Monadelphous Group Limited (8MP.F) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the Monadelphous 2022 Half Year Results Presentation. [Operator Instructions] I'd now like to hand the conference over to Ms. Kristy Glasgow. Thank you. Please go ahead.

Hello, and welcome to the Monadelphous 2022 Half Year Results Investor and Analyst Briefing. Presenting this morning from Perth are Monadelphou's Managing Director, Rob Velletri; and Chief Financial Officer, Phil Trueman. The structure of today's presentation is similar to previous results briefing. Rob and Phil will take you through the company's financial and operational performance for the half year ended 31 December 2021 as well as the outlook before answering any questions you may have. Some further details are provided as appendices in the slide deck. Copies of today's presentation and associated materials are available on our website at monadelphous.com.au. Throughout this presentation, the speakers will guide you on when to click through to the next slide. I will now hand over to our first presenter today, Mr. Rob Velletri, who will start on Slide 2. Please go ahead, Rob.

Thanks, Kristy, and welcome to our 2022 half year results briefing. 2022 marks a very special year for Monadelphous. The 50th year since this great company was established in Kalgoorlie to provide contracting services to Australia's rapidly growing mining industry. As you can see on Slide 3, we've come a long way since being established back in 1972, changing our name from contract engineering associates to Monadelphous listing on the ASX in the mid-80s, organically growing and diversifying into a broader range of industries through oil and gas now renewables, expanding our footprint overseas into countries like China, Chile, Mongolia and Papua New Guinea and establishing a number of strong subsidiaries and joint ventures that continue to contribute to our success today. I'm proud to say, over 5 decades, we've continued to build our reputation as a contractor and partner of choice, consistently delivering high-quality safe and cost-effective service solutions to an ever-expanding range of Tier 1 customers. Although we've grown significantly over the years, our people and our values remain at the heart of our business. They are what continue to drive our success today and tomorrow. I wanted to take this opportunity to pay tribute to everyone who's contributed to our growth and success over the years, including our shareholders, past and present. So moving to our half year performance now on Slide 4. Monadelphous recorded revenue of $1.065 billion for the half up 12% on the previous corresponding period. Our net profit after tax was $30.1 million an increase of 18% on a normalized basis, representing earnings per share of $0.316. Overall, we experienced high levels of demand for our services, particularly in the resource and energy sectors. However, the shortfall of skilled labor did impact our business. Our Maintenance and Industrial Services division achieved a record half year revenue of almost $600 million, I think it was $596 million, up 21% as our resources and energy customers continue to make their way through a backlog of work, which was deferred during the early stages of the pandemic. The results also reflect the strong growth of our Chilean business and higher levels of activity in Papua New Guinea. Our Engineering Construction division reported revenue of $472 million after successfully completing a significant -- a number of significant resource construction projects and shutdowns during the period. The Board declared an interim dividend of 24% -- sorry, $0.24 per share fully franked. And we ended the half with a strong cash balance of around $175 million. Since the beginning of the financial year, we have secured approximately $860 million of new contracts and contract extensions, which I'll talk more on the next slide. So on Slide 5, contracts secured. You can see many of our new contracts are within the resources sector, particularly iron ore maintenance contracts in Western Australia with major long-term customers, BHP and Rio Tinto. Outside of this, a few of our other significant contracts include the delivery of the Rye Park Wind Farm in New South Wales, via our renewable energy joint venture Zenviron as well as a 2-year extension to our existing maintenance contract with Woodside at their onshore and offshore gas production facilities in the Northwest of Western Australia. So moving now to Slide 6, our safety performance. See our 12-month total recordable injury frequency rates running at about 2.8 incidents per million man-hours worked with our performance impacted by high levels of activity and increased levels of labor turnover in a tight market. With this in mind, we increased our focus on frontline safety programs to further promote and support infield safety leadership and pleasingly, our focus on fatal risk controls contributed to a reduction in the number of serious safety incidents compared to recent periods. Our emphasis on safety innovation, SORA has named as a finalist in 3 industry safety award programs. One was for our smart conveyor module assembly system, which was used at BHP South Flank inflow project. Another for our self-propelled modular transporter frame, which was used at Woodside's Pluto LNG plant and another for our commitment to breaking down the stigma associated with mental health. Finally, we actioned a number of initiatives from our health and well-being strategy, which aims to promote healthy lifestyle choices and increase mental well-being and resilience across our workforce. Moving now to Slide 7, our people. We finished the period with a workforce of around 7,350 people. Our employee retention and attraction of new talent remained a priority, particularly given the tight supply of skilled labor. To support this, we implemented an employee retention plan to mitigate the effects of the extremely competitive labor market. The plan provides a one-off issue of retention rights to key employees which will vest over a 3-year period, subject to continued service conditions. We also have introduced flexible work arrangements aimed at enhancing employee well-being and job satisfaction and continue to focus on leadership development, mentoring and graduate programs. In addition, we spent a significant amount of time reviewing and refreshing our code of conduct and supporting policies to reinforce acceptable workplace behavior. As part of this, we rolled out our It’s Up to Us campaign to highlight the important role every employee at Monadelphous plays in creating a safe, respectful and inclusive work environment, one that's free of sexual harassment and sexual assault. To help with employee retraction, we introduced employee referral programs for physicians in high demand, continue to use our specialist in-house talent acquisition team to fill senior and strategic roles and launched our Alumni program to help win back departed talent. Our new and improved recruitment, onboarding and talent management system remains on track to go live later this year. Now as part of our strategic planning process, we also commenced an organizational review during the period to ensure our structure is appropriately aligned to deliver against our strategic plans. And finally, we announced some changes to our Board during the period with the appointment of Ric Buratto as a Non-Executive Director and the retirement of Chris Michelmore. In addition, Non-Executive Director, Sue Murphy; took over the chair of the company's Remuneration Committee and Deputy Chair and Lead Independent Non-Executive Director of the company. Moving on to our engineering construction operational highlights. So you can see having completed a number of significant resource construction projects and shutdowns our Engineering Construction division reported revenue of $472 million, which was up slightly on the previous corresponding period. It's included completing construction work at BHP South Flank project where we were involved in the construction of the project's inflow and outflow infrastructure as well as Rio Tinto's West Angeles deposit C&D project. We performed smelter campaign works at BHP's Olympic Dam copper mine in South Australia as well as a number of other packages of work for BHP under the WA Iron Ore panel agreement. In addition, we mobilized a large workforce to support the construction of Rio Tinto's Gudai-Darri iron ore project in the Pilbara. Work continued on our package of work a Albemarle's Kemerton Lithium Hydroxide plant in the southwest of WA, with the team also securing electrical and instrumentation work on this project subsequent to the end of the period. Since the beginning of the financial year, the division secured around $200 million of new work. This includes SinoStruct being awarded a 4-year agreement with Origin to continue to supply wellhead equipment for the Australia Pacific LNG project in Queensland, and our joint ventures Zenviron securing the Rye Park Wind Farm contract that I mentioned earlier. Mondium, our engineering procurement and construction joint venture substantially completed the construction of Rio Tinto Western Turner Syncline Phase 2 iron ore project. and as well as the tailings retreatment plant for Talison Lithium, Greenbushes mine in WA. Moving now to our maintenance division, Slide 9. As I mentioned earlier, our Maintenance and Industrial Services division achieved a record half year revenue of $596 million, up 21% on the prior corresponding period. This reflected buoyant conditions across the resource and energy sectors in Australia as well as Chile and Papua New Guinea. The division has been awarded approximately $660 million of new contracts and contract extensions since the beginning of the financial year. Many of these contracts are in the iron ore sector in addition to contracts with QAL, BMA, Nickel West, Woodside and Codelco in Chile. We performed a significant amount of work under our iron ore panel agreement, which included the Car Dumper 1 mega shut at BHP's Nelson Point as well as work at Rio Tinto's Cape Lambert, East Intercourse Island and Tom operations. We continue to grow our Civil capability, performing civil works for BHP Roy Hill and Rio Tinto. In addition, we commenced 2 marine projects at Rio Tinto's Parker Point and Cape Lambert wharfs. In oil and gas, we continue to provide services under our existing long-term maintenance contracts, performing turnarounds for both Woodside and INPEX during the half as well as continuing to plan for portfolio of upcoming major turnarounds. As I mentioned, our Chile-based maintenance and construction services business, Buildtek continues to go from strength to strength capitalizing on a strong copper market. And finally, the division acquired fabrication business, RTW Steel Fabrication and Construction, in the Southwest of WA to complement its service offering in that region. Turning now to Slide 10, social values. We remain committed to making a positive contribution to the societies and communities in which we operate. Our efforts are focused around key areas of diversity, community and environment. In demonstrating our ongoing commitment, we launched our second gender diversity and inclusion plan in late November. The plan focuses on ensuring a safe working environment for all employees, the removal of gender-based barriers and extending targets for female candidates in vacation and graduate programs. In alignment with our plan, we re-signed our partnerships with the University of Western Australia Girls in engineering program and the University of Queensland Gender Equity in Engineering Makes Sense Program. These programs aim to promote gender diversity within STEM subjects and encouraging female high school students to focus on STEM career pathways. As part of our reconciliation journey, we celebrated NAIDOC Week in July, hosting a number of cultural immersion activities across our locations. We also renewed our partnership with the polypharma Foundation and continue to work in partnership with Rio Tinto on our indigenous employment pathways program. Program aims to increase the number of skilled and tertiary qualified aboriginal and Torres Strait Islander peoples in the resources industry. And in addition, across -- right across our operation, we took part in over 60 community events and initiatives. So I hand over now to Phil who'll provide you with some more detail on our financial performance.

Thanks, Rob, and good morning, everyone, on the call, and thanks for joining us this morning. So Slide 11 shows our financial performance compared to that of the previous corresponding period. And as Rob mentioned, our revenue increased by 12% compared to the first half of FY '21 as we experienced high levels of demand for our services. Earnings before interest, tax, depreciation and amortization was $60.9 million, giving an EBITDA margin percentage of 5.7%. We continue to experience labor costs and productivity pressures during the period with labor demands within the industry remaining at very high levels and COVID-19 restrictions further exacerbating the recruitment and mobilization of labor. Our net profit after tax was $30.1 million, an increase of about 18% when compared to a normalized NPAT for the prior corresponding period after we excluded the impact of the $6 million R&D provision, which we reversed last year. Earnings per share was $0.316 and the Board declared an interim dividend of $0.24 per share, fully franked. We ended the half year with a cash balance of $175.3 million, representing a strong cash flow conversion rate for the period of around 104%. The last couple of years have undoubtedly been unusual times for the global economy, for the industry and for Monadelphous. During the period, with the assistance of a global investment bank, we conducted a comprehensive review of the appropriateness of our current capital structure to ensure that we remain suitably funded. Following the review, the Board concluded that our capital structure was indeed appropriate for our business and reflects the necessary level of tolerance to accommodate the current operating environment, the changing market conditions and the medium-term outlook for the business. The strength of our balance sheet provides us with the financial capacity required to effectively navigate the pandemic and successfully manage the associated unpredictable and volatile economic impacts. As well as take advantage of any potential investment opportunities which may arise. So I'll now hand you back to Rob, who is going to provide you with an overview of the outlook for Monadelphous.

Thanks, Phil. So on Slide 12, it shows the relevant current and forecast Australian market conditions for our business. You can see from this slide that the sectors in which we operate are all expected to provide a solid pipeline of opportunities, both our maintenance and construction divisions. I'm now on slide -- next slide, Slide 13, our outlook. So as I say, the outlook for our core markets is strong. Australian iron ore industry remains particularly buoyant with capital and operating expenditures required to sustain current higher iron ore production levels, driving strong demand for our services. Demand for battery metals are forecast to continue to strengthen with developments in lithium, copper, nickel and rare earth, providing numerous prospects for us in the coming years. These markets, along with the gold sector, will present us with opportunities not only here in Australia, but also in South America, Mongolia and in Papua New Guinea. Conditions in the oil and gas sector have been improving with construction opportunities from further development of new LNG projects likely to emerge in the next year or so. Demand for oil and gas maintenance services is also forecast to be solid. Australia's transition to so clean energy will continue. The portfolio of wind farms coming to market in the next few years will provide opportunities for Zenviron, particularly as electrical transmission and distribution network access improves in New South Wales and Victoria, where rapid development of the hydrogen sector is also expected to provide opportunities in the coming years. Shortage of skilled labor will continue to be a major challenge for our operations, especially in Australia, while the effects in WA have been felt across all industry sectors, the impacts of being particularly acute in our fly-in/fly-out operations in WA. Although WA border restrictions will be relaxed soon, we are expecting labor shortages to continue for some time. The escalation in COVID case numbers in WA, coupled with measures implemented to further -- to limit further transmission will no doubt provide challenges for our industry and company. With this, we'll continue to focus on the safety and well-being of our people. We'll be working -- continuing to work collaboratively with our customers ensuring we take a strategic approach to targeting new work and focusing on initiatives that enhance retention and attraction of people. The momentum generated by the surge in construction activity in the previous financial year continued in the first half of this year with a large -- a number of large construction projects reaching completion. Due to the timing and award of and commencement of new major projects, construction activities is expected to decline in the second half of this financial year before increasing again in 2023. As a result, our full year revenue for 2022 financial year is expected to be approximately 5% to 10% lower than the previous year. In closing, our reputation as a leader in our markets and as an employer of choice, together with our long-standing commitment to delivering safe, reliable and cost-competitive solutions puts us in a strong position to capitalize on the opportunities and to deal with any challenges that lie ahead. So in closing, I'd like to thank our stakeholders for their ongoing support, including our shareholders and customers, and I commend our team on their commitment and effort in achieving a solid result. Thank you. I'll now hand you over to the operator for any questions.

[Operator Instructions] Our first question comes from James Wilson at Jarden.

I was just wondering if you could update us on how your labor productivity levels were looking relative to the second half of FY '21? And are you expecting any improvement on this as borders reopen over the end of FY '22?

Okay. Well, I guess, yes, I mean we have a lot of work, a lot of construction contracts in trying right throughout a large part of a period of time where we had skilled shortages. And I guess we did feel some pain on the productivity side as a result of that. And I guess the -- we're coming out at the end of that now with most of those contracts secured at that -- during that period or before that period completed. So I guess we are -- have been a bit more conservative in terms of which -- what work will take on and also the sort of conditions of contracts. So hopefully, we can start seeing some improvements in productivity going forward. Does that...

And just -- yes, it does. Just one other question for me. Do you expect the current proportion of the business mix that's maintenance revenue to hold over the second half of the year? Or are we likely to see E&P start to take a larger proportion of the mix again?

Well, we certainly -- I mean, second half, we're forecasting our construction revenue to decline. So -- and our maintenance revenue, I mean, it's pretty resilient. I mean it will go up and down depending on volumes more generally. But that's clearly more resilient. And our construction revenue will just vary up and down depending on the amount of work that's on at a particular time. But we are saying that we'll see a decline this half. And we're seeing a number of projects that will be -- or moving into execution more next year.

Our next question comes from Michael Aspinall at Jefferies.

Rob and Phil, a couple for me. Just another kind of follow-up on labor. You invented the business again in the last half, but the numbers look like they improved a little bit through the year. Maybe can you just characterize what's improved -- or what's gotten better operationally compared to the first half of the calendar year '21?

I mean the variability is probably not -- is not significant. I mean, I think if you look at the last -- Well, after 18 months, it's been pretty consistent. If you -- I mean, we saw a dip, we saw a dip in the first half. The second half, we've probably got a bit more of our revenue that's kind of on a lower risk basis, it's probably what you're seeing.

Okay. Okay. No, that makes sense. And maybe one for Phil, but it looks like you recorded a loss from JVs in statement. Just wondering what that was related to?

So probably...

Yes, most probably. Just same as across the rest of the business, that labor cost and productivity pressures as a result of the difficulties of getting in [Technical Difficulty].

Yes. And then have those projects that a JV is working on wrapped up too like the iron ore projects? or are they a bit longer term?

No, they're substantially complete.

Okay. Cool. And of course, it will depend on how work progresses in the second half of this year, but should we expect margins to be lower just given your guidance implies revenue is going to be down quite a bit in the second half and there might be a bit of operational deleverage?

Yes. Look, you might get more -- you might get better outcomes for the work. But yes, certainly, the volumes will be down. So that will also -- that will counter that.

Okay. And maybe just one follow-up there. It sounds like there's a lot of work around. Should we expect an increase in business development costs in response to that? I think you've been running $117 million for the last couple of years, but go back a few years before that and was kind of $22 million. Will that come through in the second half? Or are you a little bit away from seeing that yet?

No. Look, I'm not seeing that to be significantly changing.

Okay. Cool. And maybe just one more then. Can you just touch on some of the contributing factors to the very strong cash flow. Were you getting paid for -- are you getting reimbursements from some of the costs you incurred last year?

I mean I think it's a 6-month period, Michael, I mean, it just depends on the -- your cash collections during that period. And to be honest, our cash flow conversion is very reliant on what gets as we get paid at the 31st of December or the 30th of June -- sorry, what gets as we get paid on 31st December, 30th of June. But I think we've seen a decline in our contract assets as well. The outcome of some of the claims is obviously is cash collection.

Our next question comes from Rohan Sundram at MST Financial.

Just a couple for me. Firstly, on that revenue guidance for the second half, which is it implying quite a big year-on-year decline. Is that reflecting revenue that's already been contracted? Or do you actually need to win new work to achieve that second half revenue?

Most of it will be one significantly, significant proportion is secured.

Yes. Okay. Understood. And Phil, just a housekeeping one. Has the Rio claim being settled? And if so, how does that appear in the accounts?

The Rio claim, yes, that was settled this time last year.

Our next question comes from John Purtell at Macquarie Group.

Rob and Phil, just had a few questions. Yes. Look, just harking back to that revenue guidance, appreciate the declines in construction. But the guidance does sort of look on the face of things sort of conservative or your sort of expecting a step down in maintenance revenue in the second half on the first. Is there anything to call out there?

No, not really. No. I mean we did have a large volume of construction work that's all but complete. So -- it's is a fair estimate of what's going to happen.

And so on the maintenance side, you think that the first half is a reasonable sort of indicator in terms of go-forward workflow?

Look, it was a record half. So we'd love to be able to repeat it I guess, I mean the issues around labor that we're talking about, they do -- it is a break on volume. So whilst it might not impact margin, it is a break on volume. So there's more work that we could do, but we just can't get to people. So I think it's a question of that -- what that looks like over the next, whatever, 6 to 12 months. So that's where the risk is, to be frank.

And just in relation to your comments there on construction activity to return in '23, Rob. Does that then imply -- just to clarify, does that imply you're expecting higher construction revenue in fiscal '23 versus '22?

Well, not necessarily. I think we're going to see a ramp up again through that financial year as to how much ends up in that year. I'm not too sure.

Okay. Got it. And maybe just to sketch out the major opportunities, Rob, that you're seeing in the market and potential timing of those, if you can give any color?

Well, yes, I mean there's -- so we talk more generally about the buoyancy in a number of markets. I mean, iron ore continue to be strong. I think on one of the slides there, you can just see a pretty solid workload going forward. There's probably 2 or 3 more significant iron ore projects that Rio and BHP have on the drawing board that will feature not this year, but start to feature next year. So they are all pretty much -- they're all sustaining capital, new like Western range and Western Ridge for BHP. There's just a stream of those projects that will come for execution from '23 onwards. Then in lithium, there's Talison expansion down at Greenbushes. Can she has a lithium hydroxide plant. Albemarle has trains 3 and 4 on the drawing board. Again, some of those will be a bit more near term and some of those will like the Albemarle will be in the same sort of period we talked about, '23 onwards. I mean there's a couple of rare earths projects on the drawing board at the moment with [indiscernible] there's -- Woodside's got Pluto 2 and Pluto 1 modifications for Scarborough Gas to come during that period. Mongolia has got a number of its back on the radar again in terms of a number of projects that will be available to us over the next couple of years. Wind farms, isn't still a number of wind farms. So I don't know, there is a significant portfolio of opportunities in major project developments. I mean we -- that -- when you look ahead, we'll kind of feature from '23 onwards.

No worries. And just a quick final one for Philip, if I can. Just that loss from joint ventures there of that $2.9 million, that's recognized in the reported EBITDA of $61 million. Is that correct?

Correct. Just bear with us, guys. We do have a few more questions that we are trying to get online at the moment. We do have an external third party who is managing the patching in and out of the callers for questions here, and it looks like they have dropped off-line. We were trying to get hold of them at the moment. All right. Maybe what we're going to have to do in the interest of time. We do have 4 people that want to ask questions. If they perhaps want to dial through to Kristy after we've concluded here, and then we'll just have individual chats with everybody. But I think we've covered off the obviously, the key material this morning. And I think a lot of the questions that we are likely seem to get historically are ultimately the ones that were already asked. So I apologize for the technical issues we've had this morning, but thanks very much, everybody, for joining us. And we'll talk to you all soon. Thank you.