.5 billion of these opportunities relate to current Macmahon sites, or where we have existing relationships and position on site, which provides us with a great advantage. And over the next 12 months, we understand that between $2 billion to $4 billion of these opportunities will be awarded. And to provide context, excluding Phase 8 at Batu Hijau and the potential Tropicana extension, we currently have approximately $1.3 billion of new work proposals out with new clients pending feedback, and it will be no surprise to you that many of these are Australian gold projects. When you combine our significant order book and tender pipeline, we feel we're in a healthy position to continue to deliver further growth over the coming years. So I'd like to conclude with some brief comments on the outlook on Slide 19. We find ourselves in a very different global environment to this on last year, and this could still potentially introduce some uncertainty. However, we and our clients have been managing COVID well so far, and we expect to continue to do so. In addition, we are in a strong position with a healthy balance sheet and significant liquidity. A clear strategy and a highly skilled team that has demonstrated it can deliver safely and efficiently. We also have a significant order book, which provides us with a solid platform, and there remains many credible opportunities for further growth. Taking all this into account, we believe we can continue to deliver growth in FY '21 and abided a revenue range of $1.4 to $1.5 billion and $90 million to $100 million of EBITDA. Overall, I remain excited about our future. Not only have we achieved record results this year, but I feel we've also been working hard in the background to establish a solid footing to continue to grow from. We've invested in our systems and our people and develop a great culture, and I believe we have a high-performing and hungry team that can achieve much more. With that, I'd like to hand back to the operator and open for questions.

[Operator Instructions] Our first question comes from Ben Brownette from CLSA.

I've got another result on this morning, so I haven't had a thorough look through everything. But I just -- on the -- obviously, you met the guidance there towards the top end, which is great and a really good second half margin. So just wondering what some of the drivers on the second half margin was and were? And is that sort of some sort of better execution? Or was it some kind of erogenous event that got you there? And how should we think about that going forward?

Yes. No, you're right, Ben, they are different. And it's actually more that there was some negative impacts in the first half. So in the first half, we had the Millennium credit loss. And obviously, we still had the Telfer legal costs, while we're finalizing that settlement. The second half was propped up a little bit with the FX. Obviously, that went in our favor in the second half a little bit. But if you remove all those, it's actually pretty flat from a performance perspective.

Yes. Okay. Great. And then so you've given those ranges for next year. And you've also spoken about the pipeline or your tender pipeline. So the things that you're bidding on at the moment you wouldn't expect to see any of that in '21, notwithstanding, you do have a little bit of win -- work to win, but that -- is that [ civil not ] mining?

No. No, that there is some opportunities that if awarded in the coming months would contribute to FY '21. There's a number of those. They are included in that $1.3 billion, I spoke about, that proposals that have been submitted pending feedback. So some of those would contribute. And as you mentioned, there's a small amount of new work there in FY '21. But just remember that order book that we showed in the presentation of $1.2 billion doesn't include the underground and civil churn work either, which is typically $100 million to $150 million a year.

Yes. Okay. Got it. And then so the CapEx guidance, the $175 million, I think it was, or just short of that. So that is for work -- so the $75 million of growth and $95 million of maintenance CapEx, if I heard it right?

Yes. So...

The $75 million growth that's the things that you already know that you won. So if you were successful on some of these tenders you're talking about that would be in addition to the $75 million, is that right?

Yes. That's correct, Ben. So yes, as you say, the $175 million, about $95 million is sustaining, but there is also some flow on from FY '20 into FY '21 of deferred. So that's probably another $15 million. But you're absolutely right that all of the other is already known. So the likes of Boston Shake, Byerwen and Silver Lake plus some other things. So yes, new work would be in addition to $175 million.

Okay. And then the extensions of Batu Hijau, what would the capital allocation look there with respect to new equipment and maintenance CapEx and the things that you've got in place now, would you be expecting to buy equipment or how might that work?

Yes. Look, that's a really good question, Ben, and I'm not buying by saying that because we're in a unique position there. The contract says that any extensions, the default is the client provides the capital. So we're in discussions about that because, obviously, if we provide capital, it will attract more of a return. So we're just working through what the most optimal outcome is for Phase 8 with that in mind. But if the contract provides it, if we prefer, the client provides it for future growth.

[Operator Instructions] We have no further questions at this time. [Operator Instructions] If there are no further questions. I'll pass back to your speakers for any final comments.

Thanks for that. Look, we appreciate everyone taking the time. As we said earlier, we know everyone's flat out this time of year. We do look forward to speaking to everyone over the coming weeks in one-on-ones and some smaller gatherings. But please, if you have any questions, give Giles, Chris or myself a call. Again, appreciate everyone's support and look forward to speaking soon.

Ladies and gentlemen, that does conclude the call today. Thank you for attending. You may now disconnect.