Mader Group Limited (MAD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Mader Group FY 2022 Half Year Results Webcast. If you wish to ask a question, please click on the ask a question box and click submit. I would now like to hand the conference over to Mr. Justin Nuich. Please go ahead.

Thanks very much, Melanie, and good morning, everybody. I'd like to welcome you to Mader Group's results presentation for the first half of FY '22. Joining us also today from Fort Worth, Texas is Mader's Chief Financial Officer, Paul Hegarty, who will be presenting the details of our financial results. We'll both be available to respond to any questions during the Q&A, which will take place straight after this presentation. The last 6 months the Mader Group delivered a record half year performance, reaping the benefits created by our shift to focus on strategic diversification in recent years. During the half, we operated in 8 countries around the globe, servicing a wide and ever-growing network of customers and sites, backed by a skilled workforce of more than 1,750 employees. At our core, we're a business built on mechanically minded experts, who provide specialist services for heavy equipment maintenance and repairs. The last 6 months have seen our traditional service offerings continue to expand in the mobile plant equipment maintenance space attributed to strong customer demand. We're excited by the early success of our new growth platforms that have been introduced, including our recently repurposed infrastructure maintenance division, which delivered revenue growth of 70% versus the previous corresponding period. This division has expanded its geographical focus and now provides services in 4 states across Australia, including Western Australia, Queensland, South Australia and the Northern territory. Regional diversification is crucially important to our goal of building a global diverse profile. For this reason, we're pleased to have also expanded our operations in North America, including the launch of new organic start-up, Mader Energy. Targeting the energy sector, we now have a team of specialized technicians, conducting equipment maintenance at energy compressor stations in Oklahoma and New Mexico and have executed several master service agreements with new customers, including a major multinational oil and gas company. Although our financials from presentations sometimes changes, our focus on safety is always constant. And as always, it remains our highest priority and our key focus of the business. Our committed and vigilant workforce and leadership team are constantly ensuring safety is our #1 focus, and they are looking after themselves and their mates on every job. In the past 6 months, we are pleased to roll out our bespoke mobile application to our workforce across North America. The app will ensure that our network of remote employees are connecting to vital safety tools, important alerts and customer news. In addition to investing heavily in safety-focused technology, we continue to invest in our people and culture amongst a slew of awards won over the half year. We topped it off with recognition at the 2021 RISE Business Awards, sponsored by Business News, where we were named Employer of the Year of safe we are incredibly proud of. Our financial performance for the 6 months ending 31st of December '21 reflects the sustained strong demand we are experiencing globally. For the group, revenue grew to AUD 185.2 million, up 31% on the previous corresponding period. EBITDA grew to AUD 21.2 million, up 30%, and the business delivered underlying earnings of AUD 12.1 million net profit after tax, up 39% on the previous corresponding period. Today, the business also declared an increased interim dividend of AUD 0.02 per share fully franked for activities during the half, totaling AUD 4 million. The dividend is scheduled for payment to shareholders on the 23rd of March 2022. A high-level overview of our operations illustrates our balanced exposure across regional and commodity-based markets. Both our North America and rest of the world segments have seen sizable growth versus the prior half year with 66% and 167% increases, respectively. With a large addressable market in North America now being targeted through Mader Energy and the geographical expansion of our core service offerings in the USA and Canada, we anticipate continued and compounding growth. A closer look at our reporting segments illustrates steady and growing operations across the group, in line with our strategic focus on diversification. In Australia, we saw increased activity levels across our new and existing service offerings with overall revenue of AUD 160.2 million generated, up 26% versus the previous corresponding period and EBITDA of AUD 18.2 million, up 35%. Key highlights included growth in our core traditional service lines with revenue up 28% and expansion in our infrastructure maintenance service line, which saw increased revenue of 70%. We also continue to develop our trade upgrade apprenticeship program, which has gone from strength to strength, inducting its ninth and tenth intakes during the period for placing into the Western Australian and Queensland mining sectors. During the half, Mader also ran a national campaign aimed at driving female participation in the program. Our North American market has seen sizable revenue growth, up 66% versus the previous corresponding period. This increase was driven by both new customers and additional requests to support from existing customers in the United States. Mader's investment in organic start-up, Mader Canada, delivered first revenue during the first half, with secured work scopes in Fort McMurray, Alberta. Our second organic startup, Mader Energy, was also launched to target maintenance opportunities in the energy sector throughout North America. With active operations in 20 states, we're excited about the large addressable market in North America and what that presents for our business. Our rest of the world operations generated AUD 5.7 million, up 167% versus the prior half year. Activity levels were steady with equipment maintenance delivered across key customers in 5 countries across Africa, Asia and Oceania. I would now like to introduce Mader's CFO, Paul Hegarty, who will present to you our financial results. Over to you, Paul.

Thanks, Justin, and good morning to everyone from a very cold Fort Worth here in Texas. Let's start with the financial performance of the group on Slide 9. We saw group revenue grew by 31% on the PCP and this included impressive revenue growth of 66% in North America as Mader continued to unlock the value of its diversification strategy in that region. North America continues to be one of our prospective high-growth regions for the future. It's pleasing to see that our rest of world segment has continued to grow with an increase in activity levels at this half year, up 167% versus the PCP. Obviously, that PCP was heavily COVID affected. Margins have remained steady across the group, delivering 11.4% at the EBITDA line and 6.5% at the NPAT line. Lastly, we completed the half year with improved EPS, up 36% versus the PCP, and we've also increased our interim dividend up to AUD 0.02 per share fully franked from AUD 0.015 per share fully franked in the PCP. Next, we'll move on to Slide 10 and the financial position of the group. We have a relatively simple balance sheet with assets consisting primarily of 800-plus service vehicles, which are located throughout the globe. We closed the half year with net debt of AUD 22.3 million, which is down slightly from June '21. The moderate decrease in net debt reflects strong operating cash flow that was delivered despite the capital invested into our service vehicle fleets during the half. To support our rapidly growing operations, Mader also completed a refinance of its debt facilities. The restructured Australian facilities have extended the tenure and reduced borrowing costs. The new facilities also increased offshore borrowing capacity, which is key for our North American offensive. Now on to the cash flow. We had solid operational cash flow of AUD 22.4 million, and we continue to invest in growth with AUD 17.7 million expenditure, largely attributed to securing a service vehicle fleet to support our new organic startups, Mader Canada and Mader Energy. Overall, a solid financial performance that paves the way for continued growth on a global scale. That's probably enough on the financials from me. I'll hand back to Justin.

Great. Thanks, Paul. Okay. So moving on to our geographic footprint. As you can see, our geographical footprint is impressive. Having been built on the back of almost 17 years of operations in Australia, we have a large presence in all major mining regions, accounting for AUD 160.2 million and 87% of group revenue. We're stretching our leads across North America, now actively operating across 20 states. We're confident this segment will continue to expand, particularly with the repositioning of our management team in the previous half year, assisting with business development and positive workflow. In Australia, we continue to leverage market opportunities through our existing and new service lines. Out of around 520 operating sites Mader servicing over 340 of these to varying degrees for a customer base of more than 220 customers. The United States represents a large addressable market, slightly larger than that of Australia. For reference, the ROM, which represents the mine production in metric tons is 1 billion metric tons radar than what we see here in Australia. Canada produces almost 6 million metric tons per annum, presenting a significant range of addressable opportunities for the group, including a large oil sands market. Having secured first work scopes in Fort McMurray, Alberta, we have established a small initial base of operations, and we'll expand from there. Across Africa and Asia, our operations remain scaled down due to ongoing workforce mobility challenges. However, demand for Mader specialist services is strong due to a widening maintenance deficit caused by the pandemic. Our operational and financial performance during the first half highlights the significant flexibility and adaptability of our unique business model. Over the past 6 months, we have laid a solid foundation to enable the business to deliver on its long-term objective of compounding annual revenue growth. Our operations in North America, including that of Mader Canada and Mader Energy are accelerating steadily, and we are excited to see further growth in this pillar of the group's long-term strategy. Looking ahead, we'll continue to diversify our revenue profile to target addressable markets with new revenue streams expected to deliver growing returns for investors. With current market conditions and increased confidence, we are pleased to forecast FY '22 revenue of at least AUD 370 million, delivering an NPAT of at least AUD 24 million. Moving over to our investment case. To summarize, our business for current and prospective investors, we believe that Mader represents a robust investment opportunity. We are the largest independent supplier of contract labor for maintenance of heavy mobile equipment in Australia with a rapidly expanding scope of services designed to capitalize on market prospects such as infrastructure maintenance and energy to name a couple, which leaves Mader well positioned to continue this rapid growth. Since listing on the Australian Stock Exchange, we are proud to report that our earnings continue to exceed third-party broker forecasts. Our operating model is high quality, responsive and replicable across multiple markets. Notable attributes of the Mader business include: 17 years of organic growth; our disruptive business model and proven track record of successfully replicating our business model in new addressable markets; our low capital operations, large remaining addressable markets in which we are actively targeting through our multidisciplinary scope of services; and our unique people and culture focus, which was recently recognized with an Employer of the Year award at the 2021 RISE Business Awards sponsored by Business News. In closing, to conclude the presentation, firstly, I'd like to thank everyone for their hard work and commitment. Our success as a business is a credit to our entire team who despite facing ongoing mobility challenges, continue to adapt quickly and embrace new opportunities. Thank you, most of all to our frontline staff in the field who worked tirelessly and professionally to build our reputation as a superior maintenance provider around the globe. I'm positive that we have created a strong platform from which the business will grow upon. With an array of exciting opportunities available to us, we'll remain a people first business and continue to diversify and invest. I look forward to guiding Mader and its journey as we deliver our potential for clients and shareholders alike. Thanks, everyone, for joining us for the presentation. And I'd like to just hand over to Paul to run through some questions for us.

Thanks, Justin. So a few questions filtering through online. We'll start with Matt Joass from Maven. Does Mader have any operations in Russia? And is there any impact or direct impact of Russian sanctions on Mader?

Yes. No, look, we don't have any operations in Russia. Yes, it's pretty well looking forward to US, Canada and the rest of the world where we talked about Africa and Asia and Oceania. We -- I guess it's too early to tell around what that impact from Russia will be. They're looking at fuel prices, I would imagine that energy costs will continue to rise and will likely flow into the energy business in the US, but very hard to tell at this point in time.

Thanks, Justin. A couple of questions from Jason Palmer at Taylor Collison. So I'll look through them. North American margin contraction, we saw that in the first half around start-up costs. Justin, do you want to sort of just give an overview of those and how we see those going forward?

For North America, yes, look, I guess we've put a, I guess, a couple of parallel organic start-ups in North America being Energy and Canada. And as you would imagine, both of those will be quite a cost burden to the business, while they start up and we invest capital and human capital into getting those up and running. That said, we are investing reasonably heavily in those. We also expect to see those sort of breakeven and start turning a profit into FY '23. And the -- I suppose the downside from the initial start-up of those 2 businesses will certainly be washed out as we see those medium- to long-term prospects come into the group.

Thanks, Justin. Another question from Jason around corporate overhead, which I'll take. Just looking at the corporate overhead increases half to half in the corporate line, I assume, Jason, there, really, it's more about reallocating some costs that used to sit in the Australian segment into the corporate segment. You'll see that the Australian segment profit margins have increased in line with, I guess, costs moving into the corporate line. Another question from Jason around significant second half vehicle delivery. Justin, do you want to just briefly touch on the thinking behind -- sorry, the significant first half vehicle delivery and the significant -- the rationale behind those?

Yes. Thanks, Paul. Look, I guess when we see significant capital spend in this business, it's really as a result of forecast growth. So we're kicking off the energy business as well as accelerated growth in the US and vehicles coming through in Australia. We've seen quite a capital spend in the first half. That said, we are entirely comfortable with that because that just demonstrates the accelerated growth of the business, and we'll still see a reasonable spend in the second half, not as high as the first half, but again, that just demonstrates the pace of growth that's happening across the business and ensuring we don't constrain our growth by not having vehicles, particularly in those market penetration areas of Canada, Energy and the US, where our field service product most often leads the way into new customers.

Perfect. Thanks, Justin. Another question coming through from Jason around one half NPAT hitting AUD 12.1 million, including AUD 0.5 million contribution from Western plant hire that has now been divested, I guess, looking forward into how that lines up with our guidance for the full year? I guess, yes, that AUD 0.5 million contribution from Western plant hire won't be there in the second half. But I guess the number of moving parts that we see in the business and the growth trajectory that we can see continue to be delivered, gives us the confidence that our NPAT guidance will be delivered on. Another one from Jason, Justin, for you, M&A seems to be a lesser discussion point, which is, I guess, a positive organically moving into energy infrastructure verticals, et cetera. Is this a lesser need now, M&A? Or how does the business think about that moving forward?

Yes. Thanks, Jason. The M&A is still front of mind. Again, we have -- I suppose we report on the things that we have done, but we certainly run our ruler across several acquisition targets over that last sort of period or over the last couple of years really. And we'll continue to do so. What we saw in energy, again, there were some opportunities to implement an M&A or acquisition, we decided not to really because of close our business model and the confidence we have in it and also the similarities between the current business and the energy business were quite alike. So trying to buy something and then change your culture and turn it into something that we want, you could spend just as much time in any you doing that, then you could doing an organic startup. So we did end up doing an organic style up on that one. That said, we are still closely running the ruler over acquisition targets, and that may be something that will come up in the future.

Thanks. A question here on tax rates and how we should think about average tax rates moving forward. We think that, that 26% in one half was a little low. And really, we think that will be sort of around the 28% moving forward as an effective tax rate for the group. As North America increases, particularly in USA, that effective tax rate for the group will come down. It's sitting at that 26% at the moment as an effective tax rate in the US. One more question here. Probably for you, Justin, from Lee Lee online. What are the main differences in terms of competitive landscape and market dynamics between Australia and North America?

Yes. Thanks, Lee Lee. I guess there are quite a few differences. With the Aussie market, I guess it's quite mature, and we see some smaller competitors doing similar sorts of things. What we probably see less of in the US is this top of business model. It tends to be more OEM dealers and local businesses that do similar things, but just in regional areas, supporting local towns, so to speak. So I guess we have a Mader business model comes to its own is that we are fully flexible. We are OEM agnostic, and we can provide people from sort of anywhere in the country to anywhere in the country to conduct work. So that flexibility and that OEM agnostic is what we see as a real advantage for us over there and probably a difference to what we see over here in Australia.

Thanks, Justin. A couple more questions coming through. One from Hamish Murray from Bell Potter. What's the outlook for rest of world? How is demand and what is the timing around growth? And then also, how do we think about the labor component needed to service that potential growth in that region?

Yes. Thanks, Hamish. Look, out of the rest of the world, I mean, obviously, given the mobility constraints and obviously being in the middle of the pandemic has been quite restrictive to growing things particularly in those parts of the world, we're seeing that free up now and putting a bit more effort into pay day to deliver more work in those regions that we have done previously. The maintenance deficit on that equipment has increased through a lack of except through that pandemic. So the need for services such as Mader's is extreme. As far as the headcount to feed that work, that really is quite an attractive thing to a lot of our Australian workforce. So we generally don't see too much of an issue servicing that work as -- I guess given the demographic of a lot of the employees that we employ, that work is very attractive to them, and they do like to go and do it. So filling the requirements is not seen as too much of an issue.

Thanks, Justin. A question here on the CapEx profile for North America. And I guess just a general question around the key differences in the service trucks versus the service vehicles that we've traditionally acquired in Australia. Do you want to just talk through that?

Yes. So in Australia, we generally service the industry with the Toyota Hiluxes or Land Cruisers. And that really is quite fit for purpose for what we do. I guess the US model is a little different, and most of that is off the back of customer demand. So the requirements for a vehicle are larger. So we look at sort of Ford F-550 or F-600s or Dodge Ram 5500s with 8,000 pound cranes equipped on those, including welders and other tooling that customers require. But that is really off the back of customer requirements. We couldn't go and service a US mine site with the Toyota Hilux, it just would not meet requirements for those customers. Hence, the increased capital cost over in the US and that said, it is all recoverable. So we are comfortable with the way that's rolling out.

Perfect. Question here from Frank Villante around growth on the East Coast of Australia, what we're seeing there and how we're addressing those particular segments?

Yes. Good question. Thanks, Frank, and good to see you're still in there. I guess the East Coast, we're seeing some really, really strong growth over there. Our headcount has increased significantly over that first half and continues to do so. The operating segments, coal is running very strong, as everybody knows at the moment, and we're seeing demand for our products off the back of that. What we are also doing is kicking off, I made a hard rock segment or store over in Manus and so servicing a lot of that non-coal commodity over in that Manus area and then into New South Wales. So we are trying to diversify as hard as we can over there, and that is -- we're still seeing strong demand across the board in that space as well. So that has only just kicked off, but expecting to see some strong growth in both of those regions as we move forward.

Thanks, Justin. And I guess a bit of a follow-up question from Frank on that is probably in a broader context, how you're seeing the mindset of the local customer base in Australia?

Look, I guess -- and we see we're importing quite often around the skill shortage, and that doesn't really change across the country. So at the moment, it's -- everybody is desperate for labor. We're seeing large owner miners expand, bringing new projects to fruition as well as significantly more fleet coming into the industry and the very little bit being retired. So it is outstripping labor suppliers. So I guess, yes, I suppose that is the mindset is around making sure that people have got labor secured to ensure that their assets and their businesses can continue to run, which is obviously where we come in and provide that service.

Thanks. One final question if there's no more to come through. It's really around Canada first revenue delivered in 1H, which is positive. Any client feedback? Or how do we think of that market moving forward into 2H and beyond?

Yes. Thanks, Paul. Look, I guess it's very early days in Canada. That said, we see the Canadian market very similar to the Australian market in a lot of ways. We've got some large -- very, very large mine sites with ultra-class fleet like similar to what we would see in a BHP or a Fortescue over here. We're really focusing on putting our key talent forward to kick that business off. And so far, the feedback from our customers has been very, very strong. Again, it's a massive mining market in excess of what we're seeing here in Australia. So yes, we're going to continue to focus on that business development and growing our service offering across that country. But again, it's similar gear, it's similar sort of mine site just a whole lot colder in winter, but it's -- I think our business model is well suited to servicing that industry.

Thanks, Justin. That is all the questions that have come through the portal now. So if there's nothing else that comes through, we'll probably wrap it up there.

Thanks, Paul. We might hand back to you. Thanks. Melanie?

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