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

Good day, and thank you for standing by. Welcome to the Monadelphous 2023 Full Year Results Presentation 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 speaker today, Kristy Glasgow. Please go ahead.

Thank you. Hello, and welcome to the Monadelphous 2023 Full Year Results Investor and Analyst Briefing. Before we commence, I would like to acknowledge and pay our respect to the traditional owners of the land on which this meeting is taking place this morning, the Whadjuk people of the Noongar Nation and pay our respects to elders past, present and emerging. Presenting from Perth are Monadelphous' Managing Director, Zoran Bebic; and Chief Financial Officer, Phil Trueman. Throughout this presentation, the speakers will guide you on when to click through to the next slide. The structure of this morning's presentation will be similar to previous results presentations with some further detail provided as appendices. Copies of today's presentation and associated materials are available on our website at monadelphous.com.au. I will now hand over to our first presenter today, Zoran Bebic, who will start on Slide 2. Please go ahead, Zoran.

Thanks, Kristy, and welcome to our 2023 full year results briefing. Today, Phil and I will present our financial and operational performance for the year ended 30 June 2023 as well as the outlook. We will then answer any questions you may have. Before I commence, I wanted to take some time to acknowledge the passing of our former chair, mentor and friend, Mr. John Rubino. We've included a small tribute to John on the next slide. Even though John is gone, his memory will always be present in our corridors at Monadelphous and in the hearts and stories of our people. We will continue to do you proud, John. To our group performance and highlights on Slide 4. Monadelphous recorded sales revenue of $1.83 billion for the year, including a record $1.3 billion from Maintenance and Industrial Services and $542 million from Engineering and Construction. The result reflects strong demand for our maintenance services across all sectors, particularly in oil and gas. As everyone is aware, construction activity was impacted by delays in the timing of award and commencement of new major projects. However, we continue to experience high levels of construction tendering throughout the year. Earnings before interest, tax, depreciation and amortization was $109.1 million, delivering an improved EBITDA margin of almost 6%. Net profit after tax increased slightly to $53.5 million, generating earnings per share of $0.558. The Board declared a final dividend of $0.25 per share, taking the total full year dividend to $0.49 per share, fully franked. We ended the year with a solid cash balance of $178.3 million. Our discipline in maintaining a strong balance sheet continues to support our markets and growth strategy and enabled us to invest in opportunities such as our purchase of Victorian-based BMC. We continue to strategically target new work opportunities while ensuring the appropriate allocation of risk. Since the beginning of the financial year, we secured approximately $2 billion of new contracts and contract extensions, including $350 million of construction work post year-end, showing a strong pipeline of work for the coming year. Importantly, we continue to develop our approach to sustainability, and we formalized our Emissions and Energy Reduction Roadmap during the year, which I'll talk about later in the presentation. Moving now to Slide 5. As you can see, we've secured new contracts and extensions across Australia as well as in Papua New Guinea and Mongolia, particularly in the resources and energy sectors. This includes a number of significant construction contracts in Western Australia, the first of a new wave of construction activity. In the iron ore sector, we were awarded more than $750 million of new work with long-term customers, including BHP, Rio Tinto and Fortescue Metals Group. We also won a major construction contract and 2 strategic long-term maintenance contracts in the lithium sector with Albermale at their Kemerton operations in the southwest of WA. These came on the back of successful delivery of earlier construction packages at Kemerton. In the energy sector, we were awarded both available 2-year extensions to our contract with INPEX valued at around $350 million as well as an extension to our contract with Santos in Papua New Guinea via our joint venture with Worley. Moving to Slide 6 now. We finished the year with a workforce, including subcontractors, of around 5,700 people. In line with our succession plan, we announced a number of changes to our Board of Directors, which came into effect at the conclusion of our AGM in November of last year, including Robert Velletri becoming Chair and me taking on the role of Managing Director. To support the attraction and retention of employees, we completed an employee survey during the year. Feedback from the survey was used to shape our latest people and culture strategy. We launched our Respect@Monadelphous program, which aims to further embed respectful behaviors across our operations. The program includes acceptable workplace behavior and code of conduct training and is rolled out to all employees. In light of the tight labor market, we continue to strengthen our approach to people data, leveraging our talent acquisition and performance management system to provide deeper insights into recruitment activity. Our leadership programs continue to support the development of our current and future leaders, and we were recognized as Australia's top Construction and Property Services Graduate Employer for 2023. Looking now at safety, we continue to focus on improving safety and well-being through the identification, elimination and mitigation of fatal risks and the delivery of sustained improvement in health and safety outcomes. This included improving relevant infield risk management tools and rolling out a series of fatal risk awareness campaigns. Pleasingly, our serious incident frequency rate remains at historically low levels. A number of technology-based safety improvement trials were completed during the year relating to the use of mobile fleet. This included implementing software to aid pedestrian avoidance, distraction and fatigue monitoring and conducting Franna crane awareness training to prevent roll overs. Through our health and well-being program, we continue to support the mental and physical health of our people. This included offering mental health awareness training, partnering with the Resilience Project and facilitating a range of health checks. We were also recognized for our efforts and contribution to safety innovation, and were named the winner of a number of state and national work health and safety excellence awards. Now to Slide 8. Following the launch of our second Stretch RAP in July 2022, we continued to celebrate and acknowledge the traditional owners of the lands where our people live and work, including providing opportunities to First Nations businesses and created pathways for indigenous peoples. During the year, we again sponsored the Yallarm STEM Camp in Gladstone. We renewed our long-term partnership with the Polly Farmer Foundation and facilitated a number of workshops for indigenous high school students at our registered training facility in Bibra Lake. Our Indigenous Pathways Program, which is run in partnership with Rio Tinto also collaborated with Madalah to support indigenous students from regional communities with their tertiary studies. With gender diversity and inclusion, we continue to facilitate networking and mentoring opportunities for women through our membership with the National Association for Women in Operations and participated in several panel discussions and in-school engagements. More broadly, in the community, we're involved in over 120 events and initiatives across 20 locations. As I mentioned earlier, we formalized our Emissions and Energy Reduction Roadmap as a part of our goal of achieving net zero emissions by 2050. We also established working groups focused on our transition to renewable power, greening our fleet and optimizing operational activities. We explored opportunities to convert diesel vehicles into electric vehicles, progress the comprehensive greenhouse gas data review and confirmed our Scope 1 and Scope 2 greenhouse gas footprint for our base reporting year. Turning now to Engineering and Construction on Slide 9. The division reported revenue of $541.9 million for the year. Following high levels of tendering activity and a number of early contractor engagement assignments, we secured $640 million of new contracts, predominantly in lithium and iron ore, and we're hopeful to announce a few more soon. In the first half of the financial year, we were reappointed to BHP's WAIO Projects Framework Agreement for a further 3 years. Under the agreement, we were awarded the Car Dumper 3 Renewal Project at Nelson Point in Port Hedland. And subsequent to year-end, we were also awarded the electrical and instrumentation package of works. We completed multidisciplinary construction services at Fortescue's Iron Bridge Magnetite Project and Rio Tinto's Gudai-Darri iron ore project in addition to a series of shutdowns at Rio Tinto's Western Turner Syncline Phase 2 Project. In Mongolia, we were awarded a contract for the construction of surface infrastructure for the Oyu Tolgoi Underground Project. We undertook a strategic review of SinoStruct, our China-based fabrication business to ensure it remains aligned to customers' expectations and is appropriately structured to grow, geographically diversify its supply chain and deliver in new and related sectors. The review resulted in a rebrand of the business to Interforge. On the back of the review, Interforge secured fabrication contracts with Liontown Resources and HydrogenPro as well as for the Oyu Tolgoi underground project. Zenviron, our renewable energy business achieved substantial completion of work at the Rye Park Wind Farm, the largest wind farm in New South Wales and was engaged on early work packages for a number of other wind farm and battery storage projects on the East Coast of Australia. Moving now to our maintenance division. Our maintenance division had a stellar year, achieving a record annual revenue of $1.3 billion, up 11.4% on last year. We secured over $1.3 billion of new work during the period and continue to perform a significant amount of maintenance shutdown and project work across the oil and gas and iron ore sectors. Under our Sustaining Capital Projects Panel Agreement with Rio Tinto, we secured several contracts. We also picked up a 2-year extension for marine infrastructure maintenance services and minor projects at Rio Tinto's Cape Lambert and Dampier ports. We were reappointed to BHP's WAIO Site Engineering Panel for a further 3 years and secured a 12-month extension to our general maintenance and shutdown services contract for BHP's iron ore operations in the Pilbara. In addition, we secured strategic long-term maintenance contracts with Fortescue Metals Group as well as with Albemarle in the lithium sector, which I spoke about earlier. In the energy sector, we won a 5-year contract for pipeline maintenance work in the Queensland coal seam gas market as well as the extensions with INPEX and Santos. We commenced work on our first oil and gas decommissioning project after being awarded a contract by Petrofac on the Northern Endeavour FPSO. Late in the year, we acquired Victorian-based maintenance services provider, BMC. This strategic acquisition establishes a presence for us in the East Coast-based energy generation, transmission and storage market and expands our geographical footprint in the growing offshore oil and gas decommissioning sector. I will now hand over to Phil, who will provide you with some more detail of our financial performance on Slide 11.

Thanks, Zoran, and good morning, everybody. So as Zoran mentioned, we recorded revenue of $1.83 billion for the year, which is slightly down on last year. And our earnings before interest, tax, depreciation and amortization was $109 million, delivering an EBITDA margin of almost 6%, which is up from the 5.8% in the previous year. And our focus on driving improved productivity, maintaining operational discipline and increasing efficiency across our business was a significant factor in this margin improvement, and were key to mitigating the effects of a period of heightened inflation and escalated costs. Our net profit after tax for the year was $53.5 million, which is an increase of 2.5% and earnings per share was $0.558. The Board declared a final dividend of $0.25 per share, taking the full year dividend to $0.49 per share fully franked. We ended the year with a strong cash balance of $178 million, a cash flow from operations of $93 million and a very pleasing cash flow conversion rate of 112%. Our continued focus on cash generation and maintaining a strong balance sheet is key to supporting our operational performance and growth strategy and enables us to take advantage of suitable investment opportunities when they arise. So now I give it back to Zoran, who will talk to you about the outlook for the business and the industry outlook.

Thanks, Phil. Slide 12 shows relevant current and forecast of Australian market conditions for our business. Pleasingly, the sectors in which we operate have a positive outlook for capital investment and operating expenditure over the next few years. Moving now to our outlook slide. Longer-term demand is forecast to remain strong across most commodity margins despite some short- to medium-term uncertainty relating to Chinese domestic consumption and a possible U.S. recession. The resources and energy sectors are expected to provide a significant pipeline of prospects across a broad range of commodities with expenditure related to energy transition representing an increasingly large proportion of investment activity over the coming years. High levels of mining and mineral processing developments are anticipated in the battery metal sector and investment to sustain iron ore production levels will continue. In the energy sector, there are several new gas construction projects currently in the development pipeline and strong demand for maintenance and decommissioning services is expected over the coming years. The development of the hydrogen market will also provide opportunities. Maintenance activity levels in the resources sector are forecast to grow on the back of a larger asset base from recently completed capital projects as well as from new mining developments and expansions moving into the operating phase. Accelerating decarbonization efforts in Australia's power sector are driving an expanding pipeline of renewable energy projects and opportunities, including a large number of new wind farms and battery storage projects. Zenviron is well placed to capitalize on the growth expected in this sector over the coming years, having developed an enviable track record since its inception. Following the substantial completion of the Rye Park Wind Farm Project this financial year, Zenviron has already been engaged on early work packages for several new wind and battery storage projects. The shortage of skilled labor in Australia continues to be a challenge, and we remain focused on improving the effectiveness of our employee attraction, training and development initiatives as well as ensuring Monadelphous remains a great place to work. An escalating cost environment and the potential for ongoing supply chain risks are also expected to continue. With capacity constrained, we will leverage our strong position and take a strategic and targeted approach to new work, engaging and collaborating early with customers, maintaining an appropriate approach to the allocation of risk and focusing on earnings quality. After securing a number of new construction contracts post year-end and with further awards expected over the coming months, we anticipate construction revenue will progressively ramp up over the 2024 financial year with overall group revenue weighted to the second half. We will also continue to assess potential acquisition opportunities to facilitate service expansion, market diversification and long-term sustainable growth. I would like to take this opportunity to thank our fantastic employees for another strong year. We have a very loyal and talented team here at Monadelphous. I would also like to extend my appreciation to our shareholders, customers and other stakeholders for their ongoing support. Thank you. I will now hand you over to the operator for any questions.

[Operator Instructions] Our first question is going to come from the line of William Park with Citi.

Can I just ask about your workforce? Just wondering whether -- if you were to sort of think about accelerating project award momentum and presumably, there are more work packages for Monadelphous to secure in FY '24, are you comfortable with the current level of workforce to, I guess, deliver work that's out there? Or do you need to see addition to the workforce that you've disclosed today?

Well, I'd say if you -- particularly in our Engineering and Construction business, we've worked hard to ensure that we've retained key white collar employees to support the execution of work. And if you have a good look at the result, you'll see a little bit of margin pressure here in the second half, and that's consistent with ensuring we've got capacity to deliver work that we secured and work that we're anticipating to secure. But from a blue collar level perspective, the reality is we employed blue collar resources to support work directly. So we spend a lot of time understanding the work profile and what we anticipate we'll secure. We've spent a lot of time and effort in terms of understanding where the labor pools are, whether they're local, interstate labor forces, trade mix, trade classification. So I think we're as well placed as we can be to support the level of activity we expect to see in FY '24. Yes, I understand [Technical difficulty].

Yes. And just on labor still, if I were to sort of compare your outlook commentary at the interim result on labor versus your commentary that you provided today, it appears that your -- am I reading into a bit too much that you're suggesting that the labor pressures are progressively easing? Or has it still been quite difficult to source skilled labor?

Well, I guess my view would be that the labor pressures haven't eased. I don't think they've got any worse than they were 6 months ago. But also understanding that the level of major construction activity has been lower than we've seen in previous years. So hence, we make reference to this next wave of work. So I would expect that we will continue to see some challenges -- we'll continue to see some challenges in securing labor. But like I said, we've done a lot of work to ensure that we're best placed to address our requirement for that work.

And then just one last one is around, I guess, some of the near-term engineering and construction opportunities in FY '24. Where do you see -- I mean, I'm aware of the opportunities, but just wondering whether if you'd like to point out some of the larger opportunities that are coming up for board decision in the near term.

Yes. I guess what we've -- if you go back to the half year results presentation, and we made some commentary around those opportunities and understanding that we've seen the award of some of this work continue to slide, the view would be similar. The work will be -- I would expect the work will be in the lithium market, rare earths market and a broad range of sustaining capital opportunities with the major iron ore producers.

Our next question is going to come from the line of James Wilson with Jarden Australia.

Just 3 quick questions from me, if I may. Firstly, on the E&C pipeline, the dollar value of the contracts that you won over the second half of this year is roughly the same as what you won in the first half of FY '21. Does the ramp-up that you're talking about imply E&C returning to similar levels that we saw in FY '22 for the division?

To be honest, I don't have the FY '22 numbers off the top of my head. But I guess, absolutely, we expect to see a ramp-up and a step-up in activity. I guess the caveat there would be in terms of the first half and the second half, so the work that -- yes, so the work that we expect to be awarded has a different ramp-up profile. So some of the work will ramp up immediately, but some of the larger projects will only really start to ramp up in the new calendar year. I've just picked up on that number. I think it was [ 770 ] in FY '24 -- in '22, sorry. So I would -- we would expect to see a ramp-up in activity moving towards that type of number.

Great. And then just my next question is on CapEx. So we saw a little bit of a step-up over the second half of the year. Are you able to just run us through what drove that step-up?

Yes. We had a -- obviously, we are -- we're always planning the business for the short and medium-term outlook in terms of resourcing, Zoran's already spoke about people. We do have an ongoing level of replacement within our CapEx every year anyway, but we're rightsizing the fleet for the expected workload, [indiscernible] the equipment fleet.

Awesome. And finally, just on that BMC acquisition from June. So you mentioned it's per annum revenue contributions around $60 million. Are you able to give us some color on how it performs relative to the group from a margin perspective or earnings perspective?

I guess our view would be that our margin expectation would be reasonably consistent with our regional operations in the maintenance business because it certainly is more of a services business.

And our next question is going to come from the line of John Purtell with Macquarie.

Just a couple of questions, if I can. Just coming back to the construction revenue comment there around progressive ramp up. So does that mean that you are expecting revenue to increase -- construction revenue to increase in '24 versus '23? Or is there a sort of dip down in the [Technical difficulty] from the timing of the awards beforehand?

Yes. I mean that's the real question is the timing. But I would say that FY '24, we would expect Engineering Construction revenue to be greater than it was in FY '23 as a function of timing of award.

And in terms of the -- just the margin piece, are you expecting sort of margin improvement in the year ahead, Zoran? And should we expect any improvement to be relatively modest, if there is?

I guess my view would be that -- we may comment around cost, our view around ongoing challenges with cost pressure. So I think that's something that everyone will need to navigate through. I think if I look at the pipeline or the work committed or the prospects in the engineering construction space, I think we've definitely seen some movement from the compensation models the way they were constructed, say, 18 months ago to the way they are now. So i.e., maybe more rates reimbursable style work. I mean, that reduces the risk associated with those contracts, but it also caps the opportunity or margin on the upside. So my broader comment would be, I think there is an opportunity for margin improvement. I don't think it's a significant step-up in the next 12 months and also understanding there are some challenges and risks, and we need to execute well to capitalize on that margin improvement opportunity.

And just the last one. You mentioned some oil and gas construction projects in the pipeline. If you're able to sort of just elaborate on what that includes.

I mean if you look at the broader pipeline spans over the next, rather than 12 months, next 2 to 3 years, obviously, there's Pluto 2, which is in train. But beyond that, there's Shell Crux, there's Santos' Dorado field. There's Santos' Barossa project. There's Arrow's Surat Basin works. There are a number of Gorgon Phase 2 potential projects. And in [indiscernible] the one that's probably closest to execution, but still some time away. So in terms of broad -- there is a pretty broad pipeline.

Our next question comes from the line of [indiscernible].

Just a couple from me. Firstly, on the headcount changes from year-to-year, seeing quite a substantial drop, fair bid in maintenance. So have you just become much more efficient? Or was that sort of maintenance sort of revenue, including the bit of construction activity and that's why it looks to become very inflated in terms of revenue per head?

We did make the commentary that we -- there was ceased operations in our Buildtek operations in Chile earlier in the year. So that certainly had an impact in the maintenance business. Probably, the other comment I'd make is the employee numbers are a snapshot at a point in time. So you're seeing numbers there at 30th of June, which is a snapshot. And we've said that we've got low -- quite low level of construction activity certainly at that point in time.

How many were employed at Buildtek?

Over 1,000.

Yes. Okay. Okay. And in terms of like just cost pressures, I mean, you said there's more reimbursement rate work sort of going on. I mean earlier in this year, or really over the last year or so, the pendulum has very much swung in favor of the contractors. Is that still very much the case?

When you say the word pendulum has very much swung in favor -- I think the pendulum has moved a little in our direction from a previously extreme position. But it has moved slightly. And like I said, the mix of work in terms of compensation models does look a little different to what it did 18 months ago.

And given like the Tier 1 bench as kind of [indiscernible], are you able to be just as selective on projects as you've been in the last year? Or do you think competition will come back in because people just want to get the projects done?

I think the broader pipeline is pretty strong in terms of opportunities. So yes, we've been fortunate enough to be able to prioritize the work that we're -- that's important to us. So yes, we have been able to be a little more selective.

And I think it is fair to say that there's a lot of our competitors as well who are telling the market they're quite full at the moment.

And our next question is going to come from the line of Nathan Reilly with UBS.

Quick one on Buildtek. Just in terms of its contribution in FY '23 [Technical difficulty].

Nathan, you're dropping out. I didn't hear the question.

Can you hear me now? I was just asking about Buildtek?

Yes.

I just wanted to know the contribution [Technical difficulty].

Yes, we talked about 4% of group revenue, so circa [ $80 ] million.

[Technical difficulty].

Sorry. No, we didn't pick that up at all.

Can you hear me now? I was just asking whether the earnings contribution from Buildtek was breakeven or loss-making in FY '23?

[Technical difficulty] there's been no material effect on our results, Nathan.

Okay. I'll move to the next question. Just around the Unitywater situation there. Just picking up your recent announcement in relation to the project and the claim that's been issued there from the customer. Can you just remind me, with that -- I think when you had a similar situation with Rio at Cape Lambert a few years back. I think you flagged that there was about $150 million worth of public liability insurance cover. Can you just give us an idea of whether that insurance cover is [Technical difficulty] to this situation?

Nathan, I mean, I think we don't talk about our insurances and we never have. So I'm not quite sure where that's come from. But we've got the usual insurances in place that you'd expect for a contracting business. And we are comfortable with the position that we have taken in respect to the claim.

Got it. Okay. No problem. And a final question, just that point that you're sort of flagging in terms of the shifting mix in compensation models. Maybe if we're focusing on that sort of $640 million worth of E&C revenues that you booked this year. I just want you to give us an idea of what the mix be between, I guess, the shift towards cost reimbursable, I guess, your historical fixed price approach?

So I think when we talk about -- they're not necessarily one model or the other. So if you say that there are contracts that are fixed price, there are contracts that are rates reimbursable and we've got a number of contracts, which are a combination of both, so components that are fixed and variable compensation for other parts of the contracts. So I would suggest that we're probably not at 50-50 but moving in that direction between fixed price and rates reimbursable.

How would that compare to [Technical difficulty] 3 years ago?

Sorry, I missed that again, Nate.

How would that compare to 3 years ago?

I would -- I think it's probably fair to say in Engineering Construction 3 years ago, most of the work was fixed price.

Our next question comes from the line of Nicholas Rawlinson with Jefferies.

Just firstly for me, given 1H '23 was so strong in maintenance with lots of turnaround activity, can we still expect to see reasonably strong year-on-year growth in maintenance in 1H '24?

Yes, I mean, the variability will be in major turnarounds and understanding the profile of what that looks like, I'd be hopeful to see some growth in FY '24 in maintenance.

And in 1H '24, some growth there?

Half 1 '24, in fact, I think the maintenance result will be stronger in the first half rather than the second based on the turnaround profile of the turnarounds that you make reference to. There are a couple of significant ones in the first half of FY '24.

But the first half of last year, Nick, was a very big one.

Yes. Yes. Yes. Okay, but you're still expecting to [ see growth ] on that. Okay. And say, in 1H '24, like, we know it's still subdued. Should we just expect it to be around what you guys did in the first half and the second half of FY '23? Or is it...

I think we're sort of -- as we said, the timing of work is going to be the key here, but our modus operandi is to give guidance around what we think the first half is going to be at the AGM. It's still very early in the year now.

So you can't give us a rough idea?

If I had one, I'd give it to you, but I don't have it.

Okay. All right. And the book-to-burn was well above 1 in E&C for the first time in a while, you booked $640 million, I think. And you've benched around $540 million. Is most of that revenue that you booked in E&C sort of forward-looking and expected to land in FY '24?

So with your question, we had $640 million worth of wins last year. Remember, we do have some recurring work in that business as well, and we also brought some work into the year too. So then we have scope growth from the [ year ] contracts. So while we've burned some of the work that we won, I mean, it depends on the timing of the work and when it comes in. I think we've already given our view in terms of where we think E&C revenues may go this year but up on last year, towards [ 22 ], somewhere in between there, but it depends on the timing of the start of the work.

Also understanding that the Engineering & Construction business has secured $350 million worth of work post FY -- the end of FY '23.

And I'm showing no further questions, and I'd like to turn the conference back over to Kristy Glasgow for any further remarks.

Thank you all for your participation today. That now concludes our briefing.

Ladies and gentlemen, this concludes our conference. You may now disconnect. Everyone, have a great day.